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 June 30, 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
(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 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 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 July 22, 2005, there were
1,505,574 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 June 30, 2005
(Unaudited) and December 31, 2004........................................ 3
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2005 and 2004 (Unaudited).................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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............... 14
Item 4.
Controls and Procedures.................................................. 15
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings........................................................ 16
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.............. 16
Item 3.
Defaults Upon Senior Securities.......................................... 16
Item 4.
Submission of Matters to a Vote of Security Holders...................... 16
Item 5.
Other Information........................................................ 16
Item 6.
Exhibits ................................................................ 16
Signatures.................................................................. 18
PART 1. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
(Dollars in thousands) 2005 2004
----------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits $ 18,509 $ 13,794
Federal funds sold 7,055 10,975
Securities available-for-sale 101,559 101,133
Federal Home Loan Bank stock 5,541 5,515
Federal Reserve Bank stock 365 365
Loans held-for-sale 400 311
Loans, net before allowance for loan losses 464,811 474,706
Less: allowance for loan losses 5,278 5,204
-----------------------
Loans, net 459,533 469,502
-----------------------
Premises and equipment, net 13,475 13,701
Core deposit intangible 2,472 2,949
Goodwill 10,152 10,152
Other assets 10,164 10,021
-----------------------
Total assets $629,225 $638,418
=======================
Liabilities and stockholders' equity:
Liabilities
Interest bearing deposits $383,696 $396,690
Noninterest bearing deposits 78,341 78,669
Short-term borrowings 7,187 11,268
Long-term debt 105,620 98,620
Other liabilities 4,026 3,661
-----------------------
Total liabilities 578,870 588,908
-----------------------
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 June 30, 2005 and December 31, 2004 and 1,505,574 outstanding
at June 30, 2005 and 1,503,574 outstanding at December 31, 2004 1,732 1,732
Surplus 2,064 2,075
Retained earnings 53,684 52,484
Treasury stock, at cost (226,395 shares at June 30, 2005 and 228,395 shares at
December 31, 2004) (6,033) (6,090)
Accumulated other comprehensive loss, net of tax (1,092) (691)
-----------------------
Total stockholders' equity 50,355 49,510
-----------------------
Total liabilities and stockholders' equity $629,225 $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 Six Months
Ended June 30, Ended June 30,
(Dollars in thousands, except per share data) 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $6,628 $ 6,641 $13,333 $13,266
Interest on debt securities:
Taxable 990 825 1,999 1,468
Tax-exempt 38 34 68 65
Dividends 78 58 151 105
Federal funds sold 7 13 23 38
Interest bearing deposits 1 - 1 -
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Total interest and dividend income 7,742 7,571 15,575 14,942
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Interest expense:
Deposits 853 743 1,664 1,555
Borrowed funds 1,215 1,130 2,300 2,145
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Total interest expense 2,068 1,873 3,964 3,700
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Net interest and dividend income 5,674 5,698 11,611 11,242
Provision for loan losses - 120 75 270
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Net interest and dividend income after
provision for loan losses 5,674 5,578 11,536 10,972
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Noninterest income:
Service charges and fees on deposit accounts 625 607 1,165 1,052
Securities gains, net 98 261 169 720
Gain on sales of loans, net 53 44 102 83
Other 519 352 846 705
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Total noninterest income 1,295 1,264 2,282 2,560
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Noninterest expense:
Salaries and employee benefits 2,896 3,087 5,779 6,087
Office occupancy and equipment 957 888 1,929 1,850
Amortization of core deposit intangible 239 239 477 477
Other 1,660 1,488 3,179 2,896
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Total noninterest expense 5,752 5,702 11,364 11,310
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Income before income tax expense 1,217 1,140 2,454 2,222
Income tax expense 313 392 727 745
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Net income $ 904 $ 748 $ 1,727 $ 1,477
================== ==================
Comprehensive net income (loss) $1,436 $(1,023) $ 1,326 $ (280)
================== ==================
Per share data:
Basic earnings per common share $ 0.60 $ 0.50$ 1.15 $ 0.99
Earnings per common share assuming dilution $ 0.60 $ 0.49$ 1.14 $ 0.98
Cash dividends declared $ 0.18 $ 0.17 $ 0.35 $ 0.34
