Northway Financial, Inc. Form 10-Q March 31, 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2007

OR

¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from   to ______________  

Commission File Number 000-23129
                                    
NORTHWAY FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

New Hampshire
  
04-3368579
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
     
9 Main Street
    
Berlin, New Hampshire
  
03570
(Address of principal executive offices)
  
(Zip Code)

(603) 752-1171
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last year)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES xNO ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. At April 30, 2007, there were 1,494,174 shares of common stock outstanding, par value $1.00 per share.



INDEX
NORTHWAY FINANCIAL, INC.


PART I.
FINANCIAL INFORMATION
PAGE
     
Item 1.
Financial Statements
  
     
   
 
3
     
   
 
4
     
   
 
5
     
 
6
     
Item 2.
  
 
10
     
Item 3.
14
     
Item 4.
14
     
PART II.
  
     
Item 1.
16
     
Item 1A.
16
     
Item 2.
16
     
Item 3.
16
     
Item 4.
16
     
Item 5.
16
     
Item 6.
16
     
 
18

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
 
NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

   
Mar. 31,
  
Dec. 31,
  
(Dollars in thousands)
  
2007
  
2006
  
   
(Unaudited)
      
Assets:
              
Cash and due from banks and interest-bearing deposits
  
$
15,765
  
$
16,053
  
Federal funds sold
    
17,065
    
8,755
  
Securities available-for-sale, at fair value
    
145,790
    
127,789
  
Federal Home Loan Bank stock
    
3,671
    
3,782
  
Loans held-for-sale
    
65
    
263
  
               
Loans, net before allowance for loan losses
    
464,739
    
462,230
  
Less: allowance for loan losses
    
5,701
    
5,581
  
Loans, net
    
459,038
    
456,649
  
               
Premises and equipment, net
    
13,495
    
13,749
  
Core deposit intangibles, net
    
2,056
    
2,178
  
Goodwill
    
10,577
    
10,577
  
Other assets
    
11,207
    
11,082
  
Total assets
  
$
678,729
  
$
650,877
  
               
Liabilities and stockholders’ equity:
              
Liabilities
              
Interest bearing deposits
  
$
419,706
  
$
412,623
  
Noninterest bearing deposits
    
69,374
    
72,054
  
Short-term borrowings
    
40,119
    
36,497
  
Long-term debt
    
87,930
    
73,620
  
Other liabilities
    
8,739
    
3,934
  
Total liabilities
    
625,868
    
598,728
  
               
               
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 March 31, 2007 and December 31, 2006 and 1,494,174 outstanding at March 31, 2007 and 1,491,174 outstanding at December 31, 2006
    
1,732
    
1,732
  
Surplus
    
2,041
    
2,064
  
Retained earnings
    
56,681
    
56,140
  
Treasury stock, at cost (237,795 shares at March 31, 2007 and 240,795 shares at December 31, 2006)
    
(6,441
)
  
(6,531
)
Accumulated other comprehensive loss, net of tax
    
(1,152
)
  
(1,256
)
Total stockholders’ equity
    
52,861
    
52,149
  
Total liabilities and stockholders’ equity
  
$
678,729
  
$
650,877
  


The accompanying notes are an integral part of these condensed consolidated financial statements.



NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
   
Three Months Ended March 31,
 
(Dollars in thousands, except per share data)
  
2007
  
2006
  
Interest and dividend income:
          
Loans
  
$
7,797
  
$
7,250
  
Interest on debt securities:
         
Taxable
   
1,215
    
889
  
Tax-exempt
    
335
    
273
  
Dividends
    
87
    
87
  
Federal funds sold
    
69
    
44
  
Interest bearing deposits
    
4
    
2
  
Total interest and dividend income
    
9,507
    
8,545
  
               
Interest expense:
              
Deposits
    
2,853
    
1,598
  
Borrowed funds
    
1,470
    
1,303
  
Total interest expense
    
4,323
    
2,901
  
               
Net interest and dividend income
    
5,184
    
5,644
  
Provision for loan losses
    
120
    
105
  
Net interest and dividend income after provision for loan losses
    
5,064
    
5,539
  
               
Noninterest income:
              
Service charges and fees on deposit accounts
    
714
    
615
  
Securities gains, net
    
141
    
210
  
Gain on sales of loans, net
    
33
    
18
  
Other
    
557
    
727
  
Total noninterest income
    
1,445
    
1,570
  
               
Noninterest expense:
              
