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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
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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 year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At October 17, 2003, there
were 1,499,574 shares of common stock outstanding, par value $1.00 per share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2003
(Unaudited) and December 31, 2002....................................3
Condensed Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 2003 and 2002 (Unaudited)........4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 (Unaudited)........................5
Notes to Condensed Consolidated Financial Statements (Unaudited).....6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk..........13
Item 4.
Controls and Procedures.............................................13
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings...................................................14
Item 2.
Changes in Securities and Use of Proceeds...........................14
Item 3.
Defaults Upon Senior Securities.....................................14
Item 4.
Submission of Matters to a Vote of Security Holders.................14
Item 5.
Other Information...................................................14
Item 6.
Exhibits and Reports on Form 8-K....................................14
Signatures...................................................................15
PART 1. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sep. 30, Dec. 31,
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits $ 16,645 $ 17,256
Federal funds sold 18,355 10,170
Securities available-for-sale 83,163 91,397
Federal Home Loan Bank stock 4,705 4,632
Federal Reserve Bank stock 365 80
Loans held-for-sale 957 669
Loans, net before allowance for loan losses 465,540 442,152
Less: allowance for loan losses 5,021 4,920
-----------------------
Loans, net 460,519 437,232
-----------------------
Other real estate owned 211 175
Premises and equipment, net 12,941 12,503
Core deposit intangible 4,142 4,857
Goodwill 10,152 10,152
Other assets 7,827 9,195
-----------------------
Total assets $619,982 $598,318
=======================
Liabilities and Stockholders' Equity:
Liabilities
Interest bearing deposits $397,231 $404,435
Noninterest bearing deposits 76,644 71,759
Securities sold under agreements to repurchase 8,633 8,251
Long-term Federal Home Loan Bank advances 67,000 46,000
Guaranteed preferred beneficial interest in junior subordinated debentures 20,000 20,000
Other liabilities 3,804 3,607
-----------------------
Total liabilities 573,312 554,052
-----------------------
Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued - -
Common stock, $1 par value; 9,000,000 shares authorized; 1,731,969 issued
at September 30, 2003 and December 31, 2002 and 1,499,574 outstanding
at September 30, 2003 and 1,516,574 outstanding at December 31, 2002 1,732 1,732
Surplus 2,088 2,088
Retained earnings 49,367 47,523
Treasury stock, at cost (232,395 and 215,395 shares, respectively) (6,213) (5,711)
Accumulated other comprehensive loss, net of tax (304) (1,366)
-----------------------
Total stockholders' equity 46,670 44,266
-----------------------
Total liabilities and stockholders' equity $619,982 $598,318
=======================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
(Dollars in thousands, except per share data) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $ 6,749 $ 6,837 $ 21,023 $ 20,826
Interest on debt securities:
Taxable 744 687 2,345 1,980
Tax-exempt 106 73 284 216
Dividends 59 62 179 183
Federal funds sold 54 119 82 179
Interest bearing deposits 1 -- 2 --
----------------------- -----------------------
Total interest and dividend income 7,713 7,778 23,915 23,384
----------------------- -----------------------
Interest expense:
Deposits 1,057 1,552 3,487 4,971
Borrowed funds 771 651 2,233 1,989
Guaranteed preferred beneficial interest in junior
subordinated debentures 248 271 757 367
----------------------- -----------------------
Total interest expense 2,076 2,474 6,477 7,327
----------------------- -----------------------
Net interest and dividend income 5,637 5,304 17,438 16,057
Provision for loan losses 210 225 655 675
----------------------- -----------------------
Net interest and dividend income after
provision for loan losses 5,427 5,079 16,783 15,382
----------------------- -----------------------
Noninterest income:
Service charges and fees on deposit accounts 404 365 1,234 1,041
Securities gains, net 614 (7) 851 267
Loan servicing income 73 86 213 279
Other 625 423 1,439 984
----------------------- -----------------------
Total noninterest income 1,716 867 3,737 2,571
----------------------- -----------------------
Noninterest expense:
Salaries and employee benefits 2,861 2,435 8,330 7,247