Weighted average number of common shares 1,507,069 1,499,574 1,505,552 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 Six Months
Ended June 30,
(Dollars in thousands) 2005 2004
----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,727 $ 1,477
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 75 270
Depreciation and amortization 1,154 1,189
Gains on sales of securities available-for-sale, net (169) (720)
Loss on sale, disposal and write-down of premises and equipment 1 4
Amortization of premiums and accretion of discounts on securities, net 24 64
Decrease in unearned income, net (175) (176)
Amortization of discount on loans acquired 73 57
Loss on sales of other real estate owned and other personal property, net - 3
Increase in loans held-for-sale (89) (333)
Net change in other assets and other liabilities 564 939
-------------------
Net cash provided by operating activities 3,185 2,774
-------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 4,256 11,667
Proceeds from maturities of securities available-for-sale 6,310 10,943
Purchases of securities available-for-sale (11,510) (38,262)
Purchases of Federal Home Loan Bank stock (26) (810)
Loan originations and principal collections, net 9,495 (25,663)
Recoveries of previously charged-off loans 185 103
Proceeds from sales of and payments received on other real estate owned 10 -
Proceeds from sales of and payments received on other personal property 226 364
Additions to premises and equipment (452) (1,385)
-------------------
Net cash provided by (used by) investing activities 8,494 (43,043)
-------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (13,322) 10,351
Advances from FHLB 13,000 20,000
Repayment of FHLB Advances (6,000) (4,000)
Net increase in overnight FHLB Advances - 2,765
Net decrease in securities sold under agreements to repurchase (4,081) (47)
Exercise of stock options, net of tax benefit 111 -
Purchase of treasury stock (65) -
Cash dividends paid (527) (509)
-------------------
Net cash (used in) provided by financing activities (10,884) 28,560
-------------------
Net increase (decrease) in cash and cash equivalents 795 (11,709)
Cash and cash equivalents at beginning of period 24,769 31,085
-------------------
Cash and cash equivalents at end of period $ 25,564 $ 19,376
===================
Supplemental disclosure of cash flows:
Interest paid $ 3,917 $ 3,815
===================
Taxes paid $ 447 $ 900
===================
Loans transferred to other real estate owned $ 10 $ -
===================
Loans transferred to other personal property $ 305 $ 318
===================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six month periods ended
June 30, 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 June 30, 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 No. 123 (revised 2004) ("SFAS 123R"), Share
Based Payment, to stock-based employee compensation.
($000 Omitted, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
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Net income As reported $ 904 $ 748 $1,727 $1,477
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects - - - -
----- ----- ------ ------
Pro forma $ 904 $ 748 $1,727 $1,477
===== ===== ====== ======
Earnings per common share As reported $0.60 $0.50 $ 1.15 $ 0.99
Pro forma $0.60 $0.50 $ 1.15 $ 0.99
Earnings per common share (assuming dilution) As reported $0.60 $0.49 $ 1.14 $ 0.98
Pro forma $0.60 $0.49 $ 1.14 $ 0.98
3. Impact of New Accounting Standards.
In January 2003, the Financial Accounting Standards Board ("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 approach, 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 (R) 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 (R) 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)").
SFAS No. 132 (revised 2003) 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. SFAS No. 132 (revised 2003) requires additional disclosures
to those in the original SFAS No. 132 about assets, obligations, cash flows and
net periodic benefit cost of defined benefit pension plans and other defined
benefit postretirement plans. SFAS No. 132 (revised 2003) is effective for
financial statements with fiscal years ending after December 15, 2003 and
interim periods beginning after December 15, 2003. Adoption of SFAS No. 132
(revised 2003) 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. 123R. SFAS No 123R 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. SFAS 123R was effective for the Company as of the
beginning of the first interim or annual reporting period that began 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 and six months ended June 30:
($000 Omitted)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---------------------- -----------------------
Service cost $134 $118 $268 $236
Interest cost 86 76 172 152
Expected return on plan assets (91) (72) (182) (144)
Amortization of prior service cost (21) (21) (42) (42)
Recognized net actuarial loss 34 32 68 73
Amortization of transition asset - - -
Special recognition of prior service costs - - - -
---- ---- ---- ----
Net periodic benefit cost $142 $133 $284 $275
==== ==== ==== ====
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 merging the two banks, 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.