Salaries and employee benefits
    
2,977
    
2,915
  
Office occupancy and equipment
    
1,080
    
961
  
Amortization of core deposit intangibles
    
121
    
238
  
Other
    
1,344
    
1,585
  
Total noninterest expense
    
5,522
    
5,699
  
               
Income before income tax expense
    
987
    
1,410
  
Income tax expense
    
141
    
330
  
               
Net income
  
$
846
  
$
1,080
  
               
Comprehensive net income
 
$
950
  
$
869
  
               
Per share data:
              
Basic earnings per common share
  
$
0.57
  
$
0.72
  
Earnings per common share assuming dilution
  
$
0.57
  
$
0.72
  
Cash dividends declared
  
$
0.20
  
$
0.18
  
Weighted average number of common shares, basic
    
1,491,407
    
1,491,174
  
Weighted average number of common shares, diluted
    
1,498,817
    
1,501,782
  





The accompanying notes are an integral part of these condensed consolidated financial statements


NORTHWAY FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
For the Three Months Ended March 31,
  
           
(Dollars in thousands)
 
2007
  
2006
  
           
Cash flows from operating activities:
              
Net income
  
$
846
  
$
1,080
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Provision for loan losses
    
120
    
105
  
Depreciation and amortization
    
538
    
554
  
Securities gains, net
    
(141
)
  
(210
)
Amortization of premiums and accretion of discounts on securities, net
    
(10
)
  
13
  
Change in unearned income/unamortized premium, net
    
(36
)
  
(5
)
Accretion of discount on loans acquired
    
(46
)
  
(31
)
Decrease in loans held-for-sale
    
198
    
162
  
Net change in other assets and other liabilities
    
(203
)
  
734
  
Net cash provided by operating activities
    
1,266
   
2,402
  
Cash flows from investing activities:
              
Proceeds from sales of securities available-for-sale
    
1,785
    
1,827
  
Proceeds from maturities of securities available-for-sale
    
4,701
    
6,766
  
Purchases of securities available-for-sale
    
(19,282
)
  
(13,164
)
Redemption of Federal Home Loan Bank stock
    
111
    
-
  
Capital contribution in investment in ltd. Partnership
    
(70
)
  
-
  
Loan originations and principal collections, net
    
(2,521
)
  
(269
)
Recoveries of previously charged-off loans
    
47
    
62
  
Proceeds from sales of and payments received on other personal property
    
43
    
139
  
Additions to premises and equipment, net of disposals
    
(162
)
  
(535
)
Net cash used in investing activities
    
(15,348
)
  
(5,174
)
Cash flows from financing activities:
              
Net increase (decrease) in deposits
    
4,403
    
(11,435
)
Net increase in FHLB overnight advances
    
-
    
6,080
  
Net increase in securities sold under agreements to repurchase
    
3,622
    
8,279
  
Advances from FHLB
    
15,000
    
-
  
Repayment of FHLB advances
    
(11,000
)
  
(19,000
)
Issuance of junior subordinated debentures
    
10,310
    
-
  
Exercise of stock options
    
67
    
-
  
Cash dividends paid
    
(298
)
  
(269
)
Net cash provided by (used in) financing activities
    
22,104
    
(16,345
)
Net increase (decrease) in cash and cash equivalents
    
8,022
    
(19,117
)
Cash and cash equivalents at beginning of period
    
24,808
    
29,362
  
Cash and cash equivalents at end of period
  
$
32,830
  
$
10,245
  
               
Supplemental disclosure of cash flows:
              
Interest paid
  
$
4,087
  
$
2,725
  
Loans transferred to other personal property
  
$
47
  
$
78
  
Amount due to broker for pending securities purchases
  
$
4,884
  
$
-
  
Amount due from broker for pending securities sales
  
$
-
  
$
226
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)

1.Basis of Presentation

The unaudited condensed consolidated financial statements of Northway Financial, Inc. and its wholly-owned subsidiary, Northway Bank, (collectively, “the Company”) included herein have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in accordance with such rules and regulations. The Company, however, believes that the disclosures are adequate to make the information presented not misleading. The amounts shown reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements for the periods reported.

