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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2000
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
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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)
No Change
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(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date. At May 8, 2000, there were
1,598,069 shares of common stock outstanding, par value $1.00 per share.
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INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1
Financial Statements (Unaudited)
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999 .................................... 3
Consolidated Balance Sheets at March 31, 2000 and December
31, 1999 ......................................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 .................................... 5
Notes to Consolidated Financial Statements ....................... 7
Item 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 8
Item 3
Quantitative and Qualitative Disclosures about Market Risk ....... 10
PART II. OTHER INFORMATION
Item 1
Legal Proceedings ................................................ 11
Item 2
Changes in Securities ............................................ 11
Item 3
Defaults Upon Senior Securities .................................. 11
Item 4
Submission of Matters to a Vote of Security Holders .............. 11
Item 5
Other Information ................................................ 11
Item 6
Exhibits and Reports on Form 8-K ................................. 11
Signatures ................................................................ 12
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
(Dollars in thousands, except per share data) 2000 1999
- --------------------------------------------------------------------------------
Interest and dividend income:
Loans $7,914 $5,928
Investment securities available-for-sale 847 751
Investment securities held-to-maturity 73 133
Federal funds sold 3 210
Interest bearing deposits 2 1
---------------------
Total interest and dividend income 8,839 7,023
---------------------
Interest expense:
Deposits 2,409 2,496
Borrowed funds 1,147 162
---------------------
Total interest expense 3,556 2,658
---------------------
Net interest and dividend income 5,283 4,365
Provision for loan losses 245 135
---------------------
Net interest and dividend income after provision
for loan losses 5,038 4,230
---------------------
Noninterest income:
Service charges on deposit accounts and fees 235 213
Securities gains, net 120 318
Other 203 187
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Total noninterest income 558 718
---------------------
Noninterest expense:
Salaries and employee benefits 2,185 2,005
Office occupancy and equipment 680 613
Amortization of deposit purchase premium 103 75
Other 1,086 1,038
---------------------
Total noninterest expense 4,054 3,731
---------------------
Income before income tax expense 1,542 1,217
Income tax expense 538 399
---------------------
Net income $1,004 $ 818
=====================
Comprehensive net income $ 777 $ 648
=====================
Per share data:
Earnings per common share $ 0.62 $ 0.48
Cash dividends declared $ 0.15 $ 0.14
Weighted average number of common shares 1,607,744 1,715,288
The accompanying notes are an integral part of these consolidated financial
statements.
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<TABLE>
NORTHWAY FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Mar. 31, Dec. 31,
(Dollars in thousands, except per share data) 2000 1999
- -----------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Cash and due from banks and interest bearing deposits $ 13,863 $ 16,087
---------------------
Federal funds sold 450 --
Investment securities available-for-sale 55,196 55,998
Investment securities held-to-maturity 4,442 5,151
Loans held for sale 96 54
Loans 387,501 373,498
Unearned income (150) (732)
Allowance for loan losses (4,115) (4,887)
---------------------
Loans, net 383,236 367,879
---------------------
Real estate acquired by foreclosure 65 115
Accrued interest receivable 2,209 2,391
Deferred income tax asset, net 2,559 2,260
Premises and equipment, net 10,282 10,387
Deposit purchase premium 1,169 1,271
Other assets 1,051 959
---------------------
Total assets $474,618 $462,552
=====================
Liabilities and Stockholders' Equity
Liabilities:
Interest bearing deposits $287,252 $293,104
Non-interest bearing deposits 49,930 49,925
Securities sold under agreements to repurchase 7,554 7,468
Short-term Federal Home Loan Bank advances 24,908 9,950
Long-term Federal Home Loan Bank advances 60,528 58,528
Other liabilities 4,928 4,291
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Total liabilities 435,100 423,266
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Stockholders' equity:
Preferred stock, $1 par value; 1,000,000 shares authorized; none issued -- --
Common stock, $1 par value; 9,000,000 shares authorized;
1,731,969 shares issued and 1,605,569 outstanding March 31, 2000
and 1,615,169 outstanding December 31, 1999 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 40,669 39,906
