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 September 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
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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)
(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 October 24, 2005, there
were 1,497,174 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 September 30, 2005
(Unaudited) and December 31, 2004......................................3
Condensed Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2005 and 2004 (Unaudited)..........4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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..............................................9
Item 3.
Quantitative and Qualitative Disclosures About Market Risk............14
Item 4.
Controls and Procedures...............................................14
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.....................................................15
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds...........15
Item 3.
Defaults Upon Senior Securities.......................................15
Item 4.
Submission of Matters to a Vote of Security Holders...................15
Item 5.
Other Information.....................................................15
Item 6.
Exhibits .............................................................15
Signatures...................................................................17
PART 1. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sep. 30, Dec. 31,
(Dollars in thousands) 2005 2004
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(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits $ 15,419 $ 13,794
Federal funds sold 15,660 10,975
Securities available-for-sale 101,571 101,133
Federal Home Loan Bank stock 5,541 5,515
Federal Reserve Bank stock 365 365
Loans held-for-sale 243 311
Loans, net before allowance for loan losses 461,481 474,706
Less: allowance for loan losses 5,210 5,204
----------------------
Loans, net 456,271 469,502
----------------------
Premises and equipment, net 13,149 13,701
Other real estate owned 25 --
Core deposit intangible 2,234 2,949
Goodwill 10,152 10,152
Other assets 10,645 10,021
----------------------
Total assets $ 631,275 $ 638,418
======================
Liabilities and stockholders' equity:
Liabilities
Interest bearing deposits $ 383,124 $ 396,690
Noninterest bearing deposits 79,205 78,669
Short-term borrowings 7,405 11,268
Long-term debt 105,620 98,620
Other liabilities 5,954 3,661
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Total liabilities 581,308 588,908
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Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued -- --
Common stock, $1.00 par value; 9,000,000 shares authorized; 1,731,969 issued
at September 30, 2005 and December 31, 2004 and 1,497,174 outstanding
at September 30, 2005 and 1,503,574 outstanding at December 31, 2004 1,732 1,732
Surplus 2,064 2,075
Retained earnings 54,290 52,484
Treasury stock, at cost (234,795 shares at September 30, 2005 and 228,395 shares
at December 31, 2004) (6,330) (6,090)
Accumulated other comprehensive loss, net of tax (1,789) (691)
----------------------
Total stockholders' equity 49,967 49,510
----------------------
Total liabilities and stockholders' equity $ 631,275 $ 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 Nine Months
Ended Sep. 30, Ended Sep. 30,
(Dollars in thousands, except per share data) 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $ 6,954 $ 6,655 $ 20,287 $ 19,921
Interest on debt securities:
Taxable 947 809 2,946 2,277
Tax-exempt 58 32 126 97
Dividends 85 65 236 170
Federal funds sold 132 33 155 71
Interest bearing deposits 1 1 2 1
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Total interest and dividend income 8,177 7,595 23,752 22,537
----------------------- -----------------------
Interest expense:
Deposits 1,094 793 2,758 2,348
Borrowed funds 1,248 1,074 3,548 3,219
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Total interest expense 2,342 1,867 6,306 5,567
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Net interest and dividend income 5,835 5,728 17,446 16,970
Provision for loan losses -- 120 75 390
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Net interest and dividend income after
provision for loan losses 5,835 5,608 17,371 16,580
----------------------- -----------------------
Noninterest income:
Service charges and fees on deposit accounts 634 591 1,799 1,643
Securities gains, net 41 20 210 740
Gain on sales of loans, net 112 319 214 402
Other 550 513 1,396 1,218
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Total noninterest income 1,337 1,443 3,619 4,003
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Noninterest expense:
Salaries and employee benefits 2,884 3,009 8,663 9,096
Office occupancy and equipment 1,131 908 3,060 2,758
Amortization of core deposit intangible 238 238 715 715
Other 1,693 1,412 4,872 4,308
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Total noninterest expense 5,946 5,567 17,310 16,877
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Income before income tax expense 1,226 1,484 3,680 3,706
Income tax expense 349 507 1,076 1,252
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Net income $ 877 $ 977 $ 2,604 $ 2,454
======================= =======================
Comprehensive net income $ 180 $ 2,037 $ 1,506 $ 1,757
======================= =======================
Per share data:
Basic earnings per common share $ 0.58 $ 0.65 $ 1.73 $ 1.64
Earnings per common share assuming dilution $ 0.58 $ 0.64 $ 1.72 $ 1.62
Cash dividends declared $ 0.18 $ 0.17 $ 0.53 $ 0.51
Weighted average number of common shares, basic 1,503,904 1,499,574 1,504,997 1,499,574