Office occupancy and equipment 894 801 2,767 2,329
Amortization of core deposit intangible 238 82 715 264
Write-down of equity securities 65 814 184 814
Other 1,549 1,530 4,422 3,897
----------------------- -----------------------
Total noninterest expense 5,607 5,662 16,418 14,551
----------------------- -----------------------
Income before income tax expense 1,536 284 4,102 3,402
Income tax expense 558 109 1,489 1,186
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Net income $ 978 $ 175 $ 2,613 $ 2,216
======================= =======================
Comprehensive net income $ 141 $ 3 $ 3,675 $ 1,714
======================= =======================
Per share data:
Earnings per common share $ 0.65 $ 0.12 $ 1.74 $ 1.46
Earnings per common share (assuming dilution) $ 0.65 $ 0.12 $ 1.73 $ 1.46
Cash dividends declared $ 0.17 $ 0.17 $ 0.51 $ 0.51
Weighted average number of common shares 1,502,563 1,516,422 1,506,028 1,514,566
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended Sep. 30,
(Dollars in thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,613 $ 2,216
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 655 675
Depreciation and amortization 1,775 1,160
Deferred income tax expense - 187
Write-down of equity securities 184 814
Gains on sales of securities available-for-sale, net (851) (267)
Loss (gain) on disposal and write-down of premises and equipment 6 (18)
Amortization of premiums and accretion of discounts on securities, net 344 158
Increase in unearned income, net 30 23
Amortization of discount on loans acquired 80 -
Loss on sales of other real estate owned and other personal property, net 6 9
Net (increase) decrease in loans held-for-sale (288) 400
Net change in other assets and other liabilities 1,189 (828)
-------------------
Net cash provided by operating activities 5,743 4,529
-------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 14,918 16,272
Proceeds from maturities of securities available-for-sale 61,328 14,415
Purchase of securities available-for-sale (66,577) (41,247)
Loan originations and principal collections, net (24,908) (8,978)
Recoveries of previously charged-off loans 141 164
Proceeds from sales of and payments received on other real estate owned 10 26
Proceeds from sales of and payments received on other personal property 630 508
Additions to premises and equipment (1,504) (1,552)
-------------------
Net cash used in investing activities (15,962) (20,392)
-------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (2,319) 6,814
Advances from FHLB 28,000 1,000
Repayment of FHLB advances (7,000) (3,028)
Net (decrease) increase in securities sold under agreements to repurchase 382 1,549
Exercise of stock options - 140
Purchases of treasury stock (502) -
Issuance of guaranteed preferred beneficial interest in junior subordinated debentures - 20,000
Cash dividends paid (768) (772)
-------------------
Net cash provided by financing activities 17,793 25,703
-------------------
Net increase in cash and cash equivalents 7,574 9,840
Cash and cash equivalents at beginning of period 27,426 29,641
-------------------
Cash and cash equivalents at end of period $ 35,000 $ 39,481
===================
Supplemental disclosure of cash flows:
Interest paid $ 6,532 $ 7,276
========-- ========
Taxes paid $ 1,528 $ 1,459
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Loans transferred to other real estate owned $ 46 $ 200
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Loans transferred to other personal property $ 668 $ 529
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its four wholly-owned subsidiaries, The Berlin City Bank,
The Pemigewasset National Bank of Plymouth, the Northway Capital Trust I (an
issuer of trust preferred securities) and the Northway Capital Trust II (also an
issuer of trust preferred securities) (collectively, "the Company") included
herein have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") have been condensed or omitted in accordance with such rules
and regulations. The Company, however, believes that the disclosures are
adequate to make the information presented not misleading. The amounts shown
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the financial statements for the periods reported.
The results of operations for the three and nine month periods ended
September 30, 2003 and 2002 are not necessarily indicative of the results of
operations to be expected for the full year or any other interim periods. The
interim financial statements are meant to be read in conjunction with the
Company's audited financial statements presented in its Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheet and revenues and expenses for
the reported periods. Actual results could differ from these estimates. Material
estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
GAAP.
