-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P81Lt23N7TkLg3b2trc4ltuCXaU3kSpLtUS7eFM8peVrB6MJvVWEu23KLq2PcBzT nYMyBApbcZinD0aKLjZZzA== 0000950156-02-000154.txt : 20020415 0000950156-02-000154.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950156-02-000154 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWAY FINANCIAL INC CENTRAL INDEX KEY: 0001041753 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 043368379 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23129-33 FILM NUMBER: 02593764 BUSINESS ADDRESS: STREET 1: 9 MAIN ST CITY: BERLIN STATE: NH ZIP: 03750 BUSINESS PHONE: 6037521171 MAIL ADDRESS: STREET 1: 9 MAIN ST CITY: BERLIN STATE: NH ZIP: 03750 10-K 1 d57772_10k.txt NORTHWAY FINANCIAL FORM 10-K =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) 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) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $1.00 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 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 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The number of shares of common stock, par value $1.00 per share, held by nonaffiliates of the registrant as of March 15, 2002 was 1,295,868 shares with an aggregate market value, computed by reference to the last reported sales price on the NASDAQ National Market on such date, of $37,450,585. At March 15, 2002, there were 1,511,324 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Stockholders are incorporated by reference in Item 1 of Part I and Items 7 and 8 of Part II. Portions of the registrant's proxy statement for its 2002 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part III. =============================================================================== FORM 10-K TABLE OF CONTENTS NORTHWAY FINANCIAL, INC. PART I ITEM 1 Business........................................................ 1 ITEM 2 Properties...................................................... 9 ITEM 3 Legal Proceedings............................................... 9 ITEM 4 Submission of Matters to a Vote of Security Holders............. 9 PART II ITEM 5 Market for the Registrant's Common Stock and Related Security Holder Matters....................................... 9 ITEM 6 Selected Financial Data......................................... 10 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. ......................... 12 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk...... 12 ITEM 8 Financial Statements and Supplementary Material................. 12 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................... 12 PART III ITEM 10 Directors and Executive Officers of the Registrant.............. 12 ITEM 11 Executive Compensation.......................................... 12 ITEM 12 Security Ownership of Certain Beneficial Owners and Management ................................................... 12 ITEM 13 Certain Relationships and Related Transactions.................. 12 PART IV ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .................................................. 13 Signatures.................................................. 14 FORWARD-LOOKING STATEMENTS Certain statements in this report 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 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 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 factors, the factors described under the caption "Risk Factors" in Item 1 of this report, overall economic and business conditions, economic and business conditions in the Company's market areas, 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, and the timing, impact and other uncertainties of future acquisitions. 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: i) the current economic downturn nationwide and regionally, as well as the deterioration of local business conditions including variations in the level of operations of a major employer in the primary market area of The Berlin City Bank; ii) changes in interest rates over the past year and the relative relationship between the various interest rate indices that the Company uses; iii) a change in product mix attributable to changing interest rates, customer preferences or competition; iv) a change in product mix attributable to changing interest rates, customer preferences or competition; v) a significant portion of the Company's loan customers are in the hospitality business and therefore could be affected by a slower economy, adverse weather conditions and/or rising gasoline prices; and vi) the effectiveness of advertising, marketing and promotional programs. The words "believe," "expect," "anticipate," "intend," "estimate," "project" or the negative of such terms and other similar expressions which are predications 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. Though the Company has attempted to list comprehensively the factors which might affect forward-looking statements, the Company wishes to caution you 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. PART 1 ITEM 1. BUSINESS Description of Business Northway Financial, Inc. (the "Company") was incorporated on March 7, 1997, under the laws of the State of New Hampshire, for the purpose of becoming the holding company of The Berlin City Bank, a New Hampshire chartered bank headquartered in Berlin, New Hampshire ("BCB"), pursuant to a reorganization transaction (the "BCB Reorganization") by and among the Company, BCB, and a subsidiary of BCB, and, thereafter, effecting the merger (the "Merger") by and among the Company, BCB, Pemi Bancorp, Inc. ("PEMI"), and PEMI's wholly owned subsidiary, Pemigewasset National Bank, a national bank headquartered in Plymouth, New Hampshire ("PNB"). The BCB Reorganization and the Merger became effective on September 30, 1997. As of such date, BCB and PNB (collectively the "Banks"), became wholly owned subsidiaries of the Company. Unless the context otherwise requires, references herein to the "Company" include Northway Financial, Inc. and its consolidated subsidiaries. The Company and its bank subsidiaries derive substantially all of their revenue and income from the furnishing of bank and bank-related services, principally to individuals and small and medium sized companies in New Hampshire. The Banks operate as typical community banking institutions and do not engage in any specialized finance or capital market activities. The Company functions primarily as the holder of stock of its subsidiaries and assists the management of its subsidiaries as appropriate. The Company is subject to regulation by the New Hampshire Bank Commissioner, the Federal Deposit Insurance Corporation, the Comptroller of the Currency of the United States, and the Board of Governors of the Federal Reserve System. See "Supervision and Regulation." BCB, which was first organized in 1891, and PNB, which was first organized in 1881, are engaged in a general commercial banking business and offer commercial and construction loans, real estate mortgages, consumer loans, including personal secured and unsecured loans, and lines of credit. During 1998, the Company, through the BCB subsidiary, established an indirect lending business unit in Concord, New Hampshire. The unit has substantially increased the volume of secured consumer installment loans originated for the Banks and for sale to third parties. The Banks accept savings, time, demand, NOW and money market deposit accounts, and offer a variety of banking services including travelers checks, safe deposit boxes, credit card accounts, overdraft lines of credit and wire transfer services. The Banks have 18 automatic teller machines to allow customers limited banking services on a 24 hour basis. The Company is a legal entity separate and distinct from its subsidiaries. The right of the Company to participate in any distribution of assets or earnings of any subsidiary is subject to the prior claims of creditors of the subsidiary, except to the extent that claims, if any, of the Company itself as a creditor may be recognized. See "Supervision and Regulation". The following information concerning the Company's investment activities, lending activities, asset quality and allowance for loan losses should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing under Item 7 of this report and the Company's Consolidated Financial Statements and Notes thereto. Investment Activities The following table presents the carrying amount of the Company's securities available-for-sale and held-to-maturity as of December 31, 2001, 2000 and 1999 (dollars in thousands): 2001 2000 1999 -------- --------- -------- Available-for-sale: US Treasury and other US government agency securities $10,977 $28,780 $26,449 Mortgage-backed securities(1) 21,097 14,652 18,813 Marketable equity securities 3,255 2,409 2,780 Non-marketable equity securities 4,712 5,199 4,456 Corporate bonds 14,230 1,003 -- State and political subdivision bonds and notes 6,005 3,444 3,500 ------- ------- ------- 60,276 55,487 55,998 ------- ------- ------- Held-to-maturity Mortgage-backed securities(1) $ - $ 2,252 $ 3,601 State and political subdivision bonds and notes - 500 1,550 ------- ------- ------- - 2,752 5,151 ------- ------- ------- Total securities $60,276 $58,239 $61,149 ======= ======= ======= (1) Includes Collateralized Mortgage Obligations. The following table sets forth the amortized cost of the Company's debt obligations maturing within stated periods and their related weighted average yields, reported on a tax equivalent basis, as of December 31, 2001 (dollars in thousands):
Maturities --------------------------------------------- One to Five to Over Within five ten ten Total One year years years years Cost -------- ----- ----- ----- ---- Available-for-sale: US Treasury and other US government agency securities $ -- $ 6,983 $ 3,986 $ -- $10,969 Mortgage-backed securities (1) 105 7,229 7,633 6,160 21,127 Corporate bonds -- 14,167 -- -- 14,167 State and political subdivision bonds and notes 1,010 311 2,930 1,656 5,907 ------ ------- ------- ------ ------- $1,115 $28,690 $14,549 $7,816 $52,170 ====== ======= ======= ====== ======= Market value $1,118 $28,651 $14,724 $7,816 $52,309 ====== ======= ======= ====== ======= Weighted average yield 5.80% 5.50% 5.31% 5.88% 5.51% (1) Includes Collateralized Mortgage Obligations Lending Activities The following table sets forth information with respect to the composition of the Company's loan portfolio, excluding loans held for sale, as of December 31, 2001, 2000, 1999, 1998 and 1997 (dollars in thousands): December 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Real estate: Residential $109,261 $129,805 $139,389 $146,603 $152,041 Commercial 111,642 100,608 93,061 77,680 61,873 Construction 1,581 5,752 4,360 4,118 5,664 Commercial 22,727 22,270 28,833 25,874 21,460 Installment 28,210 28,177 24,147 25,070 23,476 Indirect installment 120,761 98,919 75,781 18 - Other 6,303 7,881 7,369 4,795 2,769 -------- -------- -------- -------- -------- Total loans 400,485 393,412 372,940 284,158 267,283 Less: Unearned income 169 154 174 332 526 Allowance for loan losses 4,642 4,354 4,887 4,404 4,156 -------- -------- -------- -------- -------- 4,811 4,508 5,061 4 ,736 4,682 -------- -------- -------- -------- -------- Net loans $395,674 $388,904 $367,879 $279,422 $262,601 ======== ======== ======== ======== ========
The following table presents the maturity distribution of the Company's real estate construction and commercial loans at December 31, 2001 (dollars in thousands): Percent of Amount Total ------ ----- Within one year $ 5,920 24.35% One to five years 11,332 46.62 Over five years 7,056 29.03 ------- ------ $24,308 100.00% ======= ====== The Company's real estate construction and commercial loans due after one year at December 31, 2001 were comprised of the following (dollars in thousands): Amount Fixed interest rate $ 7,573 Adjustable interest rate 10,815 ------- $18,388 Analysis of the Allowance for Loan Losses The following table reflects activity in the Company's allowance for loan losses for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 (dollars in thousands): Years ended December 31, ------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Balance at the beginning of period $4,354 $4,887 $4,404 $4,156 $3,941 Charge-offs: Real estate 110 213 159 383 452 Commercial 95 1,006 25 67 105 Installment loans to individuals 529 424 120 74 48 Credit card - - - - 1 Other - - - - 6 ------ ------ ------ ------ ------ Total 734 1,643 304 524 612 ------ ------ ------ ------ ------ Recoveries: Real estate 35 32 213 115 212 Commercial - -- 21 98 55 Installment loans to individuals 87 96 12 17 19 Credit card - 2 1 2 4 Other - - - - 2 ------ ------ ------ ------ ------ Total 122 130 247 232 292 ------ ------ ------ ------ ------ Net charge-offs 612 1,513 57 292 320 Provision charged to expense 900 980 540 540 535 ------ ------ ------ ------ ------ Balance at the end of period $4,642 $4,354 $4,887 $4,404 $4,156 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans 0.15% 0.39% 0.02% 0.11% 0.12% Allocation of the Allowance for Loan Losses The following table sets forth the breakdown of the Company's allowance for loan losses in the Company's portfolio by category of loan and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated (dollars in thousands):
December 31, ----------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Percent of Percent of Percent of Percent of Percent of loans in each loans in each loans in each loans in each loans in each category to category to category to category to category to Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans -------------------------------------------------------------------- ------------------- ----------- Commercial $ 208 7.7% $ 719 5.7% $ 530 7.7% $ 651 9.1% $ 613 8.0% Real estate: Commercial & Construction 1,621 26.1 1,009 27.0 1,773 26.1 1,325 28.8 1,251 25.3 Residential 585 37.4 1,160 32.9 503 37.3 1,478 51.6 1,395 56.5 Installment 1,719 26.8 1,440 32.4 1,125 26.9 210 8.8 198 8.8 Other 17 2.0 26 2.0 60 2.0 58 1.7 55 1.0 Unallocated 492 N/A -- N/A 896 N/A 682 N/A 644 N/A ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $4,642 100.0% $4,354 100.0% $4,887 100.0% $4,404 100.0% $4,156 100.0% ====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Deposits The information set forth on page 29 of the Company's 2001 Annual Report to Stockholders is incorporated herein by reference. Supervision and Regulation General. In addition to state and federal laws generally applicable to businesses and employers, the Company, PNB and BCB are further regulated by federal and state laws and regulations applicable to financial institutions and their parent companies. State and federal banking laws have as their principal objective either the maintenance of safety and soundness of financial institutions and the federal deposit insurance system or the protection of consumers or classes of consumers, rather than the protection of stockholders of a bank or its parent company. To the extent the following discussion describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. The Company. As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), the Company is subject to substantial regulation and supervision by the Board of Governors of the Federal Reserve Board (the "Federal Reserve Board") and is required to file periodic reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also makes periodic inspections of the Company and its subsidiaries. The Federal Reserve Board has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the Federal Reserve Board. The Federal Reserve Board is also empowered to assess civil money penalties against companies or individuals who violate the BHC Act, or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Under the BHC Act, the Company is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing or controlling banks or furnishing services to, or acquiring premises for, its affiliated banks, except that the Company may engage in and own voting shares of companies engaging in certain activities determined by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or to managing or controlling banks "as to be a proper incident thereto." The Gramm-Leach-Bliley Act (the "GLB Act") established a comprehensive framework to permit affiliations among banks, securities firms, insurance firms and other financial companies by substantially modifying the BHC Act to authorize bank holding companies that qualify and elect to become "financial holding companies" to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity and allowing subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the bank holding company's banks must have been rated `satisfactory' or better in its most recent federal Community Reinvestment Act (`CRA') evaluation. The activities of bank holding companies would continue to be limited to activities authorized currently under the BHC Act. The Company is qualified but has not elected to become a "financial holding company" at this time and is therefore subject to the restrictions of the BHC Act as outlined above. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHC Act. These capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8.0% of total risk-adjusted assets and off-balance sheet items (the "Total Risk-Based Capital Ratio"), with at least one-half of that amount consisting of Tier I, or core capital, and the remaining amount consisting of Tier II, or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill and other non-qualifying intangible assets. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included in Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital (defined by reference to the risk-based capital guidelines) to total assets (the "Leverage Ratio") of 3.0%. Total assets for this purposes does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Leverage Ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those, which are not experiencing or anticipating significant growth. The Company, however, expects to be subjected to required ratios of 4.0% to 5.0% or more. The Company is currently in compliance with both the Risk-Based Capital Ratio and the Leverage Ratio requirements. At December 31, 2001, it had a Tier I Risk-Based Capital Ratio and a Total Risk-Based Capital Ratio equal to 9.08% and 10.28%, respectively, and a Leverage Ratio equal to 6.95%. U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision, currently are considering changes to the risk-based capital adequacy framework which ultimately could affect the appropriate capital guidelines. The Federal Change in Bank Control Act prohibits a person or group of persons from acquiring `control' of a bank holding company unless the Federal Reserve Board has been given at least 60 days to review the proposal. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company, such as the Company, with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the `Exchange Act') would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any company, as that term is broadly defined in the statute, would be required to obtain the approval of the Federal Reserve Board under the BHC Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more, or such lesser percentage of our outstanding common stock as the Federal Reserve Board deems to constitute control over the Company. PNB. PNB is a national banking association, organized under the National Bank Act. As such, its primary regulatory authority is the Comptroller of the Currency of the United States (the "Comptroller"). The Comptroller regularly examines national banks and their operations. In addition, operations of national banks are subject to federal statutes and regulations. Such statutes and regulations relate to required capital and reserves, investments, loans, mergers, payment of dividends, issuance of securities and many other aspects of operations. Capital requirements applicable to PNB are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies as described above. The Comptroller's approval is required for a national bank to pay dividends if the total dividends declared by a national bank in any year will exceed the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfer to surplus. The Comptroller also has authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions. The Comptroller also has the power to prevent a national bank from engaging in unsafe or unsound practices or violating applicable laws in conducting its business. PNB is also subject to applicable provisions of New Hampshire law insofar as they do not conflict with or are not otherwise preempted by federal banking law. BCB. BCB is organized under New Hampshire law and is subject to the regulations of the New Hampshire Bank Commissioner, the Federal Deposit Insurance Corporation (the "FDIC"), and the Federal Reserve Board. BCB's operations are subject to various requirements and restrictions under the laws of the United States and the State of New Hampshire, including those related to the maintenance of adequate levels of capital, the payment of dividends, investments, the nature and amount of loans which can be originated and the rate of interest that can be charged thereon, and other activities. Capital requirements applicable to BCB are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies as described above. Community Reinvestment Act. Both BCB and PNB are subject to the provisions of the Community Reinvestment Act ("CRA"). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a subsidiary institution, to assess such institution's record in meeting the credit needs of the communities served by the institution, including those of low and moderate income neighborhoods. The regulatory agency's assessment of the institution's record is made available to the public. An institution's CRA rating is taken into account by its regulators in considering various types of applications. In addition, an institution receiving a rating of substantial noncompliance is subject to civil money penalties or a cease and desist order under Section 8 of the Federal Deposit Insurance Act ("FDIA"). CRA remains a critical component of the regulatory examination process. CRA examination results and related concerns have been cited as a reason to reject and or modify branching and merger applications by various federal and state banking agencies. Formation of a "financial holding company" under the GLB Act is also dependent of the maintenance of a "satisfactory" CRA rating. Customer Information Security. The Federal Reserve Board, the FDIC and other bank regulatory agencies have adopted final guidelines (the `Guidelines') for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Privacy. The GLB Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires us to explain to consumers our policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, we are prohibited from disclosing such information except as provided in our policies and procedures. USA Patriot Act. The USA Patriot Act of 2001 (the `Patriot Act'), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates or will require financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering; suspicious activities and currency transaction reporting; and currency crimes. Government Monetary Policy. The Company's banking subsidiaries are affected by the credit policies of monetary authorities, including the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board are open market operations in U. S. Government securities, changes in the discount and fed funds rates, reserve requirements on member bank deposits, and funds availability regulations. The monetary policies of the Federal Reserve Board have in the past had a significant effect on the operations of financial institutions, including the Company and its subsidiaries, and will continue to do so in the future. Changing conditions in the national economy and money markets, as well as the impact of actions by monetary and fiscal authorities, make it difficult to predict the effect of future changes in interest rates, deposit levels or loan demand on the business and income of the Company and its subsidiaries. Competition The banking industry in the United States, which includes commercial banks, savings and loan associations, mutual savings banks, capital stock savings banks, credit unions, and bank and savings and loan holding companies, is part of the broader financial services industry which includes insurance companies, mutual funds, and the brokerage industry, among others. In recent years, intense market demands and economic pressures have eroded once clearly defined industry classifications and have forced financial services institutions to diversify their services, increase returns on deposits, and become more cost effective as a result of competition with one another and with new types of financial services companies, including non-bank competitors. The Company's banking subsidiaries face significant competition in their respective market from commercial banks, savings banks, credit unions, consumer finance companies, insurance companies, "non-bank banks," mutual funds, government agencies, investment management companies, investment advisors, brokers and investment bankers. In addition, increasing consolidation within the banking and financial services industry, as well as increased competition from larger regional and out-of-state banking organizations and non-bank providers of various financial services, may adversely affect the Company's ability to achieve its financial goals. Federal banking laws permit adequately capitalized bank holding companies to venture across state lines to offer banking services through bank subsidiaries to a wider geographic market. Consequently, it is possible for large organizations to enter many new markets including the markets served by the Company. Certain of these competitors, by virtue of their size and resources, may enjoy certain efficiencies and competitive advantages over the Company in pricing, delivery, and marketing of their products and services. The Company's long-term success depends on the ability of the Company's banking subsidiaries to compete successfully with other financial institutions in their service areas. It is not possible to assess what impact these changes in the regulatory environment will have on the Company. Many of these large competitors have significantly more financial resources, larger market share and greater name recognition in the market areas served by the Company and its banking subsidiaries. BCB and PNB compete in this environment by providing a broad range of financial services, competitive interest rates and a personal level of service that, combined, tend to retain the loyalty of its customers in its market areas against competitors with far larger resources. To a lesser extent, convenience of branch locations and hours of operations are also considered competitive advantages of the Banks. Risk Factors The discussions set forth below contains certain statements that may be considered "forward-looking statements." Forward-looking statements involve unknown risks, uncertainties and other factors that may cause the Company's actual results to materially differ from those projected in the forward-looking statements. For further information regarding forward-looking statements, you should review he discussion under the caption "FORWARD-LOOKING STATEMENTS" on page 1 of this report. The Company could be adversely impacted by changes in applicable regulations. The Company is subject to extensive federal and state laws and regulations and is subject to supervision, regulation and examination by various federal and state bank regulatory agencies. The restrictions imposed by such laws and regulations limit the manner in which the Company and its bank subsidiaries may conduct business and obtain financing. There can be no assurance that any modification of these laws and regulations, or new legislation that may be enacted, in the future will not make compliance more difficult or expensive, restrict the Company's ability to originate, broker or sell loans or otherwise adversely affect the operations of the Company. See "Supervision and Regulation." The Company's business is largely dependent upon the hospitality industry. A number of the Company's loan customers are in the hospitality industry. The hospitality industry is dependent on personal discretionary spending levels. Consequently, the hospitality industry tends to be adversely impacted during general economic downturns and recessions. Unforeseen events, such as political instability, increases in fuel prices, travel-related accidents and unusual weather patterns also may adversely affect the hospitality industry. As a result, the Company's business also is likely to be affected by those events. Interest rate volatility may adversely impact the Company's results of operations. The principal components of the Company's income stream are net interest and dividend income. Net interest and dividend income is the difference between interest and fee income on earning assets, such as loans and investments, and the interest expense paid on interest bearing liabilities, such as deposits and borrowed funds. The Company's net interest and dividend income may be significantly affected by changes in market interest rates. A decrease in interest rates could reduce the Company's net interest and dividend income as the difference between interest and fee income and interest expense decreases. An increase in interest rates could also negatively impact the Company's results of operations by reducing borrowers' ability to repay their current loan obligations, resulting in increased loan defaults, foreclosures and write-offs and may necessitate increases to the Company's allowance for loan losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report. The Company's allowance for loan losses may not be adequate to cover actual losses. The Company makes various assumptions and judgments about the collectibility of its loan portfolio and provides an allowance for potential loan losses based on several factors. If the Company's assumptions are wrong, its allowance for loan losses may be insufficient to cover its actual losses, which would have an adverse effect on the Company's results of operations, and may cause the Company to increase the allowance in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report. Employees As of December 31, 2001, the Company and its subsidiaries had approximately 250 full-time equivalent employees. The Company considers its employee relations to be good. ITEM 2. PROPERTIES The Company operates 18 branch offices and two loan origination facilities in the central and northern New Hampshire towns of Berlin, Conway (4), Gorham (2), Groveton, Littleton, West Ossipee, West Plymouth, Plymouth, Campton, Ashland, North Woodstock, Tilton (2), Franklin and Concord. Thirteen of these offices, including its main offices in Berlin, New Hampshire and Plymouth, New Hampshire, are located on properties the Company owns. The Company leases five of its branches and the two loan origination facilities under five-year leases expiring between September 30, 2001 and November 20, 2004. Thirteen of the Company's branches have drive-up facilities and all are equipped with automated teller machines. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to, nor are any of its subsidiaries the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is traded on The NASDAQ Stock Market, Inc.'s National Market under the symbol "NWFI." The following table sets forth, for the periods indicated, the high and low closing sale prices for the common stock, as reported by the NASDAQ National Market, and the dividends paid on the common stock: Price Per Share ---------------------- Low High Dividends Per Share ------- ------- ------------------- 2001 4th Quarter $27.25 $29.75 $0.17 3rd Quarter $25.75 $30.95 $0.17 2nd Quarter $23.50 $30.00 $0.17 1st Quarter $22.88 $24.19 $0.17 2000 4th Quarter $21.50 $24.13 $0.15 3rd Quarter $22.13 $24.75 $0.15 2nd Quarter $20.00 $23.50 $0.15 1st Quarter $20.00 $26.38 $0.15 On March 15, 2002, the closing sales price of the common stock on the NASDAQ National Market was $28.90 per share. As of such date, there were approximately 1,350 holders of record of the Company common stock. The Company intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth the selected consolidated financial information of the Company for the five years in the period ended December 31, 2001. This selected consolidated financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing under Item 7 of this report and the Company's Consolidated Financial Statements and Notes thereto. As a result of the Merger described under Item 1 of this report, the selected consolidated financial data for 1997 reflects the combined results of operations and financial position of the Company and PEMI restated for such periods pursuant to the pooling of interests method of accounting.
At or for the years ended December 31, 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Balance Sheet Data: Total assets $513,939 $485,144 $462,552 $403,972 $377,866 Investment securities available-for-sale 60,276 55,487 55,848 50,567 57,141 Investment securities held-to-maturity - 2,752 5,151 6,509 11,312 Loans, net of unearned income 400,316 393,258 372,766 283,826 266,757 Allowance for loan losses 4,642 4,354 4,887 4,404 4,156 Other real estate owned 22 25 115 158 222 Deposit assumption premium 8,080 5,098 1,271 860 1,161 Deposits (1) 412,840 391,772 343,029 350,921 322,063 Securities sold under agreements to repurchase 8,155 9,390 7,468 6,791 6,146 Stockholders' equity 43,339 41,562 39,286 40,956 37,526 Income Statement Data: Net interest and dividend income $ 20,721 $ 21,253 $ 19,342 $ 17,536 $ 17,027 Provision for loan losses 900 980 540 540 535 Noninterest income 2,909 2,692 2,718 2,063 1,693 Noninterest expense 17,149 16,699 15,794 12,955 11,872 Net income 3,873 4,159 3,764 4,068 4,039 Per Common Share Data: Net income - basic $ 2.55 $ 2.61 $ 2.25 $ 2.35 $ 2.33 Net income - assuming dilution 2.54 2.61 2.25 2.35 2.33 Cash dividends declared 0.68 0.60 0.56 0.42 0.55 Book value 28.68 26.74 24.32 23.67 21.67 Tangible book value 23.32 23.41 23.54 23.18 21.00 Selected Ratios: Return on average assets 0.78% 0.86% 0.90% 1.06% 1.07% Return on average equity 9.14 10.29 9.37 10.25 11.14 Dividend payout 26.54 22.96 25.03 17.90 23.69 Average equity to average assets 8.58 8.31 9.62 10.35 9.60 (1) 1998 includes a short-term money market deposit of $14,500.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth on pages 8 through 18 of the Company's 2001 Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding quantitative and qualitative disclosures about market risk is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing under Item 7 of this report and is hereby incorporated by reference in this Item 7A. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL The information set forth on pages 19 through 42 of the Company's 2001 Annual Report to Stockholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the information set forth under the captions "Information Concerning Directors and Nominees," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement to be delivered in connection with its 2002 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth under the caption "Executive Compensation" in the Company's definitive proxy statement to be delivered in connection with its 2002 Annual Meeting of Stockholders, provided however, that the "Report of the Human Resources and Compensation Committee on Executive Compensation" and the "Stock Price Performance Graph" contained in such proxy statement are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information set forth under the caption "Security Ownership of Management" in the Company's definitive proxy statement to be delivered in connection with its 2002 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information set forth under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement to be delivered in connection with its 2002 Annual Meeting of Stockholders. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements: Auditor's Independent Report set forth on Page 42 of the Company's 2001 Annual Report to Stockholders Consolidated Statements of Financial Condition as of December 31, 2001 and 2000 set forth on Page 20 of the Company's 2001 Annual Report to Stockholders Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 set forth on Page 19 of the Company's 2001 Annual Report to Stockholders Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2001, 2000 and 1999 set forth on Page 21 of the Company's 2001 Annual Report to Stockholders Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 set forth on Page 21 of the Company's 2001 Annual Report to Stockholders Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 set forth on Page 22 of the Company's 2001 Annual Report to Stockholders Notes to Consolidated Financial Statements set forth on Pages 23 through 39 of the Company's 2001 Annual Report to Stockholders (2) Financial Statement Schedules: None (3) The Exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index. The Exhibit Index is incorporated herein by reference. (b) The Company filed no Reports on Form 8-K during the quarter ended December 31, 2001. (c) See Item 14(a)(3) above (d) See Item 8 of this Annual Report on Form 10-K SIGNATURES Pursuant to requirements of Section 13 or 15(d) 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. March 27, 2002 BY:/S/ William J. Woodward ------------------------------------ William J. Woodward Chairman of the Board, President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Chairman of the Board, March 27, 2002 President and CEO (Principal /S/ William J. Woodward Executive Officer) - --------------------------- William J. Woodward Vice President, Corporate March 26, 2002 Controller and Treasurer (Principal Financial and /S/ Richard P. Orsillo Accounting Officer) - --------------------------- Richard P. Orsillo /S/ John D. Morris Director March 27, 2002 - --------------------------- John D. Morris /S/ John H. Noyes Director March 27, 2002 - --------------------------- John H. Noyes /S/ Barry J. Kelley Director March 27, 2002 - --------------------------- Barry J. Kelley /S/ Randall G. Labnon Director March 27, 2002 - --------------------------- Randall G. Labnon /S/ Stephen G. Boucher Director March 27, 2002 - --------------------------- Stephen G. Boucher /S/ Peter H. Bornstein Director March 27, 2002 - --------------------------- Peter H. Bornstein /S/ Charles H. Clifford, Jr. Director March 27, 2002 - --------------------------- Charles H. Clifford, Jr. /S/ Arnold P. Hanson, Jr. Director March 27, 2002 - --------------------------- Arnold P. Hanson, Jr. INDEX OF EXHIBITS Exhibit Number Description of Exhibit 2.1 Agreement and Plan of Merger, dated as of March 14, 1997, by and among Northway Financial, Inc., The Berlin City Bank, Pemi Bancorp, Inc. and Pemigewasset National Bank (the "Merger Agreement") (incorporated by reference to Exhibit 2.1 to Registration Statement No. 333-33033). 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).(2) 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). (2) 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). (2) 10.6 Employment Agreement for George L. Fredette (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended 1999). (2) 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). (2) 10.8 Form of Collateral Assignment Split Dollar Agreement (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended 2000).(2) 13 Northway Financial, Inc. Annual Report to Stockholders(1) 21 List of Subsidiaries(1) 23 Consent of Shatswell, MacLeod & Company, P.C. (1) (1) Filed herewith (2) Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report EX-13 3 ex_13.txt NORTHWAY FINANCIAL, INC ANNUAL REPORT EXHIBIT 13 NORTHWAY FINANCIAL, INC. ANNUAL REPORT TO STOCKHOLDERS NORTHWAY FINANCIAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of Northway Financial, Inc. ("the Company") and its subsidiaries. It is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. FORWARD-LOOKING INFORMATION Certain statements in this report 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 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 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, economic and business conditions in the Company's market areas, 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, and the timing, impact and other uncertainties of future acquisitions. 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: i) the current economic downturn nationwide and regionally, as well as a deterioration of local business conditions, including termination of operations of a major employer in the primary market area of the Berlin City Bank; ii) changes in interest rates over the past year and the relative relationship between the various interest rate indices that the Company uses; iii) a change in product mix attributable to changing interest rates, customer preferences or competition; iv) a significant portion of the Company's loan customers are in the hospitality business and therefore could be affected by a slower economy, adverse weather conditions and/or rising gasoline prices; and v) the effectiveness of advertising, marketing and promotional programs. The words "believe," "expect," "anticipate," "intend," "estimate," "project," or the negative of such terms and other expressions which are predications 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. Though 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. OVERVIEW OF PERFORMANCE Northway and its bank subsidiaries derive substantially all of their revenue and income from furnishing bank and bank-related services, principally to individuals and small and medium sized companies in New Hampshire. The Banks operate as typical community banking institutions and do not engage in any specialized finance or capital market activities. Northway functions primarily as the holder of stock of its subsidiaries and assists the management of its subsidiaries as appropriate. The Company reported net income of $3,873,000, or $2.55 per common share, in 2001 compared to net income of $4,159,000, or $2.61 per common share, in 2000 and $3,764,000, or $2.25 per common share, in 1999. Return on average equity was 9.14 percent in 2001, compared to 10.29 percent and 9.37 percent for 2000 and 1999, respectively. Return on average assets was 0.78 percent in 2001, compared to 0.86 percent and 0.90 percent for 2000 and 1999, respectively. During the year 2001, the Company continued the implementation of its growth initiatives with the purchase of a branch in Littleton, New Hampshire. In addition, during 2001, the Company completed construction of a new branch location in Tilton, New Hampshire and moved its existing branch into this location. During 2000, the Company purchased a branch in West Ossipee, New Hampshire. These strategic investments resulted in increased noninterest expense which, when added to the decline in net interest income associated with the rapidly declining interest rate environment, caused a decline in 2001 earnings as compared to 2000. The Company's results of operations are affected not only by its net interest income, but also by the level of its noninterest income, including gains and losses on the sales of loans and securities, noninterest expenses, changes in the provision for loan losses resulting from the Company's periodic assessment of the adequacy of its allowance for loan losses and income tax expense. NET INTEREST AND DIVIDEND INCOME ANALYSIS Net interest and dividend income is the principal component of a financial institution's income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in volume and mix of earning assets and interest bearing liabilities can materially impact net interest and dividend income. The discussion of net interest and dividend income is presented on a taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among various taxable and tax-exempt assets. The table on page ten presents average balances, income earned or interest paid, and average yields earned or rates paid on major categories of assets and liabilities for the years ended December 31, 2001, 2000, and 1999. Net interest and dividend income for 2001 decreased $435,000, or 2 percent, over 2000 while increasing $1,833,000, or 9 percent, in 2000 over 1999. Interest and dividend income decreased $2,199,000, or 6 percent, in 2001 compared to 2000. A rapidly declining rate environment caused a 53 basis point decrease in the yield on average earning assets. A 48 basis point decrease in the yield on loans that was partially offset by an increase in average loan balances of $3,525,000, resulted in a $1,582,000, or 5 percent, decrease in interest and fees on loans. Interest and dividend income on investment securities decreased $556,000, or 14 percent. This decrease resulted from a 12 percent decrease in the average balance of investment securities as well as a 21 basis point decline in the yield. Interest expense decreased $1,764,000, or 11 percent, in 2001 compared to 2000. The decrease in interest expense was due primarily to a 48 basis point decrease in rates paid on interest bearing liabilities, partially offset by an increase in average interest bearing liabilities of $2,503,000, or 1 percent. A decrease of $25,785,000, or 37 percent, in the average balance of Federal Home Loan Bank ("FHLB") advances, coupled with a decrease in the rate on such advances of 35 basis points, resulted in a decrease in interest expense on FHLB advances of $1,698,000. In addition, rates paid on deposit liabilities declined 32 basis points resulting in a decrease in interest expense of $1,054,000. These changes were partially offset by an increase in average interest bearing deposits of $26,538,000, or 9 percent, which increased interest expense by $1,168,000. Interest and dividend income increased $6,312,000, or 20 percent, in 2000 compared to 1999. Earning assets on average increased by $67,010,000, or 17 percent, during 2000, creating a favorable volume variance. In addition, a rising rate environment caused a 21 basis point increase in the average yield of earning assets as a whole. A $70,589,000, or 22 percent, increase in the volume of average loans, combined with a 9 basis point increase in yield, accounted for a $6,291,000, or 23 percent, increase in interest and fees on loans. Interest and dividend income on investment securities decreased $235,000, or 6 percent, from 1999 to 2000. This decrease resulted for a 9 percent decrease in the average balance of total investment securities. The decrease in average balances was partially offset by a 26 basis point increase in yield. Interest expense increased $4,479,000, or 39 percent, in 2000 compared to 1999. The increase in interest expense was due primarily to an increase in average interest bearing liabilities of $61,203,000, or 19 percent, and to a 60 basis point increase in rates paid on interest bearing liabilities. The increase in interest bearing liabilities is directly related to the increase in average loans outstanding. FHLB advances, the most expensive source of funds, increased by $46,751,000 on average, and were a significant source of funds for loan growth. The trend in net interest and dividend income is commonly evaluated in terms of average rates using net interest margin and interest rate spread. The net interest margin is computed by dividing fully taxable equivalent net interest and dividend income by average total earning assets. This ratio represents the difference between the average yield returned on average earning assets and the average rate paid for all funds used to support those earning assets, including both interest bearing and noninterest bearing sources of funds. The net interest margin decreased 11 basis points to 4.56 percent in 2001 after having decreased 31 basis points to 4.67 percent in 2000. The decrease in 2001's net interest margin was a direct result of the decrease in the yield on earning asset, which was only partially offset by the decrease in the cost of funds. The portion of interest earning assets funded by interest bearing liabilities in 2001 and 2000 was 84 percent. The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. The interest rate spread eliminates the impact of noninterest bearing funds and gives a direct perspective on the effect of interest rate movements. During 2001, the net interest rate spread decreased 4 basis points to 3.98% as the yield on earning assets declined 52 basis points while the cost of interest bearing liabilities decreased 48 basis points. During 2000, the net interest rate spread decreased 39 basis points to 4.02 percent as the cost of interest bearing liabilities increased 60 basis points while yield on earning assets increased 21 basis points. See the accompanying schedules entitled "Consolidated Average Balances, Interest and dividend income/Expense and Average Yields/Rates" and "Consolidated Rate/Volume Variance Analysis" for more information.
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES ($000 Omitted) For the Year Ended December 31, 2001 2000 1999 ------------------------------ ---------------------------- ----------------------------- Average Average Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- Assets Interest earning assets: Federal funds sold $ 13,796 $ 428 3.10% $ 7,374 $ 480 6.51% $ 4,865 $ 228 4.69% Interest bearing deposits 109 3 2.75 262 12 4.58 161 8 4.97 Investments (1) (2) 54,134 3,279 6.06 61,555 3,835 6.27 67,744 4,070 6.01 Loans, net (1) (3) 394,964 31,677 8.02 391,439 33,259 8.50 320,850 26,968 8.41 ------- ------ ------- ------ ------- ------ Total interest earning assets (1) 463,003 35,387 7.64 460,630 37,586 8.16 393,620 31,274 7.95 ------ ---- ------ ---- ------ ---- Cash and due from banks 13,529 13,045 12,800 Allowance for loan losses (4,481) (4,417) (4,653) Premises and equipment 11,283 10,531 10,125 Other assets 10,811 6,577 5,637 -------- -------- -------- Total assets $494,145 $486,366 $417,529 ======== ======== ======== Liabilities Interest bearing liabilities: Regular savings $ 62,596 992 1.58 $ 65,438 1,254 1.92 $ 68,333 1,319 1.93 NOW and super NOW 56,326 359 0.64 52,888 447 0.85 49,832 433 0.87 Money market accounts 38,232 1,111 2.91 26,670 1,000 3.75 23,765 592 2.49 Certificates of deposit 178,297 8,862 4.97 163,917 8,649 5.28 152,353 7,514 4.93 Securities sold under agreements to repurchase 10,990 469 4.27 9,240 509 5.51 9,267 432 4.66 FHLB advances 44,232 2,500 5.65 70,017 4,198 6.00 23,266 1,279 5.50 Other borrowed funds -- -- -- -- -- -- 151 9 5.96 ------- ------ ------- ------ ------- ------ Total interest bearing liabilities 390,673 14,293 3.66 388,170 16,057 4.14 326,967 11,578 3.54 ------ ---- ------ ---- ------ ---- Noninterest bearing deposits 57,621 53,275 46,459 Other liabilities 3,474 4,508 3,931 -------- -------- -------- Total liabilities 451,768 445,953 377,357 Stockholders' equity 42,377 40,413 40,172 -------- -------- -------- Total liabilities and stockholders' equity $494,145 $486,366 $417,529 ======== ======== ======== Net interest and dividend income (1) $ 21,094 $ 21,529 $ 19,696 ======== ======== ======== Interest rate spread (4) 3.98% 4.02% 4.41% ==== ==== ==== Net interest margin (5) 4.56% 4.67% 5.00% ==== ==== ==== (1) Reported on a tax equivalent basis. (2) Average balances are calculated using the adjusted cost basis. (3) Net of unearned income. Includes nonperforming loans. (4) Interest rate spread equals the yield on interest earning assets minus the rate paid on interest bearing liabilities. (5) The net interest margin equals net interest income divided by total average interest earning assets.
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS
($000 Omitted) 2001 Compared to 2000 2000 Compared to 1999 Increase (Decrease) Due to Change In Increase (Decrease) Due to Change In Volume Rate Mix Total Volume Rate Mix Total ------ ---- --- ----- ------ ---- --- ----- Interest and dividend income: Federal funds sold $ 418 $ (251) $ (219) $ (52) $ 117 $ 89 $ 46 $ 252 Interest bearing deposits (7) (5) 3 (9) 5 (1) -- 4 Investments (462) (107 13 (556) (372) 151 (14) (235) Loans 300 (1,865) (17) (1,582) 5,933 293 65 6,291 ------- ------- ------- ------- ------- ------ ------ ------- Total interest and dividend income 249 (2,228) (220) (2,199) 5,683 532 97 6,312 ------- ------- ------- ------- ------- ------ ------ ------- Interest expense: Regular savings (54) (217) 9 (262) (56) (9) -- (65) NOW and super NOW 29 (110) (7) (88) 27 (12) (1) 14 Money market accounts 434 (225) (98) 111 72 299 37 408 Certificates of deposit 759 (502) (44) 213 570 525 40 1,135 Securities sold under agreements to repurchase 97 (115) (22) (40) (1) 78 -- 77 FHLB advances (1,546) (241) 89 (1,698) 2,570 116 233 2,919 Other borrowed funds -- -- -- -- -- -- (9) (9) ------- ------- ------- ------- ------- ------ ------ ------- Total interest expense (281) (1,410) (73) (1,764) 3,182 997 300 4,479 ------- ------- ------- ------- ------- ------ ------ ------- Net interest and dividend income $ 530 $ (818) $ (147) $ (435) $ 2,501 $ (465) $ (203) $ 1,833 ======= ======= ======= ======= ======= ====== ====== =======