The results of operations for the three month periods ended March 31, 2007 and 2006 are not necessarily indicative of the results of operations to be expected for the full year or any other interim periods. The interim financial statements are meant to be read in conjunction with the Company’s audited financial statements presented in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheet and revenues and expenses for the reported periods. Actual results could differ from these estimates. The Company believes that the most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and result of operations and require management’s most difficult, subjective and complex judgments, relate to the determination of the allowance for loan losses, the impairment analysis of goodwill and core deposit intangibles, determination of the expense and liability related to the Company’s pension plan, and determination of mortgage servicing rights.

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

2. Impact of New Accounting Standards.

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, "Accounting for Certain Hybrid Instruments" (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective as of January 1, 2007. The adoption of SFAS 155 did not have a material impact on the Company’s financial condition, results of operations or cash flow.
 


NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 2007
(Unaudited)

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140” (SFAS 156). SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. SFAS 156 is effective as of an entity’s first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company’s adoption of this statement did not have a material impact on its financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP) and enhances disclosures about fair value measurements. SFAS 157 retains the exchange price notion and clarifies that the exchange price is the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS 157 is effective for the Company’s consolidated financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. The Company does not expect the adoption of this statement to have a material impact on its financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS 158). SFAS 158 requires 1) the recognition of an asset or liability for the over-funded or under-funded status of a defined benefit plan, 2) the recognition of actuarial gains and losses and prior service costs and credits in other comprehensive income, 3) measurement of plan assets and benefit obligations as of the employer’s balance sheet date, rather than at interim measurement dates as currently allowed, and 4) disclosure of additional information concerning actuarial gains and losses and prior service costs and credits recognized in other comprehensive income. This statement is effective for financial statements with fiscal years ending after December 15, 2006. The adoption of this Statement did not have a material impact on the Company’s financial position, result of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective at the beginning of the Company’s fiscal year beginning January 1, 2008, and early application may be elected in certain circumstances. The Company is currently evaluating and has not yet determined the impact the new standard is expected to have on its financial position, results of operations or cash flows.



NORTHWAY FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
March 31, 2007
(Unaudited)


3.  Pension Benefits.

The following summarizes the net periodic benefit cost for the three months ended March 31:
 

($000 Omitted)
  
Three Months Ended March 31,
     
2007
 
 
2006
  
Service cost
  
$
131
  
$
142
  
Interest cost
    
103
    
94
  
Expected return on plan assets
    
(130
)
  
(114
)
Amortization of prior service cost
    
(21
)
  
(21
)
Recognized net actuarial loss
    
25
    
36
  
Amortization of transition asset
    
-
    
-
  
Special recognition of prior service costs
    
-
    
-
  
Net periodic benefit cost
 
$
108
  
$
137
  

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2006 that it expected to make a pension plan contribution of $435,000 in 2007. During the first three months of 2007, the Company made a $400,000 contribution to the pension plan and plans to contribute an additional $35,000 prior to year-end.

4.  Going Private Transaction.
 
As reported in the Company's current report on Form 8-K filed on April 16, 2007 with the Securities and Exchange Commission ("SEC"), on April 9, 2007, the Company's Board of Directors approved a 1-for-400 reverse stock split. The purpose of the reverse stock split is to reduce the number of the Company's stockholders below 300 so that the Company may deregister its shares with the SEC and cease being a reporting company. The proposed transaction requires an amendment to the Company's Articles of Incorporation that must be approved by holders of a majority of the outstanding common shares of the Company. Only the Company’s stockholders of record as of the close of business on June 1, 2007, will be entitled to notice of, and to vote at, the annual meeting of stockholders, to be held on Tuesday, July 31, 2007 to consider the transaction.
 
As a result of the proposed reverse stock split, each stockholder owning fewer than 400 shares of common stock of the Company immediately before the reverse stock split will receive $37.50 in cash, without interest, for each share of the Company’s common stock owned by such stockholder immediately prior to the reverse stock split. The Company estimates that, as a result of the proposed reverse stock split, the number of outstanding shares of the Company’s common stock will decrease approximately 8.7%, from 1,494,174 shares to approximately 1,363,797 shares and its stockholders of record will be reduced from approximately 1,087 stockholders to approximately 271 stockholders. After the repurchase of fractional shares, the Company will effect an 800-for-1 forward stock split of the remaining the Company’s common stock. Each holder of 400 or more shares of common stock immediately before the reverse stock split will participate in the forward stock split, which will result in such stockholder holding twice the number of shares of common stock he held prior to the reverse stock split. The Company estimates that the total funds required to fund the payment of the proposed split transaction consideration to the non-continuing stockholders and to pay fees and expenses relating to the split transaction will be approximately $5,112,000. These numbers and amounts may change between the date hereof and the effective date of the split transaction. The Company has sufficient working capital to pay the estimated cost of the proposed split transaction or reasonably anticipated increases in such estimated cost.
 
