10-Q 1 0001.txt NORTHWAY FIN. FORM 10-Q 9-30-00 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, 2000 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 (I.R.S. Employer incorporation or organization) 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) No Change --------- (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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. At October 30, 2000, there were 1,573,069 shares of common stock outstanding, par value $1.00 per share. INDEX NORTHWAY FINANCIAL, INC. PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2000 and 1999 ............. 3 Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 ............................................. 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 ............................. 5 Notes to Consolidated Financial Statements .................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings ............................................. 12 Item 2. Changes in Securities ......................................... 12 Item 3. Defaults Upon Senior Securities ............................... 12 Item 4. Submission of Matters to a Vote of Security Holders ........... 12 Item 5. Other Information ............................................. 12 Item 6. Exhibits and Reports on Form 8-K .............................. 12 Signatures ......................................................... 13 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements. NORTHWAY FINANCIAL, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, (Dollars in thousands, except per share data) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------- Interest and dividend income: Loans $8,531 $6,967 $24,651 $19,201 Investment securities available-for-sale 850 823 2,541 2,424 Investment securities held-to-maturity 62 137 204 423 Federal funds sold 265 9 273 228 Interest bearing deposits 1 2 6 5 -------------------------------------------------- Total interest and dividend income 9,709 7,938 27,675 22,281 -------------------------------------------------- Interest expense: Deposits 3,032 2,514 8,025 7,438 Borrowed funds 1,268 365 3,835 804 -------------------------------------------------- Total interest expense 4,300 2,879 11,860 8,242 -------------------------------------------------- Net interest and dividend income 5,409 5,059 15,815 14,039 Provision for loan losses 255 135 755 405 -------------------------------------------------- Net interest and dividend income after provision for loan losses 5,154 4,924 15,060 13,634 -------------------------------------------------- Noninterest income: Service charges on deposit accounts and fees 266 232 746 683 Securities gains, net 138 85 414 496 Other 318 338 780 808 -------------------------------------------------- Total noninterest income 722 655 1,940 1,987 -------------------------------------------------- Noninterest expense: Salaries and employee benefits 2,353 2,227 6,724 6,265 Office occupancy and equipment 677 670 1,998 1,908 Amortization of deposit purchase premium 134 104 339 254 Other 1,143 1,139 3,381 3,229 -------------------------------------------------- Total noninterest expense 4,307 4,140 12,442 11,656 -------------------------------------------------- Income before income tax expense 1,569 1,439 4,558 3,965 Income tax expense 537 483 1,510 1,352 -------------------------------------------------- Net income $1,032 $ 956 $ 3,048 $ 2,613 ================================================== Comprehensive net income $1,360 $ 683 $ 3,103 $ 1,639 ================================================== Per share data: Earnings per common share $ 0.65 $ 0.58 $ 1.91 $ 1.55 Cash dividends declared $ 0.15 $ 0.14 $ 0.45 $ 0.42 Weighted average number of common shares 1,586,134 1,661,223 1,597,457 1,690,097 The accompanying notes are an integral part of these consolidated financial statements.
NORTHWAY FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31, (Dollars in thousands, except per share data) 2000 1999 ----------------------------------------------------------------------------------------------------------- (Unaudited) Assets Cash and due from banks and interest bearing deposits $ 13,094 $ 16,087 Federal funds sold 18,900 -- Investment securities available-for-sale 55,619 55,998 Investment securities held-to-maturity 3,863 5,151 Loans held for sale 3,054 54 Loans 397,699 373,590 Unearned income (639) (824) Allowance for loan losses (4,298) (4,887) ------------------------- Loans, net 392,762 367,879 ------------------------- Real estate acquired by foreclosure 47 115 Accrued interest receivable 2,464 2,391 Deferred income tax asset, net 2,377 2,260 Premises and equipment, net 10,912 10,387 Deposit purchase premium 5,334 1,271 Other assets 1,345 959 ------------------------- Total assets $509,771 $462,552 ========================= Liabilities and Stockholders' Equity Liabilities: Interest bearing deposits $333,115 $293,104 Non-interest bearing deposits 60,305 49,925 Repurchase agreements 11,487 7,468 Short-term Federal Home Loan Bank advances 21,000 9,950 Long-term Federal Home Loan Bank advances 38,528 58,528 Other liabilities 4,370 4,291 ------------------------- Total liabilities 468,805 423,266 ------------------------- 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 1,585,069 outstanding September 30, 2000 and 1,615,169 outstanding December 31, 1999 1,732 1,732 Additional paid-in-capital 2,101 2,101 Retained earnings 42,235 39,906 Treasury stock, at cost (146,900 and 116,800 shares, respectively) (4,102) (3,398) Accumulated other comprehensive (loss) income, net of tax (1,000) (1,055) ------------------------- Total stockholders' equity 40,966 39,286 ------------------------- Total liabilities and stockholders' equity $509,771 $462,552 ========================= The accompanying notes are an integral part of these consolidated financial statements.