PROVISION FOR LOAN LOSSES The provision for loan losses represents the annual cost of providing an allowance, or reserve, for losses on loans. The size of the provision for each year is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of collateral and general economic factors. The Company made a $900,000 provision for loan losses in 2001, a decrease of $80,000 from the provision of $980,000 made in 2000. This decrease was based upon the Company's judgment regarding the adequacy of the coverage ratio and level of portfolio risk. The 2000 provision of $980,000 was $440,000 higher than 1999's provision of $540,000. This increase was due directly to the growth of the loan portfolio over the prior two years. Although management utilizes its best judgment in providing for losses, there can be no assurance that the Company will not have to change its provisions for loan losses in subsequent periods. Management will continue to monitor the allowance for loan losses and make additional provisions to the allowance as appropriate. NONINTEREST INCOME Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services and income earned through investment and security sales. The following table sets forth the components of the Company's noninterest income: ($000 Omitted) Years Ended December 31, ------------------------------- 2001 2000 1999 ---- ---- ---- Service charges and fees on deposit accounts $1,169 $1,049 $ 935 Securities gains, net 128 512 709 Loan servicing income 401 130 52 Other 1,211 1,001 1,022 ------ ------ ------ Total noninterest income $2,909 $2,692 $2,718 ====== ====== ====== Fee income from service charges on deposit accounts increased 11 percent in 2001, 12 percent in 2000 and 11 percent in 1999. The improvement in 2001 and 2000 is due to higher balances outstanding as a result of branch purchases and openings during those years as well as a product and fee standardization effort completed during the year 2000. The increase in 1999 was principally the result of an increase in service charge fees including overdraft fees and monthly service charges. Net securities gains were $128,000 in 2001, compared to $512,000 in 2000. Securities gains in 2001 included net gains of $55,000 recorded on sales of equity securities compared to $512,000 in 2000. In 1999 net securities gains were $709,000 and included net gains on sales of equity securities of $679,000. Loan servicing income consists of income from the servicing of Federal Home Loan Mortgage Corporation ("FHLMC") mortgage loans and indirect installment loans as well as the net income recognized from the creation and amortization of servicing assets under Statement of Financial Accounting Standards ("SFAS") 125. During 2001, the Company recognized $401,000 in loan servicing income compared to $130,000 in 2000 and $52,000 in 1999. The increase in loan servicing income is directly attributable to the increase in the volume of loans serviced for others. Other noninterest income (sources of which include gains on sale of loans, debit card interchange fees, credit card merchant and fee income, automated teller fees and safe deposit fees) increased $210,000, or 21 percent, to $1,211,000 in 2001 following a $21,000, or 2 percent decrease, to $1,001,000 in 2000. Other noninterest income increased $343,000, or 51 percent, to $1,022,000 in 1999. NONINTEREST EXPENSE Total noninterest expense increased $450,000, or 3 percent, during 2001 following an increase of $905,000, or 6 percent, during 2000 and $2,884,000, or 22 percent, in 1999. The increases in these expenses were due to the Company's initiatives to standardize product offerings at the subsidiary banks, to increase market share in existing markets and enter new markets. In 2001 the Company acquired a branch in Littleton, New Hampshire and completed construction of a new branch location in Tilton, New Hampshire. In 2000 the Company acquired a branch in West Ossipee, New Hampshire. In 1999 two branches were opened and an indirect lending group began operations. In addition, during 1999, two branches were purchased. The following table sets forth information relating to the Company's noninterest expense during the periods indicated: ($000 Omitted) Years Ended December 31, ------------------------------- 2001 2000 1999 ---- ---- ---- Salaries and employee benefits $ 9,014 $ 8,868 $ 8,448 Office occupancy and equipment 2,863 2,708 2,541 Amortization of deposit assumption premium 626 513 357 Professional fees 886 1,073 1,091 Stationery and supplies 486 605 565 Other 3,274 2,932 2,792 ------- ------- ------- Total noninterest expense $17,149 $16,699 $15,794 ======= ======= ======= Salaries and employee benefits increased $146,000, or 2 percent, from 2000 to 2001, $420,000, or 5 percent, from 1999 to 2000, and by $1,691,000, or 25 percent, from 1998 to 1999. These increases reflect staff additions in connection with the expansion of the retail franchise, increased lending activities and normal salary and wage increases. The expansion initiatives also caused occupancy and equipment expense to increase $155,000, or 6 percent, from 2000 to 2001, $167,000, or 7 percent, from 1999 to 2000, and $461,000, or 22 percent, from 1998 to 1999. Amortization of deposit assumption premium increased $113,000, or 22 percent during 2001. This increase was due to the Littleton branch acquisition on October 26, 2001 as well as a full year of amortization on the branch purchased in West Ossipee during 2000. This increase was partially offset by the completion of amortization in July 2001 of branches acquired in 1994. During 2000 amortization increased $156,000, or 44 percent due to the West Ossipee branch acquisition on August 25, 2000 as well as incurring a full year of amortization on the branches acquired in 1999. In 1999 deposit assumption premium amortization increased $56,000, or 19 percent, to $357,000 as a result of the acquisition of two branches on July 9, 1999. INCOME TAX EXPENSE The Company recognized $1,708,000, $2,107,000, and $1,962,000 in income tax expense for the years ended December 31, 2001, 2000 and 1999, respectively. The effective tax rate was 30.6% for 2001, 33.6% for 2000 and 34.3% for 1999. The decrease in the effective tax rate in both 2001 and 2000 is due to the fact that the Company has obtained a number of State of New Hampshire tax credits related to economic development grants. In addition, the 2001 tax rate was reduced by the increased level of municipal income. This was partially offset by a 50 basis point increase in the Business Profits Tax. For additional information relating to income taxes, see Note 14 to the Consolidated Financial Statements. ASSETS Total assets increased $28,795,000, or 6 percent, to $513,939,000 at December 31, 2001 compared to $485,144,000 at December 31, 2000. The composition of earning assets has continued to change in order to meet corporate goals. BALANCE SHEET HIGHLIGHTS ($000 Omitted) Years Ended December 31, --------------------------------- 2001 2000 Change ---- ---- ------ Total assets $513,939 $485,144 $28,795 Earning assets 470,482 452,620 17,862 Securities 60,276 58,239 2,037 Loans, net of unearned income 400,316 393,258 7,058 Deposits 412,840 391,772 21,068 Stockholders' equity 43,339 41,562 1,777 SECURITIES The Company's securities are classified into one of two categories based on management's intent to hold the securities: (i) "held-to-maturity" securities, or (ii) securities "available-for-sale." Securities designated to be held-to-maturity are reported at amortized cost. Securities classified as available-for-sale are required to be reported at fair value with unrealized gains and losses, net of taxes, excluded from earnings and shown separately as a component of stockholders' equity. The following table summarizes the Company's securities portfolio at December 31, 2001 and 2000, showing amortized cost and market value for each category: ($000 Omitted) December 31, -------------------------------------- 2001 2000 ------------------ ------------------ Amortized Market Amortized Market Cost Value Cost Value ------- ------- ------- ------- Securities available-for-sale: US Treasury and US government agencies $10,969 $10,977 $28,883 $28,780 Mortgage-backed securities 13,810 13,744 7,513 7,475 Collateralized mortgage obligations 7,317 7,353 7,234 7,177 Marketable equity securities 4,358 3,255 3,180 2,409 Non-marketable equity securities 4,712 4,712 5,199 5,199 Corporate bonds 14,167 14,230 1,006 1,003 State and political subdivisions 5,907 6,005 3,366 3,444 ------- ------- ------- ------- Total securities available-for-sale $61,240 $60,276 $56,381 $55,487 ------- ------- ------- ------- Securities held-to-maturity: Mortgage-backed securities $ - $ - $ 1,760 $ 1,740 Collateralized mortgage obligations - - 492 488 State and political subdivisions - - 500 503 ------- ------- ------- ------- Total securities held-to-maturity $ - $ - $ 2,752 $ 2,731 ------- ------- ------- ------- Total securities $61,240 $60,276 $59,133 $58,218 ======= ======= ======= ======= Total securities increased $2,058,000 during 2001 to $60,276,000. On January 1, 2001, the Company elected, in conjunction with the adoption of SFAS No. 133, to transfer all securities held-to-maturity to the available-for-sale category at their market value. The net unrealized loss on securities available-for-sale was $964,000 at December 31, 2001 compared to $894,000 at December 31, 2000. The 2001 net unrealized loss on securities available-for-sale is primarily the result of unrealized losses on marketable equity securities, caused by the weak equity market during 2001. The Company has a policy of purchasing debt securities primarily rated A or better by Moody's Investor Services and U.S. government securities to minimize credit risk. All securities, however, carry interest rate risk, which affect their market values such that as market yields increase, the value of the Company's securities decline and vice versa. Additionally, mortgage-backed securities carry prepayment risk whereby expected yields may not be achieved due to the inability to reinvest proceeds from prepayment at comparable yields. Moreover, such mortgage-backed securities may not benefit from price appreciation in periods of declining rates to the same extent as the remainder of the portfolio. A portion of the securities portfolio is pledged to secure public deposits, short-term securities sold under agreements to repurchase and treasury, tax and loan accounts. Refer to Note 3 to the Consolidated Financial Statements for a further discussion of pledging. LOANS Loans increased 2 percent in 2001 due primarily to increases in both indirect installment loans and commercial real estate loans partially offset by a decline in residential real estate loans. The following table presents the composition of the loan portfolio as of December 31, 2001 and 2000: ($000 Omitted) Percent Percent 2001 of Total 2000 of Total ---- -------- ---- -------- Real estate: Residential $109,261 27.3% $129,805 33.0% Commercial 111,642 27.9 100,608 25.6 Construction 1,581 0.4 5,752 1.5 Commercial 22,727 5.7 22,270 5.7 Installment 28,210 7.0 28,177 7.1 Indirect installment 120,761 30.1 98,919 25.1 Other 6,303 1.6 7,881 2.0 -------- ----- -------- ----- $400,485 100.0% $393,412 100.0% ======== ===== ======== ===== The loan portfolio mix continued to change during the year. Indirect installment loans continue to be a focus of the Company along with commercial real estate loans. Indirect installment loans now comprise 30.1 percent of the loan portfolio versus 25.1 percent at the end of 2000. Residential real estate loans declined to 27.3 percent of the portfolio from 33.0 percent on December 31, 2000. The Company wishes to maintain a balanced portfolio and is working to maintain a portfolio mix of approximately one-third each of residential real estate, commercial and commercial real estate, and consumer and other loans. Commercial real estate loans consist of loans secured by income producing commercial real estate and commercial loans consist of loans that are either unsecured or are secured by inventories, receivables or other corporate assets, and many are additionally secured by a guarantee of the Small Business Administration. Commercial real estate and commercial loans increased by $11,491,000 in 2001 as compared to 2000. The Company continues to emphasize commercial real estate and commercial loans in order to enhance earnings and maintain the balance of its portfolio. Residential real estate loans decreased by $20,544,000 in 2001, a 16 percent decrease from 2000. The Company's strategy generally is to originate fixed-rate residential loans for sale to investors in the secondary market. The Company generally retains adjustable-rate loans in its portfolio but will, occasionally, retain some fixed-rate mortgages. The decline in residential real estate loans in 2001 resulted from a slightly lower rate environment, making fixed rate secondary market mortgages more appealing to the Company's customers. Installment loans consist primarily of loans originated directly by the Company, however, as part of the Littleton branch acquisition the Company purchased installment loans totaling approximately $2,601,000. Installment loans balances remained relatively unchanged compared to 2000. Indirect installment loans increased by $21,842,000, or 22 percent, in 2001. The increase is consistent with the Company's balanced portfolio strategy. The Company's loans are primarily secured by real estate and automobiles located in New Hampshire. In addition, real estate acquired by foreclosure is located in this market. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of other real estate acquired by foreclosure are susceptible to changing conditions in this market. The Company maintains significant credit relationships with borrowers in the hotel and motel industry. In addition, the Company maintains relationships with borrowers in the Berlin and surrounding market area, which loans could be impacted by the deterioration of local business conditions in this area. NONPERFORMING ASSETS Nonperforming assets were $1,519,000, or 0.30 percent of total assets, at December 31, 2001 compared to $1,070,000, or 0.22 percent of total assets, at December 31, 2000. This increase was due primarily to an increase in the level of both mortgage and consumer loan delinquencies. Nonperforming assets are comprised primarily of nonperforming loans, other chattels owned and real estate acquired by foreclosure or a similar conveyance of title. The accrual of interest on a loan is discontinued when there is reasonable doubt as to its collectibility or whenever the payment of principal or interest is more than 90 days past due. However, there are loans within this nonperforming classification that provide periodic payments, but which have a weakness with respect to the collateral securing the loan. At December 31, 2001, nonperforming loans totaled $1,392,000, or 0.35 percent of total loans, compared to $957,000, or 0.24 percent of total loans, in 2000. Other real estate owned at December 31, 2001 was $22,000 compared to $25,000 at December 31, 2000. ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses to absorb future charge-offs of loans in the existing portfolio. When a loan, or portion thereof, is considered uncollectible, it is charged against the allowance. Recoveries of amounts previously charged-off are added to the allowance when collected. The adequacy of the allowance for loan losses is evaluated on a regular basis by management. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their effect on borrowers and the market area in general, and the performance of individual credits in relation to the contract terms. The provision for loan losses charged to earnings is based on management's judgment of the amount necessary to maintain the allowance at a level adequate to absorb possible losses. In addition various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company's allowance for loan losses. The Company's allowance for loan losses increased $288,000 from December 31, 2000 to $4,642,000, or 1.16 percent of total loans, at December 31, 2001. The 2001 provision for loan losses was $900,000, $80,000 lower than the prior year level of $980,000. The following table sets forth the composition of the allowance for loan losses for the periods indicated: ($000 Omitted) Years Ended December 31, ---------------------------- 2001 2000 1999 ---- ---- ---- Beginning allowance $4,354 $4,887 $4,404 Provision for loan losses 900 980 540 Loans charged-off (734) (1,643) (304) Recoveries 122 130 247 ------ ------ ------ Net charge-offs (612) (1,513) (57) ------ ------ ------ Ending allowance $4,642 $4,354 $4,887 ====== ====== ====== Allowance as a percentage of loans outstanding 1.16% 1.11% 1.31% Allowance as a percentage of nonperforming loans 333.48 454.96 106.75 Net charge-offs as a percentage of average loans 0.15 0.39 0.02 DEPOSITS AND BORROWINGS Total deposits at December 31, 2001 were $412,840,000, an increase of $21,068,000, or 5 percent, compared to $391,772,000 at December 31, 2000. The increase in deposits was due primarily to the acquisition of a branch in October 2001, which netted the Company additional deposits of approximately $28,660,000, partially offset by a decrease in time deposits associated with a lower rate environment. The following table sets forth the components of deposit for the periods indicated: ($000 Omitted) December 31, ------------------------- 2001 2000 ---- ---- Demand $ 62,846 $ 56,745 Regular savings, NOW and money market 177,392 152,022 Time 172,602 183,005 -------- -------- Total deposits $412,840 $391,772 ======== ======== At December 31, 2001, time deposits of $100,000 or more are scheduled to mature as follows: ($000 Omitted) 3 months or less $ 9,866 Over 3 to 6 months 7,332 Over 6 to 12 months 5,925 Over 12 months 1,979 ------- $25,102 ======= At December 31, 2001 short-term borrowings consisted of FHLB advances of $0 and securities sold under agreements to repurchase of $8,155,000 compared to $2,950,000 and $9,390,000, respectively, for 2000. Long-term debt consisted solely of FHLB term advances of $48,028,000 compared to $35,528,000 in 2000. Many of the long-term term advances, however, are callable with call dates ranging from January 2002 to February 2003. The increase in FHLB advances is the result of four new advances secured for the purpose of providing liquidity to meet loan demand. See Notes 9 and 10 to the Consolidated Financial Statements for additional information. The following table sets forth certain information concerning the Company's borrowings at the dates indicated: ($000 Omitted) December 31, ---------------------------- 2001 2000 ---- ---- Short-term borrowings $ 8,155 $12,340 Long-term debt 48,028 35,528 -------- -------- $56,183 $47,868 ======= ======= CAPITAL The following table sets forth the Company's risk-based capital and leverage ratios: ($000 Omitted) December 31, ---------------------------- 2001 2000 ---- ---- Risk-adjusted assets $386,941 $353,146 Tier 1 capital (to average assets) 6.95% 7.39% Tier 1 capital (to risk weighted assets) 9.08 10.34 Total capital (to risk weighted assets) 10.28 11.57 The Company's capital serves to support growth and provide depositors and other creditors protection against loss. Equity capital represents the stockholders' investment in the Company. Management strives to maintain an optimal level of capital on which an attractive return to the stockholders will be realized over both the short-term and long-term, while serving depositors' and creditors' needs. The Company must also observe the minimum requirements enforced by the federal banking regulators. There are three capital requirements that banks and bank holding companies must meet: Tier 1 capital, total capital (combination of Tier 1 capital and Tier 2 capital), and leverage (Tier 1 capital to average assets) ratios. Tier 1 capital consists of stockholders' equity, net of intangible assets. Tier 2 capital consists of a limited amount of allowance. Tier 1 capital, total capital and leverage ratios do not include any adjustments for unrealized gains and losses relating to securities available-for-sale except net unrealized losses relating to marketable equity securities. The minimum requirements for the leverage ratio, risk-based Tier 1 capital and risk-based total capital are 4 percent, 4 percent and 8 percent, respectively. As of December 31, 2001, The Berlin City Bank ("BCB") was "adequately capitalized" and The Pemigewasset National Bank of Plymouth ("PNB") was "well capitalized" as defined under Federal Deposit Insurance Corporation ("FDIC") regulations. The Company intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends. INTEREST RATE RISK Volatility in interest rates requires the Company to manage interest rate risk, which arises from differences in the timing of repricing of assets and liabilities. Management monitors and adjusts the difference between interest sensitive assets and interest sensitive liabilities (such difference, the "GAP" position) within various time frames. An institution with more assets repricing than liabilities within a given time frame is considered asset sensitive and in time frames with more liabilities repricing than assets is liability sensitive. Within GAP limits established by the Board of Directors, the Company seeks to balance the objective of insulating the net interest margin from rate exposure with that of taking advantage of anticipated changes in rates in order to enhance income. Interest rate risk is managed by the Company's Asset/Liability Committee, which formulates strategies based on a desirable level of interest rate risk. In setting desirable levels of interest rate risk, the Committee evaluates the impact on earnings and capital caused by the current outlook on interest rates, potential changes in the outlook on interest rates and regional economies, liquidity, business strategies and other factors. The Asset/Liability Committee uses three key measurements to monitor interest rate risk: (i) the interest rate sensitivity GAP analysis; (ii) a rate shock to measure earnings volatility due to an immediate increase or decrease in market rates of interest; and (iii) simulation of changes in net interest income under alternative balance sheet and interest rate scenarios. Interest rate GAP analysis provides a static analysis of the repricing characteristics of the entire balance sheet. It is prepared by scheduling assets and liabilities into time bands based upon their next opportunity to reprice. For floating rate instruments, all balances are placed at the next date on which their rates could be reset; and for fixed rate instruments, the balances are placed in time bands according to their principal repayment schedules. It is necessary to apply further assumptions to refine this process. For instance, in order to recognize the potential for mortgage related instruments to experience early payments of principal, a prepayment assumption based on management's expectations is layered on top of the scheduled principal payments. Other categories that are scheduled using management assumptions include noncontractual deposits such as demand deposit, NOW, savings, and money market deposit accounts. These allocations are management's current estimate of the sensitivity of the rates and balances of these accounts to changes in market interest rates. The Company's limits on interest rate risk specify that the cumulative one-year GAP should be less than 10 percent of total assets. As of December 31, 2001, the estimated exposure was 3.6 percent liability sensitive (see table below). A more dynamic and detailed analysis of the earnings sensitivity of the balance sheet is provided through simulation analysis. The Company uses computer simulations to determine the impact on net interest income of various interest rate scenarios, balance sheet trends and strategies. These simulations incorporate assumptions about balance sheet dynamics such as loan and deposit growth, loan and deposit pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Simulations based on numerous assumptions are run under various interest rate scenarios to determine the impact on net interest income and capital. From these scenarios, interest rate risk is quantified and appropriate strategies are developed and implemented. Utilizing an immediate rate shock simulation where interest rates increase 200 basis points, the December 31, 2001 earnings simulation model projects that net interest income for the next twelve months would increase by an amount equal to approximately4.24 percent. In addition, utilizing an immediate rate shock stimulation where interest rates decrease 200 basis points, the December 31, 2001 earnings simulation model projects that net interest income for the next twelve months would decrease by an amount equal to approximately 4.86 percent. Both the up and down rate shock simulations are within the Company's 10 percent policy limit. The following table presents the Company's interest rate GAP analysis as of December 31, 2001:
($000 Omitted) Balance Maturing or Subject to Repricing 3 months 4 to 12 12 to 24 2 to 5 After 5 or less months months years years Total ------- ------ ------ ----- ----- ----- Loans, net $104,568 $101,358 $ 76,360 $106,912 $ 13,144 $402,342 Federal funds sold 6,900 -- -- -- -- 6,900 Securities 10,597 11,275 10,809 20,996 6,599 60,276 Other assets -- -- -- -- 44,421 44,421 -------- -------- -------- -------- -------- -------- Total assets $122,065 $112,633 $ 87,169 $127,908 $ 64,164 $513,939 -------- -------- -------- -------- -------- -------- Deposits $139,911 $102,181 $ 71,207 $ 36,715 $ 62,826 $412,840 Securities sold under agreements to repurchase 3,836 4,319 -- -- -- 8,155 Borrowed funds -- 3,028 7,000 8,000 30,000 48,028 Other liabilities and stockholders' equity -- -- -- -- 44,916 44,916 -------- -------- -------- -------- -------- -------- Total liabilities and equity $143,747 $109,528 $ 78,207 $ 44,715 $137,742 $513,939 -------- -------- -------- -------- -------- -------- GAP for period $(21,682) $ 3,105 $ 8,962 $ 83,193 $(73,578) -------- -------- -------- -------- -------- Cumulative GAP $(21,682) $(18,577) $ (9,615) $ 73,578 $ -- ======== ======== ======== ======== ======== Cumulative GAP as a percent of total assets (4.2)% (3.6)% (1.9)% 14.3%
LIQUIDITY RISK Liquidity risk management involves the Company'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 contractual maturity, the repayment of debt as it matures, 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 Company's Asset/Liability Committee. At the 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. These include brokered deposits, 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 purchase of treasury stock, capital injections to the subsidiary banks, and the payment of general corporate expenses. The primary sources of liquidity for the parent holding company are dividends from the subsidiary banks and reimbursement for services performed on behalf of the banks. As shown in the consolidated statements of cash flows, cash and cash equivalents increased by $14,240,000 during 2001. Cash used for investing activities totaled $11,437,000 with lending activities utilizing $9,078,000 and investment purchases utilizing $2,052,000. Cash provided by financing activities totaled $23,592,000. This cash consisted of $25,053,000 from a branch acquisition, partially offset by a decrease in other deposits of $7,592,000. In addition, FHLB advances provided a net source of financing totaling $9,550,000. The net cash provided by operating activities totaled $2,085,000 and consisted primarily of net income of $3,873,000 and was partially offset by an increase in loans held for-sale as well as a net decrease in other liabilities. CAPITAL EXPENDITURES AND COMMITMENTS During 2001, the Company incurred approximately $1,714,000 in capital expenditures. These expenditures included $947,000 of construction and equipment costs for the branch constructed in Tilton, New Hampshire. Approximately $388,000 was spent on technology initiatives, including Internet banking and cash management as well as a down-payment for technology initiatives to be completed in 2002. The remaining expenditures were for normal maintenance and replacement of, or upgrades in, existing property and equipment. During 2000, the Company incurred approximately $2,052,000 in capital expenditures. These expenditures included $301,000 for land, buildings, furniture and equipment for the branch purchased in West Ossipee, New Hampshire. The Company began construction of a new branch located in Tilton, New Hampshire, spending $714,000 on land and construction in progress. Approximately $336,000 was spent for the purchase of a new computer system. The remaining expenditures were for normal maintenance and replacement of, or upgrades to, existing property and equipment. During 2002, the Company's estimated capital expenditure projections total $2,100,000. The Company has budgeted approximately $1,700,000 for technology projects including upgrades to the voice and data communication network, corporate intranet, teller system and a wide-area-network. The remaining expenditures will be incurred for normal maintenance and replacement of, or upgrades to, existing property and equipment. These expenditures are expected to be funded through normal Company cashflows. CONSOLIDATED STATEMENTS OF INCOME ($000 Omitted, Except Per Share Data)
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans $31,587 $33,145 $26,865 Interest on Debt Securities: Taxable 2,169 2,971 3,109 Tax-Exempt 485 249 472 Dividends 342 453 238 Interest on Federal Funds Sold 428 480 228 Interest on Interest Bearing Deposits 3 12 8 - ---------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST AND DIVIDEND INCOME 35,014 37,310 30,920 - ---------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits: Regular Savings, NOW and Money Market Deposit Accounts 2,462 2,701 2,344 Certificates of Deposit (in Denominations of $100,000 or More) 1,363 1,259 1,169 Other Time 7,499 7,390 6,345 Interest on Short-Term Borrowings 513 1,819 954 Interest on Long-Term Debt 2,456 2,888 766 - ---------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 14,293 16,057 11,578 - ---------------------------------------------------------------------------------------------------------------------- Net Interest and Dividend Income 20,721 21,253 19,342 Provision for Loan Losses 900 980 540 - ---------------------------------------------------------------------------------------------------------------------- NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 19,821 20,273 18,802 - ---------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Service Charges and Fees on Deposit Accounts 1,169 1,049 935 Securities Gains, Net 128 512 709 Loan Servicing Income 401 130 52 Other 1,211 1,001 1,022 - ---------------------------------------------------------------------------------------------------------------------- TOTAL NONINTEREST INCOME 2,909 2,692 2,718 - ---------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and Employee Benefits 9,014 8,868 8,448 Office Occupancy and Equipment 2,864 2,708 2,541 Amortization of Deposit Assumption Premium 625 513 357 Other 4,646 4,610 4,448 - ---------------------------------------------------------------------------------------------------------------------- TOTAL NONINTEREST EXPENSE 17,149 16,699 15,794 - ---------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 5,581 6,266 5,726 Income Tax Expense 1,708 2,107 1,962 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $3,873 $4,159 $3,764 - ---------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Common Share $ 2.55 $ 2.61 $ 2.25 Earnings Per Common Share Assuming Dilution $ 2.54 $ 2.61 $ 2.25 - ---------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ($000 Omitted) AS OF DECEMBER 31, 2001 2000 - ------------------------------------------------------------------------------- ASSETS Cash and Cash Equivalents: Cash and Due from Banks and Interest Bearing Deposits $ 22,741 $ 15,401 Federal Funds Sold 6,900 -- - ------------------------------------------------------------------------------- Total Cash and Cash Equivalents 29,641 15,401 - ------------------------------------------------------------------------------- Securities Available-for-Sale 60,276 55,487 Securities Held-to-Maturity (Fair Value of $0 in 2001 and $2,731 in 2000) -- 2,752 Loans Held-for-Sale 2,026 229 Loans, Net Before Allowance for Loan Losses 400,316 393,258 Less: Allowance for Loan Losses 4,642 4,354 - ------------------------------------------------------------------------------- Net Loans 395,674 388,904 - ------------------------------------------------------------------------------- Premises and Equipment, Net 11,485 11,000 Other Real Estate Owned 22 25 Deposit Assumption Premium 8,080 5,098 Other Assets 6,735 6,248 - ------------------------------------------------------------------------------- TOTAL ASSETS $513,939 $485,144 - ------------------------------------------------------------------------------- LIABILITIES Deposits: Demand $62,846 $56,745 Regular Savings, NOW and Money Market Deposit Accounts 177,392 152,022 Certificates of Deposit (In Denominations of $100,000 or More) 25,102 28,847 Other Time 147,500 154,158 - ------------------------------------------------------------------------------- Total Deposits 412,840 391,772 - ------------------------------------------------------------------------------- Short-Term Borrowings 8,155 12,340 Accrued Taxes and Other Liabilities 1,577 3,942 Long-Term Debt 48,028 35,528 - ------------------------------------------------------------------------------- TOTAL LIABILITIES 470,600 443,582 - ------------------------------------------------------------------------------- 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 December 31, 2001 and 2000 and 1,511,324 Outstanding at December 31, 2001 and 1,559,369 Outstanding at December 31, 2000 1,732 1,732 Surplus 2,101 2,101 Retained Earnings 45,955 43,110 Treasury Stock (220,645 Shares at December 31, 2001 and 172,600 Shares at December 31, 2000) (5,864) (4,708) Accumulated Other Comprehensive Loss, Net of Tax (585) (673) - ------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 43,339 41,562 - ------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $513,939 $485,144 - ------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($000 Omitted) Accumulated Other Comprehensive Total Common Retained Treasury Income Stockholders' Stock Surplus Earnings Stock (Loss)(1) Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $1,732 $2,101 $37,084 $ (55) $ 94 $ 40,956 Net Income - 1999 -- -- 3,764 -- -- 3,764 Net Change in Accumulated Other Comprehensive Loss, Net of Tax -- -- -- -- (1,149) (1,149) Treasury Stock Purchased -- -- -- (3,343) -- (3,343) Cash Dividends Declared ($0.56 Per Share) -- -- (942) -- -- (942) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 1,732 2,101 39,906 (3,398) (1,055) 39,286 Net Income - 2000 -- -- 4,159 -- -- 4,159 Net Change in Unrealized Loss on Securities Available-for-Sale, Net of Tax -- -- -- -- 512 512 Net Change in Unfunded Pension Accumulated Benefit Obligation, Net of Tax -- -- -- -- (130) (130) Treasury Stock Purchased -- -- -- (1,310) -- (1,310) Cash Dividends Declared ($0.60 Per Share) -- -- (955) -- -- (955) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 1,732 2,101 43,110 (4,708) (673) 41,562 Net Income - 2001 -- -- 3,873 -- -- 3,873 Net Change in Unrealized Loss on Securities Available-for-Sale, Net of Tax -- -- -- -- (42) (42) Net Change in Unfunded Pension Accumulated Benefit Obligation, Net of Tax -- -- -- -- 130 130 Treasury Stock Purchased -- -- -- (1,156) -- (1,156) Cash Dividends Declared ($0.68 Per Share) -- -- (1,028) -- -- (1,028) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 $1,732 $2,101 $45,955 $(5,864) $ (585) $ 43,339 - ----------------------------------------------------------------------------------------------------------------------------------- (1) Accumulated other comprehensive loss as of December 31, 2001 consists of net unrealized holding losses on available-for-sale securities, net of taxes. Accumulated other comprehensive loss as of December 31, 2000 consists of net unrealized holding losses on available-for-sale securities of $543, net of taxes, and unfunded pension accumulated benefit obligation of $130, net of taxes. Accumulated other comprehensive loss as of December 31, 1999 consists of net unrealized holding losses on available-for-sale securities, net of taxes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($000 Omitted) FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income $ 3,873 $ 4,159 $ 3,764 Other Comprehensive Income (Loss): Net Unrealized Gains (Losses) on Available-for-Sale Securities 58 1,336 (1,162) Reclassification Adjustment for Realized Gains in Net Income 128 512 709 - ---------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities (70) 824 (1,871) Minimum Pension Liability Adjustment 197 (197) -- - ---------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) 127 627 (1,871) Income Tax Expense (Benefit) 39 245 (722) - ---------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss), Net of Tax 88 382 (1,149) - ---------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 3,961 $ 4,541 $ 2,615 - ---------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 Omitted) FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 3,873 $ 4,159 $ 3,764 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Loan Losses 900 980 540 Depreciation and Amortization 1,704 1,512 1,290 Deferred Income Tax Expense (Benefit) 188 263 (342) Write-Down of Other Real Estate Owned 3 -- 47 Gains on Sales of Securities Available-for-Sale, Net (128) (512) (709) Gains on Sale of Nonperforming and Reperforming Loans (145) (71) -- Loss on Disposal and Writedown of Premises and Equipment 22 90 -- Amortization of Premiums and Accretion of Discounts on Securities, Net 74 1 76 Increase (Decrease) in Unearned Income, Net 15 (20) (342) (Gains) Losses on Sales of Other Real Estate Owned and Other Personal Property, Net (22) (4) 4 Net (Increase) Decrease in Loans Held-for-Sale (1,532) (175) 481 Other Liabilities Assumed Net of Other Assets Acquired in Branch Transaction 34 12 (2) Net Change in Other Assets and Other Liabilities (2,900) (1,476) 1,317 - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,086 4,759 6,124 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Sales of Securities Available-for-Sale 4,212 2,609 6,157 Proceeds from Maturities of Securities Held-to-Maturity -- 3,936 13,074 Proceeds from Maturities of Securities Available-for-Sale 41,930 6,483 9,979 Purchase of Securities Available-for-Sale (48,195) (7,453) (21,813) Purchase of Securities Held-to-Maturity -- (1,555) (11,716) Loan Originations and Principal Collections, Net (6,302) (17,987) (88,556) Recoveries of Previously Charged-off Loans 122 130 247 Loans Acquired in Branch Transactions (2,601) (6,197) -- Purchase of Loans (297) -- (937) Proceeds from Sales of Nonperforming and Reperforming Loans 675 1,551 -- Proceeds from Sales of and Payments Received on Other Real Estate Owned 50 144 282 Proceeds from Sales of and Payments Received on Other Personal Property 554 536 101 Premises and Equipment Acquired in Branch Transaction (6) (301) (292) Additions to Premises and Equipment (1,580) (1,401) (1,064) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH (USED) BY INVESTING ACTIVITIES (11,438) (19,505) (94,538) - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits (7,592) 20,961 (25,903) Deposits Assumed in Branch Transactions, Net of Assumption Premiums 25,053 23,442 17,222 Advances from FHLB 14,000 21,000 57,000 Repayment of FHLB Advances (1,500) (44,000) (750) Net (Decrease) Increase in Short-term FHLB Advances (2,950) (7,000) 9,117 Net Increase (Decrease) in Securities Sold Under Agreements to Repurchase (1,235) 1,922 677 Purchases of Treasury Stock (1,156) (1,310) (3,343) Cash Dividends Paid (1,028) (955) (942) - ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 23,592 14,060 53,078 - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 14,240 (686) (35,336) Cash and Cash Equivalents at Beginning of Year 15,401 16,087 51,423 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,641 $ 15,401 $ 16,087 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flows: Interest Paid $ 16,006 $ 15,529 $ 11,242 Taxes Paid 1,776 1,817 2,043 Loans Transferred to Other Real Estate Owned 33 47 410 Loans Transferred to Other Personal Property 565 650 125 Financed Sales of Other Real Estate Owned -- 22 131 Loans Transferred to Held-for-Sale 265 -- -- Carrying Amount of Held-to-Maturity Securities Transferred to Available-for-Sale Securities 2,752 -- -- (Decrease) Increase in Amount Due to Broker -- (992) 992 See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Northway Financial, Inc. is a bank holding company formed in 1997 under the laws of New Hampshire and is registered under the Bank Holding Company Act of 1956. The Company's only business activity has been to own all of the shares of, and provide management and operational support to, The Berlin City Bank ("BCB") and The Pemigewasset National Bank of Plymouth ("PNB"). The Company's headquarters are in Berlin, New Hampshire. The subsidiaries are engaged principally in the business of attracting deposits from the general public and investing those deposits in investment securities, commercial loans, real estate loans, and consumer loans. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and judgments that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition, and income and expense for the periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change in the near-term relate to the determination of the allowance for loan losses and valuation of other real estate owned. RECLASSIFICATIONS Certain amounts in the prior years' financial statements have been reclassified to conform with the current year's presentation. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest bearing deposits. SECURITIES Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; if debt and equity securities are bought and held principally for the purpose of selling in the near term they would be classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of estimated income taxes. At this time, the Company has not established a trading account. Premiums and discounts are amortized and accreted primarily on the level yield method over the contractual life of the securities adjusted for expected prepayments. If a decline in the fair value below the adjusted cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value as the new cost basis and the amount of the write down is included as a charge against securities gains, net. Gains and losses on sales of investment securities are recognized at the time of the sale on a specific identification basis. LOANS HELD-FOR-SALE Loans held-for-sale are generally identified as such at origination and are stated at the lower of aggregate cost or market. Market value is based on outstanding investor commitments. When loans are sold, a gain or loss is recognized to the extent that the sale proceeds exceed or are less than the carrying value of the loans. Gains and losses are determined using the specific identification method. All loans sold are without recourse to the Company. LOANS Loans are carried at the principal amounts outstanding, net of any unearned income. Unearned income includes loan origination fees, net of direct loan origination costs. This income is deferred and recognized as adjustments to loan income over the contractual life of the related notes using a method the result of which approximates that of the interest method. Loans are placed on nonaccrual when payment of principal or interest is considered to be in doubt or is past due 90 days or more. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Previously accrued income on nonaccrual loans that has not been collected is reversed from current income, and subsequent cash receipts are recorded as income. Loans are returned to accrual status when collection of all contractual principal and interest is reasonably assured and there has been sustained repayment performance. The Company's loans are primarily secured by real estate in New Hampshire. In addition, other real estate owned is located in this market. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of other real estate owned are susceptible to changing conditions in this market. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered adequate by management on the basis of many factors including the risk characteristics of the portfolio, trends in loan delinquencies and an assessment of existing economic conditions. Management believes that the allowance for loan losses is adequate. Additions to the allowance are charged to earnings; realized losses, net of recoveries, are charged directly to the allowance. While management uses available information in establishing the allowance for loan losses, future additions to the allowance may be necessary if economic conditions differ substantially from the estimates used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowances for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on judgments different from those of management. Commercial, commercial real estate and individually significant mortgage and consumer loans are considered impaired, and are placed on nonaccrual, when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Mortgage and consumer loans, which are not individually significant, are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. The amount of impairment for all impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. SERVICING ASSETS Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. OTHER REAL ESTATE OWNED Other real estate owned is comprised of properties acquired either through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and for which the Company has taken physical possession. The Company classifies loans as repossessed or foreclosed if the Company receives physical possession of the debtor's assets, regardless of whether or not foreclosure proceedings take place. Assets acquired through foreclosure or a similar conveyance of title are initially recorded at the lower of the carrying value of the loan or the fair value, less estimated costs to sell, of the property constructively or actually received. Gains and losses upon disposition are reflected in operations as realized. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets. Amortization of leasehold improvements is accumulated on a straight-line basis over the lesser of the term of the respective lease or the asset's useful life. ADVERTISING The Company directly expenses costs associated with advertising as they are incurred. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK-BASED COMPENSATION The Company recognizes stock-based compensation using the "intrinsic value" approach as set forth in Accounting Principles Board ("APB") Opinion No. 25 rather than the "fair value" method introduced in SFAS No. 123. Entities electing to continue following APB Opinion No. 25 must make pro forma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting in SFAS No. 123 had been applied. The Company has made the pro forma disclosures required by SFAS No. 123. EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS, if applicable, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Earnings per common share have been computed based on the following (in thousands): Years Ended December 31, --------------------------------- 2001 2000 1999 ---- ---- ---- Net income $3,873 $4,159 $3,764 Less: Preferred stock dividends - - - ------ ------ ------ Net income applicable to common stock $3,873 $4,159 $3,764 ====== ====== ====== Average number of common shares outstanding 1,521.6 1,590.6 1,675.7 Effect of dilutive options(1) 4.3 - - ------ ------ ------ Average number of common shares outstanding used to calculate diluted earnings per common share 1,525.9 1,590.6 1,675.7 ======= ======= ======= (1) Approximately 21,000, 21,000 and 26,000 of the Company's outstanding stock options were not included in the diluted net earnings per share calculation for 2001, 2000, and 1999, respectively, because to do so would have been antidilutive. 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 in 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. Therefore, 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. This statement did not have any 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 Provision 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 adoption of this Statement has had no material impact on the consolidated financial statements. The FASB has issued Statement No. 141, Business Combinations. This Statement improves the consistency of the accounting and reporting of business combinations by requiring that all business combinations be accounted for under a single method - the purchase method. Using the pooling-of-interests method is no longer permitted. Statement No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. The adoption of this Statement has had no material impact on the consolidated financial statements. The FASB has issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the statement which for most companies, will be January 1, 2002. Management believes that adopting this Statement will have no significant impact on the consolidated financial statements. NOTE 2 CASH AND DUE FROM BANKS Cash and due from banks at December 31, 2001 and 2000 includes $5,858,000 and $4,903,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. NOTE 3 SECURITIES The amortized cost, gains in accumulated other comprehensive income, losses in accumulated other comprehensive income and market value of securities at December 31, 2001 and 2000 follows:
Securities Available-for-Sale: ($000 Omitted) Gains in Losses in Accumulated Accumulated Other Other Amortized Comprehensive Comprehensive Fair Cost Income Income Value --------- ------------- ------------- ---- December 31, 2001 - ------------------------------------------------------- US Treasury and other US government agency securities $10,969 $ 27 $ 19 $10,977 Marketable equity securities 4,358 109 1,212 3,255 Non-marketable equity securities 4,712 - - 4,712 Mortgage-backed securities 13,810 72 138 13,744 Collateralized mortgage obligations 7,317 86 50 7,353 Corporate bonds 14,167 299 236 14,230 State and political subdivision bonds and notes 5,907 98 - 6,005 ------- ---- ------ ------- $61,240 $691 $1,655 $60,276 ======= ==== ====== ======= December 31, 2000 - ------------------------------------------------------- US Treasury and other US government agency securities $28,883 $ 71 $ 174 $28,780 Marketable equity securities 3,180 88 859 2,409 Non-marketable equity securities 5,199 - - 5,199 Mortgage-backed securities 7,513 9 47 7,475 Collateralized mortgage obligations 7,234 - 57 7,177 Corporate bonds 1,006 - 3 1,003 State and political subdivision bonds and notes 3,366 78 - 3,444 ------- ---- ------ ------- $56,381 $246 $1,140 $55,487 ======= ==== ====== ======= Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ---- December 31, 2000 - ------------------------------------------------------- Mortgage-backed securities $1,760 $2 $22 $1,740 Collateralized mortgage obligations 492 - 4 488 State and political subdivision bonds and notes 500 3 - 503 ------ -- --- ------ $2,752 $5 $26 $2,731 ======= == === ====== The contractual maturity distribution of investments in debt obligations at December 31, 2001 follows: ($000 Omitted) One to Five to Over Within Five Ten Ten Total One Year Years Years Years Cost -------- ----- ----- ----- ----- Available-for-Sale: US Treasury and other US government agency securities $ - $ 6,983 $ 3,986 $ - $10,969 Mortgage-backed securities 105 7,229 4,943 1,533 13,810 Collateralized mortgage obligations - - 2,690 4,627 7,317 Corporate bonds - 14,167 - - 14,167 State and political subdivision bonds and notes 1,010 311 2,930 1,656 5,907 ------ ------- ------- ------ ------- $1,115 $28,690 $14,549 $7,816 $52,170 ====== ======= ======= ====== ======= Fair value $1,118 $28,651 $14,724 $7,816 $52,309 ====== ======= ======= ====== =======
Actual maturities of state and political subdivision bonds and notes, mortgage-backed securities and collateralized mortgage obligations will differ from the maturities presented because borrowers have the right to prepay obligations without prepayment penalties. An analysis of gross realized gains and losses on securities available-for-sale sold during the years ended December 31, follows:
($000 Omitted) 2001 2000 1999 Realized Realized Realized Realized Realized Realized Gains Losses Gains Losses Gains Losses -------- -------- -------- -------- -------- -------- Equity securities $ 61 $ 6 $517 $5 $720 $41 US government agency securities 91 - - - - - Mortgage-backed securities - 18 - - 30 - ---- --- ---- -- ---- --- $152 $24 $517 $5 $750 $41 ==== === ==== == ==== ===
The tax provision applicable to these net realized gains and losses amounted to $50,000, $201,000 and $278,000 for 2001, 2000, and 1999, respectively. Securities with a carrying amount totaling $21,382,000 and $18,729,000 were pledged to secure public deposits, securities sold under agreements to repurchase and treasury, tax and loan accounts at December 31, 2001 and 2000, respectively. NOTE 4 LOANS Loan balances were comprised of the following: ($000 Omitted) December 31, 2001 2000 - --------------------------- ---- ---- Real estate: Residential $109,261 $129,805 Commercial 111,642 100,608 Construction 1,581 5,752 Commercial 22,727 22,270 Installment 28,210 28,177 Indirect installment 120,761 98,919 Other 6,303 7,881 -------- -------- Total loans 400,485 393,412 Less: Unearned income 169 154 Allowance for loan losses 4,642 4,354 -------- -------- 4,811 4,508 -------- -------- $395,674 $388,904 ======== ======== Loans are made in the ordinary course of business to directors, executive officers, and their immediate families and to organizations in which such persons have more than a 10 percent ownership interest. These loans are made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. An analysis of activity in such loans for the years ended December 31, 2001 and 2000 follows: ($000 Omitted) 2001 2000 ------ ------ Balance at beginning of year $1,010 $ 815 Advances 378 283 Repayments (563) (88) Change in status of executive officers and directors - - ------- ------ Balance at end of year $ 825 $1,010 ======= ======= The Company's lending activities are conducted principally in New Hampshire. Although the loan portfolio is diversified, a portion of its debtors' ability to repay is dependent upon the economic conditions prevailing in New Hampshire. The Company maintains significant credit relationships with borrowers in the hotel and motel industry. The aggregate loan balances to these industries totaled $58,623,000 at December 31, 2001. As a result of the deterioration of local business conditions in the Berlin market, the Company has performed a loan population study and has determined that approximately 8 percent of gross loans are to customers in the Berlin and surrounding market area. The Company has determined that the allowance for loan losses is adequate to cover potential losses associated with these loans. Loans serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans total $46,661,000 and $28,932,000 at December 31, 2001 and 2000, respectively. The Company sold $18,577,000 of mortgage loans and $10,390,000 of indirect installment loans in 2001 and $2,196,000 of mortgage loans and $10,716,000 of indirect installment loans in 2000. The Company capitalized $204,000 and $22,000 of servicing rights and amortized $29,000 and $14,000 of those rights in 2001 and 2000, respectively. There is no valuation allowance for servicing rights, because their fair value approximates their carrying amount of $259,000 and $84,000 at December 31, 2001 and 2000, respectively. Servicing rights are carried in other assets. Restructured, accruing loans entered into prior to the adoption of SFAS No. 114 and 118 are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms at adoption of SFAS No. 114. Restructured, accruing loans entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure these loans may be removed from the impaired loan disclosure provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. At December 31, 2001 and 2000, loans restructured in a troubled debt restructuring before January 1, 1995, the effective date of SFAS No. 114, that are not impaired based on the terms specified by the restructuring agreement totaled $983,000 and $1,010,000, respectively. The gross interest income that would have been recorded in the years ended December 31, 2001 and 2000 if such restructured loans had been current in accordance with their original terms was $107,000 and $143,000, respectively. The amount of interest income recognized on such restructured loans for the years ended December 31, 2001 and 2000 was $73,000 and $94,000, respectively. The recorded investment in loans that are considered to be impaired under SFAS No. 114 was $643,000 and $197,000 at December 31, 2001 and 2000, respectively, for which the related allowance for loan losses is $76,000 as of December 31, 2001 and $0 as of December 31, 2000. All of the Company's impaired loans are collateralized and therefore all impaired loans are measured by the difference between the fair value of the collateral and the recorded amount of the loan. The