Exhibit 13 Northway Financial, Inc. Annual Report to Stockholders
Northway Financial, Inc. and Subsidiaries
NORTHWAY FINANCIAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of Northway Financial, Inc. ("the
Company") and its subsidiaries. It is intended to supplement and highlight
information contained in the accompanying consolidated financial statements and
the selected financial data presented elsewhere in this report.
FORWARD LOOKING INFORMATION
---------------------------
Certain statements in this report are "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward
looking statements may include, but are not limited to, projections of revenue,
income or loss, plans for future operations and acquisitions, and plans related
to products or services of the Company and its subsidiaries. Such forward
looking statements are subject to known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company. To the
extent any such risks, uncertainties and contingencies are realized, the
Company's actual results, performance or achievements could differ materially
from anticipated results, performance or achievements. Factors that might affect
such forward looking statements include, among other things, overall economic
and business conditions, interest rate fluctuations, the demand for the
Company's products and services, competitive factors in the industries in which
the company competes, changes in government regulations, and the timing, impact
and other uncertainties of future acquisitions.
In addition to the factors described above, the following are some additional
factors that could cause our financial performance to differ from any forward
looking statement contained herein: i) changes in interest rates and the
relative relationship between the various interest rate indices that the Company
uses; ii) a change in product mix attributable to changing interest rates,
customer preferences or competition; iii) a significant portion of the Company's
loan customers are in the hospitality business and therefore could be affected
by a slower economy, adverse weather conditions and/or rising gasoline prices;
and iv) the effectiveness of advertising, marketing and promotional programs.
The words "believe," "expect," "anticipate," "intend," "estimate," "project" and
other expressions which are predications of or indicate future events and trends
and which do not related to historical matters identify forward looking
statements. Reliance should not be placed on forward looking statements because
they involve known or unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievements of the Company to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward looking statements. The Company undertakes
no obligation to publicly update or revise any forward looking statement,
whether as a result of new information, future events or otherwise.
Though the Company has attempted to list comprehensively the factors which might
affect forward looking statements, the Company wishes to caution investors that
other factors may in the future prove to be important in affecting the Company's
results of operations. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
forward looking statements.
OVERVIEW OF PERFORMANCE
-----------------------
Northway and its bank subsidiaries derive substantially all of their revenue and
income from the furnishing of bank and bank-related services, principally to
individuals and small and medium sized companies in New Hampshire. The Banks
operate as typical community banking institutions and do not engage in any
specialized finance or capital market activities. Northway functions primarily
as the holder of stock of its subsidiaries and assists the management of its
subsidiaries as appropriate.
The Company reported net income of $4,159,000, or $2.61 per share, in 2000 as
compared to net income of $3,764,000, or $2.25 per share, in 1999 and
$4,068,000, or $2.35 per share, in 1998. Return on average equity was 10.29
percent in 2000, as compared to 9.37 percent and 10.25 percent for 1999 and
1998, respectively. Return on average assets was 0.86 percent in 2000, as
compared to 0.90 percent and 1.06 percent for 1999 and 1998, respectively.
During the year 2000, the Company continued the implementation of its growth
initiatives and purchased a branch in West Ossipee, New Hampshire. During 1999,
the Company opened two new branches, purchased an additional two branches and
began operations at the indirect lending business unit created at the end of
1998. In addition, the Company has standardized products and procedures at the
subsidiary banks to ensure that the Company achieves its long term goals. The
leveraging strategies and strategic investments made over the last several years
resulted in increased net interest income which caused an increase in 2000
earnings as compared to 1999.
The Company's results of operations are affected not only by its net interest
income, but also by the level of its noninterest income, including gains and
losses on the sales of loans and securities, noninterest expenses, changes in
the provision for loan losses resulting from the Company's periodic assessment
of the adequacy of its allowance for loan losses and income tax expense.
Northway Financial, Inc. and Subsidiaries
NET INTEREST INCOME ANALYSIS
----------------------------
Net interest income is the principal component of a financial institution's
income stream and represents the difference, or spread, between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially impact
net interest income. The discussion of net interest income is presented on a
taxable equivalent basis, unless otherwise noted, to facilitate performance
comparisons among various taxable and tax-exempt assets.
The table on page ten presents average balances, income earned or interest paid,
and average yields earned or rates paid on major categories of assets and
liabilities for the years ended December 31, 2000, 1999, and 1998.
Net interest income for 2000 increased $1,833,000, or 9 percent, over 1999 while
increasing $1,843,000, or 10 percent, in 1999 over 1998.
Interest income increased $6,312,000, or 20 percent, in 2000 versus 1999 after
increasing $1,875,000, or 6 percent, in 1999 versus 1998. Earning assets on
average increased by $66,610,000, or 17 percent, during 2000, creating a
favorable volume variance. In addition, a rising rate environment caused a 21
basis point increase in the average yield of earning assets as a whole. A
$70,589,000, or 22 percent, increase in the volume of average loans, combined
with a 9 basis point increase in yield, accounted for a $6,291,000, or 23
percent, increase in interest income on loans. Interest income on investment
securities decreased $235,000, or 6 percent, from 1999 to 2000. This decrease
resulted from a 10 percent decrease in the average balance of total investment
securities. The decrease in average balances was partially offset by a 26 basis
point increase in yield.
Interest expense increased $4,479,000, or 39 percent, in 2000 versus 1999 after
remaining relatively unchanged in 1999 versus 1998. The increase in interest
expense was due primarily to an increase in average interest bearing liabilities
of $61,203,000, or 19 percent, and to a 60 basis point increase in rates paid on
interest bearing liabilities. The increase in interest bearing liabilities is
directly related to the increase in average loans outstanding. Federal Home Loan
Bank ("FHLB") advances, the most expensive source of funds, increased by
$46,751,000 on average, and were a significant source of funds for loan growth.
Interest income increased $1,875,000, or 6 percent, in 1999 versus 1998. Earning
assets on average increased by $34,214,000, or 10%, during 1999, however, the
mix of earnings assets continued to evolve creating a favorable volume variance.
This favorable volume variance was partially offset by a 23 basis point decline
in average yield on earning assets as a whole. A $46,024,000, or 17 percent,
increase in the volume of average loans, partially offset by a 45 basis point
decrease in yield, accounted for the $2,617,000, or 11 percent, increase in
interest income on loans. Interest income on investments and securities
decreased $202,000, or 5 percent, from 1998 to 1999. This decrease resulted from
a 3 percent decrease in the average balance of total investments and securities
and an 11 basis point decrease in yield.
Total interest expense was relatively unchanged in 1999 due primarily to a 31
basis point decrease in rates paid on interest bearing liabilities which offset
a 9% increase in average volume. The composition of interest bearing liabilities
helped keep down interest cost as the average balances of all categories of low
cost funds increased, offsetting increases in average balances of categories of
high cost funds. The most expensive source of funds, FHLB advances and other
borrowed funds, increased by a combined $17,445,000 and were a significant
source of funding for loan growth.
The trend in net interest income is commonly evaluated in terms of average rates
using net interest margin and interest rate spread. The net interest margin is
computed by dividing fully taxable equivalent net interest income by average
total earning assets. This ratio represents the difference between the average
yield returned on average earning assets and the average rate paid for all funds
used to support those earning assets, including both interest bearing and
noninterest bearing sources of funds. The net interest margin decreased 32 basis
points to 4.68 percent in 2000 after having increased 3 basis points to 5.00
percent in 1999. The decrease in 2000's net interest margin was a function of a
significant increase in average volumes for both interest earning assets and
interest bearing liabilities. The net interest spread on the additional volumes
was less than existing spread causing the overall margin to decline. This type
of strategy is known as a "leveraging" and is designed to increase net interest
income and earnings as a whole. The portion of interest earning assets funded by
interest bearing liabilities in 2000 was 84 percent versus 83 percent in 1999
and 84 percent in 1998.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing liabilities. The
interest rate spread eliminates the impact of noninterest bearing funds and
gives a direct perspective on the effect of interest rate movements. During
2000, the net interest rate spread decreased 38 basis points to 4.03 percent as
the cost of interest bearing liabilities rose 60 basis points while yields on
earning assets rose 21 basis points. During 1999, the net interest rate spread
increased 8 basis points to 4.41 percent from the 1998 spread of 4.33 percent as
the cost of interest bearing liabilities declined 31 basis points while the
yields earned on earning assets decreased 23 basis points. See the accompanying
schedules entitled "Consolidated Average Balances, Interest Income/Expense and
Average Yields/Rates" and "Consolidated Rate/Volume Variance Analysis" for more
information.
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES
-------------------------------------------------------------------------------
($000 Omitted)
2000 1999 1998
-------------------------------- --------------------------------- ------------------------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ---- -------- -------- ---- -------- -------- ----
Assets
Interest earning assets:
Federal funds sold $ 7,374 $ 480 6.51% $ 4,865 $ 228 4.69% $ 14,628 $ 769 5.26%
Interest bearing
deposits 262 12 4.58 161 8 4.97 98 7 7.14
Investments (1) (2) 61,555 3,835 6.27 67,744 4,070 6.01 69,854 4,272 6.12
Loans, net (1) (3) 391,439 33,259 8.50 320,850 26,968 8.41 274,826 24,351 8.86
-------- -------- -------- -------- -------- --------
Total interest
earning assets (1) 460,630 37,586 8.17 393,620 31,274 7.95 359,406 29,399 8.18
-------- ---- -------- ---- -------- ----
Cash and due from banks 13,045 12,800 11,956
Allowance for loan losses (4,417) (4,653) (4,323)
Premises and equipment 10,531 10,125 9,844
Other assets 6,577 5,637 6,400
-------- -------- --------
Total assets $486,366 $417,529 $383,283
======== ======== ========
Liabilities Interest
bearing liabilities:
Regular savings $ 65,438 1,254 1.92 $ 68,333 1,319 1.93 $ 65,126 1,518 2.33
NOW and super NOW 52,888 447 0.85 49,832 433 0.87 46,942 536 1.14
Money market accounts 26,670 1,000 3.75 23,765 592 2.49 22,467 622 2.77
Certificates of deposit 163,917 8,649 5.28 152,353 7,514 4.93 151,244 8,079 5.34
Securities sold under
agreements to
repurchase 9,240 509 5.51 9,267 432 4.66 8,469 431 5.09
FHLB advances 70,017 4,198 6.00 23,266 1,279 5.50 5,972 360 6.03
Other borrowed funds -- -- -- 151 9 5.96 -- -- --
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities 388,170 16,057 4.14 326,967 11,578 3.54 300,220 11,546 3.85
Noninterest bearing deposits 53,275 46,459 39,561
Other liabilities 4,508 3,931 3,825
-------- -------- --------
Total liabilities 445,953 377,357 343,606
Stockholders' equity 40,413 40,172 39,677
-------- -------- --------
Total liabilities and
stockholders'
equity $486,366 $417,529 $383,283
======== ======== ========
Net interest and dividend
income (1) $21,529 $ 19,696 $ 17,853
======= ======== ========
Interest rate spread (4) 4.03% 4.41% 4.33%
==== ==== ====
Net interest margin (5) 4.68% 5.00% 4.97%
==== ==== ====
(1) Reported on a tax equivalent basis.
(2) Average balances are calculated using the adjusted cost basis.
(3) Net of unearned income. Includes nonperforming loans.
(4) Interest rate spread equals the yield on interest earning assets minus the rate paid on interest bearing liabilities.
(5) The net interest margin equals net interest income divided by total average interest earning assets.
