10-Q 1 d60969.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 March 31, 2004 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 April 23, 2004, 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 March 31, 2004 (Unaudited) and December 31, 2003....................................3 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003 (Unaudited)............................4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (Unaudited).....................5 Notes to Condensed Consolidated Financial Statements (Unaudited).....6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........13 Item 4. Controls and Procedures.............................................13 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................15 Item 2. Changes in Securities and Use of Proceeds...........................15 Item 3. Defaults Upon Senior Securities.....................................15 Item 4. Submission of Matters to a Vote of Security Holders.................15 Item 5. Other Information...................................................15 Item 6. Exhibits and Reports on Form 8-K....................................15 Signatures...................................................................16 PART 1. FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS Mar. 31, Dec. 31, (Dollars in thousands) 2004 2003 ---------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks and interest bearing deposits $ 13,156 $ 14,615 Federal funds sold 27,445 16,470 Securities available-for-sale 71,139 68,081 Federal Home Loan Bank stock 4,855 4,705 Federal Reserve Bank stock 365 365 Loans held-for-sale 395 511 Loans, net before allowance for loan losses 479,794 473,620 Less: allowance for loan losses 5,057 5,036 ----------------------- Loans, net 474,737 468,584 ----------------------- Premises and equipment, net 12,809 12,858 Core deposit intangible 3,665 3,903 Goodwill 10,152 10,152 Other assets 8,618 8,972 ----------------------- Total assets $627,336 $609,216 ======================= Liabilities and Stockholders' Equity: Liabilities Interest bearing deposits $379,576 $393,708 Noninterest bearing deposits 70,792 69,599 Short-term borrowings 7,201 7,401 Long-term debt 107,620 87,620 Other liabilities 13,787 3,016 ----------------------- Total liabilities 578,976 561,344 ----------------------- 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 March 31, 2004 and December 31, 2003 and 1,499,574 outstanding at March 31, 2004 and December 31, 2003 1,732 1,732 Surplus 2,088 2,088 Retained earnings 50,590 50,116 Treasury stock, at cost (232,395 shares at March 31, 2004 and December 31, 2003) (6,213) (6,213) Accumulated other comprehensive income, net of tax 163 149 ----------------------- Total stockholders' equity 48,360 47,872 ----------------------- Total liabilities and stockholders' equity $627,336 $609,216 ======================= The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Mar. 31, (Dollars in thousands, except per share data) 2004 2003 ----------------------------------------------------------------------------------------------------------------- Interest and dividend income: Loans $ 6,625 $ 7,102 Interest on debt securities: Taxable 643 798 Tax-exempt 31 34 Dividends 47 54 Federal funds sold 25 10 Interest bearing deposits - 1 ----------------------- Total interest and dividend income 7,371 7,999 ----------------------- Interest expense: Deposits 812 1,268 Borrowed funds 1,015 931 ----------------------- Total interest expense 1,827 2,199 ----------------------- Net interest and dividend income 5,544 5,800 Provision for loan losses 150 225 ----------------------- Net interest and dividend income after provision for loan losses 5,394 5,575 ----------------------- Noninterest income: Service charges and fees on deposit accounts 445 398 Securities gains, net 459 198 Gain on sales of loans, net 39 102 Other 353 352 ----------------------- Total noninterest income 1,296 1,050 ----------------------- Noninterest expense: Salaries and employee benefits 3,000 2,699 Office occupancy and equipment 962 935 Amortization of core deposit intangible 238 238 Write-down of equity securities - 78 Other 1,408 1,397 ----------------------- Total noninterest expense 5,608 5,347 ----------------------- Income before income tax expense 1,082 1,278 Income tax expense 353 467 ----------------------- Net income $ 729 $ 811 ======================= Comprehensive net income $ 743 $ 1,068 ======================= Per share data: Earnings per common share $ 0.49 $ 0.54 Earnings per common share (assuming dilution) $ 0.49 $ 0.54 Cash dividends declared $ 0.17 $ 0.17 Weighted average number of common shares 1,499,574 1,509,907 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 Mar. 31, (Dollars in thousands) 2004 2003 ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 729 $ 811 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 150 225 Depreciation and amortization 601 608 Write-down of equity securities - 78 Gains on sales of securities available-for-sale, net (459) (198) Loss on sale, disposal and write-down of premises and equipment - 2 Amortization of premiums and accretion of discounts on securities, net 36 131 (Decrease) increase in unearned income, net (65) 20 Amortization of discount on loans acquired 26 27 Loss on sales of other real estate owned and other personal property, net 2 - Net decrease (increase) in loans held-for-sale 116 (878) Net change in other assets and other liabilities 1,049 1,725 -------------------- Net cash provided by operating activities 2,185 2,551 -------------------- Cash flows from investing activities: Proceeds from sales of securities available-for-sale 5,854 3,169 Proceeds from maturities of securities available-for-sale 6,955 19,385 Purchases of securities available-for-sale (5,339) (7,495) Purchases of Federal Home Loan Bank stock (150) - Purchases of Federal Reserve Bank stock - (285) Loan originations and principal collections, net (6,491) (17,749) Recoveries of previously charged-off loans 65 44 Proceeds from sales of and payments received on other real estate owned - 10 Proceeds from sales of and payments received on other personal property 145 160 Additions to premises and equipment (314) (79) -------------------- Net cash provided by (used in) investing activities 725 (2,840) -------------------- Cash flows from financing activities: Net decrease in deposits (12,939) (19,307) Advances from FHLB 20,000 10,000 Net increase in federal funds purchased 95 575 Net decrease in securities sold under agreements to repurchase (295) (184) Purchases of treasury stock - (292) Cash dividends paid (255) (257) -------------------- Net cash provided by (used in) financing activities 6,606 (9,465) -------------------- Net increase (decrease) in cash and cash equivalents 9,516 (9,754) Cash and cash equivalents at beginning of period 31,085 27,426 -------------------- Cash and cash equivalents at end of period $ 40,601 $ 17,672 ==================== Supplemental disclosure of cash flows: Interest paid $ 1,848 $ 2,142 ==================== Taxes paid $ 100 $ 60 ==================== Loans transferred to other real estate owned $ - $ 21 ==================== Loans transferred to other personal property $ 159 $ 202 ==================== Amount due to broker for pending securities purchases $ 10,082 $ - ==================== The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 (Unaudited) 1. Basis of Presentation. The unaudited condensed consolidated financial statements of Northway Financial, Inc. and its wholly-owned subsidiaries, The Berlin City Bank and The Pemigewasset National Bank of Plymouth, New Hampshire (collectively, "the Company") included herein have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted in accordance with such rules and regulations. The Company, however, believes that the disclosures are adequate to make the information presented not misleading. The amounts shown reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements for the periods reported. The results of operations for the three month periods ended March 31, 2004 and 2003 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, 2003. In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheet and revenues and expenses for the reported periods. Actual results could differ from these estimates. The Company believes that the most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and result of operations and require management's most difficult, subjective and complex judgments, relate to the determination of the allowance for loan losses, the impairment analysis of goodwill and core deposit intangibles, determination of the expense and liability related to the Company's pension plan, and determination of mortgage servicing rights. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. 2. Stock-Based Compensation As of March 31, 2004, 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, 2003. The Company accounts for this plan under the recognition and measurement principles of the Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. ($000 Omitted, except per share data) Three Months Ended Mar. 31, 2004 2003 ---- ---- Net income As reported $729 $811 Deduct: Total stock-based employee compensation expense determined under fair value based methods awards, net of related tax effects - 10 ---- ---- Pro forma $729 $801 ==== ==== Earnings per common share As reported $0.49 $0.54 Pro forma $0.49 $0.53 Earnings per common share (assuming dilution) As reported $0.49 $0.54 Pro forma $0.49 $0.53 3. Impact of New Accounting Standards. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability; (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the initial recognition and initial measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure requirements effective as of December 31, 2002. The adoption of this interpretation did not have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS Statement No. 123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions and disclosure provisions are required for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and currently uses the intrinsic value method of accounting for stock options. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d) amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Company's consolidated financial statements on adoption of this Statement. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Company's consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first fiscal year or interim period ending after March 15, 2004. However, prior to the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first reporting period ending after December 15, 2003. The adoption of this interpretation did not have a material effect on the Company's consolidated financial statements. In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material impact on the Company's consolidated financial statements. 4. Pension Benefits. The following summarizes the net periodic benefit cost for the three months ended March 31: 2004 2003 ---- --- Service cost $118 $110 Interest cost 76 67 Expected return on plan assets (72) (56) Amortization of prior service cost (21) (21) Recognized net actuarial loss 41 30 Amortization of transition asset - (1) Special recognition of prior service costs - - ---- ---- Net periodic benefit cost $142 $129 ==== ==== The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003 that it expected pension plan contributions to be $430,000 in 2004. During the first quarter 2004, there were no cash contributions to the pension plan. The Company anticipates contributing $430,000 to fund its pension plan on December 31, 2004. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis and the related condensed consolidated financial statements relate to Northway Financial, Inc. and its wholly-owned subsidiaries, The Berlin City Bank, and The Pemigewasset National Bank of Plymouth, New Hampshire (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, expectations for impact of new products on noninterest income and expense, and plans related to products or services of the Company. Such forward-looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company. The Company's actual results could differ materially from those projected in the forward-looking statements as the result of, among other factors, changes in interest rates, changes in the securities or financial markets, a deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes in local business conditions resulting in rising unemployment and other circumstances which adversely affect borrowers' ability to service and repay our loans, changes in loan defaults and charge-off rates, reduction in deposit levels necessitating increased borrowing to fund loans and investments, the passing of adverse government regulation, changes in assumptions used in making such forward-looking statements, as well as those factors set forth in the Company's Annual Report on Form 10-K for the year ending December 31, 2003, and in the Company's other filings with the Securities & Exchange Commission. These forward-looking statements were based on information, plans and estimates at the date of this Form 10-Q, and the Company does not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Financial Condition The Company's total assets at March 31, 2004 were $627,336,000 compared to $609,216,000 at December 31, 2003, an increase of $18,120,000. Net loans, including loans held-for-sale, increased $6,037,000 to $475,132,000, the result of increases in residential mortgage loans, commercial real estate loans and commercial loans, which was partially offset by a decrease in both direct and indirect consumer loans. Cash and cash equivalents increased $9,516,000 to $40,601,000, compared to $31,085,000 at December 31, 2003, due primarily to an increase in federal funds sold. These increases were partially offset by a decrease in securities available-for-sale of $3,058,000 to $71,139,000, due primarily to a decrease in corporate bonds and U.S. Government Agency securities, which was partially offset by an increase in mortgage-backed securities. Deposits decreased $12,939,000 from December 31, 2003 due to a decrease in all deposit categories except DDA accounts. Long-term Federal Home Loan Bank advances increased $20,000,000 to $87,000,000 from December 31, 2003 due to six new advances, totaling $20,000,000, during the year ranging in term from two years to three years with an average interest rate of 2.22%. Total stockholders' equity increased $488,000 to $48,360,000 at March 31, 2004 from $47,872,000 at December 31, 2003 due primarily to net income of $729,000 which was partially offset by dividends paid of $255,000. The Company maintains an allowance for loan losses to absorb charge-offs of loans in the existing portfolio. The allowance is increased when a loan loss provision is recorded as an expense. When a loan, or portion thereof, is considered uncollectible, it is charged against this allowance. Recoveries of amounts previously charged-off are added to the allowance when collected. At March 31, 2004 the allowance for loan losses was $5,057,000, or 1.05% of total loans, compared to $5,036,000, or 1.06% of total loans at December 31, 2003. 