10-Q 1 d58036.txt NORTHWAY FIN. FORM 10-Q -- 3-31-02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 2002 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------- --------------------- Commission File Number 000-23129 NORTHWAY FINANCIAL, INC (Exact name of registrant as specified in its charter) New Hampshire 04-3368579 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 Main Street Berlin, New Hampshire 03570 --------------------- ----- (Address of principal executive offices) (Zip Code) (603) 752-1171 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. At April 30, 2002, there were 1,516,074 shares of common stock outstanding, par value $1.00 per share. INDEX NORTHWAY FINANCIAL, INC. PART I. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001 (Unaudited)........................... 3 Condensed Consolidated Balance Sheets at March 31, 2002 (Unaudited) and December 31, 2001............................................... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 (Unaudited)........................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited).... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................... 12 Item 2. Changes in Securities............................................... 12 Item 3. Defaults Upon Senior Securities..................................... 12 Item 4. Submission of Matters to a Vote of Security Holders................. 12 Item 5. Other Information................................................... 12 Item 6. Exhibits and Reports on Form 8-K.................................... 12 Signatures................................................................. 13 PART 1. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements. NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, (Dollars in thousands, except per share data) 2002 2001 ------------------------------------------------------------------------------- Interest and dividend income: Loans $7,104 $8,258 Interest on debt securities: Taxable 581 691 Tax-exempt 64 107 Dividends 58 105 Federal funds sold 47 20 Interest bearing deposits -- 1 ------------------- Total interest and dividend income 7,854 9,182 ------------------- Interest expense: Deposits 1,850 3,319 Borrowed funds 685 762 ------------------- Total interest expense 2,535 4,081 ------------------- Net interest and dividend income 5,319 5,101 Provision for loan losses 225 225 ------------------- Net interest and dividend income after provision for loan losses 5,094 4,876 ------------------- Noninterest income: Service charges and fees on deposit accounts 309 289 Securities gains, net 246 33 Other 397 283 ------------------- Total noninterest income 952 605 ------------------- Noninterest expense: Salaries and employee benefits 2,380 2,139 Office occupancy and equipment 763 731 Amortization of unidentifiable intangible assets 164 175 Other 1,082 996 ------------------- Total noninterest expense 4,389 4,041 ------------------- Income before income tax expense 1,657 1,440 Income tax expense 574 438 ------------------- Net income $1,083 $1,002 =================== Comprehensive net income $ 714 $1,110 =================== Per share data: Earnings per common share $ 0.72 $ 0.65 Cash dividends declared $ 0.17 $ 0.17 Weighted average number of common shares 1,511,424 1,541,377 The accompanying notes are an integral part of these condensed consolidated financial statements. NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS Mar. 31, Dec. 31, (Dollars in thousands) 2002 2001 ------------------------------------------------------------------------------- (Unaudited) Assets Cash and due from banks and interest bearing deposits $ 13,867 $ 22,741 Federal funds sold 7,700 6,900 Securities available-for-sale 60,057 60,276 Loans held-for-sale 922 2,026 Loans 395,858 400,316 Less: allowance for loan losses 4,712 4,642 ----------------------- Loans, net 391,146 395,674 ----------------------- Other real estate owned -- 22 Accrued interest receivable 2,308 2,237 Deferred income tax asset, net 1,916 1,861 Premises and equipment, net 11,421 11,485 Unidentifiable intangible assets 7,915 8,080 Other assets 2,789 2,637 ----------------------- Total assets $500,041 $513,939 ======================= Liabilities and Stockholders' Equity Liabilities: Interest bearing deposits $337,182 $349,994 Noninterest bearing deposits 57,584 62,846 Securities sold under agreements to repurchase 7,933 8,155 Long-term Federal Home Loan Bank advances 48,028 48,028 Other liabilities 5,476 1,577 ----------------------- Total liabilities 456,203 470,600 ----------------------- Stockholders' equity: Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued -- -- Common stock, $1 par value; 9,000,000 shares authorized; 1,731,969 issued at March 31, 2002 and December 31, 2001 and 1,512,824 outstanding at March 31, 2002 and 1,511,324 outstanding at December 31, 2001 1,732 1,732 Surplus 2,102 2,101 Retained earnings 46,781 45,955 Treasury stock, at cost (219,145 and 220,645 shares, respectively) (5,823) (5,864) Accumulated other comprehensive loss, net of tax (954) (585) ----------------------- Total stockholders' equity 43,838 43,339 ----------------------- Total liabilities and stockholders' equity $500,041 $513,939 ======================= The