2. Stock-Based Compensation
As of September 30, 2003, the Company has a stock-based employee compensation
plan which is described more fully in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. The Company accounts for this plan under
the recognition and measurement principles of the Auditing Practice Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of the grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
($000 Omitted, except per share data)
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
2003 2002 2003 2002
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Net income As reported $ 978 $ 175 $2,613 $2,216
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects 10 10 30 30
------- ------- ------ ------
Pro forma $ 968 $ 165 $2,583 $2,186
======= ======= ====== ======
Earnings per common share As reported $0.65 $0.12 $1.74 $1.46
Pro forma $0.64 $0.11 $1.72 $1.44
Earnings per common share (assuming dilution) As reported $0.65 $0.12 $1.73 $1.46
Pro forma $0.64 $0.11 $1.71 $1.44
3. Impact of New Accounting Standards.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceased upon adoption of the statement,
which for the Company was January 1, 2002. The effect of the adoption of SFAS
No. 142 on the Company's consolidated financial statements is described below.
In October 2002, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an
Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method, provided interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, SFAS No. 147
removes acquisitions of financial institutions from the scope of both Statement
72 and Interpretation 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141, Business Combinations and No. 142, Goodwill and
Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends
SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that SFAS No. 144
requires for other long-lived assets that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, was effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets were effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 were effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company has
reclassified, as of September 30, 2002 its recognized unidentifiable intangible
asset related to branch acquisitions. This asset was reclassified as goodwill
("reclassified goodwill"). The amount reclassified was $5,386,000, the carrying
amount as of January 1, 2002. The reclassified goodwill is being accounted for
and reported prospectively as goodwill under SFAS No. 142, with no amortization
expense. Accordingly, the consolidated financial statements for the three- and
nine-months ended September 30, 2002 do not reflect amortization in the amount
of $83,000 and $229,000, respectively, that would have been recorded if SFAS No.
147 had not been issued.
In accordance with SFAS No. 147 the Company tested its reclassified
goodwill for impairment as of January 1, 2002 and December 31, 2002. The Company
determined that its goodwill as of those dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September
30, 2002, the Company reclassified its core deposit intangible ("CDI") asset and
accounted for it as an asset apart from the unidentifiable intangible asset and
not as goodwill. CDI is amortized over the expected life of the acquired
deposits and is tested annually for impairment. As of December 31, 2002, the
Company tested its CDI asset for impairment and determined that as of that date
it was not impaired.
The effect of the Company's adoption of SFAS No. 147 was to increase
net income for the three- and nine-month periods ended September 30, 2002 by
$51,000 and $140,000, respectively.
In May 2003, FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 required the Company to reclassify on its balance sheet the line item
"Guaranteed preferred beneficial interest in junior subordinated debentures" in
the amount of $20,000,000. Prior to SFAS No. 150, this line item was presented
between the liabilities section and the equity section of the Company's balance
sheet. SFAS No. 150 requires that the line item now be classified as a
liability. No additional disclosures are required in connection with SFAS No.
150.
On a related matter, FASB Interpretation Number 46, Consolidation of
Variable Interest Rate Entities ("FIN 46") Interpretation of Accounting Research
Bulletin No. 51 has been deferred until the end of the first reporting period
that ends after December 15, 2003. Future regulatory pronouncements regarding
the interpretation of FIN 46 may affect the capital treatment of the Company's
outstanding guaranteed preferred beneficial interest in junior subordinated
debentures.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following discussion and analysis and the related condensed
consolidated financial statements relate to Northway Financial, Inc. and its
four wholly-owned subsidiaries, The Berlin City Bank, The Pemigewasset National
Bank of Plymouth, Northway Capital Trust I and Northway Capital Trust II
(collectively, the "Company").
