Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
-----------------------
(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
--------------------- -----
(Address of principal executive offices) (Zip Code)
(603) 752-1171
--------------
(Registrant's telephone number, including area code)
No Change
---------
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At April 23, 2004, there were
1,499,574 shares of common stock outstanding, par value $1.00 per share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2004
(Unaudited) and December 31, 2003....................................3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2004 and 2003 (Unaudited)............................4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2004 and 2003 (Unaudited).....................5
Notes to Condensed Consolidated Financial Statements (Unaudited).....6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk..........13
Item 4.
Controls and Procedures.............................................13
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings...................................................15
Item 2.
Changes in Securities and Use of Proceeds...........................15
Item 3.
Defaults Upon Senior Securities.....................................15
Item 4.
Submission of Matters to a Vote of Security Holders.................15
Item 5.
Other Information...................................................15
Item 6.
Exhibits and Reports on Form 8-K....................................15
Signatures...................................................................16
PART 1. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
(Dollars in thousands) 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks and interest bearing deposits $ 13,156 $ 14,615
Federal funds sold 27,445 16,470
Securities available-for-sale 71,139 68,081
Federal Home Loan Bank stock 4,855 4,705
Federal Reserve Bank stock 365 365
Loans held-for-sale 395 511
Loans, net before allowance for loan losses 479,794 473,620
Less: allowance for loan losses 5,057 5,036
-----------------------
Loans, net 474,737 468,584
-----------------------
Premises and equipment, net 12,809 12,858
Core deposit intangible 3,665 3,903
Goodwill 10,152 10,152
Other assets 8,618 8,972
-----------------------
Total assets $627,336 $609,216
=======================
Liabilities and Stockholders' Equity:
Liabilities
Interest bearing deposits $379,576 $393,708
Noninterest bearing deposits 70,792 69,599
Short-term borrowings 7,201 7,401
Long-term debt 107,620 87,620
Other liabilities 13,787 3,016
-----------------------
Total liabilities 578,976 561,344
-----------------------
Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued - -
Common stock, $1.00 par value; 9,000,000 shares authorized; 1,731,969 issued
at March 31, 2004 and December 31, 2003 and 1,499,574 outstanding
at March 31, 2004 and December 31, 2003 1,732 1,732
Surplus 2,088 2,088
Retained earnings 50,590 50,116
Treasury stock, at cost (232,395 shares at March 31, 2004 and December 31, 2003) (6,213) (6,213)
Accumulated other comprehensive income, net of tax 163 149
-----------------------
Total stockholders' equity 48,360 47,872
-----------------------
Total liabilities and stockholders' equity $627,336 $609,216
=======================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended Mar. 31,
(Dollars in thousands, except per share data) 2004 2003
- -----------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $ 6,625 $ 7,102
Interest on debt securities:
Taxable 643 798
Tax-exempt 31 34
Dividends 47 54
Federal funds sold 25 10
Interest bearing deposits - 1
-----------------------
Total interest and dividend income 7,371 7,999
-----------------------
Interest expense:
Deposits 812 1,268
Borrowed funds 1,015 931
-----------------------
Total interest expense 1,827 2,199
-----------------------
Net interest and dividend income 5,544 5,800
Provision for loan losses 150 225
-----------------------
Net interest and dividend income after
provision for loan losses 5,394 5,575
-----------------------
Noninterest income:
Service charges and fees on deposit accounts 445 398
Securities gains, net 459 198
Gain on sales of loans, net 39 102
Other 353 352
-----------------------
Total noninterest income 1,296 1,050
-----------------------
Noninterest expense:
Salaries and employee benefits 3,000 2,699
Office occupancy and equipment 962 935
Amortization of core deposit intangible 238 238
Write-down of equity securities - 78
Other 1,408 1,397
-----------------------
Total noninterest expense 5,608 5,347
-----------------------
Income before income tax expense 1,082 1,278
Income tax expense 353 467
-----------------------
Net income $ 729 $ 811
=======================
Comprehensive net income $ 743 $ 1,068
=======================
Per share data:
Earnings per common share $ 0.49 $ 0.54
Earnings per common share (assuming dilution) $ 0.49 $ 0.54
Cash dividends declared $ 0.17 $ 0.17
Weighted average number of common shares 1,499,574 1,509,907
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended Mar. 31,
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 729 $ 811
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 150 225
Depreciation and amortization 601 608
Write-down of equity securities - 78