Weighted average number of common shares, diluted 1,512,501 1,509,419 1,514,195 1,511,418
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 Nine Months
Ended Sep. 30,
(Dollars in thousands) 2005 2004
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Cash flows from operating activities:
Net income $ 2,604 $ 2,454
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 75 390
Depreciation and amortization 1,806 1,781
Securities gains, net (210) (740)
Loss on sale, disposal and write-down of premises and equipment 2 4
Amortization of premiums and accretion of discounts on securities, net 38 76
Decrease in unearned income, net (204) (148)
Amortization of discount on loans acquired 107 122
Loss on sales of other real estate owned and other personal property, net -- 5
Decrease (increase) in loans held-for-sale 68 (21)
Net change in other assets and other liabilities 835 1,460
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Net cash provided by operating activities 5,121 5,383
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Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 4,690 16,028
Proceeds from maturities of securities available-for-sale 9,284 18,357
Purchases of securities available-for-sale (14,390) (55,146)
Purchases of Federal Home Loan Bank stock (26) (810)
Loan originations and principal collections, net 12,509 (10,808)
Recoveries of previously charged-off loans 236 284
Proceeds from sales of and payments received on other real estate owned 10 --
Proceeds from sales of and payments received on other personal property 359 478
Additions to premises and equipment (541) (2,096)
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Net cash provided by (used in) investing activities 12,131 (33,713)
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Cash flows from financing activities:
Net (decrease) increase in deposits (13,030) 2,556
Advances from FHLB 13,000 20,000
Repayment of FHLB Advances (6,000) (9,000)
Net (decrease) increase in short-term borrowings (3,863) 3,234
Exercise of stock options, net of tax benefit 111 --
Purchase of treasury stock (362) --
Cash dividends paid (798) (765)
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Net cash (used in) provided by financing activities (10,942) 16,025
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Net increase (decrease) in cash and cash equivalents 6,310 (12,305)
Cash and cash equivalents at beginning of period 24,769 31,085
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Cash and cash equivalents at end of period $ 31,079 $ 18,780
======== ========
Supplemental disclosure of cash flows:
Interest paid $ 6,034 $ 5,550
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Taxes paid $ 934 $ 1,450
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Loans transferred to other real estate owned $ 35 $-
======== ========
Loans transferred to other personal property $ 473 $ 424
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Amount due to broker for pending securities purchases $ 1,666 $ 3,055
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine month periods ended
September 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 September 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 Nine Months
Ended Sep. 30, Ended Sep. 30,
2005 2004 2005 2004
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Net income As reported $ 877 $ 977 $ 2,604 $ 2,454
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects -- -- -- --
------ ------ --------- ---------
Pro forma $ 877 $ 977 $ 2,604 $ 2,454
===== ====== ========= =========
Earnings per common share As reported $ 0.58 $ 0.65 $ 1.73 $ 1.64
Pro forma $ 0.58 $ 0.65 $ 1.73 $ 1.64
Earnings per common share (assuming dilution) As reported $ 0.58 $ 0.64 $ 1.72 $ 1.62
Pro forma $ 0.58 $ 0.64 $ 1.72 $ 1.62
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 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 nine months ended September 30:
(Dollars in Thousands)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
2005 2004 2005 2004
-------------- --------------
Service cost $ 135 $ 120 $ 403 $ 356
Interest cost 86 75 258 227
Expected return on plan assets (91) (72) (273) (216)
Amortization of prior service cost (21) (21) (63) (63)
Recognized net actuarial loss 34 33 102 106
----- ----- ----- -----
Net periodic benefit cost $ 143 $ 135 $ 427 $ 410
===== ===== ===== =====
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 October 1, 2005, the Company completed 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 had been
affiliated since the creation of Northway Financial, Inc. in 1997. They had 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
was an internal corporate reorganization, was designed to strengthen the
Company's 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.
Financial Condition
The Company's total assets at September 30, 2005 were $631,275,000
compared to $638,418,000 at December 31, 2004, a decrease of $7,143,000. Net
loans, including loans held-for-sale, decreased $13,299,000 to $456,514,000.
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 $13,030,000 to $462,329,000 from $475,359,000 at
December 31, 2004 due to a decrease in all deposit categories except time
deposits. Short-term borrowings decreased $3,863,000 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 during the year totaling $13,000,000 and 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 $457,000 to $49,967,000 at September 30, 2005
from $49,510,000 at December 31, 2004 due primarily to net income of $2,604,000
which was partially offset by the recording of an additional comprehensive loss
associated with securities available-for-sale of $1,098,000, treasury stock
purchases of $362,000 and dividends paid of $798,000.
