-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MK9pNT3Hj8wPK0U9Ci0BqyEoZNAOIW/8/DaB0MlOtD7KxB2hAEo7BNBau4TWWH8E LkoWaZwvYHAAZ5FjYjEfjg== 0000950156-99-000262.txt : 19990330 0000950156-99-000262.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950156-99-000262 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWAY FINANCIAL INC CENTRAL INDEX KEY: 0001041753 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 043368379 STATE OF INCORPORATION: NH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23129-33 FILM NUMBER: 99576202 BUSINESS ADDRESS: STREET 1: 9 MAIN ST CITY: BERLIN STATE: NH ZIP: 03750 BUSINESS PHONE: 6037521171 MAIL ADDRESS: STREET 1: 9 MAIN ST CITY: BERLIN STATE: NH ZIP: 03750 10-K 1 NORTHWAY FINANCIAL FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. (Fee Required) For the fiscal year ended December 31, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) 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 (I.R.S. Employer incorporation or organization) 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) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $1.00 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 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 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by Reference in Part II of this Form 10-K or any amendment to this Form 10-K. [ ] The number of shares of common stock held by nonaffiliates of the registrant as of March 11, 1999 was 1,477,751 for an aggregate market value of $44,332,530. At March 11, 1999, there were 1,710,469 shares of common stock outstanding, par value $1.00 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for its 1999 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part III. FORM 10-K TABLE OF CONTENTS NORTHWAY FINANCIAL, INC. PART I ------ ITEM 1 Business...........................................................1 ITEM 2 Properties.........................................................7 ITEM 3 Legal Proceedings..................................................7 ITEM 4 Submission of Matters to a Vote of Security Holders................7 PART II ------- ITEM 5 Market for the Registrant's Common Stock and Related Security Holder Matters.....................................................7 ITEM 6 Selected Financial Data............................................8 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. .......................................10 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk........10 ITEM 8 Financial Statements and Supplementary Material...................10 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................................10 PART III -------- ITEM 10 Directors and Executives Officers of the Registrant...............10 ITEM 11 Executive Compensation............................................10 ITEM 12 Security Ownership of Certain Beneficial Owners and Management....11 ITEM 13 Certain Relationships and Related Transactions....................11 PART IV ------- ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...12 Signatures....................................................13 PART 1 ------ ITEM 1. BUSINESS Description of Business Northway Financial, Inc. ("Northway") was incorporated on March 7, 1997, under the laws of the State of New Hampshire, for the purpose of becoming the holding company of The Berlin City Bank, a New Hampshire chartered bank headquartered in Berlin, New Hampshire ("BCB") pursuant to a reorganization transaction (the "BCB Reorganization") by and among Northway, BCB, and a subsidiary of BCB, and, thereafter, effecting the merger (the "Merger") by and among Northway, BCB and Pemi Bancorp, Inc. ("PEMI"), and its wholly owned subsidiary, Pemigewasset National Bank, a national bank headquartered in Plymouth, New Hampshire ("PNB"). The BCB Reorganization and the Merger became effective on September 30, 1997. As of such date, BCB and PNB, (collectively the "Banks"), became wholly owned subsidiaries of Northway. Unless the context otherwise requires, references herein to "Northway" include Northway Financial, Inc. and its consolidated subsidiaries. Northway and its bank subsidiaries derive substantially all of their revenue and income from the furnishing of bank and bank-related services, principally to individuals and small and medium sized companies in New Hampshire. The Banks operate as typical community banking institutions and do not engage in any specialized finance or capital market activities. Northway functions primarily as the holder of stock of its subsidiaries and assists the management of its subsidiaries as appropriate. Northway is subject to regulation by the New Hampshire Bank Commissioner, the