EXHIBIT 13 NORTHWAY FINANCIAL, INC. ANNUAL REPORT TO STOCKHOLDERS
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, economic and business conditions in the Company's
market areas, 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) the current economic downturn
nationwide and regionally, as well as a deterioration of local business
conditions, including termination of operations of a major employer in the
primary market area of the Berlin City Bank; ii) changes in interest rates over
the past year and the relative relationship between the various interest rate
indices that the Company uses; iii) a change in product mix attributable to
changing interest rates, customer preferences or competition; iv) 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 v) the effectiveness of advertising,
marketing and promotional programs.
The words "believe," "expect," "anticipate," "intend," "estimate," "project," or
the negative of such terms and other expressions which are predications of or
indicate future events and trends and which do not relate to historical matters
identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known or unknown risks,
uncertainties or 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 anticipate all of such factors, nor can it assess the
impact of each such factor, or combination of factors, which 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 furnishing 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 $3,873,000, or $2.55 per common share, in
2001 compared to net income of $4,159,000, or $2.61 per common share, in 2000
and $3,764,000, or $2.25 per common share, in 1999. Return on average equity was
9.14 percent in 2001, compared to 10.29 percent and 9.37 percent for 2000 and
1999, respectively. Return on average assets was 0.78 percent in 2001, compared
to 0.86 percent and 0.90 percent for 2000 and 1999, respectively. During the
year 2001, the Company continued the implementation of its growth initiatives
with the purchase of a branch in Littleton, New Hampshire. In addition, during
2001, the Company completed construction of a new branch location in Tilton, New
Hampshire and moved its existing branch into this location. During 2000, the
Company purchased a branch in West Ossipee, New Hampshire. These strategic
investments resulted in increased noninterest expense which, when added to the
decline in net interest income associated with the rapidly declining interest
rate environment, caused a decline in 2001 earnings as compared to 2000.
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.
NET INTEREST AND DIVIDEND INCOME ANALYSIS
Net interest and dividend 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
changes in volume and mix of earning assets and interest bearing liabilities can
materially impact net interest and dividend income. The discussion of net
interest and dividend 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, 2001, 2000, and 1999.
Net interest and dividend income for 2001 decreased $435,000, or 2 percent, over
2000 while increasing $1,833,000, or 9 percent, in 2000 over 1999.
Interest and dividend income decreased $2,199,000, or 6 percent, in 2001
compared to 2000. A rapidly declining rate environment caused a 53 basis point
decrease in the yield on average earning assets. A 48 basis point decrease in
the yield on loans that was partially offset by an increase in average loan
balances of $3,525,000, resulted in a $1,582,000, or 5 percent, decrease in
interest and fees on loans. Interest and dividend income on investment
securities decreased $556,000, or 14 percent. This decrease resulted from a 12
percent decrease in the average balance of investment securities as well as a 21
basis point decline in the yield.
Interest expense decreased $1,764,000, or 11 percent, in 2001 compared to 2000.
The decrease in interest expense was due primarily to a 48 basis point decrease
in rates paid on interest bearing liabilities, partially offset by an increase
in average interest bearing liabilities of $2,503,000, or 1 percent. A decrease
of $25,785,000, or 37 percent, in the average balance of Federal Home Loan Bank
("FHLB") advances, coupled with a decrease in the rate on such advances of 35
basis points, resulted in a decrease in interest expense on FHLB advances of
$1,698,000. In addition, rates paid on deposit liabilities declined 32 basis
points resulting in a decrease in interest expense of $1,054,000. These changes
were partially offset by an increase in average interest bearing deposits of
$26,538,000, or 9 percent, which increased interest expense by $1,168,000.
Interest and dividend income increased $6,312,000, or 20 percent, in 2000
compared to 1999. Earning assets on average increased by $67,010,000, 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 and fees on loans. Interest
and dividend income on investment securities decreased $235,000, or 6 percent,
from 1999 to 2000. This decrease resulted for a 9 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 compared to 1999.
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. 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.
The trend in net interest and dividend 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
and dividend 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 11 basis points to 4.56 percent in 2001 after having decreased
31 basis points to 4.67 percent in 2000. The decrease in 2001's net interest
margin was a direct result of the decrease in the yield on earning asset, which
was only partially offset by the decrease in the cost of funds. The portion of
interest earning assets funded by interest bearing liabilities in 2001 and 2000
was 84 percent.
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
2001, the net interest rate spread decreased 4 basis points to 3.98% as the
yield on earning assets declined 52 basis points while the cost of interest
bearing liabilities decreased 48 basis points. During 2000, the net interest
rate spread decreased 39 basis points to 4.02 percent as the cost of interest
bearing liabilities increased 60 basis points while yield on earning assets
increased 21 basis points. See the accompanying schedules entitled "Consolidated
Average Balances, Interest and dividend income/Expense and Average Yields/Rates"
and "Consolidated Rate/Volume Variance Analysis" for more information.
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES
($000 Omitted)
For the Year Ended December 31,
2001 2000 1999
------------------------------ ---------------------------- -----------------------------
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 $ 13,796 $ 428 3.10% $ 7,374 $ 480 6.51% $ 4,865 $ 228 4.69%
Interest bearing deposits 109 3 2.75 262 12 4.58 161 8 4.97
Investments (1) (2) 54,134 3,279 6.06 61,555 3,835 6.27 67,744 4,070 6.01
Loans, net (1) (3) 394,964 31,677 8.02 391,439 33,259 8.50 320,850 26,968 8.41
------- ------ ------- ------ ------- ------
Total interest
earning assets (1) 463,003 35,387 7.64 460,630 37,586 8.16 393,620 31,274 7.95
------ ---- ------ ---- ------ ----
Cash and due from banks 13,529 13,045 12,800
Allowance for loan losses (4,481) (4,417) (4,653)
Premises and equipment 11,283 10,531 10,125
Other assets 10,811 6,577 5,637
-------- -------- --------
Total assets $494,145 $486,366 $417,529
======== ======== ========
Liabilities
Interest bearing liabilities:
Regular savings $ 62,596 992 1.58 $ 65,438 1,254 1.92 $ 68,333 1,319 1.93
NOW and super NOW 56,326 359 0.64 52,888 447 0.85 49,832 433 0.87
Money market accounts 38,232 1,111 2.91 26,670 1,000 3.75 23,765 592 2.49
Certificates of deposit 178,297 8,862 4.97 163,917 8,649 5.28 152,353 7,514 4.93
Securities sold under
agreements to repurchase 10,990 469 4.27 9,240 509 5.51 9,267 432 4.66
FHLB advances 44,232 2,500 5.65 70,017 4,198 6.00 23,266 1,279 5.50
Other borrowed funds -- -- -- -- -- -- 151 9 5.96
------- ------ ------- ------ ------- ------
Total interest bearing
liabilities 390,673 14,293 3.66 388,170 16,057 4.14 326,967 11,578 3.54
------ ---- ------ ---- ------ ----
Noninterest bearing deposits 57,621 53,275 46,459
Other liabilities 3,474 4,508 3,931
-------- -------- --------
Total liabilities 451,768 445,953 377,357
Stockholders' equity 42,377 40,413 40,172
-------- -------- --------
Total liabilities and
stockholders' equity $494,145 $486,366 $417,529
======== ======== ========
Net interest and dividend
income (1) $ 21,094 $ 21,529 $ 19,696
======== ======== ========
Interest rate spread (4) 3.98% 4.02% 4.41%
==== ==== ====
Net interest margin (5) 4.56% 4.67% 5.00%
==== ==== ====
(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.
