UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
|
T
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934.
|
For
the
fiscal year ended December 31, 2006
|
*
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
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)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock
|
NASDAQ
Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES *
NO
T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES *
NO
T
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 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 days. YES T
NO
*
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. T
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated file. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.. Large
Accelerated Filer *
Accelerated Filer *
Non-Accelerated Filer T
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES*
NO
T
The
number of shares of voting and nonvoting common stock, par value $1.00 per
share, held by nonaffiliates of the registrant as of June 30, 2006 was 1,270,163
shares with an aggregate market value, computed by reference to the last
reported sales price on the NASDAQ Global Market on such date, of $45,725,868.
Although directors and executive officers of the registrant were assumed to
be
“affiliates” of the registrant for purposes of this calculation, this
classification is not to be interpreted as an admission of such
status.
At
March
25,
2007,
there
were 1,491,174 shares of common stock outstanding, par value $1.00 per
share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s proxy statement for its 2007 Annual Meeting of Stockholders
are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part
III.
2006
FORM 10-K ANNUAL REPORT
TABLE
OF CONTENTS
FORWARD-LOOKING
STATEMENTS
Certain
statements in this report are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements may include, but are not limited to, projections of revenue, income
or loss, plans for future operations and acquisitions, projections based on
assumptions regarding market and liquidity risk, and plans related to products
or services of Northway Financial, Inc. (“Northway”) and its subsidiaries (the
“Company”). Such forward-looking statements are subject to known and unknown
risks, uncertainties and contingencies, many of which are beyond the control
of
the Company. To the extent any such risks, uncertainties and contingencies
are
realized, the Company’s actual results, performance or achievements could differ
materially from anticipated results, performance or achievements. Factors that
might affect such forward-looking statements include, among other factors,
the
factors described under the caption “Risk Factors” in Item 1A of this report,
overall economic and business conditions, economic and business conditions
in
the Company’s market areas, interest rate fluctuations, a prolonged continuation
of the current interest rate environment, the demand for the Company’s products
and services, competitive factors in the industries in which the Company
competes, changes in government regulations, and the timing, impact and other
uncertainties of future acquisitions.
In
addition to the factors described above, the following are some additional
factors that could cause our financial performance to differ from any
forward-looking statement contained herein: i) changes in interest rates over
the past year and the relative relationship between the various interest rate
indices that the Company uses; ii) a deterioration in the financial markets
affecting the valuation of securities held in the Company’s investment
portfolio; (iii) a change in product mix attributable to changing interest
rates, customer preferences or competition; iv) a significant portion of the
Company’s loan customers are in the hospitality business and therefore could be
affected by a slower economy, adverse weather conditions and/or rising gasoline
prices; and v) the effectiveness of advertising, marketing and promotional
programs.
The
words
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “project” or the
negative of such terms and other similar expressions which are predictions
of or
indicate future events and trends and which do not relate to historical matters
identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known or unknown risks,
uncertainties or other factors, which may cause the actual results, performance
or achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. The Company expressly disclaims any obligation
to
publicly update or revise any forward-looking statement, whether as a result
of
new information, future events or otherwise.
Though
the Company has attempted to list comprehensively the factors which might affect
forward-looking statements, the Company wishes to caution you that other factors
may in the future prove to be important in affecting the Company’s results of
operations. New factors emerge from time to time and it is not possible for
management to anticipate all of such factors, nor can it assess the impact
of
each such factor, or combination of factors, which may cause actual results
to
differ materially from forward-looking statements.
PART
1
Description
of Business
Northway
Financial, Inc. was incorporated on March 7, 1997, under the laws of the State
of New Hampshire, for the purpose of becoming the holding company of The Berlin
City Bank, a New Hampshire-chartered bank headquartered in Berlin, New Hampshire
(“BCB”), pursuant to a reorganization transaction (the “BCB Reorganization”) by
and among the Company, BCB, and a subsidiary of BCB, and, thereafter, the merger
(the “Merger”) by and among the Company, BCB, Pemi Bancorp, Inc. (“PEMI”), and
PEMI’s wholly owned subsidiary, The Pemigewasset National Bank of Plymouth, New
Hampshire, a national bank headquartered in Plymouth, New Hampshire (“PNB”). The
BCB Reorganization and the Merger became effective on September 30, 1997. As
of
such date, BCB and PNB became wholly owned subsidiaries of the Company. On
October 1, 2005, BCB was renamed Northway Bank and PNB was merged into Northway
Bank (“Bank”). Unless the context otherwise requires, references herein to the
“Company" include Northway Financial, Inc. and its consolidated
subsidiary.
The
Company derives substantially all of its revenue and income from the furnishing
of bank and bank-related services, principally to individuals and small and
medium-sized companies in New Hampshire. The Bank operates as a typical
community banking institution and does not engage in any specialized finance
or
capital market activities. The Company functions primarily as the holder of
stock of its subsidiary and assists the management of its subsidiary as
appropriate.
The
Company is subject to regulation by the New Hampshire Bank Commissioner (the
“Commissioner”), the Federal Deposit Insurance Corporation (the “FDIC”), and the
Board of Governors of the Federal Reserve System. See "Supervision and
Regulation"
on page
4 of this report
The
Bank
is engaged in a general commercial banking business and offers commercial and
construction loans, real estate mortgages, consumer loans, including personal
secured and unsecured loans, and lines of credit.
The
Bank
accepts savings, time, demand, NOW and money market deposit accounts, and offers
a variety of banking services including safe deposit boxes, credit cards,
official checks and money orders, overdraft lines of credit, alternative
investments, commercial cash management, and wire transfer services.
Northway
is a legal entity separate and distinct from its subsidiary. The right of
Northway to participate in any distribution of assets or earnings of the
subsidiary is subject to the prior claims of creditors of the subsidiary, except
to the extent that claims, if any, of Northway itself as a creditor may be
recognized. See “Supervision and Regulation.”
The
following information concerning the Company’s investment activities, lending
activities, asset quality and allowance for loan losses should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” appearing under Item 7 of this report and the
Company’s Consolidated Financial Statements and Notes thereto.
Investment
Activities
The
following table presents the carrying amount of the Company’s securities
available-for-sale as of December 31, 2006, 2005 and 2004 ($000
Omitted):
|
2006
|
2005
|
2004
|
||||||||
|
U.S.
Treasury and other U.S. government agency securities
|
$
|
47,063
|
$
|
47,751
|
$
|
54,563
|
||||
|
Mortgage-backed
securities (1)
|
40,621
|
23,939
|
29,301
|
|||||||
|
Marketable
equity securities
|
3,617
|
2,809
|
1,931
|
|||||||
|
Corporate
bonds
|
3,522
|
5,569
|
12,287
|
|||||||
|
Asset
backed securities
|
4,968
|
-
|
-
|
|||||||
|
State
and political subdivision bonds and notes
|
27,998
|
23,176
|
3,051
|
|||||||
|
Total
securities
|
$
|
127,789
|
$
|
103,244
|
$
|
101,133
|
||||
|
(1)
|
Includes
collateralized mortgage obligations of $6, $8 and $10 for December
31,
2006, 2005 and 2004, respectively.
|
The
following table sets forth the amortized cost of the Company’s investment in
debt securities maturing within stated periods and their related weighted
average yields, reported on a tax equivalent basis, as of December 31, 2006
($000 Omitted):
|
Maturities
|
||||||||||||||||
|
Within
one
year
|
|
|
One
to
five
years
|
|
|
Five
to
ten
years
|
|
|
Over
ten
years
|
|
|
Total
amortized
cost
|
||||
|
Available-for-sale:
|
||||||||||||||||
|
U.S.
Treasury and other U.S. government agency securities
|
$
|
6,300
|
$
|
30,455
|
$
|
10,983
|
$
|
-
|
$
|
47,738
|
||||||
|
Mortgage-backed
securities (1)
|
-
|
20
|
-
|
40,891
|
40,911
|
|||||||||||
|
Corporate
bonds
|
1,508
|
2,009
|
-
|
-
|
3,517
|
|||||||||||
|
Asset
backed securities
|
-
|
-
|
-
|
4,974
|
4,974
|
|||||||||||
|
State
and political subdivision bonds and notes
|
1,506
|
996
|
-
|
25,282
|
27,784
|
|||||||||||
|
Total
amortized cost
|
$
|
9,314
|
$
|
33,480
|
$
|
10,983
|
$
|
71,147
|
$
|
124,924
|
||||||
|
Fair
value
|
$
|
9,262
|
$
|
32,935
|
$
|
10,916
|
$
|
71,059
|
$
|
124,172
|
||||||
|
Weighted
average yield
|
3.94
|
%
|
4.13
|
%
|
5.57
|
%
|
5.49
|
%
|
5.02
|
%
|
||||||
|
(1)
|
Includes
collateralized mortgage obligations of
$6
|
Lending
Activities
The
following table sets forth information with respect to the composition of the
Company’s loan portfolio, excluding loans held for sale, as of December 31,
2006, 2005, 2004, 2003 and 2002 ($000 Omitted):
|
December
31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Real
estate:
|
||||||||||||||||
|
Residential
|
$
|
167,172
|
$
|
158,729
|
$
|
147,333
|
$
|
129,493
|
$
|
114,526
|
||||||
|
Commercial
|
158,464
|
143,456
|
130,334
|
120,366
|
111,941
|
|||||||||||
|
Construction
|
10,700
|
13,241
|
5,366
|
3,851
|
6,330
|
|||||||||||
|
Commercial
|
33,569
|
27,349
|
27,013
|
24,528
|
23,885
|
|||||||||||
|
Installment
|
42,489
|
35,786
|
29,345
|
30,291
|
40,169
|
|||||||||||
|
Indirect
installment
|
28,714
|
62,221
|
116,520
|
150,807
|
139,477
|
|||||||||||
|
Other
|
20,843
|
19,507
|
18,901
|
14,530
|
9,652
|
|||||||||||
|
Total
loans
|
461,951
|
460,289
|
474,812
|
473,866
|
445,980
|
|||||||||||
|
Unamortized
cost/(unearned income)
|
279
|
84
|
(106
|
)
|
(247
|
)
|
(207
|
)
|
||||||||
|
Allowance
for loan losses
|
(5,581
|
)
|
(5,150
|
)
|
(5,204
|
)
|
(5,036
|
)
|
(4,920
|
)
|
||||||
|
Total
unamortized cost/(unearned income) and allowance for loan
losses
|
(5,302
|
)
|
(5,066
|
)
|
(5,310
|
)
|
(5,283
|
)
|
(5,127
|
)
|
||||||
|
Net
loans
|
$
|
456,649
|
$
|
455,223
|
$
|
469,502
|
$
|
468,583
|
$
|
440,853
|
||||||
The
following table presents the maturity distribution of the Company’s real estate
construction and commercial loans at December 31, 2006 ($000
Omitted):
|
Amount
|
Percent
of
Total
|
||||||
|
Within
one year
|
$
|
12,088
|
27.31
|
%
|
|||
|
After
one through five years
|
15,154
|
34.23
|
|||||
|
Over
five years
|
17,027
|
38.46
|
|||||
|
$
|
44,269
|
100.00
|
%
|
||||
The
Company’s real estate construction and commercial loans due after one year at
December 31, 2006 were comprised of the following ($000 Omitted):
|
Amount
|
||||
|
Fixed
interest rate
|
$
|
14,965
|
||
|
Adjustable
interest rate
|
17,216
|
|||
|
$
|
32,181
|
|||
Analysis
of the Allowance for Loan Losses
The
following table reflects activity in the Company’s allowance for loan losses for
the years ended December 31, 2006, 2005, 2004, 2003 and 2002 ($000
Omitted):
|
Years
ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Balance
at the beginning of period
|
$
|
5,150
|
$
|
5,204
|
$
|
5,036
|
$
|
4,920
|
$
|
4,642
|
||||||
|
Charge-offs:
|
||||||||||||||||
|
Real
estate
|
9
|
8
|
56
|
-
|
83
|
|||||||||||
|
Commercial
|
-
|
10
|
28
|
120
|
12
|
|||||||||||
|
Installment
loans
|
323
|
397
|
581
|
750
|
729
|
|||||||||||
|
Total
|
332
|
415
|
665
|
870
|
824
|
|||||||||||
|
Recoveries:
|
||||||||||||||||
|
Real
estate
|
56
|
44
|
162
|
25
|
64
|
|||||||||||
|
Commercial
|
16
|
85
|
16
|
11
|
4
|
|||||||||||
|
Installment
loans
|
226
|
157
|
160
|
145
|
134
|
|||||||||||
|
Total
|
298
|
286
|
338
|
181
|
202
|
|||||||||||
|
Net
charge-offs
|
34
|
129
|
327
|
689
|
622
|
|||||||||||
|
Provision
charged to expense
|
465
|
75
|
495
|
805
|
900
|
|||||||||||
|
Balance
at the end of period
|
$
|
5,581
|
$
|
5,150
|
$
|
5,204
|
$
|
5,036
|
$
|
4,920
|
||||||
|
Ratio
of net charge-offs to average loans
|
0.01
|
%
|
0.03
|
%
|
0.07
|
%
|
0.15
|
%
|
0.15
|
%
|
||||||
The
increase in the provision for loan losses in 2006 was due in large part to
an
increase in commercial loans, especially large hospitality loans, which require
a higher risk weighting in the allowance for loan losses calculation. The
decrease in the 2005 provision was due in part to a reduction in average loans
of approximately $19.8 million. The decrease in the 2004 provision was due
in
part to a reduction in average impaired loans of approximately $1.1 million
as
well as the fact that the Company realized significant recoveries during 2004,
which allowed the Company to maintain its coverage ratio. The decrease in the
2003 provision was due in large 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. The
2002 provision was unchanged from the provision recorded in 2001due to an
increase in loan balances and an increased level of loan
charge-offs.
Allocation
of the Allowance for Loan Losses
The
following table sets forth the breakdown of the Company’s allowance for loan
losses in the Company’s portfolio by category of loan and the percentage of
loans in each category to total loans in the respective portfolios at the dates
indicated ($000 Omitted):
|
December
31,
|
|||||||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||||||||||||||||||
|
Amount
|
Percent
of
loans
in each
category
to
total
loans
|
Amount
|
Percent
of
loans
in each
category
to
total
loans
|
Amount
|
Percent
of
loans
in each
category
to
total
loans
|
Amount
|
Percent
of
loans
in each
category
to
total
loans
|
Amount
|
Percent
of
loans
in each
category
to
total
loans
|
||||||||||||||||||||||
|
Real
estate:
|
|||||||||||||||||||||||||||||||
|
Residential
|
$
|
996
|
36.2
|
%
|
$
|
784
|
34.5
|
%
|
$
|
644
|
31.0
|
%
|
$
|
624
|
27.3
|
%
|
$
|
598
|
25.9
|
%
|
|||||||||||
|
Commercial
& construction
|
3,422
|
36.6
|
3,032
|
34.0
|
1,892
|
28.6
|
1,724
|
26.2
|
2,008
|
26.7
|
|||||||||||||||||||||
|
Commercial
|
339
|
7.3
|
278
|
6.0
|
174
|
5.7
|
155
|
5.2
|
216
|
5.4
|
|||||||||||||||||||||
|
Installment
|
747
|
15.4
|
985
|
21.3
|
2,398
|
30.7
|
2,505
|
38.2
|
2,084
|
40.6
|
|||||||||||||||||||||
|
Other
|
77
|
4.5
|
71
|
4.2
|
96
|
4.0
|
28
|
3.1
|
14
|
1.4
|
|||||||||||||||||||||
|
$
|
5,581
|
100.0
|
%
|
$
|
5,150
|
100.0
|
%
|
$
|
5,204
|
100.0
|
%
|
$
|
5,036
|
100.0
|
%
|
$
|
4,920
|
100.0
|
%
|
||||||||||||
Deposits
See
“Financial Statements and Supplementary Data” in Item 8 of this
report.
Supervision
and Regulation
The
business in which the Company is engaged is subject to extensive supervision,
regulation and examination by various bank regulatory authorities and other
governmental agencies. State and federal banking laws have as their principal
objective either the maintenance of the safety and soundness of financial
institutions and the federal deposit insurance system or the protection of
consumers or classes of consumers, and depositors in particular, rather than
the
specific protection of stockholders of a bank or its parent company.
Set
forth
below is a brief description of certain laws and regulations that relate to
the
regulation of the Company and its banking subsidiary. To the extent the
following material describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statute or regulation.
Regulation
of the Company
General.
As
a
registered bank holding company, the Company is subject to regulation under
the
Bank Holding Company Act of 1956, as amended (“BHCA”) and to inspection,
examination and supervision by the Board of Governors of the Federal Reserve
System (“FRB”). The Company is also subject to the laws of the State of New
Hampshire.
The
FRB
has the authority to issue orders to bank holding companies to cease and desist
from unsound banking practices and violations of conditions imposed by, or
violations of agreements with, the FRB. The FRB is also empowered to assess
civil money penalties against companies or individuals who violate the BHCA
or
orders or regulations thereunder, to order termination of non-banking activities
of non-banking subsidiaries of bank holding companies, and to order termination
of ownership and control of a non-banking subsidiary by a bank holding company.
Under the BHCA, the Company may not generally engage in activities or acquire
more than 5% of any class of voting securities of any company engaged in
activities other than banking or activities that are closely related to banking.
However, a bank holding company that has elected to be treated as a “financial
holding company” may engage in activities that are financial in nature or
incidental or complementary to such financial activities, as determined by
the
FRB alone, or together with the Secretary of the Department of the Treasury.
The
Company has not elected financial holding company status. Under certain
circumstances, the Company may be required to give notice to or seek approval
of
the FRB before engaging in activities other than banking.
Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994
(“Riegle-Neal”). Riegle-Neal permits adequately- or well-capitalized and
adequately- or well-managed bank holding companies, as determined by the FRB,
to
acquire banks in any state subject to certain concentration limits and other
conditions. Riegle-Neal also generally authorizes the interstate merger of
banks. In addition, among other things, Riegle-Neal permits banks to establish
new branches on an interstate basis provided that the law of the host state
specifically authorizes such action. However, as a bank holding company, the
Company is required to obtain prior FRB approval before acquiring more than
5%
of a class of voting securities, or substantially all of the assets of a bank
holding company, bank or savings association.
Control
Acquisitions.
The
Change in Bank Control Act prohibits a person or group of persons from acquiring
“control” of a bank holding company, such as the Company, unless the FRB has
been notified and has not objected to the transaction. Under a rebuttable
presumption established by the FRB, the acquisition of 10% or more of a class
of
voting securities of a bank holding company with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the bank holding company. In addition, a company
is
required to obtain the approval of the FRB under the BHCA before acquiring
25%
(5% in the case of an acquirer that is a bank holding company) or more of any
class of outstanding voting securities of a bank holding company, or otherwise
obtaining control or a “controlling influence” over that bank holding
company.
Bank
Holding Company Dividends.
The FRB
has authority to prohibit bank holding companies from paying dividends if such
payment is deemed to be unsafe or unsound. The FRB has indicated generally
that
it may be an unsafe or unsound practice for bank holding companies to pay
dividends unless the bank holding company’s net income over the preceding year
is sufficient to fund the dividends and the expected rate of earnings retention
is consistent with the organization’s capital needs, asset quality and overall
financial condition. The Company depends in part upon dividends received from
its subsidiary bank to fund its activities, including the payment of dividends.
As
described below, the FDIC and the banks regulatory agencies may regulate the
amount of dividends payable by the subsidiary banks. The inability of the Bank
to pay a dividend may have an adverse effect on the Company.
Regulation
of the Bank
The
Bank
is organized under New Hampshire law and is subject to the regulations of the
Commissioner and the FDIC, including requirements and restrictions related
to
the maintenance of adequate levels of capital, the payment of dividends,
investments, the nature and amount of loans which can be originated and the
rate
of interest that can be charged thereon, and other activities. Capital
requirements applicable to the Bank are substantially similar to those adopted
by the FRB regarding bank holding companies as described above.
Insurance
of Accounts and FDIC Regulation.
The
Bank pays deposit insurance premiums to the FDIC based on an assessment rate
established by the FDIC. In 2006, the FDIC enacted various rules to implement
the provision of the Federal Deposit Insurance Reform Act of 2005 (the “FDI
Reform Act”). Pursuant to the FDI Reform Act, in 2006 the FDIC merged the Bank
Insurance Fund with the Savings Association Insurance Fund to create a newly
named Deposit Insurance Fund (the “DIF”) that covers both banks and savings
associations. The FDIC also revised, effective January 1, 2007, the risk-based
premium system under which the FDIC classifies institutions based on the factors
described below and generally assesses higher rates on those institutions that
tend to pose greater risk to the DIF. For most banks and savings associations,
including the Bank, FDIC rates will depend upon a combination of CAMELS
component ratings and financial ratios. CAMELS ratings reflect the applicable
bank regulatory agency’s evaluation of the financial institution’s capital,
asset quality, management, earnings, liquidity and sensitivity to risk. For
large banks and savings associations that have long-term debt issuer ratings,
assessment rates will depend upon such ratings, and CAMELS component ratings.
For institutions, such as the Bank, which are in the lowest risk category,
assessment rates will vary initially from five (5) to seven (7) basis points
per
$100 of insured deposits. The Federal Deposit Insurance Act (“FDIA”) as amended
by the FDI Reform Act requires the FDIC to set a ratio of deposit insurance
reserves to estimated insured deposits, the designated reserve ratio (the “DRR”)
for a particular year within a range of 1.15% to 1.50%. For 2007, the FDIC
has
set the initial DRR at 1.25%. Under the FDI Reform Act and the FDIC’s revised
premium assessment program, every FDIC-insured institution will pay some level
of deposit insurance assessments regardless of the level of the DRR. We cannot
predict whether, as a result of an adverse change in economic conditions or
other reasons, the FDIC will be required in the future to increase deposit
insurance assessments above 2007 levels. The FDI Reform Act allows eligible
insured depository institutions to share a one-time assessment credit pool
of
approximately $4.7 billion. The Bank will, therefore, receive a one-time credit
of $447,000 to be applied against any future deposit insurance assessments.
During 2006, the Bank paid FDIC premiums totaling $59,000.
Bank
Holding Company Support of Subsidiary Banks.
Under
FRB policy, a bank holding company is expected to act as a source of financial
and managerial strength to each of its subsidiary banks and to commit resources
to their support. This support may be required at times when the bank holding
company may not have the resources to provide it. Similarly, under the
cross-guarantee provisions of FDIA, the FDIC can hold any FDIC-insured
depository institution liable for any loss suffered or anticipated by the FDIC
in connection with (1) the “default” of a commonly controlled FDIC-insured
depository institution; or (2) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution “in danger of default.” The Bank
is an FDIC-insured depository institution.
Regulatory
Capital Requirements.
The FRB
and the FDIC have issued substantially similar risk-based and leverage capital
guidelines applicable to United States banking organizations. In addition,
these
regulatory agencies may from time to time require that a banking organization
maintain capital above the minimum levels, whether because of its financial
condition or actual or anticipated growth.
The
FRB
risk-based guidelines define a three-tier capital framework. Tier 1 capital
includes common stockholders’ equity and qualifying preferred stock, less
goodwill and other adjustments. Tier 2 capital consists of preferred stock not
qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of
subordinated debt, other qualifying term debt and the allowance for loan losses
up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated
debt that is unsecured, fully paid, has an original maturity of at least two
years, is not redeemable before maturity without prior approval by the FRB
and
includes a lock-in clause precluding payment of either interest or principal
if
the payment would cause the issuing bank’s risk-based capital ratio to fall or
remain below the required minimum. The sum of Tier 1 and Tier 2 capital less
investments in unconsolidated subsidiaries represents qualifying total capital.
Risk-based capital ratios are calculated by dividing Tier 1 and total capital
by
risk-weighted assets. Assets and off-balance sheet exposures are assigned to
one
of four categories of risk-weights, based primarily on relative credit risk.
The
minimum Tier 1 capital ratio is four percent and the minimum total capital
ratio
is eight percent. The Company’s tier 1 calculation as of December 31, 2006
equaled 14.02% and its total capital ratio as of December 31, 2006 was 15.95%.
The
leverage ratio is determined by dividing Tier 1 capital by adjusted average
total assets for the quarter. Although the stated minimum ratio is 100 to 200
basis points above three percent, banking organizations are required to maintain
a ratio of at least five percent to be classified as “well capitalized”. The
Company’s leverage ratio as of December 31, 2006 was 9.31%.
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among
other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires
the
federal bank regulatory agencies to implement systems for “prompt corrective
action” for insured depository institutions that do not meet minimum capital
requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to
meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An “undercapitalized” bank must develop a capital
restoration plan and its parent holding company must guarantee that bank’s
compliance with the plan. The liability of the parent holding company under
any
such guarantee is limited to the lesser of five percent of the bank’s assets at
the time it became “undercapitalized” or the amount needed to comply with the
plan. Furthermore, in the event of the bankruptcy of the parent holding company,
such guarantee would take priority over the parent’s general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive compensation
and permits regulatory action against a financial institution that does not
meet
such standards.
The
various regulatory agencies have adopted substantially similar regulations
that
define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as
the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a “well capitalized” institution must
have a Tier 1 risk-based capital ratio of at least six percent, a total
risk-based capital ratio of at least ten percent and a leverage ratio of at
least five percent and not be subject to a capital directive order.