Gains on sales of securities available-for-sale, net (459) (198)
Loss on sale, disposal and write-down of premises and equipment - 2
Amortization of premiums and accretion of discounts on securities, net 36 131
(Decrease) increase in unearned income, net (65) 20
Amortization of discount on loans acquired 26 27
Loss on sales of other real estate owned and other personal property, net 2 -
Net decrease (increase) in loans held-for-sale 116 (878)
Net change in other assets and other liabilities 1,049 1,725
--------------------
Net cash provided by operating activities 2,185 2,551
--------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 5,854 3,169
Proceeds from maturities of securities available-for-sale 6,955 19,385
Purchases of securities available-for-sale (5,339) (7,495)
Purchases of Federal Home Loan Bank stock (150) -
Purchases of Federal Reserve Bank stock - (285)
Loan originations and principal collections, net (6,491) (17,749)
Recoveries of previously charged-off loans 65 44
Proceeds from sales of and payments received on other real estate owned - 10
Proceeds from sales of and payments received on other personal property 145 160
Additions to premises and equipment (314) (79)
--------------------
Net cash provided by (used in) investing activities 725 (2,840)
--------------------
Cash flows from financing activities:
Net decrease in deposits (12,939) (19,307)
Advances from FHLB 20,000 10,000
Net increase in federal funds purchased 95 575
Net decrease in securities sold under agreements to repurchase (295) (184)
Purchases of treasury stock - (292)
Cash dividends paid (255) (257)
--------------------
Net cash provided by (used in) financing activities 6,606 (9,465)
--------------------
Net increase (decrease) in cash and cash equivalents 9,516 (9,754)
Cash and cash equivalents at beginning of period 31,085 27,426
--------------------
Cash and cash equivalents at end of period $ 40,601 $ 17,672
====================
Supplemental disclosure of cash flows:
Interest paid $ 1,848 $ 2,142
====================
Taxes paid $ 100 $ 60
====================
Loans transferred to other real estate owned $ - $ 21
====================
Loans transferred to other personal property $ 159 $ 202
====================
Amount due to broker for pending securities purchases $ 10,082 $ -
====================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its wholly-owned subsidiaries, The Berlin City Bank and The
Pemigewasset National Bank of Plymouth, New Hampshire (collectively, "the
Company") included herein have been prepared by the Company in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") have been condensed or omitted in accordance
with such rules and regulations. The Company, however, believes that the
disclosures are adequate to make the information presented not misleading. The
amounts shown reflect, in the opinion of management, all adjustments necessary
for a fair presentation of the financial statements for the periods reported.
The results of operations for the three month periods ended March 31,
2004 and 2003 are not necessarily indicative of the results of operations to be
expected for the full year or any other interim periods. The interim financial
statements are meant to be read in conjunction with the Company's audited
financial statements presented in its Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheet and revenues and expenses for
the reported periods. Actual results could differ from these estimates. The
Company believes that the most critical accounting policies, which are those
that are most important to the portrayal of the Company's financial condition
and result of operations and require management's most difficult, subjective
and complex judgments, relate to the determination of the allowance for loan
losses, the impairment analysis of goodwill and core deposit intangibles,
determination of the expense and liability related to the Company's pension
plan, and determination of mortgage servicing rights.
The year-end condensed consolidated balance sheet data was derived
from audited financial statements, but does not include all disclosures
required by GAAP.
2. Stock-Based Compensation
As of March 31, 2004, the Company has a stock-based employee
compensation plan which is described more fully in its Annual Report on Form
10-K for the fiscal year ended December 31, 2003. The Company accounts for this
plan under the recognition and measurement principles of the Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
($000 Omitted,
except per share data)
Three Months
Ended Mar. 31,
2004 2003
---- ----
Net income As reported $729 $811
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods awards, net
of related tax effects - 10
---- ----
Pro forma $729 $801
==== ====
Earnings per common share As reported $0.49 $0.54
Pro forma $0.49 $0.53
Earnings per common share (assuming
dilution) As reported $0.49 $0.54
Pro forma $0.49 $0.53
3. Impact of New Accounting Standards.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on
the disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to
disclose (a) the nature of the guarantee; (b) the maximum potential amount of
future payments under the guarantee; (c) the carrying amount of the liability;
(d) the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the
guarantee.