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS
------------------------------------------
(000 Omitted)
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Due to Change In Increase (Decrease) Due to Change In
----------------------------------------- -------------------------------------------
Volume Rate Mix Total Volume Rate Mix Total
------ ---- --- ----- ------ ---- --- -----
Interest and dividend income:
Federal funds sold $ 117 $ 89 $ 46 $ 252 $ (513) $ (84) $ 56 $ (541)
Interest bearing deposits 5 (1) -- 4 -- 1 -- 1
Investments (372) 151 (14) (235) (129) (75) 2 (202)
Loans 5,933 293 65 6,291 4,078 (1,251) (210) 2,617
------ ----- ----- ------ ------ ------- ----- ------
Total interest and dividend
income 5,683 532 97 6,312 3,436 (1,409) (152) 1,875
------ ----- ----- ------ ------ ------- ----- ------
Interest expense:
Regular savings (56) (9) -- (65) 75 (261) (13) (199)
NOW and super NOW 27 (12) (1) 14 33 (128) (8) (103)
Money market accounts 72 299 37 408 36 (62) (4) (30)
Certificates of deposit 570 525 40 1,135 59 (620) (4) (565)
Securities sold under agreements
to repurchase (1) 78 -- 77 40 (36) (3) 1
FHLB advances 2,570 116 233 2,919 1,042 (32) (91) 919
Other borrowed funds -- -- (9) (9) -- -- 9 9
------ ----- ----- ------ ------ ------- ----- ------
Total interest expense 3,182 997 300 4,479 1,285 (1,139) (114) 32
------ ----- ----- ------ ------ ------- ----- ------
Net interest and dividend income $2,501 $(465) $(203) $1,833 $2,151 $ (270) $ (38) $1,843
====== ===== ===== ====== ====== ======= ===== ======
PROVISION FOR LOAN LOSSES
-------------------------
The provision for loan losses represents the annual cost of providing an
allowance, or reserve, for losses on loans. The size of the provision for each
year is dependent upon many factors, including loan growth, net charge-offs,
changes in the composition of the loan portfolio, delinquencies, management's
assessment of loan portfolio quality, the value of collateral and general
economic factors.
The Company incurred a $980,000 provision for loan losses in 2000, an increase
of $440,000 from the $540,000 incurred in both 1999 and 1998. The increase is
due directly to the growth of the loan portfolio over the last two years.
Although management utilizes its best judgment in providing for losses, there
can be no assurance that the Company will not have to change its provisions for
loan losses in subsequent periods. Management will continue to monitor the
allowance for loan losses and make additional provisions to the allowance as
appropriate.
NONINTEREST INCOME
------------------
Noninterest income consists of revenues generated from a broad range of
financial services and activities, including fee-based services and income
earned through investment and security sales.
The following table sets forth the components of the Company's noninterest
income:
($000 Omitted)
Years Ended December 31, 2000 1999 1998
- ------------------------ ---- ---- ----
Service charges and fees on deposit accounts $1,049 $ 935 $ 843
Securities gains, net 512 709 496
Other 1,127 1,078 679
------ ------ ------
Total noninterest income $2,688 $2,722 $2,018
====== ====== ======
Northway Financial, Inc. and Subsidiaries
NONINTEREST INCOME (CONTINUED)
------------------------------
Fee income from service charges on deposit accounts increased 12 percent in
2000, 11 percent in 1999 and 1 percent in 1998. The improvement in 2000 is due
to higher balances outstanding as a result of branch purchases and openings over
the last two years as well as a product and fee standardization effort completed
during the year. The increase in 1999 was principally a result of the decision
to increase fees for the first time in years. The increase in 1998 was due to an
increase in the number of transaction deposit accounts.
Net securities gains were $512,000 in 2000, compared to $709,000 in 1999.
Investment securities gains in 2000 reflected net gains of $512,000 recorded on
sales of equity securities compared to $679,000 in 1999. In 1998 net securities
gains were $496,000 and included net gains on sales of equity securities of
$501,000.
Other noninterest income (sources of which include the creation of mortgage
servicing assets, debit card interchange fees, credit card merchant and fee
income, automated teller fees, safe deposit fees, etc.) increased $49,000, or 5
percent, to $1,127,000 in 2000 following a $399,000, or 59 percent increase, to
$1,078,000 in 1999. Noninterest income had a 27 percent increase in 1998.
NONINTEREST EXPENSE
-------------------
Total noninterest expense increased $879,000, or 6 percent, during 2000
following an increase of $2,888,000, or 22 percent, during 1999 and $1,051,000,
or 9 percent, in 1998. The increases in these expenses were due to the Company's
initiatives to standardize product offerings at the subsidiary banks, to
increase market share in existing markets and enter new markets. In 2000 the
Company acquired a branch in West Ossipee, New Hampshire. In both 1999 and 1998
two branches were opened and over the two year period an indirect lending group
was created and began operations. In addition, during 1999, two branches were
purchased.
The following table sets forth information relating to the Company's noninterest
expense during the periods indicated:
($000 Omitted)
Years Ended December 31, 2000 1999 1998
- ------------------------ ---- ---- ----
Salaries and employee benefits $ 8,868 $ 8,448 $ 6,757
Occupancy and equipment 2,708 2,541 2,080
Amortization of deposit assumption premium 513 357 301
Professional fees 1,073 1,091 702
Stationery and supplies 605 565 470
Other 2,928 2,796 2,600
------- ------- -------
$16,695 $15,798 $12,910
======= ======= =======
Salaries and employee benefits increased $420,000, or 5 percent, from 1999 to
2000, $1,691,000, or 25 percent, from 1998 to 1999, and by $879,000, or 15
percent, from 1997 to 1998. These increases reflect staff additions in
connection with the expansion of the retail franchise, increased lending
activities and normal salary and wage increases. The expansion initiatives also
caused occupancy and equipment expense to increase $167,000, or 7 percent, from
1999 to 2000, $461,000, or 22 percent, from 1998 to 1999, and $366,000, or 21
percent, from 1997 to 1998.
Amortization of deposit assumption premium in 2000 increased $156,000, or 44
percent. This was due to the West Ossipee branch acquisition on August 25, 2000
as well as incurring a full year of amortization on the branches acquired in
1999. In 1999 deposit assumption premium amortization increased $56,000, or 19
percent, to $357,000 versus $301,000 in 1998 as a result of the acquisition of
two branches on July 9, 1999.
INCOME TAX EXPENSE
------------------
The Company recognized $2,107,000, $1,962,000 and $2,036,000 in income tax
expense for the years ended December 31, 2000, 1999 and 1998, respectively. The
effective tax rate was 33.6% for 2000, 34.3% for 1999, and 33.3% for 1998. The
decrease in the effective tax rate in 2000 is due to the fact that the Company
has obtained a number of State of New Hampshire tax credits related to economic
development grants. The increase in the effective tax rate for 1999 over 1998 is
due to the fact that during 1999 New Hampshire adopted a new tax law that
increased the rate of the Business Profits Tax from seven to eight percent of
income. For additional information relating to income taxes, see Note 14 to the
Consolidated Financial Statements.
Northway Financial, Inc. and Subsidiaries
ASSETS
------
Total assets increased $22,592,000, or 5 percent, to $485,144,000 at December
31, 2000 versus $462,552,000 at December 31, 1999. The composition of earning
assets has continued to change in order to meet corporate goals.
BALANCE SHEET HIGHLIGHTS
($000 Omitted)
Years Ended December 31, 2000 1999 Change
- ------------------------ ---- ---- ------
Total assets $485,144 $462,552 $22,592
Earning assets 452,255 434,134 18,121
Securities 58,464 61,149 (2,685)
Loans, net of unearned income 393,258 372,766 20,492
Deposits 391,772 343,029 48,743
Equity 41,562 39,286 2,276
SECURITIES
----------
The Company's investment securities are classified into one of two categories
based on management's intent to hold the securities: (i) "held-to-maturity"
securities, or (ii) securities "available-for-sale." Securities designated to be
held-to-maturity are reported at amortized cost. Securities classified as
available-for-sale are required to be reported at fair value with unrealized
gains and losses, net of taxes, excluded from earnings and shown separately as a
component of stockholders' equity.
The following table summarizes the Company's securities portfolio at December
31, 2000 and 1999, showing amortized cost and market value for each category:
($000 Omitted)
December 31, 2000 1999
- ---------------- --------------------- ----------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Securities available-for-sale:
US Treasury and US government agencies $28,883 $28,780 $27,466 $26,449
Mortgage-backed securities 7,513 7,475 9,179 8,855
Collateralized mortgage obligations 7,234 7,177 10,139 9,958
Marketable equity securities 3,180 2,409 2,999 2,780
Non-marketable equity securities 5,424 5,424 4,456 4,456
Corporate bonds 1,006 1,003 -- --
State and political subdivisions 3,366 3,444 3,478 3,500
------- ------- ------- -------
Total securities available-for-sale $56,606 $55,712 $57,717 $55,998
------- ------- ------- -------
Securities held-to-maturity:
Mortgage-backed securities $ 1,760 $ 1,740 $ 2,285 $ 2,247
Collateralized mortgage obligations 492 488 1,316 1,297
State and political subdivisions 500 503 1,550 1,551
------- ------- ------- -------
Total securities held-to-maturity $ 2,752 $ 2,731 $ 5,151 $ 5,095
------- ------- ------- -------
Total securities $59,358 $58,443 $62,868 $61,093
======= ======= ======= =======
Securities available-for-sale decreased slightly during 2000. The net unrealized
loss on securities available-for-sale was $894,000 at December 31, 2000 as
compared to $1,719,000 in 1999. This was the result of a lower interest rate
environment, and corresponding higher bond prices in 2000. Increases in bond
values were somewhat offset by a weak equity market during 2000.
The Company has a policy of purchasing debt securities primarily rated A or
better by Moody's Investor Services and US Government securities to minimize
credit risk. All securities, however, carry interest rate risk, which affect
their market values such that as market yields increase, the value of the
Company's securities decline and vice versa. Additionally, mortgage-backed
securities carry prepayment risk whereby expected yields may not be achieved due
to the inability to reinvest proceeds from prepayment at comparable yields.
Moreover, such mortgage-backed securities may not benefit from price
appreciation in periods of declining rates to the same extent as the remainder
of the portfolio.
Northway Financial, Inc. and Subsidiaries
SECURITIES (CONTINUED)
----------------------
Securities held-to-maturity comprise approximately 5 percent and 8 percent of
the aggregate securities portfolio at December 31, 2000 and 1999, respectively.
This is consistent with management's objective to maintain portfolio flexibility
and liquidity by classifying most securities as available-for-sale. A portion of
the securities portfolio is pledged to secure public deposits, short-term
securities sold under agreements to repurchase and treasury, tax and loan
accounts. Refer to Note 3 for a further discussion of pledging.
LOANS
-----
Loans increased 5 percent in 2000 largely as a result of the increase in
indirect installment loans. The growth in the loan portfolio resulted from the
Company's ongoing efforts to increase the loan portfolio through the origination
of loans. The following table presents the composition of the loan portfolio:
($000 Omitted)
Percent Percent
2000 of Total 1999 of Total
---- -------- ---- --------
Real estate:
Residential $129,805 33.0% $139,389 37.3%
Commercial 100,608 25.5 93,061 24.9
Construction 5,752 1.5 4,360 1.2
Commercial 22,270 5.7 28,833 7.7
Installment 28,177 7.1 24,147 6.5
Indirect installment 99,359 25.2 76,431 20.4
Other 7,881 2.0 7,369 2.0
-------- ----- -------- -----
$393,852 100.0% $373,590 100.0%
======== ===== ======== =====
The loan portfolio mix continued to change during the year. Indirect installment
loans continue to be a focus of the Company along with commercial real estate
and commercial loans. Indirect installment loans now comprise 25.2 percent of
the loan portfolio versus 20.4 percent at the end of 1999. Residential real
estate loans declined to 33.0 percent of the portfolio from 37.3 percent on
December 31, 1999. The Company wishes to maintain a balanced portfolio and is
working to maintain a portfolio mix of approximately one-third each of
residential real estate, commercial and commercial real estate, and consumer and
other loans.
Commercial real estate loans consist of loans secured by income producing
commercial real estate and commercial loans consist of loans that are either
unsecured or are secured by inventories, receivables or other corporate assets,
and many are additionally secured by the guarantee of the Small Business
Administration. Commercial real estate and commercial loans increased by
$984,000 in 2000 as compared to 1999. The Company continues to emphasize
commercial real estate and commercial loans in order to enhance earnings and
maintain the balance of its portfolio.
Residential real estate loans decreased $9,584,000 in 2000, a 7 percent decrease
from 1999. The Company's strategy generally is to originate fixed-rate
residential loans for sale to investors in the secondary market. The Company
generally retains adjustable-rate loans in its portfolio but will, occasionally,
retain some fixed-rate mortgages.
Installment loans consist primarily of loans originated directly by the Company,
however, as part of the West Ossipee branch acquisition the Company purchased
loans totaling approximately $6,197,000. The increase in installment loans of
$4,030,000, or 17 percent, in 2000 is a result of this purchase. Indirect
installment loans increased $22,928,000, or 30 percent, in 2000. The increase is
consistent with the Company's balanced portfolio strategy.
