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, 2006
OR
|
¨
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
transition period from ______________
to
______________
Commission
File Number 000-23129
NORTHWAY
FINANCIAL, INC
(Exact
name of registrant as specified in its charter)
|
New
Hampshire
|
04-3368579
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
9
Main Street
|
|
|
Berlin,
New Hampshire
|
03570
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(603)
752-1171
(Registrant’s
telephone number, including area code)
(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
xNO
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large Accelerated Filer ¨
Accelerated Filer ¨
Non-Accelerated Filer x
Indicate
by check mark whether the registrant is a shell company (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 25, 2006, there were 1,493,174
shares of common stock outstanding, par value $1.00 per share.
NORTHWAY
FINANCIAL, INC.
FORM
10-Q
JUNE
30, 2006
|
PAGE
|
||
|
3
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
8
|
||
|
10
|
||
|
11
|
||
|
12
|
||
|
12
|
||
|
12
|
||
|
12
|
||
|
12
|
||
|
12
|
||
|
12
|
||
|
14
|
NORTHWAY
FINANCIAL, INC.
|
June
30,
|
Dec.
31,
|
|
|||||
|
|
2006
|
|
|
2005
|
|||
|
(Dollars
in thousands)
|
(Unaudited)
|
||||||
|
Assets:
|
|||||||
|
Cash
and due from banks and interest bearing deposits
|
$
|
16,408
|
$
|
14,587
|
|||
|
Federal
funds sold
|
165
|
14,775
|
|||||
|
Securities
available-for-sale
|
118,268
|
103,244
|
|||||
|
Federal
Home Loan Bank stock
|
4,314
|
5,541
|
|||||
|
Loans
held-for-sale
|
-
|
453
|
|||||
|
Loans,
net before allowance for loan losses
|
468,036
|
460,373
|
|||||
|
Less:
allowance for loan losses
|
5,293
|
5,150
|
|||||
|
Loans,
net
|
462,743
|
455,223
|
|||||
|
Premises
and equipment, net
|
13,020
|
11,735
|
|||||
|
Other
real estate owned
|
-
|
196
|
|||||
|
Core
deposit intangibles
|
2,710
|
1,995
|
|||||
|
Goodwill
|
10,577
|
10,152
|
|||||
|
Other
assets
|
12,057
|
14,833
|
|||||
|
Total
assets
|
$
|
640,262
|
$
|
632,734
|
|||
|
Liabilities
and stockholders’ equity:
|
|||||||
|
Liabilities
|
|||||||
|
Interest
bearing deposits
|
$
|
403,877
|
$
|
387,020
|
|||
|
Noninterest
bearing deposits
|
69,867
|
77,436
|
|||||
|
Short-term
borrowings
|
25,369
|
9,363
|
|||||
|
Long-term
debt
|
81,620
|
105,620
|
|||||
|
Other
liabilities
|
9,194
|
3,045
|
|||||
|
Total
liabilities
|
589,927
|
582,484
|
|||||
|
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, 2006 and December 31, 2005 and 1,493,174 outstanding at
June 30,
2006 and 1,491,174 outstanding at December 31, 2005
|
1,732
|
1,732
|
|||||
|
Surplus
|
2,058
|
2,064
|
|||||
|
Retained
earnings
|
55,359
|
54,089
|
|||||
|
Treasury
stock, at cost (238,795 shares at June 30, 2006 and 240,795 shares
at
December 31, 2005)
|
(6,470
|
)
|
(6,531
|
)
|
|||
|
Accumulated
other comprehensive loss, net of tax
|
(2,344
|
)
|
(1,104
|
)
|
|||
|
Total
stockholders’ equity
|
50,335
|
50,250
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
640,262
|
$
|
632,734
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY
FINANCIAL, INC.