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 month periods ended March 31, 2004 and 2003 is as follows: Three Months Ended Mar. 31, (Dollars in thousands) 2004 2003 ------------------------------------------------------------------------------ Balance at beginning of period $5,036 $4,920 ------------------ Charge-offs (194) (206) Recoveries 65 44 ------------------ Net charge-offs (129) (162) Provision for loan losses 150 225 ------------------ Balance at end of period $5,057 $4,983 ================== Nonperforming loans totaled $3,843,000 as of March 31, 2004, compared to $4,089,000 at December 31, 2003. The ratio of nonperforming loans to loans net of unearned income was 0.80% as of March 31, 2004 compared to 0.86% at December 31, 2003. Nonperforming assets, which include nonperforming loans, other real estate owned and other chattels owned, totaled $3,948,000 as of March 31, 2004, compared to $4,180,000 at December 31, 2003. The ratio of nonperforming assets to total assets was 0.63% as of March 31, 2004 compared to 0.69% at December 31, 2003. Results of Operations The Company reported net income of $729,000, or $0.49 per common share, for the three months ended March 31, 2004, compared to $811,000, or $0.54 per common share, for the three months ended March 31, 2003, a decrease of $82,000, or 10.1%. Net interest and dividend income for the first quarter decreased $256,000, or 4.4%, to $5,544,000 compared to $5,800,000 for the first quarter of 2003. The decrease is primarily the result of a 0.65% decrease in the yield on earning assets as loans continue to reprice downward in the current rate environment. This was partially offset by an increase in average earning assets of $16,104,000 as well as a decrease in the cost of interest bearing liabilities of 0.37%. The provision for loan losses decreased $75,000 to $150,000 for the first quarter of 2004 compared to $225,000 for the first quarter of 2003. 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. Noninterest income increased $246,000 to $1,296,000 in the first quarter of 2004 compared to $1,050,000 in the first quarter of 2003. Service charges and fees on deposit accounts increased $47,000 due to increases in overdraft fee income. Net securities gains increased $261,000 in the first quarter of 2004 compared to the first quarter of 2003 due to the sale of corporate bonds and equity securities. Gains on sales of loans decreased $63,000 due to a combination of lower sales volumes in the secondary market and the subsequent recognition of lower mortgage servicing asset income. Noninterest expense increased $261,000 to $5,608,000 for the quarter ended March 31, 2004, compared to the $5,347,000 recorded during the same period last year. Salaries and employee benefits increased $301,000 to $3,000,000 for the first quarter of 2004 compared to $2,699,000 for the first quarter 2003. This increase was due primarily to increases in salaries expense, related payroll taxes and benefits and the recording of a liability to deferred compensation related to a Supplemental Employee Retirement Plan. This was partially offset by the fact that the Company recorded no write-down of equity securities for the first quarter of 2004 compared to a write down of $78,000 for the same period last year. Income Tax Expense The Company recognized income tax expense of $353,000 and $467,000 for the three months ended March 31, 2004 and 2003, respectively. The effective tax rates were 32.6% and 36.5% 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 and reimbursement for services performed on behalf of the banks. Management believes that the Company's current level of liquidity and funds available from outside sources is sufficient to meet the Company's needs. Capital The Company's Tier 1 and Total Risk Based Capital ratios were 9.72% and 12.90%, respectively, at March 31, 2004. The Company's Tier 1 leverage ratio at March 31, 2004 was 7.59%. As of March 31, 2004, 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, 2003, 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 13 through 27 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 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 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Current Report on Form 8-K filed on February 2, 2004. Item reported: Earnings announcement for fourth quarter ending December 31, 2003. Current Report of Form 8-K/A filed on March 24, 2004. Item reported: Revised Selected Consolidated Financial Data for fourth quarter ending December 31, 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. May 4, 2004 BY: /S/ William J. Woodward ------------------------------ William J. Woodward President & CEO (Principal Executive Officer) May 4, 2004 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 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002