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 September 30, 2005 the allowance for loan losses was $5,210,000, or
1.13% 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 nine month periods ended September 30, 2005 and 2004 is as
follows:
Three Months Nine Months
Ended Sep. 30, Ended Sep.30,
(Dollars in thousands) 2005 2004 2005 2004
----------------------------------------------------------------------
Balance at beginning of period $5,278 $5,053 $5,204 $5,036
------ ------ ------ ------
Charge-offs (119) (147) (305) (503)
Recoveries 51 181 236 284
------ ------ ------ ------
Net (charge-offs) recoveries (68) 34 (69) (219)
Provision for loan losses -- 120 75 390
------ ------ ------ ------
Balance at end of period $5,210 $5,207 $5,210 $5,207
====== ====== ====== ======
Nonperforming loans totaled $3,050,000 as of September 30, 2005, compared
to $2,867,000 at December 31, 2004. The ratio of nonperforming loans to loans
net of unearned income was 0.66% as of September 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 $3,271,000 as of
September 30, 2005, compared to $2,949,000 at December 31, 2004. The ratio of
nonperforming assets to total assets was 0.52% as of September 30, 2005,
compared to 0.46% at December 31, 2004.
Results of Operations
The Company reported net income of $877,000, or $0.58 per common share
(basic), for the three months ended September 30, 2005, compared to $977,000, or
$0.65 per common share (basic), for the three months ended September 30, 2004, a
decrease of $100,000, or 10%. Net income for the nine months ended September 30,
2005 was $2,604,000, or $1.73 per common share (basic), compared to $2,454,000,
or $1.64 per common share (basic), for the nine months ended September 30, 2004,
an increase of $150,000, or 6%.
Net interest and dividend income for the third quarter increased $107,000
to $5,835,000 compared to $5,728,000 for the third quarter of 2004. Net interest
and dividend income for the nine months ended September 30, 2005 increased
$476,000, or 2.8%, to $17,446,000 compared to $16,970,000 for the same period
last year. The quarter-to-date and the year-to-date increase was the result of
an increase of 11 basis points in the net interest margin. The improvement in
the margin is primarily the result of redeploying amortization from the indirect
automobile line of business into higher yielding residential mortgage loans and
commercial loans.
There was no provision for loan losses for the third quarter of 2005,
compared to $120,000 for the third quarter of last year. For the nine months
ended September 30, 2005, the provision for loan losses was $75,000, a decrease
of $315,000 from the $390,000 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 decreased $106,000 to $1,337,000 in the third quarter
of 2005 compared to $1,443,000 in the third quarter of 2004. For the quarter
ended September 30, 2005, service charges and fees on deposit accounts increased
$43,000 compared to the third quarter of 2004. Net securities gains increased
$21,000 in the third quarter of 2005 compared to the third quarter of 2004.
Gains on sales of loans decreased $207,000 due primarily to the recognition of
gains associated with the sale of a pool of commercial loans guaranteed by the
Small Business Administration in 2004. In the third quarter, other noninterest
income increased $37,000 to $550,000 compared to $513,000 for the same period a
year ago. Noninterest income for the nine months ended September 30, 2005
decreased $384,000 to $3,619,000 compared to $4,003,000 for the same period last
year. For the nine months ended September 30, 2005, service charges and fees on
deposit accounts increased $156,000 due to increases in overdraft fee income
principally the result of the Bounce ProtectionTM program. Net securities gains
for the nine months ended September 30, 2005 were $210,000, a decrease of
$530,000 from the $740,000 reported for the same period a year ago. Gains on
sales of loans for the nine months ended September 30, 2005 decreased $188,000
over one year ago, again as a result of the recording of gains associated with
the sale of a pool of commercial loans during 2004. Other noninterest income for
the nine months ended September 30, 2005 increased $178,000 due primarily to the
recording of commissions on alternative investment products.
Noninterest expense increased $379,000 to $5,946,000 for the quarter ended
September 30, 2005, compared to the $5,567,000 recorded during the same period
last year. Salaries and employee benefits decreased $125,000 to $2,884,000 for
the third quarter of 2005 compared to $3,009,000 for the third quarter 2004.
