SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-23129
NORTHWAY FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
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Address of principal executive offices (Zip Code)
(603) 752-1171
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
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 [X] 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
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 28, 2002 was
1,304,858 shares with an aggregate market value, computed by reference to the
last reported sales price on the NASDAQ National Market on such date, of
$36,862,239. 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 3, 2003, there were 1,506,574 shares of common stock outstanding,
par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its 2002 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part
III.
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NORTHWAY FINANCIAL, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1 Business...........................................................1
ITEM 2 Properties.........................................................9
ITEM 3 Legal Proceedings..................................................9
ITEM 4 Submission of Matters to a Vote of Security Holders................9
PART II
ITEM 5 Market for the Registrant's Common Stock and Related
Security Holder Matters............................................9
ITEM 6 Selected Financial Data...........................................10
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. .......................................11
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk........22
ITEM 8 Financial Statements and Supplementary Material...................23
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................52
PART III
ITEM 10 Directors and Executive Officers of the Registrant................52
ITEM 11 Executive Compensation............................................52
ITEM 12 Security Ownership of Certain Beneficial Owners and Management....52
ITEM 13 Certain Relationships and Related Transactions....................52
ITEM 14 Controls and Procedures...........................................53
ITEM 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K...53
Signatures....................................................54
Certifications................................................56
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. and its
subsidiaries. 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 1 of this report,
overall economic and business conditions, economic and business conditions in
the Company's market areas, interest rate fluctuations, 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) the current economic downturn
nationwide and regionally; ii) changes in interest rates over the past year and
the relative relationship between the various interest rate indices that the
Company uses; iii) a determination in the financial market affecting the
valuation of securities held in the Company's investment portfolio; (iv) a
change in product mix attributable to changing interest rates, customer
preferences or competition; v) 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
vi) 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 predications
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
ITEM 1. BUSINESS
Description of Business
Northway Financial, Inc. (the "Company") 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, effecting the merger (the "Merger") by and
among the Company, BCB, Pemi Bancorp, Inc. ("PEMI"), and PEMI's wholly owned
subsidiary, Pemigewasset National Bank, 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 (collectively the
"Banks"), became wholly owned subsidiaries of the Company. Unless the context
otherwise requires, references herein to the "Company" include Northway
Financial, Inc. and its consolidated subsidiaries.
The Company and its subsidiaries derive substantially all of their 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 Banks
operate as typical community banking institutions and do not engage in any
specialized finance or capital market activities. The Company functions
primarily as the holder of stock of its subsidiaries and assists the management
of its subsidiaries as appropriate.
The Company is subject to regulation by the New Hampshire Bank Commissioner (the
"commissioner"), the Federal Deposit Insurance Corporation (the "FDIC"), the
Comptroller of the Currency of the United States (the "OCC"), and the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). See
"Supervision and Regulation."
BCB, which was first organized in 1891, and PNB, which was first organized in
1881, are engaged in a general commercial banking business and offer commercial
and construction loans, real estate mortgages, consumer loans, including
personal secured and unsecured loans, and lines of credit. During 1998, the
Company, through the BCB subsidiary, established an indirect lending business
unit in Concord, New Hampshire. The unit has substantially increased the volume
of secured consumer installment loans originated for the Banks and for sale to
third parties. The Banks accept savings, time, demand, NOW and money market
deposit accounts, and offer a variety of banking services including safe deposit
boxes, credit card accounts, official checks and money orders, overdraft lines
of credit and wire transfer services. The Banks have 20 automatic teller
machines to allow customers limited banking services on a 24 hour basis.
The Company is a legal entity separate and distinct from its subsidiaries. The
right of the Company to participate in any distribution of assets or earnings of
any subsidiary is subject to the prior claims of creditors of the subsidiary,
except to the extent that claims, if any, of the Company 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 and held-to-maturity as of December 31, 2002,
2001 and 2000 (dollars in thousands):
2002 2001 2000
------- ------- -------
Available-for-sale:
US Treasury and other
US government agency securities $36,188 $10,977 $28,780
Mortgage-backed securities(1) 12,646 21,097 14,652
Marketable equity securities 2,377 3,255 2,409
Corporate bonds 33,848 14,230 1,003
State and political subdivision bonds and notes 6,338 6,005 3,444
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91,397 55,564 50,288
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Held-to-maturity
Mortgage-backed securities(1) -- -- 2,252
State and political subdivision bonds and notes -- -- 500
------- ------- -------
-- -- 2,752
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Total securities $91,397 $55,564 $53,040
======= ======= =======
(1) Includes Collateralized Mortgage Obligations.
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, 2002 (dollars in thousands):
Maturities
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One to Five to Over Total
Within five ten ten amortized
one year years years years cost
-------- ------- ------- ------- ---------
Available-for-sale:
US Treasury and other
US government agency securities $13,996 $20,134 $ 2,037 $ -- $36,167
Mortgage-backed securities (1) 80 4,259 2,058 5,992 12,389
Corporate bonds 1,002 26,249 6,156 -- 33,407
State and political subdivision bonds
and notes 278 221 3,412 2,243 6,154
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Total amortized cost $15,356 $50,863 $13,663 $ 8,235 $88,117
======= ======= ======= ======= =======
Market value $15,372 $51,090 $14,227 $ 8,331 $89,020
======= ======= ======= ======= =======
Weighted average yield 1.64% 4.71% 6.48% 5.86% 4.56%
(1) Includes Collateralized Mortgage Obligations
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, 2002, 2001, 2000, 1999 and 1998 (dollars in thousands):
December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Real estate:
Residential $114,526 $109,261 $129,805 $139,389 $146,603
Commercial 111,941 111,642 100,608 93,061 77,680
Construction 6,330 1,581 5,752 4,360 4,118
Commercial 23,885 22,727 22,270 28,833 25,874
Installment 40,169 28,210 28,177 24,147 25,070
Indirect installment 139,477 120,761 98,919 75,781 18
Other 6,031 6,303 7,881 7,369 4,795
-------- -------- -------- -------- --------
Total loans 442,359 400,485 393,412 372,940 284,158
Less:
Unearned income 207 169 154 174 332
Allowance for loan losses 4,920 4,642 4,354 4,887 4,404
-------- -------- -------- -------- --------
5,127 4,811 4,508 5,061 4,736
-------- -------- -------- -------- --------
Net loans $437,232 $395,674 $388,904 $367,879 $279,422
======== ======== ======== ======== ========
The following table presents the maturity distribution of the Company's
real estate construction and commercial loans at December 31, 2002 (dollars
in thousands):
Percent of
Amount Total
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Within one year $ 9,349 30.94%
One to five years 9,626 31.86
Over five years 11,240 37.20
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$30,215 100.00%
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The Company's real estate construction and commercial loans due after one year
at December 31, 2002 were comprised of the following (dollars in
thousands):
Amount
Fixed interest rate $ 6,045
Adjustable interest rate 14,821
--------
$20,866
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, 2002, 2001, 2000, 1999 and 1998 (dollars in
thousands):
Years ended December 31,
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2002 2001 2000 1999 1998
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Balance at the beginning of period $4,642 $4,354 $4,887 $4,404 $4,156
Charge-offs:
Real estate 83 110 213 159 383
Commercial 12 95 1,006 25 67
Installment loans to individuals 729 529 424 120 74
Credit card -- -- -- -- --
Other -- -- -- -- --
------ ------ ------ ------ ------
Total 824 734 1,643 304 524
------ ------ ------ ------ ------
Recoveries:
Real estate 64 35 32 213 115
Commercial 4 -- -- 21 98
Installment loans to individuals 134 87 96 12 17
Credit card -- -- 2 1 2
Other -- -- -- -- --
------ ------ ------ ------ ------
Total 202 122 130 247 232
------ ------ ------ ------ ------
Net charge-offs 622 612 1,513 57 292
Provision charged to expense 900 900 980 540 540
------ ------ ------ ------ ------
Balance at the end of period $4,920 $4,642 $4,354 $4,887 $4,404
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.15% 0.15% 0.39% 0.02% 0.11%
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 (dollars in thousands):
December 31,
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2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
Percent of loans Percent of loans Percent of loans Percent of loans Percent of loans
in each in each in each in each in each
category category category category category
to to to to to
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Commercial $ 216 5.4% $ 208 5.7% $ 719 5.7% $ 530 7.7% $ 651 9.1%
Real estate:
Commercial &
construction 2,008 26.7 1,621 28.3 1,009 27.0 1,773 26.1 1,325 28.8
Residential 598 25.9 585 27.2 1,160 32.9 503 37.3 1,478 51.6
Installment 2,084 40.6 1,719 37.2 1,440 32.4 1,125 26.9 210 8.8
Other 14 1.4 17 1.6 26 2.0 60 2.0 58 1.7
Unallocated -- N/A 492 N/A -- N/A 896 N/A 682 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$4,920 100.0% $4,642 100.0% $4,354 100.0% $4,887 100.0% $4,404 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Deposits
See "Financial Statements and Supplementary Material" in Item 8 of this report.
Supervision and Regulation
General. In addition to state and federal laws generally applicable to
businesses and employers, the Company, PNB and BCB are further regulated by
federal and state laws and regulations applicable to financial institutions and
their parent companies. State and federal banking laws have as their principal
objective either the maintenance of safety and soundness of financial
institutions and the federal deposit insurance system or the protection of
consumers or classes of consumers, rather than the protection of stockholders of
a bank or its parent company. To the extent the following discussion describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statute or regulation. Any change in applicable law or
regulation may have a material effect on the Company's business, prospects, and
operations, as well as those of its subsidiaries.
The Company. As a bank holding company registered under the Bank Holding Company
Act of 1956, as amended (the "BHC Act"), the Company is subject to substantial
regulation and supervision by the Federal Reserve Board and is required to file
periodic reports and such additional information as the Federal Reserve Board
may require. The Federal Reserve Board also makes periodic inspections of the
Company and its subsidiaries. The Federal Reserve Board 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 Federal Reserve Board. The Federal Reserve Board is also empowered to
assess civil money penalties against companies or individuals who violate the
BHC Act, 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.
The BHC Act prohibits a bank holding company from acquiring substantially all
the assets of a bank or acquiring direct or indirect ownership or control of
more than 5 percent of the voting shares of any bank, or increasing such
ownership or control of any bank, or merging or consolidating with any bank
holding company without prior approval of the Federal Reserve Board. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally
authorizes bank holding companies to acquire banks located in any state,
possibly subject to certain state-imposed age and deposit concentration limits,
and also generally authorizes interstate mergers and to a lesser extent,
interstate branching.
Unless a bank holding company becomes a financial holding company under the
Gramm-Leach-Bliley Act of 1999 (the "GLB Act") (as discussed below), the BHC Act
also prohibits a bank holding company from acquiring a direct or indirect
interest in or control of more than 5 percent of the voting shares of any
company that is not a bank or a BHC and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiary banks, except that it may engage in and
may own shares of companies engaged in certain activities the Federal Reserve
Board determined to be so closely related to banking or managing and controlling
banks as to be a proper incident thereto. In making such determinations, the
Federal Reserve Board is required to weigh the expected benefit to the public,
such as greater convenience, increased competition or gains in efficiency,
against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests or unsound banking
practices. In addition, as discussed more fully below, New Hampshire law imposes
certain approval requirements with respect to acquisitions by a bank holding
company of certain banking institutions.
The GLB Act established a comprehensive framework to permit affiliations among
banks, securities firms, insurance firms and other financial companies by
substantially modifying the BHC Act to authorize bank holding companies that
qualify and elect to become financial holding companies to engage in securities,
insurance and other activities that are financial in nature or incidental to a
financial activity and allowing subsidiaries of banks to engage in a broad range
of financial activities that are not permitted for banks themselves. To qualify,
all of a bank holding company's subsidiary banks must be well-capitalized and
well-managed, as measured by regulatory guidelines. In addition, to engage in
the new activities, each of the bank holding company's banks must have been
rated "satisfactory" or better in its most recent federal Community Reinvestment
Act ("CRA") evaluation. The activities of bank holding companies would continue
to be limited to activities authorized currently under the BHC Act. The Company
is qualified but has not elected to become a financial holding company at this
time and is therefore subject to the restrictions of the BHC Act as outlined
above.
The Federal Reserve Board has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of capital in examining and supervising a bank
holding company and in analyzing applications to it under the BHC Act. These
capital adequacy guidelines generally require bank holding companies to maintain
total capital equal to 8.0 percent of total risk-adjusted assets and off-balance
sheet items (the "Total Risk-Based Capital Ratio"), with at least 50 percent of
that amount consisting of Tier 1, or core capital, and the remaining amount
consisting of Tier 2, or supplementary capital. Tier 1 capital for bank holding
companies generally consists of the sum of common stockholders' equity and
perpetual preferred stock (subject in the case of the latter to limitations on
the kind and amount of such stocks which may be included as Tier 1 capital),
less goodwill and other non-qualifying intangible assets. Tier 1 capital may
also include certain types of trust preferred securities that meet the
requirements specified by the Federal Reserve Board, subject to a limitation in
amount includable in Tier 1 capital. Tier 2 capital generally consists of hybrid
capital instruments; perpetual debt and mandatory convertible debt securities;
perpetual preferred stock, which is not eligible to be included in Tier 1
capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan and lease losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics.
In addition to the risk-based capital requirements, the Federal Reserve Board
requires bank holding companies to maintain a minimum leverage capital ratio of
Tier 1 capital (defined by reference to the risk-based capital guidelines) to
its average total consolidated assets (the "Leverage Ratio") of 3.0 percent.
Total average consolidated assets for this purposes does not include, for
example, goodwill and any other intangible assets and investments that the
Federal Reserve Board determines should be deducted from Tier 1 capital. The
Federal Reserve Board has determined that the 3.0 percent Leverage Ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those, which
are not experiencing or anticipating significant growth. All other bank holding
companies are required to maintain a minimum Leverage Ratio of 4.0 percent. Bank
holding companies with supervisory, financial, operational or managerial
weaknesses, as well as bank holding companies that are anticipating or
experiencing significant growth, are expected to maintain capital ratios well
above the minimum levels. Because the Company anticipates significant future
growth, it expects to be subjected to required ratios of 4.0 percent to 5.0
percent or more.
The Company is currently in compliance with both the Risk-Based Capital Ratio
and the Leverage Ratio requirements. At December 31, 2002, it had a Tier 1
Risk-Based Capital Ratio and a Total Risk-Based Capital Ratio equal to 8.57
percent and 12.04 percent, respectively, and a Leverage Ratio equal to 6.70
percent.
