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, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
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(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
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(Address of principal executive offices) (Zip Code)
(603) 752-1171
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
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 22, 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 September 30, 2004
(Unaudited) and December 31, 2003...................................3
Condensed Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2004 and 2003 (Unaudited).......4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 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.........14
Item 4.
Controls and Procedures............................................15
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings..................................................16
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds........16
Item 3.
Defaults Upon Senior Securities....................................16
Item 4.
Submission of Matters to a Vote of Security Holders................16
Item 5.
Other Information..................................................16
Item 6.
Exhibits 16
Signatures..................................................................17
PART 1. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sep. 30, Dec. 31,
(Dollars in thousands) 2004 2003
--------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits $ 15,555 $ 14,615
Federal funds sold 3,225 16,470
Securities available-for-sale 91,407 68,081
Federal Home Loan Bank stock 5,515 4,705
Federal Reserve Bank stock 365 365
Loans held-for-sale 532 511
Loans, net before allowance for loan losses 483,526 473,620
Less: allowance for loan losses 5,207 5,036
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Loans, net 478,319 468,584
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Premises and equipment, net 13,884 12,858
Core deposit intangible 3,188 3,903
Goodwill 10,152 10,152
Other assets 9,001 8,972
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Total assets $631,143 $609,216
=======================
Liabilities and Stockholders' Equity:
Liabilities
Interest bearing deposits $384,680 $393,708
Noninterest bearing deposits 81,183 69,599
Short-term borrowings 10,635 7,401
Long-term debt 98,620 87,620
Other liabilities 7,161 3,016
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Total liabilities 582,279 561,344
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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 September 30, 2004 and December 31, 2003 and 1,499,574 outstanding
at September 30, 2004 and December 31, 2003 1,732 1,732
Surplus 2,088 2,088
Retained earnings 51,805 50,116
Treasury stock, at cost (232,395 shares at September 30, 2004 and December
31, 2003) (6,213) (6,213)
Accumulated other comprehensive (loss) income, net of tax (548) 149
-----------------------
Total stockholders' equity 48,864 47,872
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Total liabilities and stockholders' equity $631,143 $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 Nine Months
Ended Sep. 30, Ended Sep. 30,
(Dollars in thousands, except per share data) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $6,655 $6,814 $19,921 $21,193
Interest on debt securities:
Taxable 809 744 2,277 2,345
Tax-exempt 32 41 97 114
Dividends 65 59 170 179
Federal funds sold 33 54 71 82
Interest bearing deposits 1 1 1 2
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Total interest and dividend income 7,595 7,713 22,537 23,915
---------------------- --------------------
Interest expense:
Deposits 793 1,057 2,348 3,487
Borrowed funds 1,074 1,027 3,219 3,014
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Total interest expense 1,867 2,084 5,567 6,501
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Net interest and dividend income 5,728 5,629 16,970 17,414
Provision for loan losses 120 210 390 655
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Net interest and dividend income after
provision for loan losses 5,608 5,419 16,580 16,759
---------------------- --------------------
Noninterest income:
Service charges and fees on deposit accounts 591 404 1,643 1,234
Securities gains, net 20 614 740 851
Gain on sales of loans, net 319 143 402 342
Other 513 562 1,218 1,333
---------------------- --------------------
Total noninterest income 1,443 1,723 4,003 3,760
---------------------- --------------------
Noninterest expense:
Salaries and employee benefits 3,009 2,861 9,096 8,330
Office occupancy and equipment 908 894 2,758 2,767
Amortization of core deposit intangible 238 238 715 715
Write-down of equity securities - 65 - 184
Other 1,412 1,548 4,308 4,421
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Total noninterest expense 5,567 5,606 16,877 16,417
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Income before income tax expense 1,484 1,536 3,706 4,102
Income tax expense 507 558 1,252 1,489
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Net income $ 977 $ 978 $ 2,454 $ 2,613
====================== ====================
Comprehensive net income $ 2,037 $ 141 $ 1,757 $ 3,675
====================== ====================
Per share data:
Earnings per common share $ 0.65 $ 0.65 $ 1.64 $ 1.74
Earnings per common share (fully diluted) $ 0.64 $ 0.65 $ 1.62 $ 1.73
