-----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, N80gAyhOVb3WFm8yhxFVopfI/9ZVKe4Ru4/H1WVKKewIfiqML6o+fvgV3uashbJs +SYtjpnoGd9r/rQyHtomrg== 0000950156-03-000352.txt : 20031110 0000950156-03-000352.hdr.sgml : 20031110 20031110120252 ACCESSION NUMBER: 0000950156-03-000352 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031110 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23129-33 FILM NUMBER: 03987267 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-Q 1 d60184.txt NORTHWAY FINANCIAL FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2003 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. At October 17, 2003, there were 1,499,574 shares of common stock outstanding, par value $1.00 per share. INDEX NORTHWAY FINANCIAL, INC. PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 2003 (Unaudited) and December 31, 2002....................................3 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2003 and 2002 (Unaudited)........4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited)........................5 Notes to Condensed Consolidated Financial Statements (Unaudited).....6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................9 Item 3. Quantitative and Qualitative Disclosures about Market Risk..........13 Item 4. Controls and Procedures.............................................13 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................14 Item 2. Changes in Securities and Use of Proceeds...........................14 Item 3. Defaults Upon Senior Securities.....................................14 Item 4. Submission of Matters to a Vote of Security Holders.................14 Item 5. Other Information...................................................14 Item 6. Exhibits and Reports on Form 8-K....................................14 Signatures...................................................................15 PART 1. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements. NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
Sep. 30, Dec. 31, (Dollars in thousands) 2003 2002 - ---------------------------------------------------------------------------------------------------------------- (Unaudited) Assets: Cash and due from banks and interest bearing deposits $ 16,645 $ 17,256 Federal funds sold 18,355 10,170 Securities available-for-sale 83,163 91,397 Federal Home Loan Bank stock 4,705 4,632 Federal Reserve Bank stock 365 80 Loans held-for-sale 957 669 Loans, net before allowance for loan losses 465,540 442,152 Less: allowance for loan losses 5,021 4,920 ----------------------- Loans, net 460,519 437,232 ----------------------- Other real estate owned 211 175 Premises and equipment, net 12,941 12,503 Core deposit intangible 4,142 4,857 Goodwill 10,152 10,152 Other assets 7,827 9,195 ----------------------- Total assets $619,982 $598,318 ======================= Liabilities and Stockholders' Equity: Liabilities Interest bearing deposits $397,231 $404,435 Noninterest bearing deposits 76,644 71,759 Securities sold under agreements to repurchase 8,633 8,251 Long-term Federal Home Loan Bank advances 67,000 46,000 Guaranteed preferred beneficial interest in junior subordinated debentures 20,000 20,000 Other liabilities 3,804 3,607 ----------------------- Total liabilities 573,312 554,052 ----------------------- 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 September 30, 2003 and December 31, 2002 and 1,499,574 outstanding at September 30, 2003 and 1,516,574 outstanding at December 31, 2002 1,732 1,732 Surplus 2,088 2,088 Retained earnings 49,367 47,523 Treasury stock, at cost (232,395 and 215,395 shares, respectively) (6,213) (5,711) Accumulated other comprehensive loss, net of tax (304) (1,366) ----------------------- Total stockholders' equity 46,670 44,266 ----------------------- Total liabilities and stockholders' equity $619,982 $598,318 ======================= The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months Ended Sep. 30, Ended Sep. 30, (Dollars in thousands, except per share data) 2003 2002 2003 2002 - ----------------------------------------------------------------------------------------------------------------- Interest and dividend income: Loans $ 6,749 $ 6,837 $ 21,023 $ 20,826 Interest on debt securities: Taxable 744 687 2,345 1,980 Tax-exempt 106 73 284 216 Dividends 59 62 179 183 Federal funds sold 54 119 82 179 Interest bearing deposits 1 -- 2 -- ----------------------- ----------------------- Total interest and dividend income 7,713 7,778 23,915 23,384 ----------------------- ----------------------- Interest expense: Deposits 1,057 1,552 3,487 4,971 Borrowed funds 771 651 2,233 1,989 Guaranteed preferred beneficial interest in junior subordinated debentures 248 271 757 367 ----------------------- ----------------------- Total interest expense 2,076 2,474 6,477 7,327 ----------------------- ----------------------- Net interest and dividend income 5,637 5,304 17,438 16,057 Provision for loan losses 210 225 655 675 ----------------------- ----------------------- Net interest and dividend income after provision for loan losses 5,427 5,079 16,783 15,382 ----------------------- ----------------------- Noninterest income: Service charges and fees on deposit accounts 404 365 1,234 1,041 Securities gains, net 614 (7) 851 267 Loan servicing income 73 86 213 279 Other 625 423 1,439 984 ----------------------- ----------------------- Total noninterest income 1,716 867 3,737 2,571 ----------------------- ----------------------- Noninterest