U.S. bank regulatory authorities and international bank supervisory
organizations, principally the Basel Committee on Banking Supervision ("Basel
Committee"), currently are considering changes to the risk-based capital
adequacy framework, which ultimately could affect the appropriate capital
guidelines. Among other things, the Basel Committee rules, which are expected to
be proposed formally for public comment in the next six months and are expected
to become effective around 2006, would add operational risk as a third component
to the denominator of the risk-based capital calculation, which currently
includes only credit and market risks.
The federal Change in Bank Control Act prohibits a person or group of persons
from acquiring "control" of a bank holding company unless the Federal Reserve
Board has been given at least 60 days to review, and does not object to, the
proposal. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10 percent or more of a class of voting stock of a
bank holding company, such as the Company, with a class of securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, any company, as that term is broadly defined in the statute, would
be required to obtain the approval of the Federal Reserve Board under the BHC
Act before acquiring 25 percent (5 percent in the case of an acquirer that is a
bank holding company) or more, or such lesser percentage of our outstanding
common stock as the Federal Reserve Board deems to constitute control over the
Company.
PNB. PNB is a national banking association, organized under the National Bank
Act. As such, its primary regulatory authority is the OCC. The OCC regularly
examines national banks and their operations. In addition, operations of
national banks are subject to federal statutes and regulations. Such statutes
and regulations relate to required capital and reserves, investments, loans,
mergers, payment of dividends, issuance of securities and many other aspects of
operations. Capital requirements applicable to PNB are substantially similar to
those adopted by the Federal Reserve Board regarding bank holding companies as
described above.
The OCC's approval is required for a national bank to pay dividends if the total
dividends declared by a national bank in any year will exceed the total of its
net profits for that year combined with its retained net profits for the
preceding two years, less any required transfer to surplus. The OCC also has
authority to approve or disapprove mergers, consolidations, the establishment of
branches and similar corporate actions. The OCC also has the power to prevent a
national bank from engaging in unsafe or unsound practices or violating
applicable laws in conducting its business.
Under the GLB Act, the OCC permits national banks, to the extent permitted under
state law, to engage in certain new activities which are permissible for
subsidiaries of a financial holding company. Further, it expressly preserves the
ability of national banks to retain all existing subsidiaries.
PNB is also subject to applicable provisions of New Hampshire law insofar as
they do not conflict with or are not otherwise preempted by federal banking law.
BCB. BCB is organized under New Hampshire law and is subject to the regulations
of the Commissioner and the FDIC. BCB's operations are subject to various
requirements and restrictions under the laws of the United States and the State
of New Hampshire, including those 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 BCB are
substantially similar to those adopted by the Federal Reserve Board regarding
bank holding companies as described above.
Community Reinvestment Act. Both BCB and PNB are subject to the provisions of
the Community Reinvestment Act ("CRA"). Under the terms of the CRA, the
appropriate federal bank regulatory agency is required, in connection with its
examination of a subsidiary institution, to assess such institution's record in
meeting the credit needs of the communities served by the institution, including
those of low and moderate income neighborhoods. The regulatory agency's
assessment of the institution's record is made available to the public.
An institution's CRA rating is taken into account by its regulators in
considering various types of applications. In addition, an institution receiving
a rating of substantial noncompliance is subject to civil money penalties or a
cease and desist order under Section 8 of the Federal Deposit Insurance Act
("FDIA"). CRA remains a critical component of the regulatory examination
process. CRA examination results and related concerns have been cited as a
reason to reject and or modify branching and merger applications by various
federal and state banking agencies. Formation of a financial holding company
under the GLB Act is also dependent of the maintenance of a "satisfactory" CRA
rating. Management of BCB and PNB believe that BCB and PNB are currently in
compliance with all CRA requirements.
Customer Information Security. The Federal Reserve Board, the FDIC and other
bank regulatory agencies have adopted final guidelines (the "Guidelines") for
safeguarding nonpublic personal information about customers. Among other things,
the Guidelines require each financial institution, under the supervision and
ongoing oversight of its Board of Directors, to create a comprehensive written
information security program designed to ensure the security and confidentiality
of customer information, protect against any anticipated threats or hazards to
the security or integrity of such information; and protect against unauthorized
access to or use of such information that could result in substantial harm or
inconvenience to any customer.
Privacy. The FDIC and other regulatory agencies have published final privacy
rules pursuant to provisions of the GLB Act ("Privacy Rules"). The Privacy
Rules, which govern the treatment of nonpublic personal information about
consumers by financial institutions, require a financial institution to provide
notice to customers (and other consumers in some circumstances) about its
privacy policies and practices, describe the conditions under which a financial
institution may disclose nonpublic personal information to nonaffiliated third
parties and provide a method for consumers to prevent a financial institution
from disclosing that information to most nonaffiliated third parties by
"opting-out" of that disclosure, subject to certain exceptions.
USA Patriot Act. The USA Patriot Act of 2001 (the "Patriot Act"), designed to
deny terrorists and others the ability to obtain anonymous access to the United
States financial system, has significant implications for depository
institutions, brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act, together with the implementing regulations of various
federal regulatory agencies, requires financial institutions to implement
additional policies and procedures with respect to, or additional measures
designed to address, any or all of the following matters, among others: money
laundering; suspicious activities and currency transaction reporting; and
currency crimes. The Patriot Act also permits 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 Federal Reserve Board (and other federal
banking agencies) to evaluate the effectiveness of an applicant in combating
money laundering activities when considering applications filed under Section 3
of the BHC Act or the Bank Merger Act. Management believes that we are currently
in compliance with all currently effective requirements prescribed by the
Patriot Act and all applicable final implementing regulations.
Government Monetary Policy. The Company's banking subsidiaries are affected by
the credit policies of monetary authorities, including the Federal Reserve
Board. An important function of the Federal Reserve Board is to regulate the
national supply of bank credit. Among the instruments of monetary policy used by
the Federal Reserve Board are open market operations in U. S. Government
securities, changes in the discount and fed funds rates, reserve requirements on
member bank deposits, and funds availability regulations. The monetary policies
of the Federal Reserve Board have in the past had a significant effect on the
operations of financial institutions, including the Company and its
subsidiaries, and will continue to do so in the future. Changing conditions in
the national economy and money markets, as well as the impact of actions by
monetary and fiscal authorities, make it difficult to predict the effect of
future changes in interest rates, deposit levels or loan demand on the business
and income of the Company and its subsidiaries.
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 subsidiaries face significant competition in their
respective 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
subsidiaries 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.
BCB and PNB compete 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 Banks.
Risk Factors
The discussions set forth below contain certain statements that may be
considered "forward-looking statements." Forward-looking statements involve
unknown risks, uncertainties and other factors that may cause the Company's
actual results to materially differ from those projected in the forward-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.
The Company could be adversely impacted by changes in applicable regulations.
The Company is subject to extensive federal and state laws and regulations and
is subject to supervision, regulation and examination by various federal and
state bank regulatory agencies. The restrictions imposed by such laws and
regulations limit the manner in which the Company and its bank subsidiaries 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 the Company's ability to originate, broker or sell loans or otherwise
adversely affect the operations of the Company. See "Supervision and Regulation"
on page 4 of this report.
The Company's business is largely dependent upon the hospitality industry. A
number of the Company's loan customers are in the hospitality industry. The
hospitality industry is dependent on personal discretionary spending levels.
Consequently, the hospitality industry has been adversely impacted by current
negative economic trends, including recession and increased unemployment.
Additionally, unforeseen events, such as political instability, including the
potential war with Iraq, increases in fuel prices, travel-related accidents and
unusual weather patterns also may adversely affect the hospitality industry. As
a result, the Company's business also is likely to be affected by those events.
Interest rate volatility may adversely impact the Company's results of
operations. The principal components of the Company's income stream are net
interest and dividend income. Net interest and dividend income is the difference
between interest and fee income on earning assets, such as loans and
investments, and the interest expense paid on interest bearing liabilities, such
as deposits and borrowed funds. The Company's net interest and dividend income
may be significantly affected by changes in market interest rates, which are
currently at historically low levels. A decrease in interest rates could reduce
the Company's net interest and dividend income as the difference between
interest and fee income and interest expense decreases. An increase in interest
rates could also negatively impact the Company's results of operations by
reducing borrowers' ability to repay their current loan obligations, resulting
in increased loan defaults, foreclosures and write-offs and may necessitate
increases to the Company's allowance for loan losses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this report.
The Company's allowance for loan losses may not be adequate to cover actual
losses. The Company makes various assumptions and judgments about the
collectibility of its loan portfolio and provides an allowance for potential
loan losses based on several factors. If the Company's assumptions are wrong,
its allowance for loan losses may be insufficient to cover its actual losses,
which would have an adverse effect on the Company's results of operations, and
may cause the Company to increase the allowance in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this report.
Changes in the securities market may adversely impact the Company's results of
operations. The securities market has experienced a significant downturn and
will likely continue to experience significant volatility as a result of, among
other things, world economic and political conditions. Continued 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. The decline in the value of Company-held securities may
decrease the Company's earnings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this report.
Employees
As of December 31, 2002 the Company and its subsidiaries had approximately 269
full-time equivalent employees. The Company considers its employee relations to
be good.
ITEM 2. PROPERTIES
The Company operates 21 branch offices and one loan origination 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, Pittsfield and Concord. Fourteen of these
offices, including its main offices in Berlin, New Hampshire and Plymouth, New
Hampshire, are located on properties the Company owns. The Company leases seven
of its branches and the loan origination facility under five-year leases
expiring between June 28, 2003 and December 31, 2008. Seventeen of the Company's
branches have drive-up facilities and twenty are equipped with automated teller
machines.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
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
------ ----- -----------
2002 4th Quarter $26.18 $31.50 $0.17
3rd Quarter 27.75 29.90 0.17
2nd Quarter 28.15 30.00 0.17
1st Quarter 27.50 29.40 0.17
2001 4th Quarter $27.25 $29.75 $0.17
3rd Quarter 25.75 30.95 0.17
2nd Quarter 23.50 30.00 0.17
1st Quarter 22.88 24.19 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 3, 2003, the closing sales price of the common stock on the Nasdaq
National Market was $29.26 per share. As of such date, there were approximately
1,302 holders of record of the Company common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected consolidated financial information
of the Company for the five years in the period ended December 31, 2002. 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, 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Balance Sheet Data:
Total assets $598,318 $513,939 $485,144 $462,552 $403,972
Securities available-for-sale 91,397 55,564 50,288 51,542 48,529
Securities held-to-maturity -- -- 2,752 5,151 6,509
Loans, net of unearned income 442,152 400,316 393,258 372,766 283,826
Allowance for loan losses 4,920 4,642 4,354 4,887 4,404
Other real estate owned 175 22 25 115 158
Unidentifiable intangible assets -- 8,080 5,098 1,271 860
Goodwill 10,152 -- -- -- --
Core deposit intangible 4,857 -- -- -- --
Deposits (1) 476,194 412,840 391,772 343,029 350,921
Securities sold under agreements to repurchase 8,251 8,155 9,390 7,468 6,791
Stockholders' equity 44,266 43,339 41,562 39,286 40,956
Income Statement Data:
Net interest and dividend income $ 21,664 $ 20,721 $ 21,253 $ 19,342 $ 17,536
Provision for loan losses 900 900 980 540 540
Noninterest income 3,376 2,909 2,692 2,718 2,063
Noninterest expense 20,035 17,149 16,699 15,794 12,955
Net income 2,598 3,873 4,159 3,764 4,068
Per Common Share Data:
Net income - basic $ 1.71 $ 2.55 $ 2.61 $ 2.25 $ 2.35
Net income - assuming dilution 1.71 2.54 2.61 2.25 2.35
Cash dividends declared 0.68 0.68 0.60 0.56 0.42
Book value 29.19 28.68 26.74 24.32 23.67
Tangible book value 19.07 23.16 23.41 23.54 23.18
Selected Ratios:
Return on average assets 0.49% 0.78% 0.86% 0.90% 1.06%
Return on average equity 5.86 9.14 10.29 9.37 10.25
Dividend payout 39.65 26.54 22.96 25.03 17.90
Average equity to average assets 8.33 8.58 8.31 9.62 10.35
(1) 1998 includes a short-term money market deposit of $14,500.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries. 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 discussions set forth below contain
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 and its Bank subsidiaries derive substantially all of their revenue
and income from furnishing bank and bank-related services, principally to
individuals and small and medium sized companies in New Hampshire. The Banks
operate as typical community banking institutions and do not engage in any
specialized finance or capital market activities. Northway functions primarily
as the holder of stock of its subsidiaries and assists the management of its
subsidiaries as appropriate.
The Company reported net income of $2,598,000, or $1.71 per common share, in
2002 compared to net income of $3,873,000, or $2.55 per common share, in 2001
and $4,159,000, or $2.61 per common share, in 2000. Return on average equity was
5.86 percent in 2002, compared to 9.14 percent in 2001 and 10.29 percent for
2000. Return on average assets was 0.49 percent in 2002, compared to 0.78
percent and 0.86 percent for 2001 and 2000, respectively.
During the year 2002, the Company continued the implementation of its growth
initiatives with the purchase of three branches located in Laconia, Belmont and
Pittsfield, New Hampshire. Also during 2002 the Company installed technology
totaling approximately $1,700,000 including a wide-area network, a voice over
internet protocol telephone system, a new on-line teller system, document
imaging and computer upgrades. The Company also made increases to staff during
the year, most notably in the lending area. In addition, the sustained weakness
of the equity market and the impact it had on certain holdings of the Company's
equity securities resulted in net losses on sale of equity securities of
$410,000 and write-downs of equities of $910,000. Costs associated with the
expansion of our branch network, new technology and personnel resulted in
increased noninterest expense which, when added to the loss on sale of equity
securities and the write-down of equity securities, caused a decline in 2002
earnings as compared to 2001.
During 2001, the Company purchased a branch location in Littleton, New
Hampshire, completed construction of a new branch location in Tilton, New
Hampshire and moved its existing Tilton branch into this location. During 2000,
the Company purchased a branch in West Ossipee, New Hampshire. These investments
resulted in increased noninterest expense which, when added to the decline in
net interest income associated with the rapidly declining interest rate
environment, caused a decline in 2001 earnings as compared to 2000.