Regulators
also must take into consideration (a) concentrations of credit risk; (b)
interest rate risk (when the interest rate sensitivity of an institution’s
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position); and (c) risks from non-traditional activities,
as
well as an institution’s ability to manage those risks, when determining the
adequacy of an institution’s capital. This evaluation will be made as a part of
the institution’s regular safety and soundness examination. In addition, the
Company, and any bank with significant trading activity, must incorporate a
measure for market risk in their regulatory capital calculations. As of December
31, 2006, the most recent notification from the FDIC categorized the Bank as
“well capitalized”.
In
2005,
the federal banking agencies issued an advance notice of proposed rulemaking
(“ANPR”) concerning potential changes in the risk-based capital rules (“Basel
IA”) that are designed to apply to, and potentially reduce the risk capital
requirements of bank holding companies, such as the Company, that are not among
the 20 or so largest US bank holding companies. In December 2006, the FDIC
issued a revised Interagency Notice of Proposed Rulemaking concerning Basel
1-A
(the “NPR”), which would allow banks and bank holding companies that are not
among the 20 or so largest US bank holding companies to either adopt Basel
1-A
or remain subject to the existing risk-based capital rules. The NPR would also,
among other changes, amend the ANPR to add new risk weights, expand the use
of
external credit ratings for certain exposures and expand the range of eligible
collateral and guarantors used to mitigate credit risk. The NPR remains subject
to approval by other regulatory agencies, and if approved, will be made
available to the public for comment, and in all likelihood, will be subject
to
further revision. The effective date, if adopted, of the Basel 1-A rules also
remains uncertain. Accordingly, the Company is not yet in a position to
determine the effect of such rules on its risk capital requirements.
Transactions
with Affiliates.
Under
Sections 23A and 23B of the Federal Reserve Act and Regulation W thereunder,
there are various legal restrictions on the extent to which a bank holding
company and its non-bank subsidiaries may borrow, obtain credit from or
otherwise engage in "covered transactions" with its FDIC insured depository
institution subsidiaries. Such borrowings and other covered transactions by
an
insured depository institution subsidiary (and its subsidiaries) with its
non-depository institution affiliates are limited to the following amounts:
(a)
in the case of one such affiliate, the aggregate amount of covered transactions
of the insured depository institution and its subsidiaries cannot exceed ten
percent (10%) of the capital stock and surplus of the insured depository
institution; and (b) in the case of all affiliates, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed twenty percent (20%) of the capital stock and surplus of the
insured depository institution.
"Covered
transactions" are defined by statute for these purposes to include a loan or
extension of credit to an affiliate, a purchase of or investment in securities
issued by an affiliate, a purchase of assets from an affiliate unless exempted
by the Federal Reserve Board, the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any person or
company, or the issuance of a guarantee, acceptance, or letter of credit on
behalf of an affiliate. Covered transactions are also subject to certain
collateral security requirements. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property of any kind,
or furnishing of any service.
Limitations
on Bank Dividends.
The
FDIC has the authority to use its enforcement powers to prohibit a bank from
paying dividends if, in its opinion, the payment of dividends would constitute
an unsafe or unsound practice. Federal law also prohibits the payment of
dividends by a bank that will result in the bank failing to meet its applicable
capital requirements on a pro forma basis.
Customer
Information Security. The
FDIC
and other bank regulatory agencies have adopted final guidelines for
establishing standards for safeguarding nonpublic personal information about
customers that implement provisions of the Gramm-Leach-Bliley Act of 1999 or
“GLBA,” which establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the BHCA framework. Specifically,
the Information Security Guidelines established by the GLBA require each
financial institution, under the supervision and ongoing oversight of its Board
of Directors or an appropriate committee thereof, to develop, implement and
maintain a comprehensive written information security program designed to ensure
the security and confidentiality of customer information, to protect against
anticipated threats or hazards to the security or integrity of such information;
and to protect against unauthorized access to or use of such information that
could result in substantial harm or inconvenience to any customer. The federal
banking regulators have issued guidance for banks on response programs for
unauthorized access to customer information. This guidance, among other things,
requires notice to be sent to customers whose “sensitive information” has been
compromised if unauthorized use of this information is “reasonably possible.”
Various states have enacted legislation concerning breaches of data security
and
various bills requiring consumer notice of data security breaches are being
considered by Congress.
Privacy.
The
GLBA
requires financial institutions to implement policies and procedures regarding
the disclosure of nonpublic personal information about consumers to
nonaffiliated third parties. In general, the statute requires financial
institutions to explain to consumers their policies and procedures regarding
the
disclosure of such nonpublic personal information, and, unless otherwise
required or permitted by law, financial institutions are prohibited from
disclosing such information except as provided in their policies and procedures.
USA
Patriot Act. The
USA
Patriot Act of 2001, designed to deny terrorists and others the ability to
obtain anonymous access to the U.S. financial system, has significant
implications for depository institutions, broker-dealers, mutual funds,
insurance companies and businesses of other types involved in the transfer
of
money. The USA Patriot Act, together with the implementing regulations of
various federal regulatory agencies, have caused financial institutions,
including banks, to adopt and implement additional, or amend existing, policies
and procedures with respect to, among other things, anti-money laundering
compliance, suspicious activity and currency transaction reporting, customer
identity verification and customer risk analysis. The statute and its underlying
regulations also permit information sharing for counter-terrorist purposes
between federal law enforcement agencies and financial institutions, as well
as
among financial institutions, subject to certain conditions, and require the
FRB
(and other federal banking agencies) to evaluate the effectiveness of an
applicant and a target institution in combating money laundering activities
when
considering applications filed under Section 3 of the BHCA or under the Bank
Merger Act. In 2006, final regulations under the USA Patriot Act were issued
requiring financial institutions, including the Bank, to take additional steps
to monitor their correspondent banking and private banking relationships as
well
as their relationships with “shell banks.” Management believes that the Company
is in compliance with all the requirements prescribed by the USA Patriot Act
and
all applicable final implementing regulations.
The
Community Reinvestment Act.
The
Community Reinvestment Act ("CRA") requires lenders to identify the communities
served by the institution's offices and other deposit taking facilities and
to
make loans and investments and provide services that meet the credit needs
of
these communities. Regulatory agencies examine each of the banks and rate such
institutions’ compliance with CRA as "Outstanding", "Satisfactory", "Needs to
Improve," or "Substantial Noncompliance". Failure of an institution to receive
at least a "Satisfactory" rating could inhibit such institution or its holding
company from undertaking certain activities, including engaging in activities
newly permitted as a financial holding company under the GLBA and acquisitions
of other financial institutions. The FRB must take into account the record
of
performance of banks in meeting the credit needs of the entire community served,
including low-and moderate-income neighborhoods. The Bank has achieved a rating
of Outstanding on its most recent examination. New Hampshire also has enacted
substantially similar community reinvestment requirements. The federal banking
agencies adopted less burdensome CRA requirements, effective in 2006, for
“intermediate - small banks,” which are banks with $250 million or more, but
less than $1 billion in total assets, under which such banks, including Northway
Bank, will be examined using only two tests, a Lending Test and a new Community
Development Test, and will be relieved of certain data collection and reporting
requirements.
Competition
The
banking industry in the United States, which includes commercial banks, savings
and loan associations, mutual savings banks, capital stock savings banks, credit
unions, and bank and savings and loan holding companies, is part of the broader
financial services industry which includes insurance companies, mutual funds,
and the brokerage industry, among others. In recent years, intense market
demands and economic pressures have eroded once clearly defined industry
classifications and have forced financial services institutions to diversify
their services, increase returns on deposits, and become more cost-effective
as
a result of competition with one another and with new types of financial
services companies, including non-bank competitors.
The
Company’s banking subsidiary faces significant competition in its markets from
commercial banks, savings banks, credit unions, consumer finance companies,
insurance companies, "non-bank banks," mutual funds, government agencies,
investment management companies, investment advisors, brokers and investment
bankers. In addition, increasing consolidation within the banking and financial
services industry, as well as increased competition from larger regional and
out-of-state banking organizations and non-bank providers of various financial
services, may adversely affect the Company’s ability to achieve its financial
goals. Federal banking laws permit adequately capitalized bank holding companies
to venture across state lines to offer banking services through bank
subsidiaries to a wider geographic market. Consequently, it is possible for
large organizations to enter many new markets including the markets served
by
the Company. Certain of these competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Company in pricing, delivery, and marketing of their products and services.
The
Company’s long-term success depends on the ability of the Company’s banking
subsidiary to compete successfully with other financial institutions in their
service areas. It is not possible to assess what impact these changes in the
regulatory environment will have on the Company. Many of these large competitors
have significantly more financial resources, larger market share and greater
name recognition in the market areas served by the Company and its banking
subsidiaries.
The
Bank
competes in this environment by providing a broad range of financial services,
competitive interest rates and a personal level of service that, combined,
tend
to retain the loyalty of its customers in its market areas against competitors
with far larger resources. To a lesser extent, convenience of branch locations
and hours of operations are also considered competitive advantages of the Bank.
Employees
As
of
December 31, 2006 the Company has 249 full-time equivalent employees. The
Company considers its employee relations to be good.
Website
Access to Company Reports
The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports are available free
of
charge on the Company’s website at www.northwaybank.com
as soon
as reasonably practicable after such material is electronically filed with
or
furnished to the Securities and Exchange Commission. Also, copies of the
Company’s annual report on Form 10-K, including the exhibits thereto, will be
made available, free of charge, upon written request.
Our
business is largely dependent upon the hospitality industry.
A
number of our loan customers are in the hospitality industry. The hospitality
industry is dependent on personal discretionary spending levels. As a result,
the hospitality industry may be adversely impacted by economic trends, including
recession and increased unemployment. Additionally, unforeseen events including
acts of terrorism, war, increases in fuel prices, travel-related accidents
and
unusual weather patterns also may adversely affect the hospitality industry.
As
a result, our business also is likely to be adversely affected by those events.
Fluctuations
in interest rates may negatively impact the business of our Bank.
Our
Bank’s main source of income from operations is net interest income, which is
equal to the difference between the interest income received on interest-earning
assets (usually loans and investment securities) and the interest expense
incurred in connection with interest-bearing liabilities (usually deposits
and
borrowings). These rates are highly sensitive to many factors beyond our
control, including general economic conditions, both domestic and foreign,
and
the monetary and fiscal policies of various governmental and regulatory
authorities. Our bank’s net interest income can be affected significantly by
changes in market interest rates. Changes in relative interest rates may reduce
our Bank’s net interest income as the difference between interest income and
interest expense decreases. As a result, our Bank’s have adopted asset and
liability management policies to minimize the potential adverse effects of
changes in interest rates on net interest income, primarily by altering the
mix
and maturity of loans, investments and funding sources. However, even with
these
policies in place, a change in interest rates can impact our results of
operations or financial condition.
An
increase in interest rates could also have a negative impact on our bank’s
results of operations by reducing the ability of borrowers to repay their
current loan obligations, which could not only result in increased loan
defaults, foreclosures and write-offs, but also necessitate further increases
in
the banks’ allowance for loan losses.
Our
allowance for loan losses may not be adequate to cover actual
losses.
We make
various assumptions and judgments about the collectibility of our loan portfolio
and provide an allowance for potential loan losses based on several factors.
If
our assumptions are incorrect, our allowance for loan losses may be insufficient
to cover our actual losses, which would have an adverse effect on our results
of
operations, and may cause us to increase the allowance in the future.
Changes
in the securities market may adversely impact our results of
operations.
In
recent years the securities market has experienced significant volatility and
will likely continue to experience volatility as a result of, among other
things, global economic and political conditions. Declines in equity prices,
as
well as declines in the performance of certain sectors or specific companies,
may result in a corresponding decline in the value of Company-held securities.
Any decline in the value of Company-held securities may decrease our earnings.
Our
loans are concentrated in certain areas of New Hampshire and adverse conditions
in those markets could adversely affect our operations. We
are
exposed to real estate and economic factors in the northern and central areas
of
New Hampshire, as virtually the entire loan portfolio is concentrated among
borrowers in these markets. Further, because a substantial portion of the loan
portfolio is secured by real estate in this area, the value of the associated
collateral is also subject to regional real estate market conditions. Adverse
economic, political or business developments or natural hazards may affect
these
areas and the ability of property owners in these areas to make payments of
principal and interest on the underlying mortgages. If these regions experience
adverse economic, political or business conditions, we would likely experience
higher rates of loss and delinquency on these mortgage loans than if the loans
were more geographically diverse.
If
we
do not maintain net income growth, the market price of our common stock could
be
adversely affected. Our
return on shareholders’ equity and other measures of profitability, which affect
the market price of our common stock, depend in part on our continued growth
and
expansion. Our growth strategy has two principal components—internal growth and
external growth. Our ability to generate internal growth is affected by the
competitive factors described below as well as by the primarily rural
characteristics and related demographic features of the markets we serve. Our
ability to continue to identify and invest in suitable acquisition candidates
on
acceptable terms is crucial to our external growth. In pursuing acquisition
opportunities, we may be in competition with other companies having similar
growth strategies. As a result, we may not be able to identify or acquire
promising acquisition candidates on acceptable terms. Competition for these
acquisitions could result in increased acquisition prices and a diminished
pool
of acquisition opportunities. An inability to find suitable acquisition
candidates at reasonable prices could slow our growth rate and have a negative
effect on the market price of our common stock.
We
experience strong competition within our markets, which may impact our
profitability. Competition
in the banking and financial services industry is strong. In our market areas,
we compete for loans and deposits with local independent banks, thrift
institutions, savings institutions, mortgage brokerage firms, credit unions,
finance companies, mutual funds, insurance companies and brokerage and
investment banking firms operating locally as well as nationally. Many of these
competitors have substantially greater resources and lending limits than those
of our subsidiaries and may offer services that our subsidiaries do not or
cannot provide. Our long-term success depends on the ability of the Bank to
compete successfully with other financial institutions in their service areas.
Because we maintain a smaller staff and have fewer financial and other resources
than larger institutions with which we compete, we may be limited in our ability
to attract customers. If we are unable to attract and retain customers, we
may
be unable to sustain growth in the loan portfolio and our results of operations
and financial condition may otherwise be negatively impacted.
Our
cost of funds for banking operations may increase as a result of general
economic conditions, interest rates and competitive pressures. Our
banking subsidiary has traditionally obtained funds principally through deposits
and borrowings. As a general matter, deposits are a less costly source of funds
than borrowings because interest rates paid for deposits are typically less
than
interest rates charged for borrowings. If, as a result of general economic
conditions, market interest rates, competitive pressures or otherwise, the
value
of deposits at our banking subsidiary decreases relative to our overall banking
operations, we may have to rely more heavily on borrowings as a source of funds
in the future.
Our
banking business is highly regulated. Bank
holding companies and state-chartered banks operate in a highly regulated
environment and are subject to supervision, regulation and examination by
various federal and state bank regulatory agencies, as well as other
governmental agencies in the states in which they operate. Federal and state
laws and regulations govern numerous matters including changes in the ownership
or control of banks and BHCs, maintenance of adequate capital and the financial
condition of a financial institution, permissible types, amounts and terms
of
extensions of credit and investments, permissible non-banking activities, the
level of reserves against deposits and restrictions on dividend payments. The
FDIC possesses cease and desist powers to prevent or remedy unsafe or unsound
practices or violations of law by banks subject to their regulation, and the
FRB
possesses similar powers with respect to BHCs. These and other restrictions
limit the manner in which we may conduct business and obtain financing. There
can be no assurance that any modification of these laws and regulations, or
new
legislation that may be enacted, in the future will not make compliance more
difficult or expensive, restrict our ability to originate, broker or sell loans
or otherwise adversely affect our operations. See “Supervision and Regulation”
on page 4 of this report.
Furthermore,
our business is also affected by the economic, fiscal and monetary policies
of
the United States and its agencies and regulatory authorities, particularly
the
FRB. The economic and fiscal policies of various governmental entities and
the
monetary policies of the FRB may affect the interest rates our bank subsidiaries
must offer to attract deposits and the interest rates they must charge on loans,
as well as the manner in which they offer deposits and make loans. These
economic, fiscal and monetary policies have had, and are expected to continue
to
have, significant effects on the operating results of depository institutions
generally, including our bank subsidiaries.
We
could be held responsible for environmental liabilities of properties we acquire
through foreclosure. If
we are
forced to foreclose on a defaulted mortgage loan to recover our investment,
we
may be subject to environmental liabilities related to the underlying real
property. Hazardous substances or wastes, contaminants, pollutants or sources
thereof may be discovered on properties during our ownership or after a sale
to
a third party. The amount of environmental liability could exceed the value
of
the real property. There can be no assurance that we would not be fully liable
for the entire cost of any removal and clean-up on an acquired property, that
the cost of removal and clean-up would not exceed the value of the property,
or
that we could recoup any of the costs from any third party.
To
the extent that we acquire other companies or branches in the future, our
business may be negatively impacted by certain risks inherent with such
acquisitions. Although
we do not have an aggressive acquisition strategy, we have acquired, and in
the
future, will continue to consider the acquisition of, branches of other
financial services companies. To the extent that we acquire branches in the
future, our business may be negatively impacted by certain risks inherent with
such acquisitions. These risks include the following:
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·
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The
risk that the acquired business will not perform in accordance with
management’s expectations;
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·
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The
risk that difficulties will arise in connection with the integration
of
the operations of the acquired business with the operation of our
businesses;
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|
·
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The
risk that management will divert its attention from other aspects
of our
business;
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·
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The
risk that we may lose key employees of the acquired business;
and
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The
risks associated with entering into geographic and product markets
in
which we have limited or no direct prior
experience.
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Due
to the nature of our business, we may be subject to litigation from time to
time, some of which may not be covered by insurance. Through
our bank subsidiary, we operate in a highly regulated industry, and as a result,
are subject to various regulations related to disclosures to our customers,
our
lending practices, and other fiduciary responsibilities. From time-to-time,
we
have been, and may become, subject to legal actions relating to our operations
that have had, or could, involve claims for substantial monetary damages.
Although we maintain insurance, the scope of this coverage may not provide
us
with full, or even partial, coverage in any particular case. As a result, a
judgment against us in any such litigation could have a material adverse effect
on our financial condition and results of operation.
Changes
in tax legislation could have a material impact on our results of operations.
Changes
in
tax legislation could have a material impact on our results of operations.
The
Company operates 20 branch offices, one commercial lending and administration
facility and one administration facility that are located in the central and
northern New Hampshire communities of Berlin, Conway (four offices), Gorham
(two
offices), Groveton, Littleton, West Ossipee, West Plymouth, Plymouth, Campton,
Ashland, North Woodstock, Tilton (two offices), Franklin, Laconia, Belmont
(two
offices), and Pittsfield. Sixteen of these offices are located on properties
the
Company owns. The Company leases six of its branches under contracts that expire
between June 30, 2007 and December 31, 2015. Furthermore, four of the leases
have an option to renew for an additional five years. Seventeen of the Company’s
branches have drive-up facilities and all are equipped with automated teller
machines.
The
Company is not a party to, nor are any of its subsidiaries the subject of,
any
material pending legal proceedings, other than ordinary routine litigation
incidental to the business.
No
matters were submitted to a vote of security holders during the quarter ended
December 31, 2006.
PART
II
The
Company’s common stock is traded on The Nasdaq Stock Market, Inc.’s National
Market under the symbol “NWFI”. The following table sets forth, for the periods
indicated, the high and low closing sale prices for the common stock, as
reported by The Nasdaq National Market, and the dividends paid on the common
stock:
|
Price
Per Share
|
Dividends
|
|||
|
Low
|
High
|
Per
Share
|
||
|
2006
|
4thQuarter
|
$32.41
|
$33.64
|
$0.20
|
|
|
3rdQuarter
|
32.41
|
34.38
|
0.20
|
|
|
2ndQuarter
|
34.72
|
38.05
|
0.20
|
|
|
1stQuarter
|
33.28
|
37.61
|
0.18
|
|
2005
|
4thQuarter
|
$31.59
|
$35.31
|
$0.18
|
|
|
3rdQuarter
|
30.27
|
35.56
|
0.18
|
|
|
2ndQuarter
|
29.61
|
33.77
|
0.18
|
|
|
1stQuarter
|
32.37
|
35.24
|
0.17
|
The
Company intends to continue to pay dividends on a quarterly basis subject to,
among other things, the financial condition and earnings of the Company, capital
requirements, and other factors, including applicable governmental regulations.
No dividends will be payable unless declared by the Board of Directors and
then
only to the extent funds are legally available for the payment of such
dividends.
On
March
1, 2007, the closing sales price of the common stock on the Nasdaq National
Market was $31.37 per share. As of such date, there were approximately 1,100
holders of record of the Company common stock.
The
following table sets forth, for the periods indicated, information regarding
stock repurchases:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plan(1)
|
|
October
1, 2006 to October 31, 2006
|
-
|
-
|
-
|
75,515
|
|
November
1, 2006 to November 30, 2006
|
-
|
-
|
-
|
75,515
|
|
December
1, 2006 to December 31, 2006
|
-
|
-
|
-
|
75,515
|
|
Total
|
-
|
-
|
-
|
(1)On
July
26, 1999, the Board of Directors authorized the repurchase of up to 175,000
shares of common stock for use in the company’s common stock repurchase program.
Under this repurchase program, the Company will repurchase shares on the open
market or in private transactions from time to time, depending on market
conditions. The repurchase program does not have an expiration
date.
The
following graph compares the cumulative total stockholder return on Northway’s
common stock (assuming $100 was invested on September 30, 1997, the date when
Northway’s common stock became publicly traded, and all dividends were
reinvested) against (i) the cumulative total return of the S&P Composite 500
Stock Index, and (ii) the NASDAQ Bank Stock Index.
|
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
|||||||||||
|
NWFI
|
$
|
115.50
|
$
|
129.67
|
$
|
129.16
|
$
|
131.97
|
$
|
131.65
|
||||||
|
S&P
500
|
90.66
|
114.58
|
124.88
|
128.63
|
146.15
|
|||||||||||
|
NASDAQ
Bank Stocks
|
107.11
|
139.17
|
154.47
|
147.77
|
164.04
|
|||||||||||
The
following table sets forth the selected consolidated financial information
of
the Company for the five years in the period ended December 31, 2006. This
selected consolidated financial information should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” appearing under Item 7 of this report and “Financial Statements and
Supplementary Data” appearing under Item 8 of this report.
|
At
or for the years ended December 31,
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
($000
Omitted, except per share data)
|
||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Total
assets
|
$
|
650,877
|
$
|
632,734
|
$
|
638,418
|
$
|
609,216
|
$
|
598,945
|
||||||
|
Securities
available-for-sale, at fair value
|
127,789
|
103,244
|
101,133
|
68,082
|
87,776
|
|||||||||||
|
Loans,
net of unearned income
|
462,230
|
460,373
|
474,706
|
473,619
|
445,773
|
|||||||||||
|
Allowance
for loan losses
|
5,581
|
5,150
|
5,204
|
5,036
|
4,920
|
|||||||||||
|
Other
real estate owned
|
-
|
196
|
-
|
175
|
22
|
|||||||||||
|
Goodwill
|
10,577
|
10,152
|
10,152
|
10,152
|
10,152
|
|||||||||||
|
Core
deposit intangibles, net
|
2,178
|
1,995
|
2,949
|
3,903
|
4,857
|
|||||||||||
|
Deposits
|
484,677
|
464,456
|
475,359
|
463,307
|
476,194
|
|||||||||||
|
Long-term
debt
|
73,620
|
105,620
|
98,620
|
87,620
|
66,620
|
|||||||||||
|
Stockholders’
equity
|
52,149
|
50,250
|
49,510
|
47,872
|
44,266
|
|||||||||||
|
Income
Statement Data:
|
||||||||||||||||
|
Net
interest and dividend income
|
$
|
22,202
|
$
|
23,176
|
$
|
22,846
|
$
|
23,050
|
$
|
21,664
|
||||||
|
Provision
for loan losses
|
465
|
75
|
495
|
805
|
900
|
|||||||||||
|
Noninterest
income
|
5,871
|
3,996
|
5,097
|
5,375
|
3,396
|
|||||||||||
|
Noninterest
expense
|
23,741
|
23,582
|
22,394
|
22,136
|
20,035
|
|||||||||||
|
Net
income
|
3,215
|
2,673
|
3,388
|
3,617
|
2,598
|
|||||||||||
|
Per
Common Share Data:
|
||||||||||||||||
|
Net
income - basic
|
$
|
2.15
|
$
|
1.78
|
$
|
2.26
|
$
|
2.40
|
$
|
1.71
|
||||||
|
Net
income - assuming dilution
|
2.14
|
1.77
|
2.24
|
2.39
|
1.71
|
|||||||||||
|
Cash
dividends declared
|
0.78
|
0.71
|
0.68
|
0.68
|
0.68
|
|||||||||||
|
Book
value
|
34.97
|
33.70
|
32.93
|
31.92
|
29.19
|
|||||||||||
|
Tangible
book value
|
26.28
|
25.39
|
24.02
|
22.30
|
19.07
|
|||||||||||
|
Selected
Ratios:
|
||||||||||||||||
|
Return
on average assets
|
0.51
|
%
|
0.43
|
%
|
0.54
|
%
|
0.59
|
%
|
0.49
|
%
|
||||||
|
Return
on average equity
|
6.24
|
5.33
|
6.97
|
7.82
|
5.86
|
|||||||||||
|
Dividend
payout
|
36.21
|
39.96
|
30.10
|
28.28
|
39.65
|
|||||||||||
|
Average
equity to average assets
|
8.12
|
7.99
|
7.75
|
7.61
|
8.33
|
|||||||||||
The
purpose of this discussion is to focus on significant changes in the financial
condition and results of operations of the Company. It is intended to supplement
and highlight information contained in the accompanying consolidated financial
statements and the selected financial data presented elsewhere in this report.