The initial recognition and initial measurement provisions of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure
requirements effective as of December 31, 2002. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition provisions and disclosure provisions
are required for financial statements for fiscal years ending after December
15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as of
December 31, 2002 and currently uses the intrinsic value method of accounting
for stock options.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"),
which amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement (a) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (b) clarifies when a derivative contains a
financing component, (c) amends the definition of an underlying to conform to
language used in FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (d) amends certain other existing pronouncements.
The provisions of SFAS No. 149 are effective for contracts entered into or
modified after June 30, 2003. There was no substantial impact on the Company's
consolidated financial statements on adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This Statement establishes standards for the classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial
instruments that were previously classified as equity must be classified as a
liability. Most of the guidance in SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. This Statement did not have any material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. In December 2003, the FASB revised Interpretation No. 46, also
referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns
or both. The Company is required to apply FIN 46, as revised, to all entities
subject to it no later than the end of the first fiscal year or interim period
ending after March 15, 2004. However, prior to the required application of FIN
46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities
that are considered to be special-purpose entities as of the end of the first
reporting period ending after December 15, 2003. The adoption of this
interpretation did not have a material effect on the Company's consolidated
financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised
2003)"). This Statement revises employers' disclosures about pension plans and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans required by SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
This Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits,"
which it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact on the
Company's consolidated financial statements.
4. Pension Benefits.
The following summarizes the net periodic benefit cost for the three
months ended March 31:
2004 2003
---- ---
Service cost $118 $110
Interest cost 76 67
Expected return on plan assets (72) (56)
Amortization of prior service cost (21) (21)
Recognized net actuarial loss 41 30
Amortization of transition asset - (1)
Special recognition of prior service costs - -
---- ----
Net periodic benefit cost $142 $129
==== ====
The Company previously disclosed in its consolidated financial
statements for the year ended December 31, 2003 that it expected pension plan
contributions to be $430,000 in 2004. During the first quarter 2004, there were
no cash contributions to the pension plan. The Company anticipates contributing
$430,000 to fund its pension plan on December 31, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis and the related condensed
consolidated financial statements relate to Northway Financial, Inc. and its
wholly-owned subsidiaries, The Berlin City Bank, and The Pemigewasset National
Bank of Plymouth, New Hampshire (collectively, the "Company").
Forward-Looking Statements
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements can be identified by the use of the words
"expect," "believe," "estimate," "will" and other expressions which predict or
indicate future trends and which do not relate to historical matters.
Forward-looking statements may include, but are not limited to, projections of
revenue, income or loss, expectations for impact of new products on noninterest
income and expense, and plans related to products or services of the Company.
Such forward-looking statements are subject to known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company. The Company's actual results could differ materially from those
projected in the forward-looking statements as the result of, among other
factors, changes in interest rates, changes in the securities or financial
markets, a deterioration in general economic conditions on a national basis or
in the local markets in which the Company operates, including changes in local
business conditions resulting in rising unemployment and other circumstances
which adversely affect borrowers' ability to service and repay our loans,
changes in loan defaults and charge-off rates, reduction in deposit levels
necessitating increased borrowing to fund loans and investments, the passing of
adverse government regulation, changes in assumptions used in making such
forward-looking statements, as well as those factors set forth in the Company's
Annual Report on Form 10-K for the year ending December 31, 2003, and in the
Company's other filings with the Securities & Exchange Commission. These
forward-looking statements were based on information, plans and estimates at
the date of this Form 10-Q, and the Company does not promise to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
Financial Condition
The Company's total assets at March 31, 2004 were $627,336,000
compared to $609,216,000 at December 31, 2003, an increase of $18,120,000. Net
loans, including loans held-for-sale, increased $6,037,000 to $475,132,000, the
result of increases in residential mortgage loans, commercial real estate loans
and commercial loans, which was partially offset by a decrease in both direct
and indirect consumer loans. Cash and cash equivalents increased $9,516,000 to
$40,601,000, compared to $31,085,000 at December 31, 2003, due primarily to an
increase in federal funds sold. These increases were partially offset by a
decrease in securities available-for-sale of $3,058,000 to $71,139,000, due
primarily to a decrease in corporate bonds and U.S. Government Agency
securities, which was partially offset by an increase in mortgage-backed
securities.