(Unaudited)
|
|
Three Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||
|
(Dollars
in thousands, except per share data)
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|||
|
Interest
and dividend income:
|
|||||||||||||
|
Loans
|
$
|
7,609
|
$
|
6,628
|
$
|
14,857
|
$
|
13,333
|
|||||
|
Interest
on debt securities:
|
|||||||||||||
|
Taxable
|
951
|
990
|
1,840
|
1,999
|
|||||||||
|
Tax-exempt
|
285
|
38
|
558
|
68
|
|||||||||
|
Dividends
|
82
|
78
|
169
|
151
|
|||||||||
|
Federal
funds sold
|
8
|
7
|
52
|
23
|
|||||||||
|
Interest
bearing deposits
|
2
|
1
|
4
|
1
|
|||||||||
|
Total
interest and dividend income
|
8,937
|
7,742
|
17,480
|
15,575
|
|||||||||
|
Interest
expense:
|
|||||||||||||
|
Deposits
|
1,956
|
853
|
3,554
|
1,664
|
|||||||||
|
Borrowed
funds
|
1,337
|
1,215
|
2,640
|
2,300
|
|||||||||
|
Total
interest expense
|
3,293
|
2,068
|
6,194
|
3,964
|
|||||||||
|
Net
interest and dividend income
|
5,644
|
5,674
|
11,286
|
11,611
|
|||||||||
|
Provision
for loan losses
|
120
|
-
|
225
|
75
|
|||||||||
|
Net
interest and dividend income after provision for loan
losses
|
5,524
|
5,674
|
11,061
|
11,536
|
|||||||||
|
Noninterest
income:
|
|||||||||||||
|
Service
charges and fees on deposit accounts
|
729
|
625
|
1,344
|
1,165
|
|||||||||
|
Securities
gains, net
|
39
|
98
|
249
|
169
|
|||||||||
|
Gain
on sales of loans, net
|
54
|
53
|
72
|
102
|
|||||||||
|
Other
|
502
|
519
|
1,231
|
846
|
|||||||||
|
Total
noninterest income
|
1,324
|
1,295
|
2,896
|
2,282
|
|||||||||
|
Noninterest
expense:
|
|||||||||||||
|
Salaries
and employee benefits
|
3,011
|
2,896
|
5,893
|
5,779
|
|||||||||
|
Office
occupancy and equipment
|
1,017
|
957
|
1,936
|
1,929
|
|||||||||
|
Amortization
of core deposit intangibles
|
280
|
239
|
518
|
477
|
|||||||||
|
Other
|
1,613
|
1,660
|
3,273
|
3,179
|
|||||||||
|
Total
noninterest expense
|
5,921
|
5,752
|
11,620
|
11,364
|
|||||||||
|
Income
before income tax expense
|
927
|
1,217
|
2,337
|
2,454
|
|||||||||
|
Income
tax expense
|
171
|
313
|
501
|
727
|
|||||||||
|
Net
income
|
$
|
756
|
$
|
904
|
$
|
1,836
|
$
|
1,727
|
|||||
|
Comprehensive
net (loss) income
|
$
|
(273
|
)
|
$
|
1,436
|
$
|
596
|
$
|
1,326
|
||||
|
Per
share data:
|
|||||||||||||
|
Basic
earnings per common share
|
$
|
0.51
|
$
|
0.60
|
$
|
1.23
|
$
|
1.15
|
|||||
|
Earnings
per common share assuming dilution
|
$
|
0.50
|
$
|
0.60
|
$
|
1.22
|
$
|
1.14
|
|||||
|
Cash
dividends declared
|
$
|
0.20
|
$
|
0.18
|
$
|
0.38
|
$
|
0.35
|
|||||
|
Weighted
average number of common shares, basic
|
1,491,548
|
1,507,069
|
1,491,362
|
1,505,552
|
|||||||||
|
Weighted
average number of common shares, diluted
|
1,502,650
|
1,515,238
|
1,502,224
|
1,515,062
|
|||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY
FINANCIAL, INC.