Forward-Looking Statements
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements can be identified by the use of the words "expect,"
"believe," "estimate," "will" and other expressions which predict or indicate
future trends and which do not relate to historical matters. Forward-looking
statements may include, but are not limited to, projections of revenue, income
or loss, plans for future operations, including in new markets, and
acquisitions, and plans related to products or services of the Company. Such
forward-looking statements are subject to known and unknown risks, uncertainties
and contingencies, many of which are beyond the control of the Company. The
Company's actual results could differ materially from those projected in the
forward-looking statements as the result of, among other factors, changes in
interest rates, changes in the securities or financial markets, a deterioration
in general economic conditions on a national basis or in the local markets in
which the Company operates, including changes in local business conditions
resulting in rising unemployment and other circumstances which adversely affect
borrowers' ability to service and repay our loans, changes in loan defaults and
charge-off rates, reduction in deposit levels necessitating increased borrowing
to fund loans and investments, the passing of adverse government regulation,
changes in assumptions used in making such forward-looking statements, as well
as those factors set forth in the Company's Annual Report on Form 10-K for the
year ending December 31, 2002, and in the Company's other filings with the
Securities & Exchange Commission. These forward-looking statements were based on
information, plans and estimates at the date of this report, and the Company
does not promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
Financial Condition
The Company's total assets at September 30, 2003 were $619,982,000
compared to $598,318,000 at December 31, 2002, an increase of $21,664,000. Net
loans, including loans held-for-sale, increased $23,575,000 to $461,476,000, the
result of increases in all loan categories. Cash and cash equivalents increased
$7,574,000 to $35,000,000, compared to $27,426,000 at December 31, 2002, due
primarily to an increase in Federal Funds Sold. This was partially offset by a
decrease in securities available-for-sale of $7,876,000 to $88,233,000 due
primarily to lower mortgage-backed security balances partially offset by US
Government Agency purchases.
Deposits decreased $2,319,000 from December 31, 2002 due to a decrease
in time deposits and money market accounts, which was partially offset by an
increase in NOW, DDA and savings account balances. Long-term Federal Home Loan
Bank advances increased $21,000,000 to $67,000,000 from December 31, 2002 due to
twelve new advances, totaling $28,000,000, during the year ranging in term from
two years to seven years with an average interest rate of 2.74% which was
partially offset by the maturity of $7,000,000 in advances. Total stockholders'
equity increased $2,404,000 to $46,670,000 at September 30, 2003 from
$44,266,000 at December 31, 2002 due primarily to net income of $2,613,000 and
an increase in accumulated other comprehensive gain of $1,062,000 which was
partially offset by dividends paid of $768,000 and an increase in treasury stock
of $502,000. At September 30, 2003, unrealized equity security losses of
$344,000 are included in accumulated other comprehensive loss, net of tax.
Management does not consider the underlying equity securities to be other than
temporarily impaired.
The Company maintains an allowance for loan losses to absorb
charge-offs of loans in the existing portfolio. The allowance is increased when
a loan loss provision is recorded as an expense. When a loan, or portion
thereof, is considered uncollectible, it is charged against this allowance.
Recoveries of amounts previously charged-off are added to the allowance when
collected. At September 30, 2003 the allowance for loan losses was $5,021,000,
or 1.08% of total loans, compared to $4,920,000, or 1.11% of total loans at
December 31, 2002. The allowance for loan losses is based on an evaluation by
each bank's management and Board of Directors of current and anticipated
economic conditions, changes in the diversification, size and risk within the
loan portfolio, and other factors. The composition of the allowance for loan
losses for the three and nine month periods ended September 30, 2003 and 2002 is
as follows:
Three Months Nine Months
Ended Sep. 30, Ended Sep. 30,
(Dollars in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------
Balance at beginning of period $4,994 $4,870 $4,920 $4,642
------------------ -----------------
Charge-offs (231) (208) (695) (534)
Recoveries 48 60 141 164
------------------ -----------------
Net charge-offs (183) (148) (554) (370)
Provision for loan losses 210 225 655 675
------------------ -----------------
Balance at end of period $5,021 $4,947 $5,021 $4,947
================== =================
Nonperforming loans totaled $4,102,000 as of September 30, 2003,
compared to $3,619,000 at December 31, 2002. The ratio of nonperforming loans to
loans net of unearned income was 0.88% as of September 30, 2003 compared to
0.82% at December 31, 2002. Nonperforming assets, which include nonperforming
loans, other real estate owned and other chattels owned, totaled $4,441,000 as
of September 30, 2003, compared to $3,892,000 at December 31, 2002. The ratio of
nonperforming assets to total assets was 0.72% as of September 30, 2003 compared
to 0.65% at December 31, 2002.
