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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 September 30, 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
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
--------------------- -----
(Address of principal executive offices) (Zip Code)
(603) 752-1171
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At October 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 Nine Months Ended September 30, 2002 and 2001 (Unaudited) ...... 3
Condensed Consolidated Balance Sheets at September 30, 2002
(Unaudited) and December 31, 2001 .................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 .......................................... 10
Item 3.
Quantitative and Qualitative Disclosures about Market Risk ......... 14
Item 4.
Controls and Procedures ............................................ 14
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings .................................................. 15
Item 2.
Changes in Securities .............................................. 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
Certifications .............................................................. 17
PART 1. FINANCIAL INFORMATION
- ------------------------------
Item 1. 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) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $6,837 $7,854 $20,826 $24,114
Interest on debt securities:
Taxable 687 454 1,980 1,607
Tax-exempt 73 122 216 354
Dividends 62 79 183 273
Federal funds sold 119 208 179 322
Interest bearing deposits - 1 - 3
----------------- ------------------
Total interest and dividend income 7,778 8,718 23,384 26,673
----------------- ------------------
Interest expense:
Deposits 1,552 2,655 4,971 8,979
Borrowed funds 651 784 1,991 2,252
Guaranteed preferred beneficial interest in junior
subordinated debentures 271 - 367 -
----------------- ------------------
Total interest expense 2,474 3,439 7,329 11,231
----------------- ------------------
Net interest and dividend income 5,304 5,279 16,055 15,442
Provision for loan losses
225 225 675 675
----------------- ------------------
Net interest and dividend income after
provision for loan losses 5,079 5,054 15,380 14,767
----------------- ------------------
Noninterest income:
Service charges and fees on deposit accounts 365 270 1,041 870
Securities gains (losses), net (7) 33 267 128
Loan servicing income 86 95 279 269
Other 423 402 984 911
----------------- ------------------
Total noninterest income 867 800 2,571 2,178
----------------- ------------------
Noninterest expense:
Salaries and employee benefits 2,435 2,299 7,247 6,677
Office occupancy and equipment 801 675 2,329 2,120
Amortization of unidentifiable intangible assets - 128 - 478
Amortization of core deposit intangible 80 - 264 -
Write-down of securities 814 - 814 -
Other 1,532 1,183 3,897 3,312
----------------- ------------------
Total noninterest expense 5,662 4,285 14,551 12,587
----------------- ------------------
Income before income tax expense 284 1,569 3,400 4,358
Income tax expense 109 470 1,186 1,321
----------------- ------------------
Net income $ 175 $1,099 $ 2,214 $3,037
================= ==================
Comprehensive net income $ 3 $ 957 $ 1,712 $2,971
================= ==================
Per share data:
Earnings per common share $ 0.12 $ 0.72 $ 1.46 $ 1.99
Cash dividends declared $ 0.17 $ 0.17 $ 0.51 $ 0.51
Weighted average number of common shares 1,516,422 1,513,264 1,514,566 1,524,952
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sep. 30, Dec. 31,
(Dollars in thousands) 2002 2001
- -------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits $ 18,111 $ 22,741
Federal funds sold 21,370 6,900
Securities available-for-sale 69,950 60,276
Loans held-for-sale 1,626 2,026
Loans 408,008 400,316
Less: allowance for loan losses 4,947 4,642
-----------------------
Loans, net 403,061 395,674
-----------------------
Other real estate owned 200 22
Accrued interest receivable 2,380 2,237
Deferred income tax asset, net 1,352 1,861
Premises and equipment, net 12,159 11,485
Core deposit intangible 2,430 --
Unidentifiable intangible assets -- 8,080
Goodwill 5,386 --
Other assets 4,068 2,637
-----------------------
Total assets $542,093 $513,939
=======================
Liabilities and Stockholders' Equity:
Liabilities
Interest bearing deposits $350,027 $349,994
Noninterest bearing deposits 69,627 62,846
Securities sold under agreements to repurchase 9,704 8,155
Long-term Federal Home Loan Bank advances 46,000 48,028
Other liabilities 2,317 1,577
-----------------------
Total liabilities 477,675 470,600
-----------------------
Guaranteed preferred beneficial interest in junior
subordinated debentures 20,000 -
-----------------------
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 September 30,
2002 and December 31, 2001 and 1,516,574
outstanding at September 30, 2002 and 1,511,324
outstanding at December 31, 2001 1,732 1,732
Surplus 2,088 2,101
Retained earnings 47,396 45,955
Treasury stock, at cost (215,395 and 220,645
shares, respectively) (5,711) (5,864)
Accumulated other comprehensive loss, net of tax (1,087) (585)
-----------------------