(Unaudited)
|
|
For
the Six Months Ended June 30,
|
||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
1,836
|
$
|
1,727
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||
|
Provision
for loan losses
|
225
|
75
|
|||||
|
Depreciation
and amortization
|
1,172
|
1,154
|
|||||
|
Securities
gains, net
|
(249
|
)
|
(169
|
)
|
|||
|
Gains
on sale of other real estate owned
|
(69
|
)
|
-
|
||||
|
Loss
on sale, disposal and write-down of premises and equipment
|
34
|
1
|
|||||
|
Amortization
of premiums and accretion of discounts on securities, net
|
24
|
24
|
|||||
|
Change
in unearned income/unamortized premium, net
|
(78
|
)
|
(175
|
)
|
|||
|
Accretion
of discount on loans acquired
|
(61
|
)
|
(73
|
)
|
|||
|
Decrease
(increase) in loans held-for-sale
|
453
|
(89
|
)
|
||||
|
Net
change in other assets and other liabilities
|
580
|
576
|
|||||
|
Net
cash provided by operating activities
|
3,867
|
3,051
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Proceeds
from sales of securities available-for-sale
|
9,467
|
4,256
|
|||||
|
Proceeds
from maturities of securities available-for-sale
|
9,811
|
6,310
|
|||||
|
Purchases
of securities available-for-sale
|
(27,099
|
)
|
(11,510
|
)
|
|||
|
Purchases
of Federal Home Loan Bank stock
|
-
|
(26
|
)
|
||||
|
Redemption
of Federal Home Loan Bank stock
|
1,227
|
-
|
|||||
|
Loan
originations and principal collections, net
|
258
|
9,641
|
|||||
|
Recoveries
of previously charged-off loans
|
108
|
185
|
|||||
|
Loans
acquired in branch transactions
|
(8,094
|
)
|
-
|
||||
|
Proceeds
from sales of and payments received on other real estate
owned
|
265
|
10
|
|||||
|
Proceeds
from sales of and payments received on other personal
property
|
198
|
226
|
|||||
|
Premises
and equipment acquired in branch transactions
|
(500
|
)
|
-
|
||||
|
Additions
to premises and equipment, net of disposals
|
(1,473
|
)
|
(452
|
)
|
|||
|
Net
cash (used in) provided by investing activities
|
(15,832
|
)
|
8,640
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Net
decrease in deposits
|
(20,206
|
)
|
(13,322
|
)
|
|||
|
Deposits
acquired in branch transactions, net of assumption premium
|
27,887
|
-
|
|||||
|
Advances
from FHLB
|
10,000
|
13,000
|
|||||
|
Repayment
of FHLB advances
|
(34,000
|
)
|
(6,000
|
)
|
|||
|
Net
increase (decrease) in securities sold under agreements to
repurchase
|
16,006
|
(4,081
|
)
|
||||
|
Exercise
of stock options
|
55
|
99
|
|||||
|
Purchases
of treasury stock
|
-
|
(65
|
)
|
||||
|
Cash
dividends paid
|
(566
|
)
|
(527
|
)
|
|||
|
Net
cash used in financing activities
|
(824
|
)
|
(10,896
|
)
|
|||
|
Net
(decrease) increase in cash and cash equivalents
|
(12,789
|
)
|
795
|
||||
|
Cash
and cash equivalents at beginning of period
|
29,362
|
24,769
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
16,573
|
$
|
25,564
|
|||
|
Supplemental
disclosure of cash flows:
|
|||||||
|
Interest
paid
|
$
|
6,130
|
$
|
3,917
|
|||
|
Taxes
paid
|
$
|
220
|
$
|
447
|
|||
|
Loans
transferred to other real estate owned
|
$
|
-
|
$
|
10
|
|||
|
Loans
transferred to other personal property
|
$
|
122
|
$
|
305
|
|||
|
Amount
due to broker for pending securities purchases
|
$
|
6,032
|
$
|
-
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY
FINANCIAL, INC.
June
30,
2006
(Unaudited)
1.
Basis
of
Presentation
The
unaudited condensed consolidated financial statements of Northway Financial,
Inc. and its wholly-owned subsidiary, Northway Bank, (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,
2006 and 2005 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, 2005.
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
The
Company maintains a stock-based employee compensation plan. Effective January
1,
2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004) “Share-Based Payment” (“SFAS 123R”). This Statement revised SFAS
No. 123, “Accounting for Stock Based Compensation” and superceded Accounting
Principles Board (“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 and establishes fair value as the measurement objective
in
accounting for share-based payment arrangements. No compensation expense was
recognized for the three months and six months ended June 30, 2006 related
to
SFAS 123R. Prior to January 1, 2006 the Company accounted for the plan under
the
recognition and measurement principles of APB Opinion No. 25. No stock-based
employee compensation cost had been recognized during periods prior to January
1, 2006 for its fixed stock option plans.
