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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 June 30, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________________ to ______________
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
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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 July 22, 2004, there were
1,499,574 shares of common stock outstanding, par value $1.00 per share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2004
(Unaudited) and December 31, 2003...................................... 3
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2004 and 2003 (Unaudited).............. 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 (Unaudited)............................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited)..... 6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk........... 13
Item 4.
Controls and Procedures.............................................. 14
PART IIOTHER 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
June 30, Dec. 31,
(Dollars in thousands) 2004 2003
- ----------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits $ 19,376 $ 14,615
Federal funds sold - 16,470
Securities available-for-sale 81,479 68,081
Federal Home Loan Bank stock 5,515 4,705
Federal Reserve Bank stock 365 365
Loans held-for-sale 844 511
Loans, net before allowance for loan losses 498,727 473,620
Less: allowance for loan losses 5,053 5,036
-----------------------
Loans, net 493,674 468,584
-----------------------
Premises and equipment, net 13,527 12,858
Core deposit intangible 3,426 3,903
Goodwill 10,152 10,152
Other assets 9,645 8,972
-----------------------
Total assets $638,003 $609,216
=======================
Liabilities and Stockholders' Equity:
Liabilities
Interest bearing deposits $391,174 $393,708
Noninterest bearing deposits 82,484 69,599
Short-term borrowings 10,119 7,401
Long-term debt 103,620 87,620
Other liabilities 3,523 3,016
-----------------------
Total liabilities 590,920 561,344
-----------------------
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 June 30, 2004 and December 31, 2003 and 1,499,574 outstanding
at June 30, 2004 and December 31, 2003 1,732 1,732
Surplus 2,088 2,088
Retained earnings 51,084 50,116
Treasury stock, at cost (232,395 shares at June 30, 2004 and December 31, 2003) (6,213) (6,213)
Accumulated other comprehensive (loss) income, net of tax (1,608) 149
-----------------------
Total stockholders' equity 47,083 47,872
-----------------------
Total liabilities and stockholders' equity $638,003 $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 Six Months
Ended June 30, Ended June 30,
(Dollars in thousands, except per share data) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $ 6,641 $7,277 $13,266 $14,379
Interest on debt securities:
Taxable 825 803 1,468 1,601
Tax-exempt 34 39 65 73
Dividends 58 66 105 120
Federal funds sold 13 18 38 28
Interest bearing deposits - - - 1
------------------- ------------------
Total interest and dividend income 7,571 8,203 14,942 16,202
------------------- ------------------
Interest expense:
Deposits 743 1,162 1,555 2,430
Borrowed funds 1,130 1,056 2,145 1,987
------------------- ------------------
Total interest expense 1,873 2,218 3,700 4,417
------------------- ------------------
Net interest and dividend income 5,698 5,985 11,242 11,785
Provision for loan losses 120 220 270 445
------------------- ------------------
Net interest and dividend income after
provision for loan losses 5,578 5,765 10,972 11,340
------------------- ------------------
Noninterest income:
Service charges and fees on deposit accounts 607 432 1,052 830
Securities gains, net 261 39 720 237
Gain on sales of loans, net 44 97 83 199
Other 382 419 705 771
------------------- ------------------
Total noninterest income 1,294 987 2,560 2,037
------------------- ------------------
Noninterest expense:
Salaries and employee benefits 3,087 2,770 6,087 5,469
Office occupancy and equipment 888 938 1,850 1,873
Amortization of core deposit intangible 239 239 477 477
Write-down of equity securities - 41 - 119
Other 1,518 1,476 2,896 2,873
------------------- ------------------
Total noninterest expense 5,732 5,464 11,310 10,811
------------------- ------------------
Income before income tax expense 1,140 1,288 2,222 2,566
Income tax expense 392 464 745 931
------------------- ------------------
Net income $ 748 $ 824 $ 1,477 $ 1,635
=================== ==================
Comprehensive net income $(1,023) $2,466 $ (280) $ 3,534
=================== ==================
Per share data:
Earnings per common share $ 0.50 $ 0.55 $ 0.99 $ 1.09
Earnings per common share (assuming dilution) $ 0.49 $ 0.54 $ 0.98 $ 1.08
Cash dividends declared $ 0.34 $ 0.34 $ 0.34 $ 0.34
Weighted average number of common shares, basic 1,499,574 1,505,695 1,499,574 1,507,789
Weighted average number of common shares, diluted 1,512,219 1,512,255 1,512,337 1,514,251
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
(Dollars in thousands) 2004 2003
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,477 $ 1,635
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 270 445
Depreciation and amortization 1,189 1,195
Write-down of equity securities - 119
Gains on sales of securities available-for-sale, net (720) (237)
Loss on sale, disposal and write-down of premises and equipment 4 6
Amortization of premiums and accretion of discounts on securities, net 64 265
(Decrease) increase in unearned income, net (176) 23
Amortization of discount on loans acquired 57 53
Loss on sales of other real estate owned and other personal property, net 3 2