Treasury stock, at cost (129,400 and 116,800 shares, respectively) (3,702) (3,398)
Accumulated other comprehensive (loss) income, net of tax (1,282) (1,055)
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Total stockholders' equity 39,518 39,286
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Total liabilities and stockholders' equity $474,618 $462,552
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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<TABLE>
NORTHWAY FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Three Months
Ended March 31,
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,004 $ 818
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 245 135
Depreciation and amortization 347 302
Deferred income taxes (150) (124)
Gains on sales of investment securities available-for-sale, net (120) (318)
Amortization of premium & accretion of discounts on securities, net 13 18
(Decrease) increase in unearned income, net (582) 13
Gains on sales of real estate acquired by foreclosure (25) (1)
Net (increase) decrease in loans held for sale (42) 103
Net change in other assets and other liabilities 727 1,342
--------------------
Net cash provided by operating activities 1,417 2,288
--------------------
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale 618 3,687
Proceeds from maturities of investment securities held-to-maturity 834 2,212
Proceeds from maturities of investment securities available-for-sale 1,245 4,483
Purchase of investment securities available-for-sale (1,330) (17,746)
Purchase of investment securities held-to-maturity (125) (6,365)
Net increase in loans (15,020) (5,352)
Proceeds from sales of real estate acquired by foreclosure 75 80
Additions to premises and equipment (140) (87)
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Net cash used in investing activities (13,843) (19,088)
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Cash flows from financing activities:
Net decrease in deposits (5,847) (24,204)
Advances from Federal Home Loan Bank 10,000 400
Repayment of Federal Home Loan Bank advances (8,000) (400)
Net increase in short-term Federal Home Loan Bank advances 14,985 --
Net increase in securities sold under agreements to repurchase 86 3,528
Purchases of treasury stock (304) (1,597)
Cash dividends paid (241) (242)
--------------------
Net cash provided by financing activities 10,652 (22,515)
Net decreases in cash and cash equivalents (1,774) (39,315)
Cash and cash equivalents at beginning of period 16,087 51,423
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Cash and cash equivalents at end of period $ 14,313 $ 12,108
====================
Continued....
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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<TABLE>
NORTHWAY FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<CAPTION>
For the Three Months
Ended March 31,
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 3,781 $ 2,600
====================
Income taxes $ 60 $ 451
====================
Supplemental disclosures of non-cash activities:
Loans transferred to real estate acquired by foreclosure $ -- $ 108
====================
Loans charged off, net of recoveries $ 1,017 $ (23)
====================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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NORTHWAY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
1. Basis of Presentation.
The unaudited consolidated financial statements of Northway Financial,
Inc. and its two wholly owned bank subsidiaries (collectively "the Corporation")
included herein have been prepared by the Corporation 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 generally accepted accounting principles have been
condensed or omitted in accordance with such rules and regulations. The
Corporation, however, believes that the disclosures are adequate to make the
information presented not misleading. The amounts shown reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the
financial statements for the periods reported.
The results of operations for the three month periods ended March 31,
2000 and 1999 are not necessarily indicative of the results of operations to be
expected for the full year or any other interim periods.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Introduction
The following discussion and analysis and related consolidated
financial statements include Northway Financial, Inc. and its wholly-owned
subsidiaries, The Berlin City Bank and Pemigewasset National Bank (collectively
the "Corporation").
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 may include, but are not limited to, projections of
revenue, income or loss, plans for future operations and acquisitions, plans
related to products or services of the Corporation 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 Corporation. To
the extent any such risks, uncertainties and contingencies are realized, the
Corporation'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 things,
overall economic and business conditions, interest rate fluctuations, the demand
for the Corporation's products and services, competitive factors in the
industries in which the Corporation competes, changes in government regulations,
the timing, impact and other uncertainties of future acquisitions, etc.