The discussion set forth below contains certain statements that may be
considered “forward-looking statements.” Forward-looking statements involve
risks, uncertainties and other factors that may cause the Company’s actual
results to materially differ from those projected in the forwarding-looking
statements. For further information regarding forward-looking statements, you
should review the discussion under the caption “FORWARD-LOOKING STATEMENTS” on
page 1 of this report.
OVERVIEW
OF PERFORMANCE
The
Company derives substantially all of its revenue and income from community
bank-related activities. The Bank operates as a typical community banking
institution and does not engage in any specialized finance or capital markets
activities. Northway functions primarily as the holder of stock of its
subsidiary and assists in the management of the operations of its subsidiary
as
appropriate.
The
principal components of the Company’s income sources are net interest and
dividend income. Net interest and dividend income is the difference between
interest, dividends and fee income received on interest earning assets, such
as
loans and investments, and the interest expense paid on interest bearing
liabilities, such as deposits and borrowed funds. Our other sources of income
include revenues from sales of securities, deposit account service fees and
fee-based services, such as debit card fees, ATM fees and alternative investment
income.
Economic
and industry factors that could cause the Company’s financial performance to
differ from expected results include changes in applicable federal and state
regulations, changes in the hospitality industry on which the Company’s business
is largely dependent, interest rate volatility, significant changes in loan
losses which may affect the Company’s allowance for loan losses and the related
provision for loan losses, and changes in the securities market that would
affect the performance of the Company’s investment portfolio. Management
evaluates each of these factors on an ongoing basis to determine their impact
and to effect any strategies necessary to mitigate these risks.
The
Company reported net income of $3,215,000, or $2.15 basic earnings per common
share, in 2006 compared to net income of $2,673,000, or $1.78 basic earnings
per
common share, in 2005 and $3,388,000, or $2.26 basic earnings per common share,
in 2004. Return on average equity was 6.24% in 2006, compared to 5.33% in 2005
and 6.97% in 2004. Return on average assets was 0.51% in 2006, compared to
0.43%
in 2005 and 0.54% in 2004.
On
April
7, 2006, the Company acquired from Washington Mutual Bank the former Providian
National Bank branches located in Tilton and Belmont, New Hampshire. This
transaction included the purchase of approximately $8,192,000 in loan balances,
net of discount, and the acquisition of deposits, net of deposit assumption
premium, totaling approximately $27,779,000, for which the Company paid a
deposit assumption premium of 6.30%. See NOTE 11 to the Consolidated Financial
Statements.
During
2006, the Company recorded a decrease in net interest and dividend income of
$974,000, as an increase in the cost of interest bearing liabilities of 0.92%
was only partially offset by an increase in the yield on earning assets of
0.65%
and an increase in average earning assets of $9,026,000. During 2006, interest
income increased $3,863,000 due primarily to an improvement in the yield on
loans as well as an increase in both the yield and average balances of
investments. Interest expense increased $4,837,000 due primarily to an increase
in interest bearing liabilities of $10,079,000 as well as a shift in liabilities
from savings and NOW accounts, a less expensive source of funds, into
certificates of deposits and securities sold under agreements to repurchase,
more costly sources of funds. The provision for loan losses increased $390,000
as the total provision for 2006 was $465,000 compared to $75,000 for 2005.
The
increase in the provision for loan losses was the result of the ongoing review
of the adequacy of the allowance for loan losses. Noninterest income, excluding
securities gains, increased $930,000 from last year due primarily to an increase
in overdraft income, debit card fees and one-time favorable items relating
to
the resolution of a significant loan relationship workout as well as unwind
fee
income from a FHLBB symmetrical advance. During 2006, the Company realized
net
securities gains of $394,000 compared to net securities losses of $551,000
for
the prior year. The 2005 net losses were the result of the restructuring of
the
investment portfolio as well as the sale of corporate bonds at a loss of
$499,000. Noninterest expense increased $159,000 over the prior year.
During
2005, the Company recorded an increase in net interest and dividend income
of
$330,000, as an increase in the average yield on earning assets of 0.33% and
an
increase in average earning assets of $2,079,000 was only partially offset
by an
increase in the cost of interest bearing liabilities of 0.31%. During 2005,
interest income increased $1,827,000 due primarily to an improvement in the
yield on loans as well as an increase in investment balances. Partially
offsetting this, interest expense increased $1,497,000 as money market and
certificates of deposit rates increased, keeping pace with the rise in interest
rates. The Company recorded a reduction in the provision for loan losses of
$420,000 as the total provision for 2005 was $75,000 compared to $495,000 for
2004. The decrease in the provision for loan losses was the result of an ongoing
review of the adequacy of the allowance for loan losses. Noninterest income,
excluding securities gains, increased $203,000 from last year due primarily
to
improvements in overdraft income, commissions on alternative investments and
debit card fees, which was partially offset by decreases in gains on sales
of
loans and loan fees. During 2005, the Company realized net securities losses
totaling $551,000 compared to net securities gains of $753,000 for the prior
year. These net losses in 2005 were the result of the restructuring of the
investment portfolio as well as the sale of corporate bonds at a loss of
$499,000. Noninterest expense increased $1,188,000 due primarily to one-time
costs of $1,161,000 associated with the merger of the two banks.
NET
INTEREST AND DIVIDEND INCOME ANALYSIS
Fluctuations
in interest rates as well as changes in volume and mix of income earning assets
and interest bearing liabilities can materially impact net interest and dividend
income, the principal source of our income. The discussion of net interest
and
dividend income is presented on a taxable equivalent basis, unless otherwise
noted, to facilitate performance comparisons among various taxable and
tax-exempt assets.
The
table
below under the caption “Consolidated Average Balances, Interest and Dividend
Income/Expense and Average Yields/Rates,” presents the average balances, income
earned or interest paid, and average yields earned or rates paid on the
Company’s assets and liabilities for the years ended December 31, 2006, 2005,
and 2004.
Net
interest and dividend income for 2006 decreased $487,000, or 2%, compared to
2005. Interest and dividend income increased $4,350,000, or 13%, in 2006
compared to 2005. Rising interest rates and a shift in the loan mix resulted
in
an improvement on the yield on loans of 0.65%. Further the average balance
on
investments increased $14,266,000 and the yield on investments increased 0.66%
resulting in an improvement in investment income of $1,419,000.
The
increase in interest income was more than offset by an increase in interest
expense of $4,837,000, or 54%, in 2006 compared to 2005. Interest expense
increased due primarily to an increase in the cost of interest bearing
liabilities of 0.92%. This increase was the result of an increase in rates
paid
on money market accounts, certificates of deposit, securities sold under
agreements to repurchase, FHLB advances and junior subordinated debentures.
These rates increased as a result of the increase in interest rates during
2006.
Further, the Company experienced a shift in liabilities from lower costing
savings and NOW accounts into money markets, certificates of deposit and
securities sold under agreements to repurchase, more expensive sources of funds.
Net
interest and dividend income for 2005 increased $489,000, or 2%, compared to
2004. Interest and dividend income increased $1,986,000, or 7%, in 2005 compared
to 2004. Rising interest rates resulted in an improvement in the yield on loans
of 0.42% which was partially offset by a decline in average balances of
$19,824,000, resulting in an increase in interest and fees on loans of $821,000.
Further, the average balance of investments increased $23,097,000 resulting
in
an improvement in investment income of $966,000.
In
2005
the increase in interest income was partially offset by an increase in interest
expense of $1,497,000, or 20%, in 2005 compared to 2004. Interest expense
increased due primarily to an increase in the cost of interest bearing
liabilities of 0.31%. This increase was the result of an increase in rates
paid
on money market accounts, certificates of deposit, securities sold under
agreements to repurchase, and junior subordinated debentures. These rates
increased as a result of the increase in general interest rates during 2005.
The
trend
in net interest and dividend income is commonly evaluated in terms of average
rates using net interest margin and interest rate spread. The net interest
margin is computed by dividing fully taxable equivalent net interest and
dividend income by average total earning assets. This ratio represents the
difference between the average yield returned on average earning assets and
the
average rate paid for all funds used to support those earning assets, including
both interest bearing and noninterest bearing sources of funds. The net interest
margin decreased 0.14% to 3.92% in 2006 after having increased 0.07% to 4.06%
in
2005. The decrease in the net interest margin for 2006 was a direct result
of
the increase in the cost of interest bearing liabilities, which increase was
only partially offset by an increase in the yield on earning assets. The
increase in the net interest margin for 2005 was a direct result of the increase
in the yield on earning assets, which increase was only partially offset by
the
increase in the cost of funds.
The
interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing liabilities. The
interest rate spread eliminates the impact of noninterest bearing funds and
gives a direct perspective on the effect of interest rate fluctuations. During
2006, the net interest rate spread decreased 0.27% to 3.53% as the cost of
interest bearing liabilities increased 0.92% and was only partially offset
by an
increase in the yield on earning assets of 0.65% During 2005, the net interest
rate spread increased 0.02% to 3.80% as the yield on earning assets increased
0.33% and was only partially offset by an increase in the cost of interest
bearing liabilities of 0.31%.
See
the
tables below under the captions “Consolidated Average Balances, Interest and
Dividend Income/Expense and Average Yields/Rates” and “Consolidated Rate/Volume
Variance Analysis” for more information.
PROVISION
FOR LOAN LOSSES
The
provision for loan losses represents the annual cost of providing an allowance
for losses inherent in the loan portfolio. The size of the provision for each
year is determined by management based upon many factors, including loan growth,
net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management’s assessment of loan portfolio quality, the value of
collateral and general economic factors.
The
provision for loan losses was $465,000 in 2006, an increase of $390,000 from
the
provision recorded in 2005. The provision for loan losses was $75,000 in 2005,
a
decrease of $420,000 from the provision recorded in 2004. The provision for
each
of the three years was 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 Company’s allowances for loan losses and such review may result in
changes to the allowance based on judgments different from those of management.
The
increase in the 2006 provision was due in large part to an increase in
commercial loans, especially large hospitality loans, which require a higher
risk weighting in the allowance for loan loss calculation. The decrease in
the
2005 provision was due in part to a reduction in average loans of $19,824,000,
which was primarily the result of a decrease in average indirect installment
loans which declined $53,234,000.
Although
management utilizes its best judgment in providing for losses, there can be
no
assurance that the Company will not have to change its provision for loan losses
in subsequent periods. Management will continue to monitor the allowance for
loan losses and modify the provision to the allowance for loan losses as
appropriate. For additional information regarding estimates in the assessment
of
the allowance for loan losses see “Application of Critical Accounting Policies”
below.
CONSOLIDATED
AVERAGE BALANCES, INTEREST AND DIVIDEND INCOME/EXPENSE
AND
AVERAGE YIELDS/RATES
($000
Omitted)
For
the
Year Ended December 31,
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
Average
Balance
|
Income/
Expense
|
Average
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Average
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Average
Yield/
Rate
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Interest
earning assets:
|
||||||||||||||||||||||||||||
|
Federal
funds sold
|
$
|
4,151
|
$
|
200
|
4.82
|
%
|
$
|
9,383
|
$
|
322
|
3.43
|
%
|
$
|
10,564
|
$
|
125
|
1.18
|
%
|
||||||||||
|
Interest
bearing deposits
|
198
|
8
|
4.04
|
130
|
3
|
2.31
|
143
|
1
|
0.70
|
|||||||||||||||||||
|
Securities
(1) (2)
|
123,599
|
6,069
|
4.91
|
109,333
|
4,650
|
4.25
|
86,236
|
3,684
|
4.27
|
|||||||||||||||||||
|
Loans,
net (3) (4)
|
463,965
|
30,690
|
6.61
|
464,041
|
27,642
|
5.96
|
483,865
|
26,821
|
5.54
|
|||||||||||||||||||
|
Total
interest earning assets (5)
|
591,913
|
36,967
|
6.25
|
582,887
|
32,617
|
5.60
|
580,808
|
30,631
|
5.27
|
|||||||||||||||||||
|
Cash
and due from banks
|
13,008
|
14,942
|
15,637
|
|||||||||||||||||||||||||
|
Allowance
for loan losses
|
(5,341
|
)
|
(5,254
|
)
|
(5,104
|
)
|
||||||||||||||||||||||
|
Premises
and equipment, net
|
12,934
|
13,453
|
13,444
|
|||||||||||||||||||||||||
|
Other
assets
|
22,071
|
21,750
|
22,574
|
|||||||||||||||||||||||||
|
Total
assets
|
$
|
634,585
|
$
|
627,778
|
$
|
627,359
|
||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Interest
bearing liabilities:
|
||||||||||||||||||||||||||||
|
Regular
savings
|
$
|
69,304
|
178
|
0.26
|
$
|
81,534
|
201
|
0.25
|
$
|
85,319
|
220
|
0.26
|
||||||||||||||||
|
NOW
and super NOW
|
85,785
|
279
|
0.33
|
96,713
|
356
|
0.37
|
97,170
|
334
|
0.34
|
|||||||||||||||||||
|
Money
market accounts
|
67,986
|
1,701
|
2.50
|
68,398
|
767
|
1.12
|
65,286
|
460
|
0.70
|
|||||||||||||||||||
|
Certificates
of deposit
|
173,706
|
6,207
|
3.57
|
135,751
|
2,769
|
2.04
|
140,614
|
2,136
|
1.52
|
|||||||||||||||||||
|
Securities
sold under agreements to repurchase
|
22,559
|
672
|
2.98
|
8,836
|
183
|
2.07
|
8,611
|
87
|
1.01
|
|||||||||||||||||||
|
FHLB
advances
|
66,408
|
2,896
|
4.36
|
84,437
|
3,189
|
3.78
|
80,744
|
3,115
|
3.86
|
|||||||||||||||||||
|
Junior
subordinated debentures
|
20,620
|
1,832
|
8.88
|
20,620
|
1,463
|
7.10
|
20,620
|
1,079
|
5.23
|
|||||||||||||||||||
|
Total
interest bearing liabilities
|
506,368
|
13,765
|
2.72
|
496,289
|
8,928
|
1.80
|
498,364
|
7,431
|
1.49
|
|||||||||||||||||||
|
Noninterest
bearing deposits
|
72,883
|
77,845
|
76,915
|
|||||||||||||||||||||||||
|
Other
liabilities
|
3,775
|
3,466
|
3,475
|
|||||||||||||||||||||||||
|
Total
liabilities
|
583,026
|
577,600
|
578,754
|
|||||||||||||||||||||||||
|
Stockholders'
equity
|
51,559
|
50,178
|
48,605
|
|||||||||||||||||||||||||
|
Total
liabilities and stockholders' equity
|
$
|
634,585
|
$
|
627,778
|
$
|
627,359
|
||||||||||||||||||||||
|
Net
interest and dividend income (6)
|
$
|
23,202
|
$
|
23,689
|
$
|
23,200
|
||||||||||||||||||||||
|
Interest
rate spread (7)
|
3.53
|
%
|
3.80
|
%
|
3.78
|
%
|
||||||||||||||||||||||
|
Net
interest margin (8)
|
3.92
|
%
|
4.06
|
%
|
3.99
|
%
|
||||||||||||||||||||||
|
(1)
|
Reported
on a tax equivalent basis. Reported interest on securities of $5,432,000,
$4,465,000 and $3,582,000 was adjusted by $637,000, $185,000 and
$102,000,
for 2006, 2005 and 2004, respectively, to reflect the tax equivalent
adjustment.
|
|
(2)
|
Average
balances are calculated using the adjusted cost
basis.
|
|
(3)
|
Reported
on a tax equivalent basis. Reported interest and fees on loans of
$30,327,000, $27,314,000 and $26,569,000 was adjusted by $364,000,
$328,000 and $252,000 for 2006, 2005 and 2004, respectively, to reflect
the tax equivalent adjustment.
|
|
(4)
|
Net
of unamortized cost/unearned income. Includes loans held for sale
and
nonperforming loans.
|
|
(5)
|
Reported
on a tax equivalent basis. Reported interest and dividend income
of
$35,967,000, $32,104,000 and $30,277,000 was adjusted by $1,000,000,
$513,000 and $354,000 for 2006, 2005 and 2004, respectively, to reflect
the tax equivalent adjustment.
|
|
(6)
|
Reported
on a tax equivalent basis. Reported net interest and dividend income
of
$22,202,000, $23,176,000 and $22,846,000 was adjusted by $1,000,000,
$513,000 and $354,000 for 2006, 2005 and 2004, respectively, to reflect
the tax equivalent adjustment.
|
|
(7)
|
Interest
rate spread equals the yield on interest earning assets minus the
rate
paid on interest bearing
liabilities.
|
|
(8)
|
The
net interest margin equals net interest and dividend income divided
by
total average interest earning
assets.
|
CONSOLIDATED
RATE/VOLUME VARIANCE ANALYSIS(1)
|
($000
Omitted)
|
|||||||||||||||||||||||||
|
2006
Compared to 2005
Increase
(Decrease) Due to Change in
|
2005
Compared to 2004
Increase
(Decrease) Due to Change in
|
||||||||||||||||||||||||
|
Volume
|
|
|
Rate
|
|
|
Mix
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Mix
|
|
|
Total
|
||||
|
Interest
and dividend income:
|
|||||||||||||||||||||||||
|
Federal
funds sold
|
$
|
(180
|
)
|
$
|
130
|
$
|
(72
|
)
|
$
|
(122
|
)
|
$
|
(14
|
)
|
$
|
238
|
$
|
(27
|
)
|
$
|
197
|
||||
|
Interest
bearing deposits
|
2
|
2
|
1
|
5
|
-
|
2
|
-
|
2
|
|||||||||||||||||
|
Securities
|
607
|
718
|
94
|
1,419
|
987
|
(16
|
)
|
(5
|
)
|
966
|
|||||||||||||||
|
Loans,
net
|
(5
|
)
|
3,053
|
-
|
3,048
|
(1,099
|
)
|
2,002
|
(82
|
)
|
821
|
||||||||||||||
|
Total
interest and dividend income
|
424
|
3,903
|
23
|
4,350
|
(126
|
)
|
2,226
|
(114
|
)
|
1,986
|
|||||||||||||||
|
Interest
expense:
|
|||||||||||||||||||||||||
|
Regular
savings
|
(30
|
)
|
8
|
(1
|
)
|
(23
|
)
|
(10
|
)
|
(9
|
)
|
-
|
(19
|
)
|
|||||||||||
|
NOW
and super NOW
|
(40
|
)
|
(42
|
)
|
5
|
(77
|
)
|
(2
|
)
|
24
|
-
|
22
|
|||||||||||||
|
Money
market accounts
|
(5
|
)
|
945
|
(6
|
)
|
934
|
22
|
272
|
13
|
307
|
|||||||||||||||
|
Certificates
of deposit
|
774
|
2,082
|
582
|
3,438
|
(74
|
)
|
732
|
(25
|
)
|
633
|
|||||||||||||||
|
Securities
sold under agreements to repurchase
|
284
|
80
|
125
|
489
|
2
|
91
|
3
|
96
|
|||||||||||||||||
|
FHLB
advances
|
(681
|
)
|
493
|
(105
|
)
|
(293
|
)
|
143
|
(66
|
)
|
(3
|
)
|
74
|
||||||||||||
|
Junior
subordinated debentures
|
-
|
369
|
-
|
369
|
-
|
384
|
-
|
384
|
|||||||||||||||||
|
Total
interest expense
|
302
|
3,935
|
600
|
4,837
|
81
|
1,428
|
(12
|
)
|
1,497
|
||||||||||||||||
|
Net
interest and dividend income
|
$
|
122
|
$
|
(32
|
)
|
$
|
(577
|
)
|
$
|
(487
|
)
|
$
|
(207
|
)
|
$
|
798
|
$
|
(102
|
)
|
$
|
489
|
||||
|
(1)
|
Reported
on a tax equivalent basis.
|
NONINTEREST
INCOME
Noninterest
income consists of revenues generated from a broad range of financial services
and activities, including fee-based services and income earned through
securities sales.
The
following table sets forth the components of the Company’s noninterest
income:
|
($000
Omitted)
Years
Ended December 31,
|
||||||||||
|
2006
|
|
|
2005
|
|
|
2004
|
||||
|
Service
charges and fees on deposit accounts
|
$
|
2,837
|
$
|
2,430
|
$
|
2,229
|
||||
|
Gain
(loss) on sales of securities available-for-sale, net
|
394
|
(551
|
)
|
753
|
||||||
|
Debit
card fees
|
557
|
456
|
372
|
|||||||
|
Gain
on sales of loans, net
|
137
|
260
|
374
|
|||||||
|
Other
|
1,946
|
1,401
|
1,369
|
|||||||
|
Total
noninterest income
|
$
|
5,871
|
$
|
3,996
|
$
|
5,097
|
||||
Fee
income from service charges and fees on deposit accounts increased 17% in 2006,
9% in 2005 and 33% in 2004. The improvement in 2006 was due primarily to an
increase in overdraft income due to a 20% increase in the insufficient funds
(“NSF”) per item fees in May 2006 as well as the impact of the two branches
acquired April 7, 2006. The improvement in 2005 was due primarily to an increase
in overdraft income due to the full year impact of the introduction of Bounce
Protection™, an overdraft privilege program, in April 2004. The improvement in
2004 was due principally to increases in the per item insufficient fund fee
as
the Company introduced new fee schedules in December 2003. In addition, 2004
overdraft income was positively impacted by the introduction of Bounce
Protection™.
During
2006, the Company recognized a net gain on sales of securities of $394,000
compared to a net loss on sales of securities of $551,000 in 2005 and a net
gain
on sales of securities of $753,000 in 2004. Securities gains in 2006 were
primarily the result of an improved equity market in 2006. Securities losses
in
2005 were primarily due to the restructuring of the investment portfolio, which
resulted in the sale of U.S. Government Agency bonds at a loss, as well as
the
sale of corporate bonds at a loss of $499,000. Securities gains in 2004 were
the
result of improved market conditions for investment securities. Securities
gains, net, in 2006 included $440,000 of net gains on sales of equity securities
compared to $117,000 and $253,000 in 2005 and 2004, respectively. Net losses
on
the sales of debt securities totaled $46,000 in 2006 compared to net losses
of
$668,000 in 2005 and net gains of $500,000 in 2004.
Debit
card fees were $557,000 in 2006 compared to $456,000 in 2005 and $372,000 in
2004. The $101,000 increase in debit card fees in 2006 and $84,000 in 2005
reflects the increase in debit card usage over the past several
years.
Gains
on
sales of loans, net, decreased $123,000 in 2006 compared to 2005 as gains on
sales of mortgage loans declined $52,000 to $77,000 and the Company recorded
no
gain on the sale of commercial loans in 2006 compared to $68,000 in 2005. Gains
on sales of loans, net, decreased $114,000 in 2005 compared to 2004. Gains
on
sales of mortgage loans remained relatively unchanged at $112,000 from the
prior
year. Gains on sales of commercial loans declined $109,000 during 2004 as the
Company sold a portfolio of commercial loans guaranteed by the Small Business
Administration for a gain of $178,000. Gains on sales of loans, net, decreased
$48,000 in 2004 compared to 2003. Gains on sales of mortgage loans decreased
$228,000 as the Company opted to retain a greater portion of fixed rate
mortgages in portfolio in 2004 compared to 2003. This was partially offset
by
the Company’s sale of a portfolio of commercial loans guaranteed by the Small
Business Administration for a gain of $178,000 in 2004.
Other
noninterest income (sources of which include credit card merchant income, ATM
fees, loan fees, safe deposit fees and commissions on alternative investment
products) increased $545,000, or 39%, to $1,946,000 in 2006 following an
increase of $32,000, or 2%, to $1,401,000 in 2005 and a decrease of $72,000,
or
5%, to $1,369,000 in 2004. The increase in 2006 was due primarily to an increase
in income from alternative investment products, an increase in the valuation
of
the cash surrender value of a company-owned life insurance and several one-time
favorable items relating to the recapture of prior years’ interest and expenses
on the payoff of a large commercial loan workout totaling $100,000, gains on
sale of OREO property of $86,000 as well as an unwind fee of $84,000 from the
redemption of a FHLBB symmetrical advance. The increase in 2005 was due
primarily to an increase in income from alternative investments products as
well
as an increase in debit card income. The decrease in 2004 compared to 2003
was
due primarily to the recognition of approximately $191,000 in other loan fees
resulting from transactions with Federal Home Loan Mortgage Corporation
(“FHLMC”). This decrease was partially offset by the introduction of alternative
investment products offered by the Company, which increased fee income by
approximately $126,000.
NONINTEREST
EXPENSE
Total
noninterest expense increased $159,000, or 1%, during 2006 following an increase
of $1,188,000, or 5%, during 2005 and an increase $258,000, or 1%, during 2004.
During 2006, noninterest expense was impacted by the expenses associated with
the acquisition of the two branches in April 2006 as well as increased fees
paid
to our outsourced marketing firm. The increase in expenses during 2005 is due
primarily to one-time expenses of $1,161,000 resulting from the merger of the
Company’s two subsidiary banks. The increase in expenses during 2004 was due
primarily to an increase in salaries and employee benefits.