Net increase in loans held-for-sale (333) (464)
Net change in other assets and other liabilities 939 1,218
-------------------
Net cash provided by operating activities 2,774 4,260
-------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 11,667 4,128
Proceeds from maturities of securities available-for-sale 10,943 36,297
Purchases of securities available-for-sale (38,262) (25,957)
Purchases of Federal Home Loan Bank stock (810) (74)
Purchases of Federal Reserve Bank stock - (285)
Loan originations and principal collections, net (25,663) (21,165)
Recoveries of previously charged-off loans 103 93
Proceeds from sales of and payments received on other real estate owned - 10
Proceeds from sales of and payments received on other personal property 364 439
Additions to premises and equipment (1,385) (280)
-------------------
Net cash used in investing activities (43,043) (6,794)
-------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 10,351 (9,956)
Advances from FHLB 20,000 28,000
Repayment of FHLB Advances (4,000) (7,000)
Net increase in short-term FHLB Advances 2,765 -
Net decrease in securities sold under agreements to repurchase (47) (1,223)
Purchases of treasury stock - (351)
Cash dividends paid (509) (513)
-------------------
Net cash provided by financing activities 28,560 8,957
-------------------
Net (decrease) increase in cash and cash equivalents (11,709) 6,423
Cash and cash equivalents at beginning of period 31,085 27,426
-------------------
Cash and cash equivalents at end of period $ 19,376 $ 33,849
===================
Supplemental disclosure of cash flows:
Interest paid $ 3,815 $ 4,504
======== ========
Taxes paid $ 900 $ 945
======== ========
Loans transferred to other real estate owned $ - $ 46
======== ========
Loans transferred to other personal property $ 318 $ 439
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its wholly-owned subsidiaries, The Berlin City Bank and The
Pemigewasset National Bank of Plymouth, New Hampshire (collectively, "the
Company") included herein have been prepared by the Company in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") have been condensed or omitted in accordance
with such rules and regulations. The Company, however, believes that the
disclosures are adequate to make the information presented not misleading. The
amounts shown reflect, in the opinion of management, all adjustments necessary
for a fair presentation of the financial statements for the periods reported.
The results of operations for the three month and six month periods ended
June 30, 2004 and 2003 are not necessarily indicative of the results of
operations to be expected for the full year or any other interim periods. The
interim financial statements are meant to be read in conjunction with the
Company's audited financial statements presented in its Annual Report on Form
10-K for the fiscal year ended December 31, 2003.
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheet and revenues and expenses for
the reported periods. Actual results could differ from these estimates. The
Company believes that the most critical accounting policies, which are those
that are most important to the portrayal of the Company's financial condition
and result of operations and require management's most difficult, subjective
and complex judgments, relate to the determination of the allowance for loan
losses, the impairment analysis of goodwill and core deposit intangibles,
determination of the expense and liability related to the Company's pension
plan, and determination of mortgage servicing rights.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
GAAP.
2. Stock-Based Compensation
As of June 30, 2004, the Company has a stock-based employee compensation
plan which is described more fully in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2003. The Company accounts for this plan under
the recognition and measurement principles of the Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of the grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
($000 Omitted, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
------------------ -------------------
Net income As reported $ 748 $ 824 $1,477 $1,635
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects - 10 - 20
------ ------ ------ ------
Pro forma $ 748 $ 814 $1,477 $1,615
====== ====== ====== ======
Earnings per common share As reported $0.50 $0.55 $0.99 $1.09
Pro forma $0.50 $0.54 $0.99 $1.07
Earnings per common share (assuming dilution) As reported $0.49 $0.54 $0.98 $1.08
Pro forma $0.49 $0.53 $0.98 $1.06
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 and six months ended June 30: ($000 Omitted)
($000 Omitted)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------------------- -----------------------
Service cost $118 $110 $236 $220
Interest cost 76 67 152 134
Expected return on plan assets (72) (56) (144) (112)
Amortization of prior service cost (21) (21) (42) (42)
Recognized net actuarial loss 32 53 73 83
Amortization of transition asset - (1) - (2)
Special recognition of prior service costs - - - -
---- ---- ---- ----
Net periodic benefit cost $133 $152 $275 $281
==== ==== ==== ====
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 six months of 2004,
there were no cash contributions to the pension plan. The Company anticipates
contributing $430,000 to fund its pension plan on December 31, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis and the related condensed
consolidated financial statements relate to Northway Financial, Inc. and its
wholly-owned subsidiaries, The Berlin City Bank, and The Pemigewasset National
Bank of Plymouth, New Hampshire (collectively, the "Company").