The description of the proposed transaction included in this Form 10-Q is not a solicitation of a proxy or an offer to acquire any common shares of the Company. Proxy solicitations will be made only by means of a definitive proxy statement to be delivered to all stockholders. The Company filed a preliminary proxy statement, a Schedule 13E-3 and an amended Schedule 13E-3 with the SEC outlining the proposed transaction on April 16, 2007. All stockholders are advised to read the definitive proxy statement and Schedule 13E-3/A carefully. Stockholders may obtain a free copy of the proxy statement and Schedule 13E-3/A at the SEC's website http://www.sec.gov. The Company will also mail a copy of the definitive proxy statement prior to the annual meeting to stockholders entitled to vote at the special meeting.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis and the related condensed consolidated financial statements relate to the Company.

    Forward-Looking Statements

Certain statements in this Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can be identified by the use of the words “expect,” “believe,” “estimate,” “will” and other expressions which predict or indicate future trends and which do not relate to historical matters. Forward-looking statements may include, but are not limited to, expectations for impact of new products on noninterest income and expense, projections of revenue, income or loss, and plans related to products or services of the Company and its subsidiary. Such forward-looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company. The Company’s actual results could differ materially from those projected in the forward-looking statements as the result of, among other factors, changes in interest rates, a prolonged continuation of the current interest rate environment, changes in the securities or financial markets, a deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes in local business conditions resulting in rising unemployment and other circumstances which adversely affect borrowers’ ability to service and repay our loans, changes in loan defaults and charge-off rates, reduction in deposit levels necessitating increased borrowing to fund loans and investments, the passing of adverse government regulation, and changes in assumptions used in making such forward-looking statements as well as those factors set forth in the Company’s Annual Report on Form 10-K for the year ending December 31, 2006, and in the Company’s other filings with the Securities & Exchange Commission. These forward-looking statements were based on information, plans and estimates at the date of this Form 10-Q, and the Company does not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Financial Condition
 
The Company’s total assets at March 31, 2007 were $678,729,000 compared to $650,877,000 at December 31, 2006, an increase of $27,852,000. Federal funds sold increased $8,310,000 to $17,065,000 compared to $8,755,000 at December 31, 2006. Further, securities available-for-sale increased $18,001,000 to $145,790,000 at March 31, 2007 from $127,789,000 at December 31, 2006, due principally to the purchase of mortgage-backed securities and municipal bonds.
 
Deposits increased $4,403,000 to $489,080,000 at March 31, 2007 from $484,677,000 at December 31, 2006 as increases in savings and time deposits were partially offset by decreases in demand deposits, NOW accounts and money market deposits. Short-term borrowings, which consist of securities sold under agreements to repurchase, increased $3,622,000 to $40,119,000 at March 31, 2007 compared to $36,497,000 at December 31, 2006. Long-term Federal Home Loan Bank advances increased $4,000,000 to $57,000,000 from $53,000,000 at December 31, 2006 due to new advances of $15,000,000 partially offset by the maturity of $11,000,000 in advances. Junior subordinated debentures increased $10,310,000 to $30,930,000 at March 31, 2007 compared to $20,620,000 at December 31, 2006. $7,217,000 of the proceeds will be used to payoff, in full, a junior subordinated debenture callable on April 22, 2007. The remaining $3,083,000 will be used to pay down a portion of the $13,403,000 junior subordinated debenture callable on July 7, 2007. Total stockholders’ equity increased $712,000 to $52,861,000 at March 31, 2007 from $52,149,000 at December 31, 2006 due to net income of $846,000, a $67,000 increase due to the exercise of stock options, and a decrease in the comprehensive loss associated with securities available-for-sale of $104,000, which was partially offset by a $7,000 adjustment to retained earnings to reclass a prior years’ income tax expense and dividends paid of $298,000.
 