Bank Consolidation
On May 31, 2005, the Company announced the consolidation of its' two
subsidiary banks, The Berlin City Bank and The Pemigewasset National Bank of
Plymouth, New Hampshire, and a name change to Northway Bank. Both banks have
been affiliated since the creation of Northway Financial, Inc. in 1997. They
have been sharing technological resources, support functions, products and
services, and administrative support. This consolidation will allow Northway
Bank to provide a higher level of service to our customer base through our 20
banking offices spread throughout northern and central New Hampshire. We will
continue to provide our customers with uninterrupted high quality service. The
Merger, which is an internal corporate reorganization, is designed to
strengthen the Registrant's and its subsidiaries' marketing initiatives under a
unified name and logo and is also expected to result in cost savings through,
for example, elimination of duplicative governmental filings and certain
back-office expenses. The consolidation has been approved by the Federal
Deposit Insurance Corporation and is expected to be consummated on or about
October 1, 2005, subject to final approval by the New Hampahire Banking
Department.
Financial Condition
The Company's total assets at June 30, 2005 were $629,225,000 compared to
$638,418,000 at December 31, 2004, a decrease of $9,193,000. Net loans,
including loans held-for-sale, decreased $9,880,000 to $459,933,000. 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 residential mortgage loans, commercial real estate, commercial and direct
consumer loans.
Deposits decreased $13,322,000 to $462,037,000 from $475,359,000 at
December 31, 2004 due to a decrease in all deposit categories except time
deposits. Short-term borrowings decreased $4,081,000 due to a decrease in
securities sold under agreements to repurchase. Long-term Federal Home Loan
Bank advances increased $7,000,000 to $85,000,000 from $78,000,000 at December
31, 2004 due to four new advances, totaling $13,000,000, during the year
ranging in term from one to three years with an average interest rate of 3.05%,
which was partially offset by the maturity of $6,000,000 in advances. Total
stockholders' equity increased $845,000 to $50,355,000 at June 30, 2005 from
$49,510,000 at December 31, 2004 due primarily to net income of $1,727,000
which was partially offset by the recording of an additional comprehensive loss
associated with securities available-for-sale of $401,000 as well as dividends
paid of $527,000.
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.
Allowance for loan losses are estimated at the individual Banks based on
estimates of losses related to customer loan balances. In establishing the
appropriate provisions for customer loan balances, the Company makes
assumptions with respect to their future collectibility. The Company's
assumptions are based on an individual assessment of the customer's credit
quality as well as subjective factors and trends, including the credit rating
of the loans. Generally, these individual credit assessments occur prior to the
inception of the credit exposure and at regular reviews during the life of the
exposure and consider (a) the customer's ability to meet and sustain their
financial commitments; (b) a customer's current and projected financial
condition; (c) the positive or negative effects of the current and projected
industry outlook; and (d) the economy in general. Once the Company considers
all of these factors, a determination is made as to the probability of default.
An appropriate provision is made, which takes into account the severity of the
likely loss on the outstanding loan balances based on the Company's experience
in collecting these amounts. The Company's level of allowance for loan losses
fluctuates depending upon all of the factors mentioned above.