expense: Salaries and employee benefits 2,861 2,435 8,330 7,247 Office occupancy and equipment 894 801 2,767 2,329 Amortization of core deposit intangible 238 82 715 264 Write-down of equity securities 65 814 184 814 Other 1,549 1,530 4,422 3,897 ----------------------- ----------------------- Total noninterest expense 5,607 5,662 16,418 14,551 ----------------------- ----------------------- Income before income tax expense 1,536 284 4,102 3,402 Income tax expense 558 109 1,489 1,186 ----------------------- ----------------------- Net income $ 978 $ 175 $ 2,613 $ 2,216 ======================= ======================= Comprehensive net income $ 141 $ 3 $ 3,675 $ 1,714 ======================= ======================= Per share data: Earnings per common share $ 0.65 $ 0.12 $ 1.74 $ 1.46 Earnings per common share (assuming dilution) $ 0.65 $ 0.12 $ 1.73 $ 1.46 Cash dividends declared $ 0.17 $ 0.17 $ 0.51 $ 0.51 Weighted average number of common shares 1,502,563 1,516,422 1,506,028 1,514,566 The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended Sep. 30, (Dollars in thousands) 2003 2002 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 2,613 $ 2,216 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 655 675 Depreciation and amortization 1,775 1,160 Deferred income tax expense - 187 Write-down of equity securities 184 814 Gains on sales of securities available-for-sale, net (851) (267) Loss (gain) on disposal and write-down of premises and equipment 6 (18) Amortization of premiums and accretion of discounts on securities, net 344 158 Increase in unearned income, net 30 23 Amortization of discount on loans acquired 80 - Loss on sales of other real estate owned and other personal property, net 6 9 Net (increase) decrease in loans held-for-sale (288) 400 Net change in other assets and other liabilities 1,189 (828) ------------------- Net cash provided by operating activities 5,743 4,529 ------------------- Cash flows from investing activities: Proceeds from sales of securities available-for-sale 14,918 16,272 Proceeds from maturities of securities available-for-sale 61,328 14,415 Purchase of securities available-for-sale (66,577) (41,247) Loan originations and principal collections, net (24,908) (8,978) Recoveries of previously charged-off loans 141 164 Proceeds from sales of and payments received on other real estate owned 10 26 Proceeds from sales of and payments received on other personal property 630 508 Additions to premises and equipment (1,504) (1,552) ------------------- Net cash used in investing activities (15,962) (20,392) ------------------- Cash flows from financing activities: Net (decrease) increase in deposits (2,319) 6,814 Advances from FHLB 28,000 1,000 Repayment of FHLB advances (7,000) (3,028) Net (decrease) increase in securities sold under agreements to repurchase 382 1,549 Exercise of stock options - 140 Purchases of treasury stock (502) - Issuance of guaranteed preferred beneficial interest in junior subordinated debentures - 20,000 Cash dividends paid (768) (772) ------------------- Net cash provided by financing activities 17,793 25,703 ------------------- Net increase in cash and cash equivalents 7,574 9,840 Cash and cash equivalents at beginning of period 27,426 29,641 ------------------- Cash and cash equivalents at end of period $ 35,000 $ 39,481 =================== Supplemental disclosure of cash flows: Interest paid $ 6,532 $ 7,276 ========-- ======== Taxes paid $ 1,528 $ 1,459 ======== ======== Loans transferred to other real estate owned $ 46 $ 200 ======== ======== Loans transferred to other personal property $ 668 $ 529 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (Unaudited) 1. Basis of Presentation. The unaudited condensed consolidated financial statements of Northway Financial, Inc. and its four wholly-owned subsidiaries, The Berlin City Bank, The Pemigewasset National Bank of Plymouth, the Northway Capital Trust I (an issuer of trust preferred securities) and the Northway Capital Trust II (also an issuer of trust preferred securities) (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 and nine month periods ended September 30, 2003 and 2002 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, 2002. 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. Stock-Based Compensation As of September 30, 2003, the Company has a stock-based employee compensation plan which is described more fully in its Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The Company accounts for this plan under the recognition and measurement principles of the Auditing Practice Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
($000 Omitted, except per share data) Three Months Nine Months Ended Sep. 30, Ended Sep. 30, 2003 2002 2003 2002 ------------------ ------------------- Net income As reported $ 978 $ 175 $2,613 $2,216 Deduct: Total stock-based employee compensation expense determined under fair value based methods awards, net of related tax effects 10 10 30 30 ------- ------- ------ ------ Pro forma $ 968 $ 165 $2,583 $2,186 ======= ======= ====== ====== Earnings per common share As reported $0.65 $0.12 $1.74 $1.46 Pro forma $0.64 $0.11 $1.72 $1.44 Earnings per common share (assuming dilution) As reported $0.65 $0.12 $1.73 $1.46 Pro forma $0.64 $0.11 $1.71 $1.44