Total stockholders' equity 44,418 43,339
-----------------------
Total liabilities and stockholders' equity $542,093 $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 Nine Months
Ended Sep. 30,
(Dollars in thousands) 2002 2001
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,214 $ 3,037
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 675 675
Depreciation and amortization 1,160 1,286
Deferred income tax expense 187 --
Write-down of other real estate owned -- 3
Write-down of equity securities 814 --
Gains on sales of securities available-for-sale, net (267) (128)
(Gain) loss on disposal and write-down of premises
and equipment (18) 14
Amortization of premiums and accretion of discounts
on securities, net 158 30
Increase in unearned income, net 23 2
(Gain) loss on sales of other real estate owned and
other personal property, net 9 (19)
Net decrease (increase) in loans held-for-sale 400 (785)
Net change in other assets and other liabilities (826) (1,347)
----------------------
Net cash provided by operating activities 4,529 2,768
----------------------
Cash flows from investing activities:
Proceeds from sales of securities
available-for-sale 16,272 4,211
Proceeds from maturities of securities
available-for-sale 14,415 33,608
Purchase of securities available-for-sale (41,247) (28,594)
Loan originations and principal collections, net (8,978) (3,431)
Recoveries of previously charged-off loans 164 144
Proceeds from sales of and payments received
on other real estate owned 26 37
Proceeds from sales of and payments received on
other personal property 508 450
Additions to premises and equipment (1,552) (1,218)
----------------------
Net cash provided by (used in) investing
activities (20,392) 5,207
----------------------
Cash flows from financing activities:
Net decrease in deposits 6,814 5,499
Advances from FHLB 1,000 14,000
Repayment of FHLB advances (3,028) (1,500)
Net decrease in short-term FHLB advances -- (2,950)
Net increase in securities sold under agreements
to repurchase 1,549 1,524
Exercise of stock options 140 --
Purchases of treasury stock -- (1,147)
Issuance of guaranteed preferred beneficial
interest in junior subordinated debentures 20,000 --
Cash dividends paid (772) (771)
----------------------
Net cash provided by financing activities 25,703 14,655
----------------------
Net increase in cash and cash equivalents 9,840 22,630
Cash and cash equivalents at beginning of period 29,641 15,401
----------------------
Cash and cash equivalents at end of period $39,481 $38,031
======================
Supplemental disclosure of cash flows:
Interest paid $ 7,276 $12,670
======= =======
Taxes paid $ 1,459 $ 1,024
======= =======
Loans transferred to other real estate owned $ 200 $ 33
======= =======
Loans transferred to other personal property $ 529 $ 402
======= =======
Carrying amount of held-to-maturity securities
transferred to available-for-sale $ -- $ 2,731
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its four wholly-owned subsidiaries, The Berlin City Bank,
The Pemigewasset National Bank of Plymouth, the Northway Capital Trust I (an
issuer of trust preferred securities) and the Northway Capital Trust II (also an
issuer of trust preferred securities) (collectively, "the Company") included
herein have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") have been condensed or omitted in accordance with such rules
and regulations. The Company, however, believes that the disclosures are
adequate to make the information presented not misleading. The amounts shown
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the financial statements for the periods reported.
The results of operations for the three and nine month periods ended
September 30, 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.
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.
In October 2002, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an
Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method, provided interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, SFAS No. 147
removes acquisitions of financial institutions from the scope of both Statement
72 and Interpretation 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141, Business Combinations and No. 142, Goodwill and
Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends
SFAS No. 144 Accounting for the Impairment or disposal of Long-Lived Assets to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that SFAS No. 144
requires for other long-lived assets that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company has
reclassified, as of September 30, 2002 its recognized unidentifiable intangible
asset related to branch acquisitions. This asset was reclassified as goodwill
("reclassified goodwill"). The amount reclassified was $5,386,000, the carrying
amount as of January 1, 2002. The reclassified goodwill is being accounted for
and reported prospectively as goodwill under SFAS No. 142, with no amortization
expense. Accordingly, the consolidated financial statements for the nine-months
ended September 30, 2002 do not reflect amortization in the amount of $229,000
that would have been recorded if SFAS No. 147 had not been issued.
