SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________________ to ____________________
Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
(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
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At July 18, 2003, there were
1,504,574 shares of common stock outstanding, par value $1.00 per share.
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended June 30, 2003 and 2002 (Unaudited)............. 3
Condensed Consolidated Balance Sheets at June 30, 2003 (Unaudited)
and December 31, 2002............................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 (Unaudited)............................ 5
Notes to Condensed Consolidated Financial Statements (Unaudited).... 6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.......... 12
Item 4.
Controls and Procedures............................................. 13
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings................................................... 14
Item 2.
Changes in Securities............................................... 14
Item 3.
Defaults Upon Senior Securities..................................... 14
Item 4.
Submission of Matters to a Vote of Security Holders................. 14
Item 5.
Other Information................................................... 14
Item 6.
Exhibits and Reports on Form 8-K.................................... 14
Signatures.................................................................. 15
PART 1. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands, except per share data) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $7,215 $6,885 $14,274 $13,989
------------------ ------------------
Interest on debt securities:
Taxable 803 712 1,601 1,293
Tax-exempt 101 79 178 143
Dividends 66 63 120 121
Federal funds sold 18 13 28 60
Interest bearing deposits - - 1 -
------------------ ------------------
Total interest and dividend income 8,203 7,752 16,202 15,606
------------------ ------------------
Interest expense:
Deposits 1,162 1,569 2,430 3,419
Borrowed funds 796 653 1,462 1,338
Guaranteed preferred beneficial interest in junior
subordinated debentures 252 96 509 96
------------------ ------------------
Total interest expense 2,210 2,318 4,401 4,853
------------------ ------------------
Net interest and dividend income 5,993 5,434 11,801 10,753
Provision for loan losses 220 225 445 450
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Net interest and dividend income after
provision for loan losses 5,773 5,209 11,356 10,303
------------------ ------------------
Noninterest income:
Service charges and fees on deposit accounts 432 367 830 676
Securities gains, net 39 28 237 274
Loan servicing income 59 74 140 193
Other 449 283 814 561
------------------ ------------------
Total noninterest income 979 752 2,021 1,704
------------------ ------------------
Noninterest expense:
Salaries and employee benefits 2,770 2,432 5,469 4,812
Office occupancy and equipment 938 765 1,873 1,528
Amortization of core deposit intangible 239 78 477 182
Write-down of equity securities 41 - 119 -
Other 1,476 1,285 2,873 2,367
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Total noninterest expense 5,464 4,560 10,811 8,889
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Income before income tax expense 1,288 1,401 2,566 3,118
Income tax expense 464 479 931 1,077
------------------ ------------------
Net income $ 824 $ 922 $ 1,635 $ 2,041
================== ==================
Comprehensive net income $2,466 $ 961 $ 3,534 $ 1,711
================== ==================
Per share data:
Earnings per common share $ 0.55 $ 0.61 $ 1.09 $ 1.35
Earnings per common share (assuming dilution) $ 0.54 $ 0.61 $ 1.08 $ 1.35
Cash dividends declared $ 0.17 $ 0.17 $ 0.34 $ 0.34
Weighted average number of common shares 1,505,695 1,515,797 1,507,789 1,513,622
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
(Dollars in thousands) 2003 2002
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(Unaudited)
Assets:
Cash and due from banks and interest bearing deposits $ 21,944 $ 17,256
Federal funds sold 11,905 10,170
Securities available-for-sale 79,846 91,397
Federal Home Loan Bank stock 4,705 4,632
Federal Reserve Bank stock 365 80
Loans held-for-sale 1,133 669
Loans, net before allowance for loan losses 460,004 442,152
Less: allowance for loan losses 4,994 4,920
------------------------------
Loans, net 455,010 437,232
------------------------------
Other real estate owned 211 175
Premises and equipment, net 12,059 12,503
Core deposit intangible 4,380 4,857
Goodwill 10,152 10,152
Due from broker 2,170 -
Other assets 6,994 9,195
------------------------------
Total assets $ 610,874 $ 598,318
==============================
Liabilities and Stockholders' Equity:
Liabilities
Interest bearing deposits $ 395,969 $ 404,435
Noninterest bearing deposits 70,269 71,759
Securities sold under agreements to repurchase 7,028 8,251