average recorded investment in impaired loans during the twelve months ended December 31, 2001 and 2000 was approximately $307,000 and $1,996,000, respectively. For the twelve months ended December 31, 2001 and 2000 the Company recognized interest income on impaired loans of $26,000 and $78,000, respectively, which included $15,000 and $72,000 of interest income recognized using the cash-basis method of income recognition, respectively. NOTE 5 ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, follows: ($000 Omitted) 2001 2000 1999 ---- ---- ---- Balance at beginning of year $4,354 $4,887 $4,404 Provision charged to expense 900 980 540 Recoveries on loans previously charged-off 122 130 247 Loans charged-off (734) (1,643) (304) ------ ------ ------ Balance at end of year $4,642 $4,354 $4,887 ====== ====== ====== NOTE 6 OTHER REAL ESTATE OWNED Other real estate owned consists of real estate acquired by foreclosure or a similar conveyance of title. At December 31, 2001 and 2000 other real estate owned was comprised of residential real estate of $22,000 and $25,000, respectively. Sales of other real estate owned by the Company resulted in gains of $17,000, $64,000 and $7,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Write downs on other real estate owned totaled $3,000, $0, and $47,000 for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 7 PREMISES AND EQUIPMENT A summary of premises and equipment follows: ($000 Omitted) December 31, -------------------- 2001 2000 ---- ---- Land $ 2,327 $ 2,294 Buildings 9,535 8,585 Construction in progress 255 138 Equipment 5,726 5,483 ------- ------- 17,843 16,500 Less accumulated depreciation and amortization 6,358 5,500 ------- ------- $11,485 $11,000 ======= ======= Depreciation expense for the years ended December 31, 2001, 2000 and 1999 amounted to $1,079,000, $999,000, and $933,000, respectively. The Company leases seven of its locations under non-cancellable operating leases. Minimum lease payments in future periods under non-cancellable operating leases at December 31, 2001 are as follows: ($000 Omitted) 2002 $309 2003 222 2004 132 2005 - 2006 - ---- $663 ==== The terms of three of the leases provide that the Company can, at the end of the initial five-year term, renew the lease under two five-year options. The terms of one of the leases provides for one additional five-year renewal option at the end of the existing term. All leases contain a provision that the Company shall pay its pro-rata share of operating costs, including all real estate taxes. Rent expense for the years ended December 31, 2001, 2000, and 1999 amounted to $287,000, $256,000 and $190,000, respectively. NOTE 8 DEPOSITS The aggregate amount of maturities for time deposits as of December 31, 2001, for each of the following five years ended December 31 and thereafter, are as follows: ($000 Omitted) 2002 $149,858 2003 18,205 2004 2,825 2005 944 2006 729 Thereafter 41 -------- $172,602 ======== Deposits from related parties held by the Banks at December 31, 2001 and 2000 amounted to $1,897,000 and $3,806,000, respectively. NOTE 9 SHORT-TERM BORROWINGS Short-term borrowings, which include securities sold under agreements to repurchase and FHLB advances with maturities of less than one year, and their related average interest rates for the years ended December 31, 2001, 2000 and 1999 are as follows:
($000 Omitted) Amount outstanding at December 31, -------------------------------------------------------------- 2001 2000 1999 ------------------ ----------------- ------------------ Avg. Avg. Avg. Int. Int. Int. Amount Rate Amount Rate Amount Rate ------ ----- ------ ----- ------ ----- FHLB advances $ - -% $ 2,950 6.67% $ 9,950 4.60% Securities sold under agreements to repurchase 8,155 1.97 9,390 6.06 7,468 4.88 ------- ------- ------- $ 8,155 1.97% $12,340 6.21% $17,418 4.72% ======= ======= ======= Maximum amount outstanding at any month end $19,080 $41,199 $33,729 Average amount outstanding during the year 11,725 4.38% 28,575 6.37% 20,442 4.67%
The underlying securities associated with securities sold under agreements to repurchase are under the control of the Company. NOTE 10 LONG-TERM DEBT Long-term debt at December 31, 2001 and 2000 consisted of FHLB advances of $48,028,000 and $35,528,000, respectively. As of December 31, 2001, contractual principal payments due under long-term debt were as follows: ($000 Omitted) 2002 $ 3,028 2003 7,000 2004 8,000 2005 - 2006 - 2007 and years thereafter 30,000 ------- $48,028 ======= The FHLB long-term debt consisted of twelve separate advances with the following terms: ($000 Omitted) Amount Rate Maturity Date Call Date ------- ------ ------------- --------- $ 28 6.78% 04/04/02 N/A 3,000 6.76 04/08/02 N/A 7,000 4.34 06/25/03 N/A 3,000 4.78 06/25/04 N/A 5,000 5.79 08/30/04 02/28/02 5,000 6.11 03/28/07 03/28/02 7,000 5.54 11/02/09 02/02/02 7,000 5.57 11/09/09 02/09/02 5,000 5.91 12/17/09 03/17/02 2,000 4.80 12/27/10 03/27/02 3,000 4.50 01/24/11 01/22/02 1,000 4.58 02/07/11 02/05/03 ------- $48,028 ======= NOTE 11 ACQUISITIONS On October 26, 2001, the Company acquired certain assets and assumed the deposits of a branch office of The Bank of New Hampshire located in Littleton, New Hampshire. As a result of this purchase the Company made the following entries to record this transaction: ($000 Omitted) Cash $22,481 Loans 2,601 Deposit assumption premium 3,607 Equipment 6 Other assets 14 Miscellaneous expense 1 Deposits 28,660 Other liabilities 48 Other income 2 This transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branch are included in the 2001 consolidated statements of income of the Company from the date of the transaction. The deposit assumption premium of $3,607,000 is being amortized to noninterest expense over fifteen years using the straight line method. On August 25, 2000, the Company acquired certain assets and assumed the deposits of a branch office of The Bank of New Hampshire located in West Ossipee, New Hampshire. As a result of this purchase the Company made the following entries to record this transaction: ($000 Omitted) Cash $16,952 Loans 6,197 Deposit assumption premium 4,340 Premises and equipment 301 Other assets 38 Miscellaneous expense 8 Deposits 27,782 Other liabilities 50 Other income 4 This transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branch are included in the consolidated statements of income of the Company from the date of the transaction. The deposit assumption premium of $4,340,000 is being amortized to noninterest expense over fifteen years using the straight line method. On July 9, 1999, the Company acquired certain assets and assumed the deposits from branch offices of Vermont National Bank located in Tilton and Franklin, New Hampshire. As a result of this purchase, the Company made the following entries to record this transaction: ($000 Omitted) Cash $16,931 Deposit assumption premium 789 Premises and equipment 292 Other assets 5 Interest expense 3 Deposits 18,011 Other liabilities 3 Other income 6 This transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branches are included in the consolidated statements of income of the Company from the date of the transaction. The deposit assumption premium of $789,000 is being amortized to noninterest expense over seven years using the straight line method. Management reviews the carrying amount of intangible assets on an ongoing basis, taking into consideration any events and circumstances that might have diminished such amount. NOTE 12 STOCKHOLDERS' EQUITY The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2001, the most recent notification from the FDIC categorized BCB as adequately capitalized and PNB as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Company's and Banks' categories. Management believes, as of December 31, 2001 and 2000, that the Company and the Banks met all capital adequacy requirements to which they are subject. These minimum capital amounts and ratios, as well as the Company's and Banks' actual capital amounts and ratios, are presented in the following table:
($000 Omitted) To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions --------------- --------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 2001 - ------------------------------------------------ Tier 1 capital (to average assets) Consolidated $35,149 6.95% $20,231 =>4.00% N/A The Berlin City Bank 20,250 5.94 13,644 =>4.00 $17,055 =>5.00% The Pemigewasset National Bank of Plymouth 12,935 7.89 6,561 =>4.00 8,201 =>5.00 Total capital (to risk weighted assets) Consolidated 39,791 10.28 30,955 =>8.00 N/A The Berlin City Bank 23,383 8.99 20,817 =>8.00 26,021 =>10.00 The Pemigewasset National Bank of Plymouth 14,443 11.49 10,058 =>8.00 12,573 =>10.00 Tier 1 capital (to risk weighted assets) Consolidated 35,149 9.08 15,478 =>4.00 N/A The Berlin City Bank 20,250 7.78 10,408 =>4.00 15,615 =>6.00 The Pemigewasset National Bank of Plymouth 12,935 10.29 5,029 =>4.00 7,544 =>6.00 As of December 31, 2000 - ------------------------------------------------ Tier 1 capital (to average assets) Consolidated $36,498 7.39% $19,749 =>4.00% N/A The Berlin City Bank 23,127 6.98 13,252 =>4.00 $16,565 =>5.00% The Pemigewasset National Bank of Plymouth 13,216 7.93 6,669 =>4.00 8,336 =>5.00 Total capital (to risk weighted assets) Consolidated 40,852 11.57 28,252 =>8.00 N/A The Berlin City Bank 25,999 11.32 18,376 =>8.00 22,971 =>10.00 The Pemigewasset National Bank of Plymouth 14,645 11.73 9,985 =>8.00 12,481 =>10.00 Tier 1 capital (to risk weighted assets) Consolidated 36,498 10.34 14,126 =>4.00 N/A The Berlin City Bank 23,127 10.07 9,188 =>4.00 13,782 =>6.00 The Pemigewasset National Bank of Plymouth 13,216 10.59 4,992 =>4.00 7,488 =>6.00
Federal regulations prohibit banking companies from paying dividends on their stock if the effect would cause stockholders' equity to be reduced below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements. Under the National Bank Act, the approval of the Office of the Comptroller of the Currency ("OCC") is required if dividends declared by PNB in any year exceed the net profits of that year, as defined, combined with the retained net profit for the two preceding years. At December 31, 2001, PNB could, without approval of the OCC, declare dividends aggregating $69,000. As of December 31, 2001, BCB is restricted from declaring dividends to the Company in an amount greater than approximately $2,566,000, as such declaration would decrease capital below BCB's required minimum level of regulatory capital. NOTE 13 OTHER NONINTEREST EXPENSE The major components of other noninterest expense for the years ended December 31, are as follows: ($000 Omitted) 2001 2000 1999 ---- ---- ---- Professional fees $ 886 $1,073 $1,091 Stationery and supplies 486 605 565 Other 3,274 2,932 2,792 ------ ------ ------ $4,646 $4,610 $4,448 ====== ====== ====== NOTE 14 FEDERAL AND STATE TAXES The components of federal and state tax expense for the years ended December 31, are as follows: ($000 Omitted) 2001 2000 1999 ---- ---- ---- Current Federal $1,319 $1,657 $1,932 State 201 187 372 ------ ------ ------ 1,520 1,844 2,304 ------ ------ ------ Deferred Federal 223 210 (248) State (35) 53 (94) ------ ------ ------ 188 263 (342) ------ ------ ------ Total $1,708 $2,107 $1,962 ====== ====== ====== The temporary differences (the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases) that give rise to significant portions of the deferred income tax asset and deferred income tax liability at December 31, are as follows: ($000 Omitted) 2001 2000 ---- ---- Deferred income tax asset Allowance for loan losses $1,568 $1,461 Other 22 52 Interest on nonaccrual loans 25 73 Deferred origination costs 26 - Unrealized holding loss on investment securities available-for-sale 379 351 Minimum pension liability adjustment - 67 Deposit assumption premium 525 488 Prepaid pension - 16 Supplemental pension 49 50 ------ ------ 2,594 2,558 ------ ------ Deferred income liabilities: Loan origination costs, net (8) (20) Depreciation (562) (604) Pension liability (247) - Mortgage and consumer servicing rights (103) (33) ------ ------ (920) (657) ------ ------ Deferred income tax asset, net $1,674 $1,901 ====== ====== The primary sources of recovery of the deferred income tax asset are taxes paid that are available for carryback and the expectation that the deductible temporary differences will reverse during periods in which the Company generates taxable income. Total income tax expense for the years ended December 31, 2001, 2000 and 1999 differs from the "expected" federal income tax expense at the 34% statutory rate for the following reasons: 2001 2000 1999 ---- ---- ---- Expected federal income taxes 34.0% 34.0% 34.0% Municipal income (4.2) (2.5) (3.9) State tax expense, net of federal benefit 2.0 2.4 3.5 Other (1.2) (0.3) 0.7 ---- ---- ---- Effective tax rates 30.6% 33.6% 34.3% ==== ==== ==== NOTE 15 EMPLOYEE BENEFITS Pension Plan The Company maintains a trusteed non-contributory pension plan (the "Plan") covering substantially all full-time employees. Assuming retirement at age 65 after 30 years or more of service, the benefits are computed as the sum of 1 percent of final average earnings up to a covered compensation limit, plus 65 percent of final average earnings in excess of covered compensation, times years of service, up to 30. Final average earnings are defined as the five consecutive years out of the employees last ten years of employment during which compensation is highest. The amounts contributed to the Plan are determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only benefits attributed to service to date but also for those expected to be earned in the future. Assets of the Plan are primarily invested in common stock, US Government and Agencies securities and high quality corporate bonds. The following table sets forth information about the Plan as of December 31, and for the years then ended: ($000 Omitted) 2001 2000 ---- ---- Change in benefit obligation - ------------------------------------------------------ Benefit obligation at beginning of year $ 3,284 $ 2,967 Service cost 309 245 Interest cost 254 230 Actuarial gain 306 173 Effect of Economic Growth Tax Relief Reconciliation Act 9 - Benefits paid (857) (331) ------- ------- Benefit obligation at end of year $ 3,305 $ 3,284 ======= ======= Change in plan assets - ------------------------------------------------------ Fair value of plan assets at beginning of year $ 2,843 $3,121 Actual return on plan assets (86) 53 Employer contributions 1,018 - Benefits paid (857) (331) ------- ------- Fair value of plan assets at end of year $ 2,918 $ 2,843 ======= ======= Funded status - ------------------------------------------------------ Funded status $ (387) $ (441) Unrecognized transition asset (10) (14) Unrecognized net actuarial loss 2,254 1,675 Unrecognized prior service cost (1,130) (1,224) ------- ------- Net amount recognized $ 727 $ (4) ======= ======= Amounts recognized in the consolidated statements of financial position consists of: - ------------------------------------------------------ Accrued benefit cost $ - $ (4) Accrued benefit liability - (197) Accumulated other comprehensive income - 197 Prepaid benefit cost 727 - ------- ------- Net amount recognized $ 727 $ (4) ======= ======= Weighted-average assumptions as of December 31, 2001 2000 - ------------------------------------------------------ ---- ---- Discount rate 7.25% 7.50% Expected return on plan assets 8.50 8.50 Rate of compensation increase 4.50 4.50 ($000 Omitted) Components of net periodic benefit cost 2001 2000 1999 - --------------------------------------- ------- ----- ---- Service cost $ 309 $ 245 $ 238 Interest cost 254 230 244 Expected return on plan assets (271) (261) (316) Amortization of prior service cost (85) (85) (85) Recognized net actuarial loss 85 62 70 Recognized transition amount (4) (4) (4) ----- ----- ----- Net periodic benefit cost $ 288 $ 187 $ 147 ===== ===== ===== 401(k) Plan On July 1, 1999, the PNB 401(k) plan was amended and restated as the Northway Financial, Inc. 401(k) and Profit Sharing Plan (the "401K Plan"). Under the 401K Plan employees must have attained age 21, completed six months of service and be credited with 1,000 hours of service in order to participate. Employees of the Company, PNB and BCB are eligible to participate. Under the 401K Plan, employers match 50% of the first 4% of employee contributions. Total 401(k) matching expense in 2001, 2000 and 1999 amounted to $113,000, $110,000, and $73,000, respectively, and the Profit Sharing contribution expense was $64,000, $60,000, and $54,000, respectively. Prior to July 1, 1999, PNB had a 401(k) plan. To be eligible, employees must have attained age 21, completed six months of service and be credited with 1,000 hours of service. PNB matched 25% of employee contributions on the first 4% of compensation deposited as elective contributions. The 401(k) matching expense was $0 for the year ended December 31, 1999. STOCK-BASED COMPENSATION As indicated in Note 1, the Company applies APB Opinion 25 and related interpretations in accounting for stock options. Accordingly, no compensation cost has been recognized for its fixed stock options granted. Had compensation cost been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: ($000 Omitted, except per share data) 2001 2000 1999 ---- ---- ---- Net income As reported $3,873 $4,159 $3,764 Pro forma 3,826 4,112 3,528 Earnings per common share As reported $ 2.55 $ 2.61 $ 2.25 Pro forma 2.52 2.58 2.11 Earnings per common share As reported $ 2.54 $ 2.61 $ 2.25 (assuming dilution) Pro forma 2.51 2.58 2.11 A summary of the status of the Company's 1999 Plan as of December 31, 2001, 2000, and 1999 and changes during the years then ended is presented below:
2001 2000 1999 -------------------- ------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ------- ------ ------- ------ ------- Outstanding, beginning of year 49,500 $24.91 26,000 $28.00 - $ - Granted - - 28,500 22.63 26,000 28.00 Forfeited - - (5,000) 28.00 - - ------ ------ ------ Outstanding, end of year 49,500 $24.91 49,500 $24.91 26,000 $28.00 ====== ====== ====== Options exercisable at year-end 35,250 28,125 24,000 Per share weighted-average fair value of options granted during the year $ - $6.55 $9.07