At June 30, 2005 the allowance for loan losses was $5,278,000, or 1.14% of
total loans, compared to $5,204,000, or 1.10% of total loans at December 31,
2004. The composition of the allowance for loan losses for the three month and
six month periods ended June 30, 2005 and 2004 is as follows:
Three Months Six Months
Ended
June 30, Ended June 30,
(Dollars in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------------
Balance at beginning of period $5,312 $5,057 $5,204 $5,036
------------------ -----------------
Charge-offs (95) (162) (186) (356)
Recoveries 61 38 185 103
------------------ -----------------
Net charge-offs (34) (124) (1) (253)
Provision for loan losses - 120 75 270
------------------ -----------------
Balance at end of period $5,278 $5,053 $5,278 $5,053
================== =================
Nonperforming loans totaled $3,163,000 as of June 30, 2005, compared to
$2,867,000 at December 31, 2004. The ratio of nonperforming loans to loans net
of unearned income was 0.68% as of June 30, 2005, compared to 0.60% at December
31, 2004. Nonperforming assets, which include nonperforming loans, other real
estate owned and other chattels owned, totaled $3,325,000 as of June 30, 2005,
compared to $2,949,000 at December 31, 2004. The ratio of nonperforming assets
to total assets was 0.53% as of June 30, 2005, compared to 0.46% at December
31, 2004.
Results of Operations
The Company reported net income of $904,000, or $0.60 per common share
(basic), for the three months ended June 30, 2005, compared to $748,000, or
$0.50 per common share (basic), for the three months ended June 30, 2004, an
increase of $156,000, or 21%. Net income for the six months ended June 30, 2005
was $1,727,000, or $1.15 per common share (basic), compared to $1,477,000, or
$0.99 per common share (basic), for the six months ended June 30, 2004, an
increase of $250,000, or 17%.
Net interest and dividend income for the second quarter decreased $24,000
to $5,674,000 compared to $5,698,000 for the second quarter of 2004. Net
interest and dividend income for the six months ended June 30, 2005 increased
$369,000, or 3.3%, to $11,611,000 compared to $11,242,000 for the same period
last year. The year-to-date increase was the result of an increase of 10 basis
points in the net interest margin as well as a $6,507,000 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.
There was no provision for loan losses for the second quarter of 2005,
compared to $120,000 for the second quarter of last year. For the six months
ended June 30, 2005, the provision for loan losses was $75,000, a decrease of
$195,000 from the $270,000 reported for the same period last year. 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
includes consideration of, among other factors, the Company's loan loss
experience and takes into account the Company's decision to terminate indirect
auto lending. 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 increased $31,000 to $1,295,000 in the second quarter
of 2005 compared to $1,264,000 in the second quarter of 2004. Service charges
and fees on deposit accounts increased $18,000. Net securities gains decreased
$163,000 in the second quarter of 2005 compared to the second quarter of 2004.
Gains on sales of loans increased $9,000. Other noninterest income increased
$167,000 to $519,000 compared to $352,000 for the same period a year ago due
primarily to the recording of a gain on the cash surrender value of life
insurance of $83,000 compared to a loss of $49,000 for the same period last
year. Further, the commission on alternative investment products increased
$68,000 to $72,000 compared to $4,000 for the same period a year ago.
Noninterest income for the six months ended June 30, 2005 decreased $278,000 to
$2,282,000 compared to $2,560,000 for the same period last year. Service
charges and fees on deposit accounts increased $113,000 due to increases in
overdraft fee income principally the result of the Bounce ProtectionTM program.
Net securities gains for the six months ended June 30, 2005 were $169,000, a
decrease of $551,000 from the $720,000 reported for the same period a year ago.
Gains on sales of loans increased $19,000 over one year ago. Other noninterest
income increased $141,000 due primarily to the recording of commissions on
alternative investment products.
Noninterest expense increased $50,000 to $5,752,000 for the quarter ended
June 30, 2005, compared to the $5,702,000 recorded during the same period last
year. Salaries and employee benefits decreased $191,000 to $2,896,000 for the
second quarter of 2005 compared to $3,087,000 for the second quarter 2004. This
decrease was due primarily to both a decrease in the expense relating to the
liability of deferred compensation on a Supplemental Employee Retirement Plan
and an increase in deferred loan origination costs related to SFAS No 91,
"Accounting for Nonrefundable Fees and Costs Associated with Origination and
Acquiring Loans and Initial Direct Cost of Leases" ("SFAS 91"), which has the
effect of reducing salary expense. Office occupancy and equipment expense
increased $69,000 to $957,000 for the second quarter 2005 compared to $888,000
for the same period last year. Other noninterest expense increased $172,000 to
$1,660,000 for the second quarter of 2005 compared to $1,488,000 for the same
period last year due primarily to increases in legal expense, repossession
expense and contributions.