The Company's loans are primarily secured by real estate and automobiles located
in New Hampshire. In addition, real estate acquired by foreclosure is located in
this market. Accordingly, the ultimate collectibility of a substantial portion
of the Company's loan portfolio and the recovery of other real estate acquired
by foreclosure are susceptible to changing conditions in this market.
Northway Financial, Inc. and Subsidiaries
NONPERFORMING ASSETS
--------------------
Nonperforming assets were $1,070,000, or 0.22 percent of total assets, at
December 31, 2000 as compared to $4,727,000, or 1.02 percent of total assets, at
December 31, 1999. This decrease was due primarily to the sale on February 29,
2000 of approximately $1,200,000 of nonperforming loans and the resolution of a
large nonperforming credit. In the course of resolving this credit the Company
incurred charge-offs of $1,100,000 and received cash totaling $2,300,000.
Nonperforming assets are comprised primarily of nonperforming loans, other
chattels owned and real estate acquired by foreclosure or a similar conveyance
of title. The accrual of interest on a loan is discontinued when there is
reasonable doubt as to its collectibility or whenever the payment of principal
or interest is more than 90 days past due. However, there are loans within this
nonperforming classification that provide periodic payments, but which have a
weakness with respect to the collateral securing the loan.
At December 31, 2000, nonperforming loans totaled $957,000, or 0.24 percent of
total loans, compared to $4,578,000, or 1.23 percent of total loans, in 1999.
Other real estate owned at December 31, 2000 was $25,000 compared to $115,000 at
December 31, 1999.
ALLOWANCE FOR LOAN LOSSES
-------------------------
The Company maintains an allowance for loan losses to absorb future charge-offs
of loans in the existing portfolio. When a loan, or portion thereof, is
considered uncollectible, it is charged against the allowance. Recoveries of
amounts previously charged-off are added to the reserve when collected. The
adequacy of the allowance for loan losses is evaluated on a regular basis by
management. Factors considered in evaluating the adequacy of the allowance
include previous loss experience, current economic conditions and their effect
on borrowers and the market area in general, and the performance of individual
credits in relation to the contract terms. The provision for loan losses charged
to earnings is based on management's judgment of the amount necessary to
maintain the allowance at a level adequate to absorb possible losses. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the Company's allowance for loan
losses.
The Company's allowance for loan losses decreased $533,000 from December 31,
1999 to $4,354,000, or 1.11 percent of total loans, at December 31, 2000. The
decline is a result of the resolution of a large nonperforming credit. The 2000
provision for loan losses was $980,000, $440,000 higher than the prior year
level of $540,000. The increase was due primarily to the increased level of
loans.
The following table sets forth the composition of the allowance for loan losses
for the periods indicated:
($000 Omitted)
Years Ended December 31, 2000 1999 1998
- ------------------------ ---- ---- ----
Beginning allowance $4,887 $4,404 $4,156
Provision for loan losses 980 540 540
Loans charged-off (1,643) (304) (524)
Recoveries 130 247 232
------- ------ ------
Net charge-offs (1,513) (57) (292)
------- ------ ------
Ending allowance $ 4,354 $4,887 $4,404
======= ====== ======
Allowance as a percentage of loans
outstanding 1.11% 1.31% 1.55%
Allowance as a percentage of
nonperforming loans 454.96 106.75 172.98
Net charge-offs as a percentage of
average loans 0.39 0.02 0.11
DEPOSITS AND BORROWINGS
-----------------------
Total deposits at December 31, 2000 were $391,772,000, an increase of
$48,743,000, or 14 percent, as compared to the$343,029,000 at December 31, 1999.
The increase in deposits was due to the acquisition of a branch in August 2000,
which netted the Company additional deposits of approximately $27,782,000, and
higher interest rates paid on time deposit and money market accounts.
($000 Omitted)
Components of Deposits
December 31, 2000 1999
- ------------ ---- ----
Demand $ 56,745 $ 49,925
Regular savings, NOW and money market 152,022 142,659
Time 183,005 150,445
-------- --------
Total deposits $391,772 $343,029
======== ========
At December 31, 2000, time deposits of $100,000 or more are scheduled to mature
as follows:
($000 Omitted)
3 months or less $ 6,931
Over 3 to 6 months 13,156
Over 6 to 12 months 7,207
Over 12 months 1,553
-------
$28,847
=======
At December 31, 2000 short-term borrowings consisted of FHLB advances of
$2,950,000 and securities sold under agreements to repurchase of $9,390,000
compared to $9,950,000 and $7,468,000, respectively, for 1999. Long-term debt
consisted solely of FHLB term advances of $35,528,000 as compared to $58,528,000
in 1999. Many of the long-term term advances, however, are callable with call
dates ranging from February 2001 to November 2001. The decrease in FHLB advances
is directly attributable to the increase in deposits. See Notes 9 and 10 to the
Consolidated Financial Statements for additional information.
The following table sets forth certain information concerning the Company's
borrowings at the dates indicated:
($000 Omitted)
December 31, 2000 1999
- ------------ ---- ----
Short-term borrowings $12,340 $17,418
Long-term debt 35,528 58,528
------- -------
$47,868 $75,946
======= =======
Northway Financial, Inc. and Subsidiaries
CAPITAL
-------
The following table sets forth the Company's risk-based capital and leverage
ratios:
($000 Omitted)
December 31, 2000 1999
- ------------ ---- ----
Risk-adjusted assets $353,146 $329,369
Tier 1 capital (to average assets) 7.42% 8.47%
Tier 1 capital (to risk weighted assets) 10.37 11.80
Total capital (to risk weighted assets) 11.60 13.05
The Company's capital serves to support growth and provide depositors and other
creditors protection against loss. Equity capital represents the stockholders'
investment in the Company. Management strives to maintain an optimal level of
capital on which an attractive return to the stockholders will be realized over
both the short-term and long-term, while serving depositors' and creditors'
needs.
The Company must also observe the minimum requirements enforced by the federal
banking regulators. There are three capital requirements that banks and bank
holding companies must meet: Tier 1 capital, total capital (combination of Tier
1 capital and Tier 2 capital), and leverage (Tier 1 capital to average assets)
ratios. Tier 1 capital consists of stockholders' equity, net of intangible
assets. Tier 2 capital consists of a limited amount of loss reserves. Tier 1
capital, total capital and leverage ratios do not include any adjustments for
unrealized gains and losses relating to securities available-for-sale except net
unrealized losses relating to marketable equity securities. The minimum
requirements for the leverage ratio, risk-based Tier 1 capital and risk-based
total capital are 4 percent, 4 percent and 8 percent, respectively. As of
December 31, 2000, the subsidiary banks of the Company were "well capitalized"
as defined under Federal Deposit Insurance Corporation ("FDIC") regulations.
The Company intends to continue to pay dividends on a quarterly basis subject
to, among other things, the financial condition and earnings of the Company,
capital requirements, and other factors, including applicable governmental
regulations. No dividends will be payable unless declared by the Board of
Directors and then only to the extent funds are legally available for the
payment of such dividends.
INTEREST RATE RISK
------------------
Volatility in interest rates requires the Company to manage interest rate risk,
which arises from differences in the timing of repricing of assets and
liabilities. Management monitors and adjusts the difference between interest
sensitive assets and interest sensitive liabilities ("GAP" position) within
various time frames. An institution with more assets repricing than liabilities
within a given time frame is considered asset sensitive and in time frames with
more liabilities repricing than assets is liability sensitive. Within GAP limits
established by the Board of Directors, the Company seeks to balance the
objective of insulating the net interest margin from rate exposure with that of
taking advantage of anticipated changes in rates in order to enhance income.
Interest rate risk is managed by the Company's Asset/Liability Committee, which
formulates strategies based on a desirable level of interest rate risk. In
setting desirable levels of interest rate risk, the Committee evaluates the
impact on earnings and capital caused by the current outlook on interest rates,
potential changes in the outlook on interest rates and regional economies,
liquidity, business strategies and other factors.
The Asset/Liability Committee uses three key measurements to monitor interest
rate risk: (i) the interest rate sensitivity GAP analysis; (ii) a rate shock to
measure earnings volatility due to an immediate increase or decrease in market
rates of interest; and (iii) simulation of changes in net interest income under
alternative balance sheet and interest rate scenarios.
Northway Financial, Inc. and Subsidiaries
INTEREST RATE RISK (CONTINUED)
------------------------------
The following table presents the Company's interest rate GAP analysis:
($000 Omitted)
Balance Maturing or Subject to Repricing
3 months 4 to 12 12 to 24 2 to 5 After 5
December 31, 2000 or less months months years years Total
- ----------------- ------- ------ ------ ----- ----- -----
Loans, net $109,516 $118,126 $ 75,844 $ 73,780 $ 16,221 $393,487
Securities 21,368 14,879 7,696 8,352 6,169 58,464
Other assets -- -- -- -- 33,193 33,193
-------- -------- -------- -------- -------- --------
Total assets $130,884 $133,005 $ 83,540 $ 82,132 $ 55,583 $485,144
-------- -------- -------- -------- -------- --------
Deposits $105,980 132,713 $ 61,938 $ 34,397 $ 56,744 $391,772
Securities sold under agreements to repurchase 6,748 2,642 -- -- -- 9,390
Borrowed funds 2,950 1,500 3,028 12,000 19,000 38,478
Other liabilities and stockholders' equity -- -- -- -- 45,504 45,504
-------- -------- -------- -------- -------- --------
Total liabilities and equity $115,678 $136,855 $ 64,966 $ 46,397 $121,248 $485,144
-------- -------- -------- -------- -------- --------
GAP for period $ 15,206 $ (3,850) $ 18,574 $ 35,735 $(65,665)
-------- -------- -------- -------- --------
Cumulative GAP $ 15,206 $ 11,356 $ 29,930 $ 65,665 $ -
======== ======== ======== ======== ========
Cumulative GAP as a percent of total assets 3.1% 2.3% 6.2% 13.5%
Interest rate GAP analysis provides a static analysis of the repricing
characteristics of the entire balance sheet. It is prepared by scheduling assets
and liabilities into time bands based upon their next opportunity to reprice.
For floating rate instruments, all balances are placed at the next date on which
their rates could be reset; and for fixed rate instruments, the balances are
placed in time bands according to their principal repayment schedules. It is
necessary to apply further assumptions to refine this process. For instance, in
order to recognize the potential for mortgage related instruments to experience
early payments of principal, a prepayment assumption based on management's
expectations is layered on top of the scheduled principal payments. Other
categories that are scheduled using management assumptions include
noncontractual deposits such as demand deposit, NOW, savings, and money market
deposit accounts. These allocations are management's current estimate of the
sensitivity of the rates and balances of these accounts to changes in market
interest rates.
The Company's limits on interest rate risk specify that the cumulative one-year
GAP should be less than 10 percent of total assets. As of December 31, 2000, the
estimated exposure was 2.3 percent asset sensitive (see table above).
A more dynamic and detailed analysis of the earnings sensitivity of the balance
sheet is provided through simulation analysis. The Company uses computer
simulations to determine the impact on net interest income of various interest
rate scenarios, balance sheet trends and strategies. These simulations
incorporate assumptions about balance sheet dynamics such as loan and deposit
growth, loan and deposit pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations based on numerous
assumptions are run under various interest rate scenarios to determine the
impact on net interest income and capital. From these scenarios, interest rate
risk is quantified and appropriate strategies are developed and implemented.
Utilizing an immediate rate shock simulation where interest rates increase 200
basis points, the December 31, 2000 earnings simulation model projects that net
interest income for the next twelve months would decrease by an amount equal to
approximately 2.19 percent. In addition, utilizing an immediate rate shock
stimulation where interest rates decrease 200 basis points, the December 31,
2000 earnings simulation model projects that net interest income for the next
twelve months would decrease by an amount equal to approximately 1.96 percent.
Both the up and down rate shock simulations are within the Company's 10 percent
policy limit.
