SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 000-23129
NORTHWAY FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
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(Address of principal executive offices) (Zip Code)
(603) 752-1171
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At May 1, 2001, there were
1,515,740 shares of common stock outstanding, par value $1.00 per share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Condensed Financial Statements
Consolidated Statements of Income for the Three Months
Ended March 31, 2001 and 2000 (Unaudited)....................... 3
Consolidated Balance Sheets at March 31, 2001
(Unaudited) and December 31, 2000............................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000 (Unaudited)....................... 5
Notes to Consolidated Financial Statements (Unaudited).......... 7
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
Item 3.
Quantitative and Qualitative Disclosures About Market Risk..... 12
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings................................................... 13
Item 2.
Changes in Securities and use of Proceeds........................... 13
Item 3.
Defaults Upon Senior Securities..................................... 13
Item 4.
Submission of Matters to a Vote of Security Holders................. 13
Item 5.
Other Information................................................... 13
Item 6.
Exhibits and Reports on Form 8-K.................................... 13
Signatures.......................................................... 14
PART 1. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
(Dollars in thousands, except per share data) 2001 2000
-----------------------------------------------------------------------------
Interest and dividend income:
Loans $8,258 $7,914
Interest on debt securities:
Taxable 691 764
Tax exempt 107 63
Dividends 105 93
Federal funds sold 20 3
Interest bearing deposits 1 2
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Total interest and dividend income 9,182 8,839
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Interest expense:
Deposits 3,319 2,409
Borrowed funds 762 1,147
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Total interest expense 4,081 3,556
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Net interest and dividend income 5,101 5,283
Provision for loan losses 225 245
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Net interest and dividend income after provision
for loan losses 4,876 5,038
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Noninterest income:
Service charges on deposit accounts and fees 289 235
Securities gains, net 32 120
Other 272 203
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Total noninterest income 593 558
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Noninterest expense:
Salaries and employee benefits 2,139 2,179
Office occupancy and equipment 731 680
Amortization of deposit purchase premium 175 103
Other 984 1,092
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Total noninterest expense 4,029 4,054
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Income before income tax expense 1,440 1,542
Income tax expense 438 538
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Net income $1,002 $1,004
===================
Comprehensive net income $1,110 $ 777
===================
Per share data:
Earnings per common share $ 0.65 $ 0.62
Cash dividends declared $ 0.17 $ 0.15
Weighted average number of common shares 1,541,377 1,607,744
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
(Dollars in thousands, except per share data) 2001 2000
(Unaudited)
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Assets
Cash and due from banks and interest bearing deposits $ 11,497 $ 15,401
Federal funds sold 8,500 --
Investment securities available-for-sale 50,730 55,712
Investment securities held-to-maturity -- 2,752
Loans held-for-sale 627 229
Loans, net before allowance for loan losses 389,354 393,258
Allowance for loan losses (4,460) (4,354)
----------------------
Loans, net 384,894 388,904
----------------------
Other real estate owned 46 25
Accrued interest receivable 2,491 2,842
Deferred income tax asset, net 1,831 1,901
Premises and equipment, net 11,053 11,000
Deposit assumption premium 4,923 5,098
Other assets 2,038 1,280
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Total assets $ 478,630 $ 485,144
======================
Liabilities and Stockholders' Equity
Liabilities:
Interest bearing deposits $ 329,295 $ 335,027
Non-interest bearing deposits 52,274 56,745
Securities sold under agreements to repurchase 11,781 9,390
Short-term Federal Home Loan Bank advances 1,500 2,950
Long-term Federal Home Loan Bank advances 38,028 35,528
Other liabilities 3,978 3,942
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Total liabilities 436,856 443,582
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Stockholders' Equity:
Preferred stock, $1 par value; 1,000,000 shares authorized; none issued -- --
Common stock, $1 par value; 9,000,000 shares authorized; 1,731,969
shares issued and 1,532,823 outstanding March 31, 2001 and 1,559,369
outstanding December 31, 2000 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 43,851 43,110
Treasury stock, at cost (199,146 and 172,600 shares, respectively) (5,345) (4,708)
Accumulated other comprehensive (loss) income, net of tax (565) (673)
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Total stockholders' equity 41,774 41,562
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Total liabilities and stockholders' equity $ 478,630 $ 485,144
======================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
(Dollars in thousands) 2001 2000
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Cash flows from operating activities:
Net income $ 1,002 $ 1,004
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 225 245
Depreciation and amortization 437 347
Deferred income taxes -- (150)
Gains on sales of investment securities available-for-sale, net (32) (120)