NET INTEREST AND DIVIDEND INCOME ANALYSIS
Net interest and dividend income is the principal component of a financial
institution's income stream and represents the difference, or spread, between
interest and fee income generated from earning assets and the interest expense
paid on deposits and borrowed funds. Fluctuations in interest rates as well as
changes in volume and mix of earning assets and interest-bearing liabilities can
materially impact net interest and dividend 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 on page 13, entitled "Consolidated Average Balances, Interest and
Dividend Income/Expense and Average Yields/Rates," presents average balances,
income earned or interest paid, and average yields earned or rates paid on major
categories of assets and liabilities for the years ended December 31, 2002,
2001, and 2000.
Net interest and dividend income for 2002 increased $822,000, or 4 percent, over
2001 while decreasing $435,000, or 2 percent, in 2001 over 2000.
Interest and dividend income decreased $3,653,000, or 10 percent, in 2002
compared to 2001. The continued decline in market interest rates caused a 1.24
percent decrease in the yield on average earning assets. A 1.19 percent decrease
in the yield on loans was partially offset by an increase in average loan
balances of $13,829,000. This resulted in a net decrease of $3,736,000, or 12
percent, in interest and fees on loans. Federal funds sold income decreased
$157,000 as a decrease in average yield of 1.67 percent was partially offset by
a $5,175,000 increase in the average balance. This was partially offset by an
increase in interest and dividend income on securities of $241,000, which was
the result of an increase in average balances of $13,580,000 partially offset by
a decrease in average yield of 0.86 percent.
Interest expense decreased $4,475,000, or 31 percent, in 2002 compared to 2001.
The decrease in net interest expense was due primarily to a 1.33 percent
decrease in rates paid on interest bearing liabilities partially offset by an
increase in average balances of $30,482,000. The increase in average balances is
the result of the addition of guaranteed preferred beneficial interest in junior
subordinated debentures issued by the Company's Delaware statutory business
trusts, Northway Capital Trust I and Northway Capital Trust II, with an average
balance of $11,299,000 as well as an increase in average interest bearing
deposit balances of $19,539,000 associated primarily with the branches acquired
in the fourth quarter of 2002.
Interest and dividend income decreased $2,199,000, or 6 percent, in 2001
compared to 2000. A rapidly declining rate environment caused a 0.52 percent
decrease in the yield on average earning assets. A 0.48 percent decrease in the
yield on loans that was partially offset by an increase in average loan balances
of $3,525,000, resulted in a $1,582,000, or 5 percent, decrease in interest and
fees on loans. Interest and dividend income on securities decreased $556,000, or
14 percent. This decrease resulted from a 12 percent decrease in the average
balance of securities as well as a 0.21 percent decline in the yield.
Interest expense decreased $1,764,000, or 11 percent, in 2001 compared to 2000.
The decrease in interest expense was due primarily to a 0.48 percent decrease in
rates paid on interest bearing liabilities, partially offset by an increase in
average interest bearing liabilities of $2,503,000, or 1 percent. A decrease of
$25,785,000, or 37 percent, in the average balance of Federal Home Loan Bank
("FHLB") advances, coupled with a decrease in the rate on such advances of 0.35
percent, resulted in a decrease in interest expense on FHLB advances of
$1,698,000. In addition, rates paid on deposit liabilities declined 0.32 percent
resulting in a decrease in interest expense of $1,054,000. These changes were
partially offset by an increase in average interest bearing deposits of
$26,538,000, or 9 percent, which increased interest expense by $1,168,000.
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 percent to 4.42 percent in 2002 after having decreased
0.11 percent to 4.56 percent in 2001. The decrease in 2002's net interest margin
was a direct result of the decrease in the yield on earning assets, which was
only partially offset by the decrease in the cost of funds. The portion of
interest earning assets funded by interest bearing liabilities rose to 85
percent in 2002 compared to 84 percent in both 2001 and 2000.
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 movements. During
2002, the net interest rate spread increased 0.09 percent to 4.07 percent as the
cost of interest bearing liabilities decreased 1.33 percent while the yield on
earning assets declined 1.24 percent. During 2001, the net interest rate spread
decreased 0.04 percent to 3.98 percent as the yield on earning assets declined
0.52 percent while the cost of interest bearing liabilities decreased 0.48
percent.
See the accompanying schedules entitled "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 dependent 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 Company made a $900,000 provision for loan losses in 2002, which provision
was unchanged from 2001. The 2001 provision of $900,000 was $80,000 lower than
2000's provision of $980,000. The provision for each of the three years was
based upon the Company's judgment regarding the adequacy of the coverage ratio
and level of portfolio risk.
Although management utilizes its best judgment in providing for losses, there
can be no assurance that the Company will not have to change its provisions for
loan losses in subsequent periods. Management will continue to monitor the
allowance for loan losses and make additional provisions to the allowance as
appropriate.
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES
($000 Omitted)
For the Year Ended December 31,
2002 2001 2000
-------------------------- -------------------------- --------------------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ---- -------- -------- ---- -------- -------- ----
Assets
Interest earning assets:
Federal funds sold $ 18,971 $ 271 1.43% $ 13,796 $ 428 3.10% $ 7,374 $ 480 6.51%
Interest bearing deposits 225 2 0.89 109 3 2.75 262 12 4.58
Securities (1) (2) 67,714 3,520 5.20 54,134 3,279 6.06 61,555 3,835 6.27
Loans, net (1) (3) 408,793 27,941 6.83 394,964 31,677 8.02 391,439 33,259 8.50
-------- -------- -------- -------- -------- --------
Total interest earning assets(1) 495,703 31,734 6.40 463,003 35,387 7.64 460,630 37,586 8.16
-------- -------- -------- -------- -------- --------
Cash and due from banks 14,597 13,529 13,045
Allowance for loan losses (4,794) (4,481) (4,417)
Premises and equipment, net 12,064 11,283 10,531
Other assets 14,607 10,811 6,577
-------- -------- --------
Total assets $532,177 $494,145 $486,366
======== ======== ========
Liabilities
Interest bearing liabilities:
Regular savings $ 70,559 712 1.01 $ 62,596 992 1.58 $ 65,438 1,254 1.92
NOW and super NOW 66,742 273 0.41 56,326 359 0.64 52,888 447 0.85
Money market accounts 54,676 894 1.64 38,232 1,111 2.91 26,670 1,000 3.75
Certificates of deposit 163,013 4,650 2.85 178,297 8,862 4.97 163,917 8,649 5.28
Securities sold under
agreements to
repurchase 8,165 136 1.67 10,990 469 4.27 9,240 509 5.51
FHLB advances 46,701 2,508 5.37 44,232 2,500 5.65 70,017 4,198 6.00
Guaranteed preferred
beneficial interest
in junior subordinated
debentures 11,299 645 5.71 -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities 421,155 9,818 2.33 390,673 14,293 3.66 388,170 16,057 4.14
-------- -------- --------
Noninterest bearing deposits 64,513 57,621 53,275
Other liabilities 2,177 3,474 4,508
-------- -------- --------
Total liabilities 487,845 451,768 445,953
Stockholders' equity 44,332 42,377 40,413
-------- -------- --------
Total liabilities and
stockholders' equity $532,177 $494,145 $486,366
======== ======== ========
Net interest and dividend income (1) $ 21,916 $ 21,094 $ 21,529
======== ======== ========
Interest rate spread (4) 4.07% 3.98% 4.02%
Net interest margin (5) 4.42% 4.56% 4.67%
(1) Reported on a tax equivalent basis.
(2) Average balances are calculated using the adjusted cost basis.
(3) Net of unearned income. Includes nonperforming loans.
(4) Interest rate spread equals the yield on interest earning assets minus the rate paid on interest bearing liabilities.
(5) The net interest margin equals net interest income divided by total average interest earning assets.
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS
($000 Omitted)
2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease) Increase (Decrease)
Due to Change In Due to Change In
--------------------------------- ---------------------------------
Volume Rate Mix Total Volume Rate Mix Total
------ ------ ------ ------ ------ ------ ------ ------
Interest and dividend income:
Federal funds sold $ 161 $ (231) $ (87) $ (157) $ 418 $ (251) $ (219) $ (52)
Interest bearing deposits 3 (2) (2) (1) (7) (5) 3 (9)
Securities 823 (465) (117) 241 (462) (107) 13 (556)
Loans 1,109 (4,681) (164) (3,736) 300 (1,865) (17) (1,582)
------ ------ ------ ------ ------ ------ ------ ------
Total interest and dividend income 2,096 (5,379) (370) (3,653) 249 (2,228) (220) (2,199)
------ ------ ------ ------ ------ ------ ------ ------
Interest expense:
Regular savings 126 (360) (46) (280) (54) (217) 9 (262)
NOW and super NOW 67 (129) (24) (86) 29 (110) (7) (88)
Money market accounts 478 (486) (209) (217) 434 (225) (98) 111
Certificates of deposit (760) (3,776) 324 (4,212) 759 (502) (44) 213
Securities sold under agreements
to repurchase (121) (286) 74 (333) 97 (115) (22) (40)
FHLB advances 140 (125) (7) 8 (1,546) (241) 89 (1,698)
Guaranteed preferred beneficial
interest in junior
subordinated debentures 645 -- -- 645 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total interest expense 575 (5,162) 112 (4,475) (281) (1,410) (73) (1,764)
------ ------ ------ ------ ------ ------ ------ ------
Net interest and dividend income $1,521 $ (217) $ (482) $ 822 $ 530 $ (818) $ (147) $ (435)
====== ====== ====== ====== ====== ====== ====== ======
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,
--------------------------------
2002 2001 2000
----- ------ ------
Service charges and fees on deposit accounts $1,473 $1,169 $1,049
Securities gains, net 151 128 512
Loan servicing income 365 401 130
Other 1,387 1,211 1,001
------ ------ ------
Total noninterest income $3,376 $2,909 $2,692
====== ====== ======
Fee income from service charges on deposit accounts increased 26 percent in
2002, 11 percent in 2001 and 12 percent in 2000. The improvement in 2002 is due
principally to the introduction of new overdrawn account procedures and fee
schedules introduced in January 2002 as well as the impact of the branch
purchases during the fourth quarter 2002. The improvements in 2001 and 2000 were
due to an increased number of deposit accounts as a result of branch purchases
and openings during those years as well as a product and fee standardization
effort completed during the year 2000.
Net gains on sales of securities were $151,000 in 2002 compared to $128,000 in
2001 and $512,000 in 2000. Securities gains in 2002 included net losses of
$410,000 on sales of equity securities compared to net gains of $55,000 in 2001
and $512,000 in 2000. Net gains on the sales of debt securities totaled $561,000
in 2002 compared to $73,000 in 2001 and none in 2000.
Loan servicing income consists of income from the servicing of Federal Home Loan
Mortgage Corporation ("FHLMC") mortgage loans and indirect installment loans as
well as the net income recognized from the creation and amortization of
servicing assets under Statement of Financial Accounting Standards ("SFAS") 140.
During 2002, the Company recognized $365,000 in loan servicing income compared
to $401,000 in 2001 and $130,000 in 2000. The $36,000 decrease in 2002 loan
servicing income is due to a decrease in income recognized under SFAS 140 and a
reduction in servicing income on indirect loans partially offset by an increase
in FHLMC servicing income. In 2001, the increase in loan servicing income is
directly attributable to the increase in the volume of loans serviced for
others.
Other noninterest income (sources of which include gains on sale of loans, debit
card interchange fees, credit card merchant and fee income, automated teller
machine fees and safe deposit fees) increased $176,000, or 15 percent, to
$1,387,000 in 2002 following an increase of $210,000, or 21 percent, to
$1,211,000 in 2001. Other noninterest income decreased $21,000, or 2 percent, to
$1,001,000 in 2000.
NONINTEREST EXPENSE
Total noninterest expense increased $2,886,000, or 17 percent, during 2002
following an increase of $450,000, or 3 percent, during 2001 and $905,000, or 6
percent, in 2000. The increase to expenses during 2002 is due in large part to
the $910,000 write-down of equity securities, expenses related to the
acquisition of three branches during the fourth quarter, staff upgrades and
technology initiatives. During 2001 and 2000, expenses increased due to the
Company's initiatives to standardize product offerings at the subsidiary banks,
to increase market share in existing markets and enter new markets. In 2001 the
Company acquired a branch in Littleton, New Hampshire and completed construction
of a new branch location in Tilton, New Hampshire. In 2000 the Company acquired
a branch in West Ossipee, New Hampshire. In 1999 two branches were opened and an
indirect lending group began operations.
The following table sets forth information relating to the Company's noninterest
expense during the periods indicated:
($000 Omitted)
Years Ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Salaries and employee benefits $ 9,758 $ 9,014 $ 8,868
Office occupancy and equipment 3,298 2,864 2,708
Amortization of unidentifiable intangible assets -- 625 513
Amortization of core deposit intangible 476 -- --
Write-down of equity securities available-for-sale 910 -- --
Professional fees 1,096 886 1,073
Stationery and supplies 596 486 605
Telephone 505 283 287
Postage and shipping 378 323 286
ATM expense 366 352 322
Other 2,652 2,316 2,037
------- ------- -------
Total noninterest expense $20,035 $17,149 $16,699
======= ======= =======
Salaries and employee benefits increased $744,000, or 8 percent, from 2001 to
2002, $146,000, or 2 percent from 2000 to 2001, and $420,000, or 5 percent, from
1999 to 2000. These increases reflect staff additions in connection with the
expansion of the retail franchise, increased lending activities and normal
salary and wage increases. The expansion initiatives as well as the technology
improvements implemented during 2002 caused occupancy and equipment expense to
increase $434,000, or 15 percent, from 2001 to 2002. In addition, retail
expansion accounted for the $155,000, or 6 percent, increase in occupancy and
equipment from 2000 to 2001 and the $167,000, or 7 percent, from 1999 to 2000.
Amortization of unidentifiable intangible assets and amortization of core
deposit intangible, net, decreased $149,000 from 2001 to 2002. On October 1,
2002, the Company adopted SFAS 147 which resulted in a decrease of amortization
expense of $281,000 over the prior year which was partially offset by the
recording of $132,000 of amortization of core deposit intangible associated with
the fourth quarter branch acquisitions. Amortization of unidentifiable
intangible assets increased $113,000, or 22 percent during 2001. This increase
was due to the Littleton branch acquisition on October 26, 2001 as well as a
full year of amortization on the branch purchased in West Ossipee during 2000.