The
following table sets forth information relating to the Company's noninterest
expense during the periods indicated:
|
($000
Omitted)
Years
Ended December 31,
|
||||||||||
|
2006
|
|
|
2005
|
|
|
2004
|
||||
|
Salaries
and employee benefits
|
$
|
12,252
|
$
|
11,633
|
$
|
12,058
|
||||
|
Office
occupancy and equipment
|
4,190
|
4,282
|
3,873
|
|||||||
|
Amortization
of core deposit intangibles
|
1,051
|
954
|
954
|
|||||||
|
Professional
fees
|
1,026
|
1,179
|
907
|
|||||||
|
Marketing
|
726
|
757
|
326
|
|||||||
|
Stationery
and supplies
|
365
|
647
|
429
|
|||||||
|
Telecommunications
|
455
|
619
|
595
|
|||||||
|
Other
|
3,676
|
3,511
|
3,252
|
|||||||
|
Total
noninterest expense
|
$
|
23,741
|
$
|
23,582
|
$
|
22,394
|
||||
The
merger related expenses, which totaled $1,161,000 for 2005, consisted primarily
of advertising expense of $386,000, stationery and supplies of $337,000,
equipment expense of $141,000, professional fees of $83,000, legal fees of
$81,000 and state transfer tax of $71,000. These one-time costs related to
marketing the Northway brand, replacing all existing forms, replacing all
existing signage, transfer of real estate, and all necessary legal and computer
systems issues related to the merger. These expenses are included in the table
above in the appropriate expense categories.
Salaries
and employee benefits increased $619,000, or 5%, from 2005 to 2006 and decreased
$425,000, or 4%, from 2004 to 2005. The increase in 2006 was attributable
primarily to increases in health and dental insurance, pension expense and
the
Supplemental Employee Retirement Plan (“SERP ) as well as one-time separation
expenses from the centralization of consumer lending. The decrease in 2005
was
due primarily to a focus on staffing levels, an increase in SFAS No. 91 credits
associated with deferred loan origination costs, and a decrease in the expense
related to the SERP. The increase in 2004 reflected staff additions in
connection with the expansion of the retail franchise, increased lending
activities and normal salary and wage increases. Also, during 2004, the Company
recorded a liability to deferred compensation related to the SERP. Refer to
NOTE
15 to the Consolidated Financial Statements for a further discussion regarding
the SERP.
Office
occupancy and equipment expense decreased $92,000 from 2005 to 2006. Further,
2005 included one-time merger related expenses of $141,000. The primary reason
for the decrease of $233,000, net of merger related expenses, was the decrease
in occupancy depreciation expense, leases and property maintenance partially
offset by an increase in equipment depreciation and maintenance expense. Office
occupancy and equipment expenses increased $268,000, net of merger related
expenses of $141,000, during 2005 compared to 2004. The increase in 2005 was
due
primarily to increases in building maintenance costs as well as one-time
expenses associated with the write-down of leasehold improvements associated
with the closure of two supermarket branch facilities.
The
amortization of core deposit intangibles increased $97,000 from 2005 to 2006
due
to the core deposit intangibles amortization associated with the two branches
acquired in April 2006. There was no change from 2004 to 2005.
Marketing
expense increased $355,000, net of merger related expenses of $386,000, during
2006 compared to 2005. During 2006, the Company expanded upon its relationship
with an outsourced marketing firm, in connection with an effort to increase
deposit balances. Telecommunications expenses decreased $164,000 from 2005
to
2006 due to a change in service providers.
INCOME
TAX EXPENSE
The
Company recognized $652,000, $842,000 and $1,666,000 in income tax expense
for
the years ended December 31, 2006, 2005 and 2004, respectively. The effective
tax rate was 16.9% for 2006, 24.0% for 2005 and 33.0% for 2004. For additional
information relating to income taxes, see NOTE 15 to the Consolidated Financial
Statements.
ASSETS
Total
assets increased $18,143,000, or 3%, to $650,877,000 at December 31, 2006
compared to $632,734,000 at December 31, 2005. The following is a summary of
significant balance sheet changes.
|
($000
Omitted)
December
31
|
|||||||||||||
|
2006
|
2005
|
$
Change
|
%
Change
|
||||||||||
|
Total
assets
|
$
|
650,877
|
$
|
632,734
|
$
|
18,143
|
2.9
|
%
|
|||||
|
Earning
assets
|
602,320
|
582,558
|
19,762
|
3.4
|
|||||||||
|
Federal
funds sold
|
8,755
|
14,775
|
(6,020
|
)
|
(40.7
|
)
|
|||||||
|
Securities
available-for-sale, at fair value (1)
|
131,571
|
108,785
|
22,786
|
21.0
|
|||||||||
|
Loans,
net of unamortized cost/unearned income
|
462,230
|
460,373
|
1,857
|
0.4
|
|||||||||
|
Deposits
|
484,677
|
464,456
|
20,221
|
4.4
|
|||||||||
|
Borrowings
|
110,117
|
114,983
|
(4,866
|
)
|
(4.2
|
)
|
|||||||
|
Stockholders’
equity
|
52,149
|
50,250
|
1,899
|
3.8
|
|||||||||
|
(1)
|
Includes
Federal Home Loan Bank stock
|
The
increase in earning assets of $19,762,000 was due primarily to an increase
in
securities available-for-sale partially offset by a decrease in federal funds
sold. The increase in earning assets was accompanied by an increase in deposits
which was partially offset by a decrease in borrowings.
SECURITIES
AVAILABLE-FOR-SALE
The
Company’s securities are classified into one of two categories based on
management’s intent to hold the securities: (i) “held-to-maturity” securities,
or (ii) securities “available-for-sale.” Securities designated to be
held-to-maturity are reported at amortized cost. Securities classified as
available-for-sale are required to be reported at fair value with unrealized
gains and losses, net of taxes, excluded from earnings and shown separately
as a
component of stockholders’ equity. At December 31, 2006 and 2005 the Company had
no securities designated as held-to-maturity.
The
following table summarizes the Company's securities portfolio at December 31,
2006 and 2005 showing amortized cost and fair value for each
category:
|
($000
Omitted)
December
31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
||||||||||
|
Securities
available-for-sale:
|
|||||||||||||
|
U.S.
Treasury and U.S. government agency securities
|
$
|
47,738
|
$
|
47,063
|
$
|
48,728
|
$
|
47,751
|
|||||
|
Mortgage-backed
securities
|
40,905
|
40,615
|
24,704
|
23,931
|
|||||||||
|
Collateralized
mortgage obligations
|
6
|
6
|
8
|
8
|
|||||||||
|
Marketable
equity securities
|
3,364
|
3,617
|
2,695
|
2,809
|
|||||||||
|
Corporate
bonds
|
3,517
|
3,522
|
5,541
|
5,569
|
|||||||||
|
Asset
backed securities
|
4,974
|
4,968
|
-
|
-
|
|||||||||
|
State
and political subdivision bonds and notes
|
27,784
|
27,998
|
23,396
|
23,176
|
|||||||||
|
Total
securities available-for-sale
|
$
|
128,288
|
$
|
127,789
|
$
|
105,072
|
$
|
103,244
|
|||||
Total
securities available-for-sale increased $24,545,000 during 2006 to $127,789,000
as a result of the growth in funding sources. The Company purchased
mortgage-backed securities, asset backed securities and state and political
subdivision bonds and notes.
The
net
unrealized loss on securities available-for-sale was $499,000 at December 31,
2006 compared to a net unrealized loss of $1,828,000 at December 31, 2005 due
primarily to the continued level of low interest rates, which increases the
value of our security holdings. At December 31, 2006, the net unrealized loss
on
debt securities was $752,000 and the net unrealized gain on marketable equity
securities was $253,000. At December 31, 2005, the net unrealized loss on debt
securities was $1,942,000 and the net unrealized gain on marketable equity
securities was $114,000.
At
December 31, 2006, the Company’s investment in equity securities totaled
$3,617,000. This amount is net of a market value adjustment of $253,000, of
which the full amount was reflected as a reduction in accumulated other
comprehensive loss in stockholders’ equity.
The
Company has a general policy of purchasing investment grade securities and
U.S.
government securities to minimize credit risk. All securities, however, carry
interest rate risk, which affect their market values such that as market yields
increase, the value of the Company's securities decline and vice versa.
Additionally, mortgage-backed securities carry prepayment risk whereby expected
yields may not be achieved due to the inability to reinvest proceeds from
prepayment at comparable yields. Moreover, such mortgage-backed securities
may
not benefit from price appreciation in periods of declining rates to the same
extent as the remainder of the portfolio.
A
portion
of the securities portfolio is pledged to secure public deposits, securities
sold under agreements to repurchase, FHLB advances and treasury, tax and loan
accounts. Refer to NOTE 3 to the Consolidated Financial Statements for a further
discussion of pledging of securities.
LOANS
Gross
loans increased $1,662,000, or 0.4%, to $461,951,000 at December 31, 2006
compared to December 31, 2005. This increase was due primarily to an increase
in
commercial real estate, residential real estate, commercial and installment
loans , which was partially offset by a decrease in indirect installment loans
of $33,507,000. Gross loans decreased $14,523,000, or 3%, to $460,289,000 at
December 31, 2005 compared to December 31, 2004. This decrease was due primarily
to a decrease in indirect installment loans of $54,299,000, which was partially
offset by increases in residential real estate, commercial real estate,
construction loans and installment loans. The following table presents the
composition of the loan portfolio as of December 31, 2006 and 2005:
|
($000 Omitted)
|
||||||||||||||||
|
2006
|
|
|
Percent
of
Total
|
|
|
2005
|
|
|
Percent
of
Total
|
|||||||
|
Real
estate:
|
||||||||||||||||
|
Residential
|
$
|
167,172
|
36.2
|
%
|
$
|
158,729
|
34.5
|
%
|
||||||||
|
Commercial
|
158,464
|
34.3
|
143,456
|
31.1
|
||||||||||||
|
Construction
|
10,700
|
2.3
|
13,241
|
2.9
|
||||||||||||
|
Commercial
|
33,569
|
7.3
|
27,349
|
6.0
|
||||||||||||
|
Installment
|
42,489
|
9.2
|
35,786
|
7.8
|
||||||||||||
|
Indirect
installment
|
28,714
|
6.2
|
62,221
|
13.5
|
||||||||||||
|
Other
|
20,843
|
4.5
|
19,507
|
4.2
|
||||||||||||
|
$
|
461,951
|
100.0
|
%
|
$
|
460,289
|
100.0
|
%
|
|||||||||
During
2006, the loan portfolio mix continued to shift as runoff from the indirect
installment loan portfolio was redeployed into residential real estate,
commercial real estate, commercial and installment loans. Further, during 2006
the Company purchased loans totaling $8,192,000, net of discount, as part of
the
branch acquisition. These loans were comprised of commercial real estate,
residential mortgage loans and consumer loans. Residential real estate loans
increased to account for 36.2% of the portfolio from 34.5% at December 31,
2005
due in part to the decision to retain high credit quality fixed-rate mortgages
in the portfolio rather than sell in the secondary market. Commercial real
estate and construction loans now comprise 34.3% and 2.3%, respectively of
total
loans compared to 31.1% and 2.9%, respectively at December 31, 2005 due to
the
continued efforts of our seasoned commercial lenders. Installment loans comprise
9.2% of the loan portfolio compared to 7.8% a year ago due primarily to an
increase in fixed rate home improvement loans. Indirect installment loans,
which
originations were discontinued in August 2004, now comprise 6.2% of total loans
compared to 13.5% at December 31, 2005.
Commercial
real estate loans consist of loans secured by income producing and
owner-occupied commercial real estate and commercial loans consist of loans
that
are either unsecured or are secured by inventories, receivables or other
corporate assets, and some are additionally secured by a guarantee of the
federal Small Business Administration. Commercial real estate and commercial
loans increased by $21,228,000 in 2006 as compared to 2005. The Company
continues to emphasize commercial real estate and commercial loans in order
to
enhance earnings and maintain the balance of its portfolio.
Residential
real estate loans increased by $8,443,000, a 5% increase from 2005, compared to
an increase of $11,396,000, or 8%, in 2005 compared to 2004. The Company
originates both fixed-rate and adjustable-rate residential loans for its
portfolio. Some fixed-rate residential loans are originated for sale to
investors in the secondary market. The increase in residential real estate
loans
in 2006 resulted primarily from the Company’s decision to retain a greater
percentage of fixed-rate residential mortgage loans.
During
2006, installment loan balances increased $6,703,000, or 19%, from 2005,
compared to an increase of $6,441,000, or 22%, in 2005 compared to 2004.
Indirect installment loans decreased by $33,507,000, or 54%, in 2006 compared
to
a decrease of $54,299,000, or 47%, in 2005.
NONPERFORMING
ASSETS
Nonperforming
assets were $3,714,000, or 0.57%, of total assets, at December 31, 2006 compared
to $3,321,000, or 0.53% of total assets, at December 31, 2005, an increase
of
$393,000, or 12%. Nonperforming assets are comprised primarily of nonaccrual
loans, other chattels owned and real estate acquired by foreclosure or a similar
conveyance of title. The accrual of interest on a loan is discontinued when
there is reasonable doubt as to its collectibility or whenever the payment
of
principal or interest is more than 90 days past due. However, there are loans
within this nonaccrual classification that provide periodic payments, but which
have a weakness with respect to the collateral securing the loan.
At
December 31, 2006, nonaccrual loans totaled $3,698,000, or 0.80% of total loans,
compared to $3,013,000, or 0.66% of total loans, in 2005. At December 31, 2006
the Company had no other real estate owned compared to $196,000 at December
31,
2005 Other chattels owned decreased $96,000 to $16,000 at December 31, 2006
compared to $112,000 at December 31, 2005.
At
December 31, 2006, gross interest income that would have been recorded for
the
year had the loans been current in accordance with their original terms totaled
approximately $393,000. During the year ended December 31, 2006, the Company
recognized interest income on these non-accrual loans of $353,000.
ALLOWANCE
FOR LOAN LOSSES
The
Company maintains an allowance for loan losses to absorb losses inherent in
the
existing loan portfolio. When a loan, or portion thereof, is considered
uncollectible, it is charged against the allowance. Recoveries of amounts
previously charged-off are added to the allowance when collected. The adequacy
of the allowance for loan losses is evaluated on a regular basis by management.
Factors considered in evaluating the adequacy of the allowance include previous
loss experience, current economic conditions and their effect on borrowers
and
the market area in general, and the performance of individual credits in
relation to the contract terms. In addition various federal and state regulatory
agencies, as an integral part of their examination process, periodically review
the adequacy of the Company’s allowance for loan losses. For additional
information regarding estimates in the assessment of the allowance for loan
losses see “Application of Critical Accounting Policies-Allowance for Loan
Losses” below.
The
Company’s allowance for loan losses increased $431,000 from December 31, 2005 to
$5,581,000, or 1.21% of total loans, at December 31, 2006.
The
following table sets forth the activity of the allowance for loan losses for
the
periods indicated:
|
($000
Omitted)
Years
Ended December 31,
|
||||||||||
|
2006
|
|
|
2005
|
|
|
2004
|
||||
|
Beginning
allowance
|
$
|
5,150
|
$
|
5,204
|
$
|
5,036
|
||||
|
Provision
for loan losses
|
465
|
75
|
495
|
|||||||
|
Loans
charged-off
|
(332
|
)
|
(415
|
)
|
(665
|
)
|
||||
|
Recoveries
on loans previously charged-off
|
298
|
286
|
338
|
|||||||
|
Net
charge-offs
|
(34
|
)
|
(129
|
)
|
(327
|
)
|
||||
|
Ending
allowance
|
$
|
5,581
|
$
|
5,150
|
$
|
5,204
|
||||
|
Allowance
as a percentage of loans outstanding
|
1.21
|
%
|
1.12
|
%
|
1.10
|
%
|
||||
|
Allowance
as a percentage of nonperforming loans
|
150.92
|
170.93
|
181.51
|
|||||||
|
Net
charge-offs as a percentage of average loans
|
0.01
|
0.03
|
0.07
|
|||||||
DEPOSITS
Total
deposits at December 31, 2006 were $484,677,000, an increase of $20,221,000,
or
4%, compared to $464,456,000 at December 31, 2005. The increase in deposits
was
due primarily to the deposits acquired, net of premium, of $29,438,000 in April
2006. Certificates of deposit increased $46,610,000 and were partially offset
by
decreases in demand, savings, NOW and money market deposits of $26,389,000.
The
following table sets forth the components of deposits for the periods
indicated:
|
($000
Omitted)
December
31,
|
|||||||
|
2006
|
|
|
2005
|
||||
|
Demand
|
$
|
72,054
|
$
|
77,436
|
|||
|
Regular
savings, NOW and
money market
|
217,682
|
238,689
|
|||||
|
Time
|
194,941
|
148,331
|
|||||
|
Total
deposits
|
$
|
484,677
|
$
|
464,456
|
|||
At
December 31, 2006, time deposits of $100,000 or more are scheduled to mature
as
follows:
|
($000
Omitted)
|
||||
|
3
months or less
|
$
|
17,084
|
||
|
Over
3 to 6 months
|
24,461
|
|||
|
Over
6 to 12 months
|
13,054
|
|||
|
Over
12 months
|
1,077
|
|||
|
$
|
55,676
|
|||
BORROWINGS
At
December 31, 2006 short-term borrowings consisted of securities sold under
agreements to repurchase of $36,497,000 compared to $9,363,000 for 2005.
Long-term
debt in 2006 consists of FHLB term advances of $53,000,000 as well as
$20,620,000 of junior subordinated debentures, compared to $85,000,000 of FHLB
term advances and $20,620,000 of junior subordinated debentures in 2005. Two
of
the long-term term FHLB advances are callable quarterly with their next call
dates in March and December 2007. The decrease in FHLB advances is the result
of
the maturity and redemption of $56,000,000 in advances partially offset by
new
advances totaling $24,000,000.
Junior
subordinated debentures consist of two issues of floating rate trust preferred
securities acquired during April and July 2002 in the amount of $7,217,000
and
$13,403,000, respectively, due in 2032. These trust preferred securities were
offered for the purpose of providing capital to the subsidiary bank to ensure
adequate capital following branch acquisitions and for general corporate
purposes. As of December 31, 2006, of the $20,620,000 principal amount
outstanding, $17,209,000 qualified as Tier 1 capital and $3,411,000 was
allocated to Tier 2 capital.
See
NOTES
9 and 10 to the Consolidated Financial Statements for additional information
regarding the Company’s borrowings.
The
following table sets forth certain information concerning the Company’s
borrowings at the dates indicated:
|
($000
Omitted)
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Short-term
borrowings
|
$
|
36,497
|
$
|
9,363
|
|||
|
Long-term
debt
|
73,620
|
105,620
|
|||||
|
$
|
110,117
|
$
|
114,983
|
||||
At
December 31, 2006, long-term debt is scheduled to mature as
follows:
|
($000
Omitted)
|
||||
|
Less
than one year
|
$
|
13,000
|
||
|
After
one year through three years
|
19,000
|
|||
|
After
three year through five years
|
7,000
|
|||
|
Over
five years
|
34,620
|
|||
|
$
|
73,620
|
|||
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and
to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet.
The
amounts of those instruments reflect the extent of involvement the Company
has
in particular classes of financial instruments.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters
of
credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for balance sheet instruments.
Financial
instruments with off-balance sheet credit risk at December 31, 2006 and 2005
totaled $92,220,000 and $81,970,000, respectively.
See
NOTE
17 to the Consolidated Financial Statements for additional information regarding
off-balance sheet arrangements.
CAPITAL
The
Company's stockholders’ equity serves to support growth and provide depositors
and other creditors protection against loss. Equity capital represents the
stockholders’ investment in the Company. Management strives to maintain an
optimal level of capital on which an attractive return to the stockholders
will
be realized over both the short-term and long-term, while serving depositors’
and creditors’ needs.
The
Company must also observe the minimum requirements enforced by the federal
banking regulators. There are three capital requirements that banks and bank
holding companies must meet: Tier 1 capital, total capital (combination of
Tier
1 capital and Tier 2 capital), and leverage (Tier 1 capital to average assets)
ratios. Tier 1 capital consists of stockholders’ equity, net of intangible
assets as well as a portion of junior subordinated debentures. Tier 2 capital
consists of a limited amount of allowance for loan losses and the portion of
junior subordinated debentures not allocated to Tier 1 capital. Tier 1 capital,
total capital and leverage ratios do not include any adjustments for unrealized
gains and losses relating to securities available-for-sale except net unrealized
losses relating to marketable equity securities. The minimum requirements for
the leverage ratio, risk-based Tier 1 capital and risk-based total capital
are
4%, 4% and 8%, respectively. As of December 31, 2006 and 2005, the Bank was
“well capitalized” as defined under FDIC regulations.
The
following table sets forth the Company’s risk-based capital and leverage
ratios:
|
($000
Omitted)
December
31,
|
||||||||||
|
2006
|
2005
|
|||||||||
|
Risk-adjusted
assets
|
$
|
416,735
|
$
|
426,731
|
||||||
|
Tier
1 capital (to average assets)
|
9.31
|
%
|
8.96
|
%
|
||||||
|
Tier
1 capital (to risk weighted assets)
|
14.02
|
13.07
|
||||||||
|
Total
capital (to risk weighted assets)
|
15.95
|
15.24
|
||||||||
Total
stockholders’ equity includes a $1,256,000 negative adjustment for accumulated
other comprehensive loss, net of tax, at December 31, 2006 and a $1,104,000
negative adjustment for accumulated other comprehensive loss, net of tax, at
December 31, 2005. At December 31, 2006 this adjustment was comprised of a
net
unrealized loss on securities available-for-sale, net of taxes, of $301,000,
a
$1,382,000 unrealized loss on pension valuation, net of tax and a $427,000
unrealized credit on prior pension service cost. At December 31, 2005, this
adjustment was comprised solely of a net unrealized loss on securities
available-for-sale, net of taxes.
The
Company intends to continue to pay dividends on a quarterly basis subject to
the
financial condition and earnings of the Company, capital requirements, and
other
factors, including applicable governmental regulations. No dividends will be
payable unless declared by the Board of Directors and then only to the extent
funds are legally available for the payment of such dividends.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
The
Company’s accounting policies are more fully described in NOTE 1 of the
Consolidated Financial Statements. As disclosed in NOTE 1, the preparation
of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions about future events that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ significantly from those estimates. The Company
believes that the following discussion addresses the Company’s most critical
accounting policies, which are those that are most important to the portrayal
of
the Company’s financial condition and results of operations and require
management’s most difficult, subjective and complex judgments.
Allowance
for Loan Losses.
The
allowance for loan losses, which is established through a charge to the
provision for loan losses, is estimated at the Bank based on estimates of losses
related to customer loan balances. In establishing the appropriate provisions,
the Company makes assumptions with respect to the future collectibility of
customer loan balances. The Company’s assumptions are based on an individual
assessment of the customer’s credit quality as well as subjective factors and
trends, including the credit rating of the loans. Generally, these individual
credit assessments occur prior to the inception of the credit exposure and
at
regular reviews during the life of the exposure and consider (a) the customer’s
ability to meet and sustain their financial commitments; (b) a customer’s
current and projected financial condition; (c) the positive or negative effects
of the current and projected industry outlook; and (d) the economy in general.
Once the Company considers all of these factors, a determination is made as
to
the probability of default. An appropriate provision is made, which takes into
account the severity of the likely loss on the outstanding loan balances based
on the Company’s experience in collecting these amounts. The Company’s level of
allowance for loan losses fluctuates depending upon all of the factors mentioned
above. The use of different estimates or assumptions could produce different
provisions for loan losses.
Goodwill
and Core Deposit Intangibles.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets.”
Under SFAS No. 142, the Company is required to perform annual impairment tests
of its goodwill and intangible assets and more frequently in certain
circumstances. The Company has elected to test for goodwill and intangible
asset
impairment in the fourth quarter of each year. In that goodwill is carried
on
the books of the Bank and the Company owns 100% of its outstanding stock, there
is no market value for its common stock. The Company utilizes a multiple of
earnings approach in analyzing the valuation of goodwill. Core deposit
intangibles are carried on the books of the Bank as well. The valuation of
core
deposit intangibles incorporate deposits acquired compared with current deposit
levels, considers deposit outflow assumptions made at acquisition as well as
other factors.
The
most
recent impairment test of goodwill and core deposit intangibles indicated that
no adjustments were required. The Company cannot predict the occurrence of
certain future events that might adversely affect the reported value of goodwill
and core deposit intangibles that totaled $10,577,000 and $2,178,000,
respectively, at December 31 2006. Such events include, but are not limited
to,
strategic decisions made in response to economic and competitive conditions,
the
impact of the economic environment on the Company’s customer base, or the impact
of changes in federal and state laws and regulations.
Pension
Benefits.
The
Company maintains a trusteed non-contributory pension plan (the “Plan”) covering
substantially all full-time employees. Several statistical and other factors,
which attempt to anticipate future events, are used in calculating the expense
and liability related to the Plan. Key factors include assumptions about the
expected rates of return on plan assets and discount rates. The Company
considers market conditions, including changes in investment returns and
interest rates, in making these assumptions.
The
Company determines the expected long-term rate of return on plan assets based
on
the building block method, which consists of aggregating the expected rates
of
return for each component of the plan’s asset mix. Plan assets are comprised
primarily of mutual funds including bond funds, US equity funds, international
equity funds, real estate funds and short-term money market funds. The Company
uses historic plan asset returns combined with current market conditions to
estimate the rate of return. The expected rate of return on plan assets is
a
long-term assumption and generally does not change annually. The discount rate
reflects the market rate for high-quality fixed income debt instruments on
the
Company’s annual measurement date (December 31) and is subject to change each
year.