For the six months ended June 30, 2005 noninterest expense totaled
$11,364,000, an increase of $54,000 over the same period last year. Included in
noninterest expense for 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. For the six months ended June 30, 2005, salaries and employee
benefits decreased $308,000 to $5,779,000 compared to $6,087,000 for the same
period a year ago. The 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 SFAS 91, which has the effect of reducing salary
expense. Office occupancy and equipment expense increased $79,000 to $1,929,000
for the six months ended June 30, 2005 compared to $1,850,000 for the same
period last year. Other noninterest expense increased $283,000 over the prior
year due in large part to the one-time expenses associated with moving proof
and item processing and data processing. In addition, the Company recorded
increases in legal expense, repossession and other real estate owned expense
and contributions.
Comprehensive Income/(Loss)
The Company reported comprehensive net income of $1,436,000 for the
quarter ended June 30, 2005, compared to a comprehensive net loss of $1,023,000
for the quarter ended June 30, 2004. For the six months ended June 30, 2005,
comprehensive net income was $1,326,000 compared to a comprehensive net loss of
$280,000 for the six months ended June 30, 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 June 30, 2005, the Company decreased its unrealized
loss on available-for-sale securities by $532,000, net of tax. When added to
the quarterly net income of $904,000 the result is a comprehensive net income
of $1,436,000. For the quarter ended June 30, 2004, the Company increased its
unrealized loss on available-for-sale securities by $1,771,000. When deducted
from the quarterly net income of $748,000, the result is a comprehensive net
loss of $1,023,000.
For the six months ended June 30, 2005, the Company increased its
unrealized loss on available-for-sale securities by $401,000, net of tax. When
deducted from net income year-to-date of $1,727,000 the result is a
comprehensive net income of $1,326,000. For the six months ended June 30, 2004,
the Company increased its unrealized loss on available-for-sale securities by
$1,757,000. When deducted from year-to-date income of $1,477,000, the result is
a comprehensive net loss of $280,000.
The primary factor contributing to the unrealized gain or loss on
available-for-sale securities is the interest rate environment at the time of
the valuation. In accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", the negative adjustment to
comprehensive income of $401,000 for the six months ended June 30, 2005 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 $727,000 and $745,000 for the
six months ended June 30, 2005 and 2004, respectively. The effective tax rates
were 29.6% and 33.5% for those respective periods. The effective tax rate for
2005 is positively impacted by the fact that several contributions in excess of
$100,000 in the aggregate were made which provided tax credits to the Company
due to the 75% state tax exemption.
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 12.65% and
14.81%, respectively, at June 30, 2005. The Company's Tier 1 leverage ratio at
June 30, 2005 was 9.04%. As of June 30, 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
The Company's Annual Meeting of Stockholders was held on May 31, 2005. At the
Annual Meeting, the stockholders elected Stephen G. Boucher, Barry J. Kelley
and Randall G. Labnon to three-year terms as directors. Each of these
directors' terms will expire at the 2008 annual meeting. The final vote for
each of these elected directors is as follows:
For Withheld
--- --------
Stephen G. Boucher 1,239,939 30,772
Barry J. Kelley 1,241,595 29,116
Randall G. Labnon 1,241,739 28,972
The directors continuing in office are Frederick C. Anderson, Brien L. Ward,
Fletcher W. Adams, Arnold P. Hanson, Jr., John H. Noyes and William J.
Woodward.
Item 5. Other Information - None
Item 6. Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
2.1 Amended and Restated Bank Merger Agreement and Contract for
Union.
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.
August 4, 2005 BY: /S/William J. Woodward
------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
August 4, 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
2.1 Amended and Restated Bank Merger Agreement and Contract For
Union
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