Deposits decreased $12,939,000 from December 31, 2003 due to a
decrease in all deposit categories except DDA accounts. Long-term Federal Home
Loan Bank advances increased $20,000,000 to $87,000,000 from December 31, 2003
due to six new advances, totaling $20,000,000, during the year ranging in term
from two years to three years with an average interest rate of 2.22%. Total
stockholders' equity increased $488,000 to $48,360,000 at March 31, 2004 from
$47,872,000 at December 31, 2003 due primarily to net income of $729,000 which
was partially offset by dividends paid of $255,000.
The Company maintains an allowance for loan losses to absorb
charge-offs of loans in the existing portfolio. The allowance is increased when
a loan loss provision is recorded as an expense. When a loan, or portion
thereof, is considered uncollectible, it is charged against this allowance.
Recoveries of amounts previously charged-off are added to the allowance when
collected. At March 31, 2004 the allowance for loan losses was $5,057,000, or
1.05% of total loans, compared to $5,036,000, or 1.06% of total loans at
December 31, 2003. The allowance for loan losses is based on an evaluation by
each bank's management and Board of Directors of current and anticipated
economic conditions, changes in the diversification, size and risk within the
loan portfolio, and other factors. The composition of the allowance for loan
losses for the three month periods ended March 31, 2004 and 2003 is as follows:
Three Months
Ended Mar. 31,
(Dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------
Balance at beginning of period $5,036 $4,920
------------------
Charge-offs (194) (206)
Recoveries 65 44
------------------
Net charge-offs (129) (162)
Provision for loan losses 150 225
------------------
Balance at end of period $5,057 $4,983
==================
Nonperforming loans totaled $3,843,000 as of March 31, 2004, compared
to $4,089,000 at December 31, 2003. The ratio of nonperforming loans to loans
net of unearned income was 0.80% as of March 31, 2004 compared to 0.86% at
December 31, 2003. Nonperforming assets, which include nonperforming loans,
other real estate owned and other chattels owned, totaled $3,948,000 as of
March 31, 2004, compared to $4,180,000 at December 31, 2003. The ratio of
nonperforming assets to total assets was 0.63% as of March 31, 2004 compared to
0.69% at December 31, 2003.
Results of Operations
The Company reported net income of $729,000, or $0.49 per common
share, for the three months ended March 31, 2004, compared to $811,000, or
$0.54 per common share, for the three months ended March 31, 2003, a decrease
of $82,000, or 10.1%.
Net interest and dividend income for the first quarter decreased
$256,000, or 4.4%, to $5,544,000 compared to $5,800,000 for the first quarter
of 2003. The decrease is primarily the result of a 0.65% decrease in the yield
on earning assets as loans continue to reprice downward in the current rate
environment. This was partially offset by an increase in average earning assets
of $16,104,000 as well as a decrease in the cost of interest bearing
liabilities of 0.37%.
The provision for loan losses decreased $75,000 to $150,000 for the
first quarter of 2004 compared to $225,000 for the first quarter of 2003. The
provision for loan losses is based upon a review of the adequacy of the
allowance for loan losses, which is conducted on a quarterly basis. This review
is based upon many factors including the risk characteristics of the portfolio,
trends in loan delinquencies, and an assessment of existing economic
conditions. In addition, various regulatory agencies, as part of their
examination process, review the banks' allowances for loan losses and such
review may result in changes to the allowance based on judgments different from
those of management.
Noninterest income increased $246,000 to $1,296,000 in the first
quarter of 2004 compared to $1,050,000 in the first quarter of 2003. Service
charges and fees on deposit accounts increased $47,000 due to increases in
overdraft fee income. Net securities gains increased $261,000 in the first
quarter of 2004 compared to the first quarter of 2003 due to the sale of
corporate bonds and equity securities. Gains on sales of loans decreased
$63,000 due to a combination of lower sales volumes in the secondary market and
the subsequent recognition of lower mortgage servicing asset income.
