<PAGE>
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, 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
-----------------------
(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
---------
(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 August 1, 2000, there were
1,585,069 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 and Six
Months Ended June 30, 2000 and 1999 ................................. 3
Consolidated Balance Sheets at June 30, 2000 and December
31, 1999 ............................................................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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 .......... 11
PART II. OTHER INFORMATION
Item 1
Legal Proceedings ................................................... 12
Item 2
Changes in Securities ............................................... 12
Item 3
Default Upon Senior Securities ...................................... 12
Item 4
Submission of Matters to a Vote of Security Holders ................. 12
Item 5
Other Information ................................................... 12
Item 6
Exhibits and Reports on Form 8-K .................................... 12
Signatures ................................................................ 13
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
NORTHWAY FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands, except per share data) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $8,206 $6,306 $16,120 $12,234
Investment securities available-for-sale 844 850 1,691 1,601
Investment securities held-to-maturity 69 153 142 286
Federal funds sold 5 9 8 219
Interest bearing deposits 3 2 5 3
--------------------------------------------------------
Total interest and dividend income 9,127 7,320 17,966 14,343
--------------------------------------------------------
Interest expense:
Deposits 2,584 2,427 4,993 4,923
Borrowed funds 1,420 278 2,567 440
--------------------------------------------------------
Total interest expense 4,004 2,705 7,560 5,363
--------------------------------------------------------
Net interest and dividend income 5,123 4,615 10,406 8,980
Provision for loan losses 255 135 500 270
--------------------------------------------------------
Net interest and dividend income after provision
for loan losses 4,868 4,480 9,906 8,710
Noninterest income:
Service charges on deposit accounts and fees 245 238 480 451
Securities gains, net 156 93 276 411
Other 259 283 462 470
--------------------------------------------------------
Total noninterest income 660 614 1,218 1,332
--------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 2,186 2,033 4,371 4,038
Office occupancy and equipment 641 625 1,321 1,238
Amortization of deposit purchase premium 102 75 205 150
Other 1,152 1,052 2,238 2,090
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Total noninterest expense 4,081 3,785 8,135 7,516
--------------------------------------------------------
Income before income tax expense 1,447 1,309 2,989 2,526
Income tax expense 435 470 973 869
--------------------------------------------------------
Net income $1,012 $ 839 $ 2,016 1,657
========================================================
Comprehensive net income $ 966 $ 308 $ 1,743 $ 956
========================================================
Per share data:
Earnings per common share $ 0.64 $ 0.50 $ 1.26 $ 0.98
Cash dividends declared $ 0.15 $ 0.14 $ 0.30 $ 0.28
Weighted average number of common shares 1,598,618 1,675,477 1,603,181 1,695,272
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<TABLE>
NORTHWAY FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Jun. 30, Dec. 31,
(Dollars in thousands, except per share data) 2000 1999
-----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks and interest bearing deposits $ 14,875 $ 16,087
Federal funds sold 2,890 --
Investment securities available-for-sale 54,585 55,998
Investment securities held-to-maturity 4,643 5,151
Loans held for sale 265 54
Loans 396,671 373,590
Unearned income (694) (824)
Allowance for loan losses (4,220) (4,887)
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Loans, net 391,757 367,879
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Real estate acquired by foreclosure 65 115
Accrued interest receivable 2,647 2,391
Deferred income tax asset, net 2,589 2,260
Premises and equipment, net 10,186 10,387
Deposit purchase premium 1,066 1,271
Other assets 1,058 959
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Total assets $486,626 $462,552
=========================
Liabilities and stockholders' equity
Liabilities:
Interest bearing deposits $302,396 $293,104
Non-interest bearing deposits 50,018 49,925
Repurchase agreements 8,454 7,468
Short-term Federal Home Loan Bank advances 26,750 9,950
Long-term Federal Home Loan Bank advances 54,528 58,528
Other liabilities 4,541 4,291
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Total liabilities 446,687 423,266