Northway Financial, Inc. and Subsidiaries
LIQUIDITY RISK
--------------
Liquidity risk management involves the Company's and its subsidiaries' ability
to raise funds in order to meet their existing and anticipated financial
obligations. These obligations are the withdrawal of deposits on demand or at
contractual maturity, the repayment of debt as it matures, the ability to fund
new and existing loan commitments and the ability to take advantage of new
business opportunities. Liquidity may be provided through amortization, maturity
or sale of assets such as loans and securities available-for-sale, liability
sources such as increased deposits, utilization of the FHLB credit facility,
purchased or other borrowed funds, and access to the capital markets. Liquidity
targets are subject to change based on economic and market conditions and are
controlled and monitored by the Company's Asset/Liability Committee. At the bank
level, liquidity is managed by measuring the net amount of marketable assets
after deducting pledged assets, plus lines of credit, primarily with the FHLB,
which are available to fund liquidity requirements. Management then measures the
adequacy of that aggregate amount relative to the aggregate amount of
liabilities deemed to be sensitive or volatile. These include brokered deposits,
deposits in excess of $100,000, term deposits with short maturities, and credit
commitments outstanding.
Additionally, the parent holding company requires cash for various operating
needs including dividends to shareholders, the purchase of treasury stock,
capital injections to the subsidiary banks, and the payment of general corporate
expenses. The primary sources of liquidity for the parent holding company are
dividends from the subsidiary banks and reimbursement for services performed on
behalf of the banks.
As shown in the consolidated statements of cash flows, cash and cash equivalents
decreased by $686,000 during 2000. The principal cause for the decrease was cash
used for investing activities which totaled $19,231,000 with lending activities
utilizing $17,047,000. Cash provided by financing activities of $14,060,000 was
provided by a branch acquisition and deposit growth, which was partially offset
by a decline in FHLB advances. The net cash provided by operating activities
provided the remainder of funding sources for 2000. The $4,485,000 of net cash
provided by operating activities was primarily attributable to net income of
$4,159,000.
CAPITAL EXPENDITURES AND COMMITMENTS
------------------------------------
During 2000, the Company incurred approximately $2,052,000 in capital
expenditures. These expenditures included $301,000 for land, buildings,
furniture and equipment for the branch purchased in West Ossipee, New Hampshire.
The Company has begun construction of a new branch located in Tilton, New
Hampshire, spending $714,000 on land and construction in progress. Approximately
$336,000 was spent for the purchase of a new computer system. The remaining
expenditures were for normal maintenance and replacement of, or upgrades to,
existing property and equipment.
During 1999, the Company incurred approximately $1,400,000 in capital
expenditures. These expenditures included $189,000 and $193,000, respectively,
for leasehold improvements and furniture and equipment for the Company's
supermarket branches in Gorham and North Conway, New Hampshire. The Company also
purchased its Tilton and Franklin, New Hampshire branch offices from Vermont
National Bank for$185,000 and $75,000, respectively. Approximately $93,000 was
spent on expenditures for furniture and equipment for Tilton and $86,000 for
Franklin. The remaining expenditures were for normal maintenance and replacement
of, or upgrades to, existing property and equipment.
During 2001, the Company's estimated capital expenditure projections total
$1,756,000. Approximately $758,000 will be spent to complete the construction of
the Tilton branch. The Company has budgeted approximately $717,000 for
technology projects including internet banking, upgrades to the data
communication network, corporate intranet and a branch wide-area-network.
Currently the Company has committed to only the internet banking project, while
the other projects are still in the cost/benefit stage and may or may not be
implemented. The remaining expenditures will be incurred for normal maintenance
and replacement of, or upgrades to, existing property and equipment.
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
($000 Omitted, Except Per Share Data)
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $33,145 $26,865 $24,313
Interest on Debt Securities:
Taxable 2,971 3,109 3,322
Tax-Exempt 249 472 479
Dividends 453 238 192
Interest on Federal Funds Sold 480 228 769
Interest on Interest Bearing Deposits 12 8 7
- -----------------------------------------------------------------------------
TOTAL INTEREST AND DIVIDEND INCOME 37,310 30,920 29,082
- -----------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits:
Regular Savings, NOW and Money Market
Deposit Accounts 2,701 2,344 2,676
Certificates of Deposit (in Denominations
of $100,000 or More) 1,259 1,169 1,176
Other Time 7,390 6,345 6,903
Interest on Short-Term Borrowings 1,819 954 751
Interest on Long-Term Debt 2,888 766 40
- -----------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 16,057 11,578 11,546
- -----------------------------------------------------------------------------
Net Interest and Dividend Income 21,253 19,342 17,536
Provision for Loan Losses 980 540 540
- -----------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER
PROVISION FOR LOAN LOSSES 20,273 18,802 16,996
- -----------------------------------------------------------------------------
NONINTEREST INCOME
Service Charges and Fees on Deposit
Accounts 1,049 935 843
Securities Gains and Losses, Net 512 709 496
Other 1,127 1,078 679
- -----------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 2,688 2,722 2,018
- -----------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and Employee Benefits 8,868 8,448 6,757
Office Occupancy and Equipment 2,708 2,541 2,080
Amortization of Deposit Assumption Premium 513 357 301
Other 4,606 4,452 3,772
- -----------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 16,695 15,798 12,910
- -----------------------------------------------------------------------------
Income Before Income Taxes 6,266 5,726 6,104
Income Tax Expense 2,107 1,962 2,036
- -----------------------------------------------------------------------------
NET INCOME $ 4,159 $ 3,764 $ 4,068
- -----------------------------------------------------------------------------
Earnings Per Common Share and Earnings Per
Common Share Assuming Dilution $ 2.61 $ 2.25 $ 2.35
- -----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
($000 Omitted)
AS OF DECEMBER 31, 2000 1999
- -----------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks and Interest
Bearing Deposits $ 15,401 $ 16,087
Securities Available-for-Sale 55,712 55,998
Securities Held-to-Maturity (Fair Value of
$2,731 in 2000 and $5,095 in 1999) 2,752 5,151
Loans Held-for-Sale 229 54
Loans, Net Before Allowance for Loan Losses 393,258 372,766
Less: Allowance for Loan Losses (4,354) (4,887)
- -----------------------------------------------------------------------------
Net Loans 388,904 367,879
Bank Premises and Equipment, Net 11,000 10,387
Other Real Estate Owned 25 115
Deposit Assumption Premium 5,098 1,271
Other Assets 6,023 5,610
- -----------------------------------------------------------------------------
TOTAL ASSETS $485,144 $462,552
- -----------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand $ 56,745 $ 49,925
Regular Savings, NOW and Money Market Deposit
Accounts 152,022 142,659
Certificates of Deposit (In Denominations of
$100,000 or More) 28,847 22,074
Other Time 154,158 128,371
- -----------------------------------------------------------------------------
Total Deposits 391,772 343,029
- -----------------------------------------------------------------------------
Short-Term Borrowings 12,340 17,418
Accrued Taxes and Other Liabilities 3,942 4,291
Long-Term Debt 35,528 58,528
- -----------------------------------------------------------------------------
TOTAL LIABILITIES 443,582 423,266
- -----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 Par Value; 1,000,000
Shares Authorized; None Issued -- --
Common Stock, $1.00 Par Value; 9,000,000 Shares
Authorized; 1,731,969 Issued and 1,559,369
Outstanding at December 31, 2000 and 1,615,169
Outstanding at December 31, 1999 1,732 1,732
Surplus 2,101 2,101
Retained Earnings 43,110 39,906
Treasury Stock (172,600 Shares at December 31,
2000 and 116,800 Shares at December 31, 1999) (4,708) (3,398)
Accumulated Other Comprehensive Loss, Net of Tax (673) (1,055)
- -----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 41,562 39,286
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $485,144 $462,552
- -----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
(000 Omitted)
Accumulated
Other
Comprehensive Total
Common Retained Treasury Income Stockholders'
Stock Surplus Earnings Stock (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $1,732 $2,101 $33,744 $ -- $ (51) $37,526
Net Income - 1998 -- -- 4,068 -- -- 4,068
Net Change in Accumulated Other Comprehensive
Income (Loss), Net of Tax -- -- -- -- 145 145
Treasury Stock Purchased -- -- -- (55) -- (55)
Cash Dividends Declared ($0.42 Per Share) -- -- (728) -- -- (728)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 1,732 2,101 37,084 (55) 94 40,956
Net Income - 1999 -- -- 3,764 -- -- 3,764
Net Change in Accumulated Other
Comprehensive Income (Loss), Net of Tax -- -- -- -- (1,149) (1,149)
Treasury Stock Purchased -- -- -- (3,343) -- (3,343)
Cash Dividends Declared ($0.56 Per Share) -- -- (942) -- -- (942)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 1,732 2,101 39,906 (3,398) (1,055) 39,286
Net Income - 2000 -- -- 4,159 -- -- 4,159
Net Change in Unrealized Loss on
Securities Available-for-Sale, Net of Tax -- -- -- -- 512 512
Net Change in Unfunded Pension Accumulated
Benefit Obligation, Net of Tax -- -- -- -- (130) (130)
Treasury Stock Purchased -- -- -- (1,310) -- (1,310)
Cash Dividends Declared ($0.60 Per Share) -- -- (955) -- -- (955)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $1,732 $2,101 $43,110 $(4,708) $ (673) $41,562
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss as of December 31, 2000 consists of net unrealized holding losses on available-for-sale
securities of $543, net of taxes, and unfunded pension accumulated benefit obligation of $130, net of taxes. Accumulated other
comprehensive income (loss) as of December 31, 1999 and 1998 consists of net unrealized holding gains (losses) on available-for-sale
securities, net of taxes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
($000)
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 4,159 $ 3,764 $ 4,068
Other Comprehensive Income (Loss):
Net Unrealized Gains (Losses) on Available-for-Sale Securities 1,336 (1,162) 731
Reclassification Adjustment for Realized Gains in Net Income 512 709 496
- -----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gains (Losses) on Securities 824 (1,871) 235
Minimum Pension Liability Adjustment (197) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 627 (1,871) 235
Income Tax Expense (Benefit) 245 (722) 90
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Net of Tax 382 (1,149) 145
- -----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 4,541 $ 2,615 $ 4,213
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(000 Omitted)
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,159 $ 3,764 $ 4,068
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Loan Losses 980 540 540
Depreciation and Amortization 1,512 1,290 1,122
Deferred Income Tax Expense (Benefit) 263 (342) 188
Write-Down of Other Real Estate Owned -- 47 5
Gains on Sales of Investment Securities Available-for-Sale, Net (512) (709) (496)
Gains on Sale of Nonperforming and Reperforming Loans (71) -- --
Loss on Disposal and Writedown of Premises and Equipment 90 -- --
Amortization of Premiums and Accretion of Discounts on Securities, Net 1 76 116
(Decrease) Increase in Unearned Income, Net (230) 308 (194)
Gains on Sales of Other Real Estate Owned (64) (7) (45)
Net (Increase) Decrease in Loans Held-for-Sale (175) 481 (243)
Other Liabilities Assumed Net of Other Assets Acquired in Branch Transaction 12 1 --
Net Change in Other Assets and Other Liabilities (1,480) 1,239 (818)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,485 6,688 4,243
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities Available-for-Sale 2,609 6,157 4,344
Proceeds from Maturities of Investment Securities Held-to-Maturity 3,936 13,074 11,756
Proceeds from Maturities of Investment Securities Available-For-Sale 6,483 9,979 27,467
Purchase of Investment Securities Available-for-Sale (7,453) (21,813) (24,558)
Purchase of Investment Securities Held-to-Maturity (1,555) (11,716) (7,017)
Net Increase in Loans (17,047) (89,709) (17,473)
Loans Aquired in Branch Transaction (6,197) -- --
Proceeds from Sales of Nonperforming and Reperforming Loans 1,551 -- --
Proceeds from Sales of and Payments Received on Other Real Estate Owned 144 282 353
Premises and Equipment Acquired in Branch Transaction (301) (292) --
Additions to Premises and Equipment (1,401) (1,064) (1,597)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (19,231) (95,102) (6,725)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits 20,961 (25,903) 28,858
Deposits Assumed in Branch Transaction, Net of Assumption Premium 23,442 17,222 --
Advances from FHLB 21,000 57,000 2,250
Repayment of FHLB Advances (44,000) (750) (82)
Net (Decrease) Increase in Short-term FHLB Advances (7,000) 9,117 (8,379)
Net Increase in Securities Sold Under Agreements to Repurchase 1,922 677 645
Purchases of Treasury Stock (1,310) (3,343) (55)
Cash Dividends Paid (955) (942) (728)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,060 53,078 22,509
- -----------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (686) (35,336) 20,027
Cash and Cash Equivalents at Beginning of Year 16,087 51,423 31,396
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,401 $ 16,087 $ 51,423
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flows:
Interest Paid $ 15,525 $ 11,242 $ 12,068
Taxes Paid 1,817 2,043 2,097
Loans Transferred to Other Real Estate Owned 47 410 524
Loans Transferred to Other Personal Property 650 125 57
Loans Charged-Off, Net of Recoveries 1,513 57 292
Financed Sales of Other Real Estate Owned 22 131 231
Other Real Estate Owned Transferred to Loans -- -- 44
(Decrease) Increase in Amount Due to Broker (992) 992 --
See Notes to Consolidated Financial Statements
Northway Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------
NATURE OF OPERATIONS
Northway Financial, Inc. is a bank holding company formed in 1997 under the laws
of New Hampshire and is registered under the Bank Holding Company Act of 1956.