Write down of real estate acquired by foreclosure 3 --
Amortization of premium & accretion of discounts on securities, net 6 13
(Decrease) increase in unearned income, net (6) 72
Gains on sales of other real estate owned and other personal property, net (12) (11)
Net increase in loans held-for-sale (398) (42)
Net change in other assets and other liabilities (141) 830
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Net cash provided by operating activities 1,084 2,188
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Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale 3,956 618
Proceeds from maturities of investment securities held-to-maturity -- 834
Proceeds from maturities of investment securities available-for-sale 19,061 1,245
Purchase of investment securities available-for-sale (15,304) (1,330)
Purchase of investment securities held-to-maturity -- (125)
Net decrease (increase) in loans 3,631 (15,872)
Proceeds from sales of and payments received on other real estate owned 15 75
Proceeds from sales of and payments received on other personal property 128 81
Additions to premises and equipment (315) (140)
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Net cash provided (used) by investing activities 11,172 (14,614)
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Cash flows from financing activities:
Net decrease in deposits (10,203) (5,847)
Advances from Federal Home Loan Bank 4,000 10,000
Repayment of Federal Home Loan Bank advances -- (8,000)
Net (decrease) increase in short-term Federal Home Loan Bank advances (2,950) 14,958
Net increase in securities sold under agreements to repurchase 2,391 86
Purchases of treasury stock (637) (304)
Cash dividends paid (261) (241)
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Net cash (used) provided by financing activities (7,660) 10,652
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Net increase (decrease) in cash and cash equivalents 4,596 (1,774)
Cash and cash equivalents at beginning of period 15,401 16,087
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Cash and cash equivalents at end of period $ 19,997 $ 14,313
====================
Cash paid during the period for:
Interest $ 4,483 $ 3,781
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Income taxes $ 40 $ 60
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Continued....
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
(Dollars in thousands) 2001 2000
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Supplemental disclosures of non-cash activities:
Loans transferred to other real estate owned $ 24 $ --
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Loans transferred to other personal property $ 134 $ 198
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Available-for-sale securities transferred to other assets $ 225 $ --
======== ========
Carrying amount of held-to-maturity securities transferred to
available-for-sale securities $ 2,752 $ --
======== ========
Long-term Federal Home Loan Bank advances transferred to short-term
Federal Home Loan Bank advances $ 1,500 $ --
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway Financial,
Inc. and its two wholly-owned bank subsidiaries (collectively, "the Company")
included herein have been prepared by the Company in accordance with the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in accordance with such rules and regulations. The Company, however,
believes that the disclosures are adequate to make the information presented not
misleading. The amounts shown reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the financial statements for
the periods reported.
The results of operations for the three month periods ended March 31, 2001 and
2000 are not necessarily indicative of the results of operations to be expected
for the full year or any other interim periods.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
2. Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (1) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (2) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (3)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The Statement generally
provides for matching the timing of the recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be either net income or other comprehensive income.
For a derivative not designated as a hedging instrument, changes in fair value
will be recognized in net income in the period of change. Management adopted
this pronouncement on January 1, 2001. Statement No. 133 allows for a one-time
change in the classification of securities in the investment portfolio. In
conjunction with the adoption of Statement No. 133 the Company transferred all
securities held-to-maturity to the available-for-sale category at their market
value of $2,731,000 as of January 1, 2001. In connection with the transfer, the
Company recorded in comprehensive income an unrealized holding loss of
approximately $13,000, net of tax effect. Under Statement No. 133, this transfer
will not call into question the Company's intent to hold other debt securities
to maturity in the future. Management does not anticipate that this statement
will have any other material impact on the consolidated financial statements.
The FASB has issued Statement No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". This Statement replaces
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", and rescinds Statement No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125".
Statement No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This Statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. The Company does
not expect that the adoption of this Statement will have a material impact on
its financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Introduction.
The following discussion and analysis and related consolidated financial
statements include Northway Financial, Inc. and its wholly-owned subsidiaries,
The Berlin City Bank and Pemigewasset National Bank (collectively, the
"Company").