NORTHWAY FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, ---------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 Cash flows from operating activities: Net income $ 3,048 $ 2,613 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 755 405 Depreciation and amortization 1,077 933 Deferred income taxes (149) (123) Writedown of real estate acquired by foreclosure -- 39 Gains on sales of investment securities available-for-sale, net (414) (496) Amortization of premium & accretion of discounts on securities, net 34 64 (Decrease) increase in unearned income, net (185) 388 Gains on sales of real estate acquired by foreclosure (57) -- Net (increase) decrease in loans held for sale (3,000) 85 Net change in other assets and other liabilities (380) 1,625 ------------------------- Net cash provided by operating activities 729 5,533 ------------------------- Cash flows from investing activities: Proceeds from sales of investment securities available-for-sale 2,013 5,038 Proceeds from maturities of investment securities held-to-maturity 2,444 4,612 Proceeds from maturities of investment securities available-for-sale 4,141 9,383 Purchase of investment securities available-for-sale (5,309) (20,561) Purchase of investment securities held-to-maturity (1,155) (9,242) Net increase in loans (25,465) (67,670) Proceeds from sales of real estate acquired by foreclosure 137 299 Additions to deposit purchase premium (4,402) (787) Additions to premises and equipment (1,263) (983) ------------------------- Net cash used in investing activities (28,859) (79,911) ------------------------- Cash flows from financing activities: Cash received from acquisition of branches 27,783 18,040 Net increase (decrease) in deposits 22,608 (16,654) Advances from Federal Home Loan Bank 19,000 23,000 Repayment of Federal Home Loan Bank advances (39,000) -- Net increase in short-term Federal Home Loan Bank advances 11,050 11,367 Net increase in securities sold under agreements to repurchase 4,019 2,181 Purchases of treasury stock (704) (2,296) Cash dividends paid (719) (711) Net cash provided by financing activities 44,037 34,927 Net increase (decrease) in cash and cash equivalents 15,907 (39,451) Cash and cash equivalents at beginning of period 16,087 51,423 ------------------------- Cash and cash equivalents at end of period $ 31,994 $ 11,972 ========================= Continued.... The accompanying notes are an integral part of these consolidated financial statements.
NORTHWAY FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, ---------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 Cash paid during the period for: Interest $ 11,424 $ 8,098 ========================= Income taxes $ 1,064 $ 1,429 ========================= Supplemental disclosures of non-cash activities: Loans transferred to real estate acquired by foreclosure $ 48 $ 352 ========================= Loans charged off, net of recoveries $ 1,344 $ 48 ========================= Financed sales of real estate acquired by foreclosure $ -- $ 44 ========================= The accompanying notes are an integral part of these consolidated financial statements.
NORTHWAY FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) 1. Basis of Presentation. The unaudited consolidated financial statements of Northway Financial, Inc. and its two wholly owned bank subsidiaries (collectively "the Corporation") included herein have been prepared by the Corporation 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 Corporation, 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 and nine month periods ended September 30, 2000 and 1999 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 Corporation's audited financial statements presented in its Annual Report on Form 10-K for the fiscal year ended December 31, 1999. In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the reported period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. 2. Impact of New Accounting Standard. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133, as amended by SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In management's opinion, SFAS No. 133 when adopted will not have a material effect on the Corporation's consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 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 "Corporation"). 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 Corporation and its subsidiaries. Such forward looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Corporation. To the extent any such risks, uncertainties and contingencies are realized, the Corporation'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 Corporation's products and services, competitive factors in the industries in which the Corporation 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 rise in interest rates over the past year and the potential for further increases in interest rates during the remainder of the year 2000; 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. Financial Condition The Corporation's total assets at September 30, 2000 were $509.8 million compared to $462.6 million at December 31, 1999, a $47.2 million increase. Net loans, including loans held for sale, increased $27.7 million to $395.8 million and investment securities decreased $1.7 million to $59.5 million. Cash and cash equivalents increased $15.9 million to $32.0 million as a result of the purchase of a branch in West Ossipee, New Hampshire from the Bank of New Hampshire. The branch acquisition contributed $27.8 million towards an increase in total deposits of $50.4 million to $393.4 million. Federal Home Loan Bank advances decreased $9.0 million while repurchase agreements increased $4.0 million. Total stockholders' equity increased $1.7 million from $39.3 million at December 31, 1999 to $41.0 million at September 30, 2000. The increase in stockholders' equity was a result of net income of $3.0 million and a decrease of accumulated comprehensive loss of $0.1 million, partially offset by dividends of $0.7 million and treasury stock purchases totaling $0.7 million. The Corporation 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 September 30, 2000 the allowance for loan losses was $4.3 million, or 1.07% of total loans, as compared to $4.9 million, or 1.31% of total loans at December 31, 1999. 