accompanying notes are an integral part of these condensed consolidated financial statements. NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, (Dollars in thousands) 2002 2001 ------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,083 $ 1,002 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 225 225 Depreciation and amortization 455 437 Deferred income tax expense 187 -- Write-down of other real estate owned -- 3 Gains on sales of securities available-for-sale, net (246) (33) Amortization of premiums & accretion of discounts on securities, net 56 6 Increase (decrease) in unearned income, net 12 (6) Gain on sales of other real estate owned and other personal property, net (4) (12) Net decrease (increase) in loans held-for-sale 1,104 (398) Net change in other assets and other liabilities 3,647 (141) --------------------- Net cash provided by operating activities 6,519 1,083 --------------------- Cash flows from investing activities: Proceeds from sales of securities available-for-sale 5,880 3,957 Proceeds from maturities of securities available-for-sale 5,684 19,061 Purchase of securities available-for-sale (11,766) (15,304) Loan originations and principal collections, net 4,100 3,589 Recoveries of previously charged-off loans 59 42 Proceeds from sales of and payments received on other real estate owned 26 15 Proceeds from sales of and payments received on other personal property 161 128 Additions to premises and equipment (226) (315) --------------------- Net cash provided by investing activities 3,918 11,173 --------------------- Cash flows from financing activities: Net decrease in deposits (18,074) (10,203) Advances from FHLB -- 4,000 Net decrease in short-term FHLB advances -- (2,950) Net increase (decrease) in securities sold under agreements to repurchase (222) 2,391 Exercise of stock options 42 -- Purchases of treasury stock -- (637) Cash dividends paid (257) (261) --------------------- Net cash used in financing activities (18,511) (7,660) --------------------- Net increase (decrease) in cash and cash equivalents (8,074) 4,596 Cash and cash equivalents at beginning of period 29,641 15,401 --------------------- Cash and cash equivalents at end of period $21,567 $19,997 ===================== Supplemental disclosure of cash flows: Interest paid $ 2,761 $ 4,483 ===================== Taxes paid $ 70 $ -- ===================== Loans transferred to other real estate owned $ -- $ 24 ===================== Loans transferred to other personal property $ 132 $ 134 ===================== Carrying amount of held-to-maturity securities transferred to available-for-sale $ -- $ 2,752 ===================== The accompanying notes are an integral part of these condensed consolidated financial statements. NORTHWAY FINANCIAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) 1. Basis of Presentation. The unaudited condensed consolidated financial statements of Northway Financial, Inc. and its two wholly-owned bank subsidiaries (collectively, "the Company") included herein have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted in accordance with such rules and regulations. The Company, however, believes that the disclosures are adequate to make the information presented not misleading. The amounts shown reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements for the periods reported. The results of operations for the three month periods ended March 31, 2002 and 2001 are not necessarily indicative of the results of operations to be expected for the full year or any other interim periods. The interim financial statements are meant to be read in conjunction with the Company's audited financial statements presented in its Annual Report on Form 10-K for the fiscal year ended December 31, 2001. In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheet and revenues and expenses for the reported periods. Actual results could differ from these estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. 2. Impact of New Accounting Standards. On January 1, 2001, the Company adopted Stated of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 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. SFAS No. 133 generally provides for matching the timing of the recognition of the gain or loss on derivatives designated as hedging instruments with the recognition of the changes in the fair value of the item being hedged. Depending on the type of hedge, such recognition will be either net income or other comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value will be recognized in net income in the period of change. SFAS No. 133 allows for a one-time change in the classification of securities in the investment portfolio. Therefore, in conjunction with the adoption of SFAS 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 SFAS No. 133, this transfer will not call into question the Company's intent to hold other debt securities to maturity in the future. The adoption of SFAS No. 133 did not have any material impact on the Company's consolidated financial statements. SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and rescinds SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 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 SFAS No. 140 has had no material impact on the Company's consolidated financial statements. SFAS No. 141, Business Combinations, 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. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. The adoption of this SFAS No. 141 has had no material impact on the Company's consolidated financial statements. SFAS No. 142, Goodwill and Other Intangible Assets, 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, was January 1, 2002. The adoption of SFAS No. 142 has had no material impact on the Company's consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis and the related condensed consolidated financial statements relate to Northway Financial, Inc. and its two wholly-owned subsidiaries, The Berlin City Bank and Pemigewasset National Bank (collectively the "Company"). Forward-Looking Statements Certain statements in this Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, but are not limited to, projections of revenue, income or loss, plans for future operations and acquisitions, and plans related to products or services of the Company. Such forward-looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company. To the extent any such risks, uncertainties and contingencies are realized, the Company's actual results, performance or achievements could differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements include, among other things, overall economic and business conditions, 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; a) the current economic downturn nation-wide 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, b) a change in product mix attributable to changing interest rates, customer preferences or competition; c) a significant portion of the Company's loan customers are in the hospitality business and therefore could be affected by weather conditions and/or high gasoline prices; and d) the effectiveness of advertising, marketing and promotional programs. The words "believe," "expect," "anticipate," "intend," "estimate," "project," or the negative of such terms and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known or unknown risks, uncertainties or other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Although the Company has attempted to list comprehensively the factors which might affect forward-looking statements, the Company wishes to caution investors that other factors may in the future prove to be important in affecting the Company's results of operations. New factors emerge from time to time and it is not possible for management to anticipate all of such factors, nor can it assess the impact of each such factor, or combination of factors, which may cause actual results to differ materially from forward-looking statements. Financial Condition The Company's total assets at March 31, 2002 were $500.0 million compared to $513.9 million at December 31, 2001, a decrease of $13.9 million. Net loans, including loans held-for-sale, decreased $5.6 million to $392.1 million. Cash and cash equivalents decreased $8.1 million to $21.6 million as a result of a decrease in vault cash as well as a decrease in Federal Reserve uncollected balances. Deposits decreased $18.1 million primarily due to lower DDA and time deposits. Total stockholders' equity increased $0.5 million from $43.3 million at December 31, 2001 to $43.8 million at March 31, 2002. The increase in stockholders' equity was a result of net income of $1.1 million partially offset by an increase in accumulated comprehensive loss of $0.4 million and dividends paid of $0.3 million. The Company maintains an allowance for loan losses to absorb future charge-offs of loans in the existing portfolio. The allowance is increased when a loan loss provision is recorded as an expense. When a loan, or portion thereof, is considered uncollectible, it is charged against this allowance. Recoveries of amounts previously charged-off are added to the allowance when collected. At March 31, 2002 the allowance for loan losses was $4.7 million, or 1.19% of total loans, compared to $4.6 million, or 1.16% of total loans at December 31, 2001. The allowance for loan losses is based on an evaluation by each bank's management and Board of Directors of current and anticipated economic conditions, changes in the diversification, size and risk within the loan portfolio, and other factors. An analysis of the allowance for loan losses for the three-month periods ended March 31, 2002 and 2001 is as follows: Three Months Ended March 31, (Dollars in thousands) 2002 2001 ------------------------------------------------------------------------------ Balance at beginning of period $4,642 $4,354 ----------------- Charge-offs (214) (161) Recoveries 59 42 ----------------- Net charge-offs (155) (119) Provision for loan losses 225 225 ----------------- Balance at end of period $4,712 $4,460 ================= Nonperforming loans totaled $1.0 million as of March 31, 2002, compared to $1.4 million at December 31, 2001. The ratio of nonperforming loans to total loans was 0.25% as of March 31, 2002 compared to 0.35% at December 31, 2001 and the ratio of nonperforming assets to total assets was 0.21% as of March 31, 2002 compared to 0.30% at December 31, 2001. Results of Operations The Company reported