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS
($000 Omitted)
2001 Compared to 2000 2000 Compared to 1999
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 $ 418 $ (251) $ (219) $ (52) $ 117 $ 89 $ 46 $ 252
Interest bearing deposits (7) (5) 3 (9) 5 (1) -- 4
Investments (462) (107 13 (556) (372) 151 (14) (235)
Loans 300 (1,865) (17) (1,582) 5,933 293 65 6,291
------- ------- ------- ------- ------- ------ ------ -------
Total interest and dividend income 249 (2,228) (220) (2,199) 5,683 532 97 6,312
------- ------- ------- ------- ------- ------ ------ -------
Interest expense:
Regular savings (54) (217) 9 (262) (56) (9) -- (65)
NOW and super NOW 29 (110) (7) (88) 27 (12) (1) 14
Money market accounts 434 (225) (98) 111 72 299 37 408
Certificates of deposit 759 (502) (44) 213 570 525 40 1,135
Securities sold under agreements
to repurchase 97 (115) (22) (40) (1) 78 -- 77
FHLB advances (1,546) (241) 89 (1,698) 2,570 116 233 2,919
Other borrowed funds -- -- -- -- -- -- (9) (9)
------- ------- ------- ------- ------- ------ ------ -------
Total interest expense (281) (1,410) (73) (1,764) 3,182 997 300 4,479
------- ------- ------- ------- ------- ------ ------ -------
Net interest and dividend income $ 530 $ (818) $ (147) $ (435) $ 2,501 $ (465) $ (203) $ 1,833
======= ======= ======= ======= ======= ====== ====== =======
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 made a $900,000 provision for loan losses in 2001, a decrease of
$80,000 from the provision of $980,000 made in 2000. This decrease was based
upon the Company's judgment regarding the adequacy of the coverage ratio and
level of portfolio risk. The 2000 provision of $980,000 was $440,000 higher than
1999's provision of $540,000. This increase was due directly to the growth of
the loan portfolio over the prior 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,
-------------------------------
2001 2000 1999
---- ---- ----
Service charges and fees on deposit accounts $1,169 $1,049 $ 935
Securities gains, net 128 512 709
Loan servicing income 401 130 52
Other 1,211 1,001 1,022
------ ------ ------
Total noninterest income $2,909 $2,692 $2,718
====== ====== ======
Fee income from service charges on deposit accounts increased 11 percent in
2001, 12 percent in 2000 and 11 percent in 1999. The improvement in 2001 and
2000 is due to higher balances outstanding as a result of branch purchases and
openings during those years as well as a product and fee standardization effort
completed during the year 2000. The increase in 1999 was principally the result
of an increase in service charge fees including overdraft fees and monthly
service charges.
Net securities gains were $128,000 in 2001, compared to $512,000 in 2000.
Securities gains in 2001 included net gains of $55,000 recorded on sales of
equity securities compared to $512,000 in 2000. In 1999 net securities gains
were $709,000 and included net gains on sales of equity securities of $679,000.
Loan servicing income consists of income from the servicing of Federal Home Loan
Mortgage Corporation ("FHLMC") mortgage loans and indirect installment loans as
well as the net income recognized from the creation and amortization of
servicing assets under Statement of Financial Accounting Standards ("SFAS") 125.
During 2001, the Company recognized $401,000 in loan servicing income compared
to $130,000 in 2000 and $52,000 in 1999. The increase in loan servicing income
is directly attributable to the increase in the volume of loans serviced for
others.
Other noninterest income (sources of which include gains on sale of loans, debit
card interchange fees, credit card merchant and fee income, automated teller
fees and safe deposit fees) increased $210,000, or 21 percent, to $1,211,000 in
2001 following a $21,000, or 2 percent decrease, to $1,001,000 in 2000. Other
noninterest income increased $343,000, or 51 percent, to $1,022,000 in 1999.
NONINTEREST EXPENSE
Total noninterest expense increased $450,000, or 3 percent, during 2001
following an increase of $905,000, or 6 percent, during 2000 and $2,884,000, or
22 percent, in 1999. 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 2001 the
Company acquired a branch in Littleton, New Hampshire and completed construction
of a new branch location in Tilton, New Hampshire. In 2000 the Company acquired
a branch in West Ossipee, New Hampshire. In 1999 two branches were opened and an
indirect lending group 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,
-------------------------------
2001 2000 1999
---- ---- ----
Salaries and employee benefits $ 9,014 $ 8,868 $ 8,448
Office occupancy and equipment 2,863 2,708 2,541
Amortization of deposit assumption premium 626 513 357
Professional fees 886 1,073 1,091
Stationery and supplies 486 605 565
Other 3,274 2,932 2,792
------- ------- -------
Total noninterest expense $17,149 $16,699 $15,794
======= ======= =======
Salaries and employee benefits increased $146,000, or 2 percent, from 2000 to
2001, $420,000, or 5 percent, from 1999 to 2000, and by $1,691,000, or 25
percent, from 1998 to 1999. 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 $155,000, or 6 percent, from
2000 to 2001, $167,000, or 7 percent, from 1999 to 2000, and $461,000, or 22
percent, from 1998 to 1999.
Amortization of deposit assumption premium increased $113,000, or 22 percent
during 2001. This increase was due to the Littleton branch acquisition on
October 26, 2001 as well as a full year of amortization on the branch purchased
in West Ossipee during 2000. This increase was partially offset by the
completion of amortization in July 2001 of branches acquired in 1994. During
2000 amortization increased $156,000, or 44 percent 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 as a result
of the acquisition of two branches on July 9, 1999.
INCOME TAX EXPENSE
The Company recognized $1,708,000, $2,107,000, and $1,962,000 in income tax
expense for the years ended December 31, 2001, 2000 and 1999, respectively. The
effective tax rate was 30.6% for 2001, 33.6% for 2000 and 34.3% for 1999. The
decrease in the effective tax rate in both 2001 and 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. In addition, the 2001 tax rate was reduced by
the increased level of municipal income. This was partially offset by a 50 basis
point increase in the Business Profits Tax. For additional information relating
to income taxes, see Note 14 to the Consolidated Financial Statements.
ASSETS
Total assets increased $28,795,000, or 6 percent, to $513,939,000 at December
31, 2001 compared to $485,144,000 at December 31, 2000. The composition of
earning assets has continued to change in order to meet corporate goals.
BALANCE SHEET HIGHLIGHTS
($000 Omitted)
Years Ended December 31,
---------------------------------
2001 2000 Change
---- ---- ------
Total assets $513,939 $485,144 $28,795
Earning assets 470,482 452,620 17,862
Securities 60,276 58,239 2,037
Loans, net of unearned income 400,316 393,258 7,058
Deposits 412,840 391,772 21,068
Stockholders' equity 43,339 41,562 1,777
SECURITIES
The Company's 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, 2001 and 2000, showing amortized cost and market value for each category:
($000 Omitted)
December 31,
--------------------------------------
2001 2000
------------------ ------------------
Amortized Market Amortized Market
Cost Value Cost Value
------- ------- ------- -------
Securities available-for-sale:
US Treasury and US government agencies $10,969 $10,977 $28,883 $28,780
Mortgage-backed securities 13,810 13,744 7,513 7,475
Collateralized mortgage obligations 7,317 7,353 7,234 7,177
Marketable equity securities 4,358 3,255 3,180 2,409
Non-marketable equity securities 4,712 4,712 5,199 5,199
Corporate bonds 14,167 14,230 1,006 1,003
State and political subdivisions 5,907 6,005 3,366 3,444
------- ------- ------- -------
Total securities available-for-sale $61,240 $60,276 $56,381 $55,487
------- ------- ------- -------
Securities held-to-maturity:
Mortgage-backed securities $ - $ - $ 1,760 $ 1,740
Collateralized mortgage obligations - - 492 488
State and political subdivisions - - 500 503
------- ------- ------- -------
Total securities held-to-maturity $ - $ - $ 2,752 $ 2,731
------- ------- ------- -------
Total securities $61,240 $60,276 $59,133 $58,218
======= ======= ======= =======
Total securities increased $2,058,000 during 2001 to $60,276,000. On January 1,
2001, the Company elected, in conjunction with the adoption of SFAS No. 133, to
transfer all securities held-to-maturity to the available-for-sale category at
their market value.