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 and nine month periods ended September 30, 2000 and 1999 is as follows: Three Months Nine Months Ended September 30, Ended September 30, (Dollars in thousands) 2000 1999 2000 1999 ------------------------------------------------------------------------------- Balance at beginning of period $4,220 $4,637 $4,887 $4,404 ------------------------------------- Charge-offs (199) (98) (1,559) (264) Recoveries 22 87 215 216 ------------------------------------- Net Charge-offs (177) (11) (1,344) (48) Provision for loan losses 255 135 755 405 ------------------------------------- Balance at end of period $4,298 $4,761 $4,298 $4,761 ------------------------------------- Nonperforming loans totaled $1.1 million as of September 30, 2000, compared to $4.6 million at December 31, 1999. The decline in nonperforming loans was due to the sale of $1.2 million in non-accrual loans on February 29, 2000 and the substantial resolution of a large nonperforming borrowing relationship. In the course of resolving this relationship the Company incurred charge-offs of $1.1 million and received cash totaling $2.3 million. The ratio of nonperforming loans to total loans was 0.27% as of September 30, 2000 compared to 1.23% at December 31, 1999 and the ratio of nonperforming assets to total assets was 0.25% as of September 30, 2000 compared to 1.02% at December 31, 1999. Results of Operations The Corporation reported net income of $1.03 million, or $0.65 per share, for the three months ended September 30, 2000, versus $.96 million, or $0.58 per common share, for the three months ended September 30, 1999. Net income for the nine months ended September 30, 2000 was $3.05 million, or $1.91 per share, compared to $2.61 million, or $1.55 per share, for the nine months ended September 30, 1999. The increase in net income is primarily a result of increases in average loan balances resulting in increased net interest income. Net interest income for the three months ended September 30, 2000 increased $.35 million to $5.41 million compared to $5.06 million for the third quarter of the prior year. For the nine months ended September 30, 2000 net interest income increased $1.78 million to $15.82 million compared to $14.04 million for the same period of the prior year. Noninterest income increased $.07 million to $.72 million in the third quarter of 2000 versus $.65 million in the third quarter of 1999. For the nine months ended September 30, 2000 noninterest income decreased $.05 million to $1.94 million compared to $1.99 million for the same period of the prior year. The decrease was primarily attributable to decreases in security gains on a year to date basis. Noninterest expense increased $0.17 million to $4.31 million for the quarter ended September 30, 2000 compared to the $4.14 million recorded during the same period last year. For the nine months ended September 30, 2000 noninterest expense totaled $12.44 million, an increase of $0.78 million over the $11.66 million recorded for the same period of the prior year. The increase was principally attributable to continued branch expansion including the recent acquisition of the West Ossipee branch, and increased noninterest expense incurred in connection with the operation of branches in Franklin and Tilton, New Hampshire acquired in July of 1999 and the supermarket branch in Conway, New Hampshire acquired in November of 1999. Income Tax Expense The Corporation recognized income tax expense of $1.51 million and $1.35 million for the nine months ended September 30, 2000 and 1999, respectively. The effective tax rate was 33.1% and 34.1% 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. Liquidity Liquidity risk management refers to the Corporation's and its subsidiaries' ability to raise funds in order to meet their 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 amortization, 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 Corporation'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 Corporation's current level of liquidity and funds availability from outside sources are sufficient to meet the Corporation's needs. However the Corporation 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 Corporation's Tier 1 and Total Risk Based Capital ratios were 9.96% and 11.14%, respectively, at September 30, 2000. The Corporation's Tier 1 Leverage ratio at September 30, 2000 was 7.28%. As of September 30, 2000, the capital ratios of the Corporation and all its subsidiary banks exceeded the minimum capital ratio requirements of the "well capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Item 3. Quantitative and Qualitative Disclosures About Market Risk For information regarding quantitative and qualitative disclosures about market risk, see the Corporation's discussion under Item 7A of its Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Between December 31, 1999 and September 30, 2000, there were no material changes in the Corporation's market risk. PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - 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 Exhibit Number (27) Financial Data Schedule (b) The Corporation did not file any Reports on Form 8-K during the quarter ended September 30, 2000 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 13, 2000 BY: \S\ William J. Woodward --------------------------------- William J. Woodward President & CEO (Principal Executive Officer) November 13, 2000 BY: \S\ George L. Fredette --------------------------------- George L. Fredette Senior Vice President & CFO (Principal Financial and Accounting Officer)