Cash dividends declared $ 0.17 $ 0.17 $ 0.51 $ 0.51
Weighted average number of common shares, basic 1,499,574 1,502,563 1,499,574 1,506,028
Weighted average number of common shares, diluted 1,509,419 1,509,503 1,511,418 1,512,652
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) 2004 2003
-----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,454 $ 2,613
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 390 655
Depreciation and amortization 1,781 1,775
Write-down of equity securities - 184
Gains on sales of securities available-for-sale, net (740) (851)
Loss on sale, disposal and write-down of premises and equipment 4 6
Amortization of premiums and accretion of discounts on securities, net 76 344
(Decrease) increase in unearned income, net (148) 30
Amortization of discount on loans acquired 122 80
Loss on sales of other real estate owned and other personal property, net 5 6
Net increase in loans held-for-sale (21) (288)
Net change in other assets and other liabilities 1,460 1,189
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Net cash provided by operating activities 5,383 5,743
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Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 16,028 14,918
Proceeds from maturities of securities available-for-sale 18,357 61,182
Purchases of securities available-for-sale (55,146) (63,971)
Purchases of Federal Home Loan Bank stock (810) (74)
Purchases of Federal Reserve Bank stock - (285)
Loan originations and principal collections, net (10,808) (27,009)
Recoveries of previously charged-off loans 284 141
Proceeds from sales of and payments received on other real estate owned - 10
Proceeds from sales of and payments received on other personal property 478 630
Additions to premises and equipment (2,096) (1,504)
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Net cash used in investing activities (33,713) (15,962)
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Cash flows from financing activities:
Net increase (decrease) in deposits 2,556 (2,319)
Advances from FHLB 20,000 28,000
Repayment of FHLB Advances (9,000) (7,000)
Net increase in securities sold under agreements to repurchase 3,234 382
Purchases of treasury stock - (502)
Cash dividends paid (765) (768)
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Net cash provided by financing activities 16,025 17,793
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Net (decrease) increase in cash and cash equivalents (12,305) 7,574
Cash and cash equivalents at beginning of period 31,085 27,426
--------------------
Cash and cash equivalents at end of period $ 18,780 $ 35,000
====================
Supplemental disclosure of cash flows:
Interest paid $ 5,550 $ 6,532
====================
Taxes paid $ 1,450 $ 1,528
====================
Loans transferred to other real estate owned $ - $ 46
====================
Loans transferred to other personal property $ 424 $ 668
====================
Amount due to broker for pending securities purchases $ 3,055 $ -
====================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine month periods ended
September 30, 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 September 30, 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 Nine Months
Ended Sep. 30, Ended Sep. 30,
2004 2003 2004 2003
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Net income As reported $ 977 $ 978 $2,454 $2,613
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects - 10 - 30
------- ------- ------ ------
Pro forma $ 977 $ 968 $2,454 $2,583
======= ======= ====== ======
Earnings per common share As reported $0.65 $0.65 $1.64 $1.74
Pro forma $0.65 $0.64 $1.64 $1.71
Earnings per common share (fully diluted) As reported $0.64 $0.65 $1.62 $1.73
Pro forma $0.64 $0.64 $1.62 $1.70
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 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.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans
acquired through a transfer, such as a business combination, where there are
differences in expected cash flows and contractual cash flows due in part to
credit quality be recognized at their fair value. The excess of contractual cash
flows over expected cash flows is not to be recognized as an adjustment of
yield, loss accrual, or valuation allowance. Valuation allowances cannot be
created nor "carried over" in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption encouraged. The Company does not
believe the adoption of SOP 03-3 will have a material impact on the Company's
financial position or results of operations.
4. Pension Benefits.
The following summarizes the net periodic benefit cost for the three months
and nine months ended September 30:
($000 Omitted)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---------------------- -----------------------
Service cost $120 $110 $356 $330
Interest cost 75 68 227 202
Expected return on plan assets (72) (56) (216) (168)
Amortization of prior service cost (21) (21) (63) (63)
Recognized net actuarial loss 33 52 106 135
Amortization of transition asset - (1) - (3)
Special recognition of prior service costs - - - -
---- ---- ---- ----
Net periodic benefit cost $135 $152 $410 $433
==== ==== ==== ====
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 nine months of 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, expectations regarding the
impact on net income of withdrawing from the indirect automobile lending line of
business, 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.
