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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
(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
--------------------- -----
(Address of principal executive offices) (Zip Code)
(603) 752-1171
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At July 31, 2002, there were
1,516,574 shares of common stock outstanding, par value $1.00 per share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2002 and 2001 (Unaudited)..............3
Condensed Consolidated Balance Sheets at June 30, 2002 (Unaudited)
and December 31, 2001................................................4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (Unaudited).............................5
Notes to Condensed Consolidated Financial Statements (Unaudited).....6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk..........12
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings...................................................13
Item 2.
Changes in Securities...............................................13
Item 3.
Defaults Upon Senior Securities.....................................13
Item 4.
Submission of Matters to a Vote of Security Holders.................13
Item 5.
Other Information...................................................13
Item 6.
Exhibits and Reports on Form 8-K....................................13
Signatures...................................................................14
PART 1. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $6,885 $8,002 $13,989 $16,260
Interest on debt securities:
Taxable 712 462 1,293 1,153
Tax-exempt 79 125 143 232
Dividends 63 89 121 194
Federal funds sold 13 94 60 114
Interest bearing deposits - 1 - 2
------------------ -----------------
Total interest and dividend income 7,752 8,773 15,606 17,955
------------------ -----------------
Interest expense:
Deposits 1,569 3,005 3,419 6,324
Borrowed funds 653 706 1,338 1,468
Guaranteed preferred beneficial interest in junior
subordinated debentures 96 - 96 -
------------------ -----------------
Total interest expense 2,318 3,711 4,853 7,792
------------------ -----------------
Net interest and dividend income 5,434 5,062 10,753 10,163
Provision for loan losses 225 225 450 450
------------------ -----------------
Net interest and dividend income after
provision for loan losses 5,209 4,837 10,303 9,713
------------------ -----------------
Noninterest income:
Service charges and fees on deposit accounts 367 311 676 600
Securities gains, net 28 63 274 95
Loan servicing income 74 123 193 174
Other 283 288 561 509
------------------ -----------------
Total noninterest income 752 785 1,704 1,378
------------------ -----------------
Noninterest expense:
Salaries and employee benefits 2,432 2,239 4,812 4,378
Office occupancy and equipment 765 714 1,528 1,445
Amortization of unidentifiable intangible assets 164 175 328 350
Other 1,285 1,145 2,367 2,129
------------------ -----------------
Total noninterest expense 4,646 4,273 9,035 8,302
------------------ -----------------
Income before income tax expense 1,315 1,349 2,972 2,789
Income tax expense 446 413 1,020 851
------------------ -----------------
Net income $ 869 $ 936 $1,952 $1,938
================== =================
Comprehensive net income $ 908 $ 904 $1,622 $2,014
================== =================
Per share data:
Earnings per common share $ 0.57 $ 0.62 $ 1.29 $ 1.27
Cash dividends declared $ 0.17 $ 0.17 $ 0.34 $ 0.34
Weighted average number of common shares 1,515,797 1,520,525 1,513,622 1,530,893
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
(Dollars in thousands) 2002 2001
- -------------------------------------------------------------------------------
(Unaudited)
Assets
Cash and due from banks and interest bearing deposits $ 13,941 $ 22,741
Federal funds sold 8,825 6,900
Securities available-for-sale 64,809 60,276
Loans held-for-sale 1,399 2,026
Loans 400,077 400,316
Less: allowance for loan losses 4,870 4,642
------------------------
Loans, net 395,207 395,674
------------------------
Other real estate owned 25 22
Accrued interest receivable 2,413 2,237
Deferred income tax asset, net 1,891 1,861
Premises and equipment, net 11,997 11,485
Unidentifiable intangible assets 7,751 8,080
Other assets 3,300 2,637
------------------------
Total assets $511,558 $513,939
=======================
Liabilities and Stockholders' Equity
Liabilities:
Interest bearing deposits $343,624 $349,994
Noninterest bearing deposits 61,236 62,846
Securities sold under agreements to repurchase 7,440 8,155
Long-term Federal Home Loan Bank advances 46,000 48,028