NORTHWAY
FINANCIAL, INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
June
30,
2006
(Unaudited)
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of SFAS 123R
to
stock-based employee compensation during the three month and six month periods
ended June 30, 2005.
|
Three
Months and Six Months Ended June 30, 2005
|
||||||||||
|
($000
Omitted, except per share data)
|
Three
Months
|
Six
Months
|
||||||||
|
Net
income
|
As
reported
|
$
|
904
|
$
|
1,727
|
|||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based methods awards, net of related tax effects
|
-
|
-
|
||||||||
|
Pro
forma
|
$
|
904
|
$
|
1,727
|
||||||
|
Earnings
per common share
|
As
reported
|
$
|
0.60
|
$
|
1.15
|
|||||
|
|
Pro
forma
|
$
|
0.60
|
$
|
1.15
|
|||||
|
Earnings
per common share (assuming dilution)
|
As
reported
|
$
|
0.60
|
$
|
1.14
|
|||||
|
Pro
forma
|
$
|
0.60
|
$
|
1.14
|
||||||
3. Impact
of New Accounting Standards.
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.
Effective January 1, 2006, the Company adopted SFAS 123R. See Note
2.
In March 2006, the Financial Accounting Standards Board issued an exposure
draft
that seeks to make improvements to Statement of Financial Accounting Standards
No. 132R (“SFAS 132R”), “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans”. The proposed amendment would not alter the
basic approach to measuring plan assets, benefit obligations, or net periodic
benefit cost (expense). Major changes to SFAS 132R proposed in the amendment
include 1) the recognition of an asset or liability for the over-funded or
under-funded status of a defined benefit plan, 2) the recognition of actuarial
gains and losses and prior service costs and credits in other comprehensive
income, 3) measurement of plan assets and benefit obligations as of the
employer’s balance sheet date, rather than at interim measurement dates as
currently allowed, and 4) disclosure of additional information concerning
actuarial gains and losses and prior service costs and credits recognized
in
other comprehensive income. The amendment’s requirement for public companies to
recognize on their balance sheet the asset or liability associated with the
over-funded or under-funded status of a defined benefits pension plan would
take
effect for years ending after December 15, 2006. Companies would be
required to synchronize their measurement dates to the end of their fiscal
years
beginning after December 31, 2006. The Company continues to monitor the
status of this exposure draft.
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 June 30,
|
Six
Months Ended June 30
|
|||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Service
cost
|
$
|
142
|
$
|
134
|
$
|
284
|
$
|
268
|
|||||
|
Interest
cost
|
94
|
86
|
188
|
172
|
|||||||||
|
Expected
return on plan assets
|
(113
|
)
|
(91
|
)
|
(227
|
)
|
(182
|
)
|
|||||
|
Amortization
of prior service cost
|
(21
|
)
|
(21
|
)
|
(42
|
)
|
(42
|
)
|
|||||
|
Recognized
net actuarial loss
|
36
|
34
|
72
|
68
|
|||||||||
|
Amortization
of transition asset
|
-
|
-
|
-
|
-
|
|||||||||
|
Special
recognition of prior service costs
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
periodic benefit cost
|
$
|
138
|
$
|
142
|
$
|
275
|
$
|
284
|
|||||
The
Company previously disclosed in its consolidated financial statements for the
year ended December 31, 2005 that it did not expect to make a pension plan
contribution in 2006. During the first six months of 2006, the Company did
not
make a contribution to the pension plan. However,
a contribution may be made prior to year-end 2006 in response to the adoption
of
any accounting changes associated with the exposure draft, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans-an
amendment of FASB Statements No. 87, 88, 106, and 132(R).” See Note
3.
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 for impact of new products on
noninterest income and expense, projections of revenue, income or loss, and
plans related to products or services of the Company and its subsidiary. 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, projections based on assumptions regarding market and
liquidity risk, 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, 2005, 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
On
April
7, 2006, the Company acquired from Washington Mutual Bank the former Providian
National Bank branches located in Tilton and Belmont, New Hampshire. This
transaction included the purchase of approximately $8,100,000 in loan balances
and the acquisition of deposits totaling approximately $29,500,000, for which
the Company paid a deposit assumption premium of 6.30%.