Exit from Indirect Automobile Lending Line of Business.
The Company announced its exit from the indirect automobile lending
line of business effective August 31, 2004. The Bank continues to service the
existing $134 million portfolio and expects to retain, for a period of twelve
months, a majority of the staff that performs this function. As a result of this
decision, several employees were terminated on September 10, 2004, while others
were offered positions within the Company.
The decision to exit this line of business was predicated on the low
interest rate environment and competitive pressures of the past eighteen months.
The Company expects that the next twenty-four months cash flows from the
remaining portfolio will be redeployed into commercial loans, residential
mortgage loans, consumer loans such as home equity loans and automobile loans,
and the Company's investment portfolio, which in recent years have generated
higher yields for the Company.
Under SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", the Company is required to create a liability for the cost
associated with one-time termination benefits and reflect the expense from
continuing operations before income taxes in the period in which they are
incurred. Therefore, one-time termination benefits associated with terminated
employees totaled $19,000 and is reflected in the financial statements for the
three-month and nine-month periods ended September 30, 2004.
Further, to induce employees to remain and service the portfolio for
the next twelve months, the Company has established an incentive to stay bonus
arrangement which will be paid out at the end of the twelve month period. The
expense of this arrangement is estimated at $88,000 and is being accrued over a
twelve month period commencing in September 2004.
Financial Condition
The Company's total assets at September 30, 2004 were $631,143,000
compared to $609,216,000 at December 31, 2003, an increase of $21,927,000. Net
loans, including loans held-for-sale, increased $9,756,000 to $478,851,000, 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. Indirect consumer loans have declined $16,955,000
to $133,851,000 since December 31, 2003. This is the result of portfolio
amortization outpacing new loan originations as pricing and competitive
pressures have made new loan originations unattractive, prompting the decision
to exit this line of business effective August 31, 2004. Securities
available-for-sale, including Federal Home Loan Bank ("FHLB") stock and Federal
Reserve Bank stock, increased $24,136,000 to $97,287,000, which was primarily
the result of mortgage-backed security and U.S. agency security purchases.
Securities purchases during the third quarter totaled $10,000,000 and were
primarily funded by the cash flows generated from the indirect lending
portfolio. Cash and cash equivalents decreased $12,305,000 to $18,780,000,
compared to $31,085,000 at December 31, 2003, due primarily to a decrease in
federal funds sold.
Deposits increased $2,556,000 to $465,863,000 from December 31, 2003
due to an increase in both DDA and NOW accounts partially offset by a decrease
in savings and time accounts. Long-term FHLB advances increased $11,000,000 to
$78,000,000 from December 31, 2003. During the first quarter, the Company
borrowed $20,000,000 in medium term advances as part of an interest rate
arbitrage, investing the funds in mortgage-backed securities at an attractive
spread. Total stockholders' equity increased $992,000 to $48,864,000 at
September 30, 2004 from $47,872,000 at December 31, 2003. Net income of
$2,454,000 was offset by dividends paid of $765,000 and a decrease in the
unrealized gain on investment securities available-for-sale of $697,000 due to
the recent increase in interest rates.
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, 2004 the allowance for loan losses was $5,207,000,
or 1.08% 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 and nine month periods ended September 30, 2004 and
2003 is as follows:
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
(Dollars in thousands) 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $5,053 $4,994 $5,036 $4,920
------------------ -----------------
Charge-offs (147) (231) (503) (695)
Recoveries 181 48 284 141
------------------ -----------------
Net charge-offs 34 (183) (219) (554)
Provision for loan losses 120 210 390 655
------------------ -----------------
Balance at end of period $5,207 $5,021 $5,207 $5,021
================== =================
Nonperforming loans totaled $3,040,000 as of September 30, 2004,
compared to $4,089,000 at December 31, 2003. The ratio of nonperforming loans to
loans net of unearned income was 0.63% as of September 30, 2004 compared to
0.86% at December 31, 2003. Nonperforming assets, which include nonperforming
loans, other real estate owned and other chattels owned, totaled $3,073,000 as
of September 30, 2004, compared to $4,180,000 at December 31, 2003. The ratio of
nonperforming assets to total assets was 0.49% as of September 30, 2004 compared
to 0.69% at December 31, 2003.