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; a) the rise in interest rates over
the past year and expected increases in interest rates during the remainder of
the year 2000; b) a change in product mix attributable to changing interest
rates, customer preferences or competition; c) a significant portion of the
Company's loan customers are in the hospitality business and therefore could be
affected by weather conditions and/or high gasoline prices; and d) the
effectiveness of advertising, marketing and promotional programs.
Financial Condition
The Corporation's total assets at March 31, 2000 were $474.6 million
compared to $462.6 million at December 31, 1999, a $12.0 million increase. Net
loans, including loans held for sale, increased $15.4 million to $383.3 million,
principally because of increases in installment loans and commercial real estate
loans outstanding. Total deposits decreased $5.8 million. Federal Home Loan Bank
advances increased $17.0 million to fund loan growth and offset the decline in
deposits. Total stockholders equity increased $0.2 million from $39.3 million at
December 31, 1999 to $39.5 million at March 31, 2000. The increase in
stockholders' equity was a attributable to net income of $1.0 million, offset by
treasury share purchases totaling $0.3 million, dividend payments of $0.3
million and a $0.2 million decline in accumulated other comprehensive income.
The Corporation maintains an allowance for loan losses to absorb future
charge-offs of loans in the existing portfolio. The allowance is increased when
a loan loss provision is recorded as an expense in the income statement. When a
loan, or portion thereof, is considered uncollectible, it is charged against
this allowance. Recoveries of amounts previously charged off are added to the
allowance when collected. At March 31, 2000 the allowance for loan losses was
$4.1 million, or 1.06% of total loans, as compared to $4.9 million, or 1.31% of
total loans at December 31, 1999. The adequacy of the allowance for loan losses
was 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. An analysis of the
allowance for loan losses for the three month period ended March 31, 2000 and
1999 is as follows:
Three Months
Ended March 31,
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Balance at beginning of period $4,887 $4,404
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Charge-offs (1,202) (89)
Recoveries 185 112
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Net Charge-offs (1,017) 23
Provision for loan losses 245 135
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Balance at end of period $4,115 $4,562
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Nonperforming loans totaled $3.5 million as of March 31, 2000, compared
to $4.6 million at December 31, 1999. The decline in nonperforming loans was due
to the sale of $1.2 million of non-accrual loans on February 29 and charge-offs
of $1.2 million. Approximately $1.0 million of the $1.2 million in charge-offs
related to one large borrowing relationship. The Company may make additional
provisions to the allowance for loan losses or incur additional charge-offs
related to this credit in the future. The ratio of nonperforming loans to total
loans was 0.90% as of March 31, 2000 compared to 1.23% at December 31, 1999 and
the ratio of nonperforming assets to total assets was 0.78% as of March 31, 2000
compared to 1.02% at December 31, 1999.
Results of Operations
The Corporation reported net income of $1.0 million, or $0.62 per
share, for the three months ended March 31, 2000, versus $818 thousand, or $0.48
per common share, for the three months ended March 31, 1999. The increase in net
income is primarily a result of increases in average loan balances resulting in
increased net interest income. Net interest income for the first quarter
increased $918 thousand to $5.3 million as compared to $4.4 million for the
first quarter of the prior year. Due to the above mentioned increase in loan
volumes, the provision for loan losses increased $110 thousand to $245 thousand
for the quarter ended March 31, 2000 versus $135 thousand for the same quarter
of the prior year.
Noninterest income decreased $160 thousand to $558 thousand in the
first quarter of 2000 versus $718 thousand in the first quarter of 1999. The
decrease was primarily attributable to decreases in security gains which were
$198 thousand below the level of the prior year.