3. Impact of New Accounting Standards. 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 ceased upon adoption of the statement, which for the Company was January 1, 2002. The effect of the adoption of SFAS No. 142 on the Company's consolidated financial statements is described below. In October 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. Paragraph 5 of SFAS No. 147, which relates to the application of the purchase method of accounting, was effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets were effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 were effective on October 1, 2002, with earlier application permitted. In accordance with paragraph 9 of SFAS No. 147, the Company has reclassified, as of September 30, 2002 its recognized unidentifiable intangible asset related to branch acquisitions. This asset was reclassified as goodwill ("reclassified goodwill"). The amount reclassified was $5,386,000, the carrying amount as of January 1, 2002. The reclassified goodwill is being accounted for and reported prospectively as goodwill under SFAS No. 142, with no amortization expense. Accordingly, the consolidated financial statements for the three- and nine-months ended September 30, 2002 do not reflect amortization in the amount of $83,000 and $229,000, respectively, that would have been recorded if SFAS No. 147 had not been issued. In accordance with SFAS No. 147 the Company tested its reclassified goodwill for impairment as of January 1, 2002 and December 31, 2002. The Company determined that its goodwill as of those dates was not impaired. Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002, the Company reclassified its core deposit intangible ("CDI") asset and accounted for it as an asset apart from the unidentifiable intangible asset and not as goodwill. CDI is amortized over the expected life of the acquired deposits and is tested annually for impairment. As of December 31, 2002, the Company tested its CDI asset for impairment and determined that as of that date it was not impaired. The effect of the Company's adoption of SFAS No. 147 was to increase net income for the three- and nine-month periods ended September 30, 2002 by $51,000 and $140,000, respectively. In May 2003, FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 required the Company to reclassify on its balance sheet the line item "Guaranteed preferred beneficial interest in junior subordinated debentures" in the amount of $20,000,000. Prior to SFAS No. 150, this line item was presented between the liabilities section and the equity section of the Company's balance sheet. SFAS No. 150 requires that the line item now be classified as a liability. No additional disclosures are required in connection with SFAS No. 150. On a related matter, FASB Interpretation Number 46, Consolidation of Variable Interest Rate Entities ("FIN 46") Interpretation of Accounting Research Bulletin No. 51 has been deferred until the end of the first reporting period that ends after December 15, 2003. Future regulatory pronouncements regarding the interpretation of FIN 46 may affect the capital treatment of the Company's outstanding guaranteed preferred beneficial interest in junior subordinated debentures. 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 four wholly-owned subsidiaries, The Berlin City Bank, The Pemigewasset National Bank of Plymouth, Northway Capital Trust I and Northway Capital Trust II (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 can be identified by the use of the words "expect," "believe," "estimate," "will" and other expressions which predict or indicate future trends and which do not relate to historical matters. Forward-looking statements may include, but are not limited to, projections of revenue, income or loss, plans for future operations, including in new markets, 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. The Company's actual results could differ materially from those projected in the forward-looking statements as the result of, among other factors, changes in interest rates, changes in the securities or financial markets, a deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes in local business conditions resulting in rising unemployment and other circumstances which adversely affect borrowers' ability to service and repay our loans, changes in loan defaults and charge-off rates, reduction in deposit levels necessitating increased borrowing to fund loans and investments, the passing of adverse government regulation, changes in assumptions used in making such forward-looking statements, as well as those factors set forth in the Company's Annual Report on Form 10-K for the year ending December 31, 2002, and in the Company's other filings with the Securities & Exchange Commission. These forward-looking statements were based on information, plans and estimates at the date of this report, and the Company does not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Financial Condition The Company's total assets at September 30, 2003 were $619,982,000 compared to $598,318,000 at December 31, 2002, an increase of $21,664,000. Net loans, including loans held-for-sale, increased $23,575,000 to $461,476,000, the result of increases in all loan categories. Cash and cash equivalents increased $7,574,000 to $35,000,000, compared to $27,426,000 at December 31, 2002, due primarily to an increase in Federal Funds Sold. This was partially offset by a decrease in securities available-for-sale of $7,876,000 to $88,233,000 due primarily to lower mortgage-backed security balances partially offset by US Government Agency purchases. Deposits decreased $2,319,000 from December 31, 2002 due to a decrease in time