Forward-Looking Statements
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements can be identified by the use of the words
"expect," "believe," "estimate," "will" and other expressions which predict or
indicate future trends and which do not relate to historical matters.
Forward-looking statements may include, but are not limited to, 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 June 30, 2004 were $638,003,000 compared to
$609,216,000 at December 31, 2003, an increase of $28,787,000. Net loans,
including loans held-for-sale, increased $25,423,000 to $494,518,000, 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. Securities available-for-sale, including FHLB
Stock and Federal Reserve Bank Stock, increased $14,208,000 to $87,359,000,
which was primarily the result of Mortgage-backed security and US Agency
security purchases. Cash and cash equivalents decreased $11,709,000 to
$19,376,000, compared to $31,085,000 at December 31, 2003, due primarily to a
decrease in federal funds sold.
Deposits increased $10,351,000 to $473,658,000 from December 31, 2003 due
to an increase in both DDA and NOW accounts partially offset by a decrease in
savings and time accounts. Long-term Federal Home Loan Bank advances increased
$16,000,000 to $83,000,000 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%, which was partially offset by the
maturity of $4,000,000 in advances. Total stockholders' equity decreased
$789,000 to $47,083,000 at June 30, 2004 from $47,872,000 at December 31, 2003.
Net income of $1,477,000 was offset by dividends paid of $509,000 and a
decrease in accumulated comprehensive income of $1,757,000 as the recent
increase in interest rates has resulted in an unrealized loss on investment
securities available-for-sale.
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
June 30, 2004 the allowance for loan losses was $5,053,000, or 1.01% of total
loans, compared to $5,036,000, or 1.06% of total loans at December 31, 2003.
The allowance for loan losses is based on an evaluation by each bank's
management and Board of Directors of current and anticipated economic
conditions, changes in the diversification, size and risk within the loan
portfolio, and other factors. The composition of the allowance for loan losses
for the three month and six month periods ended June 30, 2004 and 2003 is as
follows:
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) 2004 2003 2004 2003
- -------------------------------------------------------------------------------
Balance at beginning of period $5,057 $4,983 $5,036 $4,920
------------------ -----------------
Charge-offs (162) (258) (356) (464)
Recoveries 38 49 103 93
------------------ -----------------
Net charge-offs (124) (209) (253) (371)
Provision for loan losses 120 220 270 445
------------------ -----------------
Balance at end of period $5,053 $4,994 $5,053 $4,994
================== =================
Nonperforming loans totaled $3,586,000 as of June 30, 2004, compared to
$4,089,000 at December 31, 2003. The ratio of nonperforming loans to loans net
of unearned income was 0.72% as of June 30, 2004 compared to 0.86% at December
31, 2003. Nonperforming assets, which include nonperforming loans, other real
estate owned and other chattels owned, totaled $3,629,000 as of June 30, 2004,
compared to $4,180,000 at December 31, 2003. The ratio of nonperforming assets
to total assets was 0.57% as of June 30, 2004 compared to 0.69% at December 31,
2003.
Results of Operations
The Company reported net income of $748,000, or $0.50 per common share,
for the three months ended June 30, 2004, compared to $824,000, or $0.55 per
common share, for the three months ended June 30, 2003, a decrease of $76,000,
or 9.2%. Net income for the six months ended June 30, 2004 was $1,477,000, or
$0.99 per common share, compared to $1,635,000, or $1.09 per common share, for
the six months ended June 30, 2003, a decrease of $158,000, or 9.7%.
Net interest and dividend income for the second quarter decreased
$287,000, or 4.8%, to $5,698,000 compared to $5,985,000 for the second quarter
of 2003. Net interest and dividend income for the six months ended June 30,
2004 decreased $543,000, or 4.6%, to $11,242,000 compared to $11,785,000 for
the same period last year. The decrease for both the quarter and year-to-date
is due primarily to a decrease in the yield on earning assets as loans
continued to reprice downward. This was partially offset by an increase in
average earning assets as well as a decrease in the cost of interest bearing
liabilities.
The provision for loan losses decreased $100,000 to $120,000 for the
second quarter of 2004 compared to $220,000 for the second quarter of 2003. For
the six months ended June 30, 2004, the provision for loan losses was $270,000,
a decrease of $175,000 from the $445,000 reported for the same period last
year. The provision for loan losses is based upon a review of the adequacy of
the allowance for loan losses, which is conducted on a quarterly basis. This
review is based upon many factors including the risk characteristics of the
portfolio, trends in loan delinquencies, and an assessment of existing economic
conditions. In addition, various regulatory agencies, as part of their
examination process, review the banks' allowances for loan losses and such
review may result in changes to the allowance based on judgments different from
those of management.