Federal Deposit Insurance Corporation, the Comptroller of the Currency of the United States, and the Board of Governors of the Federal Reserve System. See "Supervision and Regulation." BCB, which was first organized in 1891, and PNB, which was first organized in 1881, are engaged in a general commercial banking business and offer commercial and construction loans, real estate mortgages, consumer loans, including personal secured and unsecured loans, and lines of credit. During 1998, Northway, through the subsidiary banks, established an indirect lending business unit in Concord, New Hampshire. The unit is expected to substantially increase the volume of secured consumer installment loans originated by the Banks. The banks accept savings, time, demand, NOW and money market deposit accounts, and offer a variety of banking services including travelers checks, safe deposit boxes, Master Charge accounts, overdraft lines of credit and wire transfer services. The Banks have 14 automatic teller machines to allow customers limited banking services on a 24 hour basis. Northway is a legal entity separate and distinct from its subsidiaries. The right of Northway to participate in any distribution of assets or earnings of any subsidiary is subject to the prior claims of creditors of the subsidiary, except to the extent that claims, if any, of Northway itself as a creditor may be recognized. See "Supervision and Regulation". The following information concerning Northway's investment activities, lending activities, asset quality and allowance for loan losses should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing under Item 7 and Northway's Consolidated Financial Statements and Notes thereto. Investment Activities The following table presents the carrying amount of Northway's investment securities available-for-sale and held-to-maturity as of December 31, 1998, 1997 and 1996 (dollars in thousands): 1998 1997 1996 ------- -------- -------- Available-for-sale: US Treasury and other US government agencies $17,391 $ 11,929 $ 20,479 Mortgage-backed securities(1) 24,512 31,235 48,348 Corporate notes -- 5,000 13,068 Foreign notes -- -- 1,000 Common and preferred stocks 2,741 2,796 2,284 State and political subdivisions 3,885 4,143 3,259 Other -- -- 190 ------- -------- -------- 48,529 55,103 88,628 ------- -------- -------- Held-to-maturity: US Treasury and other US government agencies $ -- $ -- $ 501 Mortgage-backed securities(1) 5,501 8,400 9,943 State and political subdivisions 1,008 2,912 1,755 ------- -------- -------- 6,509 11,312 12,199 ------- -------- -------- Total Investment Securities $55,038 $ 66,415 $100,827 ======= ======== ======== (1) Includes Collateralized Mortgage Obligations. The following table sets forth the amortized cost of Northway's debt obligations maturing within stated periods and their related weighted average yields, reported on a tax equivalent basis, as of December 31, 1998 (dollars in thousands):
Maturities ------------------------------------------------------ One to Five to Over Available-for-sale: Within five ten ten Total one year years years years Cost ------- ------ ------- ------- ------- US Treasury and other US government agencies $ 500 $6,002 $10,820 $ -- $17,322 Mortgage-backed securities (1) 142 1,219 10,382 12,717 24,460 State and political subdivisions -- 662 222 2,792 3,676 ------- ------ ------- ------- ------- $ 642 $7,883 $21,424 $15,509 $45,458 ======= ====== ======= ======= ======= Market value $ 642 $7,962 $21,451 $15,733 $45,788 ======= ====== ======= ======= ======= Weighted average yield 6.46% 6.37% 6.07% 6.44% 6.25% Maturities ------------------------------------------------------ One to Five to Over Within five ten ten Total Held-to-maturity: one year years years years Cost ------- ------ ------- ------- ------- Mortgage-backed securities(1) $ 22 $ 659 $ 2,629 $ 2,155 $ 5,501 State and political subdivisions 225 783 -- -- 1,008 ------- ------ ------- ------- ------- $ 247 $1,478 $ 2,629 $ 2,155 $ 6,509 ======= ====== ======= ======= ======= Market value $ 247 $1,503 $ 2,630 $ 2,135 $ 6,515 ======= ====== ======= ======= ======= Weighted average yield 7.13% 7.23% 6.15% 6.26% 6.47%
(1) Includes Collateralized Mortgage Obligations Lending Activities The following table sets forth information with respect to the composition of Northway's loan portfolio, excluding loans held for sale, as of December 31, 1998, 1997, 1996, 1995 and 1994 (dollars in thousands):