The Company maintains an allowance for loan losses to absorb charge-offs of loans in the existing portfolio. The allowance is increased when a loan loss provision is recorded as an expense. When a loan, or portion thereof, is considered uncollectible, it is charged against this allowance. Recoveries of amounts previously charged-off are added to the allowance when collected. The allowance for loan losses is established based on estimates of losses related to customer loan balances. In establishing the appropriate provisions for customer loan balances, the Company makes assumptions with respect to their future collectibility. The Company’s assumptions are based on an individual assessment of the customer’s credit quality as well as subjective factors and trends, including the credit rating of the loans. Generally, these individual credit assessments occur prior to the inception of the credit exposure and at regular reviews during the life of the exposure and consider (a) the customer’s ability to meet and sustain their financial commitments; (b) the customer’s current and projected financial condition; (c) the positive or negative effects of the current and projected industry outlook; and (d) the economy in general. Once the Company considers all of these factors, a determination is made as to the probability of default. The Company then takes into account the severity of the likely loss, based on its experience in collecting outstanding loan balances, and makes what it believes to be an appropriate provision.
 
At March 31, 2007 the allowance for loan losses was $5,701,000, or 1.23% of total loans, compared to $5,581,000, or 1.21% of total loans at December 31, 2006. The composition of the allowance for loan losses for the three month periods ended March 31, 2007 and 2006 is as follows:


   
Three Months Ended Mar. 31,
  
(Dollars in thousands)
 
2007
  
2006
  
           
Balance at beginning of period
  
$
5,581
  
$
5,150
  
Charge-offs
    
(47
)
  
(106
)
Recoveries
    
47
    
62
  
Net (charge-offs) recoveries
    
-
    
(44
)
Provision for loan losses
    
120
    
105
  
Balance at end of period
  
$
5,701
  
$
5,211
  

Nonperforming loans totaled $4,678,000 as of March 31, 2007, compared to $3,698,000 at December 31, 2006 due primarily to an increase in nonperforming commercial loans. The ratio of nonperforming loans to loans net of unearned income was 1.00% as of March 31, 2007, compared to 0.80% at December 31, 2006. Nonperforming assets, which include nonperforming loans, other real estate owned and other chattels owned, totaled $4,700,000 as of March 31, 2007, compared to $3,714,000 at December 31, 2006. The ratio of nonperforming assets to total assets was 0.69% as of March 31, 2007, compared to 0.57% at December 31, 2006.

Results of Operations

The Company reported net income of $846,000, or $0.57 per common share-basic, for the three months ended March 31, 2007, compared to $1,080,000, or $0.72 per common share-basic, for the three months ended March 31, 2006, a decrease of $234,000, or 21.7%.

Net interest and dividend income for the first quarter of 2007 decreased $460,000 to $5,184,000 compared to $5,644,000 for the first quarter of 2006. This was due primarily to a decrease in the net interest margin of 50 basis points that resulted principally from an increase in the cost of interest bearing liabilities of 93 basis points partially offset by an increase in the yield on earning assets of 35 basis points. The decrease in the net interest margin was also partially mitigated by the increase in average earning assets of $29,483,000 from $582,793,000 at March 31, 2006 to $612,276,000 at March 31, 2007.

The provision for loan losses was $120,000 for the first quarter of 2007, compared to $105,000 for the first quarter of last year. The provision for loan losses is based upon a review of the adequacy of the allowance for loan losses, which is conducted on a quarterly basis. This review is based upon many factors including the risk characteristics of the portfolio, trends in loan delinquencies, and an assessment of existing economic conditions. In addition, various regulatory agencies, as part of their examination process, review the bank’s allowance for loan losses and such review may result in changes to the allowance based on judgments different from those of management.

Noninterest income decreased $125,000 to $1,445,000 in the first quarter of 2007 compared to $1,570,000 in the first quarter of 2006. Service charges and fees on deposit accounts increased $99,000 to $714,000 for the first quarter of 2007 compared to $615,000 for the first quarter of 2006 due primarily to an increase in the insufficient funds (“NSF”) per item fee in May 2006. Net securities gains decreased $69,000 to $141,000 in the first quarter of 2007 compared to $210,000 for the first quarter of 2006. Gains on sales of loans increased $15,000 to $33,000 compared to $18,000 for the same period last year. In the first quarter, other noninterest income decreased $170,000 to $557,000 compared to $727,000 for the same period a year ago due primarily to the fact that in 2006 the Bank recorded gains on the redemption of two FHLB symmetrical advances, as well as the recovery of prior year expenses associated with a non-accrual loan that paid in full during the quarter.
 