Certain statements in this Form 10-Q are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may include, but are not limited to, projections of
revenue, income or loss, plans for future operations and acquisitions, and plans
related to products or services of the Company. Such forward-looking statements
are subject to known and unknown risks, uncertainties and contingencies, many of
which are beyond the control of the Company. To the extent any such risks,
uncertainties and contingencies are realized, the Company's actual results,
performance or achievements could differ materially from anticipated results,
performance or achievements. Factors that might affect such forward-looking
statements include, among other things, overall economic and business
conditions, interest rate fluctuations, the demand for the Company's products
and services, competitive factors in the industries in which the Company
competes, changes in government regulations, the timing, impact and other
uncertainties of future acquisitions, etc.
In addition to the factors described above, the following are some additional
factors that could cause our financial performance to differ from any
forward-looking statement contained herein: a) the change in interest rates over
the past year and expected changes in interest rates during the remainder of the
year 2001; b) a change in product mix attributable to changing interest rates,
customer preferences or competition; c) a significant portion of the Company's
loan customers are in the hospitality business and therefore could be affected
by weather conditions and/or high gasoline prices; and d) the effectiveness of
advertising, marketing and promotional programs.
The words "believe," "expect," "anticipate," "intend," "estimate," "project,"
and other expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Reliance should not be placed on forward-looking statements because
they involve known or unknown risks, uncertainties or other factors, which may
cause the actual results, performance or achievements of the Company to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. The Company undertakes
no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
Although the Company has attempted to list comprehensively the factors which
might affect forward-looking statements, the Company wishes to caution investors
that other factors may in the future prove to be important in affecting the
Company's results of operations. New factors emerge from time to time and it is
not possible for management to anticipate all of such factors, nor can it assess
the impact of each such factor, or combination of factors, which may cause
actual results to differ materially from forward-looking statements.
Financial Condition
The Company's total assets at March 31, 2001 were $478.6 million compared to
$485.1 million at December 31, 2000, a $6.5 million decrease. Net loans,
including loans held-for-sale, decreased $3.6 million to $385.5 million,
principally because of decreases in installment loans and residential real
estate loans outstanding. Total deposits decreased $10.2 million. The decline in
deposits was funded by loan pay downs, an increase in Federal Home Loan Bank
("FHLB") debt of $1.1 million and a $2.4 million increase in repurchase
agreements. Total stockholders' equity increased $0.2 million from $41.6 million
at December 31, 2000 to $41.8 million at March 31, 2001. The increase in
stockholders' equity was attributable to net income of $1.0 million and a $0.1
million decline in accumulated other comprehensive loss, offset by treasury
share purchases totaling $0.6 million and dividend payments of $0.3 million.
The Company maintains an allowance for loan losses to absorb future charge-offs
of loans in the existing portfolio. The allowance is increased when a loan loss
provision is recorded as an expense in the income statement. When a loan, or
portion thereof, is considered uncollectible, it is charged against this
allowance. Recoveries of amounts previously charged-off are added to the
allowance when collected. At March 31, 2001 the allowance for loan losses was
$4.5 million, or 1.15% of total loans, as compared to $4.4 million, or 1.11% of
total loans at December 31, 2000. The adequacy of the allowance for loan losses
was based on an evaluation by each bank's management and Board of Directors of
current and anticipated economic conditions, changes in the diversification,
size and risk within the loan portfolio, and other factors. An analysis of the
allowance for loan losses for the three month period ended March 31, 2001 and
2000 is as follows:
Three Months
Ended March 31,
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------------
Balance at beginning of period $4,354 $4,887
-----------------
Charge-offs (161) (1,202)
Recoveries 42 185
-----------------
Net Charge-offs (119) (1,017)
Provision for loan losses 225 245
-----------------
Balance at end of period $4,460 $4,115
=================
Nonperforming loans totaled $1.1 million as of March 31, 2001, compared to $1.0
million at December 31, 2000. The ratio of nonperforming loans to total loans
was 0.29% as of March 31, 2001 compared to 0.24% at December 31, 2000 and the
ratio of nonperforming assets to total assets was 0.27% as of March 31, 2001
compared to 0.22% at December 31, 2000.