Results of Operations
The Company reported net income of $978,000, or $0.65 per common share,
for the three months ended September 30, 2003, compared to $175,000, or $0.12
per common share, for the three months ended September 30, 2002. Net income for
the nine months ended September 30, 2003 was $2,613,000, or $1.74 per common
share, compared to $2,216,000, or $1.46 per common share, for the nine months
ended September 30, 2002. The increase in net income for both the quarter and
year-to-date is attributable to an improvement in net interest income, an
increase in noninterest income, and a decrease in write-down of equity
securities. This is partially offset by an increase in noninterest expense,
excluding the write-down of equity securities.
Net interest and dividend income for the third quarter increased
$333,000 to $5,637,000 compared to $5,304,000 for the third quarter of 2002. For
the nine months ended September 30, 2003 net interest and dividend income
increased $1,381,000, or 8.6%, to $17,438,000 compared to $16,057,000 for the
same period of the prior year due primarily to an increase in average earning
assets of $78,229,000 partially offset by a decrease in the net interest margin
of 0.30%.
The provision for loan losses decreased $15,000 to $210,000 for the
third quarter of 2003 compared to $225,000 for the third quarter of 2002. In
addition, the provision decreased $20,000 to $655,000 for the nine months ended
September 30, 2003 compared to $675,000 for the nine months ended September 30,
2002. The provision for loan losses is based upon a review of the adequacy of
the allowance for loan losses, which is conducted on a quarterly basis. This
review is based upon many factors including the risk characteristics of the
portfolio, trends in loan delinquencies, and an assessment of existing economic
conditions. In addition, various regulatory agencies, as part of their
examination process, review the banks' allowances for loan losses and such
review may result in changes to the allowance based on judgments different from
those of management.
The decrease in the provision was due in part to the recording of
$70,000 to other expense for a provision for losses related to unfunded loan
commitments such as unused lines of credit and unused portions of home-equity
loans. This provision had previously been calculated as part of the allowance
for loan losses.
Noninterest income increased $849,000 to $1,716,000 in the third
quarter of 2003 compared to $867,000 in the third quarter of 2002. Service
charges and fees on deposit accounts increased $39,000 due to increases in
overdraft fee income and service charge income resulting from the branch
acquisitions in the fourth quarter 2002. Net securities gains increased $621,000
in the third quarter of 2003 compared to the third quarter of 2002 due primarily
to the sale of corporate securities. Other noninterest income increased $202,000
due primarily to increases in gains on sales of loans and the recognition of
other loan fees resulting from transactions with Federal Home Loan Mortgage
Corporation ("FHLMC"). This was partially offset by a decrease in gain on sale
of property resulting from the 2002 sale of a former branch facility. For the
nine months ended September 30, 2003 noninterest income increased $1,166,000, or
45.4%, to $3,737,000 compared to $2,571,000 for the same period of the prior
year. The increase was primarily the result of increases in service charges on
deposit accounts and overdraft fees, gains on sales of securities, debit card
fee income, gain on sale of loans, FHLMC fee income, and a valuation adjustment
on split dollar life insurance. This was partially offset by decreases in gain
on sale of property, loan servicing income and extension fees associated with
our skip-a-payment program for indirect auto loans.
Noninterest expense decreased $55,000 to $5,607,000 for the quarter
ended September 30, 2003, compared to the $5,662,000 recorded during the same
period last year. Noninterest expense increased $1,867,000, or 12.8%, to
$16,418,000 for the nine months ended September 30, 2003, compared to
$14,551,000 for the same period last year.
Although the equity investment market has improved significantly over
last year when an impairment of $814,000 was experienced during the third
quarter, stocks within certain market segments have underperformed. Accordingly,
based on the Company's ongoing analysis of its equity holdings during the third
quarter of 2003 and for the year-to-date period impairment write-downs of
$65,000 and $184,000, respectively were recorded.
Excluding this write-down of equity securities noninterest expense
increased $694,000 for the quarter and $2,497,000 year-to-date. For both the
quarter and year-to-date these increases were attributable to the following: As
a result of the branch acquisitions in the fourth quarter of 2002, the Company
experienced increases in salaries and benefits, office occupancy and equipment,
the amortization of core deposit intangibles and other expenses. Increases were
also recognized in salaries and benefits due to staff additions to support
increased loan demand and expansion into new markets. In addition, other
expenses increased due to staff development initiatives in support of a customer
focused Northway culture.