Long-term Federal Home Loan Bank advances 67,000 46,000
Other liabilities 3,672 3,607
------------------------------
Total liabilities 543,938 534,052
------------------------------
Guaranteed preferred beneficial interest in junior
subordinated debentures 20,000 20,000
------------------------------
Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued - -
Common stock, $1 par value; 9,000,000 shares authorized; 1,731,969
issued at June 30, 2003 and December 31, 2002 and 1,504,574 outstanding
at June 30, 2003 and 1,516,574 outstanding at December 31, 2002 1,732 1,732
Surplus 2,088 2,088
Retained earnings 48,645 47,523
Treasury stock, at cost (227,395 and 215,395 shares, respectively) (6,062) (5,711)
Accumulated other comprehensive gain (loss), net of tax 533 (1,366)
------------------------------
Total stockholders' equity 46,936 44,266
------------------------------
Total liabilities and stockholders' equity $ 610,874 $ 598,318
==============================
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
(Dollars in thousands) 2003 2002
------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,635 $ 2,041
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 445 450
Depreciation and amortization 1,195 743
Deferred income tax expense - 187
Write-down of equity securities 119 -
Gains on sales of securities available-for-sale, net (237) (274)
Loss on disposal and write-down of premises and equipment 6 42
Amortization of premiums and accretion of discounts on securities, net 265 102
Increase in unearned income, net 23 17
Amortization of discount on loans acquired 53 -
Loss (gain) on sales of other real estate owned and other personal property, net 2 (4)
Net decrease (increase) in loans held-for-sale (464) 627
Net change in other assets and other liabilities 1,218 (677)
------------------
Net cash provided by operating activities 4,260 3,254
------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale 4,128 6,908
Proceeds from maturities of securities available-for-sale 36,297 9,154
Purchase of securities available-for-sale (28,604) (20,970)
Loan originations and principal collections, net (18,877) (373)
Recoveries of previously charged-off loans 93 104
Proceeds from sales of and payments received on other real estate owned 10 26
Proceeds from sales of and payments received on other personal property 439 246
Additions to premises and equipment (280) (1,114)
------------------
Net cash used in investing activities (6,794) (6,019)
------------------
Cash flows from financing activities:
Net decrease in deposits (9,956) (7,980)
Advances from FHLB 28,000 1,000
Repayment of FHLB advances (7,000) (3,028)
Net decrease in securities sold under agreements to repurchase (1,223) (715)
Exercise of stock options - 128
Purchases of treasury stock (351) -
Issuance of guaranteed preferred beneficial interest in junior subordinated debentures - 7,000
Cash dividends paid (513) (515)
------------------
Net cash provided by (used in) financing activities 8,957 (4,110)
------------------
Net increase (decrease) in cash and cash equivalents 6,423 (6,875)
Cash and cash equivalents at beginning of period 27,426 29,641
------------------
Cash and cash equivalents at end of period $33,849 $22,766
==================
Supplemental disclosure of cash flows:
Interest paid $ 4,504 $ 5,078
======= =======
Taxes paid $ 945 $ 1,016
======= =======
Loans transferred to other real estate owned $ 46 $ 25
======= =======
Loans transferred to other personal property $ 439 $ 244
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
1. Basis of Presentation.
The unaudited condensed consolidated financial statements of Northway
Financial, Inc. and its four wholly-owned subsidiaries, The Berlin City Bank,
The Pemigewasset National Bank of Plymouth, the Northway Capital Trust I (an
issuer of trust preferred securities) and the Northway Capital Trust II (also an
issuer of trust preferred securities) (collectively, "the Company") included
herein have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") have been condensed or omitted in accordance with such rules
and regulations. The Company, however, believes that the disclosures are
adequate to make the information presented not misleading. The amounts shown
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the financial statements for the periods reported.
The results of operations for the three and six month periods ended June
30, 2003 and 2002 are not necessarily indicative of the results of operations to
be expected for the full year or any other interim periods. The interim
financial statements are meant to be read in conjunction with the Company's
audited financial statements presented in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheet and revenues and expenses for
the reported periods. Actual results could differ from these estimates. Material
estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
GAAP.