 Noninterest expense decreased $177,000 to $5,522,000 for the quarter ended March 31, 2007, compared to the $5,699,000 recorded during the same period last year. Salaries and employee benefits increased $62,000 to $2,977,000 for the first quarter of 2007 compared to $2,915,000 for the same period last year due primarily to an increase in salary expense, health and dental insurance, and employee relocation expense partially offset by a decrease in pension expense and profit sharing expense. Office occupancy and equipment expense increased $119,000 to $1,080,000 for the first quarter 2007 compared to $961,000 for the same period last year due primarily to increases in depreciation expense on equipment and furniture as well as increases in real estate taxes and building lease expense. Amortization of core deposit intangibles decreased $117,000 to $121,000 for the first quarter of 2007 compared to $238,000 for the first quarter of 2006 due to the cessation of amortization of the core deposit intangible associated with the three branch locations purchased 2002. Other noninterest expense decreased $241,000 to $1,344,000 for the first quarter of 2007 compared to $1,585,000 for the same period last year. Decreases in telephone expense, postage, courier, seminars, professional services, and stationary and office supplies were partially offset by increases in marketing expenses.

Comprehensive Net Income/(Loss)

Comprehensive net income/(loss) includes net income plus or minus other items required to be reported directly in the equity section of the balance sheet without having been recognized in the determination of net income. These other components include the unrealized holding gains and losses on available-for-sale securities and any unrealized gains and losses on the Company’s pension valuation as well as the recognition of prior service costs and credits relating to the pension.

The Company reported comprehensive net income of $950,000 for the quarter ended March 31, 2007, compared to comprehensive net income of $869,000 for the quarter ended March 31, 2006.

For the quarter ended March 31, 2007, the unrealized loss on available-for-sale securities decreased $102,000, net of tax. For the quarter ended March 31, 2007, the unrealized loss on pension valuation decreased $15,000 and the prior service credit decreased $13,000. When the $104,000 net credit is added to the quarterly net income of $846,000 the result is comprehensive net income of $950,000. For the quarter ended March 31, 2006, the unrealized loss on available-for-sale securities increased $211,000, net of tax. When deducted from the quarterly net income of $1,080,000, the result is comprehensive net income of $869,000.

The primary factor contributing to the unrealized gain or loss on available-for-sale securities is the interest rate environment at the time of the valuation.

Income Tax Expense

The Company recognized income tax expense of $141,000 and $330,000 for the three months ended March 31, 2007 and 2006, respectively. The effective tax rates were 14.3% and 23.4% for those respective periods. The effective tax rate for both years is positively impacted by the Company’s significant increase in municipal bond investments as well as certain charitable contributions made which provide tax credits to the Company due to a 75% state tax exemption.
 
Liquidity

Liquidity risk management refers to the Company’s ability to raise funds in order to meet existing and anticipated financial obligations. These obligations to make payments include withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments as well as 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 subsidiary bank level, liquidity is managed by measuring forecasted cash flows. Liquidity levels are defined as the amount of cash flow available to meet loan originations requirements and potential deposit outflows. Liquidity is managed using a combination of net marketable assets, lines of credit, FHLB borrowings, purchase and sale of loan assets, and brokered/wholesale CD relationships.

Additionally, Northway Financial, Inc. requires cash for various operating needs, including dividends to shareholders, the stock repurchase program, capital contributions to the subsidiary bank, interest payments on capital securities and the payment of general corporate expenses. The primary sources of liquidity for Northway Financial, Inc. are dividends from its subsidiary bank and reimbursement for services performed on behalf of the bank.

Further, the Company is party to off-balance sheet financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, unadvanced home equity loans, unadvanced lines of credit, standby letters of credit and unadvanced portions of Bounce ProtectionTM, an overdraft privilege program. The amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments, and, if advanced, will impact the Company’s liquidity. As of March 31, 2007, off-balance sheet financial commitments totaled approximately $92,900,000.

 
As explained in more detail on Note 4 of the “Notes to Condensed Consolidated Financial Statements,” on April 9, 2007, the Company's Board of Directors approved a 1-for-400 reverse stock split. The purpose of the proposed reverse stock split is to reduce the number of the Company's stockholders below 300 so that the Company may deregister its shares with the SEC and cease being a reporting company. The proposed transaction requires an amendment to the Company's Articles of Incorporation that must be approved by holders of a majority of the outstanding common shares of the Company. Only the Company’s stockholders of record as of the close of business on June 1, 2007, will be entitled to notice of, and to vote at, the annual meeting of stockholders, to be held on Tuesday, July 31, 2007 to consider the transaction.
 