deposits and money market accounts, which was partially offset by an increase in NOW, DDA and savings account balances. Long-term Federal Home Loan Bank advances increased $21,000,000 to $67,000,000 from December 31, 2002 due to twelve new advances, totaling $28,000,000, during the year ranging in term from two years to seven years with an average interest rate of 2.74% which was partially offset by the maturity of $7,000,000 in advances. Total stockholders' equity increased $2,404,000 to $46,670,000 at September 30, 2003 from $44,266,000 at December 31, 2002 due primarily to net income of $2,613,000 and an increase in accumulated other comprehensive gain of $1,062,000 which was partially offset by dividends paid of $768,000 and an increase in treasury stock of $502,000. At September 30, 2003, unrealized equity security losses of $344,000 are included in accumulated other comprehensive loss, net of tax. Management does not consider the underlying equity securities to be other than temporarily impaired. The Company maintains an allowance for loan losses to absorb charge-offs of loans in the existing portfolio. The allowance is increased when a loan loss provision is recorded as an expense. When a loan, or portion thereof, is considered uncollectible, it is charged against this allowance. Recoveries of amounts previously charged-off are added to the allowance when collected. At September 30, 2003 the allowance for loan losses was $5,021,000, or 1.08% of total loans, compared to $4,920,000, or 1.11% of total loans at December 31, 2002. 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. The composition of the allowance for loan losses for the three and nine month periods ended September 30, 2003 and 2002 is as follows: Three Months Nine Months Ended Sep. 30, Ended Sep. 30, (Dollars in thousands) 2003 2002 2003 2002 - ----------------------------------------------------------------------------- Balance at beginning of period $4,994 $4,870 $4,920 $4,642 ------------------ ----------------- Charge-offs (231) (208) (695) (534) Recoveries 48 60 141 164 ------------------ ----------------- Net charge-offs (183) (148) (554) (370) Provision for loan losses 210 225 655 675 ------------------ ----------------- Balance at end of period $5,021 $4,947 $5,021 $4,947 ================== ================= Nonperforming loans totaled $4,102,000 as of September 30, 2003, compared to $3,619,000 at December 31, 2002. The ratio of nonperforming loans to loans net of unearned income was 0.88% as of September 30, 2003 compared to 0.82% at December 31, 2002. Nonperforming assets, which include nonperforming loans, other real estate owned and other chattels owned, totaled $4,441,000 as of September 30, 2003, compared to $3,892,000 at December 31, 2002. The ratio of nonperforming assets to total assets was 0.72% as of September 30, 2003 compared to 0.65% at December 31, 2002. Results of Operations The Company reported net income of $978,000, or $0.65 per common share, for the three months ended September 30, 2003, compared to $175,000, or $0.12 per common share, for the three months ended September 30, 2002. Net income for the nine months ended September 30, 2003 was $2,613,000, or $1.74 per common share, compared to $2,216,000, or $1.46 per common share, for the nine months ended September 30, 2002. The increase in net income for both the quarter and year-to-date is attributable to an improvement in net interest income, an increase in noninterest income, and a decrease in write-down of equity securities. This is partially offset by an increase in noninterest expense, excluding the write-down of equity securities. Net interest and dividend income for the third quarter increased $333,000 to $5,637,000 compared to $5,304,000 for the third quarter of 2002. For the nine months ended September 30, 2003 net interest and dividend income increased $1,381,000, or 8.6%, to $17,438,000 compared to $16,057,000 for the same period of the prior year due primarily to an increase in average earning assets of $78,229,000 partially offset by a decrease in the net interest margin of 0.30%. The provision for loan losses decreased $15,000 to $210,000 for the third quarter of 2003 compared to $225,000 for the third quarter of 2002. In addition, the provision decreased $20,000 to $655,000 for the nine months ended September 30, 2003 compared to $675,000 for the nine months ended September 30, 2002. The provision for loan losses is based upon a review of the adequacy of the allowance for loan losses, which is conducted on a quarterly basis. This review is based upon many factors including the risk characteristics of the portfolio, trends in loan delinquencies, and an assessment of existing economic conditions. In addition, various regulatory agencies, as part of their examination process, review the banks' allowances for loan losses and such review may result in changes to the allowance based on judgments different from those of management. The decrease in the provision was due in part to the recording of $70,000 to other expense for a provision for losses related to unfunded loan commitments such as unused lines of credit and unused portions of home-equity loans. This provision had previously been calculated as part of the allowance for loan losses. Noninterest income increased $849,000 to $1,716,000 in the third quarter of 2003 compared to $867,000 in the third quarter of 2002. Service charges and fees on deposit accounts increased $39,000 due to increases in overdraft