2. Stock-Based Compensation
As of June 30, 2003, the Company has a stock-based employee compensation
plan which is described more fully in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. The Company accounts for this plan under
the recognition and measurement principles of the Auditing Practice Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under this plan had an exercise price equal to
the market value of the underlying common stock on the date of the grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
($000 Omitted, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
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Net income As reported $ 824 $ 922 $1,635 $2,041
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
awards, net of related tax effects 10 10 20 20
--------- --------- -------- --------
Pro forma $ 814 $ 912 $1,615 $2,021
======= ======= ====== ======
Earnings per common share As reported $0.55 $0.61 $1.09 $1.35
Pro forma $0.54 $0.60 $1.07 $1.34
Earnings per common share (assuming dilution) As reported $0.55 $0.61 $1.08 $1.35
Pro forma $0.54 $0.60 $1.06 $1.34
3. Impact of New Accounting Standards.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceased upon adoption of the statement,
which for the Company was January 1, 2002. The effect of the adoption of SFAS
No. 142 on the Company's consolidated financial statements is described below.
In October 2002, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an
Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method, provided interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, SFAS No. 147
removes acquisitions of financial institutions from the scope of both Statement
72 and Interpretation 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141, Business Combinations and No. 142, Goodwill and
Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends
SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that SFAS No. 144
requires for other long-lived assets that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, was effective for acquisitions for which the date
of acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets were effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 were effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company has
reclassified, as of September 30, 2002 its recognized unidentifiable intangible
asset related to branch acquisitions. This asset was reclassified as goodwill
("reclassified goodwill"). The amount reclassified was $5,386,000, the carrying
amount as of January 1, 2002. The reclassified goodwill is being accounted for
and reported prospectively as goodwill under SFAS No. 142, with no amortization
expense. Accordingly, the consolidated financial statements for the three- and
six-months ended June 30, 2002 do not reflect amortization in the amount of
$86,000 and $146,000, respectively, that would have been recorded if SFAS No.
147 had not been issued.
In accordance with SFAS No. 147 the Company tested its reclassified
goodwill for impairment as of January 1, 2002 and December 31, 2002. The Company
determined that its goodwill as of those dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September
30, 2002, the Company reclassified its core deposit intangible ("CDI") asset and
accounted for it as an asset apart from the unidentifiable intangible asset and
not as goodwill. CDI is amortized over the expected life of the acquired
deposits and is tested annually for impairment. As of December 31, 2002, the
Company tested its CDI asset for impairment and determined that as of that date
it was not impaired.
The effect of the Company's adoption of SFAS No. 147 was to increase
net income for the three- and six-month periods ended June 30, 2002 by $53,000
and $89,000, respectively.
In May 2003, FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 will require the Company to reclassify on its balance sheet the line
item "Guaranteed preferred beneficial interest in junior subordinated
debentures" in the amount of $20,000,000. At present, this line item is
presented between the liabilities section and the equity section of the
Company's balance sheet. SFAS No. 150, which is effective for the Company for
the quarter ending September 30, 2003, will require that the line item be
reclassified as a liability. FASB expects to require additional disclosures in
connection with SFAS No. 150 but the disclosure requirements are not yet
finalized.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion and analysis and the related condensed
consolidated financial statements relate to Northway Financial, Inc. and its
four wholly-owned subsidiaries, The Berlin City Bank, The Pemigewasset National
Bank of Plymouth, Northway Capital Trust I and Northway Capital Trust II
(collectively, the "Company").