Additionally, year-to-date noninterest expense has been impacted by an
increase in depreciation expense resulting from the technology purchases made
during the third quarter of 2002. Further, the year-to-date noninterest expense
was impacted by an increase in legal expense due primarily to the review of new
disclosure requirements and loan documentation. In addition, during the second
and third quarters of 2003, the Company recognized an expense to record a
provision for losses related to unfunded loan commitments such as unused lines
of credits and unused portions of home-equity loans. Management will review this
provision quarterly and adjustments to expense will be made as appropriate.
Income Tax Expense
The Company recognized income tax expense of $1,489,000 and $1,186,000
for the nine months ended September 30, 2003 and 2002, respectively. The
effective tax rates were 36.3% and 34.9% for those respective periods.
Liquidity
Liquidity risk management refers to the Company's ability to raise
funds in order to meet existing and anticipated financial obligations. These
obligations to make payment include withdrawal of deposits on demand or at their
contractual maturity, the repayment of borrowings as they mature, funding new
and existing loan commitments as well as new business opportunities. Liquidity
may be provided through amortization, maturity or sale of assets such as loans
and securities available-for-sale, liability sources such as increased deposits,
utilization of the Federal Home Loan Bank ("FHLB") credit facility, purchased or
other borrowed funds, and access to the capital markets. Liquidity targets are
subject to change based on economic and market conditions and are controlled and
monitored by the Company's Asset/Liability Committee.
At the subsidiary bank level, liquidity is managed by measuring the net
amount of marketable assets, after deducting pledged assets, plus lines of
credit, primarily with the FHLB, that are available to fund liquidity
requirements. Management then measures the adequacy of that aggregate amount
relative to the aggregate amount of liabilities deemed to be sensitive or
volatile. These include core deposits in excess of $100,000, term deposits with
short maturities, and credit commitments outstanding.
Additionally, Northway Financial, Inc. requires cash for various
operating needs, including dividends to shareholders, the stock repurchase
program, capital injections to the subsidiary banks, and the payment of general
corporate expenses. The primary sources of liquidity for Northway Financial,
Inc. are dividends from its subsidiary banks.
Management believes that the Company's current level of liquidity and
funds available from outside sources is sufficient to meet the Company's needs.
Capital
The Company's Tier 1 and Total Risk Based Capital ratios were 8.98% and
12.19%, respectively, at September 30, 2003. The Company's Tier 1 leverage ratio
at September 30, 2003 was 6.85%. As of September 30, 2003, the capital ratios of
the Company and the subsidiary banks exceeded the minimum capital ratio
requirements of the "well-capitalized" category under the Federal Deposit
Insurance Corporation Improvement Act of 1991.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2002, there have been no material changes in the
Company's quantitative and qualitative disclosures about market risk. A fuller
description of the quantitative and qualitative disclosures about market risk
was provided by the Company on pages 11 through 22 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Company's management conducted an
evaluation with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, regarding the effectiveness of the Company's disclosure
controls and procedures, as of the end of the last fiscal quarter. In designing
and evaluating the Company's disclosure controls and procedures, the Company and
its management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that they believe the Company's disclosure controls and procedures are
reasonably effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. We intend to continue to
review and document our disclosure controls and procedures, including our
internal controls and procedures for financial reporting, and we may from time
to time make changes to the disclosure controls and procedures to enhance their
effectiveness and to ensure that our systems evolve with our business.
(b) Changes in internal controls.
There were no changes in the Company's internal controls over financial
reporting identified in connection with the Company's evaluation of its
disclosure controls and procedures that occurred during the Company's last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
11 Statement Re Computation of per share earnings(1)
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934(1)
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934(1)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(1)
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(1)
(1) Filed herewith.
(b) Current Report on Form 8-K filed on July 31, 2003.
Item reported: Earnings announcement for second quarter ending June 30,
2003.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWAY FINANCIAL, INC.
November 4, 2003 BY:/S/ William J. Woodward
----------------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
November 4, 2003 BY:/S/ Richard P. Orsillo
----------------------------------------
Richard P. Orsillo
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)
INDEX OF EXHIBITS
Exhibit Number Description of Exhibit
11 Statement Re Computation of per share earnings(1)
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934(1)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934(1)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(1)
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(1)
(1) Filed herewith.