Noninterest income increased $307,000 to $1,294,000 in the second quarter
of 2004 compared to $987,000 in the second quarter of 2003. Service charges and
fees on deposit accounts increased $175,000 due to increases in overdraft fee
income primarily the result of the introduction of a new overdraft privilege
source. Net securities gains increased $222,000 in the second 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 $53,000 due to a
combination of lower sales volumes in the secondary market and the subsequent
recognition of lower mortgage servicing asset income. Noninterest income for
the six months ended June 30, 2004 increased $523,000 to $2,560,000 compared to
$2,037,000 for the same period last year. Service charges and fees on deposit
accounts increased $222,000 due to increases in overdraft fee income
principally the result of the bounce protection program. Net securities gains
for the six months ended June 30, 2004 were $720,000, an increase of $483,000
over the $237,000 reported for the same period a year ago. Gains on sales of
loans decreased $116,000 over one year ago and other noninterest income
decreased $66,000.
Noninterest expense increased $268,000 to $5,732,000 for the quarter ended
June 30, 2004, compared to the $5,464,000 recorded during the same period last
year. For the six months ended June 30, 2004 noninterest expense totaled
$11,310,000, an increase of $499,000 over the same period last year. Salaries
and employee benefits increased $317,000 to $3,087,000 for the second quarter
of 2004 compared to $2,770,000 for the first quarter 2003. For the six months
ended June 30, 2004, salaries and employee benefits increased $618,000 to
$6,087,000 compared to $5,469,000 for the same period a year ago. The increase
for both the quarter and the year-to-date 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 both the second quarter of 2004
and the year-to-date ended June 30, 2004 compared to a write down of $41,000
for the second quarter of 2003 and $119,000 for the six months ended June 30,
2003.
Income Tax Expense
The Company recognized income tax expense of $745,000 and $931,000 for the
six months ended June 30, 2004 and 2003, respectively. The effective tax rates
were 33.5% and 36.3% for those respective periods.
Liquidity
Liquidity risk management refers to the Company's ability to raise funds
in order to meet existing and anticipated financial obligations. These
obligations to make payment include withdrawal of deposits on demand or at
their contractual maturity, the repayment of borrowings as they mature, funding
new and existing loan commitments as well as new business opportunities.
Liquidity may be provided through amortization, maturity or sale of assets such
as loans and securities available-for-sale, liability sources such as increased
deposits, utilization of the 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 9.71% and
12.78%, respectively, at June 30, 2004. The Company's Tier 1 leverage ratio at
June 30, 2004 was 7.44%. As of June 30, 2004, the capital ratios of the Company
and the subsidiary banks exceeded the minimum capital ratio requirements of the
"well-capitalized" category under the Federal Deposit Insurance Corporation
Improvement Act of 1991.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2003, there have been no material changes in the
Company's quantitative and qualitative disclosures about market risk. A fuller
description of the quantitative and qualitative disclosures about market risk
was provided by the Company on pages 13 through 27 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company's management conducted an evaluation
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of the Company's disclosure
controls and procedures, as of the end of the last fiscal quarter. In designing
and evaluating the Company's disclosure controls and procedures, the Company
and its management recognize that any controls and procedures, no matter how
well designed and operated, can provide only a reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating and implementing possible controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that they believe the Company's disclosure
controls and procedures are reasonably effective to ensure that information
required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules
and forms. We intend to continue to review and document our disclosure controls
and procedures, including our internal controls and procedures for financial
reporting, and we may from time to time make changes to the disclosure controls
and procedures to enhance their effectiveness and to ensure that our systems
evolve with our business.
(b) Changes in internal controls.
There were no changes in the Company's internal controls over financial
reporting identified in connection with the Company's evaluation of its
disclosure controls and procedures that occurred during the Company's last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. 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
The Company's Annual Meeting of Stockholders was held on May 25, 2004. At the
Annual Meeting, the stockholders elected Fletcher W. Adams, Arnold P. Hanson,
Jr., John H. Noyes and William J. Woodward to three-year terms as directors.
Each of these directors' terms will expire at the 2007 annual meeting. The
final vote for each of these elected directors is as follows:
For Withheld
--------- --------
Fletcher W. Adams 1,233,859 11,208
Arnold P. Hanson, Jr. 1,233,322 11,745
John H. Noyes 1,232,466 12,601
William J. Woodward 1,227,802 17,263
The directors continuing in office are Stephen G. Boucher, Barry J. Kelley,
Frederick C. Anderson, Charles H. Clifford, Jr., John D. Morris, Brien L. Ward
and Randall G. Labnon.
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 April 30, 2004.
Item reported: Earnings announcement for first quarter ending March
31, 2004.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWAY FINANCIAL, INC.
August 3, 2004 BY:/S/William J. Woodward
------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
August 2, 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