The Company's only business activity has been to own all of the shares of, and
provide management and operational support to, The Berlin City Bank ("BCB") and
The Pemigewasset National Bank ("PNB"). The Company's headquarters are in
Berlin, New Hampshire. The subsidiaries are engaged principally in the business
of attracting deposits from the general public and investing those deposits in
investment securities, commercial loans, real estate loans, and consumer loans.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry.
In preparing the financial statements, management is required to make estimates
and judgments that affect the reported amounts of assets and liabilities as of
the dates of the statements of financial condition, and income and expense for
the periods. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change in the near-term relate to
the determination of the allowance for loan losses and valuation of other real
estate owned.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the current year's presentation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents include
cash and due from banks, federal funds sold and interest bearing deposits.
SECURITIES
Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost; if
debt and equity securities are bought and held principally for the purpose of
selling in the near term they would be classified as trading and reported at
fair value, with unrealized gains and losses included in earnings; and debt and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of estimated income taxes. At this time, the Company
has not established a trading account.
Premiums and discounts are amortized and accreted primarily on the level yield
method over the contractual life of the securities adjusted for expected
prepayments.
If a decline in the fair value below the adjusted cost basis of an investment is
judged to be other than temporary, the cost basis of the investment is written
down to fair value as the new cost basis and the amount of the write down in
included as a charge against securities gains, net.
Gains and losses on sales of investment securities are recognized at the time of
the sale on a specific identification basis.
LOANS HELD-FOR-SALE
Loans held-for-sale are generally identified as such at orig-ination and are
stated at the lower of aggregate cost or market. Market value is based on
outstanding investor commitments. When loans are sold, a gain or loss is
recognized to the extent that the sale proceeds exceed or are less than the
carrying value of the loans. Gains and losses are determined using the specific
identification method. All loans sold are without recourse to the Company.
LOANS
Loans are carried at the principal amounts outstanding, net of any unearned
income. Unearned income includes loan origination fees, net of direct loan
origination costs, and discounts on purchased loans. This income is deferred and
recognized as adjustments to loan income over the contractual life of the
related notes using a method the result of which approximates that of the
interest method.
Loans are placed on nonaccrual when payment of principal or interest is
considered to be in doubt or is past due 90 days or more. The Company may choose
to place a loan on nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired, if (i) it is
probable that the Company will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is not a commercial, commercial
real estate or an individually significant mortgage or consumer loan. Previously
accrued income on nonaccrual loans that has not been collected is reversed from
current income, and subsequent cash receipts are recorded as income. Loans are
returned to accrual status when collection of all contractual principal and
interest is reasonably assured and there has been sustained repayment
performance.
The Company's loans are primarily secured by real estate in New Hampshire. In
addition, other real estate owned is located in this market. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan portfolio
and the recovery of other real estate owned are susceptible to changing
conditions in this market.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate by
management on the basis of many factors including the risk characteristics of
the portfolio, trends in loan delinquencies and an assessment of existing
economic conditions. Management believes that the allowance for loan losses is
adequate. Additions to the allowance are charged to earnings; realized losses,
net of recoveries, are charged directly to the allowance.
While management uses available information in establishing the allowance for
loan losses, future additions to the allowance may be necessary if economic
conditions differ substantially from the estimates used in making the
evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowances for loan
losses. Such agencies may require the Banks to recognize additions to the
allowance based on judgements different from those of management.
Commercial, commercial real estate and individually significant mortgage and
consumer loans are considered impaired, and are placed on nonaccrual, when it is
probable that the Company will not be able to collect all amounts due according
to the contractual terms of the loan agreement. Mortgage and consumer loans,
which are not individually significant, are measured for impairment
collectively. Loans that experience insignificant payment delays and
insignificant shortfalls in payment amounts generally are not classified as
impaired. The amount of impairment for all impaired loans is determined by the
difference between the present value of the expected cash flows related to the
loan, using the original contractual interest rate, and its recorded value, or,
as a practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the loan.
When foreclosure is probable, impairment is measured based on the fair value of
the collateral.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of properties acquired either through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and for
which the Company has taken physical possession. The Company classifies loans as
repossessed or foreclosed if the Company receives physical possession of the
debtor's assets, regardless of whether or not foreclosure proceedings take
place.
Assets acquired through foreclosure or a similar conveyance of title are
initially recorded at the lower of the carrying value of the loan or the fair
value, less estimated costs to sell, of the property constructively or actually
received. Gains and losses upon disposition are reflected in operations as
realized.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the respective assets.
Amortization of leasehold improvements is accumulated on a straight-line basis
over the lesser of the term of the respective lease or the asset's useful life.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
the respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation using the "intrinsic value"
approach as set forth in Accounting Principles Board ("APB") Opinion No. 25
rather than the "fair value" method introduced in SFAS No. 123. Entities
electing to continue following APB Opinion No. 25 must make pro forma disclosure
of net income and, if presented, earnings per share, as if the fair value based
method of accounting in SFAS No. 123 had been applied. The Company has made the
pro forma disclosures required by SFAS No. 123.
EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS, if applicable, reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
stock options granted in 2000 and 1999 had no dilutive effect on EPS.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (1) a hedge of the exposure to changes in the fair value
of a recognized asset or liability or an unrecognized firm commitment, (2) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (3)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The Statement generally
provides for matching the timing of the recognition of the gain or loss on
derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in fair
value will be recognized in net income in the period of change. Management
adopted this pronouncement on January 1, 2001. Statement No. 133 allows for a
one-time change in the classification of securities in the investment portfolio.
Therefore, in conjunction with the adoption of Statement No. 133, the Company
will transfer all securities held-to-maturity to the available-for-sale category
at their market value of $2,731,000 as of January 1, 2001. In connection with
the transfer, the Company will record in comprehensive income an unrealized
holding loss of approximately $13,000, net of tax effect. Under Statement No.
133, this transfer will not call into question the Company's intent to hold
other debt securities to maturity in the future. Management does not anticipate
that this statement will have any other material impact on the consolidated
financial statements.
NOTE 2 CASH AND DUE FROM BANKS
------------------------------
Cash and due from banks at December 31, 2000 and 1999 includes $4,903,000 and
$3,338,000, respectively, which is subject to withdrawals and usage restrictions
to satisfy the reserve requirements of the Federal Reserve Bank.
NOTE 3 SECURITIES
-----------------
The amortized cost, gross unrealized gains, gross unrealized losses and market
value of investment securities at December 31, 2000 and 1999 follows:
Securities Available-for-Sale: ($000 Omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
December 31, 2000
- -----------------------------
US Treasury and other US government agencies $28,883 $ 71 $ 174 $28,780
Marketable equity securities 3,180 88 859 2,409
Non-marketable equity securities 5,424 -- -- 5,424
Mortgage-backed securities 7,513 9 47 7,475
Collateralized mortgage obligations 7,234 -- 57 7,177
Corporate bonds 1,006 -- 3 1,003
State and political subdivisions 3,366 78 -- 3,444
------- ----- ------ -------
$56,606 $ 246 $1,140 $55,712
======= ===== ====== =======
December 31, 1999
- -----------------------------
US Treasury and other US government agencies $27,466 $ 2 $1,019 $26,449
Marketable equity securities 2,999 141 360 2,780
Non-marketable equity securities 4,456 -- -- 4,456
Mortgage-backed securities 9,179 7 331 8,855
Collateralized mortgage obligations 10,139 -- 181 9,958
State and political subdivisions 3,478 37 15 3,500
------- ----- ------ -------
$57,717 $ 187 $1,906 $55,998
======= ===== ====== =======
Securities Held-to-maturity: ($000 Omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
December 31, 2000
- --------------------------
Mortgage-backed securities $ 1,760 $ 2 $ 22 $ 1,740
Collateralized mortgage obligations 492 -- 4 488
State and political subdivisions 500 3 -- 503
------- ----- ------ -------
$ 2,752 $ 5 $ 26 $ 2,731
======= ===== ====== =======
December 31, 1999
- --------------------------
Mortgage-backed securities $ 2,285 $ 3 $ 41 $ 2,247
Collateralized mortgage obligations 1,316 -- 19 1,297
State and political subdivisions 1,550 3 2 1,551
------- ----- ------ -------
$ 5,151 $ 6 $ 62 $ 5,095
======= ===== ====== =======
The contractual maturity distribution of investments in debt obligations at December 31, 2000 follows:
($000 Omitted)
One to Five to Over
Within Five Ten Ten Total
One Year Years Years Years Cost
-------- ----- ----- ----- ----
Available-for-Sale:
US Treasury and other US government agencies $500 $18,496 $ 8,888 $ 999 $28,883
Mortgage-backed securities 52 599 5,737 1,125 7,513
Collateralized mortgage obligations -- -- 6,690 544 7,234
Corporate bonds -- 1,006 -- -- 1,006
State and political subdivisions -- 465 1,006 1,895 3,366
---- ------- ------- ------ -------
$552 $20,566 $22,321 $4,563 $48,002
==== ======= ======= ====== =======
Market value $551 $20,466 $22,252 $4,610 $47,879
==== ======= ======= ====== =======
Held-to-Maturity:
Mortgage-backed securities $ 28 $ 337 $ 173 $1,222 $ 1,760
Collateralized mortgage obligations -- -- 456 36 492
State and political subdivisions -- -- -- 500 500
---- ------- ------- ------ -------
$ 28 $ 337 $ 629 $1,758 $ 2,752
==== ======= ======= ====== =======
Market value $ 28 $ 338 $ 624 $1,741 $ 2,731
==== ======= ======= ====== =======
Actual maturities of state and political subdivisions, mortgage-backed securities and collateralized
mortgage obligations will differ from the maturities presented because borrowers have the right to prepay
obligations without prepayment penalties. An analysis of gross realized gains and losses on investment
securities available-for-sale sold during the years ended December 31, follows:
($000 Omitted)
2000 1999 1998
-------------------------- -------------------------- --------------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
Equity $517 $5 $720 $41 $523 $22
Mortgage-backed securities -- -- 30 -- -- 5
---- -- ---- --- ---- ---
$517 $5 $750 $41 $523 $27
==== == ==== === ==== ===
The tax provision applicable to these net realized gains and losses amounted to
$201,000, $278,000 and $192,000 for 2000, 1999, and 1998, respectively.
Investment securities with a carrying amount totaling $18,729,000 and
$22,805,000 were pledged to secure public deposits, securities sold under
agreements to repurchase and treasury, tax and loan accounts at December 31,
2000 and 1999, respectively.
NOTE 4 LOANS
------------
Loan balances were comprised of the following:
($000 Omitted)
December 31, 2000 1999
- --------------------------------------------------------------------------------
Real estate:
Residential $129,805 $139,389
Commercial 100,608 93,061
Construction 5,752 4,360
Commercial 22,270 28,833
Installment 28,177 24,147
Indirect installment 99,359 76,431
Other 7,881 7,369
-------- --------
Total loans 393,852 373,590
Less:
Unearned income 594 824
Allowance for loan losses 4,354 4,887
-------- --------
4,948 5,711
-------- --------
$388,904 $367,879
======== ========
Loans are made in the ordinary course of business to directors, executive
officers, and their immediate families and to organizations in which such
persons have more than a 10 percent ownership interest. These loans are made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the same time for comparable transactions with unrelated persons
and did not involve more than the normal risk of collectibility or present other
unfavorable features.