December 31, 1998 1997 1996 1995 1994 -------- -------- -------- -------- ------- Real estate: Residential $ 146,603 $ 152,041 $145,847 $139,941 $143,193 Commercial 77,680 61,873 43,901 37,595 34,120 Construction 4,118 5,664 2,329 363 517 Commercial 25,874 21,460 27,293 24,283 25,277 Installment 25,088 23,476 18,733 14,533 12,084 Other 4,795 2,769 2,999 2,277 4,038 --------- --------- -------- -------- -------- Total Loans 284,158 267,283 241,102 218,992 219,229 Less: Unearned income (332) (526) (719) (1,014) (1,181) Allowance for loan losses (4,404) (4,156) (3,941) (3,866) (3,682) --------- --------- -------- -------- -------- Net Loans $279,422 $262,601 $236,442 $214,112 $214,366 ======== ======== ======== ======== ========
The following table presents the maturity distribution of Northway's real estate construction and commercial loans at December 31, 1998 (dollars in thousands): Percent of Amount Total Within one year $ 2,974 9.92% One to five years 11,465 38.22 Over five years 15,553 51.86 ------- ------- $29,992 100.00% ======= ======= Northway's real estate construction and commercial loans due after one year at December 31, 1998 were comprised of the following (dollars in thousands): Amount Fixed interest rate $10,918 Adjustable interest rate 16,100 ------- $27,018 Asset Quality At December 31, 1998, the amount of interest on nonaccrual and restructured loans that would have been recorded had the loans been paying in accordance with their original terms during 1998 was approximately $341,000. The amount of interest income on these loans included in net income in 1998 was approximately $293,000. At December 31, 1998, Northway had classified certain loans totaling $567,000. Such loans represent a higher degree of risk and could become non-performing loans in the future. Analysis of the Allowance for Loan Losses The following table reflects activity in Northway's allowance for loan losses for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 (dollars in thousands):
Years ended December 31, 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Balance at the beginning of period $4,156 $3,941 $3,866 $3,682 $3,706 Charge-offs: Real estate 383 452 583 456 563 Commercial 67 105 29 190 307 Installment loans to individuals 74 48 27 29 30 Credit card -- 1 11 21 20 Other -- 6 -- -- -- ------ ------ ------ ------ ------ Total 524 612 650 696 920 ------ ------ ------ ------ ------ Recoveries: Real estate 115 212 160 177 56 Commercial 98 55 11 28 136 Installment loans to individuals 17 19 28 11 26 Credit card 2 4 14 12 18 Other -- 2 -- -- -- ------ ------ ------ ------ ------ Total 232 292 213 228 236 ------ ------ ------ ------ ------ Net charge-offs 292 320 437 468 684 Provision charged to expense 540 535 512 652 660 ------ ------ ------ ------ ------ Balance at the end of period $4,404 $4,156 $3,941 $3,866 $3,682 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans 0.10% 0.13% 0.20% 0.32% 0.45%
Allocation of the Allowance for Loan Losses The following table sets forth the breakdown of Northway's allowance for loan losses in Northway's portfolio by category of loan and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated (dollars in thousands):
December 31, ---------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------- ---------------------- -------------------- -------------------- ------------------- Percent of Percent of Percent of Percent of Percent of loans in each loans in each loans in each loans in each loans in each category to category to category to category to category to Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- Commercial $ 651 9.1% $ 613 8.0% $ 582 11.3% $ 924 11.1% $1,344 11.5% Real estate: Commercial & Construction 1,325 28.8 1,251 25.3 1,186 19.2 675 17.2 375 15.6 Residential 1,478 51.6 1,395 56.9 1,323 60.5 1,417 64.1 1,131 65.6 Installment 210 8.8 198 8.8 188 7.8 147 6.6 139 5.5 Other 58 1.7 55 1.0 52 1.2 53 1.0 53 1.8 Unallocated 682 N/A 644 N/A 610 N/A 650 N/A 640 N/A ------ --- ------ --- ------ ---- ------ ---- ------ ----- $4,404 100.0% $4,156 100.0% $3,941 100.0% $3,866 100.0% $3,682 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Supervision and Regulation As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), Northway is subject to substantial regulation and supervision by the Federal Reserve Board and is required to file periodic reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also makes periodic inspections of Northway and its subsidiaries. Under the BHC Act, Northway is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing or controlling banks or furnishing services to, or acquiring premises for, its affiliated banks, except that Northway may engage in and own voting shares of companies engaging in certain activities determined by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or to managing or controlling banks "as to be a proper incident thereto." PNB is a