<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 September 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
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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 October 30, 2000, there were
1,573,069 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 Nine Months Ended September 30, 2000 and 1999 ............. 3
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 ............................................. 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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.
Defaults 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 Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands, except per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $8,531 $6,967 $24,651 $19,201
Investment securities available-for-sale 850 823 2,541 2,424
Investment securities held-to-maturity 62 137 204 423
Federal funds sold 265 9 273 228
Interest bearing deposits 1 2 6 5
--------------------------------------------------
Total interest and dividend income 9,709 7,938 27,675 22,281
--------------------------------------------------
Interest expense:
Deposits 3,032 2,514 8,025 7,438
Borrowed funds 1,268 365 3,835 804
--------------------------------------------------
Total interest expense 4,300 2,879 11,860 8,242
--------------------------------------------------
Net interest and dividend income 5,409 5,059 15,815 14,039
Provision for loan losses 255 135 755 405
--------------------------------------------------
Net interest and dividend income after
provision for loan losses 5,154 4,924 15,060 13,634
--------------------------------------------------
Noninterest income:
Service charges on deposit accounts and fees 266 232 746 683
Securities gains, net 138 85 414 496
Other 318 338 780 808
--------------------------------------------------
Total noninterest income 722 655 1,940 1,987
--------------------------------------------------
Noninterest expense:
Salaries and employee benefits 2,353 2,227 6,724 6,265
Office occupancy and equipment 677 670 1,998 1,908
Amortization of deposit purchase premium 134 104 339 254
Other 1,143 1,139 3,381 3,229
--------------------------------------------------
Total noninterest expense 4,307 4,140 12,442 11,656
--------------------------------------------------
Income before income tax expense 1,569 1,439 4,558 3,965
Income tax expense 537 483 1,510 1,352
--------------------------------------------------
Net income $1,032 $ 956 $ 3,048 $ 2,613
==================================================
Comprehensive net income $1,360 $ 683 $ 3,103 $ 1,639
==================================================
Per share data:
Earnings per common share $ 0.65 $ 0.58 $ 1.91 $ 1.55
Cash dividends declared $ 0.15 $ 0.14 $ 0.45 $ 0.42
Weighted average number of common shares 1,586,134 1,661,223 1,597,457 1,690,097
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>
Sept. 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 $ 13,094 $ 16,087
Federal funds sold 18,900 --
Investment securities available-for-sale 55,619 55,998
Investment securities held-to-maturity 3,863 5,151
Loans held for sale 3,054 54
Loans 397,699 373,590
Unearned income (639) (824)
Allowance for loan losses (4,298) (4,887)
-------------------------
Loans, net 392,762 367,879
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Real estate acquired by foreclosure 47 115
Accrued interest receivable 2,464 2,391
Deferred income tax asset, net 2,377 2,260
Premises and equipment, net 10,912 10,387
Deposit purchase premium 5,334 1,271
Other assets 1,345 959
-------------------------
Total assets $509,771 $462,552
=========================
Liabilities and Stockholders' Equity
Liabilities:
Interest bearing deposits $333,115 $293,104
Non-interest bearing deposits 60,305 49,925
Repurchase agreements 11,487 7,468
Short-term Federal Home Loan Bank advances 21,000 9,950
Long-term Federal Home Loan Bank advances 38,528 58,528
Other liabilities 4,370 4,291
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Total liabilities 468,805 423,266
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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 1,585,069 outstanding September 30, 2000
and 1,615,169 outstanding December 31, 1999 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 42,235 39,906
Treasury stock, at cost (146,900 and 116,800 shares, respectively) (4,102) (3,398)
Accumulated other comprehensive (loss) income, net of tax (1,000) (1,055)
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Total stockholders' equity 40,966 39,286
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Total liabilities and stockholders' equity $509,771 $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 Nine Months
Ended September 30,
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,048 $ 2,613
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 755 405
Depreciation and amortization 1,077 933
Deferred income taxes (149) (123)
Writedown of real estate acquired by foreclosure -- 39
Gains on sales of investment securities available-for-sale, net (414) (496)
Amortization of premium & accretion of discounts on securities, net 34 64
(Decrease) increase in unearned income, net (185) 388
Gains on sales of real estate acquired by foreclosure (57) --
Net (increase) decrease in loans held for sale (3,000) 85
Net change in other assets and other liabilities (380) 1,625
-------------------------
Net cash provided by operating activities 729 5,533
-------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale 2,013 5,038
Proceeds from maturities of investment securities held-to-maturity 2,444 4,612
Proceeds from maturities of investment securities available-for-sale 4,141 9,383
Purchase of investment securities available-for-sale (5,309) (20,561)
Purchase of investment securities held-to-maturity (1,155) (9,242)
Net increase in loans (25,465) (67,670)
Proceeds from sales of real estate acquired by foreclosure 137 299
Additions to deposit purchase premium (4,402) (787)
Additions to premises and equipment (1,263) (983)
-------------------------
Net cash used in investing activities (28,859) (79,911)
-------------------------
Cash flows from financing activities:
Cash received from acquisition of branches 27,783 18,040
Net increase (decrease) in deposits 22,608 (16,654)
Advances from Federal Home Loan Bank 19,000 23,000
Repayment of Federal Home Loan Bank advances (39,000) --
Net increase in short-term Federal Home Loan Bank advances 11,050 11,367
Net increase in securities sold under agreements to repurchase 4,019 2,181
Purchases of treasury stock (704) (2,296)
Cash dividends paid (719) (711)
Net cash provided by financing activities 44,037 34,927
Net increase (decrease) in cash and cash equivalents 15,907 (39,451)
Cash and cash equivalents at beginning of period 16,087 51,423
-------------------------
Cash and cash equivalents at end of period $ 31,994 $ 11,972
=========================
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 CASH FLOWS
(Unaudited)
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999
<S> <C> <C>
Cash paid during the period for:
Interest $ 11,424 $ 8,098
=========================
Income taxes $ 1,064 $ 1,429
=========================
Supplemental disclosures of non-cash activities:
Loans transferred to real estate acquired by foreclosure $ 48 $ 352
=========================
Loans charged off, net of recoveries $ 1,344 $ 48
=========================
Financed sales of real estate acquired by foreclosure $ -- $ 44
=========================
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
September 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 nine month periods ended
September 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. The
interim financial statements are meant to be read in conjunction with the
Corporation's audited financial statements presented in its Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
In preparing financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the reported period. 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.