Other liabilities 1,684 1,577
------------------------
Total liabilities 459,984 470,600
------------------------
Guaranteed preferred beneficial interest in junior
subordinated debentures 7,000 -
------------------------
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 June 30, 2002 and
December 31, 2001 and 1,516,074 outstanding
at June 30, 2002 and 1,511,324 outstanding at
December 31, 2001 1,732 1,732
Surplus 2,090 2,101
Retained earnings 47,393 45,955
Treasury stock, at cost (215,895 and 220,645
shares, respectively) (5,726) (5,864)
Accumulated other comprehensive loss, net of tax (915) (585)
------------------------
Total stockholders' equity 44,574 43,339
-----------------------
Total liabilities and stockholders' equity $ 511,558 $513,939
========================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,952 $ 1,938
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 450 450
Depreciation and amortization 889 869
Deferred income tax expense 187 --
Write-down of other real estate owned -- 3
Gains on sales of securities available-for-sale, net (274) (95)
Loss on disposal and write-down of premises and equipment 42 14
Amortization of premiums and accretion of discounts on securities, net 102 11
Increase in unearned income, net 17 1
Gain on sales of other real estate owned and other personal property, net (4) (9)
Net decrease (increase) in loans held-for-sale 627 (1,699)
Net change in other assets and other liabilities (734) (1,626)
------------------
Net cash provided by (used in) operating activities 3,254 (143)
------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 6,908 4,118
Proceeds from maturities of securities available-for-sale 9,154 28,880
Purchase of securities available-for-sale (20,970) (20,965)
Loan originations and principal collections, net (373) (1,303)
Recoveries of previously charged-off loans 104 98
Proceeds from sales of and payments received on other real estate owned 26 15
Proceeds from sales of and payments received on other personal property 246 296
Additions to premises and equipment (1,114) (817)
------------------
Net cash provided by (used in) investing activities (6,019) 10,322
------------------
Cash flows from financing activities:
Net decrease in deposits (7,980) (9,243)
Advances from FHLB 1,000 14,000
Repayment of FHLB advances (3,028) --
Net decrease in short-term FHLB advances -- (2,950)
Net increase (decrease) in securities sold under agreements to repurchase (715) 938
Exercise of stock options 128 --
Purchases of treasury stock -- (1,052)
Issuance of guaranteed preferred beneficial interest in junior subordinated debentures 7,000 --
Cash dividends paid (515) (521)
------------------
Net cash provided by (used in) financing activities (4,110) 1,172
------------------
Net increase (decrease) in cash and cash equivalents (6,875) 11,351
Cash and cash equivalents at beginning of period 29,641 15,401
------------------
Cash and cash equivalents at end of period $22,766 $26,752
==================
Supplemental disclosure of cash flows:
Interest paid $5,078 $9,081
====== ======
Taxes paid $1,016 $ 983
====== ======
Loans transferred to other real estate owned $ 25 $ 33
====== ======
Loans transferred to other personal property $ 244 $ 270
====== =====
Carrying amount of held-to-maturity securities transferred to available-for-sale $ -- $2,738
====== ======
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its three wholly-owned subsidiaries, The Berlin City Bank,
The Pemigewasset National Bank of Plymouth and the Northway Capital Trust I (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 six month periods ended June
30, 2002 and 2001 are not necessarily indicative of the results of operations to
be expected for the full year or any other interim periods. The interim
financial statements are meant to be read in conjunction with the Company's
audited financial statements presented in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2001.
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheet and revenues and expenses for
the reported periods. Actual results could differ from these estimates. Material
estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
GAAP.
2. Impact of New Accounting Standards.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (1) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (2) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (3)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. SFAS No. 133 generally
provides for matching the timing of the recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be either net income or other comprehensive income.