This increase was partially offset by the completion of amortization in July
2001 of branches acquired in 1994. During 2000 amortization of unidentifiable
intangible assets increased $156,000, or 44 percent due to the West Ossipee
branch acquisition on August 25, 2000 as well as incurring a full year of
amortization on the branches acquired in 1999.
INCOME TAX EXPENSE
The Company recognized $1,507,000, $1,708,000 and $2,107,000 in income tax
expense for the years ended December 31, 2002, 2001 and 2000, respectively. The
effective tax rate was 36.2 percent for 2002, 30.6 percent for 2001 and 33.6
percent for 2000. The increase in the effective tax rate in 2002 over both 2001
and 2000 is due to the fact that, during 2001 and 2000, the Company had obtained
a number of State of New Hampshire tax credits related to economic development
grants. In addition, the 2001 tax rate as compared to 2000 was reduced by the
increased level of municipal income. This was partially offset by a 50 basis
point increase in the Business Profits Tax. For additional information relating
to income taxes, see Note 15 to the Consolidated Financial Statements.
ASSETS
Total assets increased $84,379,000, or 16 percent, to $598,318,000 at December
31, 2002 compared to $513,939,000 at December 31, 2001. The composition of
earning assets has continued to change in order to meet corporate goals.
BALANCE SHEET HIGHLIGHTS
($000 Omitted)
Years Ended December 31,
------------------------------
2002 2001 Change
--------- ----------- ---------
Total assets $598,318 $513,939 $ 84,379
Earning assets 548,980 470,482 78,498
Securities 96,109 60,276 35,833
Loans, net of unearned income 442,152 400,316 41,836
Deposits 476,194 412,840 63,354
Stockholders' equity 44,266 43,339 927
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.
The following table summarizes the Company's securities portfolio at December
31, 2002 and 2001, showing amortized cost and market value for each category:
($000 Omitted)
December 31,
--------------------------------------
2002 2001
------------------ ------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------- --------- -------
Securities available-for-sale:
US Treasury and US government agencies $36,167 $36,188 $10,969 $10,977
Mortgage-backed securities 7,286 7,476 13,810 13,744
Collateralized mortgage obligations 5,103 5,170 7,317 7,353
Marketable equity securities 3,163 2,377 4,358 3,255
Corporate bonds 33,407 33,848 14,167 14,230
State and political subdivisions 6,154 6,338 5,907 6,005
------- ------- ------- -------
Total securities available-for-sale $91,280 $91,397 $56,528 $55,564
======= ======= ======= =======
Total securities increased $35,833,000 during 2002 to $91,397,000. On January 1,
2001, the Company elected, in conjunction with the adoption of SFAS No. 133, to
transfer all securities held-to-maturity to the available-for-sale category at
their market value.
The net unrealized gain on securities available-for-sale was $117,000 at
December 31, 2002 compared to a net unrealized loss on securities
available-for-sale of $964,000 at December 31, 2001. At December 31, 2002, the
net unrealized gain on debt securities totaled $903,000, which was partially
offset by a net unrealized loss on marketable equity securities of $786,000. The
net unrealized gain on debt securities is primarily the result of the low rate
environment during 2002, which resulted in an appreciation in value of existing
debt holdings. The net unrealized loss on marketable equity securities is
primarily the result of the weak equity market during 2002.
Due to the sustained overall weakness in the equity market as well as
significant declines in certain sectors and specific companies within those
sectors, the Company determined, through the evaluations described in Note 1 to
the Consolidated Financial Statements, that the market values of certain of its
marketable equity securities were other than temporarily impaired. As a result,
during 2002 net losses on sales of marketable equity securities amounted to
$410,000 and write-downs of marketable equity securities amounted to $910,000.
At December 31, 2002, the Company's investment in equity securities totaled
$2,377,000. This amount is net of a market value adjustment of $786,000, of
which the full amount was reflected in accumulated other comprehensive loss in
shareholders' equity.
The Company has a general policy of purchasing debt securities primarily rated A
or better by Moody's Investor Services and U.S. government securities to
minimize credit risk. However, a corporate bond with an amortized cost of
$987,000 and a fair value of $660,000 was downgraded by both Moody's and
Standard & Poor's during 2002. This bond is being carried at fair value and
continues to perform in accordance with its original terms. 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,
short-term securities sold under agreements to repurchase and treasury, tax and
loan accounts. Refer to Note 3 to the Consolidated Financial Statements for a
further discussion of pledging.
LOANS
Loans increased 10 percent in 2002 as all categories of loans, with the
exception of other loans, recognized increases, with the greatest increases
occurring in residential real estate, installment loans and indirect installment
loans. The following table presents the composition of the loan portfolio as of
December 31, 2002 and 2001:
($000 Omitted)
Percent Percent
2002 of Total 2001 of Total
-------- -------- -------- --------
Real estate:
Residential $114,526 25.9% $109,261 27.3%
Commercial 111,941 25.3 111,642 27.9
Construction 6,330 1.4 1,581 0.4
Commercial 23,885 5.4 22,727 5.7
Installment 40,169 9.1 28,210 7.0
Indirect installment 139,477 31.5 120,761 30.1
Other 6,031 1.4 6,303 1.6
-------- ----- -------- -----
$442,359 100.0% $400,485 100.0%
======== ===== ======== =====
The loan portfolio mix continued to change during the year. Indirect installment
loans, which are fixed-rate loans secured by automobiles originated through
automobile dealers with an average term of 60 months, now comprise 31.5 percent
of the loan portfolio versus 30.1 percent at the end of 2001. In addition the
purchase of installment loans as a result of the branch acquisitions increased
installment loans as a percent of the total portfolio. Residential real estate
loans declined to 25.9 percent of the portfolio from 27.3 percent at December
31, 2001; and commercial real estate loans declined to 25.3 percent of the
portfolio from 27.9 percent at December 31, 2001. The Company wishes to maintain
a balanced portfolio and is working to maintain a portfolio mix of approximately
30 percent residential real estate loans, 33-35 percent commercial loans, and
35-37 percent installment and other loans.
Commercial real estate loans consist of loans secured by income producing
commercial real estate and commercial loans consist of loans that are either
unsecured or are secured by inventories, receivables or other corporate assets,
and many are additionally secured by a guarantee of the Small Business
Administration. Commercial real estate and commercial loans increased by
$1,457,000 in 2002 as compared to 2001. 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 $5,265,000 in 2002, a 5 percent
increase from 2001, compared to a decrease of $20,544,000, or 16 percent, in
2001 as compared to 2000. 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 2002 resulted primarily from the Company's
decision to retain a greater percentage of fixed-rate residential mortgage
loans.
Installment loans consist primarily of loans originated directly by the Company,
however, as part of the Laconia, Belmont and Pittsfield branch acquisitions the
Company purchased installment loans totaling approximately $18,102,000. As a
result of these acquired loans, installment loans balances increased a net of
$11,959,000 compared to 2001. Indirect installment loans increased by
$18,716,000, or 15 percent, in 2002.
NONPERFORMING ASSETS
Nonperforming assets were $3,892,000, or 0.65 percent of total assets, at
December 31, 2002 compared to $1,519,000, or 0.30 percent of total assets, at
December 31, 2001, an increase of $2,373,000, or 156 percent. This increase was
due primarily to the addition to nonperforming status of a large commercial
credit totaling $1,625,000. In addition, nonaccrual mortgage loans increased
over the prior year.
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, 2002, nonaccrual loans totaled $3,619,000, or 0.82 percent of
total loans, compared to $1,392,000, or 0.35 percent of total loans, in 2001.
Other real estate owned at December 31, 2002 was $175,000 compared to $22,000 at
December 31, 2001.
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. The provision for loan losses charged to
earnings is based on management's judgment of the amount necessary to maintain
the allowance at a level adequate to absorb losses. In addition various
regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of the Company's allowance for loan losses.
The Company's allowance for loan losses increased $278,000 from December 31,
2001 to $4,920,000, or 1.11 percent of total loans, at December 31, 2002. The
2002 provision for loan losses was $900,000, unchanged from the prior year.
The following table sets forth the composition of the allowance for loan losses
for the periods indicated:
($000 Omitted)
Years Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Beginning allowance $ 4,642 $ 4,354 $ 4,887
Provision for loan losses 900 900 980
Loans charged-off (824) (734) (1,643)
Recoveries of loans previously charged-off 202 122 130
------- ------- -------
Net charge-offs (622) (612) (1,513)
------- ------- -------
Ending allowance $ 4,920 $ 4,642 $ 4,354
======= ======= =======
Allowance as a percentage of loans
outstanding 1.11% 1.16% 1.11%
Allowance as a percentage of nonperforming
loans 135.95 333.48 454.96
Net charge-offs as a percentage of average
loans 0.15 0.15 0.39
DEPOSITS AND BORROWINGS
Total deposits at December 31, 2002 were $476,194,000, an increase of
$63,354,000, or 15 percent, compared to $412,840,000 at December 31, 2001. The
increase in deposits was due primarily to the acquisition of three branches in
October 2002, which netted the Company additional deposits of approximately
$54,932,000.
The following table sets forth the components of deposits for the periods
indicated:
($000 Omitted)
December 31,
-------------------
2002 2001
-------- --------
Demand $ 71,759 $ 62,846
Regular savings, NOW and money market 232,892 177,392
Time 171,543 172,602
-------- --------
Total deposits $476,194 $412,840
======== ========
At December 31, 2002, time deposits of $100,000 or more are scheduled to mature
as follows:
($000 Omitted)
3 months or less $ 7,106
Over 3 to 6 months 3,596
Over 6 to 12 months 9,648
Over 12 months 5,363
--------
$ 25,713
========
At December 31, 2002 short-term borrowings consisted of securities sold under
agreements to repurchase of $8,251,000 compared to $8,155,000 for 2001.
Long-term debt consisted solely of FHLB term advances of $46,000,000 compared to
$48,028,000 in 2001. Many of the long-term term advances, however, are callable
quarterly with call dates in February and March 2003. The decrease in FHLB
advances is the result of maturing advances partially offset by one new advance.
See Notes 9 and 10 to the Consolidated Financial Statements for additional
information.
The following table sets forth certain information concerning the Company's
borrowings at the dates indicated:
($000 Omitted)
December 31,
-------------------------
2002 2001
------- ---------
Short-term borrowings $ 8,251 $ 8,155
Long-term debt 46,000 48,028
------- -------
$54,251 $56,183
======= =======
GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES
During April and July 2002 the Company completed the private placement of
$7,000,000 and $13,000,000, respectively, of floating rate trust preferred
securities due in 2032. These trust preferred securities were offered for the
purpose of providing capital to the subsidiary banks to ensure adequate capital
following the recent branch acquisitions and for general corporate purposes. As
of December 31, 2002, $9,463,000 qualified as Tier 1 capital and $10,537,000 was
allocated to Tier 2 capital.
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 capital securities. Tier 2 capital consists of a
limited amount of allowance for loan losses and the portion of capital
securities 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 percent, 4
percent and 8 percent, respectively. As of December 31, 2002, the subsidiary
banks of the Company were "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,
------------------------
2002 2001
-------- --------
Risk-adjusted assets $445,281 $386,941
Tier 1 capital (to average assets) 6.70% 6.95%
Tier 1 capital (to risk weighted assets) 8.57 9.08
Total capital (to risk weighted assets) 12.04 10.28
Total stockholders' equity includes a $1,366,000 and $585,000 negative
adjustment for accumulated other comprehensive loss, net of tax, at December 31,
2002 and 2001, respectively. At December 31, 2002, this adjustment was comprised
of a net unrealized loss on securities available-for-sale of $240,000, net of
taxes, and an unfunded pension accumulated benefit obligation of $1,126,000, net
of taxes. The net unrealized loss on securities available-for-sale is
attributable to the downturn in the securities market. While the Company
continues to contribute the maximum amount permitted by law to its pension plan,
the discount rate used to calculate the future value of such contribution and
the poor asset performance of investment securities has resulted in the unfunded
pension accumulated benefit obligation.
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.
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/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 Company's management 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 200 basis point upward and downward shift in interest rates. Using an
immediate rate shock simulation where interest rates increase 200 basis points,
the December 31, 2003 earnings simulation model projects that net interest
income for the next twelve months would increase by an amount equal to
approximately 0.72 percent. In addition, utilizing an immediate rate shock
simulation where interest rates decrease 200 basis points, the December 31, 2003
earnings simulation model projects that net interest income for the next twelve
months would decrease by an amount equal to approximately 9.21 percent.
Using an immediate rate shock simulation where interest rates increase 200 basis
points, the December 31, 2002 earnings simulation model projected that net
interest income for the following twelve months would increase by an amount
equal to approximately 4.24 percent. In addition, utilizing an immediate rate
shock simulation where interest rates decrease 200 basis points, the December
31, 2002 earnings simulation model projected that net interest income for the
following twelve months would decrease by an amount equal to approximately 4.86
percent.
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 2002 compared to 2001 were the decrease in interest rates market-wide,
changes in the yield curve for investment securities, the increase in the
aggregate principal amount in fixed-rate loans extended by the subsidiary banks,
the aggregate increase in securities available-for-sale, and increase in total
deposits, as well as the increase in floating rate subordinated debentures.
LIQUIDITY RISK
Liquidity risk management involves the Company's and its subsidiaries' ability
to raise funds in order to meet their 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 the Company's Asset/Liability Committee. 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 parent holding company requires cash for various operating
needs including dividends to shareholders, the purchase of treasury stock,
capital injections to the subsidiary banks, and the payment of general corporate
expenses. The primary sources of liquidity for the parent holding company are
dividends from the subsidiary banks and reimbursement for services performed on
behalf of the banks. Additionally, the parent holding company may utilize
outside sources of funding such as the trust preferred issues undertaken during
2002.
As shown in the consolidated statements of cash flows, cash and cash equivalents
decreased by $2,215,000 during 2002. Cash used for investing activities totaled
$80,734,000 with lending activities utilizing $43,516,000 and investment
purchases utilizing $35,757,000. Cash provided by financing activities totaled
$73,127,000. This cash consisted of $47,527,000 from a branch acquisition,
$20,000,000 from the issuance of guaranteed preferred beneficial interest in
junior subordinated debentures, as well as an increase in other deposits of
$8,422,000. The net cash provided by operating activities totaled $5,392,000 and
consisted primarily of net income of $2,598,000 as well as a decrease in loans
held for-sale partially offset by an increase in other assets and other
liabilities, net.