Forward-Looking Statements
Certain statements in this Form 10-Q are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements can be identified by the use of the words "expect,"
"believe," "estimate," "will" and other expressions which predict or indicate
future trends and which do not relate to historical matters. Forward-looking
statements may include, but are not limited to, projections of revenue, income
or loss, plans for future operations, including in new markets, and
acquisitions, and plans related to products or services of the Company. Such
forward-looking statements are subject to known and unknown risks, uncertainties
and contingencies, many of which are beyond the control of the Company. The
Company's actual results could differ materially from those projected in the
forward-looking statements as the result of, among other factors, changes in
interest rates, changes in the securities or financial markets, a deterioration
in general economic conditions on a national basis or in the local markets in
which the Company operates, including changes in local business conditions
resulting in rising unemployment and other circumstances which adversely affect
borrowers' ability to service and repay our loans, changes in loan defaults and
charge-off rates, reduction in deposit levels necessitating increased borrowing
to fund loans and investments, the passing of adverse government regulation,
changes in assumptions used in making such forward-looking statements, as well
as those factors set forth in the Company's Annual Report on Form 10-K for the
year ending December 31, 2002, and in the Company's other filings with the
Securities & Exchange Commission. These forward-looking statements were based on
information, plans and estimates at the date of this report, and the Company
does not promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
Financial Condition
The Company's total assets at June 30, 2003 were $610,874,000 compared
to $598,318,000 at December 31, 2002, an increase of $12,556,000. Net loans,
including loans held-for-sale, increased $18,242,000 to $456,143,000. The
increase in net loans was due to increases in all loan categories. Cash and cash
equivalents increased $6,423,000 to $33,849,000, compared to $27,426,000 at
December 31, 2002, due primarily to an increase in both cash and Federal Reserve
Bank uncollected funds. This was partially offset by a decrease in securities
available-for-sale of $11,551,000 to $79,846,000 due primarily to lower US
Treasury and Government Agency securities and mortgage-backed security balances
partially offset by corporate and municipal security purchases.
Deposits decreased $9,956,000 from December 31, 2002 due a decrease in
DDA, money market, savings and time deposits which was partially offset by an
increase in NOW account balances. Long-term Federal Home Loan Bank advances
increased $21,000,000 to $67,000,000 from December 31, 2002 due to twelve new
advances, totaling $28,000,000, during the year ranging in term from two years
to seven years with an average interest rate of 2.74% which was partially offset
by the maturity of $7,000,000 in advances. Total stockholders' equity increased
$2,670,000 to $46,936,000 at June 30, 2003 from $44,266,000 at December 31, 2002
due primarily to net income of $1,635,000 and an increase in accumulated other
comprehensive gain of $1,899,000 which was partially offset by dividends paid of
$513,000 and an increase in treasury stock of $351,000. At June 30, 2003,
unrealized equity security losses of $436,000 are included in accumulated other
comprehensive gain, net of tax. Management does not consider the underlying
equity securities to be other than temporarily impaired.
The Company maintains an allowance for loan losses to absorb
charge-offs of loans in the existing portfolio. The allowance is increased when
a loan loss provision is recorded as an expense. When a loan, or portion
thereof, is considered uncollectible, it is charged against this allowance.
Recoveries of amounts previously charged-off are added to the allowance when
collected. At June 30, 2003 the allowance for loan losses was $4,994,000, or
1.09% of total loans, compared to $4,920,000, or 1.11% of total loans at
December 31, 2002. The allowance for loan losses is based on an evaluation by
each bank's management and Board of Directors of current and anticipated
economic conditions, changes in the diversification, size and risk within the
loan portfolio, and other factors. The composition of the allowance for loan
losses for the three and six month periods ended June 30, 2003 and 2002 is as
follows:
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) 2003 2002 2003 2002
-------------------------------------------------------------------------------
Balance at beginning of period $4,983 $4,712 $4,920 $4,642
------------------ -----------------
Charge-offs (258) (112) (464) (326)
Recoveries 49 45 93 104
------------------ -----------------
Net charge-offs (209) (67) (371) (222)
Provision for loan losses 220 225 445 450
------------------ -----------------
Balance at end of period $4,994 $4,870 $4,994 $4,870
================== =================
Nonperforming loans totaled $3,886,000 as of June 30, 2003, compared to
$3,619,000 at December 31, 2002. The ratio of nonperforming loans to loans net
of unearned income was 0.84% as of June 30, 2003 compared to 0.82% at December
31, 2002. Nonperforming assets, which include nonperforming loans, other real
estate owned and other chattels owned, totaled $4,190,000 as of June 30, 2003,
compared to $3,892,000 at December 31, 2002. The ratio of nonperforming assets
to total assets was 0.68% as of June 30, 2003 compared to 0.65% at December 31,
2002.