For a derivative not designated as a hedging instrument, changes in fair value
will be recognized in net income in the period of change. SFAS No. 133 allows
for a one-time change in the classification of securities in the investment
portfolio. Therefore, in conjunction with the adoption of SFAS No. 133, the
Company transferred all securities held-to-maturity to the available-for-sale
category at their market value of $2,731,000 as of January 1, 2001. In
connection with the transfer, the Company recorded in comprehensive income an
unrealized holding loss of approximately $13,000, net of tax effect. Under SFAS
No. 133, this transfer will not call into question the Company's intent to hold
other debt securities to maturity in the future. The adoption of SFAS No. 133
did not have any material impact on the Company's consolidated financial
statements.
SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, replaces SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and rescinds SFAS No. 127, Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125. SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 140 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001;
however, the disclosure provisions are effective for fiscal years ending after
December 15, 2000. The adoption of SFAS No. 140 has had no material impact on
the Company's consolidated financial statements.
SFAS No. 141, Business Combinations, improves the consistency of the
accounting and reporting of business combinations by requiring that all business
combinations be accounted for under a single method - the purchase method. Use
of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires
that the purchase method be used for business combinations initiated after June
30, 2001. The adoption of this SFAS No. 141 has had no material impact on the
Company's consolidated financial statements.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceases upon adoption of the statement,
which for most companies, was January 1, 2002. The adoption of SFAS No. 142 has
had no material impact on the Company's consolidated financial statements.
3. Preferred Beneficial Interest in Junior Subordinated Debentures.
On April 10, 2002, the Company completed the private placement of
$7,000,000 aggregate liquidation amount of floating rate trust preferred
securities (the "Capital Securities") issued by its Delaware statutory business
trust, Northway Capital Trust I (the "Trust"). The Capital Securities were sold
to a pooled investment vehicle sponsored by Sandler O'Neill & Partners, L.P. The
proceeds from the sale of the Capital Securities, together with the proceeds
from the sale by the Trust of its common securities to the Company, were
invested in Floating Rate Junior Subordinated Debt Securities of the Company due
2032 ("the Junior Subordinated Debt"), which were issued pursuant to an
Indenture, dated April 10, 2002, between the Company and Wilmington Trust
Company, as Trustee. Both the Capital Securities and the Junior Subordinated
Debt have a floating rate, which resets semi-annually, equal to 6-month LIBOR
plus 3.70%, with a ceiling of 11.00% for the first five years. Currently, the
interest rate on these securities is 6.0154%. Payments of distributions and
other amounts due on the Capital Securities are irrevocably guaranteed by the
Company, to the extent that the Trust has funds available for the payments of
such distributions, pursuant to a Guarantee Agreement, dated April 10, 2002,
between the Company and Wilmington Trust Company, as Guarantee Trustee. The
Junior Subordinated Debt and the Capital Securities may be redeemed at the
option of the Company on fixed semi-annual dates beginning on April 22, 2007.
4. Branch Acquisition
On May 22, 2002, the Pemigewasset National Bank of Plymouth ("PNB")
signed a purchase and sale agreement with Fleet National Bank ("Fleet") which
will result in the acquisition of the Fleet branches located in Laconia, Belmont
and Pittsfield, New Hampshire. Deposit levels at these branches totaled
approximately $73.7 million as of March 31, 2002, for which the Company will pay
a deposit purchase premium of 11.25%. In addition, PNB will purchase certain
loans associated with the branches totaling approximately $16.9 million. The
purchase is expected to close on October 18, 2002.
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
three wholly-owned subsidiaries, The Berlin City Bank, The Pemigewasset National
Bank of Plymouth and Northway Capital Trust I (collectively, the "Company").