Unrecognized
actuarial gains and losses are being recognized to net periodic pension expense
over approximately
a 17-year period,
which
represents the expected remaining service life of the employee group.
Unrecognized actuarial gains and losses arise from several factors including
experience and assumption changes in the obligations and from the difference
between expected returns and actual returns on plan assets. These unrecognized
losses will be systematically recognized as an increase in future net periodic
pension expense and a decrease in accumulated other comprehensive loss in
accordance with FAS 87, “Employers’ Accounting for Pensions, ” as amended by
SFAS 158, “Employer’s Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R).”
The
actuarial assumptions used by the Company in determining its pension benefits
may differ materially from actual results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or shorter life spans
of
the participants. While the Company believes that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may
materially affect the Company’s financial position or results of
operations.
Mortgage
Servicing Rights (MSR or MSRs).
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into noninterest income
in
proportion to, and over the period of, the estimated future net servicing income
of the underlying financial assets. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and original loan terms (primarily
15
and 30 year). Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. In periods of falling market interest rates,
accelerated loan prepayment speeds can adversely impact the fair value of these
mortgage-servicing rights relative to their book value. In the event that the
fair value of these assets were to increase in the future, the Company can
recognize the increased fair value to the extent of the impairment allowance
but
cannot recognize an asset in excess of its amortized book value. When the book
value of an individual stratum exceeds its fair value, an impairment reserve
must be recognized. Future changes in management's assessment of the impairment
of these servicing assets, as a result of changes in observable market data
relating to market interest rates, loan prepayment speeds, and other factors,
could impact the Company's financial condition and results of operations either
positively or adversely.
MARKET
RISK
Market
risk is the risk of loss in a financial instrument arising from adverse changes
in market rates and prices, such as interest rates, foreign currency exchange
rates, commodity prices and equity prices. The Company’s primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies established by the Company’s Boards of
Directors that are reviewed and approved annually. The Board of Directors
delegates responsibility for carrying out the asset/liability management
policies to the Company's Asset Liability Committee (“ALCO”). In this capacity
ALCO develops guidelines and strategies impacting the Company's asset/liability
management-related activities based upon estimated market risk sensitivity,
policy limits and overall market interest rate levels/trends.
Interest
Rate Risk
Interest
rate risk represents the sensitivity of earnings to changes in market interest
rates. As interest rates change, the interest income and interest expenses
associated with the Company's financial instruments also change, thereby
impacting net interest income ("NII"), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling 2-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk.
The
simulation model captures the impact of changing interest rates on the interest
income received and interest expense paid on all interest-earning assets and
interest--bearing liabilities reflected on the Company's balance sheet. The
Company uses computer simulations to determine the impact on net interest income
of various interest rate scenarios, balance sheet trends and strategies. These
simulations incorporate assumptions about balance sheet dynamics such as loan
and deposit growth, loan and deposit pricing, changes in funding mix, and asset
and liability repricing and maturity characteristics. Simulations based on
numerous assumptions are run under various interest rate scenarios to determine
the impact on net interest income and capital. From these scenarios, interest
rate risk is quantified and appropriate strategies are developed and
implemented.
This
sensitivity analysis is compared to ALCO policy limits which specify a maximum
tolerance level for NII exposure over a 1-year horizon given both an immediate
300 basis point, or 3%, upward and downward shift in interest rates. Given
the
current level of interest rates, the Company has modeled an upward shift in
rates of 200 basis points and a downward shift in rates of 200 basis points.
Using an immediate rate shock simulation where interest rates increase 200
basis
points, the December 31, 2006 earnings simulation model projects that net
interest income for the twelve months ending December 31, 2007 would decrease
by
an amount equal to approximately 7.33%. In addition, utilizing an immediate
rate
shock simulation where interest rates decrease 200 basis points, the December
31, 2006 earnings simulation model projects that net interest income for the
twelve months ending December 31, 2007 would increase by an amount equal to
approximately 1.06%.
Using
an
immediate rate shock simulation where interest rates increase 200 basis points,
the December 31, 2006 earnings simulation model projects that net interest
income for the twelve months ending December 31, 2008 would decrease by an
amount equal to approximately 4.57%. In addition, utilizing an immediate rate
shock simulation where interest rates decrease 200 basis points, the December
31, 2006 earnings simulation model projects that net interest income for the
twelve months ending December 31, 2008 would decrease by an amount equal to
approximately 6.44%. The projected results are within Company’s ALCO policy
limits for both years.
The
preceding sensitivity analysis does not represent a Company forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including, among
others, the nature and timing of interest rate levels, yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions
on
loans and deposits, and reinvestment/replacement of asset and liability
cashflows-. The assumptions differed in each of the periods included in the
sensitivity analysis above. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances
as
to the predictive nature of these assumptions, including how customer
preferences or competitor influences might change.
The
most
significant factors affecting the changes in market risk exposure during 2006
compared to 2005 was the decrease in interest rates, changes in the yield curve,
the shift in loan mix from indirect installment loans to commercial and
commercial real estate loans, the aggregate increase in securities
available-for-sale, the increase in total deposits, and increase in short-term
borrowings and the decrease in long-term debt.
LIQUIDITY
RISK
Liquidity
risk management involves the Company’s ability to raise funds in order to meet
its existing and anticipated financial obligations. These obligations are the
withdrawal of deposits on demand or at contractual maturity, the repayment
of
debt as it matures, the ability to fund new and existing loan commitments and
the ability to take advantage of 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 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 ALCO. At
the
bank level, liquidity is managed by measuring the net amount of marketable
assets after deducting pledged assets, plus lines of credit, primarily with
the
FHLB, which are available to fund liquidity requirements. Management then
measures the adequacy of that aggregate amount relative to the aggregate amount
of liabilities deemed to be sensitive or volatile. These include brokered
deposits, deposits in excess of $100,000, term deposits with short maturities,
and credit commitments outstanding.
Additionally,
the Company requires cash for various operating needs including dividends to
stockholders, the purchase of treasury stock, capital injections to the Bank,
and the payment of general corporate expenses. The primary sources of liquidity
for the Company are dividends from the Bank and reimbursement for services
performed on behalf of the Bank. Additionally, the Company may utilize outside
sources of funding such as the issuance of the trust preferred
securities.
Cash
and
cash equivalents decreased $4,554,000 during 2006. Cash used in investing
activities totaled $22,503,000 with lending activities using $1,188,000, net,
and investment activities using $17,874,000, net. Cash provided by financing
activities totaled $12,532,000. This cash consisted of an increase in deposits
of $18,562,000, an increase in repurchase agreements of $27,134,000, advances
of
$24,000,000 from the FHLB advances offset by the repayment of maturing FHLB
advances and redemption of FHLB advances in the amount of $56,000,000. The
net
cash provided by operating activities totaled $5,417,000 and consisted primarily
of net income of $3,215,000 and a decrease in other assets and other
liabilities, net.
CAPITAL
EXPENDITURES AND COMMITMENTS
During
2006, the Company incurred approximately $3,441,000 in capital expenditures,
which included real estate acquired in the branch acquisition, significant
building improvements at several of our branch locations, the purchase of remote
capture software to allow for more efficient processing of daily work, and
normal replacement of, or upgrades in, existing property and
equipment.
During
2005, the Company incurred approximately $1,257,000 in capital expenditures,
which included new signage related to the name change and merger of PNB into
the
Bank, ATM upgrades, security camera upgrades, renovations to the Belmont
facility, renovations to the Berlin facility due to the relocation of item
processing, as well as the normal replacement of, or upgrades in, existing
property and equipment. During 2005, the Company disposed of assets with a
total
net book value of approximately $1,747,000, which consisted primarily of the
West Plymouth branch facility.
The
Company’s estimated capital expenditures for 2007 total $600,000. They include
network upgrades, ATM purchases and various equipment and software
upgrades.
CONTRACTUAL
OBLIGATIONS
The
table
below contains information on the Company’s contractual obligations as of the
fiscal year ended December 31, 2006:
|
($000
Omitted)
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
|
|
Less
Than
One
Year
|
|
|
One
to Three
Years
|
|
|
Three
to Five
Years
|
|
|
More
than
Five
Years
|
|||
|
FHLB
advances
|
$
|
53,000
|
$
|
13,000
|
$
|
19,000
|
$
|
7,000
|
$
|
14,000
|
||||||
|
Junior
subordinated debentures
|
20,620
|
-
|
-
|
-
|
20,620
|
|||||||||||
|
Total
|
$
|
73,620
|
$
|
13,000
|
$
|
19,000
|
$
|
7,000
|
$
|
34,620
|
||||||
Information
regarding quantitative and qualitative disclosures about market risk is included
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” appearing under Item 7 of this report and is hereby incorporated by
reference in this Item 7A.
CONSOLIDATED
STATEMENTS OF INCOME
|
($000
Omitted, Except Per Share Data)
|
||||||||||
|
FOR
THE YEAR ENDED DECEMBER 31,
|
2006
|
|
|
2005
|
|
|
2004
|
|||
|
Interest
and dividend income
|
||||||||||
|
Interest
and fees on loans
|
$
|
30,327
|
$
|
27,314
|
$
|
26,569
|
||||
|
Interest
on debt securities available-for-sale:
|
||||||||||
|
Taxable
|
3,946
|
3,843
|
3,201
|
|||||||
|
Tax-exempt
|
1,149
|
299
|
142
|
|||||||
|
Dividends
|
337
|
323
|
239
|
|||||||
|
Interest
on federal funds sold
|
200
|
322
|
125
|
|||||||
|
Interest
on interest-bearing deposits
|
8
|
3
|
1
|
|||||||
|
Total
interest and dividend income
|
35,967
|
32,104
|
30,277
|
|||||||
|
Interest
expense
|
||||||||||
|
Interest
on deposits
|
8,365
|
4,092
|
3,150
|
|||||||
|
Interest
on short-term borrowings
|
811
|
257
|
110
|
|||||||
|
Interest
on long-term debt
|
4,589
|
4,579
|
4,171
|
|||||||
|
Total
interest expense
|
13,765
|
8,928
|
7,431
|
|||||||
|
Net
interest and dividend income
|
22,202
|
23,176
|
22,846
|
|||||||
|
Provision
for loan losses
|
465
|
75
|
495
|
|||||||
|
Net
interest and dividend income after provision for loan
losses
|
21,737
|
23,101
|
22,351
|
|||||||
|
Noninterest
income
|
||||||||||
|
Service
charges and fees on deposit accounts
|
2,837
|
2,430
|
2,229
|
|||||||
|
Gain
(loss) on sales of securities available-for-sale, net
|
394
|
(551
|
)
|
753
|
||||||
|
Debit
card fees
|
557
|
456
|
372
|
|||||||
|
Gain
on sales of loans, net
|
137
|
260
|
374
|
|||||||
|
Other
|
1,946
|
1,401
|
1,369
|
|||||||
|
Total
noninterest income
|
5,871
|
3,996
|
5,097
|
|||||||
|
Noninterest
expense
|
||||||||||
|
Salaries
and employee benefits
|
12,252
|
11,633
|
12,058
|
|||||||
|
Office
occupancy and equipment
|
4,190
|
4,282
|
3,873
|
|||||||
|
Amortization
of core deposit intangibles
|
1,051
|
954
|
954
|
|||||||
|
Other
|
6,248
|
6,713
|
5,509
|
|||||||
|
Total
noninterest expense
|
23,741
|
23,582
|
22,394
|
|||||||
|
Income
before income tax expense
|
3,867
|
3,515
|
5,054
|
|||||||
|
Income
tax expense
|
652
|
842
|
1,666
|
|||||||
|
Net
income
|
$
|
3,215
|
$
|
2,673
|
$
|
3,388
|
||||
|
Basic
earnings per common share
|
$
|
2.15
|
$
|
1.78
|
$
|
2.26
|
||||
|
Earnings
per common share assuming dilution
|
$
|
2.14
|
$
|
1.77
|
$
|
2.24
|
||||
See
Notes
to Consolidated Financial Statements
CONSOLIDATED
BALANCE SHEETS
|
($000
Omitted)
|
|||||||
|
AS
OF DECEMBER 31,
|
2006
|
|
|
2005
|
|||
|
Assets
|
|||||||
|
Cash
and cash equivalents
|
|||||||
|
Cash
and due from banks and interest-bearing deposits
|
$
|
16,053
|
$
|
14,587
|
|||
|
Federal
funds sold
|
8,755
|
14,775
|
|||||
|
Total
cash and cash equivalents
|
24,808
|
29,362
|
|||||
|
Securities
available-for-sale, at fair value
|
127,789
|
103,244
|
|||||
|
Federal
Home Loan Bank stock
|
3,782
|
5,541
|
|||||
|
Loans
held-for-sale
|
263
|
453
|
|||||
|
Loans,
net before allowance for loan losses
|
462,230
|
460,373
|
|||||
|
Less:
allowance for loan losses
|
5,581
|
5,150
|
|||||
|
Net
loans
|
456,649
|
455,223
|
|||||
|
Premises
and equipment, net
|
13,749
|
11,735
|
|||||
|
Other
real estate owned
|
-
|
196
|
|||||
|
Goodwill
|
10,577
|
10,152
|
|||||
|
Core
deposit intangibles, net
|
2,178
|
1,995
|
|||||
|
Other
assets
|
11,082
|
14,833
|
|||||
|
Total
assets
|
$
|
650,877
|
$
|
632,734
|
|||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Liabilities
|
|||||||
|
Deposits
|
|||||||
|
Demand
|
$
|
72,054
|
$
|
77,436
|
|||
|
Regular
savings, NOW and money market deposit accounts
|
217,682
|
238,689
|
|||||
|
Certificates
of deposit (in denominations of $100,000 or more)
|
55,676
|
28,297
|
|||||
|
Other
time
|
139,265
|
120,034
|
|||||
|
Total
deposits
|
484,677
|
464,456
|
|||||
|
Short-term
borrowings
|
36,497
|
9,363
|
|||||
|
Long-term
debt
|
73,620
|
105,620
|
|||||
|
Other
liabilities
|
3,934
|
3,045
|
|||||
|
Total
liabilities
|
598,728
|
582,484
|
|||||
|
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 shares
issued and 1,491,174 shares outstanding in 2006 and 2005
|
1,732
|
1,732
|
|||||
|
Surplus
|
2,064
|
2,064
|
|||||
|
Retained
earnings
|
56,140
|
54,089
|
|||||
|
Treasury
stock (240,795 shares at December 31, 2006 and 2005)
|
(6,531
|
)
|
(6,531
|
)
|
|||
|
Accumulated
other comprehensive loss, net of tax
|
(1,256
|
)
|
(1,104
|
)
|
|||
|
Total
stockholders’ equity
|
52,149
|
50,250
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
650,877
|
$
|
632,734
|
|||
See
Notes
to Consolidated Financial Statements
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
($000
Omitted)
|
|||||||||||||||||||
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)¹
|
|
|
Total
Stockholders'
Equity
|
||||
|
Balance
at December 31, 2003
|
$
|
1,732
|
$
|
2,088
|
$
|
50,116
|
$
|
(6,213
|
)
|
$
|
149
|
$
|
47,872
|
||||||
|
Net
income - 2004
|
-
|
-
|
3,388
|
-
|
-
|
3,388
|
|||||||||||||
|
Net
change in unrealized gain (loss) on securities available-for-sale,
net of
tax
|
-
|
-
|
-
|
-
|
(889
|
)
|
(889
|
)
|
|||||||||||
|
Net
change in unfunded pension accumulated benefit obligation, net of
tax
|
-
|
-
|
-
|
-
|
49
|
49
|
|||||||||||||
|
Exercise
of stock options, net of tax benefit
|
-
|
(13
|
)
|
-
|
123
|
-
|
110
|
||||||||||||
|
Cash
dividends declared ($0.68 per share)
|
-
|
-
|
(1,020
|
)
|
-
|
-
|
(1,020
|
)
|
|||||||||||
|
Balance
at December 31, 2004
|
1,732
|
2,075
|
52,484
|
(6,090
|
)
|
(691
|
)
|
49,510
|
|||||||||||
|
Net
income - 2005
|
-
|
-
|
2,673
|
-
|
-
|
2,673
|
|||||||||||||
|
Net
change in unrealized loss on securities available-for-sale, net of
tax
|
-
|
-
|
-
|
-
|
(1,085
|
)
|
(1,085
|
)
|
|||||||||||
|
Net
change in unfunded pension accumulated benefit obligation, net of
tax
|
-
|
-
|
-
|
-
|
672
|
672
|
|||||||||||||
|
Exercise
of stock options, net of tax benefit
|
-
|
(11
|
)
|
-
|
122
|
-
|
111
|
||||||||||||
|
Treasury
stock purchased
|
-
|
-
|
-
|
(563
|
)
|
-
|
(563
|
)
|
|||||||||||
|
Cash
dividends declared ($0.71 per share)
|
-
|
-
|
(1,068
|
)
|
-
|
-
|
(1,068
|
)
|
|||||||||||
|
Balance
at December 31, 2005
|
1,732
|
2,064
|
54,089
|
(6,531
|
)
|
(1,104
|
)
|
50,250
|
|||||||||||
|
Net
income - 2006
|
-
|
-
|
3,215
|
-
|
-
|
3,215
|
|||||||||||||
|
Net
change in unrealized loss on securities available-for-sale, net of
tax
|
-
|
-
|
-
|
-
|
803
|
803
|
|||||||||||||
|
Net
change in unrecognized loss on pension valuation, net of
tax
|
-
|
-
|
-
|
-
|
(1,382
|
)
|
(1,382
|
)
|
|||||||||||
|
Net
change in unrecognized pension prior service credit, net of tax
|
-
|
-
|
-
|
-
|
427
|
427
|
|||||||||||||
|
Cash
dividends declared ($0.78 per share)
|
-
|
-
|
(1,164
|
)
|
-
|
-
|
(1,164
|
)
|
|||||||||||
|
Balance
at December 31, 2006
|
$
|
1,732
|
$
|
2,064
|
$
|
56,140
|
$
|
(6,531
|
)
|
$
|
(1,256
|
)
|
$
|
52,149
|
|||||
|
1
|
Accumulated
other comprehensive loss as of December 31, 2006 consists of net
unrealized holding losses on available-for-sale securities of $301,
net of
taxes, net unrealized loss on pension valuation of $1,382, net of
taxes,
and a net credit for prior service on pension of $427, net of tax
benefit.
Accumulated other comprehensive loss as of December 31, 2005 consists
of
net unrealized holding losses on available-for-sale securities of
$1,104,
net of taxes. Accumulated other comprehensive loss at December 31,
2004
consists of net holding losses on available-for-sale securities of
$19,
net of taxes, and net unrealized holding losses on unfunded pension
accumulated obligation of $672, net of
taxes.
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
($000
Omitted)
|
||||||||||
|
FOR
THE YEAR ENDED DECEMBER 31,
|
2006
|
|
|
2005
|
|
|
2004
|
|
||
|
Net
income
|
$
|
3,215
|
$
|
2,673
|
$
|
3,388
|
||||
|
Other
comprehensive income (loss)
|
||||||||||
|
Net
unrealized holding gains (losses) on securities
available-for-sale
|
1,723
|
(2,347
|
)
|
(720
|
)
|
|||||
|
Reclassification
adjustment for realized (gains) losses in net income
|
(394
|
)
|
551
|
(753
|
)
|
|||||
|
Net
unrealized gains (losses) on securities
|
1,329
|
(1,796
|
)
|
(1,473
|
)
|
|||||
|
Pension
valuation adjustment
|
(2,289
|
)
|
-
|
-
|
||||||
|
Pension
prior service credit adjustment
|
708
|
-
|
-
|
|||||||
|
Minimum
pension liability adjustment
|
-
|
1,018
|
74
|
|||||||
|
Other
comprehensive income (loss)
|
(252
|
)
|
(778
|
)
|
(1,399
|
)
|
||||
|
Income
tax benefit
|
(100
|
)
|
(365
|
)
|
(559
|
)
|
||||
|
Other
comprehensive loss, net of tax
|
(152
|
)
|
(413
|
)
|
(840
|
)
|
||||
|
Comprehensive
income
|
$
|
3,063
|
$
|
2,260
|
$
|
2,548
|
||||
See
Notes
to Consolidated Financial Statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
($000
Omitted)
|
||||||||||
|
FOR
THE YEAR ENDED DECEMBER 31,
|
2006
|
|
|
2005
|
|
|
2004
|
|||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
3,215
|
$
|
2,673
|
$
|
3,388
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Provision
for loan losses
|
465
|
75
|
495
|
|||||||
|
Depreciation
and amortization
|
2,426
|
2,367
|
2,369
|
|||||||
|
Deferred
income tax (benefit) expense
|
(358
|
)
|
(4
|
)
|
43
|
|||||
|
(Gain)
loss on sales of securities available-for-sale, net
|
(394
|
)
|
551
|
(753
|
)
|
|||||
|
Loss
on sale, disposal and write-down of premises and equipment
|
52
|
57
|
9
|
|||||||
|
Amortization
of premiums and accretion of discounts on securities, net
|
21
|
54
|
90
|
|||||||
|
Change
in unearned income/unamortized cost, net
|
(195
|
)
|
(190
|
)
|
(141
|
)
|
||||
|
Accretion
of discount on loans acquired
|
(149
|
)
|
(140
|
)
|
(160
|
)
|
||||
|
(Gains)
losses on sales of other real estate owned and other personal property,
net
|
(68
|
)
|
-
|
9
|
||||||
|
Net
decrease (increase) in loans held-for-sale
|
190
|
(142
|
)
|
200
|
||||||
|
Net
change in other assets and other liabilities
|
212
|
(999
|
)
|
587
|
||||||
|
Net
cash provided by operating activities
|
5,417
|
4,302
|
6,136
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Proceeds
from sales of securities available-for-sale
|
11,459
|
16,002
|
16,964
|
|||||||
|
Proceeds
from maturities of securities available-for-sale
|
16,688
|
17,315
|
25,690
|
|||||||
|
Purchases
of securities available-for-sale
|
(47,990
|
)
|
(40,829
|
)
|
(76,515
|
)
|
||||
|
Purchases
of Federal Home Loan Bank stock
|
-
|
(26
|
)
|
(810
|
)
|
|||||
|
Proceeds
from sales of Federal Reserve Bank stock
|
-
|
365
|
-
|
|||||||
|
Redemption
of Federal Home Loan Bank stock
|
1,759
|
-
|
-
|
|||||||
|
Capital
distribution on investment in limited partnership
|
210
|
-
|
-
|
|||||||
|
Loan
originations and principal collections, net
|
6,112
|
13,345
|
(7,142
|
)
|
||||||
|
Recoveries
of previously charged-off loans
|
298
|
286
|
338
|
|||||||
|
Loans
acquired in branch transactions
|
(8,192
|
)
|
-
|
-
|
||||||
|
Proceeds
from sale of commercial loans
|
-
|
-
|
5,088
|
|||||||
|
Proceeds
from sales of and payments received on other real estate
owned
|
264
|
25
|
-
|
|||||||
|
Proceeds
from sales of and payments received on other personal
property
|
330
|
652
|
604
|
|||||||
|
Premises
and equipment acquired in branch transactions
|
(507
|
)
|
-
|
-
|
||||||
|
Additions
to premises and equipment, net of disposals
|
(2,934
|
)
|
496
|
(2,267
|
)
|
|||||
|
Purchase
of company owned life insurance policies
|
-
|
-
|
(400
|
)
|
||||||
|
Net
cash (used by) provided by investing activities
|
(22,503
|
)
|
7,631
|
(38,450
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Net
(decrease) increase in deposits
|
(9,217
|
)
|
(10,903
|
)
|
12,052
|
|||||
|
Deposits
assumed in branch transactions, net of assumption premiums
|
27,779
|
-
|
-
|
|||||||
|
Net
increase (decrease) in short-term borrowings
|
27,134
|
(1,905
|
)
|
3,867
|
||||||
|
Advances
from Federal Home Loan Bank (FHLB)
|
24,000
|
13,000
|
20,000
|
|||||||
|
Repayment
of FHLB advances
|
(56,000
|
)
|
(6,000
|
)
|
(9,000
|
)
|
||||
|
Exercise
of stock options
|
-
|
99
|
99
|
|||||||
|
Purchases
of treasury stock
|
-
|
(563
|
)
|
-
|
||||||
|
Cash
dividends paid
|
(1,164
|
)
|
(1,068
|
)
|
(1,020
|
)
|
||||
|
Net
cash provided by (used in) financing activities
|
12,532
|
(7,340
|
)
|
25,998
|
||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(4,554
|
)
|
4,593
|
(6,316
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
29,362
|
24,769
|
31,085
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
24,808
|
$
|
29,362
|
$
|
24,769
|
||||
See
Notes
to Consolidated Financial Statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
|
($000
Omitted)
|
||||||||||
|
FOR
THE YEAR ENDED DECEMBER 31,
|
2006
|
|
|
2005
|
|
|
2004
|
|
||
|
Supplemental
disclosures of cash flows:
|
||||||||||
|
Interest
paid
|
$
|
13,728
|
$
|
8,662
|
$
|
7,519
|
||||
|
Income
taxes paid
|
860
|
1,106
|
2,090
|
|||||||
|
Loans
transferred to other real estate owned
|
-
|
231
|
-
|
|||||||
|
Loans
transferred to other personal property
|
235
|
682
|
603
|
|||||||
|
Amount
due from customer for pending municipal security maturity
|
-
|
3,000
|
-
|
|||||||
See
Notes
to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
Northway
is a bank holding company formed in 1997 under the laws of New Hampshire and
is
registered under the Bank Holding Company Act of 1956. Northway’s only business
activity has been to own all of the shares of, and provide management, capital
and operational support to Northway Bank (“Bank”), formerly known as The Berlin
City Bank, and its Delaware statutory business trusts Northway Capital Trust
I
and Northway Capital Trust II. On October 1, 2005 The Berlin City Bank was
renamed Northway Bank and The Pemigewasset National Bank of Plymouth, New
Hampshire was merged into Northway Bank. The Company’s headquarters are in
Berlin, New Hampshire. The banking subsidy is engaged principally in the
business of attracting deposits from the general public and investing those
deposits in securities, commercial loans, real estate loans, and consumer loans.