CAPITAL EXPENDITURES AND COMMITMENTS
During 2002, the Company incurred approximately $2,628,000 in capital
expenditures. These expenditures included approximately $1,700,000 in technology
improvements including installation of a wide-area network, a voice over
internet protocol telephone system, a new on-line teller system, document
imaging and computer upgrades. In addition, $430,000 was recorded for the
purchase of real estate in Laconia, New Hampshire as part of the recent branch
acquisition. The remaining expenditures were for normal maintenance and
replacement of, or upgrades in, existing property and equipment.
During 2001, the Company incurred approximately $1,714,000 in capital
expenditures. These expenditures included $947,000 of construction and equipment
costs for the branch constructed in Tilton, New Hampshire. Approximately
$388,000 was spent on technology initiatives, including Internet banking and
cash management as well as a down-payment for technology initiatives to be
completed in 2002. The remaining expenditures were for normal maintenance and
replacement of, or upgrades in, existing property and equipment.
The Company's estimated capital expenditure projections for 2003 total $710,000.
The Company has budgeted approximately $145,000 for ATM replacement and upgrades
and $115,000 for software purchases for indirect lending to improve workflow.
The remaining expenditures will be incurred for normal maintenance and
replacement of, or upgrades to, existing property and equipment. These
expenditures are expected to be funded through normal Company cashflows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL
CONSOLIDATED STATEMENTS OF INCOME
($000 Omitted, Except Per Share Data)
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income
Interest and fees on loans $27,879 $31,587 $33,145
Interest on debt securities available-for-sale:
Taxable 2,781 2,169 2,971
Tax-exempt 308 485 249
Dividends 241 342 453
Interest on federal funds sold 271 428 480
Interest on interest bearing deposits 2 3 12
------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 31,482 35,014 37,310
------------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits:
Regular savings, NOW and money market deposit accounts 1,878 2,462 2,701
Certificates of deposit (in denominations of $100,000 or more) 703 1,363 1,259
Other time 3,947 7,499 7,390
Interest on short-term borrowings 141 513 1,819
Interest on long-term debt 2,504 2,456 2,888
Interest on guaranteed preferred beneficial interest in junior subordinated debentures 645 -- --
------------------------------------------------------------------------------------------------------------------------------
Total interest expense 9,818 14,293 16,057
------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 21,664 20,721 21,253
Provision for loan losses 900 900 980
------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for loan losses 20,764 19,821 20,273
------------------------------------------------------------------------------------------------------------------------------
Noninterest income
Service charges and fees on deposit accounts 1,473 1,169 1,049
Gains on sales of securities available-for-sale, net 151 128 512
Loan servicing income 365 401 130
Other 1,387 1,211 1,001
Total noninterest income 3,376 2,909 2,692
Noninterest expense
Salaries and employee benefits 9,758 9,014 8,868
Office occupancy and equipment 3,298 2,864 2,708
Amortization of core deposit intangible 476 -- --
Amortization of unidentifiable intangible assets -- 625 513
Write-down of equity securities
910 -- --
Other 5,593 4,646 4,610
------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 20,035 17,149 16,699
Income before income taxes 4,105 5,581 6,266
Income tax expense 1,507 1,708 2,107
Net income $ 2,598 $ 3,873 $ 4,159
------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 1.71 $ 2.55 $ 2.61
Earnings per common share assuming dilution $ 1.71 $ 2.54 $ 2.61
------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
($000 Omitted)
AS OF DECEMBER 31, 2002 2001
----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents:
Cash and due from banks and interest bearing deposits $17,256 $22,741
Federal funds sold 10,170 6,900
----------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 27,426 29,641
----------------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale, at fair value 91,397 55,564
Federal Home Loan Bank stock 4,632 4,632
Federal Reserve Bank stock 80 80
Loans held-for-sale 669 2,026
Loans, net before allowance for loan losses 442,152 400,316
Less: allowance for loan losses 4,920 4,642
----------------------------------------------------------------------------------------------------------------------------------
Net loans 437,232 395,674
----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 12,503 11,485
Other real estate owned 175 22
Goodwill 10,152 --
Core deposit intangible 4,857 --
Unidentified intangible assets -- 8,080
Other assets 9,195 6,735
----------------------------------------------------------------------------------------------------------------------------------
Total assets $598,318 $513,939
----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Demand $71,759 $62,846
Regular savings, NOW and money market deposit accounts 232,892 177,392
Certificates of deposit (in denominations of $100,000 or more) 25,713 25,102
Other time 145,830 147,500
----------------------------------------------------------------------------------------------------------------------------------
Total deposits 476,194 412,840
----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 8,251 8,155
Accrued taxes and other liabilities 3,607 1,577
Long-term debt 46,000 48,028
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 534,052 470,600
----------------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interest in junior subordinated debentures 20,000 --
----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued -- --
Common stock, $1.00 par value; 9,000,000 shares authorized; 1,731,969 issued at December 31,
2002 and 2001 and 1,516,574 outstanding at December 31, 2002 and 1,511,324 outstanding at
December 31, 2001 1,732 1,732
Surplus 2,088 2,101
Retained earnings 47,523 45,955
Treasury stock (215,395 shares at December 31, 2002 and 220,645 shares at December 31, 2001) (5,711) (5,864)
Accumulated other comprehensive loss, net of tax (1,366) (585)
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 44,266 43,339
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $598,318 $513,939
----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($000 Omitted)
Accumulated
Other Total
Common Retained Treasury Comprehensive Stockholders'
Stock Surplus Earnings Stock Loss(1) Equity
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 1,732 $ 2,101 $ 39,906 $ (3,398) $ (1,055) $ 39,286
Net income - 2000 -- -- 4,159 -- -- 4,159
Net change in unrealized loss on securities
available-for-sale, net of taxes -- -- -- -- 512 512
Net change in unfunded pension accumulated
benefit obligation, net of taxes -- -- -- -- (130) (130)
Treasury stock purchased, 55,800 shares -- -- -- (1,310) -- (1,310)
Cash dividends declared ($0.60 per share) -- -- (955) -- -- (955)
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 1,732 2,101 43,110 (4,708) (673) 41,562
Net income - 2001 -- -- 3,873 -- -- 3,873
Net change in unrealized loss on securities
available-for-sale, net of taxes -- -- -- -- (42) (42)
Net change in unfunded pension accumulated
benefit obligation, net of taxes -- -- -- -- 130 130
Treasury stock purchased, 48,045 shares -- -- -- (1,156) -- (1,156)
Cash dividends declared ($0.68 per share) -- -- (1,028) -- -- (1,028)
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,732 2,101 45,955 (5,864) (585) 43,339
Net income - 2002 -- -- 2,598 -- -- 2,598
Net change in unrealized loss on securities
available-for-sale, net of taxes -- -- -- -- 345 345
Net change in unfunded pension accumulated
benefit obligation, net of taxes -- -- -- -- (1,126) (1,126)
Exercise of stock options for 5,250 shares,
net of tax benefit -- (13) -- 153 -- 140
Cash dividends declared ($0.68 per share) -- -- (1,030) -- -- (1,030)
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 1,732 $ 2,088 $ 47,523 $ (5,711) $ (1,366) $ 44,266
-----------------------------------------------------------------------------------------------------------------------------
(1) Accumulated other comprehensive loss as of December 31, 2002 consists of net unrealized holding losses on available-for-sale
securities of $240, net of taxes, and unfunded pension accumulated benefit obligation of $1,126, net of taxes. Accumulated
other comprehensive loss as of December 31, 2001 consists of net unrealized holding losses on available-for-sale securities,
net of taxes. Accumulated other comprehensive loss as of December 31, 2000 consists of net unrealized holding losses on
available-for-sale securities of $543, net of taxes, and unfunded pension accumulated benefit obligation of $130, net of
taxes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Net income $2,598 $3,873 $4,159
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss):
Net unrealized gains on securities available-for-sale 322 58 1,336
Reclassification adjustment for realized gains (losses) in net income (759) 128
512
-----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities 1,081 (70) 824)
Minimum pension liability adjustment (1,707) 197 (197)
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (626) 127 627
Income tax expense 155 39 245
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (781) 88 382
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $1,817 $3,961 $4,541
-----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,598 $3,873 $ 4,159
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 900 900 980
Depreciation and amortization 1,791 1,704 1,512
Deferred income tax expense 195 188 263
Write-down of other real estate owned -- 3 --
Write-down of equity securities 910 -- --
Gains on sales of securities available-for-sale, net (151) (128) (512)
Gains on sale of nonperforming and reperforming loans -- (145) (71)
(Gains) loss on sale, disposal and write-down of premises and equipment (18) 22 90
Amortization of premiums and accretion of discounts on securities, net 246 74 1
Increase (decrease) in unearned income, net 38 15 (20)
Amortization of discount on loans acquired 18 -- --
(Gains) losses on sales of other real estate owned and other personal property, net 5 (22) (4)
Net (increase) decrease in loans held-for-sale 1,357 (1,532) (175)
Other liabilities assumed net of (other assets acquired) in branch transactions (66) 34 12
Net change in other assets and other liabilities (2,431) (2,900) (1,476)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,392 2,086 4,759
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 16,709 4,212 2,609
Proceeds from maturities of securities held-to-maturity -- -- 3,936
Proceeds from maturities of securities available-for-sale 30,043 41,930 6,483
Purchase of securities available-for-sale (82,509) (48,195) (7,453)
Purchase of securities held-to-maturity -- -- (1,555)
Loan originations and principal collections, net (23,526) (6,302) (17,987)
Recoveries of previously charged-off loans 202 122 130
Loans acquired in branch transactions (20,192) (2,601) (6,197)
Purchase of loans -- (297) --
Proceeds from sales of nonperforming and reperforming loans -- 675 1,551
Proceeds from sales of and payments received on other real estate owned 60 50 144
Proceeds from sales of and payments received on other personal property 794 554 536
Premises and equipment acquired in branch transactions (519) (6) (301)
Additions to premises and equipment, net of disposals (1,796) (1,580) (1,401)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (80,734) (11,438) (19,505)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 8,422 (7,592) 20,961
Deposits assumed in branch transactions, net of assumption premiums 47,527 25,053 23,442
Advances from FHLB 1,000 14,000 21,000
Repayment of FHLB advances (3,028) (1,500) (44,000)
Net decrease in short-term FHLB advances -- (2,950) (7,000)
Net increase (decrease) in securities sold under agreements to repurchase 96 (1,235) 1,922
Exercise of stock options, net of tax benefit 140 -- --
Purchases of treasury stock -- (1,156) (1,310)
Issuance of guaranteed preferred beneficial interest in junior subordinated
debentures 20,000 -- --
Cash dividends paid (1,030) (1,028) (955)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 73,127 23,592 14,060
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,215) 14,240 (686)
Cash and cash equivalents at beginning of year 29,641 15,401 16,087
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 27,426 $ 29,641 $ 15,401
-----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flows:
Interest paid $9,876 $16,006 $15,529
Taxes paid 1,743 1,776 1,817
Loans transferred to other real estate owned 200 33 47
Loans transferred to other personal property 802 565 650
Financed sales of other real estate owned -- -- 22
Loans transferred to held-for-sale -- 265 --
Carrying amount of held-to-maturity securities transferred to available-for-sale
securities -- 2,752 --
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Northway Financial, Inc. 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.
The Company's only business activity has been to own all of the shares of, and
provide management, capital and operational support to, The Berlin City Bank
("BCB") and The Pemigewasset National Bank of Plymouth ("PNB") and its wholly
owned subsidiaries Northway Capital Trust I and Northway Capital Trust II. The
Company's headquarters are in Berlin, New Hampshire. The banking subsidiaries
are 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 subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
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 statements of financial condition, 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 and valuation of other real
estate owned.
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, federal funds sold and interest bearing deposits.
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, premiums on originated loans and discounts on acquired loans. Unearned
income includes loan origination fees, net of direct loan origination costs.
This income 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. 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 Banks' allowances for loan
losses. Such agencies may require the Banks 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.
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 operations as
realized.
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 39 years for buildings, ten
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.
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, 2002, the Company has a stock-based employee compensation plan
which is described more fully in Note 16. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of the grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
($000 Omitted, except per share data)
2002 2001 2000
--------- --------- ---------
Net income As reported $ 2,598 $ 3,873 $ 4,159
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects 39 47 47
--------- --------- ---------
Pro forma $ 2,559 $ 3,826 $ 4,112
Earnings per common share As reported $ 1.71 $ 2.55 $ 2.61
Pro forma 1.68 2.52 2.58
Earnings per common share As reported $ 1.71 $ 2.54 $ 2.61
(assuming dilution) Pro forma 1.68 2.51 2.58
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 (in
thousands):
Years Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Net income $ 2,598 $ 3,873 $ 4,159
Less: Preferred stock dividends -- -- --
-------- -------- --------
Net income applicable to common stock $ 2,598 $ 3,873 $ 4,159
======== ======== ========
Average number of common shares outstanding 1,515.1 1,521.6 1,590.6
Effect of dilutive options(1) 6.0 4.3 --
-------- -------- --------
Average number of common shares outstanding used to
calculate diluted earnings per common share 1,521.1 1,525.9 1,590.6
======== ======== ========
(1) Approximately 0, 21,000 and 21,000 of the Company's outstanding stock options
were not included in the diluted net earnings per share calculation for 2002,
2001, and 2000, respectively, because to do so would have been antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement replaces
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and rescinds Statement No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125. Statement
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. The adoption of
this Statement has had no material impact on the consolidated financial
statements.
The FASB has issued Statement No. 141, Business Combinations. This Statement
improves the consistency of the accounting and reporting of business
combinations by requiring that all business combinations be accounted for under
a single method - the purchase method. Using the pooling-of-interests method is
no longer permitted. Statement No. 141 requires that the purchase method be used
for business combinations initiated after June 30, 2001. The adoption of this
Statement has had no material impact on the consolidated financial statements.
The FASB has issued Statement No. 142, Goodwill and Other Intangible Assets.
Statement No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceased upon
adoption of the statement which for the Company was January 1, 2002. The effect
of the adoption of this statement on the consolidated financial statements is
described below.
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions, an Amendment of Statements No. 72 and No. 144 and FASB
Interpretation No. 9. Statement No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions and FASB Interpretation No. 9, Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method, provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.
Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Asset, to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the purchase
method of accounting, is effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 its recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $5,386,000, the carrying amount as of
January 1, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended December
31, 2002 do not reflect amortization in the amount of $313,000 that would have
been recorded if SFAS No. 147 had not been issued.