The Board of Directors (the "Committee") administers the 1999 Stock Option and Grant Plan (the "1999 Plan") which is described below. The 1999 Plan was approved by shareholders on May 18, 1999. Under the 1999 Plan, the Committee may select the individuals to whom awards may from time to time be granted; determine the time or times of grant, and the extent, if any, of incentive stock options, non-qualified stock options, restricted stock awards, unrestricted stock awards, performance share awards, or any combination of the foregoing. The 1999 Plan expires in February 2009. The aggregate number of shares of the Company's common stock which may be issued upon the exercise of options granted under the 1999 Plan is 175,000. The option price is fixed by the Committee at the time of the grant and may not be less than 100% of the fair market value of the stock, as determined by the Committee, in good faith as of the grant date. Each option may be exercised at such times as shall be determined by the Committee at or after the grant date; provided, however, that no option may be exercised ten years after the date of grant. The fair value of each option granted is estimated on grant date using the Black-Scholes option pricing model. The weighted average dividend yield was 2.5% and 2.0% and the weighted average risk-free interest rate was 6.01% and 6.03% for 2000 and 1999, respectively. In addition, the expected volatility was 23% and the expected life was 8 years for both 2000 and 1999. The following table summarizes information about fixed stock options outstanding as of December 31, 2001: Options Outstanding Options Exercisable ----------------------------------------- -------------------------- Weighted Number Average Number Weighted Outstanding Remaining Exercisable Average Exercise as of Contractual as of Exercise Price 12/31/01 Life 12/31/01 Price ------- ----------- ----------- ----------- --------- $28.00 21,000 7.50 years 21,000 $28.00 22.63 28,500 8.63 years 14,250 22.63 ------ ------ $24.91 49,500 8.15 years 35,250 $25.83 ====== ====== CHANGE IN CONTROL The Company and its subsidiaries have entered into employment agreements with certain officers. These agreements provide for the payment, under certain circumstances, to the officer upon the officer's termination after a change of control. The amount of such payments is set forth in their individual agreements. NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet credit risk at December 31, are as follows: ($000 Omitted) 2001 2000 ---- ---- Financial instrument whose contract amounts represent credit risk: Unadvanced portions of home equity loans $ 8,754 $5,314 Unadvanced portions of lines of credit 9,317 7,983 Unadvanced portions of commercial real estate loans 624 622 Commitments to originate all other loans 16,862 6,887 Commitments to originate municipal notes 80 5,420 Standby letters of credit 83 645 Commitments to originate loans and municipal notes, unadvanced portions of home equity loans, lines of credit and commercial real estate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without having been drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximates the fair value of those assets. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. FHLB and Federal Reserve Bank ("FRB") Stock: The carrying amount reported in the balance sheets for FHLB and FRB Stock approximates their fair value. If redeemed, the Company will receive an amount equal to the par value of the stocks. Loans held-for-sale: The carrying amount reported in the balance sheet approximates fair value. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value of nonaccrual loans was estimated using the estimated fair value of the underlying collateral. The fair value of commitments to originate loans and outstanding letters of credit were considered in estimating the fair value of loans. As the undisbursed lines of credit are at floating rates, there is no fair value adjustment. Accrued interest receivable: The carrying value of accrued interest receivable approximates its fair value because of the short-term nature of this financial instrument. Deposits: The fair value of demand deposits (e.g. NOW and Super NOW checking, noninterest bearing checking, regular savings, money market accounts and mortgagors' escrow accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits. Short-term borrowings: The carrying value of short-term borrowings approximates its fair value because of the short-term nature of these financial instruments. Long-term debt: The fair values of long-term debt were determined by discounting the anticipated future cash payments by using the rates currently available to the Company for debt with similar terms and remaining maturities. The estimated fair values of the Company's financial instruments are as follows:
($000 Omitted) December 31, ----------------------------------------------------- 2001 2000 ----------------------- ---------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value -------- --------- -------- --------- Financial assets: Cash and cash equivalents $ 29,641 $ 29,641 $ 15,401 $ 15,401 Investment securities available-for-sale 55,564 55,564 50,288 50,288 Investment securities held-to-maturity - - 2,752 2,731 FHLB stock 4,632 4,632 5,119 5,119 FRB stock 80 80 80 80 Loans held-for-sale 2,026 2,026 229 229 Loans, net 395,674 401,237 388,904 387,938 Accrued interest receivable 2,237 2,237 2,909 2,909 Financial liabilities: Deposits 412,840 414,631 391,772 391,671 Short-term borrowings 8,155 8,155 12,340 12,340 Long-term debt 48,028 48,748 35,528 35,555
The carrying amounts of financial instruments shown in the above table are included in the consolidated statements of financial condition under the indicated captions except that (1) FHLB stock and FRB stock are included with investment securities available-for-sale in the statements; and (2) accrued interest receivable is included with other assets in the statements. At December 31, 2001, all the Company's financial instruments were held for purposes other than trading. At December 31, 2001, the Company had no derivative financial instruments subject to the provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for some of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. The fair value amounts presented do not represent the underlying value of the Company because fair values of certain other financial instruments, assets and liabilities have not been determined. NOTE 18 CONDENSED PARENT ONLY FINANCIAL STATEMENTS Condensed financial statements of Northway Financial, Inc. (Parent Company only) as of December 31, 2001 and 2000 and for the three years ended December 31, 2001 follow: STATEMENTS OF FINANCIAL CONDITION ($000 Omitted) 2001 2000 ---- ---- Assets - --------------------------------------------------- Cash and cash equivalents $ 333 $ 232 Investment in subsidiary, The Berlin City Bank 27,763 27,496 Investment in subsidiary, The Pemigewasset National Bank of Plymouth 13,612 13,911 Equipment, net 747 432 Due from subsidiaries 442 448 Other assets 1,091 442 ------- ------- Total assets $43,988 $42,961 ======= ======= Liabilities and stockholders' equity - --------------------------------------------------- Accrued expenses $ 221 $ 499 Other liabilities 428 220 Borrowings from subsidiary - 680 ------- ------- Total liabilities 649 1,399 ------- ------- Stockholders' equity: Common stock 1,732 1,732 Additional paid-in-capital 2,101 2,101 Retained earnings 45,955 43,110 Treasury stock (5,864) (4,708) Accumulated other comprehensive (loss) income (585) (673) ------- ------- Total stockholders' equity 43,339 41,562 ------- ------- Total liabilities and stockholders' equity $43,988 $42,961 ======= ======= STATEMENTS OF INCOME ($000 Omitted) 2001 2000 1999 ---- ---- ---- Dividends from subsidiaries $3,925 $2,450 $2,922 Interest income 24 22 50 Management fee income from subsidiaries 5,337 5,252 - Other - - 70 ------ ------ ------ 9,286 7,724 3,042 ------ ------ ------ Interest expense 10 7 - Salaries and employee benefits 3,430 3,507 - Office occupancy and equipment expense 664 552 5 Professional fees 587 628 142 Other 755 735 709 ------ ------ ------ 5,446 5,429 856 ------ ------ ------ Income before income tax benefit and equity in undistributed net income of subsidiaries 3,840 2,295 2,186 Income tax benefit (29) (53) (250) ------ ------ ------ Income before equity in undistributed net income of subsidiaries 3,869 2,348 2,436 Equity in undistributed net income of subsidiaries 4 1,811 1,328 ------ ------ ------ Net income $3,873 $4,159 $3,764 ====== ====== ====== STATEMENTS OF CASH FLOWS ($000 Omitted) 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $3,873 $4,159 $ 3,764 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 132 35 3 Due from subsidiaries 6 (448) - Increase in other assets (400) (332) (58) Increase (decrease) in accrued expenses and other liabilities (195) 293 218 Loss on sale of assets - 18 - Undistributed net income of subsidiaries (4) (1,811) (1,328) ------- ------- ------- Net cash provided by operating activities 3,412 1,914 2,599 ------- ------- ------- Cash flows from investing activities: Additions to premises and equipment (447) (469) (19) ------- ------- ------- Net cash used in investing activities (447) (469) (19) ------- ------- ------- Cash flows from financing activities: Proceeds from advances from subsidiaries 1,855 1,565 - Repayments of advances from subsidiaries (2,535) (885) - Cash paid to BCB - - (245) Purchases of treasury stock (1,156) (1,310) (3,343) Dividends paid (1,028) (955) (942) ------- ------- ------- Net cash used in financing activities (2,864) (1,585) (4,530) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 101 (140) (1,950) Cash and cash equivalents at beginning of year 232 372 2,322 ------- ------- ------- Cash and cash equivalents at end of year $ 333 $ 232 $ 372 ======= ======= ======= QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Summarized quarterly financial data for 2001 and 2000 follows: ($000 Omitted, except earnings per share) 2001 Quarters Ended ------------------------------------------ Mar 31 Jun 30 Sep 30 Dec 31 ------ ------ ------ ------ Interest and dividend income $9,182 $8,773 $8,718 $8,341 Interest expense 4,081 3,711 3,439 3,062 ------ ------ ------ ------ Net interest and dividend income 5,101 5,062 5,279 5,279 Provision for loan losses 225 225 225 225 Noninterest income 605 794 800 710 Noninterest expense 4,041 4,282 4,285 4,541 ------ ------ ------ ------ Income before taxes 1,440 1,349 1,569 1,223 Income tax expense 438 413 470 387 ------ ------ ------ ------ Net income $1,002 $ 936 $1,099 $ 836 ====== ======= ====== ======= Basic earnings per common share $ 0.65 $ 0.62 $ 0.72 $ 0.56 ====== ====== ====== ====== Earnings per common share assuming dilution $ 0.65 $ 0.62 $ 0.72 $ 0.55 ====== ====== ====== ====== 2000 Quarters Ended ------------------------------------------ Mar 31 Jun 30 Sep 30 Dec 31 ------ ------ ------ ------ Interest and dividend income $8,839 $9,127 $9,709 $9,635 Interest expense 3,556 4,004 4,300 4,197 ------ ------ ------ ------ Net interest and dividend income 5,283 5,123 5,409 5,438 Provision for loan losses 245 255 255 225 Noninterest income 570 633 732 757 Noninterest expense 4,066 4,054 4,317 4,262 ------ ------ ------ ------ Income before taxes 1,542 1,447 1,569 1,708 Income tax expense 538 435 537 597 ------ ------ ------ ------ Net income $1,004 $1,012 $1,032 $1,111 ====== ====== ====== ====== Basic earnings per common share $ 0.62 $ 0.63 $ 0.65 $ 0.71 ====== ====== ====== ====== Earnings per common share assuming dilution $ 0.62 $ 0.63 $ 0.65 $ 0.71 ====== ====== ====== ====== MARKET INFORMATION (UNAUDITED) Northway's common stock is traded on The NASDAQ Stock Market, Inc.'s National Market under the symbol "NWFI." The following table sets forth, for the periods indicated, the high and low closing sale prices for the common stock, as reported by The NASDAQ National Market, and the dividends paid on the common stock: Price Per Share ---------------------- Low High Dividends Per Share --- ---- ------------------- 2001 4th Quarter $27.25 $29.75 $0.17 3rd Quarter 25.75 30.95 0.17 2nd Quarter 23.50 30.00 0.17 1st Quarter 22.88 24.19 0.17 2000 4th Quarter $21.50 $24.13 $0.15 3rd Quarter 22.13 24.75 0.15 2nd Quarter 20.00 23.50 0.15 1st Quarter 20.00 26.38 0.15 The Company intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends. MANAGEMENT'S STATEMENT OF RESPONSIBILITY Responsibility for the financial information presented in the Annual Report rests with Northway Financial, Inc.'s management. The Company believes that the consolidated financial statements reflect fairly the substance of transactions and present fairly the Company's financial position and results of operations in conformity with generally accepted accounting principles appropriate in the circumstances, applying certain estimates and judgments as required. In meeting its responsibilities for the reliability of the consolidated financial statements, the Company depends on its system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with the appropriate corporate authorizations and recorded properly to permit the preparation of consolidated financial statements in accordance with generally accepted accounting principles. Although accounting control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. The Company believes that its accounting controls provide reasonable assurance that errors and irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. An important element of the system is a continuing and extensive internal audit program. The Board of Directors of the Company has an Audit Committee composed entirely of directors who are not officers or employees of the Company. The Committee meets periodically and privately with management, the internal auditor, and the independent public accountants to consider audit results and to discuss internal accounting controls, auditing, and financial reporting matters. Shatswell, MacLeod & Company, P.C., independent certified public accountants, have been engaged to render an independent professional opinion of the Company's consolidated financial statements. Their audit is conducted in accordance with generally accepted auditing standards and forms the basis for their report as to the fair presentation, in the consolidated financial statements, of the Company's financial position, operating results and cash flows. William J. Woodward Richard P. Orsillo President and Chief Executive Officer Vice President and Corporate Controller January 15, 2002 INDEPENDENT AUDITORS' REPORT Shatswell, MacLeod & Company, P.C. Certified Public Accountants 83 Pine Street West Peabody, Massachusetts 01960 The Board of Directors and Stockholders Northway Financial, Inc. Berlin, New Hampshire We have audited the accompanying consolidated statements of financial condition of Northway Financial, Inc. and Subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northway Financial, Inc. and Subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Shatswell, MacLeod & Company, P.C. West Peabody, Massachusetts January 15, 2002 NORTHWAY FINANCIAL, INC. BOARD OF DIRECTORS BOARD OF DIRECTORS OFFICERS Fletcher W. Adams William J. Woodward Vice Chairman Chairman of the Board, Northway Financial, Inc. President and CEO Chairman of the Board and President Pemigewasset National Bank Fletcher W. Adams Vice Chairman Peter H. Bornstein Attorney and Partner Richard P. Orsillo Bergeron, Hanson & Bornstein Vice President Corporate Controller Stephen G. Boucher President Joseph N. Rozek Airmar Technology Corp. Secretary Charles H. Clifford, Jr. Retired Businessman Arnold P. Hanson, Jr. President Isaacson Structural Steel, Inc. Barry J. Kelley President White Mountain Lumber Co. Randall G. Labnon General Manager Town and Country Motor Inn John D. Morris Retired Businessman John H. Noyes President Noyes Insurance Agency, Inc. President Central Square Insurance, Inc. William J. Woodward Chairman of the Board, President and CEO Northway Financial, Inc. The Berlin City Bank SUBSIDIARY BANK DIRECTORS THE BERLIN CITY BANK PEMIGEWASSET NATIONAL BANK Frederick Anderson Fletcher W. Adams Vice Chairman Vice Chairman Northway Financial, Inc. Northway Financial, Inc. Pemigewasset National Bank Chairman of the Board and President Pemigewasset National Bank General Manager and CEO NH Electric Cooperative, Inc. Frederick C. Anderson General Manager and CEO Peter H. Bornstein NH Electric Cooperative, Inc. Attorney and Partner Bergeron, Hanson & Bornstein Charles H. Clifford, Jr. Retired Businessman Stephen G. Boucher President John H. Noyes Airmar Technology Corp. President Noyes Insurance Agency, Inc. Arnold P. Hanson, Jr. President President Central Square Insurance, Inc. Isaacson Structural Steel, Inc. Brien L. Ward Barry J. Kelley Attorney President White Mountain Lumber Co. William J. Woodward Chairman of the Board, Randall G. Labnon President and CEO General Manager Northway Financial, Inc. Town and Country Motor Inn The Berlin City Bank Brien L. Ward Attorney William J. Woodward Chairman of the Board, President and CEO Northway Financial, Inc. The Berlin City Bank INFORMATION FOR STOCKHOLDERS TRANSFER AGENT INDEPENDENT AUDITORS Boston EquiServe, LP Shatswell, MacLeod & Company, P.C. Investor Relations 83 Pine Street P.O. Box 8040 West Peabody, Massachusetts 01960-3635 Mail Stop 45-02-64 Boston, Massachusetts 02266-8040 FINANCIAL INFORMATION 1-800-730-6001 FOR FINANCIAL DOCUMENTS, INCLUDING THE ANNUAL REPORT, MARKET MAKERS QUARTERLY REPORTS TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K OR FORM 10-Q, CONTACT: The following companies are currently market makers for Northway Financial, Inc. common stock. JOSEPH N. ROZEK SECRETARY Ryan Beck & Co., Inc. NORTHWAY FINANCIAL, INC. Monroe Securities, Inc. BERLIN, NEW HAMPSHIRE 03570 Spear, Leeds, and Kellogg EX-21 4 ex_21.txt LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries Northway Financial, Inc. 2001 Annual report on Form 10-K Subsidiaries of the Registrant Jurisdiction of Name of Significant Subsidiary % Owned Incorporation - ------------------------------ ------- ------------- Berlin City Bank 100 New Hampshire Pemigewasset National Bank 100 United States EX-23 5 ex_23.txt CONSENT OF SHATSWELL, MACLEOD & CO., P.C. Exhibit 23 Consent CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report on Form 10-K of Northway Financial, Inc. of our report dated January 15, 2002, relating to the consolidated statements of financial condition of Northway Financial, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2001. /S/ Shatswell, Macleod & Company, P.C. -------------------------------------- SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----