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. All significant intercompany accounts and transactions
have been eliminated in the consolidation.
Northway
Capital Trust I and Northway Capital Trust II, affiliates of the Company, were
formed to sell capital securities to the public through a third party trust
pool. In accordance with FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities” (“FIN 46”), these affiliates have not been included in the
consolidated financial statements.
The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry.
In
preparing the financial statements, management is required to make estimates
and
judgments that affect the reported amounts of assets and liabilities as of
the
dates of the consolidated balance sheets, and income and expense for the
periods. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to change in the near-term relate to the
determination of the allowance for loan losses.
Reclassifications
Certain
amounts in the prior years’ financial statements have been reclassified to
conform with the current year’s presentation.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, cash and cash equivalents include
cash
and due from banks, interest-bearing deposits, and federal funds
sold.
Securities
Debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost;
if
debt and equity securities are bought and held principally for the purpose
of
selling in the near term they would be classified as trading and reported at
fair value, with unrealized gains and losses included in earnings; and debt
and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of
stockholders’ equity, net of estimated income taxes. At this time, the Company
has not established a trading account.
Premiums
and discounts are amortized and accreted primarily on the level yield method
over the contractual life of the securities adjusted for expected
prepayments.
If
a
decline in the fair value below the adjusted cost basis of an investment is
judged to be other than temporary, the cost basis of the investment is written
down to fair value as the new cost basis and the amount of the write-down is
included in noninterest expense.
Gains
and
losses on sales of securities available-for-sale are recognized at the time
of
the sale on a specific identification basis.
Loans
Held-for-Sale
Loans
held-for-sale are generally identified as such at origination and are stated
at
the lower of aggregate cost or market. Market value is based on outstanding
investor commitments. When loans are sold, a gain or loss is recognized to
the
extent that the sale proceeds exceed or are less than the carrying value of
the
loans. Gains and losses are determined using the specific identification method.
All loans sold are without recourse to the Company.
Loans
Loans
are
carried at the principal amounts outstanding, net of any unearned income or
unamortized cost, premiums on originated loans and discounts on acquired loans.
Unearned income and unamortized cost includes loan origination fees, net of
direct loan origination costs. This income or expense is deferred and recognized
as adjustments to loan income over the contractual life of the related notes
using a method the result of which approximates that of the interest
method.
Loans
are
placed on nonaccrual when payment of principal or interest is considered to
be
in doubt or is past due 90 days or more. The Company may choose to place a
loan
on nonaccrual status due to payment delinquency or uncertain collectibility,
while not classifying the loan as impaired, if (i) it is probable that the
Company will collect all amounts due in accordance with the contractual terms
of
the loan or (ii) the loan is not a commercial, commercial real estate or an
individually significant mortgage or consumer loan. Previously accrued income
on
nonaccrual loans that has not been collected is reversed from current income,
and subsequent cash receipts are recorded as income if principal on the loans
is
deemed collectible. Loans are returned to accrual status when collection of
all
contractual principal and interest is reasonably assured and there has been
sustained repayment performance.
The
Company’s loans are primarily secured by real estate in New Hampshire. In
addition, other real estate owned is located in this market. Accordingly, the
ultimate collectibility of a substantial portion of the Company’s loan portfolio
and the recovery of other real estate owned are susceptible to changing
conditions in this market.
Allowance
for Loan Losses
The
allowance for loan losses is maintained at a level considered adequate by
management on the basis of many factors including the risk characteristics
of
the portfolio, trends in loan delinquencies and an assessment of existing
economic conditions. Additions to the allowance are charged to earnings;
realized losses, net of recoveries, are charged directly to the
allowance.
While
management uses available information in establishing the allowance for loan
losses, future additions to the allowance may be necessary if economic
conditions differ substantially from the estimates used in making the
evaluations. In addition, various regulatory agencies, as an integral part
of
their examination process, periodically review the Company’s allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on judgments different from those of management.
Commercial,
commercial real estate and individually significant mortgage and consumer loans
are considered impaired, and are placed on nonaccrual, when it is probable
that
the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Mortgage and consumer loans, which
are
not individually significant, are measured for impairment collectively. Loans
that experience insignificant payment delays and insignificant shortfalls in
payment amounts generally are not classified as impaired. The amount of
impairment for all impaired loans is determined by the difference between the
present value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value
of
the collateral and the recorded amount of the loan.
When
foreclosure is probable, impairment is measured based on the fair value of
the
collateral.
Servicing
Assets
Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. Capitalized servicing rights
are
reported in other assets and are amortized into noninterest income in proportion
to, and over the period of, the estimated future net servicing income of the
underlying financial assets. Servicing assets are evaluated for impairment
based
upon the fair value of the rights as compared to amortized cost. Impairment
is
determined by stratifying rights by predominant characteristics, such as
interest rates and terms. Fair value is determined using prices for similar
assets with similar characteristics, when available, or based upon discounted
cash flows using market-based assumptions. Impairment is recognized through
a
valuation allowance for an individual stratum, to the extent that fair value
is
less than the capitalized amount for the stratum.
Premises
and Equipment
Premises
and equipment are carried at cost less accumulated depreciation. Depreciation
is
computed on the straight-line method over the estimated useful lives of the
respective assets. Estimated lives are thirty-nine years for buildings, ten
to
fifteen years for building improvements and three to seven years for furniture
and equipment.
Amortization
of leasehold improvements is accumulated on a straight-line basis over the
lesser of the term of the respective lease or the asset’s useful life, not to
exceed ten years.
Other
Real Estate Owned
Other
real estate owned is comprised of properties acquired either through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure, and for which the
Company has taken physical possession. The Company classifies loans as
repossessed or foreclosed if the Company receives physical possession of the
debtor’s assets, regardless of whether or not foreclosure proceedings take
place.
Assets
acquired through foreclosure or a similar conveyance of title are initially
recorded at the lower of the carrying value of the loan or the fair value,
less
estimated costs to sell, of the property constructively or actually received.
Gains and losses upon disposition are reflected in the statement of income
as
realized.
Advertising
The
Company directly expenses costs associated with advertising as they are
incurred.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and
the respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Stock-Based
Compensation
At
December 31, 2006, the Company has a stock-based employee compensation plan
which is described more fully in NOTE 16. Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised 2004)
“Share-Based Payment” (“SFAS 123R”). This Statement revised SFAS No. 123,
“Accounting for Stock Based Compensation” and superceded Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
its related implementation guidance. SFAS 123R requires that the cost resulting
from all share-based payment transactions be recognized in the financial
statements and establishes fair value as the measurement objective in accounting
for share-based payment arrangements. No compensation expense was recognized
for
the twelve months ended December 31, 2006 related to SFAS 123R. Prior to January
1, 2006, the Company accounted for the plan under the recognition and
measurement principles of APB Opinion No. 25. No stock-based employee
compensation cost had been recognized during periods prior to January 1, 2006
for its fixed stock option plans.
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of SFAS 123R
to
stock-based employee compensation during the years ended December 31, 2005
and
2004.
|
($000
Omitted, Except Per Share Data)
|
||||||||||
|
2005
|
|
|
2004
|
|||||||
|
Net
income
|
As
reported
|
$
|
2,673
|
$
|
3,388
|
|||||
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based methods awards, net of related tax effects
|
-
|
-
|
||||||||
|
Pro
forma
|
$
|
2,673
|
$
|
3,388
|
||||||
|
|
||||||||||
|
Earnings
per common share
|
As
reported
|
$
|
1.78
|
$
|
2.26
|
|||||
|
Pro
forma
|
1.78
|
2.26
|
||||||||
|
|
||||||||||
|
Earnings
per common share
|
As
reported
|
$
|
1.77
|
$
|
2.24
|
|||||
|
(assuming
dilution)
|
Pro
forma
|
1.77
|
2.24
|
|||||||
Earnings
Per Share
Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS, if applicable, reflects the potential
dilution that could occur if securities or other contracts to issue common
stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
Earnings
per common share have been computed based on the following:
|
($000
Omitted, Shares Reported in Millions)
Years
Ended December 31,
|
||||||||||
|
2006
|
|
|
2005
|
|
|
2004
|
||||
|
Net
income
|
$
|
3,215
|
$
|
2,673
|
$
|
3,388
|
||||
|
Less:
Preferred stock dividends
|
-
|
-
|
-
|
|||||||
|
Net
income applicable to common stock
|
$
|
3,215
|
$
|
2,673
|
$
|
3,388
|
||||
|
Average
number of common shares outstanding
|
1,492.3
|
1,502.1
|
1,500.1
|
|||||||
|
Effect
of dilutive options
|
9.1
|
9.3
|
11.6
|
|||||||
|
Average
number of common shares outstanding used to calculate diluted earnings
per
common share
|
1,501.4
|
1,511.4
|
1,511.7
|
|||||||
Recent
Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No.
155, "Accounting for Certain Hybrid Instruments" (SFAS 155), which permits,
but
does not require, fair value accounting for any hybrid financial instrument
that
contains an embedded derivative that would otherwise require bifurcation in
accordance with SFAS 133. The statement also subjects beneficial interests
issued by securitization vehicles to the requirements of SFAS 133. The statement
is effective as of January 1, 2007. The adoption of SFAS 155 is not expected
to
have a material impact on the Company’s financial condition, results of
operations or cash flow.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets- an amendment of FASB Statement No. 140” (SFAS 156). SFAS 156 requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in specific situations. Additionally, the servicing asset
or
servicing liability shall be initially measured at fair value; however, an
entity may elect the “amortization method” or “fair value method” for subsequent
balance sheet reporting periods. SFAS 156 is effective as of an entity’s first
fiscal year beginning after September 15, 2006. Early adoption is permitted
as
of the beginning of an entity’s fiscal year, provided the entity has not yet
issued financial statements, including interim financial statements, for any
period of that fiscal year. The Company does not expect the adoption of this
statement to have a material impact on its financial condition, results of
operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles (GAAP) and enhances
disclosures about fair value measurements. SFAS 157 retains the exchange price
notion and clarifies that the exchange price is the price that would be received
for an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. SFAS 157 is
effective for the Company’s consolidated financial statements for the year
beginning on January 1, 2008, with earlier adoption permitted. The Company
does
not expect the adoption of this statement to have a material impact on its
financial condition, results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined
Benefit Pension and other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R)” (SFAS 158). SFAS 158 requires 1) the recognition of
an asset or liability for the over-funded or under-funded status of a defined
benefit plan, 2) the recognition of actuarial gains and losses and prior service
costs and credits in other comprehensive income, 3) measurement of plan assets
and benefit obligations as of the employer’s balance sheet date, rather than at
interim measurement dates as currently allowed, and 4) disclosure of additional
information concerning actuarial gains and losses and prior service costs and
credits recognized in other comprehensive income. This statement is effective
for financial statements with fiscal years ending after December 15, 2006.
The adoption of this Statement did not have a material impact on the Company’s
financial position, result of operations or cash flows.
NOTE
2 CASH AND DUE FROM BANKS
At
December 31, 2006, there was $64,000, which was subject to withdrawals and
usage
restrictions to satisfy the reserve requirements of the Federal Reserve Bank.
There was no cash and due from bank balances at December 31, 2005 subject to
withdrawals and usage restrictions to satisfy the reserve requirements of the
Federal Reserve Bank.
NOTE
3 SECURITIES AVAILABLE-FOR-SALE
The
amortized cost, gross unrealized gains, gross unrealized losses, and fair value
of securities at December 31, 2006 and 2005 follows:
|
($000
Omitted)
|
|||||||||||||
|
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|||||
|
December
31, 2006
|
|||||||||||||
|
U.S.
Treasury and other U.S. government agency securities
|
$
|
47,738
|
$
|
50
|
$
|
725
|
$
|
47,063
|
|||||
|
Marketable
equity securities
|
3,364
|
311
|
58
|
3,617
|
|||||||||
|
Mortgage-backed
securities
|
40,905
|
310
|
600
|
40,615
|
|||||||||
|
Collateralized
mortgage obligations
|
6
|
-
|
-
|
6
|
|||||||||
|
Corporate
bonds
|
3,517
|
10
|
5
|
3,522
|
|||||||||
|
Asset
backed securities
|
4,974
|
-
|
6
|
4,968
|
|||||||||
|
State
and political subdivision bonds and notes
|
27,784
|
221
|
7
|
27,998
|
|||||||||
|
$
|
128,288
|
$
|
902
|
$
|
1,401
|
$
|
127,789
|
||||||
|
December
31, 2005
|
|||||||||||||
|
U.S.
Treasury and other U.S. government agency securities
|
$
|
48,728
|
$
|
-
|
$
|
977
|
$
|
47,751
|
|||||
|
Marketable
equity securities
|
2,695
|
178
|
64
|
2,809
|
|||||||||
|
Mortgage-backed
securities
|
24,704
|
1
|
774
|
23,931
|
|||||||||
|
Collateralized
mortgage obligations
|
8
|
-
|
-
|
8
|
|||||||||
|
Corporate
bonds
|
5,541
|
37
|
9
|
5,569
|
|||||||||
|
State
and political subdivision bonds and notes
|
23,396
|
45
|
265
|
23,176
|
|||||||||
|
$
|
105,072
|
$
|
261
|
$
|
2,089
|
$
|
103,244
|
The
contractual maturity distribution of investments in debt obligations at December
31, 2006 follows:
|
($000
Omitted)
|
||||||||||||||||
|
Within
One
Year
|
|
|
Over
One Through
Five
Years
|
|
|
After
Five Through
Ten
Years
|
|
|
Over
Ten
Years
|
|
|
Total
Amortized
Cost
|
||||
|
U.S.
Treasury and other U.S. government agency securities
|
$
|
6,300
|
$
|
30,455
|
$
|
10,983
|
$
|
-
|
$
|
47,738
|
||||||
|
Mortgage-backed
securities
|
-
|
20
|
-
|
40,885
|
40,905
|
|||||||||||
|
Collateralized
mortgage obligations
|
-
|
-
|
-
|
6
|
6
|
|||||||||||
|
Corporate
bonds
|
1,508
|
2,009
|
-
|
-
|
3,517
|
|||||||||||
|
Asset
backed securities
|
-
|
-
|
-
|
4,974
|
4,974
|
|||||||||||
|
State
and political subdivision bonds and notes
|
1,506
|
996
|
-
|
25,282
|
27,784
|
|||||||||||
|
Total
amortized cost
|
$
|
9,314
|
$
|
33,480
|
$
|
10,983
|
$
|
71,147
|
$
|
124,924
|
||||||
|
Fair
value
|
$
|
9,262
|
$
|
32,935
|
$
|
10,916
|
$
|
71,059
|
$
|
124,172
|
||||||
Actual
maturities of state and political subdivision bonds and notes, mortgage-backed
securities and collateralized mortgage obligations will differ from the
maturities presented because borrowers have the right to prepay obligations
without prepayment penalties.
For
the
years ended December 31, 2006, 2005 and 2004, proceeds from the sales of
securities available-for-sale amounted to $11,459,000, $16,002,000 and
$16,964,000, respectively. An analysis of gross realized gains and losses on
sales of securities available-for-sale during the years ended December 31,
follows:
|
($000
Omitted)
|
|||||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||||
|
Realized
Gains
|
|
|
Realized
Losses
|
|
|
Realized
Gains
|
|
|
Realized
Losses
|
|
|
Realized
Gains
|
|
|
Realized
Losses
|
||||||
|
Marketable
equity securities
|
$
|
480
|
$
|
40
|
$
|
221
|
$
|
104
|
$
|
402
|
$
|
149
|
|||||||||
|
U.S.
Treasury and other U.S. government agency securities
|
-
|
49
|
-
|
200
|
5
|
-
|
|||||||||||||||
|
Mortgage-backed
securities
|
-
|
-
|
12
|
11
|
-
|
-
|
|||||||||||||||
|
Corporate
bonds
|
3
|
-
|
30
|
499
|
539
|
50
|
|||||||||||||||
|
State
and political subdivision bonds and notes
|
-
|
-
|
-
|
-
|
6
|
-
|
|||||||||||||||
|
$
|
483
|
$
|
89
|
$
|
263
|
$
|
814
|
$
|
952
|
$
|
199
|
||||||||||
The
tax
provision (benefit) applicable to these net realized gains/(losses) amounted
to
$156,000, (218,000) and $298,000 for 2006, 2005, and 2004,
respectively.
Securities
with a carrying amount totaling $91,155,000 and $73,651,000 were pledged to
secure public deposits, securities sold under agreements to repurchase, FHLB
advances and treasury, tax and loan accounts at December 31, 2006 and 2005,
respectively
The
aggregate fair value and unrealized losses of securities that have been in
a
continuous unrealized loss position for less than twelve months and for twelve
months or more, and are not other than temporarily impaired, are as follows
as
of December 31, 2006:
|
($000
Omitted)
|
|||||||||||||||||||
|
Less
than 12 Months
|
12
Months or Longer
|
Total
|
|||||||||||||||||
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||
|
U.S.
Treasury and other U.S. government agency securities
|
$
|
-
|
$
|
-
|
$
|
38,030
|
$
|
725
|
$
|
38,030
|
$
|
725
|
|||||||
|
Marketable
equity securities
|
525
|
58
|
-
|
-
|
525
|
58
|
|||||||||||||
|
Mortgage-backed
securities
|
-
|
-
|
25,048
|
600
|
25,048
|
600
|
|||||||||||||
|
Corporate
bonds
|
-
|
-
|
1,503
|
5
|
1,503
|
5
|
|||||||||||||
|
Asset
backed securities
|
4,968
|
6
|
-
|
-
|
4,968
|
6
|
|||||||||||||
|
State
and political subdivision bonds and notes
|
3,497
|
7
|
-
|
-
|
3,497
|
7
|
|||||||||||||
|
Total
temporarily impaired securities
|
$
|
8,990
|
$
|
71
|
$
|
64,581
|
$
|
1,330
|
$
|
73,571
|
$
|
1,401
|
|||||||
At
December 31, 2006, securities with a total fair value of $73,571,000 were in
a
loss position. These securities included twenty U.S. government agency
securities with a fair value of $38,030,000 and an unrealized loss of $725,000.
These securities had an unrealized loss due to the current interest rate
environment. As these securities are guaranteed by U.S. government agencies
such
as FHLB, FHLMC or FNMA there is no credit risk associated with them. These
securities are not other-than-temporarily impaired as the Company has the
ability and the intent to hold these securities until recovery to cost basis.
Mortgage-backed
securities with a fair value of $25,048,000 had an unrealized loss of $600,000
at December 31, 2006. As with the U.S. government agency securities, these
securities have an unrealized loss due to the current interest rate environment.
As all of these mortgage-backed securities are guaranteed by U.S. government
agencies such as FHLMC, GNMA or FNMA there is no credit risk associated with
them. These securities have not been classified as other-than-temporarily
impaired as the Company has the ability and intent to hold these securities
until recovery to cost basis.
Eight
marketable equity securities with a fair value of $525,000 had an unrealized
loss of $58,000 at December 31, 2006. Marketable equity securities are subject
to internal testing on a quarterly basis to determine impairment. Testing
includes review of industry analyst reports, credit ratings, sector analysis
and
earnings projections. Based upon the December 31, 2006 review, these securities
were not determined to be other-than-temporarily impaired.
One
corporate bond security with a fair value of $1,503,000 had an unrealized loss
of $5,000 at December 31, 2006. Corporate bond securities are subject to
internal testing on a quarterly basis to determine other-than-temporary
impairment. Based upon the December 31, 2006 review, this security was not
determined to be other-than-temporarily impaired.
One
asset-backed security with a fair value of $4,968,000 had an unrealized loss
of
$6,000 at December 31, 2006. Asset-backed securities are subject to internal
testing on a quarterly basis to determine other-than-temporary impairment.
Based
upon the December 31, 2006 review, this security was not determined to be
other-than-temporarily impaired.
Eight
state and political subdivision securities with a fair value of $3,497,000
had
an unrealized loss of $7,000 at December 31, 2006. As all of these state and
political subdivision securities are guaranteed by municipalities there is
minimal credit risk associated with them. These securities have not been
classified as other-than-temporarily impaired as the Company has the ability
to
hold these securities until recovery to cost basis.
NOTE
4 LOANS
Loan
balances were comprised of the following:
|
($000
Omitted)
|
|||||||
|
December
31,
|
2006
|
2005
|
|||||
|
Real
estate:
|
|||||||
|
Residential
|
$
|
167,172
|
$
|
158,729
|
|||
|
Commercial
|
158,464
|
143,456
|
|||||
|
Construction
|
10,700
|
13,241
|
|||||
|
Commercial
|
33,569
|
27,349
|
|||||
|
Installment
|
42,489
|
35,786
|
|||||
|
Indirect
installment
|
28,714
|
62,221
|
|||||
|
Other
|
20,843
|
19,507
|
|||||
|
Total
loans
|
461,951
|
460,289
|
|||||
|
Unamortized
cost
|
279
|
84
|
|||||
|
Allowance
for loan losses
|
(5,581
|
)
|
(5,150
|
)
|
|||
|
Total
unamortized cost and allowance for loan losses
|
(5,302
|
)
|
(5,066
|
)
|
|||
|
Net
loans
|
$
|
456,649
|
$
|
455,223
|
|||
Total
loans above are net of unearned discount on loans acquired in the amount of
$181,000 and $275,000 at December 31, 2006 and 2005, respectively. In addition,
total loans above are net of unamortized premium on indirect installment loans
originated in the amount of $234,000 and $789,000 at December 31, 2006 and
2005,
respectively.
Loans
are
made in the ordinary course of business to directors, executive officers, and
their immediate families and to organizations in which such persons have more
than a 10% ownership interest. These loans are made on substantially the same
terms, including interest rate and collateral, as those prevailing at the same
time for comparable transactions with unrelated persons and did not involve
more
than the normal risk of collectibility or present other unfavorable features.
Total loans to such persons and their companies amounted to $571,000 as of
December 31, 2006. During 2006, principal payments were $203,000 and principal
advances amounted to $230,000.
The
Company’s lending activities are conducted principally in New Hampshire.
Although the loan portfolio is diversified, a portion of its debtors’ ability to
repay is dependent upon the economic conditions prevailing in New Hampshire.
The
Company maintains significant credit relationships with borrowers in the hotel
and motel industry. The aggregate loan balances to these industries totaled
$71,874,000 at December 31, 2006 and $67,152,000 at December 31,
2005.
Loans
serviced for others are not included in the accompanying consolidated balance
sheets. The unpaid principal balances of these loans total $36,225,000 and
$39,219,000 at December 31, 2006 and 2005, respectively. The Company sold
$5,965,000 of mortgage loans in 2006 and $9,132,000 of mortgage loans in
2005.
The
Company capitalized $77,000 and $79,000 of servicing rights and amortized
$115,000 and $144,000 of total servicing rights in 2006 and 2005, respectively.
The impairment valuation allowance of mortgage servicing rights was reduced
by
$0 and $3,000 in 2006 and 2005, respectively. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate.
The amount of the impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value. At December 31, 2006 and
2005, respectively, the carrying amount of servicing rights was $198,000 and
$236,000, and is included in other assets. At December 31, 2006 and 2005,
respectively, the fair value of servicing rights was $417,000 and
$389,000.
Restructured,
accruing loans entered into prior to the adoption of SFAS No. 114 and 118 are
not required to be reported as impaired loans unless such loans are not
performing in accordance with the restructured terms at adoption of SFAS No.
114. Restructured, accruing loans entered into subsequent to the adoption of
these statements are reported as impaired loans. In the year subsequent to
restructure these loans may be removed from the impaired loan disclosure
provided that the loan bears a market rate of interest at the time of
restructure and is performing under the restructured terms.
At
December 31, 2006 and 2005, the Company had no loans restructured in a troubled
debt restructuring before January 1, 1995, the effective date of SFAS No.
114.
At
December 31, 2006 and 2005, nonperforming loans totaled $3,698,000 and
$3,013,000, respectively. No nonperforming loans were past due 90 days or more
and still accruing interest at December 31, 2006 and 2005.
The
recorded investment in loans that are considered to be impaired under SFAS
No.
114 was $2,666,000 and $2,082,000 at December 31, 2006 and 2005, respectively,
for which the related allowance for loan losses is $0 for both years. All of
the
Company’s impaired loans are collateralized and therefore all impaired loans are
measured by the difference between the fair value of the collateral and the
recorded amount of the loan. The average recorded investment in impaired loans
during the twelve months ended December 31, 2006 and 2005 was approximately
$2,787,000 and $2,147,000, respectively. For the twelve months ended December
31, 2006 and 2005 the Company recognized interest income on impaired loans
of
$231,000 and $88,000, respectively, which was recognized using the cash-basis
method of income recognition.