The
Company’s total assets at June 30, 2006 were $640,262,000 compared to
$632,734,000 at December 31, 2005, an increase of $7,528,000. Securities
available-for-sale increased $15,024,000 to $118,268,000 at June 30, 2006 from
$103,244,000 at December 31, 2005 due principally to the purchase of
mortgage-backed securities and municipal bonds. Loans increased $7,663,000
to
$468,036,000 at June 30, 2006 compared to $460,373,000 at December 31, 2005
due
primarily to the loans purchased as part of the branch acquisition in April.
Partially offsetting this, federal funds sold decreased $14,610,000 compared
to
December 31, 2005.
Deposits
increased $9,288,000 to $473,744,000 at June 30, 2006 from $464,456,000 at
December 31, 2005. Acquired deposits of $29,494,000 were partially offset by
a
decrease in overall deposits of $20,206,000, which was the result of a decline
in all deposit categories except time deposits. Short-term borrowings increased
$16,006,000 due to an increase in securities sold under agreements to
repurchase. Long-term Federal Home Loan Bank advances decreased $24,000,000
to
$61,000,000 from $85,000,000 at December 31, 2005 due to the maturity, call
and
prepayment of eleven advances totaling $34,000,000, which was partially offset
by one new advance totaling $10,000,000. Total stockholders’ equity increased
$85,000 to $50,335,000 at June 30, 2006 from $50,250,000 at December 31, 2005
due primarily to net income of $1,836,000 which was partially offset by the
recording of an additional comprehensive loss associated with securities
available-for-sale of $1,240,000, and dividends paid of $566,000.
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 established 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) the 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, 2006 the allowance for loan losses was $5,293,000, or 1.13% of total loans,
compared to $5,150,000, or 1.12% of total loans at December 31, 2005. The
composition of the allowance for loan losses for the three month and six month
periods ended June 30, 2006 and 2005 is as follows:
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
||||||||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
||||||
|
Balance
at beginning of period
|
$
|
5,211
|
$
|
5,312
|
$
|
5,150
|
$
|
5,204
|
||||||||
|
Charge-offs
|
(84
|
)
|
(95
|
)
|
(190
|
)
|
(186
|
)
|
||||||||
|
Recoveries
|
46
|
61
|
108
|
185
|
||||||||||||
|
Net
(charge-offs) recoveries
|
(38
|
)
|
(34
|
)
|
(82
|
)
|
(1
|
)
|
||||||||
|
Provision
for loan losses
|
120
|
-
|
225
|
75
|
||||||||||||
|
alance
at end of period
|
$
|
5,293
|
$
|
5,278
|
$
|
5,293
|
$
|
5,278
|
||||||||
Nonperforming
loans totaled
$2,238,000 as of June 30, 2006, compared to $3,013,000 at December 31, 2005.
The
ratio of nonperforming loans to loans net of unearned income was 0.48% as of
June 30, 2006, compared to 0.66% at December 31, 2005. Nonperforming assets,
which include nonperforming loans, other real estate owned and other chattels
owned, totaled $2,274,000 as of June 30, 2006, compared to $3,321,000 at
December 31, 2005. The ratio of nonperforming assets to total assets was 0.36%
as of June 30, 2006, compared to 0.53% at December 31, 2005.
Results
of Operations
The
Company reported net income of $756,000, or $0.51 per common share-basic, for
the three months ended June 30, 2006, compared to $904,000, or $0.60 per common
share-basic, for the three months ended June 30, 2005, a decrease of $148,000,
or 16.4%. Net income for the six months ended June 30, 2006 was $1,836,000,
or
$1.23 per common share-basic, compared to $1,727,000, or $1.15 per common
share-basic, for the six months ended June 30, 2005, an increase of $109,000,
or
6.3%.
Net
interest and dividend income for the second quarter of 2006 decreased $30,000
to
$5,644,000 compared to $5,674,000 for the second quarter of 2005. Net interest
and dividend income for the six months ended June 30, 2006 decreased $325,000,
or 2.8%, to $11,286,000 compared to $11,611,000 for the same period last year.
The year-to-date decrease was primarily due to an increase in the cost of
interest bearing liabilities of 87 basis points resulting from an increase
in
money market, time deposit, securities sold under agreements to repurchase
and
capital security rates. This was partially offset by an increase in the yield
on
earning assets of 56 basis points due to the increase in the prime rate as
well
as the continued redeployment of the amortization from the indirect automobile
line of business into higher yielding residential mortgage loans and commercial
loans.