Results of Operations
The Company reported net income of $824,000, or $0.55 per common share,
for the three months ended June 30, 2003, compared to $922,000, or $0.61 per
common share, for the three months ended June 30, 2002. The decline in net
income for the quarter is due primarily to a 19.8% increase in operating
expenses primarily related to the 2002 fourth quarter branch acquisitions by the
Company's subsidiary Pemigewasset National Bank, staff additions to support
current loan demand, and the phase-in costs associated with the implementation
of bank-wide re-engineering and new technology initiatives. This was partially
offset by a 10.3% increase in net interest income and a 30.2% increase in
noninterest income. Net income for the six months ended June 30, 2003 was
$1,635,000, or $1.09 per common share, compared to $2,041,000, or $1.35 per
common share, for the six months ended June 30, 2002. As with the quarter,
year-to-date income has been impacted by an increase in noninterest expense
partially offset by improved net interest income and noninterest income.
Net interest and dividend income for the second quarter increased
$559,000 to $5,993,000 compared to $5,434,000 for the second quarter of 2002.
For the six months ended June 30, 2003 net interest and dividend income
increased $1,048,000, or 9.8%, to $11,801,000 compared to $10,753,000 for the
same period of the prior year due primarily to an increase in average earning
assets of $80,728,000 partially offset by a decrease in the net interest margin
of 0.30%.
The provision for loan losses decreased $5,000 to $220,000 for the
second quarter of 2003 compared to $225,000 for the second quarter of 2002. In
addition, the provision decreased $5,000 to $445,000 for the six months ended
June 30, 2003 compared to $450,000 for the six months ended June 30, 2002. The
provision for loan losses is based upon a review of the adequacy of the
allowance for loan losses, which is conducted on a quarterly basis. This review
is based upon many factors including the risk characteristics of the portfolio,
trends in loan delinquencies, and an assessment of existing economic conditions.
In addition, various regulatory agencies, as part of their examination process,
review the Banks' allowances for loan losses and such review may result in
changes to the allowance based on judgments different from those of management.
Noninterest income increased $227,000 to $979,000 in the second quarter
of 2003 compared to $752,000 in the second quarter of 2002. Service charges and
fees on deposit accounts increased $65,000 due to increases in overdraft fee
income and service charge income resulting from the branch acquisitions in the
fourth quarter 2002, as well as increases in income from existing branches.
Other noninterest income increased $166,000 due primarily to increases in gains
on sales of loans, debit card fee income, and a valuation adjustment on split
dollar life insurance. For the six months ended June 30, 2003 noninterest income
increased $317,000, or 18.6%, to $2,021,000 compared to $1,704,000 for the same
period of the prior year. The increase was primarily the result of increases in
service charges on deposit accounts and overdraft fees, debit card fee income,
gain on sale of loans, and a valuation adjustment on split dollar life
insurance. This was partially offset by decreases in gains on sale of
securities, loan servicing income and extension fees associated with our
skip-a-payment program for indirect auto loans.
Noninterest expense increased $904,000 to $5,464,000 for the quarter
ended June 30, 2003, compared to the $4,560,000 recorded during the same period
last year. Noninterest expense increased $1,922,000, or 21.6%, to $10,811,000
for the six months ended June 30, 2003, compared to $8,889,000 for the same
period last year.
As a result of the branch acquisitions in the fourth quarter of 2002,
the Company recognized increases in salaries, lease expense, energy expense,
postage and the amortization of core deposit intangibles. In addition, due to
staff additions to support current loan demand and phase-in costs associated
with the implementation of bank-wide re-engineering and new technology
initiatives, the Company recognized increases in salaries, professional fees,
and courier, telephone and depreciation expense. These increases have impacted
both the quarter and year-to-date noninterest expense.
Additionally, the second quarter and year-to-date noninterest expense
was impacted by an increase in legal expense due primarily to the review of new
disclosure requirements and our consumer loan documentation. In addition, during
the second quarter, the Company recognized an expense to record a provision for
losses related to unfunded loan commitments such as unused lines of credits and
unused portions of home-equity loans. Management will review this provision
quarterly and adjustments to expense will be made as appropriate.
During the second quarter of 2003, the Company recorded a $41,000
write-down of equity securities. Year-to-date, the Company has recorded
write-downs of equity securities totaling $119,000. These write-downs were due
to the continued sustained overall weakness in the equity market as well as
significant declines in certain sectors and specific companies within those
sectors whereby the Company determined, through evaluations described below,
that the market values of certain of its marketable equity securities were other
than temporarily impaired. 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 and the amount of the write-down
is included in noninterest expense.