The Company estimates that the total funds required to fund the payment of the proposed split transaction consideration to the non-continuing stockholders and to pay fees and expenses relating to the split transaction will be approximately $5,112,000. This amount may change between the date hereof and the effective date of the split transaction. The Company has sufficient working capital to pay the estimated cost of the split transaction or reasonably anticipated increases in such estimated cost.
 
The Company filed a preliminary proxy statement, a Schedule 13E-3 and an amended Schedule 13E-3 with the SEC outlining the proposed transaction on April 16, 2007. The description of the proposed transaction included in this Form 10-Q is not a solicitation of a proxy or an offer to acquire any common shares of the Company. Proxy solicitations will be made only by means of a definitive proxy statement to be delivered to all stockholders. All stockholders are advised to read the definitive proxy statement and Schedule 13E-3/A carefully. Stockholders may obtain a free copy of the proxy statement and Schedule 13E-3/A at the SEC's website http://www.sec.gov. The Company will also mail a copy of the definitive proxy statement prior to the annual meeting to stockholders entitled to vote at the special meeting.
 
Management believes that the Company’s current level of liquidity and funds available from outside sources is sufficient to meet the Company’s needs.

Capital

The Company’s Tier 1 and Total Risk Based Capital ratios were 13.99% and 15.93, respectively, at March 31, 2007. The Company’s Tier 1 leverage ratio at March 31, 2007 was 9.20%. As of March 31, 2007, the capital ratios of the Company and the subsidiary bank exceeded the minimum capital ratio requirements for the “well-capitalized” category under the Federal Deposit Insurance Corporation Improvement Act of 1991.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Since December 31, 2006, there have been no material changes in the Company’s quantitative and qualitative disclosures concerning market risk. A more detailed description of the quantitative and qualitative disclosures about market risk was provided by the Company on pages 27 and 28 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that they believe the Company’s disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.

(b) Changes in internal controls.

There were no changes in the Company’s internal controls over financial reporting identified in connection with the Company’s evaluation of its disclosure controls and procedures that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II. OTHER INFORMATION

Item 1. Legal Proceedings - None

Item 1A. Risk Factors.

There have been no material changes in the Company’s risk factors as previously disclosed on pages 9-11 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None

Item 3. Defaults Upon Senior Securities - None

Item 4. Submission of Matters to a Vote of Security Holders - None

Item 5. Other Information - None

Item 6. Exhibits

Exhibit Number Description of Exhibit

3.1
Amended and Restated Articles of Incorporation of Northway Financial, Inc. (incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-33033).
   
3.2
By-laws of Northway Financial, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
4
Form of Certificate representing the Company Common Stock (reference is also made to Exhibits 3.1 and 3.2) (incorporated by reference to Exhibit 4 to Registration Statement No. 333-33033).
   
10.1
Employment Agreement for William J. Woodward (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
10.3
Amendment to the Employment Agreement for William J. Woodward. (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
10.5
Northway Financial, Inc. 1999 Stock Option and Grant Plan (incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-83571 dated July 23, 1999).
   
10.7
Form of Key Employee Agreement (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
10.8
Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
   

Exhibit Number Description of Exhibit

   
   
   
   



SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
NORTHWAY FINANCIAL, INC
   
April 30, 2007
BY:/S/William J. Woodward
 
William J. Woodward
 
President & CEO
 
(Principal Executive Officer)
   
April 30, 2007
BY:/S/Richard P. Orsillo
 
Richard P. Orsillo
 
Senior Vice President & CFO
 
(Principal Financial and Accounting Officer)




INDEX OF EXHIBITS
Exhibit Number Description of Exhibit

3.1
Amended and Restated Articles of Incorporation of Northway Financial, Inc. (incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-33033).
   
3.2
By-laws of Northway Financial, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
4
Form of Certificate representing the Company Common Stock (reference is also made to Exhibits 3.1 and 3.2) (incorporated by reference to Exhibit 4 to Registration Statement No. 333-33033).
   
10.1
Employment Agreement for William J. Woodward (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
10.3
Amendment to the Employment Agreement for William J. Woodward. (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
10.5
Northway Financial, Inc. 1999 Stock Option and Grant Plan (incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-83571 dated July 23, 1999).
   
10.7
Form of Key Employee Agreement (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
   
10.8
Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).