Forward-Looking Statements
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may include, but are not limited to, projections of
revenue, income or loss, plans for future operations and acquisitions, and plans
related to products or services of the Company. Such forward-looking statements
are subject to known and unknown risks, uncertainties and contingencies, many of
which are beyond the control of the Company. To the extent any such risks,
uncertainties and contingencies are realized, the Company's actual results,
performance or achievements could differ materially from anticipated results,
performance or achievements. Factors that might affect such forward-looking
statements include, among other things, overall economic and business
conditions, economic and business conditions in the Company's market areas,
interest rate fluctuations, the demand for the Company's products and services,
competitive factors in the industries in which the Company competes, changes in
government regulations, and the timing, impact and other uncertainties of future
acquisitions.
In addition to the factors described above, the following are some
additional factors that could cause our financial performance to differ from any
forward-looking statement contained herein; a) the current economic downturn
nation-wide and regionally, as well as a deterioration of local business
conditions, including termination of operations of a major employer in the
primary market area of the Berlin City Bank last August and limited resumption
of operations in June 2002, b) a change in product mix attributable to changing
interest rates, customer preferences or competition; c) a significant portion of
the Company's loan customers are in the hospitality business and therefore could
be affected by weather conditions and/or high gasoline prices; and d) the
effectiveness of advertising, marketing and promotional programs.
The words "believe," "expect," "anticipate," "intend," "estimate,"
"project," or the negative of such terms and other expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. Reliance should not be
placed on forward-looking statements because they involve known or unknown
risks, uncertainties or other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
Although the Company has attempted to list comprehensively the factors
which might affect forward-looking statements, the Company wishes to caution
investors that other factors may in the future prove to be important in
affecting the Company's results of operations. New factors emerge from time to
time and it is not possible for management to anticipate all of such factors,
nor can it assess the impact of each such factor, or combination of factors,
which may cause actual results to differ materially from forward-looking
statements.
Financial Condition
The Company's total assets at June 30, 2002 were $511,558,000 compared
to $513,939,000 at December 31, 2001, a decrease of $2,381,000. Cash and cash
equivalents decreased $6,875,000 to $22,766,000 at December 31, 2001 as a result
of decreases in vault cash, cash in transit, and Federal Reserve balances. Net
loans, including loans held-for-sale, decreased $1,094,000 to $396,606,000. This
decrease was partially offset by an increase in securities available-for-sale of
$4,533,000 to $64,809,000 due primarily to corporate and municipal security
purchases. Deposits decreased $7,980,000 primarily due to lower time deposit
balances which was partially offset by an increase in both savings and money
market deposit balances. Guaranteed preferred beneficial interest in junior
subordinated debentures increased $7,000,000 compared to none at December 31,
2001. Total stockholders' equity increased $1,235,000 from $43,339,000 at
December 31, 2001 to $44,574,000 at June 30, 2002 due primarily to an increase
in net income of $1,952,000 which was partially offset by dividends paid of
$514,000 and an increase in accumulated other comprehensive loss of $330,000.
The Company maintains an allowance for loan losses to absorb future
charge-offs of loans in the existing portfolio. The allowance is increased when
a loan loss provision is recorded as an expense. When a loan, or portion
thereof, is considered uncollectible, it is charged against this allowance.
Recoveries of amounts previously charged-off are added to the allowance when
collected. At June 30, 2002 the allowance for loan losses was $4,870,000, or
1.21% of total loans, compared to $4,642,000, or 1.16% of total loans at
December 31, 2001. The allowance for loan losses is based on an evaluation by
each bank's management and Board of Directors of current and anticipated
economic conditions, changes in the diversification, size and risk within the
loan portfolio, and other factors. An analysis of the allowance for loan losses
for the three and six month periods ended June 30, 2002 and 2001 is as follows:
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------
Balance at beginning of period $4,712 $4,460 $4,642 $4,354
------------------ -----------------
Charge-offs (112) (218) (326) (379)
Recoveries 45 19 104 61
------------------ -----------------
Net charge-offs (67) (199) (222) (318)
Provision for loan losses 225 225 450 450
------------------ -----------------
Balance at end of period $4,870 $4,486 $4,870 $4,486
================== =================
Nonperforming loans totaled $1,236,000 as of June 30, 2002, compared to
$1,392,000 at December 31, 2001. The ratio of nonperforming loans to total loans
was 0.31% as of June 30, 2002 compared to 0.35% at December 31, 2001.