NOTE
5 ALLOWANCE FOR LOAN LOSSES
Changes
in the allowance for loan losses for the years ended December 31,
follows:
|
|
($000
Omitted)
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Balance
at beginning of year
|
$
|
5,150
|
$
|
5,204
|
$
|
5,036
|
||||
|
Provision
for loan losses
|
465
|
75
|
495
|
|||||||
|
Recoveries
on loans previously
charged-off
|
298
|
286
|
338
|
|||||||
|
Loans
charged-off
|
(332
|
)
|
(415
|
)
|
(665
|
)
|
||||
|
Balance
at end of year
|
$
|
5,581
|
$
|
5,150
|
$
|
5,204
|
||||
NOTE
6 PREMISES AND EQUIPMENT
A
summary
of premises and equipment follows:
|
($000
Omitted)
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Land
|
$
|
2,610
|
$
|
2,455
|
|||
|
Buildings
|
11,033
|
9,718
|
|||||
|
Leasehold
improvements
|
601
|
120
|
|||||
|
Construction
in progress
|
381
|
129
|
|||||
|
Equipment
|
10,166
|
9,359
|
|||||
|
24,791
|
21,781
|
||||||
|
Less
accumulated depreciation and amortization
|
11,042
|
10,046
|
|||||
|
$
|
13,749
|
$
|
11,735
|
||||
Depreciation
expense for the years ended December 31, 2006, 2005 and 2004 amounted to
$1,375,000, $1,413,000 and $1,415,000, respectively.
The
Company leases six of its branch locations and an automobile under
non-cancelable operating leases. In addition, the Company leases one storage
facility under a non-cancelable lease. Minimum lease payments in future periods
under non-cancelable operating leases at December 31, 2006 are as
follows:
|
($000
Omitted)
|
||||
|
2007
|
$
|
220
|
||
|
2008
|
115
|
|||
|
2009
|
85
|
|||
|
2010
|
85
|
|||
|
2011
|
91
|
|||
|
Thereafter
|
397
|
|||
|
$
|
993
|
|||
The
terms
of two of the leases provide that the Company can, at the end of the current
five-year term, renew the lease under one five-year option. The terms of two
additional leases provide that the Company can, at the end of a ten-year term,
renew the lease under two five-year options. All branch leases contain a
provision that the Company shall pay its pro-rata share of operating costs.
Additionally, two of the leases require that the Company pay all real estate
taxes. The automobile lease contains a purchase option at the end of the lease
term.
Rent
expense for the years ended December 31, 2006, 2005, and 2004 amounted to
$263,000, $359,000 and $404,000, respectively.
NOTE
7 OTHER REAL ESTATE OWNED
Other
real estate owned consists of real estate acquired by foreclosure or a similar
conveyance of title. At December 31, 2006, the Company had no other real estate
owned. At December 31, 2005 other real estate owned was comprised of commercial
real estate of $196,000.
Sales
of
other real estate owned by the Company resulted in gains of $68,000 for the
year
ended December 31, 2006.
There
were no write-downs on other real estate owned for the years ended December
31,
2006, 2005, and 2004.
NOTE
8 DEPOSITS
The
aggregate amount of maturities for time deposits as of December 31, 2006 for
each of the following five years is as follows:
|
($000
Omitted)
|
||||
|
2007
|
$
|
186,296
|
||
|
2008
|
5,689
|
|||
|
2009
|
1,469
|
|||
|
2010
|
769
|
|||
|
2011
|
718
|
|||
|
$
|
194,941
|
|||
Deposits
from related parties held by the Bank at December 31, 2006 and 2005 amounted
to
$5,234,000 and $3,785,000, respectively.
NOTE
9 SHORT-TERM BORROWINGS
Short-term
borrowings consist of securities sold under agreements to repurchase. The
securities sold under agreements to repurchase as of December 31, 2006 and
2005
are securities sold on a short term basis by the Company that have been
accounted for not as sales but as borrowings. The underlying securities
associated with securities sold under agreements to repurchase are under the
control of the Company. The purchasers have agreed to sell to the Company
substantially identical securities at the maturity of the
agreements.
NOTE
10 LONG-TERM DEBT
Long-term
debt at December 31, 2006 and 2005 consisted of FHLB advances of $53,000,000
and
$85,000,000, respectively, as well as $20,620,000 of junior subordinated
debentures, for each year.
As
of
December 31, 2006, contractual principal payments due under long-term debt,
which consists of FHLB advances and junior subordinated debentures, are as
follows:
|
($000
Omitted)
|
||||
|
2007
|
$
|
13,000
|
||
|
2008
|
14,000
|
|||
|
2009
|
5,000
|
|||
|
2010
|
5,000
|
|||
|
2012
and years thereafter
|
36,620
|
|||
|
$
|
73,620
|
|||
The
FHLB
long-term debt consisted of fourteen separate advances. Two of these advances
are callable with the following rates and terms ($000 Omitted):
|
Amount
|
Rate
|
Maturity
Date
|
Next
Call Date
|
|||
|
$
5,000
|
5.91
|
%
|
12/17/09
|
03/19/07
and quarterly thereafter
|
||
|
14,000
|
4.50
|
12/27/13
|
12/29/08
and quarterly thereafter
|
|||
|
$19,000
|
One
advance, totaling $10,000,000 with a maturity date of May 9, 2008 and an
interest rate of 5.31% reprices monthly to the 4-week weighted average money
market yield, as published by the FHLB, plus 10 basis points.
The
remaining eleven advances, totaling $24,000,000, are at rates ranging from
2.35%
to 6.11% with a weighted average rate of 3.79%.
The
$20,620,000 of junior subordinated debentures consists of the following two
issues:
On
April
10, 2002, the Company completed the private placement of $7,217,000 aggregate
liquidation amount of floating rate trust preferred securities (the “Trust I
Capital Securities”) issued by its Delaware statutory business trust, Northway
Capital Trust I (“Capital Trust I”). The Trust I Capital Securities were sold to
a pooled investment vehicle. The proceeds from the sale of the Trust I Capital
Securities, which included the proceeds from the sale by Capital Trust I of
its
common securities to the Company, were invested in Floating Rate Junior
Subordinated Debt Securities of the Company due 2032 (the “Trust I Junior
Subordinated Debt”), which were issued pursuant to an Indenture, dated April 10,
2002, between the Company and Wilmington Trust Company, as Trustee. Both the
Trust I Capital Securities and the Trust I Junior Subordinated Debt have a
floating rate, which resets semi-annually, equal to six-month LIBOR plus 3.70%,
with a ceiling of 11.00% for the first five years. Currently, the interest
rate
on these securities is 9.089%. Payments of distributions and other amounts
due
on the Trust I Capital Securities are irrevocably guaranteed by the Company,
to
the extent that Capital Trust I has funds available for the payments of such
distributions, pursuant to a Guarantee Agreement, dated April 10, 2002, between
the Company and Wilmington Trust Company, as Guarantee Trustee. The Trust I
Junior Subordinated Debt and the Trust I Capital Securities may be redeemed
at
the option of the Company on fixed semi-annual dates beginning on April 22,
2007.
On
July
11, 2002, the Company completed the private placement of $13,403,000 aggregate
liquidation amount of floating rate trust preferred securities (the “Trust II
Capital Securities”) issued by its Delaware statutory business trust, Northway
Capital Trust II (the “Capital Trust II”). The Trust II Capital Securities were
sold to a pooled investment vehicle. The proceeds from the sale of the Trust
II
Capital Securities, which include the proceeds from the sale by Capital Trust
II
of its common securities to the Company, were invested in Floating Rate Junior
Subordinated Debt Securities of the Company due 2032 (the “Trust II Junior
Subordinated Debt”), which were issued pursuant to an Indenture, dated July 11,
2002, between the Company and Wilmington Trust Company, as Trustee. Both the
Trust II Capital Securities and the Trust II Junior Subordinated Debt have
a
floating rate, which resets quarterly, equal to three-month LIBOR plus 3.65%,
with a ceiling of 12.50% for the first five years. Currently, the interest
rate
on these securities is 9.01%. Payments of distributions and other amounts due
on
the Trust II Capital Securities are irrevocably guaranteed by the Company,
to
the extent that Capital Trust II has funds available for the payments of such
distributions, pursuant to a Guarantee Agreement, dated July 11, 2002, between
the Company and Wilmington Trust Company, as Guarantee Trustee. The Trust II
Junior Subordinated Debt and the Trust II Capital Securities may be redeemed
at
the option of the Company on fixed quarterly dates beginning on July 7,
2007.
NOTE
11 ACQUISITIONS
On
April
7, 2006, the Company acquired certain assets and assumed the deposits of two
branch offices of Washington Mutual Bank located in Laconia and Belmont, New
Hampshire. This acquisition has allowed the Company to expand its market area
further in Belknap County. Deposits assumed totaled $29,438,000 for which the
Company paid a deposit purchase premium of 6.30%. In addition, the Company
acquired certain loans associated with the branches totaling $8,192,000. As
a
result of this purchase, the Company made the following entries to record this
transaction:
|
($000
Omitted)
|
|||||||
|
Cash
|
$
|
19,130
|
|||||
|
Loans
|
8,192
|
||||||
|
Goodwill
|
425
|
||||||
|
Core
deposit intangible
|
1,234
|
||||||
|
Equipment
|
49
|
||||||
|
Land
and buildings
|
458
|
||||||
|
Other
assets
|
28
|
||||||
|
Building
and equipment expense
|
1
|
||||||
|
Deposits
|
$
|
29,438
|
|||||
|
Other
liabilities
|
74
|
||||||
|
Miscellaneous
income
|
|
5
|
|||||
|
$
|
29,517
|
$
|
29,517
|
||||
This
transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branches are included in the 2006
consolidated statements of income of the Company from the date of the
transaction.
The
cost
of the acquired branch offices exceeded the fair value of the assets acquired
and liabilities assumed by $1,659,000. Of this amount, $1,234,000 was assigned
to core deposit intangible and $425,000 was recorded as goodwill. All of the
goodwill was deductible for tax purposes. The core deposit intangible of
$1,234,000 is being amortized to noninterest expense over fourteen years using
the sum-of-the-years'-digits method.
NOTE
12 GOODWILL AND OTHER INTANGIBLE ASSETS
At
December 31, 2006, the Company has goodwill and core deposit intangibles
totaling $12,755,000. Core deposit intangibles are being amortized over their
useful lives and both core deposit intangibles and goodwill are tested for
impairment at least annually.
The
changes in the carrying amount of goodwill and core deposit intangibles for
the
years ended December 31, 2006 and 2005 are as follows:
|
($000
Omitted)
|
|||||||
|
Goodwill
|
Core
Deposit
Intangibles
|
||||||
|
Balance,
December 31, 2004
|
$
|
10,152
|
$
|
2,949
|
|||
|
Amortization
expense
|
-
|
(954
|
)
|
||||
|
Balance,
December 31, 2005
|
10,152
|
1,995
|
|||||
|
Branch
acquisition
|
425
|
1,234
|
|||||
|
Amortization
expense
|
-
|
(1,051
|
)
|
||||
|
Balance,
December 31, 2006
|
$
|
10,577
|
$
|
2,178
|
|||
Estimated
annual amortization expense:
|
($000
Omitted)
|
||||
|
Core
Deposit
Intangibles
|
||||
|
2007
|
$
|
476
|
||
|
2008
|
464
|
|||
|
2009
|
453
|
|||
|
2010
|
227
|
|||
|
2011
|
109
|
|||
|
2012
and thereafter
|
449
|
|||
The
following table reflects the gross carrying amount and accumulated amortization
of core deposit intangibles as of December 31, 2006:
|
($000
Omitted)
|
|||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|
|
Core
deposit intangibles
|
$6,566
|
$4,388
|
$2,178
|
Management
reviews the carrying amount of intangible assets on an ongoing basis, taking
into consideration any events and circumstances that might have diminished
such
amount. During 2006 and 2005, the Company reviewed the carrying amount of
intangible assets and determined that no impairment write-down was
required.
NOTE
13 REGULATORY MATTERS
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s and the Bank’s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The
capital amounts and classifications are also subject to qualitative judgments
by
the regulators about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). As of December 31, 2006, the most recent notification
from
the FDIC categorized the Bank as “well-capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well-capitalized”
the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios above regulatory prescribed minimum levels. There are no conditions
or
events since that notification that management believes have changed the Bank’s
category. Management believes, as of December 31, 2006 and 2005, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
These
minimum capital amounts and ratios, as well as the Company’s and Bank’s actual
capital amounts and ratios, are presented in the following table:
|
($000
Omitted)
|
|||||||||
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
Be Well Capitalized
Under
Prompt Corrective Action
Provisions
|
|||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||
|
As
of December 31, 2006
|
|||||||||
|
Tier
1 capital (to average assets)
|
|||||||||
|
Northway
Financial, Inc.
|
$58,432
|
9.31
|
%
|
$25,102
|
³4.00
|
%
|
N/A
|
||
|
Northway
Bank
|
51,653
|
8.30
|
24,887
|
³4.00
|
$31,109
|
³5.00
|
%
|
||
|
Total
capital (to risk weighted assets)
|
|||||||||
|
Northway
Financial, Inc.
|
66,464
|
15.95
|
33,339
|
³8.00
|
N/A
|
||||
|
Northway
Bank
|
56,796
|
13.82
|
32,885
|
³8.00
|
41,107
|
³10.00
|
|||
|
Tier
1 capital (to risk weighted assets)
|
|||||||||
|
Northway
Financial, Inc.
|
58,432
|
14.02
|
16,669
|
³4.00
|
N/A
|
||||
|
Northway
Bank
|
51,653
|
12.57
|
16,443
|
³4.00
|
24,664
|
³6.00
|
|||
|
As
of December 31, 2005
|
|||||||||
|
Tier
1 capital (to average assets)
|
|||||||||
|
Northway
Financial, Inc.
|
$55,765
|
8.96
|
$24,888
|
³4.00
|
N/A
|
||||
|
Northway
Bank
|
50,450
|
8.19
|
24,644
|
³4.00
|
$30,806
|
³5.00
|
|||
|
Total
capital (to risk weighted assets)
|
|||||||||
|
Northway
Financial, Inc.
|
65,025
|
15.24
|
34,138
|
³8.00
|
N/A
|
||||
|
Northway
Bank
|
55,673
|
13.25
|
33,623
|
³8.00
|
42,029
|
³10.00
|
|||
|
Tier
1 capital (to risk weighted assets)
|
|||||||||
|
Northway
Financial, Inc.
|
55,765
|
13.07
|
17,069
|
³4.00
|
N/A
|
||||
|
Northway
Bank
|
50,450
|
12.00
|
16,812
|
³4.00
|
25,217
|
³6.00
|
|||
Federal
regulations prohibit banking companies from paying dividends on their stock
if
the effect would cause stockholders' equity to be reduced below applicable
regulatory capital requirements or if such declaration and payment would
otherwise violate regulatory requirements.
As
of
December 31, 2006, the Bank is restricted from declaring dividends to the
Company in an amount greater than approximately $23,900,000, as such declaration
would decrease capital below the Bank’s required minimum level of regulatory
capital.
NOTE
14 OTHER NONINTEREST EXPENSE
The
following table sets for information relating to the Company’s other noninterest
expense for the years ended December 31:
|
($000
Omitted)
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Professional
fees
|
$
|
1,026
|
$
|
1,179
|
$
|
907
|
||||
|
Marketing
|
726
|
757
|
326
|
|||||||
|
Stationery
and supplies
|
365
|
647
|
429
|
|||||||
|
Telecommunications
|
455
|
619
|
595
|
|||||||
|
Other
|
3,676
|
3,511
|
3,252
|
|||||||
|
$
|
6,248
|
$
|
6,713
|
$
|
5,509
|
|||||
NOTE
15 FEDERAL AND STATE TAXES
The
components of federal and state tax expense for the years ended December 31,
are
as follows:
|
($000
Omitted)
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Current
|
||||||||||
|
Federal
|
$
|
1,010
|
$
|
820
|
$
|
1,289
|
||||
|
State
|
-
|
26
|
334
|
|||||||
|
1,010
|
846
|
1,623
|
||||||||
|
Deferred
|
||||||||||
|
Federal
|
(363
|
)
|
2
|
44
|
||||||
|
State
|
5
|
(6
|
)
|
(1
|
)
|
|||||
|
(358
|
)
|
(4
|
)
|
43
|
||||||
|
Total
|
$
|
652
|
$
|
842
|
$
|
1,666
|
||||
The
temporary differences (the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases)
that
give rise to significant portions of the net deferred income tax asset at
December 31, are as follows:
|
($000
Omitted)
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
income tax assets
|
|||||||
|
Allowance
for loan losses
|
$
|
2,234
|
$
|
2,072
|
|||
|
Interest
on nonaccrual loans
|
16
|
46
|
|||||
|
Unrealized
holding loss on securities available-for-sale
|
198
|
724
|
|||||
|
Capital
loss carryforward
|
-
|
24
|
|||||
|
Pension
unfunded status valuation adjustment
|
626
|
-
|
|||||
|
Amortization
of goodwill and core deposit intangible
|
-
|
3
|
|||||
|
Supplemental
pension
|
416
|
325
|
|||||
|
Other
|
10
|
9
|
|||||
|
3,500
|
3,203
|
||||||
|
Deferred
income tax liabilities
|
|||||||
|
Depreciation
|
(557
|
)
|
(621
|
)
|
|||
|
Amortization
of goodwill and core deposit intangible
|
(86
|
)
|
-
|
||||
|
Prepaid
pension
|
(286
|
)
|
(454
|
)
|
|||
|
Mortgage
and consumer servicing rights
|
(79
|
)
|
(94
|
)
|
|||
|
(1,008
|
)
|
(1,169
|
)
|
||||
|
Deferred
income tax asset, net
|
$
|
2,492
|
$
|
2,034
|
|||
The
primary sources of recovery of the deferred income tax asset are taxes paid
that
are available for carryback and the expectation that the deductible temporary
differences will reverse during periods in which the Company generates taxable
income.
Total
income tax expense for the years ended December 31, 2006, 2005 and 2004 differs
from the "expected" federal income tax expense at the 34% statutory rate for
the
following reasons:
|
2006
|
2005
|
2004
|
||||||||
|
Expected
federal income taxes
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
||||
|
Interest
on municipal securities available-for-sale and municipal
loans
|
(16.8
|
)
|
(9.4
|
)
|
(4.5
|
)
|
||||
|
State
tax expense, net of federal benefit
|
0.1
|
0.4
|
4.3
|
|||||||
|
Other
|
(0.4
|
)
|
(1.0
|
)
|
(0.8
|
)
|
||||
|
Effective
tax rates
|
16.9
|
%
|
24.0
|
%
|
33.0
|
%
|
||||
NOTE
16 EMPLOYEE BENEFITS
Pension
Plan
The
Company maintains a trusteed non-contributory pension plan (the “Plan”) covering
substantially all full-time employees. Assuming retirement at age 65 after
30
years or more of service, the benefits are computed as the sum of one percent
of
final average earnings up to a covered compensation limit, plus 0.65 percent
of
final average earnings in excess of covered compensation, times years of
service, up to 30. Final average earnings are defined as the five consecutive
years out of the employee’s last ten years of employment during which
compensation is highest. The amounts contributed to the Plan are determined
annually on the basis of (a) the maximum amount that can be deducted for federal
income tax purposes or (b) the amount certified by a consulting actuary as
necessary to avoid an accumulated funding deficiency as defined by the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only benefits attributed to service to date but also for those expected
to
be earned in the future.
The
following table sets forth information about the Plan as of December 31, using
a
measurement date of December 31, and for the years then ended:
|
($000
Omitted)
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Accumulated
benefit obligation at the end of the year
|
$
|
5,863
|
$
|
4,986
|
$
|
5,475
|
||||
|
Change
in projected benefit obligation
|
||||||||||
|
Projected
benefit obligation at beginning of year
|
$
|
6,590
|
$
|
5,805
|
$
|
4,901
|
||||
|
Service
cost
|
519
|
515
|
481
|
|||||||
|
Interest
cost
|
371
|
346
|
303
|
|||||||
|
Actuarial
(gain) loss
|
(344
|
)
|
235
|
233
|
||||||
|
Benefits
paid
|
(169
|
)
|
(311
|
)
|
(113
|
)
|
||||
|
Projected
benefit obligation at end of year
|
6,967
|
6,590
|
5,805
|
|||||||
|
Change
in plan assets
|
||||||||||
|
Fair
value of plan assets at beginning of year
|
5,730
|
4,601
|
3,652
|
|||||||
|
Actual
return on plan assets
|
680
|
295
|
401
|
|||||||
|
Employer
contributions
|
-
|
1,145
|
661
|
|||||||
|
Administrative
expense
|
(15
|
)
|
-
|
-
|
||||||
|
Benefits
paid
|
(169
|
)
|
(311
|
)
|
(113
|
)
|
||||
|
Fair
value of plan assets at end of year
|
6,226
|
5,730
|
4,601
|
|||||||
|
Funded
status at end of year
|
$
|
(741
|
)
|
(
860
|
)
|
(1,204
|
)
|
|||
|
Unrecognized
net actuarial loss
|
2,989
|
2,803
|
||||||||
|
Unrecognized
prior service credit
|
(792
|
)
|
(877
|
)
|
||||||
|
Net
amount recognized
|
$
|
1,337
|
$
|
722
|
||||||
|
Amounts
recognized in the Statement of Financial Position
|
||||||||||
|
Prepaid
benefit cost
|
$
|
-
|
$
|
1,337
|
$
|
722
|
||||
|
Accrued
benefit liability
|
-
|
-
|
(1,018
|
)
|
||||||
|
Unfunded
pension liability
|
(741
|
)
|
-
|
-
|
||||||
|
Total
|
$
|
(741
|
)
|
$
|
1,337
|
$
|
(296
|
)
|
||
|
Amounts
recognized in accumulated other comprehensive income
|
||||||||||
|
Pension
liability adjustment
|
$
|
-
|
$
|
-
|
$
|
1,018
|
||||
|
Prior
service credit
|
(708
|
)
|
-
|
-
|
||||||
|
Net
loss
|
2,289
|
-
|
-
|
|||||||
|
Total
|
$
|
1,581
|
$
|
-
|
$
|
1,018
|
||||
The
following table illustrates the incremental effect of applying SFAS No. 158
on
individual line items in the balance sheet as of December 31, 2006:
|
($000
Omitted)
|
||||||||||
|
Before
Application of SFAS No. 158
|
Adjustments
|
After
Application of SFAS No. 158
|
||||||||
|
Prepaid
benefit cost
|
$
|
840
|
$
|
(840
|
)
|
$
|
-
|
|||
|
Deferred
income taxes
|
1,866
|
626
|
2,492
|
|||||||
|
Total
assets
|
651,091
|
(214
|
)
|
650,877
|
||||||
|
Liability
for pension benefits
|
-
|
741
|
741
|
|||||||
|
Total
liabilities
|
597,987
|
741
|
598,728
|
|||||||
|
Accumulated
other comprehensive loss
|
(301
|
)
|
(955
|
)
|
(1,256
|
)
|
||||
|
Total
stockholders’ equity
|
53,104
|
(955
|
)
|
52,149
|
||||||
|
Components
of net periodic benefit cost and other amounts recognized in other
comprehensive loss
|
2006
|
2005
|
2004
|
||||||||||
|
Service
cost
|
$
|
519
|
$
|
515
|
$
|
481
|
|||||||
|
Interest
cost
|
371
|
346
|
303
|
||||||||||
|
Expected
return on plan assets
|
(451
|
)
|
(384
|
)
|
(288
|
)
|
|||||||
|
Amortization
of prior service cost
|
(85
|
)
|
(85
|
)
|
(84
|
)
|
|||||||
|
Amortization
of net actuarial loss
|
143
|
138
|
141
|
||||||||||
|
Recognized
transition amount
|
-
|
-
|
(1
|
)
|
|||||||||
|
Net
periodic benefit cost
|
497
|
$
|
530
|
$
|
552
|
||||||||
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive loss*
|
|||||||||||||
|
Net
gain for period
|
(558
|
)
|
|||||||||||
|
Amortization
of prior service credit
|
85
|
||||||||||||
|
Amortization
of net loss
|
(143
|
)
|
|||||||||||
|
Total
|
(616
|
)
|
|||||||||||
|
Total
recognized in net period pension cost and other comprehensive
loss*
|
$
|
(119
|
)
|
||||||||||
|
*This
section illustrates the reconciliation items if FAS 158 were in effect
at
December 31, 2005
|
|||||||||||||
The
estimated prior service credit and net loss that will be accreted and amortized
from accumulated other comprehensive loss into net periodic benefit cost over
the year ended December 31, 2007 are $84,000 and $100,000,
respectively.
|
Assumptions
used to determine benefit obligations and benefit cost as of and
for the
years ending December 31,
|
2006
|
2005
|
2004
|
||||
|
Discount
rate:
|
|||||||
|
Benefit
obligation
|
6.00
|
%
|
5.75
|
%
|
6.00
|
%
|
|
|
Benefit
cost
|
5.75
|
6.00
|
6.25
|
||||
|
Long-term
rate of return on plan assets
|
8.00
|
8.00
|
8.00
|
||||
|
Rate
of compensation increase
|
3.50
|
3.50
|
3.50
|
The
expected long-term rate of return for the plan’s total assets is based on the
expected return of asset categories identified below, weighted based on the
target allocations for each class. Equity funds are expected to return 8% to
10%
over the long-term and bond funds and short-term money markets are expected
to
return between 4% and 6%.