The net unrealized loss on securities available-for-sale was $964,000 at
December 31, 2001 compared to $894,000 at December 31, 2000. The 2001 net
unrealized loss on securities available-for-sale is primarily the result of
unrealized losses on marketable equity securities, caused by the weak equity
market during 2001.
The Company has a policy of purchasing debt securities primarily rated A or
better by Moody's Investor Services and U.S. 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.
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 to the Consolidated Financial Statements for a
further discussion of pledging.
LOANS
Loans increased 2 percent in 2001 due primarily to increases in both indirect
installment loans and commercial real estate loans partially offset by a decline
in residential real estate loans. The following table presents the composition
of the loan portfolio as of December 31, 2001 and 2000:
($000 Omitted)
Percent Percent
2001 of Total 2000 of Total
---- -------- ---- --------
Real estate:
Residential $109,261 27.3% $129,805 33.0%
Commercial 111,642 27.9 100,608 25.6
Construction 1,581 0.4 5,752 1.5
Commercial 22,727 5.7 22,270 5.7
Installment 28,210 7.0 28,177 7.1
Indirect installment 120,761 30.1 98,919 25.1
Other 6,303 1.6 7,881 2.0
-------- ----- -------- -----
$400,485 100.0% $393,412 100.0%
======== ===== ======== =====
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
loans. Indirect installment loans now comprise 30.1 percent of the loan
portfolio versus 25.1 percent at the end of 2000. Residential real estate loans
declined to 27.3 percent of the portfolio from 33.0 percent on December 31,
2000. 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 a guarantee of the Small Business
Administration. Commercial real estate and commercial loans increased by
$11,491,000 in 2001 as compared to 2000. 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 by $20,544,000 in 2001, a 16 percent
decrease from 2000. 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. The decline in residential real estate loans
in 2001 resulted from a slightly lower rate environment, making fixed rate
secondary market mortgages more appealing to the Company's customers.
Installment loans consist primarily of loans originated directly by the Company,
however, as part of the Littleton branch acquisition the Company purchased
installment loans totaling approximately $2,601,000. Installment loans balances
remained relatively unchanged compared to 2000. Indirect installment loans
increased by $21,842,000, or 22 percent, in 2001. 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. The
Company maintains significant credit relationships with borrowers in the hotel
and motel industry. In addition, the Company maintains relationships with
borrowers in the Berlin and surrounding market area, which loans could be
impacted by the deterioration of local business conditions in this area.
NONPERFORMING ASSETS
Nonperforming assets were $1,519,000, or 0.30 percent of total assets, at
December 31, 2001 compared to $1,070,000, or 0.22 percent of total assets, at
December 31, 2000. This increase was due primarily to an increase in the level
of both mortgage and consumer loan delinquencies.
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, 2001, nonperforming loans totaled $1,392,000, or 0.35 percent of
total loans, compared to $957,000, or 0.24 percent of total loans, in 2000.
Other real estate owned at December 31, 2001 was $22,000 compared to $25,000 at
December 31, 2000.
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 allowance 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 increased $288,000 from December 31,
2000 to $4,642,000, or 1.16 percent of total loans, at December 31, 2001. The
2001 provision for loan losses was $900,000, $80,000 lower than the prior year
level of $980,000.
The following table sets forth the composition of the allowance for loan losses
for the periods indicated:
($000 Omitted)
Years Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
Beginning allowance $4,354 $4,887 $4,404
Provision for loan losses 900 980 540
Loans charged-off (734) (1,643) (304)
Recoveries 122 130 247
------ ------ ------
Net charge-offs (612) (1,513) (57)
------ ------ ------
Ending allowance $4,642 $4,354 $4,887
====== ====== ======
Allowance as a percentage of loans outstanding 1.16% 1.11% 1.31%
Allowance as a percentage of nonperforming loans 333.48 454.96 106.75
Net charge-offs as a percentage of average loans 0.15 0.39 0.02
DEPOSITS AND BORROWINGS
Total deposits at December 31, 2001 were $412,840,000, an increase of
$21,068,000, or 5 percent, compared to $391,772,000 at December 31, 2000. The
increase in deposits was due primarily to the acquisition of a branch in October
2001, which netted the Company additional deposits of approximately $28,660,000,
partially offset by a decrease in time deposits associated with a lower rate
environment.
The following table sets forth the components of deposit for the periods
indicated:
($000 Omitted)
December 31,
-------------------------
2001 2000
---- ----
Demand $ 62,846 $ 56,745
Regular savings, NOW and money market 177,392 152,022
Time 172,602 183,005
-------- --------
Total deposits $412,840 $391,772
======== ========
At December 31, 2001, time deposits of $100,000 or more are scheduled to mature
as follows:
($000 Omitted)
3 months or less $ 9,866
Over 3 to 6 months 7,332
Over 6 to 12 months 5,925
Over 12 months 1,979
-------
$25,102
=======
At December 31, 2001 short-term borrowings consisted of FHLB advances of $0 and
securities sold under agreements to repurchase of $8,155,000 compared to
$2,950,000 and $9,390,000, respectively, for 2000. Long-term debt consisted
solely of FHLB term advances of $48,028,000 compared to $35,528,000 in 2000.
Many of the long-term term advances, however, are callable with call dates
ranging from January 2002 to February 2003. The increase in FHLB advances is the
result of four new advances secured for the purpose of providing liquidity to
meet loan demand. 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,
----------------------------
2001 2000
---- ----
Short-term borrowings $ 8,155 $12,340
Long-term debt 48,028 35,528
-------- --------
$56,183 $47,868
======= =======
CAPITAL
The following table sets forth the Company's risk-based capital and leverage
ratios:
($000 Omitted)
December 31,
----------------------------
2001 2000
---- ----
Risk-adjusted assets $386,941 $353,146
Tier 1 capital (to average assets) 6.95% 7.39%
Tier 1 capital (to risk weighted assets) 9.08 10.34
Total capital (to risk weighted assets) 10.28 11.57
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 allowance. 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, 2001, The Berlin City Bank ("BCB") was "adequately capitalized" and
The Pemigewasset National Bank of Plymouth ("PNB") was "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 (such difference, the "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.
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, 2001, the
estimated exposure was 3.6 percent liability sensitive (see table below).
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, 2001 earnings simulation model projects that net
interest income for the next twelve months would increase by an amount equal to
approximately4.24 percent. In addition, utilizing an immediate rate shock
stimulation where interest rates decrease 200 basis points, the December 31,
2001 earnings simulation model projects that net interest income for the next
twelve months would decrease by an amount equal to approximately 4.86 percent.
Both the up and down rate shock simulations are within the Company's 10 percent
policy limit.
The following table presents the Company's interest rate GAP analysis as of
December 31, 2001:
($000 Omitted)
Balance Maturing or Subject to Repricing
3 months 4 to 12 12 to 24 2 to 5 After 5
or less months months years years Total
------- ------ ------ ----- ----- -----
Loans, net $104,568 $101,358 $ 76,360 $106,912 $ 13,144 $402,342
Federal funds sold 6,900 -- -- -- -- 6,900
Securities 10,597 11,275 10,809 20,996 6,599 60,276
Other assets -- -- -- -- 44,421 44,421
-------- -------- -------- -------- -------- --------
Total assets $122,065 $112,633 $ 87,169 $127,908 $ 64,164 $513,939
-------- -------- -------- -------- -------- --------
Deposits $139,911 $102,181 $ 71,207 $ 36,715 $ 62,826 $412,840
Securities sold under agreements
to repurchase 3,836 4,319 -- -- -- 8,155
Borrowed funds -- 3,028 7,000 8,000 30,000 48,028
Other liabilities and
stockholders' equity -- -- -- -- 44,916 44,916
-------- -------- -------- -------- -------- --------
Total liabilities and equity $143,747 $109,528 $ 78,207 $ 44,715 $137,742 $513,939
-------- -------- -------- -------- -------- --------
GAP for period $(21,682) $ 3,105 $ 8,962 $ 83,193 $(73,578)
-------- -------- -------- -------- --------
Cumulative GAP $(21,682) $(18,577) $ (9,615) $ 73,578 $ --
======== ======== ======== ======== ========
Cumulative GAP as a percent
of total assets (4.2)% (3.6)% (1.9)% 14.3%
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
increased by $14,240,000 during 2001. Cash used for investing activities totaled
$11,437,000 with lending activities utilizing $9,078,000 and investment
purchases utilizing $2,052,000. Cash provided by financing activities totaled
$23,592,000. This cash consisted of $25,053,000 from a branch acquisition,
partially offset by a decrease in other deposits of $7,592,000. In addition,
FHLB advances provided a net source of financing totaling $9,550,000. The net
cash provided by operating activities totaled $2,085,000 and consisted primarily
of net income of $3,873,000 and was partially offset by an increase in loans
held for-sale as well as a net decrease in other liabilities.