national banking association, organized pursuant to the provisions of the National Bank Act. As such, its primary regulatory authority is the Comptroller of the Currency of the United States (the "Comptroller"). The Comptroller regularly examines national banks and their operations. In addition, operations of national banks are subject to federal statutes and regulations. Such statutes and regulations relate to required reserves, investments, loans, mergers, payment of dividends, issuance of securities and many other aspects of operations. With respect to the ability of a national bank to pay dividends, the Comptroller's approval is required if the total dividends declared by a national bank in any year will exceed the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfer to surplus. The Comptroller also has authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions. The comptroller also has the power to prevent a national bank from engaging in unsafe or unsound practices or violating applicable laws in conducting its business. PNB is also subject to applicable provisions of New Hampshire law insofar as they do not conflict with or are not otherwise preempted by federal banking law. BCB is organized under New Hampshire law and is subject to the regulations of the New Hampshire Bank Commissioner, the Federal Deposit Insurance Corporation, and the Federal Reserve Board. BCB's operations are subject to various requirements and restrictions under the laws of the United States and the State of New Hampshire, including those related to the maintenance of adequate levels of capital, the payment of dividends, the nature and amount of loans which can be originated and the rate of interest that can be charged thereon, investments and other activities of BCB. Both BCB and PNB are subject to the provisions of the "Community Reinvestment Act" (CRA). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a subsidiary institution, to assess such institution's record in meeting the credit needs of the community served by the institution, including those of low and moderate income neighborhoods. The regulatory agency's assessment of the institution's record is made available to the public. An institution's CRA rating is taken into account by its regulators in considering various types of applications. In addition, an institution receiving a rating of Asubstantial noncompliance" is subject to civil money penalties or a cease and desist order under Section 8 of the Federal Deposit Insurance Act (the "FDIA"). CRA remains a critical component of the regulatory examination process. CRA examination results and related concerns have been cited as a reason to reject and or modify branching and merger applications by various federal and state banking agencies. The banking industry in the United States, which includes commercial banks, savings and loan associations, mutual savings banks, capital stock savings banks, credit unions, and bank and savings and loan holding companies, is part of the broader financial services industry which includes insurance companies, mutual funds, and the brokerage industry among others. In recent years, intense market demands and economic pressures have eroded once clearly defined industry classifications and have forced the financial services institutions to diversify their services, increase returns on deposits, and become more cost effective as a result of competition with one another and with new types of financial services companies, including non-bank competitors. The present bank regulatory scheme is undergoing significant change, both as it affects the banking industry itself and as it affects competition between banks and non-bank financial institutions. There has been significant regulatory change in the bank mergers and acquisitions area, in the products and services banks can offer, and in the non-banking activities in which bank holding companies can engage. Banks are now actively competing with non-bank financial institutions for products such as money market funds. Federal banking laws permit adequately capitalized bank holding companies to venture across state lines to offer banking services through bank subsidiaries to a wider geographic market. Consequently, it is possible for large organizations to enter many new markets including the markets served by Northway. Certain of these competitors, by virtue of their size and resources, may enjoy certain efficiencies and competitive advantages over Northway in pricing, delivery, and marketing of their products and services. It is not possible to assess what impact these changes in the regulatory scheme will have on Northway. Government Monetary Policy