Noninterest expense increased $261,000 to $5,608,000 for the quarter
ended March 31, 2004, compared to the $5,347,000 recorded during the same
period last year. Salaries and employee benefits increased $301,000 to
$3,000,000 for the first quarter of 2004 compared to $2,699,000 for the first
quarter 2003. This increase was due primarily to increases in salaries expense,
related payroll taxes and benefits and the recording of a liability to deferred
compensation related to a Supplemental Employee Retirement Plan. This was
partially offset by the fact that the Company recorded no write-down of equity
securities for the first quarter of 2004 compared to a write down of $78,000
for the same period last year.
Income Tax Expense
The Company recognized income tax expense of $353,000 and $467,000 for
the three months ended March 31, 2004 and 2003, respectively. The effective tax
rates were 32.6% and 36.5% for those respective periods.
Liquidity
Liquidity risk management refers to the Company's ability to raise
funds in order to meet existing and anticipated financial obligations. These
obligations to make payment include withdrawal of deposits on demand or at
their contractual maturity, the repayment of borrowings as they mature, funding
new and existing loan commitments as well as new business opportunities.
Liquidity may be provided through amortization, maturity or sale of assets such
as loans and securities available-for-sale, liability sources such as increased
deposits, utilization of the Federal Home Loan Bank ("FHLB") credit facility,
purchased or other borrowed funds, and access to the capital markets. Liquidity
targets are subject to change based on economic and market conditions and are
controlled and monitored by the Company's Asset/Liability Committee.
At the subsidiary bank level, liquidity is managed by measuring the
net amount of marketable assets, after deducting pledged assets, plus lines of
credit, primarily with the FHLB, that are available to fund liquidity
requirements. Management then measures the adequacy of that aggregate amount
relative to the aggregate amount of liabilities deemed to be sensitive or
volatile. These include core deposits in excess of $100,000, term deposits with
short maturities, and credit commitments outstanding.
Additionally, Northway Financial, Inc. requires cash for various
operating needs, including dividends to shareholders, the stock repurchase
program, capital injections to the subsidiary banks, and the payment of general
corporate expenses. The primary sources of liquidity for Northway Financial,
Inc. are dividends from its subsidiary banks and reimbursement for services
performed on behalf of the banks.
Management believes that the Company's current level of liquidity and
funds available from outside sources is sufficient to meet the Company's needs.
Capital
The Company's Tier 1 and Total Risk Based Capital ratios were 9.72%
and 12.90%, respectively, at March 31, 2004. The Company's Tier 1 leverage
ratio at March 31, 2004 was 7.59%. As of March 31, 2004, the capital ratios of
the Company and the subsidiary banks exceeded the minimum capital ratio
requirements of the "well-capitalized" category under the Federal Deposit
Insurance Corporation Improvement Act of 1991.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2003, there have been no material changes in the
Company's quantitative and qualitative disclosures about market risk. A fuller
description of the quantitative and qualitative disclosures about market risk
was provided by the Company on pages 13 through 27 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Company's management conducted an
evaluation with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, regarding the effectiveness of the Company's
disclosure controls and procedures, as of the end of the last fiscal quarter.
In designing and evaluating the Company's disclosure controls and procedures,
the Company and its management recognize that any controls and procedures, no
matter how well designed and operated, can provide only a reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating and implementing possible controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that they believe the Company's disclosure
controls and procedures are reasonably effective to ensure that information
required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms. We intend to continue to review and document our disclosure controls
and procedures, including our internal controls and procedures for financial
reporting, and we may from time to time make changes to the disclosure controls
and procedures to enhance their effectiveness and to ensure that our systems
evolve with our business.
(b) Changes in internal controls.
There were no changes in the Company's internal controls over
financial reporting identified in connection with the Company's evaluation of
its disclosure controls and procedures that occurred during the Company's last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds- None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
11 Statement re Computation of per share earnings
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Current Report on Form 8-K filed on February 2, 2004.
Item reported: Earnings announcement for fourth quarter ending
December 31, 2003.
Current Report of Form 8-K/A filed on March 24, 2004.
Item reported: Revised Selected Consolidated Financial Data for fourth
quarter ending December 31, 2003.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWAY FINANCIAL, INC.
May 4, 2004 BY: /S/ William J. Woodward
------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
May 4, 2004 BY: /S/ Richard P. Orsillo
------------------------------
Richard P. Orsillo
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)
INDEX OF EXHIBITS
Exhibit Number Description of Exhibit
11 Statement re Computation of per share earnings
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002