The
provision for loan losses was $120,000 for the second quarter of 2006, compared
to no provision for the second quarter of last year. For the six months ended
June 30, 2006, the provision for loan losses was $225,000, an increase of
$150,000 from the $75,000 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 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
bank’s 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 $29,000 to $1,324,000 in the second quarter of 2006 compared
to
$1,295,000 in the second quarter of 2005. Service charges and fees on deposit
accounts increased $104,000 to $729,000 for the second quarter of 2006 compared
to $625,000 for the second quarter of 2005 due primarily to an increase in
the
NSF per item fees in May 2006. Net securities gains decreased $59,000 to $39,000
in the second quarter of 2006 compared to $98,000 for the second quarter of
2005
due primarily to a minor repositioning of the investment portfolio during the
second quarter of 2006. Gains on sales of loans increased $1,000 to $54,000.
In
the second quarter, other noninterest income decreased $17,000 to $502,000
compared to $519,000 for the same period a year ago.
Noninterest
income for the six months ended June 30, 2006 increased $614,000 to $2,896,000
compared to $2,282,000 for the same period last year. Year-to-date, service
charges and fees on deposit accounts were $1,344,000, an increase of $179,000,
compared to the prior year. Net securities gains increased $80,000 to $249,000
for the six months ended June 30, 2006 compared to $169,000 for the same period
last year. Gains on sales of loans decreased $30,000 to $72,000 for the six
months ended June 30, 2006 compared to $102,000 for the same period a year
ago
due to the lower level of secondary market sales in 2006. For the first six
months of 2006, other noninterest income increased $385,000 to $1,231,000
compared to $846,000 for the same period a year ago. The increase in other
noninterest income was due primarily to gains on sale of other real estate
owned, gains recorded on the redemption of two FHLB symmetrical advances, and
the recovery of prior year expenses associated with a non-accrual loan that
paid
in full during the first quarter of this year.
Noninterest expense increased $169,000 to $5,921,000 for the quarter ended
June
30, 2006, compared to the $5,752,000 recorded during the same period last year.
During the second quarter of 2006, the Company incurred one-time expenses
associated with the branch acquisition of $118,000. Further, ongoing expenses
of
these two new locations were $127,000 for the quarter. Salaries and employee
benefits increased $115,000 to $3,011,000 for the second quarter of 2006
compared to $2,896,000 for the same period last year due primarily to an
increase in salary expense and health and dental insurance. Office occupancy
and
equipment expense increased $60,000 to $1,017,000 for the second quarter 2006
compared to $957,000 for the same period last year. This increase is due
primarily to an increase in equipment maintenance, equipment expense and loss
on
equipment disposal. Amortization of core deposit intangibles increased $41,000
to $280,000 for the second quarter of 2006 compared to $239,000 for the second
quarter of 2005 due to the amortization of the core deposit intangible
associated with the two branch locations purchased in April of this year. Other
noninterest expense decreased $47,000 to $1,613,000 for the second quarter
of
2006 compared to $1,660,000 for the same period last year. Decreases were
realized in legal fees, telephone expense and repossession expense, which was
partially offset by an increase in professional fees.
For the six months ended June 30, 2006 noninterest expense totaled $11,620,000,
an increase of $256,000 over the $11,364,000 reported for the same period
last
year. For the six months ended June 30, 2006, the Company incurred one-time
expenses associated with the acquisition of two Washington Mutual Bank branches
of $118,000. Further, ongoing expenses of these two new branches were $127,000
year-to-date. For the six months ended June 30, 2006, salaries and employee
benefits increased $114,000 to $5,893,000, compared to $5,779,000 for the
same
period a year ago. Office occupancy and equipment expense increased $7,000
to
$1,936,000 for the six months ended June 30, 2006, compared to the same period
last year. Amortization of core deposit intangibles increased $41,000 to
$518,000 for the six months ended June 30, 2006, compared to $477,000 for
the
same period last year due to the amortization of the core deposit intangible
associated with the two branch locations purchased in April of this year.
Other
noninterest expense increased $94,000 to $3,273,000 for the six months ended
June 30, 2006 compared to $3,179,000 for the same period a year ago. Increases
were recorded in professional fees, postage and stationery and office supplies,
which were partially offset by reductions in legal fees and repossession
expense.