Northway's banking subsidiaries are affected by the credit policies of monetary authorities, including the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board are open market operations in U. S. Government securities, changes in the discount and fed funds rates, reserve requirements on member bank deposits, and funds availability regulations. The monetary policies of the Federal Reserve Board have in the past had a significant effect on the operations of financial institutions, including Northway and its subsidiaries, and will continue to do so in the future. Changing conditions in the national economy and money markets, as well as the impact of actions by monetary and fiscal authorities, make it difficult to predict the effect of future changes in interest rates, deposit levels or loan demand on the business and income of Northway and its subsidiaries. Competition Northway's banking subsidiaries face significant competition in their respective market from commercial banks, savings banks, credit unions, consumer finance companies, insurance companies, "non-bank banks," mutual funds, government agencies, investment management companies, investment advisors, brokers and investment bankers. In addition, increasing consolidation within the banking and financial services industry, as well as increased competition from larger regional and out-of-state banking organizations and non-bank providers of various financial services, may adversely affect Northway's ability to achieve its= financial goals. Many of these large competitors have significantly more financial resources, larger market share and greater name recognition in the market areas served by Northway. BCB and PNB compete in this environment by providing a broad range of financial services, competitive interest rates and a personal level of service that, combined, tend to retain the loyalty of its customers in its market areas against competitors with far larger resources. To a lesser extent, convenience of branch locations and hours of operations are also considered competitive advantages of the Banks. Employees As of December 31, 1998, Northway and its subsidiaries had approximately 217 full-time and part-time employees. Northway considers its employee relations to be good. ITEM 2. PROPERTIES Northway operates 14 branch offices and a loan origination facility in the central and northern New Hampshire towns of Berlin, Conway (3), Gorham (2), Groveton, Littleton, West Plymouth, Plymouth, Campton, Ashland, North Woodstock, Tilton and Concord. Eleven of these offices, including its main offices in Berlin, New Hampshire and Plymouth, New Hampshire, are located in properties it owns. Northway leases three of its branches and the loan origination facility under five-year leases expiring between December 31, 2000 and April 21, 2003. Northway also operates a limited services facility at the Plymouth Regional High School. Eleven of Northway's branches have drive-up facilities and all are equipped with automated teller machines. ITEM 3. LEGAL PROCEEDINGS Northway is not a party to, nor are any of its subsidiaries the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS No matters were submitted to a vote of stockholders during the quarter ended December 31,1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Since the completion of the Merger, Northway's common stock has been 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 ------ ------ ------------------- 1998 4th Quarter $24.00 $30.00 $0.14 3rd Quarter $24.75 $35.25 $0.14 2nd Quarter $32.50 $36.00 $0.14 1st Quarter $29.75 $32.75 -- 1997 4th Quarter $30.00 $37.50 $0.32 On March 11, 1999, the closing sales price of the common stock on the Nasdaq National Market was $30.00 per share. As of such date, there were approximately 1,558 holders of record of the Northway common stock. Northway intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of Northway, 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. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth the selected consolidated financial information of Northway for the five years in the period ended December 31, 1998. This selected consolidated financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing under Item 7 and Northway's Consolidated Financial Statements and Notes thereto. As a result of the Merger described under Item 1, the selected consolidated financial data for 1997, 1996, 1995 and 1994 reflects the combined results of operations and financial position of Northway Financial, Inc. and Pemi Bancorp, Inc. restated for such periods pursuant to the pooling of interests method of accounting. See Note 23 to the Consolidated Financial Statements.