Nonperforming assets, which include nonperforming loans, other real estate owned
and other chattels owned, totaled $1,364,000 as of June 30, 2002, compared to
$1,519,000 at December 31, 2001. The ratio of nonperforming assets to total
assets was 0.27% as of June 30, 2002 compared to 0.30% at December 31, 2001.
Results of Operations
The Company reported net income of $869,000, or $0.57 per common share,
for the three months ended June 30, 2002, compared to $936,000, or $0.62 per
common share, for the three months ended June 30, 2001. The decrease in net
income for the quarter is primarily attributable to higher health insurance and
pension costs and by increases in salaries and occupancy expenses, some of which
are associated with the October 2001 Littleton branch acquisition. This was
partially offset by a 7.3% increase in net interest income. Net income for the
six months ended June 30, 2002 was $1,952,000, or $1.29 per common share,
compared to $1,938,000, or $1.27 per common share, for the six months ended June
30, 2001.
Net interest and dividend income for the second quarter increased
$372,000 to $5,434,000 compared to $5,062,000 for the second quarter of the
prior year. For the six months ended June 30, 2002 net interest and dividend
income increased $590,000, or 5.8%, to $10,753,000 compared to $10,163,000 for
the same period of the prior year due primarily to a decrease in the Company's
cost of funds and an increase in average earning assets partially offset by a
decrease in the yield on earning assets. The decrease in interest expense was
partially offset by an increase in interest expense of $96,000 associated with
Northway Capital Trust I Capital Securities issued during April 2002.
The provision for loan losses remained unchanged for the second quarter
2002 at $225,000 compared to the second quarter 2001. In addition, the provision
remained unchanged for the six months ended June 30, 2002 at $450,000 compared
to the six months ended June 30, 2001.
Noninterest income decreased $33,000 to $752,000 in the second quarter
of 2002 compared to $785,000 in the second quarter of 2001. The decrease was
primarily due to a decrease in servicing asset income as well as a decrease in
gains on sale of securities which was partially offset by an increase in
overdraft fee income. For the six months ended June 30, 2002 noninterest income
increased $326,000 to $1,704,000 compared to $1,378,000 for the same period of
the prior year. The increase was the result of increases in several areas
including securities gains, overdraft fees, loan servicing income and debit card
fees.
Noninterest expense increased $373,000 to $4,646,000 for the quarter
ended June 30, 2002 compared to the $4,273,000 recorded during the same period
last year. Noninterest expense increased $733,000 to $9,035,000 for the six
months ended June 30, 2002 compared to $8,302,000 for the same period last year.
For both periods the increase is primarily due to significant increases in
pension and employee insurance plan expenses over the same period last year as
well as an increase in professional fees. In addition, the Littleton branch
acquisition, which occurred during the fourth quarter of 2001, resulted in an
increase in salaries and employee benefits as well as occupancy and other
expense.
Income Tax Expense
The Company recognized income tax expense of $1,020,000 and $851,000
for the six months ended June 30, 2002 and 2001, respectively. The effective tax
rates were 34.3% and 30.5% for those respective periods. The increase in the
effective tax rate is due to the fact that during 2001 the Company obtained a
number of State of New Hampshire tax credits related to economic development
grants and carried a larger percentage of tax exempt securities and loans versus
the amount carried this year.