The
Company’s pension plan actual asset allocations by asset category are as
follows:
|
Plan
Assets at December 31,
|
|||||||
| Asset Category |
2006
|
2005
|
2004
|
||||
|
Mutual
funds:
|
|||||||
|
Bond
funds
|
29.0
|
%
|
32.7
|
%
|
32.6
|
%
|
|
|
Equity
securities
|
51.0
|
42.5
|
43.6
|
||||
|
Real
estate funds
|
7.0
|
8.5
|
9.4
|
||||
|
Short-term
money market
|
13.0
|
16.3
|
14.4
|
||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|
The
investment policy, as established by the Company, is to provide for a moderate
growth of capital with a moderate level of volatility by investing assets per
the target allocations as follows:
| Asset Category |
2006
|
2005
|
2004
|
||||
|
Mutual
funds:
|
|||||||
|
Bond
funds
|
25-45
|
%
|
40-60
|
%
|
40-60
|
%
|
|
|
Equity
securities
|
45-65
|
30-50
|
30-50
|
||||
|
Real
estate funds
|
0-15
|
0-15
|
0-15
|
||||
|
Other
|
0-25
|
-
|
-
|
The
assets will be re-allocated quarterly to meet the above target allocations.
The
investment policy is reviewed on an annual basis, under the advisement of the
Company’s certified investment advisor, to determine if the policy should be
changed.
The
plan
assets do not include any Company common stock at December 31, 2006 and
2005.
The
Company expects to contribute $435,000 to its pension plan in 2007.
Estimated
future benefit payments, which reflect future service, as appropriate, are
as
follows for the years ended December 31:
|
($000
Omitted)
|
|
|
2007
|
$
169
|
|
2008
|
194
|
|
2009
|
224
|
|
2010
|
235
|
|
2011
|
262
|
|
2012-2016
|
1,827
|
401(k)
Plan
The
Company offers a contributory 401(k) Plan. Under the Northway Financial, Inc.
401(k) and Profit Sharing Plan (the “401K Plan”) employees must have attained
age 21, completed six months of service and be credited with 1,000 hours of
service in order to participate. Employees of the Company are eligible to
participate. Under the 401K Plan, the Company matches 50 percent of the first
4
percent of employee contributions. Total 401(k) matching expense in 2006, 2005
and 2004 amounted to $151,000, $139,000 and $143,000, respectively, and Profit
Sharing contribution expense for 2006, 2005, and 2004 was $0, $0, and $38,000,
respectively.
Supplemental
Executive Retirement Plan (SERP)
Effective
May 29, 2003, the existing Executive Life program sponsored by the Company
was
terminated and replaced with a SERP in which Mr. Woodward participates. The
existing Split Dollar Life Insurance policy designed to support the Executive
Life program is now fully owned by Northway. This policy will be maintained
by
Northway and is used as the benchmark for the SERP.
The
total
retirement SERP benefit is as follows: Upon Mr. Woodward’s termination of
employment for reasons other than death or for cause, the account balance is
paid out to him in ten (10) equal annual installments on the first day of the
month following the month in which employment is terminated. Upon death after
retirement, the unpaid account balance, if any, is paid out in a lump sum to
the
named beneficiary. During retirement, an additional retirement payment, based
on
the policy gains associated with the prior calendar year, will also be paid
on
an annual basis until the executive’s death. In the event of Mr. Woodward’s
death while employed by the Company, the SERP permits a death benefit of
$2,000,000 be paid to his beneficiary.
Stock-Based
Compensation
The
Board
of Directors (the “Committee”) administers the 1999 Stock Option and Grant Plan
(the “1999 Plan”) which is described below.
Under
the
1999 Plan, the Committee may select the individuals to whom awards may from
time
to time be granted; determine the time or times of grant; and determines the
extent, if any, of incentive stock options, non-qualified stock options,
restricted stock awards, unrestricted stock awards, performance share awards,
or
any combination of the foregoing.
The
1999
Plan expires in February 2009. The aggregate number of shares of the Company’s
common stock which may be issued upon the exercise of options granted under
the
1999 Plan is 175,000. The option price is fixed by the Committee at the time
of
the grant and may not be less than 100 percent of the fair market value of
the
stock, as determined by the Committee, in good faith as of the grant date.
Each
option may be exercised at such times as shall be determined by the Committee
at
or after the grant date; provided, however, that no option may be exercised
ten
years after the date of grant. The fair value of each option granted is
estimated on grant date using the Black-Scholes option pricing model.
A
summary
of the status of the Company’s 1999 Plan as of December 31, 2006, 2005 and 2004
and changes during the years then ended is presented below:
|
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
||||||||||||||
|
Outstanding,
beginning of year
|
34,000
|
$
|
25.00
|
38,000
|
$
|
24.96
|
42,000
|
$
|
24.93
|
||||||||||
|
Exercised
|
-
|
(4,000
|
)
|
24.64
|
(4,000
|
)
|
24.64
|
||||||||||||
|
Forfeited
|
(3,500
|
)
|
28.00
|
-
|
-
|
||||||||||||||
|
Outstanding,
end of year
|
30,500
|
24.65
|
34,000
|
25.00
|
38,000
|
24.96
|
|||||||||||||
|
Options
exercisable at year-end
|
30,500
|
34,000
|
38,000
|
||||||||||||||||
The
following table summarizes information about fixed stock options outstanding
as
of December 31, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Weighted
Average
Exercise
Price
|
Number
Outstanding
as
of
12/31/06
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Number
Exercisable
as
of
12/31/06
|
|
|
Weighted
Average
Exercise
Price
|
||||||
|
$
|
28.00
|
11,500
|
2.50
years
|
11,500
|
$
|
28.00
|
||||||||||
|
22.63
|
19,000
|
3.63
years
|
19,000
|
22.63
|
||||||||||||
|
24.65
|
30,500
|
3.20
years
|
30,500
|
24.65
|
||||||||||||
Change
in Control
The
Company and its subsidiary have entered into Key Employee agreements with
specific Executive Officers as well as other Senior Officers of the Company.
These agreements provide for payments, under certain circumstances, to the
officer upon the officer’s termination after a change in control. Payments will
be made under these agreements upon the officer’s termination or resignation in
connection with certain specified actions adverse to the officer’s employment
status after a change in control. The amount of such payments ranges from 1.0
to
1.5 times such officer’s annual compensation.
NOTE
17 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and
to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters
of
credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Financial
instruments with off-balance sheet credit risk at December 31, are as follows:
|
($000
Omitted)
|
|||||||
|
2006
|
2005
|
||||||
|
Financial
instrument whose contract amounts represent credit risk:
|
|||||||
|
Unadvanced
portions of home equity loans
|
$
|
17,691
|
$
|
18,761
|
|||
|
Unadvanced
portions of lines of credit
|
21,424
|
14,485
|
|||||
|
Unadvanced
portions of commercial real estate loans
|
17,421
|
17,381
|
|||||
|
Unadvanced
portions of Bounce Protection™
|
13,667
|
11,294
|
|||||
|
Commitments
to originate all other loans
|
20,742
|
19,971
|
|||||
|
Commitments
to originate municipal notes
|
972
|
-
|
|||||
|
Standby
letters of credit
|
303
|
78
|
|||||
|
Total
|
$
|
92,220
|
$
|
81,970
|
|||
Commitments
to originate loans and municipal notes, unadvanced portions of home equity
loans, lines of credit and commercial real estate loans are agreements to lend
to a customer provided there is no violation of any condition established in
the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without having been drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates
each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management’s credit evaluation of the borrower.
Unadvanced
portions of Bounce Protection™ represent the unused portion of the Bank’s
overdraft privilege program.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance by a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan commitments to customers. As of December 31, 2006 and 2005, the maximum
potential amount of the Company’s obligation was $303,000 and $78,000,
respectively, for financial and standby letters of credit. The Company’s
outstanding letters of credit generally have a term of less than one year.
If a
letter of credit is drawn upon, the Company may seek recourse through the
customer’s underlying line of credit. If the customer’s line of credit is also
in default, the Company may take possession of the collateral, if any, securing
the line of credit.
NOTE
18 FAIR VALUE OF FINANCIAL INSTRUMENTS
The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash
and
cash equivalents: The carrying amounts reported in the consolidated balance
sheets for cash and cash equivalents approximates the fair value of those
assets.
Securities:
Fair values for securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
FHLB
Stock: The carrying amount reported in the consolidated balance sheets for
FHLB
Stock approximates its fair value. If redeemed, the Company will receive an
amount equal to the par value of the stock.
Loans
held-for-sale: Fair values for loans held-for-sale are estimated based on
outstanding investor commitments, or in the absence of such commitments, are
based on current investor yield requirements.
Loans:
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The fair values of nonaccrual loans was estimated using
discounted cash flow analyses or the estimated fair value of the underlying
collateral where applicable.
Accrued
interest receivable: The carrying value of accrued interest receivable
approximates its fair value because of the short-term nature of this financial
instrument.
Deposits:
The fair value of demand deposits (e.g. NOW and super NOW checking, noninterest
bearing checking, regular savings, money market accounts and mortgagors’ escrow
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e. their carrying amounts). Fair values for certificates
of
deposit are estimated using a discounted cash flow technique that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities of time deposits.
Short-term
borrowings: The carrying value of short-term borrowings approximates its fair
value because of the short-term nature of these financial
instruments.
Long-term
debt: The fair values of long-term debt are determined by discounting the
anticipated future cash payments by using the rates currently available to
the
Company for debt with similar terms and remaining maturities.
Junior
subordinated debentures: The fair values of junior subordinated debentures
are
based on quoted market prices, where available. If quoted market prices are
not
available, fair values are based on quoted market prices of comparable
instruments.
Off-balance
sheet instruments: The fair value of commitments to originate loans is estimated
using the fees currently charged to enter similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments and the unadvanced
portion of loans, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters
of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation with the
counterparties at the reporting date. See NOTE 17 for further
information.
The
estimated fair values of the Company’s financial instruments are as
follows:
|
($000
Omitted)
|
|||||||||||||
|
December
31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Carrying
Amount
|
Estimated
Fair
Value
|
Carrying
Amount
|
Estimated
Fair
Value
|
||||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
24,808
|
$
|
24,808
|
$
|
29,362
|
$
|
29,362
|
|||||
|
Securities
available-for-sale
|
127,789
|
127,789
|
103,244
|
103,244
|
|||||||||
|
FHLB
stock
|
3,782
|
3,782
|
5,541
|
5,541
|
|||||||||
|
Loans
held-for-sale
|
263
|
268
|
453
|
461
|
|||||||||
|
Loans,
net
|
456,649
|
445,550
|
455,223
|
445,529
|
|||||||||
|
Accrued
interest receivable
|
2,941
|
2,941
|
2,614
|
2,614
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Deposits
|
$
|
484,677
|
$
|
484,266
|
$
|
464,456
|
$
|
463,159
|
|||||
|
Short-term
borrowings
|
36,497
|
36,497
|
9,363
|
9,363
|
|||||||||
|
Long-term
debt
|
53,000
|
51,900
|
85,000
|
84,296
|
|||||||||
|
Junior
subordinated debentures
|
20,620
|
20,646
|
20,620
|
20,908
|
|||||||||
The
carrying amounts of financial instruments shown in the above table are included
in the consolidated balance sheets under the indicated captions except that
accrued interest receivable is included with other assets and junior
subordinated debentures are included with long-term debt.
At
December 31, 2006 and 2005 all the Company’s financial instruments were held for
purposes other than trading.
Limitations
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates
do
not reflect any premium or discount that could result from offering for sale
at
one time the Company’s entire holdings of a particular financial instrument.
Because no market exists for some of the Company’s financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, cash flows, current economic conditions, risk characteristics,
and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions and changes in the loan,
debt
and interest rate markets could significantly affect the estimates. Further,
the
income tax ramifications related to the realization of the unrealized gains
and
losses can have a significant effect on the fair value estimates and have not
been considered. The fair value amounts presented do not represent the
underlying value of the Company because fair values of certain other financial
instruments, assets and liabilities have not been determined.
NOTE
19 CONDENSED PARENT ONLY FINANCIAL STATEMENTS
Condensed
financial statements of Northway Financial, Inc. (Parent Company only) as of
December 31, 2006 and 2005 and for the three years ended December 31, 2006
follow:
Balance
Sheets
|
($000
Omitted)
|
|||||||
|
2006
|
2005
|
||||||
|
Assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
5,182
|
$
|
3,780
|
|||
|
Investment
in subsidiary, Northway Bank
|
64,126
|
61,517
|
|||||
|
Investment
in unconsolidated subsidiaries, Northway Capital Trust I &
II
|
620
|
620
|
|||||
|
Equipment,
net
|
960
|
1,571
|
|||||
|
Due
from subsidiary
|
145
|
540
|
|||||
|
Other
assets
|
4,126
|
4,751
|
|||||
|
Total
assets
|
$
|
75,159
|
$
|
72,779
|
|||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Accrued
expenses
|
$
|
541
|
$
|
540
|
|||
|
Other
liabilities
|
1,849
|
1,369
|
|||||
|
Junior
subordinated debentures
|
20,620
|
20,620
|
|||||
|
Total
liabilities
|
23,010
|
22,529
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Common
stock
|
1,732
|
1,732
|
|||||
|
Additional
paid-in capital
|
2,064
|
2,064
|
|||||
|
Retained
earnings
|
56,140
|
54,089
|
|||||
|
Treasury
stock
|
(6,531
|
)
|
(6,531
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(1,256
|
)
|
(1,104
|
)
|
|||
|
Total
stockholders’ equity
|
52,149
|
50,250
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
75,159
|
$
|
72,779
|
|||
|
Statements
of Income
|
($000
Omitted)
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Income:
|
||||||||||
|
Dividends
from subsidiary
|
$
|
2,210
|
$
|
2,036
|
$
|
2,030
|
||||
|
Interest
income
|
210
|
120
|
48
|
|||||||
|
Management
fee income from subsidiary
|
1,913
|
8,750
|
9,576
|
|||||||
|
Other
|
290
|
202
|
178
|
|||||||
|
4,623
|
11,108
|
11,832
|
||||||||
|
Expense:
|
||||||||||
|
Interest
expense
|
1,832
|
1,463
|
1,079
|
|||||||
|
Salaries
and employee benefits
|
940
|
5,536
|
5,715
|
|||||||
|
Office
occupancy and equipment expense
|
611
|
1,137
|
1,268
|
|||||||
|
Professional
fees
|
257
|
661
|
777
|
|||||||
|
Other
|
104
|
1,417
|
1,833
|
|||||||
|
3,744
|
10,214
|
10,672
|
||||||||
|
Income
before income tax benefit and equity in undistributed net income
of
subsidiary
|
879
|
894
|
1,160
|
|||||||
|
Income
tax benefit
|
(531
|
)
|
(438
|
)
|
(345
|
)
|
||||
|
Income
before equity in undistributed net income of subsidiary
|
1,410
|
1,332
|
1,505
|
|||||||
|
Equity
in undistributed net income of subsidiary
|
1,805
|
1,341
|
1,883
|
|||||||
|
Net
income
|
$
|
3,215
|
$
|
2,673
|
$
|
3,388
|
||||
Statements
of Cash Flows
|
($000
Omitted)
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
3,215
|
$
|
2,673
|
$
|
3,388
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
597
|
630
|
603
|
|||||||
|
Decrease
in amount due from subsidiary
|
395
|
268
|
170
|
|||||||
|
Increase
in other assets
|
411
|
(622
|
)
|
(305
|
)
|
|||||
|
Increase
in accrued expenses and other liabilities
|
(261
|
)
|
4
|
535
|
||||||
|
Loss
on disposal of assets
|
14
|
2
|
-
|
|||||||
|
Undistributed
net income of subsidiary
|
(1,805
|
)
|
(1,341
|
)
|
(1,883
|
)
|
||||
|
Net
cash provided by operating activities
|
2,566
|
1,614
|
2,508
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Capital
contributions to subsidiary
|
-
|
-
|
-
|
|||||||
|
Additions
to premises and equipment
|
-
|
(145
|
)
|
(869
|
)
|
|||||
|
Purchase
of company owned life insurance
|
-
|
-
|
(400
|
)
|
||||||
|
Net
cash used by investing activities
|
-
|
(
145
|
)
|
(1,269
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Exercise
of stock options
|
-
|
99
|
99
|
|||||||
|
Purchases
of treasury stock
|
-
|
(563
|
)
|
-
|
||||||
|
Cash
dividends paid
|
(1,164
|
)
|
(1,068
|
)
|
(1,020
|
)
|
||||
|
Net
cash used by financing activities
|
(1,164
|
)
|
(1,532
|
)
|
(
921
|
)
|
||||
|
Net
(decrease) increase in cash and cash equivalents
|
1,402
|
(63
|
)
|
318
|
||||||
|
Cash
and cash equivalents at beginning of year
|
3,780
|
3,843
|
3,525
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
5,182
|
$
|
3,780
|
$
|
3,843
|
||||
QUARTERLY
RESULTS OF OPERATIONS (UNAUDITED)
Summarized
quarterly financial data for 2006 and 2005 follows:
|
($000
Omitted, except earnings per share)
|
|||||||||||||
|
2006
Quarters Ended
|
|||||||||||||
|
Mar
31
|
|
Jun
30
|
|
Sep
30
|
|
Dec
31
|
|||||||
|
Interest
and dividend income
|
$
|
8,543
|
$
|
8,937
|
$
|
9,179
|
$
|
9,308
|
|||||
|
Interest
expense
|
2,901
|
3,293
|
3,623
|
3,948
|
|||||||||
|
Net
interest and dividend income
|
5,642
|
5,644
|
5,556
|
5,360
|
|||||||||
|
Provision
for loan losses
|
105
|
120
|
120
|
120
|
|||||||||
|
Noninterest
income
|
1,572
|
1,324
|
1,507
|
1,468
|
|||||||||
|
Noninterest
expense
|
5,699
|
5,921
|
5,904
|
6,217
|
|||||||||
|
Income
before taxes
|
1,410
|
927
|
1,039
|
491
|
|||||||||
|
Income
tax expense (benefit)
|
330
|
171
|
185
|
(
34
|
)
|
||||||||
|
Net
income
|
$
|
1,080
|
$
|
756
|
$
|
854
|
$
|
525
|
|||||
|
Basic
earnings per common share
|
$
|
0.72
|
$
|
0.51
|
$
|
0.57
|
$
|
0.35
|
|||||
|
Earnings
per common share assuming dilution
|
$
|
0.72
|
$
|
0.50
|
$
|
0.57
|
$
|
0.35
|
|||||
|
2005
Quarters Ended
|
|||||||||||||
|
Mar
31
|
|
Jun
30
|
|
Sep
30
|
|
Dec
31
|
|||||||
|
Interest
and dividend income
|
$
|
7,833
|
$
|
7,742
|
$
|
8,177
|
$
|
8,352
|
|||||
|
Interest
expense
|
1,896
|
2,068
|
2,342
|
2,622
|
|||||||||
|
Net
interest and dividend income
|
5,937
|
5,674
|
5,835
|
5,730
|
|||||||||
|
Provision
for loan losses
|
75
|
-
|
-
|
-
|
|||||||||
|
Noninterest
income
|
987
|
1,295
|
1,337
|
377
|
|||||||||
|
Noninterest
expense
|
5,612
|
5,752
|
5,946
|
6,272
|
|||||||||
|
Income
before taxes
|
1,237
|
1,217
|
1,226
|
(165
|
)
|
||||||||
|
Income
tax expense (benefit)
|
414
|
313
|
349
|
(
234
|
)
|
||||||||
|
Net
income
|
$
|
823
|
$
|
904
|
$
|
877
|
$
|
69
|
|||||
|
Basic
earnings per common share
|
$
|
0.55
|
$
|
0.60
|
$
|
0.58
|
$
|
0.05
|
|||||
|
Earnings
per common share assuming dilution
|
$
|
0.54
|
$
|
0.60
|
$
|
0.58
|
$
|
0.05
|
|||||
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shatswell,
MacLeod & Company, P.C.
Certified
Public Accountants
83
Pine
Street
West
Peabody, Massachusetts 01960
The
Board
of Directors and Stockholders
Northway
Financial, Inc.
Berlin,
New Hampshire
We
have
audited the accompanying consolidated balance sheets of Northway Financial,
Inc.
and Subsidiaries as of December 31, 2006 and 2005 and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity and
cash flows for each of the years in the three-year period ended December 31,
2006. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Northway
Financial, Inc. and Subsidiaries as of December 31, 2006 and 2005 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.
SHATSWELL,
MacLEOD & COMPANY,
P.C.
West
Peabody, Massachusetts
January
26, 2007
None.
The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures as of December 31, 2006. Based on
that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2006. There were no changes in the Company’s
internal control over financial reporting during the fourth quarter 2006 that
has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
None
PART
III
Information
required by this item is incorporated by reference to the information in the
Company’s definitive proxy statement to be delivered in connection with its 2007
Annual Meeting of Stockholders.
The
information required by this item is incorporated by reference to the
information set forth in the Company’s definitive proxy statement to be
delivered in connection with its 2007 Annual Meeting of
Stockholders.
The
information required by this item is incorporated by reference to the
information in the Company’s definitive proxy statement to be delivered in
connection with its 2007 Annual Meeting of Stockholders.
The
information required by this item is incorporated by reference to the
information in the Company’s definitive proxy statement to be delivered in
connection with its 2007 Annual Meeting of Stockholders.
The
information required by this item is incorporated by reference to the
information in the Company’s definitive proxy statement to be delivered in
connection with its 2007 Annual Meeting of Stockholders.
(a)
(1)
The following financial statements are filed as part of this Report on Form
10-K:
Report
of
Independent Registered Public Accounting Firm
Consolidated
Statements of Income for the years ended December 31, 2006, 2005 and
2004
Consolidated
Balance Sheets as of December 31, 2006 and 2005
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December 31,
2006, 2005, and 2004
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2006, 2005
and 2004
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005 and
2004
Notes
to
Consolidated Financial Statements
(2) Financial Statement Schedules:
None
(3)
The Exhibits which are
filed with this report or which are incorporated herein by reference are set
forth in the Exhibit
Index. The Exhibit Index is incorporated herein by reference.
Pursuant
to requirements of Section 13 or 15(d) 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.
March
22,
2007
BY:
/S/
William J. Woodward
William
J. Woodward
Chairman
of the Board, President & Chief Executive
Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/S/
William J. Woodward
William
J. Woodward
|
Chairman
of the Board, President, and CEO (Principal Executive
Officer)
|
March
22, 2007
|
|
/S/
Richard P. Orsillo
Richard
P. Orsillo
|
Senior
Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer)
|
March
22, 2007
|
|
/S/
John H. Noyes
John
H. Noyes
|
Director
|
March
27, 2007
|
|
/S/
Barry J. Kelley
Barry
J. Kelley
|
Director
|
March
22, 2007
|
|
/S/
Randall G. Labnon
Randall
G. Labnon
|
Director
|
March
26, 2007
|
|
/S/
Brien L. Ward
Brien
L. Ward
|
Director
|
March
22, 2007
|
|
/S/
Arnold P. Hanson, Jr.
Arnold
P. Hanson, Jr.
|
Director
|
March
22, 2007
|
|
/S/
Frederick C. Anderson
Frederick
C. Anderson
|
Director
|
March
27, 2007
|
|
/S/
Stephen G. Boucher
Stephen
G. Boucher
|
Director
|
March
26, 2007
|
|
/S/
Fletcher W. Adams
Fletcher
W. Adams
|
Director
|
March
27, 2007
|
INDEX
OF EXHIBITS
Exhibit
Number Description
of Exhibit
|
2.1
|
Agreement
and Plan of Merger, dated as of March 14, 1997, by and among Northway
Financial, Inc., The Berlin City Bank, Pemi Bancorp, Inc. and Pemigewasset
National Bank (the "Merger Agreement") (incorporated by reference
to
Exhibit 2.1 to Registration Statement No.
333-33033).
|
|
3.1
|
Amended
and Restated Articles of Incorporation of Northway Financial, Inc.
(incorporated by reference to Exhibit 3.1 to Registration Statement
No.
333-33033).
|
|
3.2
|
By-laws
of Northway Financial, Inc. (incorporated by reference to Exhibit
3.2 to
the Company’s Annual Report on Form 10-K for the year ended
2005).
|
|
4
|
Form
of Certificate representing the Company Common Stock (reference is
also
made to Exhibits 3.1 and 3.2) (incorporated by reference to Exhibit
4 to
Registration Statement No.
333-33033).
|
|
10.1
|
Employment
Agreement for William J. Woodward (incorporated by reference to Exhibit
10.1 to the Company’s Annual Report on Form 10-K for the year ended
2005).
(2)
|
|
10.2
|
Amendment
to the Employment Agreement for William J. Woodward (incorporated
by
reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for
the year ended 2005).
(2)
|
|
10.3
|
Northway
Financial, Inc. 1999 Stock Option and Grant Plan (incorporated by
reference to
|
|
Exhibit
4.1 to Registration Statement No. 333-83571 dated July 23,1999).
(2)
|
|
10.4
|
Form
of Key Employee Agreement (incorporated by reference to Exhibit 10.7
to
the Company’s Annual Report on Form 10-K for the year ended
2005).(2)
|
|
10.5
|
Supplemental
Executive Retirement Plan. (incorporated by reference to Exhibit
10.8 to
the Company’s Annual Report on Form 10-K for the year ended
2003).
|
(1) Filed
herewith.
(2) Management
contract or compensatory plan required to be filed as an exhibit to this form
pursuant to Item 15(a) of this report.