CAPITAL EXPENDITURES AND COMMITMENTS
During 2001, the Company incurred approximately $1,714,000 in capital
expenditures. These expenditures included $947,000 of construction and equipment
costs for the branch constructed in Tilton, New Hampshire. Approximately
$388,000 was spent on technology initiatives, including Internet banking and
cash management as well as a down-payment for technology initiatives to be
completed in 2002. The remaining expenditures were for normal maintenance and
replacement of, or upgrades in, existing property and equipment.
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 began 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 2002, the Company's estimated capital expenditure projections total
$2,100,000. The Company has budgeted approximately $1,700,000 for technology
projects including upgrades to the voice and data communication network,
corporate intranet, teller system and a wide-area-network. The remaining
expenditures will be incurred for normal maintenance and replacement of, or
upgrades to, existing property and equipment. These expenditures are expected to
be funded through normal Company cashflows.
CONSOLIDATED STATEMENTS OF INCOME
($000 Omitted, Except Per Share Data)
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $31,587 $33,145 $26,865
Interest on Debt Securities:
Taxable 2,169 2,971 3,109
Tax-Exempt 485 249 472
Dividends 342 453 238
Interest on Federal Funds Sold 428 480 228
Interest on Interest Bearing Deposits 3 12 8
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST AND DIVIDEND INCOME 35,014 37,310 30,920
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE Interest on Deposits:
Regular Savings, NOW and Money Market Deposit Accounts 2,462 2,701 2,344
Certificates of Deposit (in Denominations of $100,000 or More) 1,363 1,259 1,169
Other Time 7,499 7,390 6,345
Interest on Short-Term Borrowings 513 1,819 954
Interest on Long-Term Debt 2,456 2,888 766
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 14,293 16,057 11,578
- ----------------------------------------------------------------------------------------------------------------------
Net Interest and Dividend Income 20,721 21,253 19,342
Provision for Loan Losses 900 980 540
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 19,821 20,273 18,802
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service Charges and Fees on Deposit Accounts 1,169 1,049 935
Securities Gains, Net 128 512 709
Loan Servicing Income 401 130 52
Other 1,211 1,001 1,022
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 2,909 2,692 2,718
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and Employee Benefits 9,014 8,868 8,448
Office Occupancy and Equipment 2,864 2,708 2,541
Amortization of Deposit Assumption Premium 625 513 357
Other 4,646 4,610 4,448
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 17,149 16,699 15,794
- ----------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,581 6,266 5,726
Income Tax Expense 1,708 2,107 1,962
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $3,873 $4,159 $3,764
- ----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share $ 2.55 $ 2.61 $ 2.25
Earnings Per Common Share Assuming Dilution $ 2.54 $ 2.61 $ 2.25
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
($000 Omitted)
AS OF DECEMBER 31, 2001 2000
- -------------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks and Interest Bearing
Deposits $ 22,741 $ 15,401
Federal Funds Sold 6,900 --
- -------------------------------------------------------------------------------
Total Cash and Cash Equivalents 29,641 15,401
- -------------------------------------------------------------------------------
Securities Available-for-Sale 60,276 55,487
Securities Held-to-Maturity (Fair Value of $0 in 2001
and $2,731 in 2000) -- 2,752
Loans Held-for-Sale 2,026 229
Loans, Net Before Allowance for Loan Losses 400,316 393,258
Less: Allowance for Loan Losses 4,642 4,354
- -------------------------------------------------------------------------------
Net Loans 395,674 388,904
- -------------------------------------------------------------------------------
Premises and Equipment, Net 11,485 11,000
Other Real Estate Owned 22 25
Deposit Assumption Premium 8,080 5,098
Other Assets 6,735 6,248
- -------------------------------------------------------------------------------
TOTAL ASSETS $513,939 $485,144
- -------------------------------------------------------------------------------
LIABILITIES
Deposits:
Demand $62,846 $56,745
Regular Savings, NOW and Money Market Deposit
Accounts 177,392 152,022
Certificates of Deposit (In Denominations of
$100,000 or More) 25,102 28,847
Other Time 147,500 154,158
- -------------------------------------------------------------------------------
Total Deposits 412,840 391,772
- -------------------------------------------------------------------------------
Short-Term Borrowings 8,155 12,340
Accrued Taxes and Other Liabilities 1,577 3,942
Long-Term Debt 48,028 35,528
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 470,600 443,582
- -------------------------------------------------------------------------------
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 at December 31, 2001 and 2000 and
1,511,324 Outstanding at December 31, 2001 and
1,559,369 Outstanding at December 31, 2000 1,732 1,732
Surplus 2,101 2,101
Retained Earnings 45,955 43,110
Treasury Stock (220,645 Shares at December 31, 2001
and 172,600 Shares at December 31, 2000) (5,864) (4,708)
Accumulated Other Comprehensive Loss, Net of Tax (585) (673)
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 43,339 41,562
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $513,939 $485,144
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($000 Omitted)
Accumulated
Other
Comprehensive Total
Common Retained Treasury Income Stockholders'
Stock Surplus Earnings Stock (Loss)(1) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
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 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
Net Income - 2001 -- -- 3,873 -- -- 3,873
Net Change in Unrealized Loss on
Securities Available-for-Sale, Net of Tax -- -- -- -- (42) (42)
Net Change in Unfunded Pension
Accumulated Benefit Obligation, Net of Tax -- -- -- -- 130 130
Treasury Stock Purchased -- -- -- (1,156) -- (1,156)
Cash Dividends Declared ($0.68 Per Share) -- -- (1,028) -- -- (1,028)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $1,732 $2,101 $45,955 $(5,864) $ (585) $ 43,339
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Accumulated other comprehensive loss as of December 31, 2001 consists of net unrealized holding losses on available-for-sale
securities, net of taxes. 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 loss as of December 31, 1999 consists of net unrealized holding losses on
available-for-sale securities, net of taxes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,873 $ 4,159 $ 3,764
Other Comprehensive Income (Loss):
Net Unrealized Gains (Losses) on Available-for-Sale Securities 58 1,336 (1,162)
Reclassification Adjustment for Realized Gains in Net Income 128 512 709
- ----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gains (Losses) on Securities (70) 824 (1,871)
Minimum Pension Liability Adjustment 197 (197) --
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 127 627 (1,871)
Income Tax Expense (Benefit) 39 245 (722)
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Net of Tax 88 382 (1,149)
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,961 $ 4,541 $ 2,615
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,873 $ 4,159 $ 3,764
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Loan Losses 900 980 540
Depreciation and Amortization 1,704 1,512 1,290
Deferred Income Tax Expense (Benefit) 188 263 (342)
Write-Down of Other Real Estate Owned 3 -- 47
Gains on Sales of Securities Available-for-Sale, Net (128) (512) (709)
Gains on Sale of Nonperforming and Reperforming Loans (145) (71) --
Loss on Disposal and Writedown of Premises and Equipment 22 90 --
Amortization of Premiums and Accretion of Discounts on Securities, Net 74 1 76
Increase (Decrease) in Unearned Income, Net 15 (20) (342)
(Gains) Losses on Sales of Other Real Estate Owned and Other Personal Property, Net (22) (4) 4
Net (Increase) Decrease in Loans Held-for-Sale (1,532) (175) 481
Other Liabilities Assumed Net of Other Assets Acquired in Branch Transaction 34 12 (2)
Net Change in Other Assets and Other Liabilities (2,900) (1,476) 1,317
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,086 4,759 6,124
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Securities Available-for-Sale 4,212 2,609 6,157
Proceeds from Maturities of Securities Held-to-Maturity -- 3,936 13,074
Proceeds from Maturities of Securities Available-for-Sale 41,930 6,483 9,979