Noninterest expense increased $323 thousand to $4.1 million for the
quarter ended March 31, 2000 compared to the $3.7 million recorded during the
same period last year. The increase was principally attributable to ongoing
operating expenses resulting from the acquisition or opening of four additional
branches since the first quarter of the prior year.
Income Tax Expense
The Corporation recognized income tax expense of $538 thousand and $399
thousand for the three months ended March 31, 2000 and 1999, respectively. The
effective tax rate was 34.9% and 32.8% for those respective periods. The
increase in the effective tax rate is due to the fact that on April 29, 1999 New
Hampshire adopted a new tax law that increased the rate of the Business Profits
Tax from seven to eight percent of income and because the Company has had a
significant reduction in tax exempt investments versus the amount carried in the
prior year.
Liquidity
Liquidity risk management refers to the Corporation'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 their contractual maturity, the repayment of borrowings
as they mature, 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
Corporation'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, 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 liabilities. These include core 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 stock repurchase
program, capital injections to the subsidiary banks, and the payment of general
corporate expenses. The primary source of liquidity for the parent holding
company is dividends from the subsidiary banks.
The Corporation's current level of liquidity and funds availability
from outside sources are sufficient to meet the Corporation's needs. The
Corporation however, has been successful in its efforts to increase its lending
capabilities and may need to identify additional sources of liquidity as the
loan portfolio builds.
Capital
The Corporation's Tier 1 and Total Risk Based Capital ratios were
11.38% and 12.63%, respectively, at March 31, 2000. The Corporation's leverage
ratio at March 31, 2000 was 8.44%.
As of March 31, 2000, the capital ratios of the Corporation and all its
subsidiary banks exceeded the minimum capital ratio requirements of the "well
capitalized" category under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding quantitative and qualitative disclosures
about market risk, see the Corporation's discussion under Item 7A of its Annual
Report on Form 10-K for the fiscal year ended December 31, 1999. Between
December 31, 1999 and March 31, 2000, there were no material changes in the
Corporation's market risk.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
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(27) Financial Data Schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended March 31, 2000.
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWAY FINANCIAL, INC.
May 11, 2000 BY: \S\ William J. Woodward
---------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
May 11, 2000 BY: \S\ George L. Fredette
---------------------------------
George L. Fredette
Senior Vice President & CFO
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND FROM THE MANAGEMENT DISCUSSION AND ANALYSIS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
MANAGEMENT DISCUSSION.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-2000
<CASH> 13,765
<INT-BEARING-DEPOSITS> 98
<FED-FUNDS-SOLD> 450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,196
<INVESTMENTS-CARRYING> 4,442
<INVESTMENTS-MARKET> 4,377
<LOANS> 387,447
<ALLOWANCE> 4,115
<TOTAL-ASSETS> 474,618
<DEPOSITS> 337,182
<SHORT-TERM> 24,908
<LIABILITIES-OTHER> 4,928
<LONG-TERM> 60,528
0
0
<COMMON> 1,732
<OTHER-SE> 37,786
<TOTAL-LIABILITIES-AND-EQUITY> 474,618
<INTEREST-LOAN> 7,914
<INTEREST-INVEST> 920
<INTEREST-OTHER> 5
<INTEREST-TOTAL> 8,839
<INTEREST-DEPOSIT> 2,409
<INTEREST-EXPENSE> 1,147
<INTEREST-INCOME-NET> 3,556
<LOAN-LOSSES> 245
<SECURITIES-GAINS> 120
<EXPENSE-OTHER> 4,054
<INCOME-PRETAX> 1,542
<INCOME-PRE-EXTRAORDINARY> 1,542
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,004
<EPS-BASIC> .62
<EPS-DILUTED> .62
<YIELD-ACTUAL> 8.07
<LOANS-NON> 3,523
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,134
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,887
<CHARGE-OFFS> 1,202
<RECOVERIES> 185
<ALLOWANCE-CLOSE> 4,115
<ALLOWANCE-DOMESTIC> 4,115
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