Results of Operations
The Company reported net income of $977,000, or $0.65 per common share,
for the three months ended September 30, 2004, compared to $978,000, or $0.65
per common share, for the three months ended September 30, 2003. Net income for
the nine months ended September 30, 2004 was $2,454,000, or $1.64 per common
share, compared to $2,613,000, or $1.74 per common share, for the nine months
ended September 30, 2003, a decrease of $159,000, or 6.1%.
Net interest and dividend income for the third quarter increased
$99,000, or 1.8%, to $5,728,000 compared to $5,629,000 for the third quarter of
2003. The increase for the quarter is due primarily to an increase in average
earning assets as well as a lower cost of interest bearing liabilities, which is
partially offset by a lower yield on earning assets. Net interest and dividend
income for the nine months ended September 30, 2004 decreased $444,000, or 2.5%,
to $16,970,000 compared to $17,414,000 for the same period last year. The
decrease year-to-date is due primarily to a decrease in the yield on earning
assets as loans continued to reprice downward. This was partially offset by an
increase in average earning assets as well as a decrease in the cost of interest
bearing liabilities.
The provision for loan losses decreased $90,000 to $120,000 for the
third quarter of 2004 compared to $210,000 for the third quarter of 2003. For
the nine months ended September 30, 2004, the provision for loan losses was
$390,000, a decrease of $265,000 from the $655,000 reported for the same period
last year. 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 decreased $280,000 to $1,443,000 in the third
quarter of 2004 compared to $1,723,000 in the third quarter of 2003. Service
charges and fees on deposit accounts increased $187,000 due to increases in
overdraft fee income primarily the result of the introduction of a new overdraft
privilege program. Net securities gains decreased $594,000 to $20,000 in the
third quarter of 2004 compared to $614,000 for the third quarter of 2003. During
2003 the Company recorded securities gains primarily due to the sale of
corporate bonds. Gains on sales of loans increased $176,000 due to the
recognition of gains associated with the sale of a pool of commercial loans
guaranteed by the Small Business Administration which was partially offset by a
combination of lower sales volumes in the secondary mortgage market and the
subsequent recognition of lower mortgage servicing asset income.
Noninterest income for the nine months ended September 30, 2004
increased $243,000 to $4,003,000 compared to $3,760,000 for the same period last
year. Service charges and fees on deposit accounts increased $409,000 due to
increases in overdraft fee income principally the result of the overdraft
privilege program. Net securities gains for the nine months ended September 30,
2004 were $740,000, a decrease of $111,000 over the $851,000 reported for the
same period a year ago. Gains on sales of loans increased $60,000 over one year
ago and other noninterest income decreased $115,000.
Noninterest expense decreased $39,000 to $5,567,000 for the quarter
ended September 30, 2004, compared to the $5,606,000 recorded during the same
period last year. This was partially due to the fact that the Company recorded
no write-down of equity securities for the third quarter of 2004 compared to a
write down of $65,000 for the third quarter of 2003. Further, other noninterest
expense decreased $136,000 to $1,412,000 for the third quarter 2004 compared to
$1,548,000 for the same period last year due primarily to decreases in
professional fees, advertising expense, ATM expense, stationery and office
supplies, and postage and shipping. This was partially offset by an increase in
salaries and employee benefits of $148,000 to $3,009,000 for the third quarter
of 2004 compared to $2,861,000 for the third quarter 2003.
For the nine months ended September 30, 2004 noninterest expense
totaled $16,877,000, an increase of $460,000 over the same period last year.
Salaries and employee benefits increased $766,000 to $9,096,000 for the nine
months ended September 30, 2004 compared to $8,330,000 for the same period a
year ago 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 nine
months ended September 30, 2004 compared to a write down of $184,000 for the
nine months ended September 30, 2003. Further, other noninterest expense
decreased $113,000 from the same period a year ago.
Income Tax Expense
The Company recognized income tax expense of $1,252,000 and $1,489,000
for the nine months ended September 30, 2004 and 2003, respectively. The
effective tax rates were 33.8% and 36.3% 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 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 11.33%
and 13.48%, respectively, at September 30, 2004. The Company's Tier 1 leverage
ratio at September 30, 2004 was 8.22%. As of September 30, 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. Unregistered Sales of Equity 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
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
SIGNATURES
Pursuant to the 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 10, 2004 BY:/S/William J. Woodward
------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
November 10, 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