An analysis of activity in such loans for the years ended December 31, 2000 and
1999 follows:
($000 Omitted)
2000 1999
---- ----
Balance at beginning of year $ 800 $ 1,121
Advances 283 530
Repayments (83) (431)
Change in status of executive
officers and directors -- (420)
-------- --------
Balance at end of year $ 1,000 $ 800
======== ========
The Company's lending activities are conducted principally in New Hampshire.
Although the loan portfolio is diversified, a portion of its debtors' ability to
repay is dependent upon the economic conditions prevailing in New Hampshire. The
Company maintains significant credit relationships with borrowers in the hotel
and motel industry. The aggregate loan balances to these industries totaled
$61,272,000 at December 31, 2000.
Loans serviced for others are not included in the accompanying statements of
financial condition. The unpaid principal balances of these loans total
$28,932,000 and $18,755,000 at December 31, 2000 and 1999, respectively. The
Company sold $2,196,000 of mortgage loans and $10,716,000 of indirect
installment loans in 2000 and $8,306,000 of mortgage loans in 1999.
The Company capitalized $22,000 and $83,000 of servicing rights and amortized
$14,000 and $7,000 of those rights in 2000 and 1999, respectively. There is no
valuation allowance for mortgage servicing rights, because their fair value
approximates their carrying amount of $84,000 and $76,000 at December 31, 2000
and 1999, respectively. Mortgage servicing rights are carried in other assets.
Restructured, accruing loans entered into prior to the adoption of SFAS No. 114
and 118 are not required to be reported as impaired loans unless such loans are
not performing in accordance with the restructured terms at adoption of SFAS No.
114. Restructured, accruing loans entered into subsequent to the adoption of
these statements are reported as impaired loans. In the year subsequent to
restructure these loans may be removed from the impaired loan disclosure
provided that the loan bears a market rate of interest at the time of
restructure and is performing under the restructured terms.
At December 31, 2000 and 1999, loans restructured in a troubled debt
restructuring before January 1, 1995, the effective date of SFAS No. 114, that
are not impaired based on the terms specified by the restructuring agreement
totaled $1,010,000 and $1,035,000, respectively. The gross interest income that
would have been recorded in the years ended December 31, 2000 and 1999 if such
restructured loans had been current in accordance with their original terms was
$143,000 and $133,000, respectively. The amount of interest income recognized on
such restructured loans for the years ended December 31, 2000 and 1999 was
$94,000 and $88,000, respectively.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $197,000 and $3,139,000 at December 31, 2000 and 1999, respectively,
for which the related allowance for loan losses is $0 and $1,000,000,
respectively. All of the Company's impaired loans are collateralized and
therefore all impaired loans are measured by the difference between the fair
value of the collateral and the recorded amount of the loan. The average
recorded investment in impaired loans during the twelve months ended December
31, 2000 and 1999 was approximately $1,996,000 and $120,000, respectively. For
the twelve months ended December 31, 2000 and 1999 the Company recognized
interest income on impaired loans of $78,000 and $11,000, respectively, which
included $72,000 and $0 of interest income recognized using the cash-basis
method of income recognition, respectively.
NOTE 5 ALLOWANCE FOR LOAN LOSSES
--------------------------------
Changes in the allowance for loan losses for the years ended December 31,
follows:
($000 Omitted)
2000 1999 1998
------- ------ ------
Balance at beginning of year $4,887 $4,404 $4,156
Provision charged to expense 980 540 540
Recoveries on loans previously charged-off 130 247 232
Loans charged-off (1,643) (304) (524)
------- ------ ------
Balance at end of year $4,354 $4,887 $4,404
======= ====== ======
NOTE 6 OTHER REAL ESTATE OWNED
------------------------------
Other real estate owned consists of real estate acquired by foreclosure or a
similar conveyance of title. Other real estate owned at December 31, follows:
($000 Omitted)
2000 1999
----- -----
Commercial real estate $-- $ 40
Residential real estate 25 75
--- ----
$25 $115
=== ====
Sales of other real estate owned by the Company resulted in gains of $64,000,
$7,000, and $45,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.
Write downs on other real estate owned totaled $0, $47,000, and $5,000 for the
years ended December 31, 2000, 1999, and 1998, respectively.
NOTE 7 PREMISES AND EQUIPMENT
-----------------------------
A summary of premises and equipment at December 31, follows:
($000 Omitted)
2000 1999
---- ----
Land $ 2,294 $ 1,650
Buildings 8,585 8,309
Construction in progress 138 4
Equipment 5,483 4,935
------- -------
16,500 14,898
Less accumulated depreciation and amortization 5,500 4,511
------- -------
$11,000 $10,387
======= =======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
amounted to $999,000, $933,000, and $821,000, respectively.
The Company leases six of its locations under non-cancellable operating leases.
Minimum lease payments in future periods under non-cancellable operating leases
at December 31, 2000 are as follows:
($000 Omitted)
2001 $234
2002 177
2003 155
2004 63
2005 --
-----
$629
====
The terms of four of the leases provide that the Company can, at the end of the
initial five-year term, renew the lease under two five-year options. All leases
contain a provision that the Company shall pay its pro-rata share of operating
costs, including all real estate taxes.
Rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to
$256,000, $190,000 and $91,000, respectively.
NOTE 8 DEPOSITS
---------------
The aggregate amount of maturities for time deposits as of December 31, 2000,
for each of the following five years ended December 31, are as follows:
($000 Omitted)
2001 $168,268
2002 11,996
2003 2,098
2004 412
2005 231
--------
$183,005
========
NOTE 9 SHORT-TERM BORROWINGS
----------------------------
Short-term borrowings, which include securities sold under agreements to
repurchase and FHLB advances with maturities of less than one year, and their
related average interest rates for the years ended December 31, 2000, 1999 and
1998 are as follows:
($000 Omitted)
Amount outstanding at December 31, 2000 1999 1998
- ---------------------------------------------- ---------------- ---------------- ---------------
Avg. Avg. Avg.
Int. Int. Int.
Amount Rate Amount Rate Amount Rate
------- ---- ------- ---- ------- ----
FHLB advances $ 2,950 6.67% $ 9,950 4.60% $ 833 5.91%
Securities sold under agreements to repurchase 9,390 6.06 7,468 4.88 6,791 4.97
------- ---- ------- ---- ------- ----
$12,340 6.21% $17,418 4.72% $ 7,624 5.07%
======= ==== ======= ==== ======= ====
Maximum amount outstanding at any month end $41,199 $33,729 $17,608
Average amount outstanding during the year 28,575 6.37% 20,442 4.67% 13,420 5.60%
The underlying securities associated with securities sold under agreements to
repurchase are under the control of the Company.
NOTE 10 LONG-TERM DEBT
----------------------
Long-term debt at December 31, 2000 and 1999 consisted of FHLB advances of
$35,528,000 and $58,528,000, respectively.
As of December 31, 2000, contractual principal payments due under long-term debt
were as follows:
($000 Omitted)
2001 $ 1,500
2002 3,028
2003 --
2004 5,000
2005 --
2006 and years thereafter 26,000
-------
$35,528
=======
The FHLB long-term debt consisted of nine separate advances with the following
terms:
($000 Omitted)
Amount Rate Maturity Date Call Date
- ------- ---- ------------- ---------
$ 1,500 5.95% 07/30/01 N/A
28 6.78 04/04/02 N/A
3,000 6.76 04/08/02 N/A
5,000 5.79 08/30/04 08/30/01
5,000 6.11 03/28/07 03/28/01
7,000 5.54 11/02/09 02/01/01
7,000 5.57 11/09/09 11/09/01
5,000 5.91 12/17/09 06/18/01
2,000 4.80 12/27/10 06/26/01
- -------
$35,528
=======
NOTE 11 ACQUISITIONS
--------------------
On August 25, 2000, the Company acquired certain assets and assumed the deposits
of a branch office of The Bank of New Hampshire located in West Ossipee, New
Hampshire. As a result of this purchase the Company made the following entries
to record this transaction:
($000 Omitted)
Cash $16,952
Loans 6,197
Deposit assumption premium 4,340
Premises and equipment 301
Other assets 38
Miscellaneous expense 8
Deposits 27,782
Other liabilities 50
Other income 4
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branch is included in the 2000
consolidated statement of income of the Company from the date of the
transaction.
The deposit assumption premium of $4,340,000 is being amortized to noninterest
expense over fifteen years using the straight line method.
On July 9, 1999, the Company acquired certain assets and assumed deposits from
branch offices of Vermont National Bank located in Tilton and Franklin, New
Hampshire. As a result of the purchase, the Company made the following entries
to record this transaction:
($000 Omitted)
Cash $16,931
Deposit assumption premium 789
Premises and equipment 292
Prepaid expenses 5
Interest expense 3
Deposits 18,011
Other income 3
Other liabilities 6
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branches are included in the 1999
consolidated statement of income of the Company from the date of the
transaction.
The deposit assumption premium of $789,000 is being amortized to noninterest
expense over seven years using the straight line method.
Management reviews the carrying amount of intangible assets on an ongoing basis,
taking into consideration any events and circumstances that might have
diminished such amount.
NOTE 12 STOCKHOLDERS' EQUITY
----------------------------
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks' capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 2000, the most
recent notification from the FDIC categorized the Banks as well-capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized the Banks must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios. There are no conditions or events since
that notification that management believes have changed the Company's and Banks'
categories. Management believes, as of December 31, 2000 and 1999, that the
Company and the Banks met all capital adequacy requirements to which they are
subject.
These minimum capital amounts and ratios, as well as the Company's and Banks'
actual capital amounts and ratios, are presented in the following table:
($000 Omitted)
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
----------------- ----------------- ------------------
As of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------- ------ ----- ------ ----- ------ -----
Tier 1 capital (to average assets)
Consolidated $36,628 7.42% $19,749 ->4.00% N/A
The Berlin City Bank 23,127 6.98 13,252 ->4.00 $16,565 ->5.00%
The Pemigewasset National Bank 13,216 7.93 6,669 ->4.00 8,336 ->5.00
Total capital (to risk weighted assets)
Consolidated 40,982 11.60 28,252 ->8.00 N/A
The Berlin City Bank 25,999 11.32 18,376 ->8.00 22,971 ->10.00
The Pemigewasset National Bank 14,645 11.73 9,985 ->8.00 12,481 ->10.00
Tier 1 capital (to risk weighted assets)
Consolidated 36,628 10.37 14,126 ->4.00 N/A
The Berlin City Bank 23,127 10.07 9,188 ->4.00 13,782 ->6.00
The Pemigewasset National Bank 13,216 10.59 4,992 ->4.00 7,488 ->6.00
As of December 31, 1999
- --------------------------------------
Tier 1 capital (to average assets)
Consolidated $38,852 8.47% $18,356 ->4.00% N/A
The Berlin City Bank 25,664 8.20 12,513 ->4.00 $15,641 ->5.00%
The Pemigewasset National Bank 12,986 8.69 5,980 ->4.00 7,475 ->5.00
Total capital (to risk weighted assets)
Consolidated 42,969 13.05 26,350 ->8.00 N/A
The Berlin City Bank 28,420 12.93 17,581 ->8.00 21,976 ->10.00
The Pemigewasset National Bank 14,283 13.78 8,293 ->8.00 10,366 ->10.00
Tier 1 capital (to risk weighted assets)
Consolidated 38,852 11.80 13,175 ->4.00 N/A
The Berlin City Bank 25,664 11.68 8,790 ->4.00 13,186 ->6.00
The Pemigewasset National Bank 12,986 12.53 4,146 ->4.00 6,220 ->6.00
Federal regulations prohibit banking companies from paying dividends on their
stock if the effect would cause stockholders' equity to be reduced below
applicable regulatory capital requirements or if such declaration and payment
would otherwise violate regulatory requirements.
Under the National Bank Act, the approval of the Office of the Comptroller of
the Currency ("OCC") is required if dividends declared by PNB in any year exceed
the net profits of that year, as defined, combined with the retained net profit
for the two preceding years. At December 31, 2000, PNB could, without approval
of the OCC, declare dividends aggregating $1,148,000.
As of December 31, 2000, BCB is restricted from declaring dividends to the
Company in an amount greater than approximately $6,563,000, as such declaration
would decrease capital below BCB's required minimum level of regulatory capital.