This decrease was due primarily to both a decrease in salaries expense 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, which was partially offset by a higher level of health and
dental insurance and profit sharing expense. Office occupancy and equipment
expense increased $223,000 to $1,131,000 for the third quarter 2005 compared to
$908,000 for the same period last year. This increase is due primarily to
signage expense of $129,000 related to the merger as well as $91,000 in
write-down of leasehold improvements associated with the decision to close two
supermarket branches in December 2005. Other noninterest expense increased
$281,000 to $1,693,000 for the third quarter of 2005 compared to $1,412,000 for
the same period last year. The Company incurred one-time merger-related expenses
of $346,000 during the third quarter of 2005 associated primarily with
advertising, professional fees, legal fees, and stationery and office supplies.
These expenses were partially offset by a decrease in both insurance expense and
miscellaneous expense associated with consumer rebates on indirect installment
loans.
For the nine months ended September 30, 2005 noninterest expense totaled
$17,310,000, an increase of $433,000 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. In addition, the Company incurred $542,000
during the nine months ended September 30, 2005 in one-time merger-related
expenses associated primarily with advertising, professional fees, legal fees,
signage and stationery and office supplies. Additional merger-related expenses
relating to professional fees, advertising, legal fees, and stationery and
office supplies of approximately $325,000 are expected to be incurred in the
fourth quarter of 2005.
For the nine months ended September 30, 2005, salaries and employee
benefits decreased $433,000 to $8,663,000 compared to $9,096,000 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 No. 91, which has the effect of reducing
salary expense. Office occupancy and equipment expense increased $302,000 to
$3,060,000 for the nine months ended September 30, 2005 compared to $2,758,000
for the same period last year. This expense includes $129,000 of merger related
expenses associated with signage as well as $91,000 of one-time expenses
associated with the write-down of leasehold improvements associated with the
pending closure of two supermarket branches in December 2005. Other noninterest
expense increased $564,000 over the prior year. This increase was primarily the
result of the one-time expenses associated with moving proof and item processing
and data processing as well as the one-time merger related expenses. Excluding
these one-time expenses, other noninterest expense declined approximately
$40,000 when compared to one year ago. This is due primarily to a decrease in
insurance, shareholder reporting, and home equity closing costs, partially
offset by increases in legal expense, repossession and other real estate owned
expense, telecommunications and contributions.
Comprehensive Net Income
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.
The Company reported comprehensive net income of $180,000 for the quarter
ended September 30, 2005, compared to comprehensive net income of $2,037,000 for
the quarter ended September 30, 2004. For the nine months ended September 30,
2005, comprehensive net income was $1,506,000 compared to comprehensive net
income of $1,757,000 for the nine months ended September 30, 2004.
For the quarter ended September 30, 2005, the Company increased its
unrealized loss on available-for-sale securities by $697,000, net of tax. When
deducted from the quarterly net income of $877,000 the result is a comprehensive
net income of $180,000. For the quarter ended September 30, 2004, the Company
decreased its unrealized loss on available-for-sale securities by $1,060,000.
When added to the quarterly net income of $977,000, the result is a
comprehensive net income of $2,037,000.
For the nine months ended September 30, 2005, the Company increased its
unrealized loss on available-for-sale securities by $1,098,000, net of tax. When
deducted from net income year-to-date of $2,604,000 the result is a
comprehensive net income of $1,506,000. For the nine months ended September 30,
2004, the Company increased its unrealized loss on available-for-sale securities
by $697,000. When deducted from year-to-date income of $2,454,000, the result is
a comprehensive net income of $1,757,000.
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 and the impact of the downgrade of two bond holdings that continue
to perform. In accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", the negative adjustment to comprehensive income
of $1,098,000 for the nine months ended September 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 $349,000 and $507,000 for the
three months ended September 30, 2005 and 2004, respectively. The effective tax
rates were 28.5% and 34.2% for those respective periods. The effective tax rate
for 2005 is positively impacted by the fact that several contributions were made
which provided tax credits to the Company due to the 75% state tax exemption.
The Company recognized income tax expense of $1,076,000 and $1,252,000 for
the nine months ended September 30, 2005 and 2004, respectively. The effective
tax rates were 29.2% and 33.8% 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 12.86% and
15.05%, respectively, at September 30, 2005. The Company's Tier 1 leverage ratio
at September 30, 2005 was 8.86%. As of September 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 - None
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. (incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report of Form 10-Q for the quarter
ended June 30, 2005).
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.
November 4, 2005 BY:/S/William J. Woodward
------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
November 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 (incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report of Form 10-Q for the quarter
ended June 30, 2005).
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