In accordance with SFAS No. 147 the Company tested its reclassified goodwill for
impairment as of January 1, 2002 and December 31, 2002. The Company determined
that its goodwill as of those dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
The Company's amortization expense related to reclassified goodwill was $456,000
and $224,000 for the years ended December 31, 2001 and 2000, respectively.
The following is a reconciliation of reported net income adjusted for adoption
of SFAS No. 142 for years ended December 31:
($000 Omitted, Except Per Share Data)
2002 2001 2000
--------- --------- ---------
Reported net income $ 2,598 $ 3,873 $ 4,159
Add back reclassified goodwill amortization, net of tax effect -- 275 135
--------- --------- ---------
Adjusted net income $ 2,598 $ 4,148 $ 4,294
========= ========= =========
Basic earnings per share:
Reported net income $ 1.71 $ 2.55 $ 2.61
Reclassified goodwill amortization, net of tax effect -- 0.18 0.09
--------- --------- ---------
Adjusted net income $ 1.71 $ 2.73 $ 2.70
========= ========= =========
Diluted earnings per share:
Reported net income $ 1.71 $ 2.54 $ 2.61
Reclassified goodwill amortization, net of tax effect -- 0.18 0.09
--------- --------- ---------
Adjusted net income $ 1.71 $ 2.72 $ 2.70
========= ========= =========
The gross carrying amount and accumulated amortization of the core deposit
intangible as of December 31, 2002 was $5,333,000 and $476,000, respectively.
The estimated amortization of the core deposit intangible for each of the five
succeeding years is as follows:
2003 $954,000
2004 $954,000
2005 $954,000
2006 $927,000
2007 $320,000
The weighted-average amortization period for the core deposit intangible is 64
months.
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Statement No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement No. 144 supercedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," but retains the
basic recognition and measurement model for assets held for use and held for
sale. The provisions of Statement No. 144 are required to be adopted starting
with fiscal years beginning after December 15, 2001. This Statement did not have
a material impact on the Company's consolidated financial statements.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. Statement No. 146
is effective for exit or disposal activities that are initiated after December
31, 2002. Management does not anticipate that this Statement will have any
material impact on the Company's consolidated financial statements.
NOTE 2 CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2002 and 2001 includes $2,911,000 and
$5,858,000, respectively, which is 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, gains in accumulated other comprehensive income, losses in
accumulated other comprehensive income and fair value of securities at December
31, 2002 and 2001 follows:
($000 Omitted)
Gains in Losses in
Accumulated Accumulated
Other Other
Amortized Comprehensive Comprehensive Fair
Cost Income Income Value
------- ------- ------- -------
December 31, 2002
-----------------------------------------------------
US Treasury and other US government agency securities $36,167 $ 51 $ 30 $36,188
Marketable equity securities 3,163 45 831 2,377
Mortgage-backed securities 7,286 199 9 7,476
Collateralized mortgage obligations 5,103 67 -- 5,170
Corporate bonds 33,407 892 451 33,848
State and political subdivision bonds and notes 6,154 184 -- 6,338
------- ------- ------- -------
$91,280 $ 1,438 $ 1,321 $91,397
======= ======= ======= =======
December 31, 2001
-----------------------------------------------------
US Treasury and other US government agency securities $10,969 $ 27 $ 19 $10,977
Marketable equity securities 4,358 109 1,212 3,255
Mortgage-backed securities 13,810 72 138 13,744
Collateralized mortgage obligations 7,317 86 50 7,353
Corporate bonds 14,167 299 236 14,230
State and political subdivision bonds and notes 5,907 98 -- 6,005
------- ------- ------- -------
$56,528 $ 691 $ 1,655 $55,564
======= ======= ======= =======
The contractual maturity distribution of investments in debt obligations at December 31, 2002 follows:
($000 Omitted)
One to Five to Over Total
Within Five Ten Ten Amortized
One Year Years Years Years Cost
------- ------- ------- ------- -------
US Treasury and other US government agency securities $13,996 $20,134 $ 2,037 $ -- $36,167
Mortgage-backed securities 80 4,259 1,992 955 7,286
Collateralized mortgage obligations -- -- 66 5,037 5,103
Corporate bonds 1,002 26,249 6,156 -- 33,407
State and political subdivision bonds and notes 278 221 3,412 2,243 6,154
------- ------- ------- ------- -------
Total amortized cost $15,356 $50,863 $13,663 $ 8,235 $88,117
======= ======= ======= ======= =======
Market value $15,372 $51,090 $14,227 $ 8,331 $89,020
======= ======= ======= ======= =======
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.
Due to the sustained overall weakness in the equity market as well as
significant declines in certain sectors and specific companies within those
sectors, the Company determined, through the evaluations described in Note 1 to
the Consolidated Financial Statements, that the market values of certain of its
marketable equity securities were other than temporarily impaired. As a result,
during 2002 net losses on sales of marketable equity securities amounted to
$410,000 and write-downs of marketable equity securities amounted to $910,000.
At December 31, 2002, the Company's investment in equity securities totaled
$2,377,000. This amount is net of a market value adjustment of $786,000, of
which the full amount was reflected in accumulated other comprehensive loss in
shareholders' equity.
A corporate bond with an amortized cost of $987,000 and a fair value of $660,000
was downgraded by both Moody's and Standard & Poor's during 2002. This bond is
being carried at fair value and continues to perform in accordance with its
original terms
An analysis of gross realized gains and losses on securities available-for-sale
which have been sold or called during the years ended December 31, follows:
($000 Omitted)
2002 2001 2000
----------------------- ----------------------- ---------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
---------- --------- ---------- --------- --------- ---------
Equity securities $ 39 $449 $ 61 $ 6 $517 $ 5
US government agency securities 149 -- 91 -- -- --
Mortgage-backed securities 159 -- -- 18 -- --
Corporate bonds 246 -- -- -- -- --
State and political subdivisions 7 -- -- -- -- --
---- ---- ---- ---- ---- ----
$600 $449 $152 $ 24 $517 $ 5
==== ==== ==== ==== ==== ====
The tax provision applicable to these net realized gains amounted to $60,000,
$50,000 and $201,000 for 2002, 2001, and 2000, respectively.
Securities with a carrying amount totaling $48,433,000 and $21,382,000 were
pledged to secure public deposits, securities sold under agreements to
repurchase and treasury, tax and loan accounts at December 31, 2002 and 2001,
respectively.
NOTE 4 LOANS
Loan balances were comprised of the following:
($000 Omitted)
December 31, 2002 2001
------------------------------ -------- --------
Real estate:
Residential $114,526 $109,261
Commercial 111,941 111,642
Construction 6,330 1,581
Commercial 23,885 22,727
Installment 40,169 28,210
Indirect installment 139,477 120,761
Other 6,031 6,303
-------- --------
Total loans 442,359 400,485
Less:
Unearned income 207 169
Allowance for loan losses 4,920 4,642
-------- --------
5,127 4,811
-------- --------
$437,232 $395,674
======== ========
Total loans above are net of unearned discount on loans acquired in the amount
of $862,000 at December 31, 2002. In addition, total loans above are net of
unamortized premium on indirect installment loans originated in the amount of
$3,684,000 and $3,611,000 at December 31, 2002 and 2001, 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 percent 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 $839,000 as of December 31, 2002. During 2002, principal payments were
$311,000 and principal advances amounted to $383,000.
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
$56,470,000 at December 31, 2002 and $58,623,000 at December 31, 2001.
Loans serviced for others are not included in the accompanying statements of
financial condition. The unpaid principal balances of these loans total
$49,908,000 and $46,661,000 at December 31, 2002 and 2001, respectively. The
Company sold $20,694,000 of mortgage loans and $1,472,000 of indirect
installment loans in 2002 and $18,577,000 of mortgage loans and $10,390,000 of
indirect installment loans in 2001.
The Company capitalized $177,000 and $204,000 of servicing rights and amortized
$97,000 and $29,000 of those rights in 2002 and 2001, respectively. There is no
valuation allowance for servicing rights, because their fair value approximates
their carrying amount of $339,000 and $259,000 at December 31, 2002 and 2001,
respectively. Servicing rights are carried in other assets.
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, 2002 and 2001, loans restructured in a troubled debt
restructuring before January 1, 1995, the effective date of SFAS No. 114, that
are not impaired based on the terms specified by the restructuring agreement
totaled $945,000 and $983,000, respectively. The gross interest income that
would have been recorded in the years ended December 31, 2002 and 2001 if such
restructured loans had been current in accordance with their original terms was
$76,000 and $107,000, respectively. The amount of interest income recognized on
such restructured loans for the years ended December 31, 2002 and 2001 was
$54,000 and $73,000, respectively.
At December 31, 2002 and 2001, nonperforming loans totaled $3,619,000 and
$1,392,000, respectively. Of this total, $3,000 and $0, for December 31, 2002
and 2001, respectively, were past due 90 days or more and still accruing
interest.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $2,775,000 and $643,000 at December 31, 2002 and 2001, respectively,
for which the related allowance for loan losses is $459,000 and $76,000 as of
December 31, 2002 and 2001, respectively. 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, 2002 and 2001 was approximately $854,000 and $307,000,
respectively. For the twelve months ended December 31, 2002 and 2001 the Company
recognized interest income on impaired loans of $94,000 and $26,000,
respectively, which included $67,000 and $15,000 of interest income recognized
using the cash-basis method of income recognition, respectively.
NOTE 5 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
follows:
($000 Omitted)
2002 2001 2000
------ ------ ------
Balance at beginning of year $4,642 $4,354 $4,887
Provision for loan losses 900 900 980
Recoveries on loans previously charged-off 202 122 130
Loans charged-off (824) (734) (1,643)
------ ------ ------
Balance at end of year $4,920 $4,642 $4,354
====== ====== ======
NOTE 6 OTHER REAL ESTATE OWNED
Other real estate owned consists of real estate acquired by foreclosure or a
similar conveyance of title. At December 31, 2002 other real estate owned was
comprised of commercial real estate of $175,000. At December 31, 2001 other real
estate owned was comprised of residential real estate of $22,000.
Sales of other real estate owned by the Company resulted in gains of $13,000,
$17,000 and $64,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
There were no write-downs on other real estate owned for the years ended
December 31, 2002 and 2000; and write-downs on other real estate owned totaled
$3,000 for the year ended December 31, 2001.
NOTE 7 PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
($000 Omitted)
December 31,
-----------------
2002 2001
------- -------
Land $ 2,418 $ 2,327
Buildings 9,437 9,134
Leasehold improvements 481 401
Construction in progress 228 255
Equipment 7,162 5,726
------- -------
19,726 17,843
Less accumulated depreciation and amortization 7,223 6,358
------- -------
$12,503 $11,485
======= =======
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
amounted to $1,315,000, $1,079,000, and $999,000, respectively.
The Company leases eight of its locations under non-cancellable operating
leases. Minimum lease payments in future periods under non-cancellable operating
leases at December 31, 2002 are as follows:
($000 Omitted)
2003 $ 391
2004 302
2005 152
2006 153
2007 130
Thereafter 25
------
$1,153
======
The terms of four of the leases provide that the Company can, at the end of the
initial five-year term, renew the lease under two five-year options. One lease
will reach the end of its initial five-year term on June 28, 2003, at which time
it will not be renewed. The terms of one of the leases provides that the Company
can, at the end of the current five-year term, renew the lease under one
five-year option. All 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.
Rent expense for the years ended December 31, 2002, 2001, and 2000 amounted to
$369,000, $287,000 and $256,000, respectively.
NOTE 8 DEPOSITS
The aggregate amount of maturities for time deposits as of December 31, 2002,
for each of the following five years ended December 31 and thereafter, are as
follows:
($000 Omitted)
2003 $132,297
2004 30,862
2005 4,625
2006 3,211
2007 528
Thereafter 20
--------
$171,543
========
Deposits from related parties held by the Banks at December 31, 2002 and 2001
amounted to $2,315,000 and $1,897,000, respectively.
NOTE 9 SHORT-TERM BORROWINGS
Short-term borrowings, which include securities sold under agreements to
repurchase and FHLB advances with maturities of less than one year, and their
related average interest rates for the years ended December 31, 2002, 2001 and
2000 are as follows:
($000 Omitted)
Amount outstanding at December 31,
---------------------------------------------------------------
2002 2001 2000
------------------- ----------------- -----------------
Avg. Avg. Avg.
Int. Int. Int.
Amount Rate Amount Rate Amount Rate
------ ----- ------ ----- ------ -----
FHLB advances $ -- --% $ -- --% $ 2,950 6.67%
Securities sold under agreements to repurchase 8,251 1.54 8,155 1.97 9,390 6.06
------- ------- -------
$ 8,251 1.54% $ 8,155 1.97% $12,340 6.21%
======= ======= =======
Maximum amount outstanding at any month end $12,834 $19,080 $41,199
Average amount outstanding during the year 8,454 1.67% 11,725 4.38% 28,575 6.37%
The underlying securities associated with securities sold under agreements to
repurchase are under the control of the Company.
NOTE 10 LONG-TERM DEBT
Long-term debt at December 31, 2002 and 2001 consisted of FHLB advances of
$46,000,000 and $48,028,000, respectively.
As of December 31, 2002, contractual principal payments due under long-term debt
were as follows:
($000 Omitted)
2003 $ 7,000
2004 9,000
2005 --
2006 --
2007 5,000
2008 and years thereafter 25,000
--------
$46,000
=======
The FHLB long-term debt consisted of eleven separate advances with the following
terms:
($000 Omitted)
Amount Rate Maturity Date Call Date
------- ----- ------------- ---------
$ 7,000 4.34 06/25/03 N/A
1,000 3.49 05/14/04 N/A
3,000 4.78 06/25/04 N/A
5,000 5.79 08/30/04 02/28/03
5,000 6.11 03/28/07 03/27/03
7,000 5.54 11/02/09 02/04/03
7,000 5.57 11/09/09 02/10/03
5,000 5.91 12/17/09 03/18/03
2,000 4.80 12/27/10 03/26/03
3,000 4.50 01/24/11 01/24/03
1,000 4.58 02/07/11 02/05/03
---------
$46,000
=======
NOTE 11 GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
DEBENTURES
On April 10, 2002, the Company completed the private placement of $7,000,000
aggregate liquidation amount of floating rate trust preferred securities (the
"Trust I Capital Securities") issued by its Delaware statutory business trust,
Northway Capital Trust I ("Capital Trust I"). The Trust I Capital Securities
were sold to a pooled investment vehicle. The proceeds from the sale of the
Trust I Capital Securities, together with the proceeds from the sale by Capital
Trust I of its common securities to the Company, were invested in Floating Rate
Junior Subordinated Debt Securities of the Company due 2032 (the "Trust I Junior
Subordinated Debt"), which were issued pursuant to an Indenture, dated April 10,
2002, between the Company and Wilmington Trust Company, as Trustee. Both the
Trust I Capital Securities and the Trust I Junior Subordinated Debt have a
floating rate, which resets semi-annually, equal to six-month LIBOR plus 3.70
percent, with a ceiling of 11.00 percent for the first five years. Currently,
the interest rate on these securities is 5.32 percent. Payments of distributions
and other amounts due on the Trust I Capital Securities are irrevocably
guaranteed by the Company, to the extent that Capital Trust I has funds
available for the payments of such distributions, pursuant to a Guarantee
Agreement, dated April 10, 2002, between the Company and Wilmington Trust
Company, as Guarantee Trustee. The Trust I Junior Subordinated Debt and the
Trust I Capital Securities may be redeemed at the option of the Company on fixed
semi-annual dates beginning on April 22, 2007.