Purchase of Securities Available-for-Sale (48,195) (7,453) (21,813)
Purchase of Securities Held-to-Maturity -- (1,555) (11,716)
Loan Originations and Principal Collections, Net (6,302) (17,987) (88,556)
Recoveries of Previously Charged-off Loans 122 130 247
Loans Acquired in Branch Transactions (2,601) (6,197) --
Purchase of Loans (297) -- (937)
Proceeds from Sales of Nonperforming and Reperforming Loans 675 1,551 --
Proceeds from Sales of and Payments Received on Other Real Estate Owned 50 144 282
Proceeds from Sales of and Payments Received on Other Personal Property 554 536 101
Premises and Equipment Acquired in Branch Transaction (6) (301) (292)
Additions to Premises and Equipment (1,580) (1,401) (1,064)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (11,438) (19,505) (94,538)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (7,592) 20,961 (25,903)
Deposits Assumed in Branch Transactions, Net of Assumption Premiums 25,053 23,442 17,222
Advances from FHLB 14,000 21,000 57,000
Repayment of FHLB Advances (1,500) (44,000) (750)
Net (Decrease) Increase in Short-term FHLB Advances (2,950) (7,000) 9,117
Net Increase (Decrease) in Securities Sold Under Agreements to Repurchase (1,235) 1,922 677
Purchases of Treasury Stock (1,156) (1,310) (3,343)
Cash Dividends Paid (1,028) (955) (942)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,592 14,060 53,078
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 14,240 (686) (35,336)
Cash and Cash Equivalents at Beginning of Year 15,401 16,087 51,423
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,641 $ 15,401 $ 16,087
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flows:
Interest Paid $ 16,006 $ 15,529 $ 11,242
Taxes Paid 1,776 1,817 2,043
Loans Transferred to Other Real Estate Owned 33 47 410
Loans Transferred to Other Personal Property 565 650 125
Financed Sales of Other Real Estate Owned -- 22 131
Loans Transferred to Held-for-Sale 265 -- --
Carrying Amount of Held-to-Maturity Securities Transferred to
Available-for-Sale Securities 2,752 -- --
(Decrease) Increase in Amount Due to Broker -- (992) 992
See Notes to Consolidated Financial Statements
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 of Plymouth ("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 is
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 origination 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. 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 judgments 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.
SERVICING ASSETS
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into noninterest income in
proportion to, and over the period of, the estimated future net servicing income
of the underlying financial assets. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the
extent that fair value is less than the capitalized amount for the stratum.
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.
ADVERTISING
The Company directly expenses costs associated with advertising as they are
incurred.
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.
Earnings per common share have been computed based on the following (in
thousands):
Years Ended December 31,
---------------------------------
2001 2000 1999
---- ---- ----
Net income $3,873 $4,159 $3,764
Less: Preferred stock dividends - - -
------ ------ ------
Net income applicable to common stock $3,873 $4,159 $3,764
====== ====== ======
Average number of common shares
outstanding 1,521.6 1,590.6 1,675.7
Effect of dilutive options(1) 4.3 - -
------ ------ ------
Average number of common shares
outstanding used to calculate diluted
earnings per common share 1,525.9 1,590.6 1,675.7
======= ======= =======
(1) Approximately 21,000, 21,000 and 26,000 of the Company's outstanding stock
options were not included in the diluted net earnings per share calculation
for 2001, 2000, and 1999, respectively, because to do so would have been
antidilutive.
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
transferred 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 recorded 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. This statement did not have any material
impact on the consolidated financial statements.
The FASB has issued Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement replaces
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and rescinds Statement No. 127, Deferral of
the Effective Date of Certain Provision of FASB Statement No. 125. Statement No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. The adoption of
this Statement has had no material impact on the consolidated financial
statements.
The FASB has issued Statement No. 141, Business Combinations. This Statement
improves the consistency of the accounting and reporting of business
combinations by requiring that all business combinations be accounted for under
a single method - the purchase method. Using the pooling-of-interests method is
no longer permitted. Statement No. 141 requires that the purchase method be used
for business combinations initiated after June 30, 2001. The adoption of this
Statement has had no material impact on the consolidated financial statements.
The FASB has issued Statement No. 142, Goodwill and Other Intangible Assets.
Statement No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of the statement which for most companies, will be January 1, 2002.
Management believes that adopting this Statement will have no significant impact
on the consolidated financial statements.
NOTE 2 CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 2001 and 2000 includes $5,858,000 and
$4,903,000, 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, gains in accumulated other comprehensive income, losses in
accumulated other comprehensive income and market value of securities at
December 31, 2001 and 2000 follows:
Securities Available-for-Sale: ($000 Omitted)
Gains in Losses in
Accumulated Accumulated
Other Other
Amortized Comprehensive Comprehensive Fair
Cost Income Income Value
--------- ------------- ------------- ----
December 31, 2001
- -------------------------------------------------------
US Treasury and other US government agency securities $10,969 $ 27 $ 19 $10,977
Marketable equity securities 4,358 109 1,212 3,255
Non-marketable equity securities 4,712 - - 4,712
Mortgage-backed securities 13,810 72 138 13,744
Collateralized mortgage obligations 7,317 86 50 7,353
Corporate bonds 14,167 299 236 14,230
State and political subdivision bonds and notes 5,907 98 - 6,005
------- ---- ------ -------
$61,240 $691 $1,655 $60,276
======= ==== ====== =======
December 31, 2000
- -------------------------------------------------------
US Treasury and other US government agency securities $28,883 $ 71 $ 174 $28,780
Marketable equity securities 3,180 88 859 2,409
Non-marketable equity securities 5,199 - - 5,199
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 subdivision bonds and notes 3,366 78 - 3,444
------- ---- ------ -------
$56,381 $246 $1,140 $55,487
======= ==== ====== =======
Gross Gross
Amortized Unrealized Unrealized Fair
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 subdivision bonds and notes 500 3 - 503
------ -- --- ------
$2,752 $5 $26 $2,731
======= == === ======
The contractual maturity distribution of investments in debt obligations at December 31, 2001 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 agency securities $ - $ 6,983 $ 3,986 $ - $10,969
Mortgage-backed securities 105 7,229 4,943 1,533 13,810
Collateralized mortgage obligations - - 2,690 4,627 7,317
Corporate bonds - 14,167 - - 14,167
State and political subdivision bonds and notes 1,010 311 2,930 1,656 5,907
------ ------- ------- ------ -------
$1,115 $28,690 $14,549 $7,816 $52,170
====== ======= ======= ====== =======
Fair value $1,118 $28,651 $14,724 $7,816 $52,309
====== ======= ======= ====== =======
Actual maturities of state and political subdivision bonds and notes,
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 securities available-for-sale
sold during the years ended December 31, follows:
($000 Omitted)
2001 2000 1999
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
-------- -------- -------- -------- -------- --------
Equity securities $ 61 $ 6 $517 $5 $720 $41
US government agency securities 91 - - - - -
Mortgage-backed securities - 18 - - 30 -
---- --- ---- -- ---- ---
$152 $24 $517 $5 $750 $41
==== === ==== == ==== ===
The tax provision applicable to these net realized gains and losses amounted to
$50,000, $201,000 and $278,000 for 2001, 2000, and 1999, respectively.
Securities with a carrying amount totaling $21,382,000 and $18,729,000 were
pledged to secure public deposits, securities sold under agreements to
repurchase and treasury, tax and loan accounts at December 31, 2001 and 2000,
respectively.