fee income and service charge income resulting from the branch acquisitions in the fourth quarter 2002. Net securities gains increased $621,000 in the third quarter of 2003 compared to the third quarter of 2002 due primarily to the sale of corporate securities. Other noninterest income increased $202,000 due primarily to increases in gains on sales of loans and the recognition of other loan fees resulting from transactions with Federal Home Loan Mortgage Corporation ("FHLMC"). This was partially offset by a decrease in gain on sale of property resulting from the 2002 sale of a former branch facility. For the nine months ended September 30, 2003 noninterest income increased $1,166,000, or 45.4%, to $3,737,000 compared to $2,571,000 for the same period of the prior year. The increase was primarily the result of increases in service charges on deposit accounts and overdraft fees, gains on sales of securities, debit card fee income, gain on sale of loans, FHLMC fee income, and a valuation adjustment on split dollar life insurance. This was partially offset by decreases in gain on sale of property, loan servicing income and extension fees associated with our skip-a-payment program for indirect auto loans. Noninterest expense decreased $55,000 to $5,607,000 for the quarter ended September 30, 2003, compared to the $5,662,000 recorded during the same period last year. Noninterest expense increased $1,867,000, or 12.8%, to $16,418,000 for the nine months ended September 30, 2003, compared to $14,551,000 for the same period last year. Although the equity investment market has improved significantly over last year when an impairment of $814,000 was experienced during the third quarter, stocks within certain market segments have underperformed. Accordingly, based on the Company's ongoing analysis of its equity holdings during the third quarter of 2003 and for the year-to-date period impairment write-downs of $65,000 and $184,000, respectively were recorded. Excluding this write-down of equity securities noninterest expense increased $694,000 for the quarter and $2,497,000 year-to-date. For both the quarter and year-to-date these increases were attributable to the following: As a result of the branch acquisitions in the fourth quarter of 2002, the Company experienced increases in salaries and benefits, office occupancy and equipment, the amortization of core deposit intangibles and other expenses. Increases were also recognized in salaries and benefits due to staff additions to support increased loan demand and expansion into new markets. In addition, other expenses increased due to staff development initiatives in support of a customer focused Northway culture. Additionally, year-to-date noninterest expense has been impacted by an increase in depreciation expense resulting from the technology purchases made during the third quarter of 2002. Further, the year-to-date noninterest expense was impacted by an increase in legal expense due primarily to the review of new disclosure requirements and loan documentation. In addition, during the second and third quarters of 2003, the Company recognized an expense to record a provision for losses related to unfunded loan commitments such as unused lines of credits and unused portions of home-equity loans. Management will review this provision quarterly and adjustments to expense will be made as appropriate. Income Tax Expense The Company recognized income tax expense of $1,489,000 and $1,186,000 for the nine months ended September 30, 2003 and 2002, respectively. The effective tax rates were 36.3% and 34.9% for those respective periods. Liquidity Liquidity risk management refers to the Company's ability to raise funds in order to meet existing and anticipated financial obligations. These obligations to make payment include withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments as well as new business opportunities. Liquidity may be provided through amortization, maturity or sale of assets such as loans and securities available-for-sale, liability sources such as increased deposits, utilization of the Federal Home Loan Bank ("FHLB") credit facility, purchased or other borrowed funds, and access to the capital markets. Liquidity targets are subject to change based on economic and market conditions and are controlled and monitored by the Company's Asset/Liability Committee. At the subsidiary bank level, liquidity is managed by measuring the net amount of marketable assets, after deducting pledged assets, plus lines of credit, primarily with the FHLB, that are available to fund liquidity requirements. Management then measures the adequacy of that aggregate amount relative to the aggregate amount of liabilities deemed to be sensitive or volatile. These include core deposits in excess of $100,000, term deposits with short maturities, and credit commitments outstanding. Additionally, Northway Financial, Inc. requires cash for various operating needs, including dividends to shareholders, the stock repurchase program, capital injections to the subsidiary banks, and the payment of general corporate expenses. The primary sources of liquidity for Northway Financial, Inc. are dividends from its subsidiary banks. Management believes that the Company's current level of liquidity and funds available from outside sources is sufficient to meet the Company's needs. Capital The Company's Tier 1 and Total Risk Based Capital ratios were 8.98% and 12.19%, respectively, at September 30, 2003. The Company's Tier 1 leverage ratio at September 30, 2003 was 6.85%. As of September 30, 2003, the capital ratios of the Company and the subsidiary banks exceeded the minimum capital ratio requirements of the "well-capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991. Item 3. Quantitative and Qualitative Disclosures About Market Risk Since December 31, 2002, 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 11 through 22 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company's management conducted an evaluation with the participation of the Company's Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Company's disclosure controls and procedures, as of the end of the last fiscal quarter. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that they believe the Company's disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business. (b) Changes in internal controls. There were no changes in the Company's internal controls over financial reporting identified in connection with the Company's evaluation of its disclosure controls and procedures that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description of Exhibit 11 Statement Re Computation of per share earnings(1) 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934(1) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934(1) 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) (1) Filed herewith. (b) Current Report on Form 8-K filed on July 31, 2003. Item reported: Earnings announcement for second quarter ending June 30, 2003. SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHWAY FINANCIAL, INC. November 4, 2003 BY:/S/ William J. Woodward ---------------------------------------- William J. Woodward President & CEO (Principal Executive Officer) November 4, 2003 BY:/S/ Richard P. Orsillo ---------------------------------------- Richard P. Orsillo Senior Vice President & CFO (Principal Financial and Accounting Officer) INDEX OF EXHIBITS Exhibit Number Description of Exhibit 11 Statement Re Computation of per share earnings(1) 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934(1) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934(1) 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1) (1) Filed herewith. EX-11 3 ex99_11.txt COMPUTATION OF PER SHARE EARNINGS Exhibit 11. Statement Re Computation of per share earnings - ----------------------------------------------------------- Nine Months Ended September 30, 2003 Basic Earnings Per Share: Net Income $2,612,993 = $1.74 - ------------------------------------------------ --------------- Weighted Average Number of Common Shares 1,506,028 Diluted Earnings Per Share: Net Income $2,612,993 = $2,612,993 = $1.73 - ------------------------------------------------ --------------- --------- Weighted Average Number of Common Shares 1,506,028+4,954 1,510,982 Adjusted for Effect of Outstanding Options Three Months Ended September 30, 2003 Basic Earnings Per Share: Net Income $978,357 = $0.65 - ------------------------------------------------ --------------- Weighted Average Number of Common Shares 1,502,563 Diluted Earnings Per Share: Net Income $978,357 = $978,357 = $0.65 - ------------------------------------------------ --------------- --------- Weighted Average Number of Common Shares 1,502,563+1,749 1,504,312 Adjusted for Effect of Outstanding Options
EX-31.1 4 ex99_31-1.txt CERT. OF CEO/SEC 302 SARBANES-OXLEY ACT Exhibit 31.1. Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 I, William J. Woodward, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Northway Financial, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based upon such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date November 4, 2003 /S/ William J. Woodward ---------------- ------------------------------------- William J. Woodward President and Chief Executive Officer EX-31.2 5 ex99_31-2.txt CERT. OF CFO/SEC 302 SARBANES-OXLEY ACT Exhibit 31.2. Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 I, Richard P. Orsillo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Northway Financial, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based upon such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date November 4, 2003 /S/ Richard P. Orsillo ---------------- ------------------------------ Richard P. Orsillo Senior Vice President and Chief Financial Officer EX-32.1 6 ex99_32-1.txt CERT. OF CEO/SEC 906 SARBANES-OXLEY ACT Exhibit 32.1. Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act In connection with the quarterly report of Northway Financial, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William J. Woodward, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K ("Item 601(b)(32)") promulgated under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. Date: November 4, 2003 Name: /S/ William J. Woodward ---------------- ----------------------- William J. Woodward President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 7 ex99_32-2.txt CERT. OF CEO/SEC 906 SARBANES-OXLEY ACT Exhibit 32.2. Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act In connection with the quarterly report of Northway Financial, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard P. Orsillo, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K ("Item 601(b)(32)") promulgated under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. Date: November 4, 2003 Name: /S/ Richard P. Orsillo ---------------- -------------------------------- Richard P. Orsillo Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----