On July 11, 2002, the Company completed the private placement of $13,000,000
aggregate liquidation amount of floating rate trust preferred securities (the
"Trust II Capital Securities") issued by its Delaware statutory business trust,
Northway Capital Trust II (the "Capital Trust II"). The Trust II Capital
Securities were sold to a pooled investment vehicle. The proceeds from the sale
of the Trust II Capital Securities, together with the proceeds from the sale by
Capital Trust II of its common securities to the Company, were invested in
Floating Rate Junior Subordinated Debt Securities of the Company due 2032 (the
"Trust II Junior Subordinated Debt"), which were issued pursuant to an
Indenture, dated July 11, 2002, between the Company and Wilmington Trust
Company, as Trustee. Both the Trust II Capital Securities and the Trust II
Junior Subordinated Debt have a floating rate, which resets quarterly, equal to
three-month LIBOR plus 3.65 percent, with a ceiling of 12.50 percent for the
first five years. Currently, the interest rate on these securities is 5.03
percent. 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 12 ACQUISITIONS
On October 18, 2002, the Company acquired certain assets and assumed the
deposits of three branches offices of Fleet National Bank located in Laconia,
Belmont and Pittsfield, New Hampshire. This acquisition has allowed the Company
to expand its market area further into Belknap and Merrimack Counties. Deposits
assumed totaled $54,932,000 for which the Company paid a deposit purchase
premium of 11.25 percent. In addition, the Company acquired certain loans
associated with the branches totaling $20,192,000. As a result of this purchase
the Company made the following entries to record this transaction:
($000 Omitted)
Cash $26,738
Loans 20,192
Goodwill 4,766
Core deposit intangible 2,639
Land and buildings 430
Furniture and fixtures 13
Leasehold improvements 76
Other assets 83
Building lease and equipment expense 12
Salary expense 7
Deposits 54,932
Other liabilities 17
Other income 7
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branches are included in the 2002
consolidated statements of income of the Company from the date of the
transaction.
All goodwill is expected to be deductible for tax purposes. The cost of the
acquired branch office was $7,405,000. The core deposit intangible of $2,639,000
is being amortized to noninterest expense over fifty months using the straight
line method.
On October 26, 2001, the Company acquired certain assets and assumed the
deposits of a branch office of The Bank of New Hampshire located in Littleton,
New Hampshire. As a result of this purchase the Company made the following
entries to record this transaction:
($000 Omitted)
Cash $22,481
Loans 2,601
Deposit assumption premium 3,607
Equipment 6
Other assets 14
Miscellaneous expense 1
Deposits 28,660
Other liabilities 48
Other income 2
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branch are included in the 2001
consolidated statements of income of the Company from the date of the
transaction.
The deposit assumption premium of $3,607,000 was amortized, through December 31,
2001, to noninterest expense over fifteen years using the straight line method.
For 2002 accounting, see Note 1, Recent Accounting Pronouncements, SFAS No. 147.
On August 25, 2000, the Company acquired certain assets and assumed the deposits
of a branch office of The Bank of New Hampshire located in West Ossipee, New
Hampshire. As a result of this purchase the Company made the following entries
to record this transaction:
($000 Omitted)
Cash $16,952
Loans 6,197
Deposit assumption premium 4,340
Premises and equipment 301
Other assets 38
Miscellaneous expense 8
Deposits 27,782
Other liabilities 50
Other income 4
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branch are included in the consolidated
statements of income of the Company from the date of the transaction.
The deposit assumption premium of $4,340,000 was amortized, through December 31,
2001, to noninterest expense over fifteen years using the straight line method.
For 2002 accounting, see Note 1, Recent Accounting Pronouncements, SFAS No. 147.
On July 9, 1999, the Company acquired certain assets and assumed the deposits
from branch offices of Vermont National Bank located in Tilton and Franklin, New
Hampshire. As a result of this purchase, the Company made the following entries
to record this transaction:
($000 Omitted)
Cash $16,931
Deposit assumption premium 789
Premises and equipment 292
Other assets 5
Interest expense 3
Deposits 18,011
Other liabilities 3
Other income 6
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branches are included in the consolidated
statements of income of the Company from the date of the transaction.
The deposit assumption premium of $789,000 was amortized, through December 31,
2001, to noninterest expense over seven years using the straight line method.
For 2002 accounting, see Note 1, Recent Accounting Pronouncements, SFAS No. 147.
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 2002, the Company reviewed the carrying amount of
intangible assets and determined that no impairment was required.
NOTE 13 STOCKHOLDERS' EQUITY
The Company and the Banks 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 Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks' 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 Banks 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, 2002, the most
recent notification from the FDIC categorized both banks as well-capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized the Banks must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios. There are no conditions or events since
that notification that management believes have changed the Company's and Banks'
categories. Management believes, as of December 31, 2002 and 2001, that the
Company and the Banks met all capital adequacy requirements to which they are
subject.
These minimum capital amounts and ratios, as well as the Company's and Banks'
actual capital amounts and ratios, are presented in the following table:
($000 Omitted)
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
----------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------- -----
As of December 31, 2002
------------------------------------------------
Tier 1 capital (to average assets)
Consolidated $38,140 6.70% $22,766 =>4.00% N/A
The Berlin City Bank 24,743 6.82 14,513 =>4.00 $18,141 =>5.00%
The Pemigewasset National Bank of Plymouth 15,416 7.05 8,749 =>4.00 10,936 =>5.00
Total capital (to risk weighted assets)
Consolidated 53,597 12.04 35,622 =>8.00 N/A
The Berlin City Bank 28,121 10.30 21,850 =>8.00 27,312 =>10.00
The Pemigewasset National Bank of Plymouth 16,958 10.02 13,540 =>8.00 16,925 =>10.00
Tier 1 capital (to risk weighted assets)
Consolidated 38,140 8.57 17,811 =>4.00 N/A
The Berlin City Bank 24,743 9.06 10,925 =>4.00 16,387 =>6.00
The Pemigewasset National Bank of Plymouth 15,416 9.11 6,770 =>4.00 10,155 =>6.00
As of December 31, 2001
------------------------------------------------
Tier 1 capital (to average assets)
Consolidated $35,149 6.95% $20,231 =>4.00% N/A
The Berlin City Bank 20,250 5.94 13,644 =>4.00 $17,055 =>5.00%
The Pemigewasset National Bank of Plymouth 12,935 7.89 6,561 =>4.00 8,201 =>5.00
Total capital (to risk weighted assets)
Consolidated 39,791 10.28 30,955 =>8.00 N/A
The Berlin City Bank 23,383 8.99 20,817 =>8.00 26,021 =>10.00
The Pemigewasset National Bank of Plymouth 14,443 11.49 10,058 =>8.00 12,573 =>10.00
Tier 1 capital (to risk weighted assets)
Consolidated 35,149 9.08 15,478 =>4.00 N/A
The Berlin City Bank 20,250 7.78 10,408 =>4.00 15,615 =>6.00
The Pemigewasset National Bank of Plymouth 12,935 10.29 5,029 =>4.00 7,544 =>6.00
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.
Under the National Bank Act, the approval of the OCC is required if dividends
declared by PNB in any year exceed the net profits of that year, as defined,
combined with the retained net profit for the two preceding years. At December
31, 2002 PNB could not declare a dividend to the Company without the approval of
the OCC. All such requests made to the OCC during 2002 were approved.
As of December 31, 2002, BCB is restricted from declaring dividends to the
Company in an amount greater than approximately $6,271,000, as such declaration
would decrease capital below BCB's required minimum level of regulatory capital.
NOTE 14 OTHER NONINTEREST EXPENSE
The major components of other noninterest expense for the years ended December
31, are as follows:
($000 Omitted)
2002 2001 2000
------ ------- -------
Professional fees $1,096 $ 886 $1,073
Stationery and supplies 596 486 605
Telephone 505 283 287
Postage and shipping 378 323 286
ATM expense 366 352 322
Other 2,652 2,316 2,037
------ ------- -------
$5,593 $ 4,646 $ 4,610
====== ======= =======
NOTE 15 FEDERAL AND STATE TAXES
The components of federal and state tax expense (benefit) for the years ended
December 31, are as follows:
($000 Omitted)
2002 2001 2000
------ ------- -------
Current
Federal $ 985 $1,319 $1,657
State 327 201 187
------ ------ ------
1,312 1,520 1,844
------ ------ ------
Deferred
Federal 207 223 210
State (12) (35) 53
------ ------ ------
195 188 263
------ ------ ------
Total $1,507 $1,708 $2,107
====== ====== ======
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 deferred income tax asset
and deferred income tax liability at December 31, are as follows:
($000 Omitted)
2002 2001
------- -------
Deferred income tax asset
Allowance for loan losses $ 1,706 $ 1,568
Other 15 22
Interest on nonaccrual loans 22 25
Deferred origination costs -- 26
Loan origination costs, net 8 --
Unrealized holding loss on equities available-for-sale 285 --
Unrealized holding losses on securities available-for-sale -- 379
Minimum pension liability adjustment 581 --
Amortization of goodwill and core deposit intangible 384 --
Deposit assumption premium -- 525
Supplemental pension 48 49
------- -------
3,049 2,594
Valuation allowance for equity securities (285) --
------- -------
2,764 2,594
Deferred income liabilities
Loan origination costs, net -- (8)
Depreciation (728) (562)
Unrealized holding gain on debt securities available-for-sale (357) --
Prepaid pension (221) (247)
Mortgage and consumer servicing rights (134) (103)
------- -------
(1,440) (920)
------- -------
Deferred income tax asset, net $ 1,324 $ 1,674
======= =======
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, 2002, 2001 and 2000
differs from the "expected" federal income tax expense at the 34 percent
statutory rate for the following reasons:
2002 2001 2000
---- ---- ----
Expected federal income taxes 34.0% 34.0% 34.0%
Interest on municipal securities available-for-sale and municipal loans (3.8) (4.2) (2.5)
State tax expense, net of federal benefit 5.1 2.0 2.4
Other 1.4 (1.2) (0.3)
---- ---- ----
Effective tax rates 36.7% 30.6% 33.6%
==== ==== ====
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 employees 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. Assets of the Plan are managed by an independent asset
manager and advisor and are primarily invested in common stock, US Government
and Agency securities and high quality corporate bonds.
The following table sets forth information about the Plan as of December 31, and
for the years then ended:
($000 Omitted)
2002 2001
------- -------
Change in benefit obligation
--------------------------------------------------
Benefit obligation at beginning of year $ 3,305 $ 3,284
Service cost 356 309
Interest cost 246 254
Actuarial gain 747 306
Effect of Economic Growth Tax Relief Reconciliation Act -- 9
Benefits paid (298) (857)
------- -------
Benefit obligation at end of year 4,356 3,305
------- -------
Change in plan assets
--------------------------------------------------
Fair value of plan assets at beginning of year 2,918 2,843
Actual return on plan assets (248) (86)
Employer contributions 313 1,018
Benefits paid (298) (857)
------- -------
Fair value of plan assets at end of year 2,685 2,918
------- -------
Funded status
--------------------------------------------------
Funded status (1,671) (387)
Unrecognized transition asset (5) (10)
Unrecognized net actuarial loss 3,371 2,254
Unrecognized prior service cost (1,046) (1,130)
------- -------
Net amount recognized $ 649 $ 727
======= =======
Amounts recognized in the consolidated statements of
financial condition consists of:
----------------------------------------------------
Accrued benefit liability $(1,707)$ --
Accumulated other comprehensive loss, before income tax effect 1,707 --
Prepaid benefit cost 649 727
------- -------
Net amount recognized $ 649 $ 727
======= =======
Weighted-average assumptions as of December 31, 2002 2001
-------------------------------------------------- ------- -------
Discount rate 6.25% 7.25%
Expected return on plan assets 8.50 8.50
Rate of compensation increase 4.00 4.50
($000 Omitted)
Components of net periodic benefit cost 2002 2001 2000
-------------------------------------------------- ------- ------- -------
Service cost $ 356 $ 309 $ 245
Interest cost 246 254 230
Expected return on plan assets (244) (271) (261)
Amortization of prior service cost (84) (85) (85)
Recognized net actuarial loss 122 85 62
Recognized transition amount (5) (4) (4)
------- ------- -------
Net periodic benefit cost $ 391 $ 288 $ 187
======= ======= =======
At December 31, 2002, the Company recorded an adjustment to comprehensive income
for the unfunded pension accumulated benefit obligation in the amount of
$1,126,000, net of taxes. While the Company continues to contribute the maximum
amount permitted by law to its pension plan, the discount rate used to calculate
the future value of such contribution and the poor asset performance of
investment securities has resulted in the unfunded pension accumulated benefit
obligation.
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, PNB and BCB
are eligible to participate. Under the 401K Plan, employers match 50 percent of
the first 4 percent of employee contributions. Total 401(k) matching expense in
2002, 2001 and 2000 amounted to $120,000, $113,000 and $110,000, respectively,
and the Profit Sharing contribution expense was $0, $64,000 and $60,000,
respectively.
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 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. In 2000 the weighted average dividend yield
was 2.5 percent, the weighted average risk-free interest rate was 6.01 percent,
the expected volatility was 23 percent and the expected life was 8 years.