SFAS No. 147 requires that the Company's reclassified goodwill shall be
tested for impairment as of January 1, 2002 and that such test be completed by
December 31, 2002.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30,
2002, the Company reclassified its core deposit intangible asset and accounted
for it as an asset apart from the unidentifiable intangible asset and not as
goodwill.
The Company has no goodwill other than reclassified goodwill. The test
for impairment of the reclassified goodwill will be completed by December 31,
2002.
The effect of the Company's adoption of SFAS No. 147 was to increase net
income for the nine and three-month periods ended September 30, 2002 by $140,000
and $51,000, respectively.
The Company's amortization expense related to reclassified goodwill was
$478,000 and $128,000 for the nine and three-month periods ended September 30,
2001, respectively.
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 "Trust I Capital Securities") issued by its Delaware statutory
business trust, Northway Capital Trust I ("Capital Trust I"). The Trust I
Capital Securities were sold to a pooled investment vehicle sponsored by Sandler
O'Neill & Partners, L.P. The proceeds from the sale of the Trust I Capital
Securities, together with the proceeds from the sale by Capital Trust I of its
common securities to the Company, were invested in Floating Rate Junior
Subordinated Debt Securities of the Company due 2032 (the "Trust I 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
Trust I Capital Securities and the Trust I Junior Subordinated Debt have a
floating rate, which resets semi-annually, equal to six-month LIBOR plus 3.70%,
with a ceiling of 11.00% for the first five years. Currently, the interest rate
on these securities is 5.31875%. Payments of distributions and other amounts due
on the Trust I Capital Securities are irrevocably guaranteed by the Company, to
the extent that Capital Trust I 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 Trust I
Junior Subordinated Debt and the Trust I Capital Securities may be redeemed at
the option of the Company on fixed semi-annual dates beginning on April 22,
2007.
On July 11, 2002, the Company completed the private placement of
$13,000,000 aggregate liquidation amount of floating rate trust preferred
securities (the "Trust II Capital Securities") issued by its Delaware statutory
business trust, Northway Capital Trust II (the "Capital Trust II"). The Trust II
Capital Securities were sold to a pooled investment vehicle sponsored by Sandler
O'Neill & Partners, L.P. The proceeds from the sale of the Trust II Capital
Securities, together with the proceeds from the sale by Capital Trust II of its
common securities to the Company, were invested in Floating Rate Junior
Subordinated Debt Securities of the Company due 2032 (the "Trust II Junior
Subordinated Debt"), which were issued pursuant to an Indenture, dated July 11,
2002, between the Company and Wilmington Trust Company, as Trustee. Both the
Trust II Capital Securities and the Trust II Junior Subordinated Debt have a
floating rate, which resets quarterly, equal to three-month LIBOR plus 3.65%,
with a ceiling of 12.50% for the first five years. Currently, the interest rate
on these securities is 5.425%. Payments of distributions and other amounts due
on the Trust II Capital Securities are irrevocably guaranteed by the Company, to
the extent that Capital Trust II has funds available for the payments of such
distributions, pursuant to a Guarantee Agreement, dated July 11, 2002, between
the Company and Wilmington Trust Company, as Guarantee Trustee. The Trust II
Junior Subordinated Debt and the Trust II Capital Securities may be redeemed at
the option of the Company on fixed quarterly dates beginning on July 7, 2007.
4. Branch Acquisitions.
On October 18, 2002, the Pemigewasset National Bank of Plymouth ("PNB")
completed the acquisition from Fleet National Bank of branches located in
Laconia, Belmont and Pittsfield, New Hampshire. The deposits acquired totaled
approximately $54.8 million for which the Company paid a deposit purchase
premium of 11.25%. In addition, PNB purchased certain loans associated with the
branches totaling approximately $20.9 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis and the related condensed
consolidated financial statements relate to Northway Financial, Inc. and its
four wholly-owned subsidiaries, The Berlin City Bank, The Pemigewasset National
Bank of Plymouth, Northway Capital Trust I and Northway Capital Trust II
(collectively, the "Company").