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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 June 30, 2000 and December 31, 1999; and
1,589,069 outstanding June 30, 2000 and 1,615,169 outstanding
December 31, 1999 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 41,440 39,906
Treasury stock, at cost (142,900 and 116,800 shares, respectively) (4,006) (3,398)
Accumulated other comprehensive income (loss), net of tax (1,328) (1,055)
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Total stockholders' equity 39,939 39,286
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Total liabilities and stockholders' equity $486,626 $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 CASHFLOWS
(Unaudited)
<CAPTION>
For the Six Months
Ended June 30,
(Dollars in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,016 $ 1,657
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 500 270
Depreciation and amortization 697 598
Deferred income taxes (149) (125)
Writedown of real estate acquired by foreclosure -- 37
Gains on sales of investment securities available-for-sale, net (276) (411)
Amortization of premiums & accretion of discounts on securities, net 25 52
(Decrease) increase in unearned income, net (130) 169
Gains on sales of real estate acquired by foreclosure (25) --
Net increase in loans held for sale (211) (114)
Net change in other assets and other liabilities (105) 1,306
----------------------
Net cash provided by operating activities 2,342 3,439
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Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale 1,351 4,588
Proceeds from maturities of investment securities held-to-maturity 1,363 1,729
Proceeds from maturities of investment securities available-for-sale 2,569 8,451
Purchase of investment securities available-for-sale (2,709) (18,999)
Purchase of investment securities held-to-maturity (855) (9,156)
Net increase in loans (24,248) (32,057)
Proceeds from sales of real estate acquired by foreclosure 75 126
Additions to premises and equipment (291) (508)
----------------------
Net cash used in investing activities (22,745) (45,826)
----------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 9,385 (19,157)
Advances from Federal Home Loan Bank 19,000 --
Repayment of Federal Home Loan Bank advances (23,000) --
Net increase in short-term Federal Home Loan Bank advances 16,800 23,715
Net increase in securities sold under agreements to repurchase 986 2,263
Purchases of treasury stock (608) (1,801)
Cash dividends paid (482) (477)
----------------------
Net cash provided by financing activities 22,081 4,543
----------------------
Net increase (decrease) in cash and cash equivalents 1,678 (37,844)
Cash and cash equivalents at beginning of period 16,087 51,423
----------------------
Cash and cash equivalents at end of period $17,765 $13,579
======================
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 Six Months
Ended June 30,
(Dollars in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 7,528 $ 5,068
======================
Income taxes $ 756 $ 971
======================
Supplemental disclosures of non-cash activities:
Loans transferred to real estate acquired by foreclosure $ -- $ 289
======================
Loans charged off, net of recoveries $ 1,167 $ 37
======================
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
June 30, 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 and six month periods ended June
30, 2000 and 1999 are not necessarily indicative of the results of operations to
be expected for the full year or any other interim periods.
2 Impact of New Accounting Standard.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133, as amended by SFAS No.
138, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. In management's opinion, SFAS No. 133 when
adopted will not have a material effect on the Corporation's consolidated
financial statements.
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, and 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 the potential for further 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 June 30, 2000 were $486.6 million
compared to $462.6 million at December 31, 1999, a $24.0 million increase. Net
loans, including loans held for sale, increased $24.1 million to $392.0 million
and investment securities decreased $1.9 million to $59.2 million. Cash and cash
equivalents increased $1.8 million to $17.8 million as a result of the increase
in federal funds sold balances. Total deposits increased $9.4 million, while
Federal Home Loan Bank advances increased $12.8 million and repurchase
agreements increased $1.0 million. Total stockholders equity increased $0.6
million from $39.3 million at December 31, 1999 to $39.9 million at June 30,
2000. The increase in stockholders' equity was a result of net income of $2.0
million partially offset by dividends of $0.5 million, treasury stock purchases
totaling $0.6 million and an increase in accumulated comprehensive loss of $0.3
million.