Comprehensive
Net Income/(Loss)
Comprehensive
income/(loss) 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.
The
Company reported comprehensive
net loss of $273,000 for the quarter ended June 30, 2006, compared to
comprehensive net income of $1,436,000 for the quarter ended June 30, 2005.
For
the six months ended June 30, 2006, comprehensive net income was $596,000,
compared to $1,326,000 for the six months ended June 30, 2005.
For the quarter ended June 30, 2006, the Company increased its unrealized loss
on available-for-sale securities by $1,029,000, net of tax. When deducted from
the quarterly net income of $756,000 the result is a comprehensive net loss
of
$273,000. 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 six months ended June 30, 2006, the Company increased its unrealized
loss on available-for-sale securities by $1,240,000, net of tax. When deducted
from net income year-to-date of $1,836,000 the result is a net comprehensive
income of $596,000. 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
net comprehensive income of $1,326,000.
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
$1,240,000 for the six months ended June 30, 2006 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 $501,000 and $727,000 for the
six
months ended June 30, 2006 and 2005, respectively. The effective tax rates
were
21.4% and 29.6% for those respective periods. The effective tax rate for 2006
is
positively impacted by the Company’s significant increase in its investment in
municipal bonds as well as certain charitable contributions made which provide
tax credits to the Company due to a 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 payments 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 contributions to the subsidiary bank, interest payments on capital
securities and the payment of general corporate expenses. The primary sources
of
liquidity for Northway Financial, Inc. are dividends from its subsidiary bank
and reimbursement for services performed on behalf of the banks.
Further, the Company is party to off-balance sheet financial instruments
in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, unadvanced
home
equity loans, unadvanced lines of credit, standby letters of credit and
unadvanced portions of Bounce ProtectionTM.
The
amounts of those instruments reflect the extent of involvement the Company
has
in particular classes of financial instruments, and, if advanced, will impact
the Company’s liquidity. As of June 30, 2006, off-balance sheet financial
commitments totaled approximately $77,800,000.
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 13.25% and 15.45%,
respectively, at June 30, 2006. The Company’s Tier 1 leverage ratio at June 30,
2006 was 9.01%. As of June 30, 2006, the capital ratios of the Company and
the
subsidiary bank exceeded the minimum capital ratio requirements for the
“well-capitalized” category under the Federal Deposit Insurance Corporation
Improvement Act of 1991.
Since December 31, 2005, there have been no material changes in the Company’s
quantitative and qualitative disclosures concerning market risk. A more detailed
description of the quantitative and qualitative disclosures about market
risk
was provided by the Company on pages 26 and 27 of the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, and is incorporated
by
reference as Exhibit 19 of this report.
|
(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 have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
|
Item
1.
|
|
Item
1A.
|
There
have been no material changes in the Company’s risk factors as previously
disclosed on pages 9-11 of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
The
Company’s Annual Meeting of Stockholders was held on May 30, 2006. At the Annual
Meeting, the stockholders elected Frederick C. Anderson and Brien L. Ward to
three-year terms as directors. Each of these directors’ terms will expire at the
2009 Annual Meeting. The final vote for each of these elected directors is
as
follows:
For Withheld
Frederick
Anderson
1,030,604 181,685
Brien
L. Ward
1,030,111 182,178
The directors continuing in office are Fletcher W. Adams, Stephen G. Boucher, Arnold P. Hanson, Jr., Barry J. Kelley, Randall G. Labnon, John H. Noyes, and William J. Woodward.
|
Item
5.
|
|
Item
6.
|
|
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,
2005).
|
|
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, 2005).
|
|
Exhibit
Number
|
Description
of Exhibit
|
|
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, 2005).
|
|
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 December 31,
2005).
|
|
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).
|
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
7, 2006
|
BY:/S/William
J. Woodward
|
|
William
J. Woodward
|
|
|
President
& CEO
|
|
|
(Principal
Executive Officer)
|
|
|
August
7, 2006
|
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,
2005).
|
|
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, 2005).
|
|
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, 2005).
|
|
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 December 31,
2005).
|
|
0.8
|
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, 2005.
|
|
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.
|
15