NOTE 4 LOANS
Loan balances were comprised of the following:
($000 Omitted)
December 31, 2001 2000
- --------------------------- ---- ----
Real estate:
Residential $109,261 $129,805
Commercial 111,642 100,608
Construction 1,581 5,752
Commercial 22,727 22,270
Installment 28,210 28,177
Indirect installment 120,761 98,919
Other 6,303 7,881
-------- --------
Total loans 400,485 393,412
Less:
Unearned income 169 154
Allowance for loan losses 4,642 4,354
-------- --------
4,811 4,508
-------- --------
$395,674 $388,904
======== ========
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, 2001 and
2000 follows:
($000 Omitted)
2001 2000
------ ------
Balance at beginning of year $1,010 $ 815
Advances 378 283
Repayments (563) (88)
Change in status of executive officers and directors - -
------- ------
Balance at end of year $ 825 $1,010
======= =======
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
$58,623,000 at December 31, 2001. As a result of the deterioration of local
business conditions in the Berlin market, the Company has performed a loan
population study and has determined that approximately 8 percent of gross loans
are to customers in the Berlin and surrounding market area. The Company has
determined that the allowance for loan losses is adequate to cover potential
losses associated with these loans.
Loans serviced for others are not included in the accompanying statements of
financial condition. The unpaid principal balances of these loans total
$46,661,000 and $28,932,000 at December 31, 2001 and 2000, respectively. The
Company sold $18,577,000 of mortgage loans and $10,390,000 of indirect
installment loans in 2001 and $2,196,000 of mortgage loans and $10,716,000 of
indirect installment loans in 2000.
The Company capitalized $204,000 and $22,000 of servicing rights and amortized
$29,000 and $14,000 of those rights in 2001 and 2000, respectively. There is no
valuation allowance for servicing rights, because their fair value approximates
their carrying amount of $259,000 and $84,000 at December 31, 2001 and 2000,
respectively. 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, 2001 and 2000, 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 $983,000 and $1,010,000, respectively. The gross interest income that
would have been recorded in the years ended December 31, 2001 and 2000 if such
restructured loans had been current in accordance with their original terms was
$107,000 and $143,000, respectively. The amount of interest income recognized on
such restructured loans for the years ended December 31, 2001 and 2000 was
$73,000 and $94,000, respectively.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $643,000 and $197,000 at December 31, 2001 and 2000, respectively,
for which the related allowance for loan losses is $76,000 as of December 31,
2001 and $0 as of December 31, 2000. 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, 2001 and 2000 was approximately $307,000 and $1,996,000,
respectively. For the twelve months ended December 31, 2001 and 2000 the Company
recognized interest income on impaired loans of $26,000 and $78,000,
respectively, which included $15,000 and $72,000 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)
2001 2000 1999
---- ---- ----
Balance at beginning of year $4,354 $4,887 $4,404
Provision charged to expense 900 980 540
Recoveries on loans previously charged-off 122 130 247
Loans charged-off (734) (1,643) (304)
------ ------ ------
Balance at end of year $4,642 $4,354 $4,887
====== ====== ======
NOTE 6 OTHER REAL ESTATE OWNED
Other real estate owned consists of real estate acquired by foreclosure or a
similar conveyance of title. At December 31, 2001 and 2000 other real estate
owned was comprised of residential real estate of $22,000 and $25,000,
respectively.
Sales of other real estate owned by the Company resulted in gains of $17,000,
$64,000 and $7,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Write downs on other real estate owned totaled $3,000, $0, and $47,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
NOTE 7 PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
($000 Omitted)
December 31,
--------------------
2001 2000
---- ----
Land $ 2,327 $ 2,294
Buildings 9,535 8,585
Construction in progress 255 138
Equipment 5,726 5,483
------- -------
17,843 16,500
Less accumulated depreciation and amortization 6,358 5,500
------- -------
$11,485 $11,000
======= =======
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
amounted to $1,079,000, $999,000, and $933,000, respectively.
The Company leases seven of its locations under non-cancellable operating
leases. Minimum lease payments in future periods under non-cancellable operating
leases at December 31, 2001 are as follows:
($000 Omitted)
2002 $309
2003 222
2004 132
2005 -
2006 -
----
$663
====
The terms of three 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. The terms
of one of the leases provides for one additional five-year renewal option at the
end of the existing term. 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, 2001, 2000, and 1999 amounted to
$287,000, $256,000 and $190,000, respectively.
NOTE 8 DEPOSITS
The aggregate amount of maturities for time deposits as of December 31, 2001,
for each of the following five years ended December 31 and thereafter, are as
follows:
($000 Omitted)
2002 $149,858
2003 18,205
2004 2,825
2005 944
2006 729
Thereafter 41
--------
$172,602
========
Deposits from related parties held by the Banks at December 31, 2001 and 2000
amounted to $1,897,000 and $3,806,000, respectively.
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, 2001, 2000 and
1999 are as follows:
($000 Omitted)
Amount outstanding at December 31,
--------------------------------------------------------------
2001 2000 1999
------------------ ----------------- ------------------
Avg. Avg. Avg.
Int. Int. Int.
Amount Rate Amount Rate Amount Rate
------ ----- ------ ----- ------ -----
FHLB advances $ - -% $ 2,950 6.67% $ 9,950 4.60%
Securities sold under agreements to repurchase 8,155 1.97 9,390 6.06 7,468 4.88
------- ------- -------
$ 8,155 1.97% $12,340 6.21% $17,418 4.72%
======= ======= =======
Maximum amount outstanding at any month end $19,080 $41,199 $33,729
Average amount outstanding during the year 11,725 4.38% 28,575 6.37% 20,442 4.67%
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, 2001 and 2000 consisted of FHLB advances of
$48,028,000 and $35,528,000, respectively.
As of December 31, 2001, contractual principal payments due under long-term debt
were as follows:
($000 Omitted)
2002 $ 3,028
2003 7,000
2004 8,000
2005 -
2006 -
2007 and years thereafter 30,000
-------
$48,028
=======
The FHLB long-term debt consisted of twelve separate advances with the following
terms:
($000 Omitted)
Amount Rate Maturity Date Call Date
------- ------ ------------- ---------
$ 28 6.78% 04/04/02 N/A
3,000 6.76 04/08/02 N/A
7,000 4.34 06/25/03 N/A
3,000 4.78 06/25/04 N/A
5,000 5.79 08/30/04 02/28/02
5,000 6.11 03/28/07 03/28/02
7,000 5.54 11/02/09 02/02/02
7,000 5.57 11/09/09 02/09/02
5,000 5.91 12/17/09 03/17/02
2,000 4.80 12/27/10 03/27/02
3,000 4.50 01/24/11 01/22/02
1,000 4.58 02/07/11 02/05/03
-------
$48,028
=======
NOTE 11 ACQUISITIONS
On October 26, 2001, the Company acquired certain assets and assumed the
deposits of a branch office of The Bank of New Hampshire located in Littleton,
New Hampshire. As a result of this purchase the Company made the following
entries to record this transaction:
($000 Omitted)
Cash $22,481
Loans 2,601
Deposit assumption premium 3,607
Equipment 6
Other assets 14
Miscellaneous expense 1
Deposits 28,660
Other liabilities 48
Other income 2
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branch are included in the 2001
consolidated statements of income of the Company from the date of the
transaction.
The deposit assumption premium of $3,607,000 is being amortized to noninterest
expense over fifteen years using the straight line method.