Results of Operations
The Company reported net income of $1.0 million for the three months ended March
31, 2001, which equaled the $1.0 million recorded for the three months ended
March 31, 2000. Due to the ongoing stock repurchase program, earnings per share
increased $0.03 to $0.65 from the $0.62 recorded in the first quarter of 2000.
Although net income was constant as compared to the first quarter of 2000 there
were notable changes in the components of net income. Net interest income for
the first quarter decreased $182 thousand to $5.1 million as compared to $5.3
million for the first quarter of the prior year. Due to the low level of problem
loans, the provision for loan losses decreased $20 thousand to $225 thousand for
the quarter ended March 31, 2001 versus $245 thousand for the same quarter of
the prior year.
Noninterest income increased $35 thousand to $593 thousand in the first quarter
of 2001 versus $558 thousand in the first quarter of 2000. The increase was
primarily attributable to increases in service charge and other income which
offset a decrease in security gains of $88 thousand from the level of the prior
year.
Noninterest expense decreased $25 thousand to $4.0 million for the quarter ended
March 31, 2001 compared to the $4.1 million recorded during the same period last
year. The decrease was principally attributable to lower ongoing operating
expenses offset by an increase in occupancy and equipment expense and deposit
purchase premium amortization resulting from the acquisition of the West Ossipee
Branch in August of 2000.
Income Tax Expense
The Company recognized income tax expense of $438 thousand and $538 thousand for
the three months ended March 31, 2001 and 2000, respectively. The effective tax
rate was 30.4% and 34.9% for those respective periods. The decrease in the
effective tax rate is due to the fact that the Company has obtained a number of
State of New Hampshire tax credits related to economic development grants and
carried a larger percentage of tax exempt securities and loans versus the amount
carried in the prior year.
Liquidity
Liquidity risk management refers to the Company's ability to raise funds in
order to meet existing and anticipated financial obligations. These obligations
are the withdrawal of deposits on demand or at their contractual maturity, the
repayment of borrowings as they mature, the ability to fund new and existing
loan commitments and the ability to take advantage of new business
opportunities. Liquidity may be provided through the maturity or sale of assets
such as loans and securities available-for-sale, liability sources such as
increased deposits, utilization of the FHLB credit facility, purchased or other
borrowed funds, and access to the capital markets. Liquidity targets are subject
to change based on economic and market conditions and are controlled and
monitored by the Company's Asset/Liability Committee.
At the subsidiary bank level, liquidity is managed by measuring the net amount
of marketable assets after deducting pledged assets, plus lines of credit,
primarily with the FHLB, which are available to fund liquidity requirements.
Management then measures the adequacy of that aggregate amount relative to the
aggregate amount of liabilities deemed to be sensitive or volatile liabilities.
These include core deposits in excess of $100,000, term deposits with short
maturities, and credit commitments outstanding.
Additionally, the parent holding company requires cash for various operating
needs including dividends to shareholders, the stock repurchase program, capital
injections to the subsidiary banks, and the payment of general corporate
expenses. The primary source of liquidity for the parent holding company is
dividends from the subsidiary banks.
The Company's current level of liquidity and funds availability from outside
sources are sufficient to meet the Company's needs. The Company, however, has
been successful in its efforts to increase its lending capabilities and may need
to identify additional sources of liquidity as the loan portfolio builds.
Capital
The Company's Tier 1 and Total Risk Based Capital ratios were 10.03% and 11.25%,
respectively, at March 31, 2001. The Company's leverage ratio at March 31, 2001
was 7.56%.
As of March 31, 2001, the capital ratios of the Company and all of its
subsidiary banks exceeded the minimum capital ratio requirements of the "well
capitalized" category under the Federal Deposit Insurance Company Improvement
Act of 1991 (FDICIA).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2000, there have been no material changes in the Company's
quantitative and qualitative disclosures about market risk. A more full
description of the quantitative and qualitative disclosures about market risk
was provided by the Company on pages 8 through 18 of the Company's 2000 Annual
Report to Stockholders filed as Exhibit 13 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) The Company did not file any Reports on Form 8-K during the quarter
ended March 31, 2001.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
NORTHWAY FINANCIAL, INC.
May 9, 2001 BY: \S\ William J. Woodward
---------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
May 9, 2001 BY: \S\ George L. Fredette
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George L. Fredette
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)