Liquidity
Liquidity risk management refers to the Company's ability to raise
funds in order to meet existing and anticipated financial obligations. These
obligations to make payment include withdrawal of deposits on demand or at their
contractual maturity, the repayment of borrowings as they mature, funding new
and existing loan commitments as well as new business opportunities. Liquidity
may be provided through amortization, maturity or sale of assets such as loans
and securities available-for-sale, liability sources such as increased deposits,
utilization of the Federal Home Loan Bank ("FHLB") credit facility, purchased or
other borrowed funds, and access to the capital markets. Liquidity targets are
subject to change based on economic and market conditions and are controlled and
monitored by the Company's Asset/Liability Committee.
At the subsidiary bank level, liquidity is managed by measuring the net
amount of marketable assets after deducting pledged assets, plus lines of
credit, primarily with the FHLB, which are available to fund liquidity
requirements. Management then measures the adequacy of that aggregate amount
relative to the aggregate amount of liabilities deemed to be sensitive or
volatile. These include core deposits in excess of $100,000, term deposits with
short maturities, and credit commitments outstanding.
Additionally, the parent holding company requires cash for various
operating needs including dividends to shareholders, the stock repurchase
program, capital injections to the subsidiary banks, and the payment of general
corporate expenses. The primary sources of liquidity for the parent holding
company are dividends from the subsidiary banks.
Management believes that the Company's current level of liquidity and
funds availability from outside sources is sufficient to meet the Company's
needs.
Capital
The Company's Tier 1 and Total Risk Based Capital ratios were 11.03%
and 12.26%, respectively, at June 30, 2002. The Company's Tier 1 leverage ratio
at June 30, 2002 was 8.81%. As of June 30, 2002, the capital ratios of the
Company and Pemigewasset National Bank exceeded the minimum capital ratio
requirements of the "well-capitalized" category under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). Berlin City Bank's
capital ratios as of June 30, 2002 exceeded the minimum capital ratio
requirements of the "adequately-capitalized" category under FDICIA. This was the
result of the branch acquisition during the fourth quarter of 2001, which caused
Total Risk Based Capital to fall below the "well-capitalized" level.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2001, there have been no material changes in the
Company's quantitative and qualitative disclosures about market risk. A fuller
description of the quantitative and qualitative disclosures about market risk
was provided by the Company on pages 8 through 18 of the Company's 2001 Annual
Report to Stockholders filed as Exhibit 13 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 21, 2002. At the
Annual Meeting, the stockholders elected Stephen G. Boucher, Barry J. Kelley,
and Randall G. Labnon to three-year terms as directors. Each of these directors'
terms will expire at the 2005 annual meeting. The final vote for each of these
elected directors is as follows:
For Withheld
--------- ------
Stephen G. Boucher 1,194,063 40,476
Barry J. Kelley 1,194,111 40,428
Randall G. Labnon 1,174,911 59,628
The directors continuing in office are Fletcher W. Adams, Arnold P. Hanson, Jr.,
John H. Noyes, William J. Woodward, Charles H. Clifford, Jr. and John D. Morris.
Effective July 1, 2002, Peter H. Bornstein voluntarily resigned from the Board
of Directors.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Indenture Dated as of April 10, 2002 Between Northway Financial
Inc. as Issuer and Wilmington Trust Company as Trustee for
Floating Rate Junior Subordinated Debt Securities Due 2032
2. Amended and Restated Declaration of Trust for Northway Capital
Trust 1 Dated as of April 10, 2002
3. Guarantee Agreement for Northway Financial Inc. Dated as of
April 10, 2002
4. Common Security Certificate
5. Capital Security Certificate
6. Floating Rate Junior Subordinated Debt Security Due 2032
(b) Current Report on Form 8-K dated April 10, 2002, as filed on April 25,
2002, announcing the private placement of $7,000,000 aggregate
liquidation amount of floating rate trust preferred securities (the
"Capital Securities") issued by the Company's wholly-owned Delaware
statutory business trust, Northway Capital Trust I (the "Trust").
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.
August 12, 2002 BY: /s/ William J. Woodward
---------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
August 12, 2002 BY: /s/ Richard P. Orsillo
---------------------------------
Richard P. Orsillo
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)