A summary of the status of the Company's 1999 Plan as of December 31, 2002, 2001
and 2000 and changes during the years then ended is presented below:
2002 2001 2000
-------------------- ------------------ --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ -------- ------ ---------
Outstanding, beginning of year 49,500 $24.91 49,500 $ 24.91 26,000 $28.00
Granted -- -- -- -- 28,500 22.63
Exercised (5,250) 25.70 -- -- -- --
Forfeited (2,250) 22.63 -- -- (5,000) 28.00
------- ------- -------
Outstanding, end of year 42,000 $24.93 49,500 $ 24.91 49,500 $24.91
======= ======= =======
Options exercisable at year-end 36,000 35,250 28,125
Per share weighted-average fair value
of options granted during the year $ -- $ -- $ 6.55
The following table summarizes information about fixed stock options outstanding as of December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------- ----------------------------
Weighted
Number Average Number Weighted
Outstanding Remaining Exercisable Average
Exercise as of Contractual as of Exercise
Price 12/31/02 Life 12/31/02 Price
-------- ----------- ----------- ----------- ----------
$28.00 18,000 6.50 years 18,000 $28.00
22.63 24,000 7.63 years 18,000 22.63
------ ------
$24.93 42,000 7.15 years 36,000 $25.32
====== ======
Change in Control
The Company and its subsidiaries have entered into Key Employee agreements with
the Named 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 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 on-balance sheet instruments.
Financial instruments with off-balance sheet credit risk at December 31, are as
follows:
($000 Omitted)
2002 2001
------- --------
Financial instrument whose contract amounts represent credit risk:
Unadvanced portions of home equity loans $14,414 $ 8,754
Unadvanced portions of lines of credit 10,761 9,317
Unadvanced portions of commercial real estate loans 2,410 624
Commitments to originate all other loans 29,608 16,862
Commitments to originate municipal notes 1,000 80
Standby letters of credit 32 83
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.
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.
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 statements of
financial condition 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 and Federal Reserve Bank ("FRB") Stock: The carrying amount reported in the
statements of financial condition for FHLB and FRB Stock approximates their fair
value. If redeemed, the Company will receive an amount equal to the par value of
the stocks.
Loans held-for-sale: The carrying amount reported in the statements of financial
condition sheet approximates fair value.
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 value
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 value of nonaccrual loans was estimated
using the estimated fair value of the underlying collateral. The fair value of
commitments to originate loans and outstanding letters of credit were considered
in estimating the fair value of loans. As the undisbursed lines of credit are at
floating rates, there is no fair value adjustment.
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 were 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.
Guaranteed preferred beneficial interest in junior subordinated debentures: The
fair value of guaranteed preferred beneficial interest in junior subordinated
debentures is based on carrying values due to the frequent repricing of these
instruments.
The estimated fair values of the Company's financial instruments are as follows:
($000 Omitted)
December 31,
---------------------------------------------------------
2002 2001
------------------------ -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------- --------- ------- --------
Financial assets:
Cash and cash equivalents $ 27,426 $ 27,426 $ 29,641 $ 29,641
Securities available-for-sale 91,397 91,397 55,564 55,564
FHLB stock 4,632 4,632 4,632 4,632
FRB stock 80 80 80 80
Loans held-for-sale 669 669 2,026 2,026
Loans, net 437,232 440,639 395,674 401,237
Accrued interest receivable 2,680 2,680 2,237 2,237
Financial liabilities:
Deposits 476,194 477,907 412,840 414,631
Short-term borrowings 8,251 8,251 8,155 8,155
Long-term debt 46,000 49,067 48,028 48,748
Guaranteed preferred beneficial interest
in junior subordinated debentures 20,000 20,000 -- --
The carrying amounts of financial instruments shown in the above table are
included in the consolidated statements of financial condition under the
indicated captions except that accrued interest receivable is included with
other assets in the statements.
At December 31, 2002, 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, 2002 and 2001 and for the three years ended December 31, 2002
follow:
STATEMENTS OF FINANCIAL CONDITION
($000 Omitted)
2002 2001
------- -------
Assets
Cash and cash equivalents $ 6,688 $ 333
Investment in subsidiary, The Berlin City Bank 32,114 27,763
Investment in subsidiary, The Pemigewasset National Bank
of Plymouth 23,634 13,612
Investment in subsidiary, Northway Capital Trust 620 --
Equipment, net 1,820 747
Due from subsidiaries 515 442
Other assets 1,905 1,091
------- -------
Total assets $67,296 $43,988
======= =======
Liabilities and stockholders' equity
Accrued expenses $ 568 $ 221
Other liabilities 1,842 428
Guaranteed preferred beneficial interest in junior
subordinated debentures issued by subsidiaries 20,620 --
------- -------
Total liabilities 23,030 649
------- -------
Stockholders' equity:
Common stock 1,732 1,732
Additional paid-in-capital 2,088 2,101
Retained earnings 47,523 45,955
Treasury stock (5,711) (5,864)
Accumulated other comprehensive loss (1,366) (585)
------- -------
Total stockholders' equity 44,266 43,339
------- -------
Total liabilities and stockholders' equity $67,296 $43,988
======= =======
STATEMENTS OF INCOME
($000 Omitted)
2002 2001 2000
------- ------- -------
Income:
Dividends from subsidiaries $ 1,520 $ 3,925 $ 2,450
Interest income 104 24 22
Management fee income from subsidiaries 6,710 5,337 5,252
Other 20 -- --
------- ------- -------
8,354 9,286 7,724
------- ------- -------
Expense:
Interest expense 665 10 7
Salaries and employee benefits 3,848 3,430 3,507
Office occupancy and equipment expense 905 664 552
Professional fees 683 587 628
Other 1,415 755 735
------- ------- -------
7,516 5,446 5,429
------- ------- -------
Income before income tax benefit and
equity in undistributed net income of subsidiaries 838 3,840 2,295
Income tax benefit (232) (29) (53)
------- ------- -------
Income before equity in undistributed net
income of subsidiaries 1,070 3,869 2,348
Equity in undistributed net income of subsidiaries 1,528 4 1,811
------- ------- -------
Net income $ 2,598 $ 3,873 $ 4,159
======= ======= =======
STATEMENTS OF CASH FLOWS
($000 Omitted)
2002 2001 2000
------- ------- -------
Cash flows from operating activities:
Net income $ 2,598 $ 3,873 $ 4,159
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 289 132 35
(Increase) decrease in amount due from subsidiaries (73) 6 (448)
Increase in other assets (493) (400) (332)
Increase (decrease) in accrued expenses and other liabilities 314 (195) 293
Loss on sale of assets -- -- 18
Undistributed net income of subsidiaries (1,528) (4) (1,811)
------- ------- -------
Net cash provided by operating activities 1,107 3,412 1,914
------- ------- -------
Cash flows from investing activities:
Capital contributions to subsidiaries:
The Berlin City Bank (3,000) -- --
Pemigewasset National Bank (9,500) -- --
Additions to premises and equipment (1,362) (447) (469)
------- ------- -------
Net cash used in investing activities (13,862) (447) (469)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of guaranteed preferred
beneficial interest in junior subordinated debentures
by subsidiaries 20,000 1,855 1,565
Repayments of advances from subsidiaries -- (2,535) (885)
Exercise of stock options 140 -- --
Purchases of treasury stock -- (1,156) (1,310)
Dividends paid (1,030) (1,028) (955)
------- ------- -------
Net cash provided by (used in) financing activities 19,110 (2,864) (1,585)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 6,355 101 (140)
Cash and cash equivalents at beginning of year 333 232 372
------- ------- -------
Cash and cash equivalents at end of year $ 6,688 $ 333 $ 232
======= ======= =======
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 2002 and 2001 follows:
($000 Omitted, except earnings per share)
2002 Quarters Ended
-----------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $ 7,854 $ 7,752 $ 7,778 $ 8,098
Interest expense 2,535 2,318 2,474 2,491
------- ------- ------- -------
Net interest and dividend income 5,319 5,434 5,304 5,607
Provision for loan losses 225 225 225 225
Noninterest income 952 752 867 805
Noninterest expense 4,329 4,560 5,662 5,484
------- ------- ------- -------
Income before taxes 1,717 1,401 284 703
Income tax expense 598 479 109 321
------- ------- ------- -------
Net income $ 1,119 $ 922 $ 175 $ 382
======= ======= ======= =======
Basic earnings per common share $ 0.74 $ 0.60 $ 0.12 $ 0.25
======= ======= ======= =======
Earnings per common share assuming dilution $ 0.74 $ 0.60 $ 0.12 $ 0.25
======= ======= ======= =======
2001 Quarters
-----------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $ 9,182 $ 8,773 $ 8,718 $ 8,341
Interest expense 4,081 3,711 3,439 3,062
------- ------- ------- -------
Net interest and dividend income 5,101 5,062 5,279 5,279
Provision for loan losses 225 225 225 225
Noninterest income 605 794 800 710
Noninterest expense 4,041 4,282 4,285 4,541
------- ------- ------- -------
Income before taxes 1,440 1,349 1,569 1,223
Income tax expense 438 413 470 387
------- ------- ------- -------
Net income $ 1,002 $ 936 $ 1,099 $ 836
======= ======= ======= =======
Basic earnings per common share $ 0.65 $ 0.62 $ 0.72 $ 0.56
======= ======= ======= =======
Earnings per common share assuming dilution $ 0.65 $ 0.62 $ 0.72 $ 0.55
======= ======= ======= =======
INDEPENDENT AUDITORS' REPORT
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 statements of financial condition
of Northway Financial, Inc. and Subsidiaries as of December 31, 2002 and 2001
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, 2002. 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 auditing standards generally accepted
in the United States of America. 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. 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, 2002 and 2001 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
Shatswell, MacLeod & Company, P.C.
West Peabody, Massachusetts
January 23, 2003
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information set forth under the captions "Information Concerning Directors and
Nominees," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement to be
delivered in connection with its 2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" in the
Company's definitive proxy statement to be delivered in connection with its 2003
Annual Meeting of Stockholders, provided however, that the "Report of the Human
Resources and Compensation Committee on Executive Compensation" and the "Stock
Price Performance Graph" contained in such proxy statement are not incorporated
by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth under the caption "Security Ownership of Management" in
the Company's definitive proxy statement to be delivered in connection with its
2003 Annual Meeting of Stockholders.
The following table sets forth information regarding securities authorized for
issuance under the Company's equity compensation plans as of December 31, 2002:
Equity Compensation Plan Information
Number of securities
Number of securities remaining available
To be issued Weighted-average for future issuance under
Upon exercise of exercise price of equity compensation plans
Outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
------------- --------------------- -------------------- -------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 42,000 $ 24.93 127,750
Equity compensation
plans not approved
by security holders -- -- --
--------------------- -------------------- ------------------------
Total 42,000 $ 24.93 127,750
===================== ==================== ========================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement to be delivered in
connection with its 2003 Annual Meeting of Stockholders.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the
90 days prior to the date of this report, the Company carried out an evaluation
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. In designing and evaluating the Company's disclosure
controls and procedures, the Company and its management recognize that any
controls and procedures, no matter how well designed and operated, can provide
only a reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that they believe
the Company's disclosure controls and procedures are reasonably effective to
ensure that information required to be disclosed by the Company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. In connection with the rules regarding disclosure
and control procedures, we intend to continue to review and document our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, and may from time to time make changes aimed
at enhancing their effectiveness and to ensure that our systems evolve with our
business.
(b) Changes in internal controls.
None.
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following financial statements are incorporated by reference from
Item 8 hereof:
Auditor's Independent Report
Consolidated Statements of Financial Condition as of December 31,
2002 and 2001
Consolidated Statements of Income for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders Equity for the
years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December
31, 2002, 2001 and 2000
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.
(b) The Company filed no Reports on Form 8-K during the quarter ended December
31, 2002.
(c) See Item 15(a)(3) above
(d) See Item 8 of this Annual Report on Form 10-K
SIGNATURES
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 25, 2003 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 Chairman of the Board, President March 25, 2003
--------------------------- President and CEO (Principal
William J. Woodward Executive Officer)
/S/Richard P. Orsillo Senior Vice President and March 25, 2003
--------------------------- Chief Financial Officer
Richard P. Orsillo (PrincipalFinancial and
Accounting Officer)
/S/Fletcher W. Adams Vice Chairman of the Board March 25, 2003
---------------------------
Fletcher W. Adams
/S/John D. Morris Director March 25, 2003
---------------------------
John D. Morris
/S/John H. Noyes Director March 25, 2003
---------------------------
John H. Noyes
/S/Barry J. Kelley Director March 25, 2003
---------------------------
Barry J. Kelley
/S/Randall G. Labnon Director March 25, 2003
---------------------------
Randall G. Labnon
/S/Stephen G. Boucher Director March 25, 2003
---------------------------
Stephen G. Boucher
/S/Brien L. Ward Director March 25, 2003
---------------------------
Brien L. Ward
/S/Charles H. Clifford, Jr Director March 25, 2003
---------------------------
Charles H. Clifford, Jr.
/S/Arnold P. Hanson, Jr. Director March 25, 2003
---------------------------
Arnold P. Hanson, Jr.
/S/Frederick C. Anderson Director March 25, 2003
---------------------------
Frederick C. Anderson
CERTIFICATIONS
I, William J. Woodward, certify that:
1. I have reviewed this annual report on Form 10-K of Northway Financial,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based upon
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date March 25, 2003 /S/William J. Woodward
------------------ -------------------------------
William J. Woodward
Chairman of the Board, President
and Chief Executive Officer
I, Richard P. Orsillo, certify that:
1. I have reviewed this annual report on Form 10-K of Northway Financial,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based upon
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date March 25, 2003 /S/Richard P. Orsillo
------------------ ------------------------------------
Richard P. Orsillo
Senior Vice President and
Chief Financial Officer
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 December 31, 1997).
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 December 31, 1997).
10.2 Employment Agreement for Fletcher W. Adams (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997).
10.3 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 December 31, 1998).(2)
10.4 Amendment to the Employment Agreement for Fletcher W. Adams.
(incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998). (2)
10.5 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)
10.7 Form of Key Employee Agreement (incorporated by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the year ended
1999). (2)
10.8 Form of Collateral Assignment Split Dollar Agreement (incorporated
by reference to Exhibit 10.7 to the Company's Annual Report on Form
10-K for the year ended 2000).(2)
21 List of Subsidiaries(1)
23 Consent of Shatswell, MacLeod & Company, P.C. (1)
(1) Filed herewith.
(2) Management contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c) of this report.