NOTE 13 OTHER NONINTEREST EXPENSE
---------------------------------
The major components of other noninterest expense for the years ended December
31, are as follows:
($000 Omitted)
2000 1999 1998
------ ------ ------
Professional fees $1,073 $1,091 $ 702
Stationary and supplies 605 565 470
Other 2,928 2,796 2,600
------ ------ ------
$4,606 $4,452 $3,772
====== ====== ======
NOTE 14 FEDERAL AND STATE TAXES
-------------------------------
The components of federal and state tax expense for the years ended December 31,
are as follows:
($000 Omitted)
2000 1999 1998
------ ------ ------
Current
Federal $1,657 $1,932 $1,628
State 187 372 220
------ ------ ------
1,844 2,304 1,848
====== ====== ======
Deferred
Federal 210 (248) 154
State 53 (94) 34
------ ------ ------
263 (342) 188
------ ------ ------
Total $2,107 $1,962 $2,036
====== ====== ======
The temporary differences (the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases) that give rise to significant portions of the deferred income tax asset
and deferred income tax liability at December 31, are as follows:
($000 Omitted)
2000 1999
---- ----
Deferred income tax asset
Allowance for loan losses $1,461 $1,653
Other 52 -
Interest on nonaccrual loans 73 165
Deferred origination costs - 38
Unrealized holding loss on investment securities
available-for-sale 351 664
Minimum pension liability adjustment 67 -
Deposit assumption premium 488 390
Prepaid pension 16 24
Supplemental pension 50 51
------ ------
2,558 2,985
------ ------
Deferred income liabilities:
Loan origination costs, net (20) (3)
Depreciation (604) (542)
Mortgage servicing rights (33) (30)
------ ------
(657) (575)
Deferred income tax asset, net $1,901 $2,410
====== ======
The primary sources of recovery of the deferred income tax asset are taxes paid
that are available for carryback and the expectation that the deductible
temporary differences will reverse during periods in which the Company generates
taxable income.
Total income tax expense for the years ended December 31, 2000, 1999 and 1998
differs from the "expected" federal income tax expense at the 34% statutory rate
for the following reasons:
2000 1999 1998
---- ---- ----
Expected federal income taxes 34.0% 34.0% 34.0%
Municipal income (2.5) (3.9) (3.6)
State tax expense, net of federal benefit 2.4 3.5 2.8
Other (0.3) 0.7 0.1
---- ---- ----
Effective tax rates 33.6% 34.3% 33.3%
==== ==== ====
NOTE 15 EMPLOYEE BENEFITS
-------------------------
Pension Plan
The Company maintains a trusteed non-contributory pension plan (the "Plan")
covering substantially all full-time employees. Assuming retirement at age 65
after 30 years or more of service, the benefits are computed as the sum of 1
percent of final average earnings up to a covered compensation limit, plus 65
percent of final average earnings in excess of covered compensation, times years
of service, up to 30. Final average earnings are defined as the five consecutive
years out of the employees last ten years of employment during which
compensation is highest. The amounts contributed to the Plan are determined
annually on the basis of (a) the maximum amount that can be deducted for federal
income tax purposes or (b) the amount certified by a consulting actuary as
necessary to avoid an accumulated funding deficiency as defined by the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only benefits attributed to service to date but also for those expected to
be earned in the future. Assets of the Plan are primarily invested in common
stock, US Government and Agency securities and high quality corporate bonds.
The following table sets forth information about the Plan as of December 31, and
for the years then ended:
($000 Omitted)
2000 1999
---- ----
Change in benefit obligation
- ----------------------------
Benefit obligation at beginning of year $2,967 $3,988
Service cost 245 238
Interest cost 230 244
Actuarial gain (loss) 173 (672)
Benefits paid (331) (831)
------ ------
Benefit obligation at end of year $3,284 $2,967
====== ======
Change in plan assets
- ---------------------
Fair value of plan assets at
beginning of year $3,121 $3,766
Actual return on plan assets 53 186
Benefits paid (331) (831)
------ ------
Fair value of plan assets at end of year $2,843 $3,121
====== ======
($000 Omitted)
2000 1999
---- ----
Funded status
- -------------
Funded status $ (441) $ 154
Unrecognized transition asset (14) -
Unrecognized net actuarial loss 1,675 1,338
Unrecognized prior service cost (1,224) (1,309)
------- -------
Net amount recognized $ (4) $ 183
======= =======
Amounts recognized in the consolidated
statements of financial position consists of:
- -----------------------------------------------
Accrued benefit cost $ (4) $ -
Accrued benefit liability (197) -
Accumulated other comprehensive
income 197 -
Prepaid benefit cost - 183
------- -------
Net amount recognized $ (4) $ 183
======= =======
Weighted-average assumptions
as of December 31, 2000 1999
- ------------------------------ ------ ------
Discount rate 7.50% 7.75%
Expected return on plan assets 8.50 8.50
Rate of compensation increase 4.50 4.50
($000 Omitted)
Components of net periodic benefit cost 2000 1999 1998
- --------------------------------------- ---- ---- ----
Service cost $ 245 $ 238 $ 218
Interest cost 230 244 268
Expected return on plan assets (261) (316) (296)
Amortization of prior service cost (85) (85) 1
Recognized net actuarial loss 62 70 16
Recognized transition amount (4) (4) (4)
----- ----- -----
Net periodic benefit cost $ 187 $ 147 $ 203
===== ===== =====
401(k) Plan
On July 1, 1999, the PNB 401(k) plan was amended and restated as the Northway
Financial, Inc. 401(k) and Profit Sharing Plan (the "401K Plan"). Under the 401K
Plan employees must have attained age 21, completed six months of service and be
credited with 1,000 hours of service in order to participate. Employees of the
Company, PNB and BCB are eligible to participate. Under the 401K Plan, employers
match 50% of the first 4% of employee contributions. Total 401(k) matching
expense in 2000 and 1999 amounted to $110,000 and $73,000, respectively, and the
Profit Sharing contribution expense was $60,000 and $54,000, respectively.
Prior to July 1, 1999, PNB had a 401(k) plan. To be eligible, employees must
have attained age 21, completed six months of service and be credited with 1,000
hours of service. PNB matched 25% of employee contributions on the first 4% of
compensation deposited as elective contributions. The 401(k) matching expense
was $0 and $15,000 for the years ended December 31, 1999 and 1998, respectively.
STOCK-BASED COMPENSATION
As indicated in Note 1, the Company applies APB Opinion 25 and related
interpretations in accounting for stock options. Accordingly, no compensation
cost has been recognized for its fixed stock options granted. Had compensation
cost been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
($000 Omitted, except per share data)
2000 1999
---- ----
Net income As reported $4,159 $3,764
Pro forma 4,112 3,528
Earnings per share As reported $ 2.61 $ 2.25
Pro forma 2.58 2.11
The Board of Directors (the "Committee") administers the 1999 Stock Option and
Grant Plan (the "1999 Plan") which is described below. The 1999 Plan was
approved by shareholders on May 18, 1999.
Under the 1999 Plan, the Committee may select the individuals to whom awards may
from time to time be granted; determine the time or times of grant, and the
extent, if any, of incentive stock options, non-qualified stock options,
restricted stock awards, unrestricted stock awards, performance share awards, or
any combination of the foregoing.
The 1999 Plan expires in February 2009. The aggregate number of shares of the
Company's common stock which may be issued upon the exercise of options granted
under the 1999 Plan is 175,000. The option price is fixed by the Committee at
the time of the grant and may not be less than 100% of the fair market value of
the stock, as determined by the Committee, in good faith as of the grant date.
Each option may be exercised at such times as shall be determined by the
Committee at or after the grant date; provided, however, that no option may be
exercised ten years after the date of grant.
The fair value of each option granted is estimated on grant date using the
Black-Scholes option pricing model. The weighted average dividend yield was 2.5%
and 2.0% and the weighted average risk-free interest rate was 6.01% and 6.03%
for 2000 and 1999, respectively. In addition, the expected volatility was 23%
and the expected life was 8 years for both 2000 and 1999.
A summary of the status of the Company's 1999 Plan as of December 31, 2000 and
1999 and changes during the years then ended is presented below:
2000 1999
---------------------- ----------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding, beginning of year 26,000 $28.00 - $ -
Granted 28,500 22.63 26,000 28.00
Forfeited (5,000) 28.00 - -
------ ------
Outstanding, end of year 49,500 $24.91 26,000 $28.00
====== ======
Options exercisable at year-end 28,125 24,000
Per share weighted-average fair
value of options granted
during the year $6.55 $9.07
The following table summarizes information about fixed stock options outstanding
as of December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted
Number Average Number Weighted
Outstanding Remaining Exercisable Average
Exercise as of Contractual as of Exercise
Price 12/31/00 Life 12/31/00 Price
------ ------ ---------- ------ ------
$28.00 21,000 8.50 years 21,000 $28.00
22.63 28,500 9.63 years 7,125 22.63
------ ------
$24.91 49,500 9.15 years 28,125 $26.35
====== ======
CHANGES IN CONTROL
The Company and its subsidiaries have entered into employment agreements with
certain officers. These agreements provide for the payment, under certain
circumstances, to the officer upon the officer's termination after a change of
control. The amount of such payments is set forth in their individual
agreements.
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
---------------------------------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
amounts of those instru-ments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance sheet credit risk at December 31, are as
follows:
($000 Omitted)
2000 1999
---- ----
Financial instrument whose contract
amounts represent credit risk:
Unadvanced portions of home equity loans $5,314 $ 3,165
Unadvanced portions of lines of credit 7,983 9,612
Unadvanced portions of commercial real estate loans 622 2,034
Commitments to originate loans 6,887 17,249
Commitments to originate municipal notes 5,420 675
Standby letters of credit 645 531
Commitments to originate loans, unadvanced portions of home equity loans, lines
of credit and commercial real estate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without having been drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan commitments to customers.
NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS
-------------------------------------------
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and cash equivalents approximates the fair value of those assets.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
FHLB and Federal Reserve Bank ("FRB") Stock: The carrying amount reported in the
balance sheets for FHLB and FRB Stock approximates their fair value. If
redeemed, the Company will receive an amount equal to the par value of the
stocks.
Loans held-for-sale: The carrying amount reported in the balance sheet
approximates fair value.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair value
for other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The fair value of nonaccrual loans was estimated
using the estimated fair value of the underlying collateral. The fair value of
commitments to originate loans and outstanding letters of credit were considered
in estimating the fair value of loans. As the undisbursed lines of credit are at
floating rates, there is no fair value adjustment.
Accrued interest receivable: The carrying value of accrued interest receivable
approximates its fair value because of the short term nature of this financial
instrument.
Deposits: The fair value of demand deposits (e.g. NOW and Super NOW checking,
non-interest bearing checking, regular savings, money market accounts and
mortgagors' escrow accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e. their carrying amounts). Fair values for
certificates of deposit are estimated using a discounted cash flow technique
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities of time deposits.
Short-term borrowings: The carrying value of short-term bor-rowings approximates
its fair value because of the short-term nature of these financial instruments.
Long-term debt: The fair values of long-term debt were determined by discounting
the anticipated future cash payments by using the rates currently available to
the Company for debt with similar terms and remaining maturities.
The estimated fair values of the Company's financial instruments are as follows:
($000 Omitted)
2000 1999
------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 15,401 $ 15,401 $ 16,087 $ 16,087
Investment securities
available-for-sale 50,513 50,513 51,692 51,692
Investment securities
held-to-maturity 2,752 2,731 5,151 5,095
FHLB stock 5,119 5,119 4,226 4,226
FRB stock 80 80 80 80
Loans held-for-sale 229 229 54 54
Loans, net 388,904 387,938 367,879 366,596
Accrued interest receivable 2,909 2,909 2,439 2,439
Financial liabilities:
Deposits 391,772 391,671 343,029 343,782
Short-term borrowings 12,340 12,340 17,418 17,418
Long-term debt 35,528 35,555 58,528 58,231
The carrying amounts of financial instruments shown in the above table are
included in the consolidated statements of financial condition under the
indicated captions except that (1) FHLB stock and FRB stock are included with
investment securities available-for-sale in the statements; and (2) accrued
interest receivable is included with other assets in the statement.
At December 31, 2000, all the Company's financial instruments were held for
purposes other than trading.
At December 31, 2000, the Company had no derivative financial instruments
subject to the provisions of SFAS No. 119 "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments."