Forward-Looking Statements
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements can be identified by the use of the words "expect,"
"believe," "estimate," "will" and other expressions which predict or indicate
future trends and which do not relate to historical matters. Forward-looking
statements may include, but are not limited to, projections of revenue, income
or loss, plans for future operations, including in new markets, and
acquisitions, and plans related to products or services of the Company. Such
forward-looking statements are subject to known and unknown risks, uncertainties
and contingencies, many of which are beyond the control of the Company. The
Company's actual results could differ materially from those projected in the
forward-looking statements as the result of, among other factors, changes in
interest rates, changes in the securities or financial markets, a deterioration
in general economic conditions on a national basis or in the local markets in
which the Company operates, including changes in local business conditions
resulting in rising unemployment and other circumstances which adversely affect
borrowers' ability to service and repay our loans, changes in loan defaults and
charge-off rates, reduction in deposit levels necessitating increased borrowing
to fund loans and investments, the passing of adverse government regulation,
changes in assumptions used in making such forward-looking statements, as well
as those factors set forth in the Company's Annual Report on Form 10-K for the
year ending December 31, 2001, as well as in the Company's other filings with
the Securities & Exchange Commission. These forward-looking statements were
based on information, plans and estimates at the date of this report, and the
Company does not promise to update any forward-looking statements to reflect
changes in underlying assumptions or factors, new information, future events or
other changes.
Financial Condition
The Company's total assets at September 30, 2002 were $542,093,000
compared to $513,939,000 at December 31, 2001, an increase of $28,154,000. Cash
and cash equivalents increased $9,840,000 to $39,481,000, compared to
$29,641,000 at December 31, 2001, as a result of an increase in federal funds
sold partially offset by decreases in vault cash and Federal Reserve balances.
Net loans, including loans held-for-sale, increased $6,987,000 to $404,687,000
as an increase in consumer loans was partially offset by a decrease in retained
residential mortgage loans. In addition, securities available-for-sale increased
$9,674,000 to $69,950,000 due primarily to corporate and municipal security
purchases partially offset by lower US Government Agency and mortgage-backed
security balances.
Deposits increased $6,814,000 from December 31, 2001 as increases in
demand deposit and NOW accounts were partially offset by a decrease in time
deposit balances. Guaranteed preferred beneficial interest in junior
subordinated debentures increased $20,000,000 compared to none at December 31,
2001. Total stockholders' equity increased $1,079,000 from $43,339,000 at
December 31, 2001 to $44,418,000 at September 30, 2002 due primarily to an
increase in net income of $2,214,000 which was partially offset by dividends
paid of $772,000 and an increase in accumulated other comprehensive loss of
$502,000. At September 30, 2002, unrealized equity security losses of $1,080,000
are included in accumulated other comprehensive loss, net of tax. Management
does not consider the underlying equity securities to be other than temporarily
impaired.
The Company maintains an allowance for loan losses to absorb charge-offs
of loans in the existing portfolio. The allowance is increased when a loan loss
provision is recorded as an expense. When a loan, or portion thereof, is
considered uncollectible, it is charged against this allowance. Recoveries of
amounts previously charged-off are added to the allowance when collected. At
September 30, 2002 the allowance for loan losses was $4,947,000, 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. The composition of the allowance for loan losses
for the three and nine-month periods ended September 30, 2002 and 2001 is as
follows:
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
(Dollars in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------
Balance at beginning of period $4,870 $4,486 $4,642 $4,354
------------------ -----------------
Charge-offs (208) (174) (534) (553)
Recoveries 60 39 164 100
------------------ -----------------
Net charge-offs (148) (135) (370) (453)
Provision for loan losses 225 225 675 675
------------------ -----------------
Balance at end of period $4,947 $4,576 $4,947 $4,576
================== =================
Nonperforming loans totaled $1,781,000 as of September 30, 2002,
compared to $1,392,000 at December 31, 2001. The ratio of nonperforming loans to
loans net of unearned income was 0.44% as of September 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 $2,093,000 as
of September 30, 2002, compared to $1,519,000 at December 31, 2001. The ratio of
nonperforming assets to total assets was 0.39% as of September 30, 2002 compared
to 0.30% at December 31, 2001.
Results of Operations
The Company reported net income of $175,000, or $0.12 per common share,
for the three months ended September 30, 2002, compared to $1,099,000, or $0.72
per common share, for the three months ended September 30, 2001. Net income for
the nine months ended September 30, 2002 was $2,214,000, or $1.46 per common
share, compared to $3,037,000, or $1.99 per common share, for the nine months
ended September 30, 2001. The decline in net income for the quarter and on a
year-to-date basis is due primarily to the Company's decision in September to
write-down the carrying value of selected equity holdings. The Company
subsequently sold these securities in October. The decision to write-down and
subsequently sell these equity holdings was the result of the sustained decline
in the stock market and the desire to take advantage of income tax benefits
arising from prior years' capital gains. The net effect of the transaction was a
reduction in net income for the quarter of $540,000. In addition, earnings were
also negatively impacted by start up and other expenses associated with new
technology initiatives undertaken during 2002 and the hiring of additional staff
required to manage record levels of lending activity experienced this year.