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 September 30, 2000 were $509.8 million
compared to $462.6 million at December 31, 1999, a $47.2 million increase. Net
loans, including loans held for sale, increased $27.7 million to $395.8 million
and investment securities decreased $1.7 million to $59.5 million. Cash and cash
equivalents increased $15.9 million to $32.0 million as a result of the purchase
of a branch in West Ossipee, New Hampshire from the Bank of New Hampshire. The
branch acquisition contributed $27.8 million towards an increase in total
deposits of $50.4 million to $393.4 million. Federal Home Loan Bank advances
decreased $9.0 million while repurchase agreements increased $4.0 million. Total
stockholders' equity increased $1.7 million from $39.3 million at December 31,
1999 to $41.0 million at September 30, 2000. The increase in stockholders'
equity was a result of net income of $3.0 million and a decrease of accumulated
comprehensive loss of $0.1 million, partially offset by dividends of $0.7
million and treasury stock purchases totaling $0.7 million.
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 September 30, 2000 the allowance for loan losses
was $4.3 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 month and nine month
periods ended September 30, 2000 and 1999 is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------
Balance at beginning of period $4,220 $4,637 $4,887 $4,404
-------------------------------------
Charge-offs (199) (98) (1,559) (264)
Recoveries 22 87 215 216
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Net Charge-offs (177) (11) (1,344) (48)
Provision for loan losses 255 135 755 405
-------------------------------------
Balance at end of period $4,298 $4,761 $4,298 $4,761
-------------------------------------
Nonperforming loans totaled $1.1 million as of September 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 in non-accrual loans on February 29,
2000 and the substantial resolution of a large nonperforming borrowing
relationship. In the course of resolving this relationship the Company incurred
charge-offs of $1.1 million and received cash totaling $2.3 million. The ratio
of nonperforming loans to total loans was 0.27% as of September 30, 2000
compared to 1.23% at December 31, 1999 and the ratio of nonperforming assets to
total assets was 0.25% as of September 30, 2000 compared to 1.02% at December
31, 1999.
Results of Operations
The Corporation reported net income of $1.03 million, or $0.65 per share,
for the three months ended September 30, 2000, versus $.96 million, or $0.58 per
common share, for the three months ended September 30, 1999. Net income for the
nine months ended September 30, 2000 was $3.05 million, or $1.91 per share,
compared to $2.61 million, or $1.55 per share, for the nine months ended
September 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 three months ended September 30, 2000 increased $.35
million to $5.41 million compared to $5.06 million for the third quarter of the
prior year. For the nine months ended September 30, 2000 net interest income
increased $1.78 million to $15.82 million compared to $14.04 million for the
same period of the prior year.
Noninterest income increased $.07 million to $.72 million in the third
quarter of 2000 versus $.65 million in the third quarter of 1999. For the nine
months ended September 30, 2000 noninterest income decreased $.05 million to
$1.94 million compared to $1.99 million for the same period of the prior year.
The decrease was primarily attributable to decreases in security gains on a year
to date basis.
Noninterest expense increased $0.17 million to $4.31 million for the
quarter ended September 30, 2000 compared to the $4.14 million recorded during
the same period last year. For the nine months ended September 30, 2000
noninterest expense totaled $12.44 million, an increase of $0.78 million over
the $11.66 million recorded for the same period of the prior year. The increase
was principally attributable to continued branch expansion including the recent
acquisition of the West Ossipee branch, and increased noninterest expense
incurred in connection with the operation of branches in Franklin and Tilton,
New Hampshire acquired in July of 1999 and the supermarket branch in Conway, New
Hampshire acquired in November of 1999.
Income Tax Expense
The Corporation recognized income tax expense of $1.51 million and $1.35
million for the nine months ended September 30, 2000 and 1999, respectively. The
effective tax rate was 33.1% and 34.1% 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. However the
Corporation 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 9.96%
and 11.14%, respectively, at September 30, 2000. The Corporation's Tier 1
Leverage ratio at September 30, 2000 was 7.28%.
As of September 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 September 30, 2000, there were no material changes in the Corporation's
market risk.
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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
(27) Financial Data Schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended September 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.
November 13, 2000 BY: \S\ William J. Woodward
---------------------------------
William J. Woodward
President & CEO
(Principal Executive Officer)
November 13, 2000 BY: \S\ George L. Fredette
---------------------------------
George L. Fredette
Senior Vice President & CFO
(Principal Financial and Accounting
Officer)