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for some of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, cash flows, current economic conditions, risk
characteristics, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered. The fair value amounts presented do not
represent the underlying value of the Company because fair values of certain
other financial instruments, assets and liabilities have not been determined.
NOTE 18 CONDENSED PARENT ONLY FINANCIAL STATEMENTS
--------------------------------------------------
Condensed financial statements of Northway Financial, Inc. (Parent Company only)
as of December 31, 2000 and 1999 and for the three years ended December 31, 2000
follow:
STATEMENTS OF FINANCIAL CONDITION
($000 Omitted)
2000 1999
------- -------
Assets
- --------------------------------------------------------
Cash and cash equivalents $ 232 $ 372
Investment in subsidiary, The Berlin City Bank 27,496 25,394
Investment in subsidiary, The Pemigewasset National Bank 13,911 13,691
Equipment, net 432 16
Due from subsidiaries 448 -
Other assets 442 43
------- -------
Total assets $42,961 $39,516
======= =======
Liabilities and stockholders' equity
- --------------------------------------------------------
Accrued expenses $ 499 $ 116
Other liabilities 220 114
Borrowings from subsidiary 680 -
------- -------
Total liabilities 1,399 230
------- -------
Stockholders' equity:
Common stock 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 43,110 39,906
Treasury stock (4,708) (3,398)
Accumulated other comprehensive (loss) income (673) (1,055)
------- -------
Total stockholders' equity 41,562 39,286
------- -------
Total liabilities and stockholders' equity $42,961 $39,516
======= =======
STATEMENTS OF INCOME
($000 Omitted)
2000 1999 1998
---- ---- ----
Dividends from subsidiaries $ 2,450 $ 2,922 $ 1,686
Interest income 22 50 43
Fee income from subsidiary banks 5,252 -- --
Other -- 70 --
------- ------- -------
7,724 3,042 1,729
------- ------- -------
Interest expense 7 -- --
Salaries and employee benefits 3,507 -- --
Equipment expense 552 5 --
Professional fees 628 142 34
Other 735 709 36
------- ------- -------
5,429 856 70
------- ------- -------
Income before income tax (benefit) expense and
equity in undistributed net income of subsidiaries 2,295 2,186 1,659
Income tax (benefit) expense (53) (250) (9)
------- ------- -------
Income before equity in undistributed net
income of subsidiaries 2,348 2,436 1,668
Equity in undistributed net income of subsidiaries 1,811 1,328 2,400
------- ------- -------
Net income $ 4,159 $ 3,764 $ 4,068
======= ======= =======
STATEMENTS OF CASH FLOWS
($000 Omitted)
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income $ 4,159 $ 3,764 $ 4,068
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 35 3 --
Due from subsidiaries (448) -- --
Increase in other assets (332) (58) --
Increase in accrued expenses and other
liabilities 293 218 25
Loss on sale of assets 18 -- --
Undistributed net income of subsidiaries (1,811) (1,328) (2,400)
------- ------- -------
Net cash provided by operating activities 1,914 2,599 1,693
------- ------- -------
Cash flows from investing activities:
Additions to premises and equipment (469) (19) --
------- ------- -------
Net cash used in investing activities (469) (19) --
------- ------- -------
Cash flows from financing activities:
Proceeds from advances from subsidiaries 1,565 -- --
Repayments of advances from subsidiaries (885) -- --
Cash paid to BCB -- (245) --
Purchases of treasury stock (1,310) (3,343) (55)
Dividends paid (955) (942) (728)
------- ------- -------
Net cash used in financing activities (1,585) (4,530) (783)
------- ------- -------
Net (decrease) increase in cash and cash
equivalents (140) (1,950) 910
Cash and cash equivalents at beginning of year 372 2,322 1,412
------- ------- -------
Cash and cash equivalents at end of year $ 232 $ 372 $ 2,322
======= ======= =======
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 2000 and 1999 follows:
($000 Omitted, except earnings per share)
2000 Quarters Ended
- -------------------------------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $8,839 $9,127 $9,709 $9,635
Interest expense 3,556 4,004 4,300 4,197
------ ------ ------ ------
Net interest income 5,283 5,123 5,409 5,438
Provision for loan losses 245 255 255 225
Noninterest income 558 660 722 748
Noninterest expense 4,054 4,081 4,307 4,253
------ ------ ------ ------
Income before taxes 1,542 1,447 1,569 1,708
Income tax expense 538 435 537 597
------
Net income $1,004 $1,012 $1,032 $1,111
====== ====== ====== ======
Earnings per share $ 0.62 $ 0.63 $ 0.65 $ 0.71
====== ====== ====== ======
1999 Quarters Ended
- -------------------------------------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $7,023 $7,320 $7,938 $8,639
Interest expense 2,658 2,705 2,879 3,336
------ ------ ------ ------
Net interest income 4,365 4,615 5,059 5,303
Provision for loan losses 135 135 135 135
Noninterest income 718 614 655 735
Noninterest expense 3,731 3,785 4,140 4,142
------ ------ ------ ------
Income before taxes 1,217 1,309 1,439 1,761
Income tax expense 399 470 483 610
------
Net income $ 818 $ 839 $ 956 $1,151
====== ====== ====== ======
Earnings per share $ 0.48 $ 0.50 $ 0.57 $ 0.70
====== ====== ====== ======
MARKET INFORMATION (UNAUDITED)
Northway's common stock is traded on The Nasdaq Stock Market, Inc.'s National
Market under the symbol "NWFI." The following table sets forth, for the periods
indicated, the high and low closing sale prices for the common stock, as
reported by the Nasdaq National Market, and the dividends paid on the common
stock:
Price Per Share
---------------
Low High Dividends Per Share
--- ---- -------------------
2000 4th Quarter $21.50 $24.13 $0.15
3rd Quarter $22.13 $24.75 $0.15
2nd Quarter $20.00 $23.50 $0.15
1st Quarter $20.00 $26.38 $0.15
1999 4th Quarter $26.00 $28.75 $0.14
3rd Quarter $26.00 $29.75 $0.14
2nd Quarter $25.25 $30.25 $0.14
1st Quarter $29.75 $31.00 $0.14
The Company intends to continue to pay dividends on a quarterly basis subject
to, among other things, the financial condition and earnings of the Company,
capital requirements, and other factors, including applicable governmental
regulations. No dividends will be payable unless declared by the Board of
Directors and then only to the extent funds are legally available for the
payment of such dividends.
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
----------------------------------------
Responsibility for the financial information presented in the Annual Report
rests with Northway Financial, Inc.'s management. The Company believes that the
consolidated financial statements reflect fairly the substance of transactions
and present fairly the Company's financial position and results of operations in
conformity with generally accepted accounting principles appropriate in the
circumstances, applying certain estimates and judgments as required.
In meeting its responsibilities for the reliability of the consolidated
financial statements, the Company depends on its system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are executed in accordance with the appropriate
corporate authorizations and recorded properly to permit the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. Although accounting control procedures are designed to
achieve these objectives, it must be recognized that errors or irregularities
may nevertheless occur. Also, estimates and judgments are required to assess and
balance the relative cost and expected benefits of the controls. The Company
believes that its accounting controls provide reasonable assurance that errors
and irregularities that could be material to the consolidated financial
statements are prevented or would be detected within a timely period by
employees in the normal course of performing their assigned functions. An
important element of the system is a continuing and extensive internal audit
program.
The Board of Directors of the Company has an Audit Committee composed entirely
of directors who are not officers or employees of the Company. The Committee
meets periodically and privately with management, the internal auditor, and the
independent public accountants to consider audit results and to discuss internal
accounting controls, auditing, and financial reporting matters.
Shatswell, MacLeod & Company, P.C., independent certified public accountants,
have been engaged to render an independent professional opinion of the Company's
consolidated financial statements. Their audit is conducted in accordance with
generally accepted auditing standards and forms the basis for their report as to
the fair presentation, in the consolidated financial statements, of the
Company's financial position, operating results and cash flows.
William J. Woodward George L. Fredette
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
January 18, 2001
INDEPENDENT AUDITORS' REPORT
----------------------------
Shatswell, MacLeod & Company, P.C.
Certified Public Accountants
83 Pine Street
West Peabody, Massachusetts 01960
The Board of Directors and Stockholders
Northway Financial, Inc.
Berlin, New Hampshire
We have audited the accompanying consolidated statements of financial condition
of Northway Financial, Inc. and Subsidiaries as of December 31, 2000 and 1999
and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Northway Financial, Inc. and Subsidiaries as of December 31, 2000 and 1999 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with generally
accepted accounting principles.
SHATSELL, MacLEOD, & COMPANY, P.C.
West Peabody, Massachusetts
January 18, 2001
NORTHWAY FINANCIAL, INC. BOARD OF DIRECTORS
-------------------------------------------
BOARD OF DIRECTORS OFFICERS
Fletcher W. Adams
Vice Chairman William J. Woodward
Northway Financial, Inc. Chairman of the Board,
Chairman of the Board and President President and CEO
Pemigewasset National Bank
Fletcher W. Adams
Peter H. Bornstein Vice Chairman
Attorney and Partner
Bergeron, Hanson, Bornstein & Carlson George L. Fredette
Senior Vice President, CFO
Stephen G. Boucher and Treasurer
President
Airmar Technology Corp. Richard P. Orsillo
Vice President
Charles H. Clifford, Jr. Corporate Controller
Retired Businessman
Joseph N. Rozek
Arnold P. Hanson, Jr. Assistant Secretary
President
Isaacson Structural Steel, Inc.
Barry J. Kelley
President
White Mountain Lumber Co.
Bruce W. Keough
Private Investor
Randall G. Labnon
General Manager
Town and Country Motor Inn
John D. Morris
Retired Businessman
John H. Noyes
President
Noyes Insurance Agency, Inc.
President
Central Square Insurance, Inc.
William J. Woodward
Chairman of the Board,
President and CEO
Northway Financial, Inc.
The Berlin City Bank
SUBSIDIARY BANK DIRECTORS
-------------------------
THE BERLIN CITY BANK PEMIGEWASSET NATIONAL BANK
Frederick Anderson Fletcher W. Adams
General Manager and CEO Vice Chairman
NH Electric Cooperative, Inc. Northway Financial, Inc.
Chairman of the Board and President
Peter H. Bornstein Pemigewasset National Bank
Attorney and Partner
Bergeron, Hanson, Bornstein & Carlson Frederick C. Anderson
General Manager and CEO
Stephen G. Boucher NH Electric Cooperative, Inc.
President
Airmar Technology Corp. Charles H. Clifford, Jr.
Retired Businessman
Arnold P. Hanson, Jr.
President John H. Noyes
Isaacson Structural Steel, Inc. President
Noyes Insurance Agency, Inc.
Barry J. Kelley President
President Central Square Insurance, Inc.
White Mountain Lumber Co.
Brien L. Ward
Bruce W. Keough Attorney
Private Investor
William J. Woodward
Randall G. Labnon Chairman of the Board,
General Manager President and CEO
Town and Country Motor Inn Northway Financial, Inc.
The Berlin City Bank
John D. Morris
Retired Businessman
Brien L. Ward
Attorney
William J. Woodward
Chairman of the Board,
President and CEO
Northway Financial, Inc.
The Berlin City Bank
INFORMATION FOR STOCKHOLDERS
----------------------------
TRANSFER AGENT INDEPENDENT AUDITORS
Boston EquiServe, LP Shatwell, MacLeod & Company, P.C.
Investor Relations 83 Pine Street
P.O. Box 8040 West Peabody, Massachusetts 01960-3635
Mail Stop 45-02-64
Boston, Massachusetts 02266-8040 FINANCIAL INFORMATION
MARKET MAKERS FOR FINANCIAL DOCUMENTS, INCLUDING
THE ANNUAL REPORT, QUARTERLY
The following companies have REPORTS TO THE SECURITIES AND
generally been market makers for EXCHANGE COMMISSION ON FORM 10-K OR
Northway Financial, Inc. common stock FORM 10-Q, CONTACT:
as of March 31, 2001.
GEORGE L. FREDETTE
Ryan Beck & Co., Inc. SENIOR VICE PRESIDENT AND CFO
Monroe Securities, Inc. NORTHWAY FINANCIAL, INC.
Spear, Leeds, and Kellogg 9 MAIN STREET
BERLIN, NEW HAMPSHIRE 03570