Net interest and dividend income for the third quarter of 2002 increased
$25,000 to $5,304,000 compared to $5,279,000 for the third quarter of 2001. Net
interest and dividend income for the nine months ended September 30, 2002
increased $613,000, or 4.0%, to $16,055,000 compared to $15,442,000 for the same
period last 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 Company's cost of funds has been negatively
impacted by the recognition of interest expense of $367,000 year-to-date on the
Trust I and Trust II Capital Securities issued during 2002.
The provision for loan losses for the third quarter of 2002 remained
unchanged at $225,000 compared to the third quarter of last year. In addition,
the provision for loan losses for the nine months ended September 30, 2002
remained unchanged at $675,000 compared to the same period a year ago.
Noninterest income for the third quarter of 2002, excluding securities
gains, increased $107,000 to $874,000 compared to $767,000 for the same period
last year due primarily to an increase in overdraft fee income resulting from
the implementation of new overdraft policies and procedures in January 2002. The
Company recorded net securities losses for the third quarter of 2002 of $7,000
compared to net securities gains of $33,000 for the same period last year.
Noninterest income for the first nine months of 2002, excluding securities
gains, increased $254,000, to $2,304,000 compared to $2,050,000 for the same
period last year due primarily to an increase in overdraft fee income and the
recognition of $84,000 in gain on the sale of bank owned real estate. Securities
gains during the nine-month period ended September 30, 2002 increased $139,000
to $267,000 compared to $128,000 for the first nine months of 2001.
Noninterest expense increased $1,377,000 to $5,662,000 for the third
quarter of 2002 compared to $4,285,000 for the same period last year due
primarily to the write-down in equity securities, a valuation adjustment on a
split-dollar value life insurance policy, and increases to salaries, pension
expense, FDIC insurance, professional fees, and depreciation expense.
Noninterest expense increased $1,964,000 to $14,551,000 for the nine month
period ended September 30, 2002 compared to $12,587,000 for the same period last
year. This was due principally to the write-down of equity securities in the
third quarter, increases in salaries, health insurance, pension, equipment
depreciation, FDIC insurance, professional fees, and insurance expense.
Income Tax Expense
The Company recognized income tax expense of $1,186,000 and $1,321,000
for the nine- month periods ended September 30, 2002 and 2001, respectively. The
effective tax rates were 34.9% and 30.3% for those respective periods. The
increase in the effective tax rate is due to the fact that during 2001 the
Company received several New Hampshire income tax credits related to economic
development grants and carried a larger percentage of tax exempt securities and
loans compared to 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, 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, 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 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 11.65% and
14.73%, respectively, at September 30, 2002. The Company's Tier 1 leverage ratio
at September 30, 2002 was 9.22%. As of September 30, 2002, the capital ratios of
the Company and its 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, 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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of
1934, within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are 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. In connection with the new rules, the Company currently is in the process
of further reviewing and documenting its disclosure controls and procedures,
including its internal controls and procedures for financial reporting, and may
from time to time make changes aimed at enhancing their effectiveness and to
ensure that its systems evolve with its business.
(b) Changes in internal controls.
None.
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
1. Indenture Dated as of July 11, 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 II Dated as of July 11, 2002
3. Guarantee Agreement for Northway Financial Inc. Dated as of
July 11, 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 July 11, 2002, as filed on July 25,
2002, announcing the private placement of $13,000,000 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 II (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.
November 8, 2002 BY:/S/William J. Woodward
------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
November 8, 2002 BY:/S/Richard P. Orsillo
------------------------
Richard P. Orsillo
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)
CERTIFICATION
I, William J. Woodward, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northway Financial,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based upon our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date November 8, 2002 /S/William J. Woodward
--------------------------- ---------------------------
William J. Woodward
Chief Executive Officer
CERTIFICATION
I, Richard P. Orsillo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northway Financial,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based upon our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date November 8, 2002 /S/Richard P. Orsillo
--------------------------- ---------------------------
Richard P. Orsillo
Chief Financial Officer