Income Tax Expense
The Company recognized income tax expense of $931,000 and $1,077,000
for the six months ended June 30, 2003 and 2002, respectively. The effective tax
rates were 36.3% and 34.5% for those respective periods.
Liquidity
Liquidity risk management refers to the Company's ability to raise
funds in order to meet existing and anticipated financial obligations. These
obligations to make payment include withdrawal of deposits on demand or at their
contractual maturity, the repayment of borrowings as they mature, funding new
and existing loan commitments as well as new business opportunities. Liquidity
may be provided through amortization, maturity or sale of assets such as loans
and securities available-for-sale, liability sources such as increased deposits,
utilization of the Federal Home Loan Bank ("FHLB") credit facility, purchased or
other borrowed funds, and access to the capital markets. Liquidity targets are
subject to change based on economic and market conditions and are controlled and
monitored by the Company's Asset/Liability Committee.
At the subsidiary bank level, liquidity is managed by measuring the net
amount of marketable assets, after deducting pledged assets, plus lines of
credit, primarily with the FHLB, that are available to fund liquidity
requirements. Management then measures the adequacy of that aggregate amount
relative to the aggregate amount of liabilities deemed to be sensitive or
volatile. These include core deposits in excess of $100,000, term deposits with
short maturities, and credit commitments outstanding.
Additionally, Northway Financial, Inc. requires cash for various
operating needs, including dividends to shareholders, the stock repurchase
program, capital injections to the subsidiary banks, and the payment of general
corporate expenses. The primary sources of liquidity for Northway Financial,
Inc. are dividends from its subsidiary banks.
Management believes that the Company's current level of liquidity and
funds available from outside sources is sufficient to meet the Company's needs.
Capital
The Company's Tier 1 and Total Risk Based Capital ratios were 8.71% and
11.96%, respectively, at June 30, 2003. The Company's Tier 1 leverage ratio at
June 30, 2003 was 6.88%. As of June 30, 2003, the capital ratios of the Company
and the subsidiary banks exceeded the minimum capital ratio requirements of the
"well-capitalized" category under the Federal Deposit Insurance Corporation
Improvement Act of 1991.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2002, there have been no material changes in the
Company's quantitative and qualitative disclosures about market risk. A fuller
description of the quantitative and qualitative disclosures about market risk
was provided by the Company on pages 11 through 22 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by new 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. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are 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 new rules, the Company currently is in the process
of further reviewing and documenting its disclosure controls and procedures,
including its internal controls and procedures for financial reporting, and may
from time to time make changes aimed at enhancing their effectiveness and to
ensure that its systems evolve with its business.
(b) Changes in internal controls.
None.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds- None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 27, 2003. At the
Annual Meeting, the stockholders elected Frederick C. Anderson, Charles H.
Clifford, Jr., John D. Morris and Brien L. Ward to three-year terms as
directors. Each of these directors' terms will expire at the 2006 annual
meeting. The final vote for each of these elected directors is as follows:
For Withheld
--------- --------
Frederick C. Anderson 1,218,842 51,403
Charles H. Clifford, Jr. 1,221,054 49,191
John D. Morris 1,221,110 49,135
Brien L. Ward 1,218,558 51,687
The directors continuing in office are Fletcher W. Adams, Arnold P. Hanson,
Jr., John H. Noyes, William J. Woodward, Stephen G. Boucher, Barry J. Kelley
and Randall G. Labnon.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
11 Computation of per share earnings(1)
99.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act(1)
99.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act(1)
99.3 Certification of CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act(1)
99.4 Certification of CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act(1)
(1) Filed herewith.
(b) Current Report on Form 8-K filed on May 14, 2003.
Item reported: Earnings announcement for first quarter ending March 31,
2003.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWAY FINANCIAL, INC.
August 6, 2003 BY: /S/ William J. Woodward
-----------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
August 6, 2003 BY: /S/ Richard P. Orsillo
-----------------------------------
Richard P. Orsillo
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)
INDEX OF EXHIBITS
Exhibit Number Description of Exhibit
-------------- ----------------------
11 Computation of per share earnings(1)
99.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act(1)
99.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act(1)
99.3 Certification of CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act(1)
99.4 Certification of CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act(1)
(1) Filed herewith.