net income of $1,083,000, or $0.72 per common share, for the three months ended March 31, 2002, compared to $1,002,000, or $0.65 per common share, for the three months ended March 31, 2001. The increase in net income for the quarter is primarily attributable to higher net interest income and noninterest income partially offset by higher noninterest expense. The increase in per share net income reflects these factors as well as a reduction of common stock outstanding as a result of stock repurchased by the Company since March 2001. Net interest and dividend income for the three months ended March 31, 2002 increased $218,000 to $5,319,000 compared to $5,101,000 for the first quarter of the prior year. Noninterest income increased $347,000 to $952,000 in the first quarter of 2002 compared to $605,000 in the first quarter of 2001. The increase was primarily due to an increase in securities gains and loan extension fees, as well as an increase in the recognition of FAS125 servicing asset income. Noninterest expense increased $348,000 to $4,389,000 for the quarter ended March 31, 2002 compared to the $4,041,000 recorded during the same period last year primarily due to significant increases in pension and employee insurance plan expenses over the same period last year. In addition, the Littleton branch acquisition, which occurred during the fourth quarter of 2001, resulted in an increase in salaries and employee benefits as well as occupancy and other expense. Income Tax Expense The Company recognized income tax expense of $574,000 and $438,000 for the three months ended March 31, 2002 and 2001, respectively. The effective tax rates were 34.6% and 30.4% for those respective periods. The increase in the effective tax rate is due to the fact that during 2001 the Company obtained a number of State of New Hampshire tax credits related to economic development grants and carried a larger percentage of tax exempt securities and loans versus the amount carried this year. Liquidity Liquidity risk management refers to the Company's ability to raise funds in order to meet existing and anticipated financial obligations. These obligations to make payment include withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments as well as new business opportunities. Liquidity may be provided through amortization, maturity or sale of assets such as loans and securities available-for-sale, liability sources such as increased deposits, utilization of the Federal Home Loan Bank ("FHLB") credit facility, purchased or other borrowed funds, and access to the capital markets. Liquidity targets are subject to change based on economic and market conditions and are controlled and monitored by the Company's Asset/Liability Committee. At the subsidiary bank level, liquidity is managed by measuring the net amount of marketable assets after deducting pledged assets, plus lines of credit, primarily with the FHLB, 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 core deposits in excess of $100,000, term deposits with short maturities, and credit commitments outstanding. Additionally, the parent holding company requires cash for various operating needs including dividends to shareholders, the stock repurchase program, capital injections to the subsidiary banks, and the payment of general corporate expenses. The primary sources of liquidity for the parent holding company are dividends from the subsidiary banks. Management believes that the Company's current level of liquidity and funds availability from outside sources is sufficient to meet the Company's needs. Capital The Company's Tier 1 and Total Risk Based Capital ratios were 9.37% and 10.59%, respectively, at March 31, 2002. The Company's Tier 1 leverage ratio at March 31, 2002 was 7.30%. As of March 31, 2002, the capital ratios of the Company and Pemigewasset National Bank exceeded the minimum capital ratio requirements of the "well-capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). Berlin City Bank's capital ratios as of March 31, 2002 exceeded the minimum capital ratio requirements of the "adequately-capitalized" category under FDICIA. This was the result of the branch acquisition during the fourth quarter of 2001, which caused Total Risk Based Capital to fall below the "well-capitalized" level. Item 3. Quantitative and Qualitative Disclosures About Market Risk Since December 31, 2001, there have been no material changes in the Company's quantitative and qualitative disclosures about market risk. A fuller description of the quantitative and qualitative disclosures about market risk was provided by the Company on pages 8 through 18 of the Company's 2001 Annual Report to Stockholders filed as Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 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). (b) The Company did not file any Reports on Form 8-K during the quarter ended March 31, 2002 SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHWAY FINANCIAL, INC. May 14, 2002 BY: \S\ William J. Woodward ------------------------ William J. Woodward President & CEO (Principal Executive Officer) May 14, 2002 BY: \S\ Richard P. Orsillo ------------------------ Richard P. Orsillo Senior Vice President & CFO (Principal Financial and Accounting Officer)