At or for the years ended December 31, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Balance Sheet Data: Total assets $403,972 $377,866 $372,581 $357,917 $349,447 Investment securities available-for-sale 48,529 55,103 88,628 84,799 23,761 Investment securities held-to-maturity 6,509 11,312 12,199 15,377 81,021 Loans, net of unearned income 283,826 266,757 240,383 217,978 218,048 Allowance for possible loan losses 4,404 4,156 3,941 3,866 3,682 Real estate acquired by foreclosure or substantively repossessed 158 222 202 492 665 Deposit purchase premium 860 1,161 1,462 1,800 2,122 Deposits 350,921 322,063 322,315 310,388 304,983 Securities sold under agreements to repurchase 6,791 6,146 4,620 6,087 6,882 Stockholders= equity (1) 40,956 37,526 33,663 31,102 26,113 Income Statement Data: Net interest and dividend income $ 17,535 $ 17,027 $ 15,717 $ 15,493 $ 14,521 Provision for possible loan losses 540 535 512 652 660 Noninterest income 2,019 1,680 1,602 1,257 1,399 Noninterest expense 12,910 11,859 10,976 10,613 10,271 Net income 4,068 4,039 3,857 3,596 3,276 Per Common Share Data: Net income $ 2.35 $ 2.33 $ 2.23 $ 2.08 $ 1.82 Cash dividends declared 0.42 0.55 0.52 0.44 0.40 Book value 23.67 21.67 19.44 17.96 14.79 Tangible Book Value (1) 23.18 21.00 18.59 16.92 13.59 Selected Ratios: Return on average assets 1.06% 1.07% 1.05% 1.02% 0.95% Return on average equity 10.25 11.14 12.04 12.71 11.75 Dividend payout 17.90 23.69 23.13 21.22 21.37 Average equity to average asset ratio 10.35 9.60 8.69 8.00 8.07 (1) Stockholders= equity as of December 31, 1998, 1997, 1996, 1995 and 1994 has been reduced by deposit purchase premium.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See "Management's Discussion and Analysis of Financial Condition and Results of Operations" which begins on page B-1 of this Annual Report on Form 10-K and is hereby incorporated by reference in this Item 7. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding quantitative and qualitative disclosures about market risk is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing under Item 7 of this Annual Report on Form 10-K and is hereby incorporated by reference in this Item 7A. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL The Consolidated Financial Statements of Northway listed in the index appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on Form 10-K and are hereby incorporated by reference in this Item 8. See also "Index to Consolidated Financial Statements" on page C-1 hereof. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the information set forth under the captions "Information Concerning Directors and Nominees" and "Executive Officers" in Northway's definitive proxy statement to be delivered in connection with its 1999 Annual Meeting of Stockholders. Section 16(a) of the Securities Exchange Act of 1934 requires Northway's executive officers, directors and 10% shareholders to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers and directors are required by the SEC regulation to furnish Northway with copies of all Section 16(a) filings. During the 1997 fiscal year, Donald Hatt, Senior Executive Vice President failed to file Form 3 upon joining Northway. The Form 3 for Mr. Hatt was filed subsequently in 1999. Each of the following individuals inadvertently failed to file a Form 4 with respect to transactions in the Northway's common stock on a timely basis: Fletcher W. Adams, Vice Chairman of the Board, three occasions representing ten transactions; Peter H. Bornstein, Director, one occasion representing two transactions; Arnold P. Hanson, Director, two occasions representing four transactions; and Barry Kelley, Director, one occasion representing two transactions. Form 4's relating to each of the foregoing transactions were subsequently filed. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth under the caption "Executive Compensation" in Northway's definitive proxy statement to be delivered in connection with its 1999 Annual Meeting of Stockholders, provided however, that the "Report on Executive Compensation" and the "Stock Price Performance Graph" contained in such proxy Statement are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information set forth under the caption "Security Ownership of Management" in Northway's definitive proxy statement to be delivered in connection with its 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information set forth under the caption "Certain Relationships and Related Transactions" in Northway's definitive proxy statement to be delivered in connection with its 1999 Annual Meeting of Stockholders. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the fiscal years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: None (3) The Exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index which appears on page A-1 hereof, which Exhibit Index is incorporated herein by reference. (b) Northway filed no Reports on Form 8-K during the quarter ended December 31, 1998. (c) See Item 14(a)(3) above (d) See Item 8 to this Annual Report on Form 10-K NORTHWAY FINANCIAL, INC. 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 the Company and its subsidiaries. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. Prior year information has been restated to reflect the 1997 acquisition of the Pemi Bancorp which was accounted for using the pooling-of-interest accounting method. RESULTS OF OPERATIONS OVERVIEW The Company reported net income of $4,068,000, or $2.35 per share, in 1998 as compared to net income of $4,039,000, or $2.33 per share, in 1997 and $3,857,000, or $2.23 per share, in 1996. Return on average assets was 1.06 percent in 1998, as compared to 1.07 percent and 1.05 percent for 1997 and 1996, respectively. During 1998 the Company continued to position itself for growth. The Company opened two new branches and created an indirect lending business unit. In addition, the Company has retained qualified personnel to ensure that the Company achieves its long term goals. These strategic investments resulted in increased noninterest expense which slowed the growth rate of the Company's earnings in 1998 and will continue to impact results of operations during at least the first half of 1999. The Company's results of operations are affected not only by its net interest income, but also by the level of its noninterest income, including gains and losses on the sales of loans and securities, noninterest expenses, changes in the provision for loan losses resulting from the Company's periodic assessment of the adequacy of its allowance for loan losses and income tax expense. NET INTEREST INCOME ANALYSIS Net interest income is the principal component of a financial institution's income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The discussion of net interest income is presented on a taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among various taxable and tax-exempt assets. The table on page B-3 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, 1998, 1997, and 1996. Net interest income for 1998 increased $475,000, or 3 percent, over 1997 while increasing $1,350,000, or 8 percent, in 1997 over 1996. Interest income was relatively unchanged in 1998 after increasing $1,099,000, or 4 percent, in 1997. Earning assets on average increased by $2,448,999, or 1%, during 1998, however, the mix of earning assets continued to evolve creating a favorable volume variance. This favorable volume variance was offset by a 5 basis point decline in average yield on earning assets as a whole. A $17,079,000, or 7 percent, increase in the volume of average loans, offset by a 20 basis point decrease in yield, accounted for the $1,001,000, or 4 percent, increase in interest income on loans. Interest income on investment and mortgage-backed securities decreased $1,226,000, or 22 percent, from 1997 to 1998. This decrease resulted from a 22 percent decrease in the average balance of total investment and mortgage-backed securities and a 3 basis point decrease in yield. Total interest expense decreased by $461,000, or 4 percent, in 1998 due primarily to a 12 basis point decrease in rates paid on interest bearing liabilities combined with a modest decrease in average volume. The composition of interest bearing liabilities helped drive down interest cost as all categories of low cost funds increased while all categories of high cost funds declined. The most expensive sources of funds, Federal Home Loan Bank advances and other borrowed funds, declined by a combined 52 percent. Interest income in 1997 grew $1,099,000, or 4 percent, over 1996 as a result of a 3 percent increase in the volume of earning assets, and as a result of the change in the mix of assets. A $30,459,000, or 13 percent, increase in the volume of average loans and a 26 basis point decrease in yield accounted for the $2,207,000, or 10 percent, increase in interest income on loans. Interest income on investment and mortgage-backed securities decreased $1,195,000, or 18 percent, from 1996 to 1997. This decrease resulted from a 21 percent decrease in the average balance of total investment and mortgage-backed securities offset by a 20 basis point increase in yield. Total interest expense decreased by $251,000, or 2 percent, in 1997 due primarily to a 10 basis point decrease in rates paid on interest bearing liabilities combined with