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 are included in the consolidated
statements 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 the deposits
from branch offices of Vermont National Bank located in Tilton and Franklin, New
Hampshire. As a result of this purchase, the Company made the following entries
to record this transaction:
($000 Omitted)
Cash $16,931
Deposit assumption premium 789
Premises and equipment 292
Other assets 5
Interest expense 3
Deposits 18,011
Other liabilities 3
Other income 6
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branches are included in the consolidated
statements 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, 2001, the most
recent notification from the FDIC categorized BCB as adequately capitalized and
PNB 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, 2001 and 2000, 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
--------------- --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2001
- ------------------------------------------------
Tier 1 capital (to average assets)
Consolidated $35,149 6.95% $20,231 =>4.00% N/A
The Berlin City Bank 20,250 5.94 13,644 =>4.00 $17,055 =>5.00%
The Pemigewasset National Bank of Plymouth 12,935 7.89 6,561 =>4.00 8,201 =>5.00
Total capital (to risk weighted assets)
Consolidated 39,791 10.28 30,955 =>8.00 N/A
The Berlin City Bank 23,383 8.99 20,817 =>8.00 26,021 =>10.00
The Pemigewasset National Bank of Plymouth 14,443 11.49 10,058 =>8.00 12,573 =>10.00
Tier 1 capital (to risk weighted assets)
Consolidated 35,149 9.08 15,478 =>4.00 N/A
The Berlin City Bank 20,250 7.78 10,408 =>4.00 15,615 =>6.00
The Pemigewasset National Bank of Plymouth 12,935 10.29 5,029 =>4.00 7,544 =>6.00
As of December 31, 2000
- ------------------------------------------------
Tier 1 capital (to average assets)
Consolidated $36,498 7.39% $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 of Plymouth 13,216 7.93 6,669 =>4.00 8,336 =>5.00
Total capital (to risk weighted assets)
Consolidated 40,852 11.57 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 of Plymouth 14,645 11.73 9,985 =>8.00 12,481 =>10.00
Tier 1 capital (to risk weighted assets)
Consolidated 36,498 10.34 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 of Plymouth 13,216 10.59 4,992 =>4.00 7,488 =>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, 2001, PNB could, without approval
of the OCC, declare dividends aggregating $69,000.
As of December 31, 2001, BCB is restricted from declaring dividends to the
Company in an amount greater than approximately $2,566,000, 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)
2001 2000 1999
---- ---- ----
Professional fees $ 886 $1,073 $1,091
Stationery and supplies 486 605 565
Other 3,274 2,932 2,792
------ ------ ------
$4,646 $4,610 $4,448
====== ====== ======
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)
2001 2000 1999
---- ---- ----
Current
Federal $1,319 $1,657 $1,932
State 201 187 372
------ ------ ------
1,520 1,844 2,304
------ ------ ------
Deferred
Federal 223 210 (248)
State (35) 53 (94)
------ ------ ------
188 263 (342)
------ ------ ------
Total $1,708 $2,107 $1,962
====== ====== ======
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)
2001 2000
---- ----
Deferred income tax asset
Allowance for loan losses $1,568 $1,461
Other 22 52
Interest on nonaccrual loans 25 73
Deferred origination costs 26 -
Unrealized holding loss on investment securities
available-for-sale 379 351
Minimum pension liability adjustment - 67
Deposit assumption premium 525 488
Prepaid pension - 16
Supplemental pension 49 50
------ ------
2,594 2,558
------ ------
Deferred income liabilities:
Loan origination costs, net (8) (20)
Depreciation (562) (604)
Pension liability (247) -
Mortgage and consumer servicing rights (103) (33)
------ ------
(920) (657)
------ ------
Deferred income tax asset, net $1,674 $1,901
====== ======
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, 2001, 2000 and 1999
differs from the "expected" federal income tax expense at the 34% statutory rate
for the following reasons:
2001 2000 1999
---- ---- ----
Expected federal income taxes 34.0% 34.0% 34.0%
Municipal income (4.2) (2.5) (3.9)
State tax expense, net of federal benefit 2.0 2.4 3.5
Other (1.2) (0.3) 0.7
---- ---- ----
Effective tax rates 30.6% 33.6% 34.3%
==== ==== ====
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 Agencies 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)
2001 2000
---- ----
Change in benefit obligation
- ------------------------------------------------------
Benefit obligation at beginning of year $ 3,284 $ 2,967
Service cost 309 245
Interest cost 254 230
Actuarial gain 306 173
Effect of Economic Growth Tax Relief Reconciliation Act 9 -
Benefits paid (857) (331)
------- -------
Benefit obligation at end of year $ 3,305 $ 3,284
======= =======
Change in plan assets
- ------------------------------------------------------
Fair value of plan assets at beginning of year $ 2,843 $3,121
Actual return on plan assets (86) 53
Employer contributions 1,018 -
Benefits paid (857) (331)
------- -------
Fair value of plan assets at end of year $ 2,918 $ 2,843
======= =======
Funded status
- ------------------------------------------------------
Funded status $ (387) $ (441)
Unrecognized transition asset (10) (14)
Unrecognized net actuarial loss 2,254 1,675
Unrecognized prior service cost (1,130) (1,224)
------- -------
Net amount recognized $ 727 $ (4)
======= =======
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 727 -
------- -------
Net amount recognized $ 727 $ (4)
======= =======
Weighted-average assumptions as of December 31, 2001 2000
- ------------------------------------------------------ ---- ----
Discount rate 7.25% 7.50%
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 2001 2000 1999
- --------------------------------------- ------- ----- ----
Service cost $ 309 $ 245 $ 238
Interest cost 254 230 244
Expected return on plan assets (271) (261) (316)
Amortization of prior service cost (85) (85) (85)
Recognized net actuarial loss 85 62 70
Recognized transition amount (4) (4) (4)
----- ----- -----
Net periodic benefit cost $ 288 $ 187 $ 147
===== ===== =====
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 2001, 2000 and 1999 amounted to $113,000, $110,000, and $73,000,
respectively, and the Profit Sharing contribution expense was $64,000, $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 for the year ended December 31, 1999.
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)
2001 2000 1999
---- ---- ----
Net income As reported $3,873 $4,159 $3,764
Pro forma 3,826 4,112 3,528
Earnings per common share As reported $ 2.55 $ 2.61 $ 2.25
Pro forma 2.52 2.58 2.11
Earnings per common share As reported $ 2.54 $ 2.61 $ 2.25
(assuming dilution) Pro forma 2.51 2.58 2.11
A summary of the status of the Company's 1999 Plan as of December 31, 2001,
2000, and 1999 and changes during the years then ended is presented below:
2001 2000 1999
-------------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ------- ------ ------- ------ -------
Outstanding, beginning of year 49,500 $24.91 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 49,500 $24.91 26,000 $28.00
====== ====== ======
Options exercisable at year-end 35,250 28,125 24,000
Per share weighted-average fair value
of options granted during the year $ - $6.55 $9.07
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.
The following table summarizes information about fixed stock options outstanding
as of December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Number Average Number Weighted
Outstanding Remaining Exercisable Average
Exercise as of Contractual as of Exercise
Price 12/31/01 Life 12/31/01 Price
------- ----------- ----------- ----------- ---------
$28.00 21,000 7.50 years 21,000 $28.00
22.63 28,500 8.63 years 14,250 22.63
------ ------
$24.91 49,500 8.15 years 35,250 $25.83
====== ======
CHANGE 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 instruments 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)
2001 2000
---- ----
Financial instrument whose contract amounts represent
credit risk:
Unadvanced portions of home equity loans $ 8,754 $5,314
Unadvanced portions of lines of credit 9,317 7,983
Unadvanced portions of commercial real estate loans 624 622
Commitments to originate all other loans 16,862 6,887
Commitments to originate municipal notes 80 5,420
Standby letters of credit 83 645
Commitments to originate loans and municipal notes, 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,
noninterest 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 borrowings 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)
December 31,
-----------------------------------------------------
2001 2000
----------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Financial assets:
Cash and cash equivalents $ 29,641 $ 29,641 $ 15,401 $ 15,401
Investment securities available-for-sale 55,564 55,564 50,288 50,288
Investment securities held-to-maturity - - 2,752 2,731
FHLB stock 4,632 4,632 5,119 5,119
FRB stock 80 80 80 80
Loans held-for-sale 2,026 2,026 229 229
Loans, net 395,674 401,237 388,904 387,938
Accrued interest receivable 2,237 2,237 2,909 2,909
Financial liabilities:
Deposits 412,840 414,631 391,772 391,671
Short-term borrowings 8,155 8,155 12,340 12,340
Long-term debt 48,028 48,748 35,528 35,555
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 statements.