The Corporation maintains an allowance for loan losses to absorb future
chargeoffs of loans in the existing portfolio. The allowance is increased when a
loan loss provision is recorded 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 June 30, 2000 the allowance for loan losses was $4.2 million, or
1.07% 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 and six month periods ended June 30, 2000 and 1999 is
as follows:
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------
Balance at beginning of period $4,115 $4,562 $4,887 $4,404
-----------------------------------
Charge-offs (173) (77) (1,360) (166)
Recoveries 23 17 193 129
-----------------------------------
Net Charge-offs (150) (60) (1,167) (37)
Provision for loan losses 255 135 500 270
-----------------------------------
Balance at end of period $4,220 $4,637 $4,220 $4,637
-----------------------------------
Nonperforming loans totaled $3.3 million as of June 30, 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
$1.4 million. Approximately $1.1 million of the $1.4 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 0.84% as of June 30, 2000 compared to 1.23% at December 31, 1999 and
the ratio of nonperforming assets to total assets was 0.71% as of June 30, 2000
compared to 1.02% at December 31, 1999.
Results of Operations
The Corporation reported net income of $1.0 million, or $0.64 per share,
for the three months ended June 30, 2000, versus $839 thousand, or $0.50 per
common share, for the three months ended June 30, 1999. Net income for the six
months ended June 30, 2000 was $2.0 million, or $1.26 per share, as compared to
$1.7 million, or $0.98 per share, for the six months ended June 30, 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
second quarter increased $508 thousand to $5.1 million as compared to $4.6
million for the second quarter of the prior year. For the six months ended June
30, 2000 net interest income increased $1.4 million to $10.4 million as compared
to $9.0 million for the same period of the prior year.
Due to the above mentioned increase in loans, the provision for loan
losses increased $120 thousand to $255 thousand for the three months ended June
30, 2000 compared to $135 thousand for the same quarter a year ago and increased
$270 thousand to $500 thousand for the six months ended June 30, 2000 compared
to $270 thousand for the same period a year ago.
Noninterest income increased $46 thousand to $660 thousand in the second
quarter of 2000 versus $614 thousand in the second quarter of 1999 due to
increased securities gains. For the six months ended June 30, 2000 noninterest
income decreased $114 thousand to $1.2 million as compared to $1.3 million for
the same period of the prior year. The decrease was primarily attributable to
lower securities gains on a year to date basis.
Noninterest expense increased $296 thousand to $4.1 million for the
quarter ended June 30, 2000 compared to the $3.8 million recorded during the
same period last year. For the six months ended June 30, 2000 noninterest
expense totaled $8.1 million, an increase of $0.6 million over the $7.5 million
recorded for the same period of the prior year. The increase was principally
attributable to the acquisition or opening of three additional branches since
the second quarter of the prior year.
Income Tax Expense
The Corporation recognized income tax expense of $973 thousand and $869
thousand for the six months ended June 30, 2000 and 1999, respectively. The
effective tax rate was 32.6% and 34.4% for those respective periods. The
decrease in the effective tax rate is due to the fact that the Company has
obtained a number of State of New Hampshire tax credits related to economic
development grants.
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.
Capital
The Corporation's Tier 1 and Total Risk Based Capital ratios were 11.24%
and 12.43%, respectively, at June 30, 2000. The Corporation's leverage ratio at
June 30, 2000 was 8.32%.
As of June 30, 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 June 30, 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
The Company's Annual Meeting of Stockholders was held on May 16, 2000. At the
Annual Meeting, the stockholders elected Peter H. Bornstein, Charles H.
Clifford, Jr., Bruce W. Keough and John D. Morris to three year terms as
directors expiring at the 2003 annual meeting. The final vote for each of these
elected directors is as follows:
For Withheld
--- --------
Peter H. Bornstein 1,319,810 20,075
Charles H. Clifford, Jr. 1,322,546 17,339
Bruce W. Keough 1,316,957 22,928
John D. Morris 1,319,202 20,683
Directors continuing in office are William J. Woodward, Fletcher W. Adams,
Arnold P. Hanson, Jr., John H. Noyes, 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
(27) Financial Data Schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended June 30, 2000.
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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 11, 2000 BY: \S\ William J. Woodward
-------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
August 11, 2000 BY: \S\ George L. Fredette
-------------------------
George L. Fredette
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)