At December 31, 2001, all the Company's financial instruments were held for
purposes other than trading.
At December 31, 2001, 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, 2001 and 2000 and for the three years ended December 31, 2001
follow:
STATEMENTS OF FINANCIAL CONDITION
($000 Omitted)
2001 2000
---- ----
Assets
- ---------------------------------------------------
Cash and cash equivalents $ 333 $ 232
Investment in subsidiary, The Berlin City Bank 27,763 27,496
Investment in subsidiary, The Pemigewasset
National Bank of Plymouth 13,612 13,911
Equipment, net 747 432
Due from subsidiaries 442 448
Other assets 1,091 442
------- -------
Total assets $43,988 $42,961
======= =======
Liabilities and stockholders' equity
- ---------------------------------------------------
Accrued expenses $ 221 $ 499
Other liabilities 428 220
Borrowings from subsidiary - 680
------- -------
Total liabilities 649 1,399
------- -------
Stockholders' equity:
Common stock 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 45,955 43,110
Treasury stock (5,864) (4,708)
Accumulated other comprehensive (loss) income (585) (673)
------- -------
Total stockholders' equity 43,339 41,562
------- -------
Total liabilities and stockholders' equity $43,988 $42,961
======= =======
STATEMENTS OF INCOME
($000 Omitted)
2001 2000 1999
---- ---- ----
Dividends from subsidiaries $3,925 $2,450 $2,922
Interest income 24 22 50
Management fee income from subsidiaries 5,337 5,252 -
Other - - 70
------ ------ ------
9,286 7,724 3,042
------ ------ ------
Interest expense 10 7 -
Salaries and employee benefits 3,430 3,507 -
Office occupancy and equipment expense 664 552 5
Professional fees 587 628 142
Other 755 735 709
------ ------ ------
5,446 5,429 856
------ ------ ------
Income before income tax benefit and
equity in undistributed net income of
subsidiaries 3,840 2,295 2,186
Income tax benefit (29) (53) (250)
------ ------ ------
Income before equity in undistributed net
income of subsidiaries 3,869 2,348 2,436
Equity in undistributed net income of
subsidiaries 4 1,811 1,328
------ ------ ------
Net income $3,873 $4,159 $3,764
====== ====== ======
STATEMENTS OF CASH FLOWS
($000 Omitted)
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $3,873 $4,159 $ 3,764
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 132 35 3
Due from subsidiaries 6 (448) -
Increase in other assets (400) (332) (58)
Increase (decrease) in accrued expenses and
other liabilities (195) 293 218
Loss on sale of assets - 18 -
Undistributed net income of subsidiaries (4) (1,811) (1,328)
------- ------- -------
Net cash provided by operating activities 3,412 1,914 2,599
------- ------- -------
Cash flows from investing activities:
Additions to premises and equipment (447) (469) (19)
------- ------- -------
Net cash used in investing activities (447) (469) (19)
------- ------- -------
Cash flows from financing activities:
Proceeds from advances from subsidiaries 1,855 1,565 -
Repayments of advances from subsidiaries (2,535) (885) -
Cash paid to BCB - - (245)
Purchases of treasury stock (1,156) (1,310) (3,343)
Dividends paid (1,028) (955) (942)
------- ------- -------
Net cash used in financing activities (2,864) (1,585) (4,530)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 101 (140) (1,950)
Cash and cash equivalents at beginning of year 232 372 2,322
------- ------- -------
Cash and cash equivalents at end of year $ 333 $ 232 $ 372
======= ======= =======
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 2001 and 2000 follows:
($000 Omitted, except earnings per share)
2001 Quarters Ended
------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $9,182 $8,773 $8,718 $8,341
Interest expense 4,081 3,711 3,439 3,062
------ ------ ------ ------
Net interest and dividend income 5,101 5,062 5,279 5,279
Provision for loan losses 225 225 225 225
Noninterest income 605 794 800 710
Noninterest expense 4,041 4,282 4,285 4,541
------ ------ ------ ------
Income before taxes 1,440 1,349 1,569 1,223
Income tax expense 438 413 470 387
------ ------ ------ ------
Net income $1,002 $ 936 $1,099 $ 836
====== ======= ====== =======
Basic earnings per common share $ 0.65 $ 0.62 $ 0.72 $ 0.56
====== ====== ====== ======
Earnings per common share assuming
dilution $ 0.65 $ 0.62 $ 0.72 $ 0.55
====== ====== ====== ======
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 and dividend income 5,283 5,123 5,409 5,438
Provision for loan losses 245 255 255 225
Noninterest income 570 633 732 757
Noninterest expense 4,066 4,054 4,317 4,262
------ ------ ------ ------
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
====== ====== ====== ======
Basic earnings per common share $ 0.62 $ 0.63 $ 0.65 $ 0.71
====== ====== ====== ======
Earnings per common share assuming
dilution $ 0.62 $ 0.63 $ 0.65 $ 0.71
====== ====== ====== ======
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
--- ---- -------------------
2001 4th Quarter $27.25 $29.75 $0.17
3rd Quarter 25.75 30.95 0.17
2nd Quarter 23.50 30.00 0.17
1st Quarter 22.88 24.19 0.17
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
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 Richard P. Orsillo
President and Chief Executive Officer Vice President and Corporate Controller
January 15, 2002
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, 2001 and 2000
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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
Shatswell, MacLeod & Company, P.C.
West Peabody, Massachusetts
January 15, 2002
NORTHWAY FINANCIAL, INC. BOARD OF DIRECTORS
BOARD OF DIRECTORS OFFICERS
Fletcher W. Adams William J. Woodward
Vice Chairman Chairman of the Board,
Northway Financial, Inc. President and CEO
Chairman of the Board and President
Pemigewasset National Bank Fletcher W. Adams
Vice Chairman
Peter H. Bornstein
Attorney and Partner Richard P. Orsillo
Bergeron, Hanson & Bornstein Vice President
Corporate Controller
Stephen G. Boucher
President Joseph N. Rozek
Airmar Technology Corp. Secretary
Charles H. Clifford, Jr.
Retired Businessman
Arnold P. Hanson, Jr.
President
Isaacson Structural Steel, Inc.
Barry J. Kelley
President
White Mountain Lumber Co.
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
Vice Chairman Vice Chairman
Northway Financial, Inc. Northway Financial, Inc.
Pemigewasset National Bank Chairman of the Board and
President
Pemigewasset National Bank
General Manager and CEO
NH Electric Cooperative, Inc. Frederick C. Anderson
General Manager and CEO
Peter H. Bornstein NH Electric Cooperative,
Inc.
Attorney and Partner
Bergeron, Hanson & Bornstein Charles H. Clifford, Jr.
Retired Businessman
Stephen G. Boucher
President John H. Noyes
Airmar Technology Corp. President
Noyes Insurance Agency,
Inc.
Arnold P. Hanson, Jr. President
President Central Square Insurance,
Inc.
Isaacson Structural Steel, Inc.
Brien L. Ward
Barry J. Kelley Attorney
President
White Mountain Lumber Co. William J. Woodward
Chairman of the Board,
Randall G. Labnon President and CEO
General Manager Northway Financial, Inc.
Town and Country Motor Inn The Berlin City Bank
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 Shatswell, 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
1-800-730-6001
FOR FINANCIAL DOCUMENTS,
INCLUDING THE ANNUAL REPORT,
MARKET MAKERS QUARTERLY REPORTS TO THE
SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K
OR FORM 10-Q, CONTACT:
The following companies are currently market
makers for Northway Financial, Inc. common stock. JOSEPH N. ROZEK
SECRETARY
Ryan Beck & Co., Inc. NORTHWAY FINANCIAL, INC.
Monroe Securities, Inc. BERLIN, NEW HAMPSHIRE
03570
Spear, Leeds, and Kellogg