a modest increase in average volume. In addition, interest expense on certificates of deposit decreased 5 percent as a result of a 21 basis point decrease in rate. The trend in net interest income is commonly evaluated in terms of average rates using net interest margin and interest rate spread. The net interest margin is computed by dividing fully taxable equivalent net interest income by average total earning assets. This ratio represents the difference between the average yield returned on average earning assets and the average rate paid for all funds used to support those earning assets, including both interest bearing and noninterest bearing sources of funds. The net interest margin increased 10 basis points to 4.97 percent in 1998 after having increased 26 basis points to 4.87 percent in 1997. The increase in 1998's net interest margin was a function of the downward pricing of interest bearing liabilities, partially offset by the lower yields on earning assets. At the same time, the portion of interest earning assets funded by interest bearing liabilities in 1998 was 84 percent. In 1997 and 1996 the portion of interest earning assets funded by interest bearing liabilities was 85 percent and 87 percent, respectively. 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 on interest rate movements. During 1998, the net interest rate spread increased 7 basis points to 4.33 percent from the 1997 spread of 4.26 percent as the cost of interest bearing liabilities declined 12 basis points while the yields earned on earning assets decreased 5 basis points. The increase in 1997 was 20 basis points from 4.06 percent in 1996. See the accompanying schedules entitled "Consolidated Average Balances, Interest Income/Expense and Average Yields/Rates" and "Consolidated Rate/Volume Variance Analysis" for more information. PROVISION FOR LOAN LOSSES The provision for loan losses represents the annual cost of providing an allowance or reserve for anticipated future losses on loans. The size of the provision for each year is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of collateral and general economic factors. The Company incurred a $540,000 provision for loan losses in 1998 reflecting an increase of $5,000 from 1997. In 1997, the provision for loan losses increased $23,000 to $535,000 from $512,000 in 1996. The allowance for loan losses as a percentage of nonperforming loans decreased to 172.99 percent at December 31, 1998 compared to 227.35 percent at December 31, 1997. Although management utilizes its best judgement 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. The following table sets forth the provisions and allowance for loan losses for the periods indicated. Years Ended December 31, (Dollars in thousands) 1998 1997 1996 - ---------------------------------------------------- Beginning allowance $4,156 $3,941 $3,866 Provision for loan losses 540 535 512 Loans charged-off (524) (612) (650) Recoveries 232 292 213 ------ ------ ------ Net credit losses (292) (320) (437) ------ ------ ------ Ending allowance $4,404 $4,156 $3,941 ====== ====== ====== Ending allowance as a percentage of loans 1.55% 1.56% 1.64% NONINTEREST INCOME Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services and profits earned through investment and security sales. The following table sets forth the components of the Company's noninterest income: Noninterest Income - ------------------------------------------------------ Years Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------ Service Charges on deposit account and fees $ 843 $ 831 $ 816 Securities gains, net 496 313 306 Other 680 536 480 ------ ------ ------ Total noninterest income $2,019 $1,680 $1,602 ====== ====== ====== Fee income from service charges on deposit accounts increased 1 percent in 1998 and 2 percent in 1997. The improvement in both years was primarily related to the increase in both the number of accounts and balances outstanding in transaction deposit accounts. Net securities gains were $496,000 in 1998, compared to $313,000 in 1997. Investment securities gains in 1998 included net gains of $501,000 recorded on sales of equity securities compared to $548,000 in 1997. In 1996 net securities gains were $306,000 and included equity gains of $305,000. Other noninterest income (sources of which include credit card merchant and fee income, automated teller fees, and safe deposit fees) increased $144,000, or 27 percent, to $680,000 in 1998 following a 12 percent increase in 1997. The largest component of this increase was the institution of a service charge on noncustomer ATM users, which charges totaled approximately $72,000. NONINTEREST EXPENSE Total noninterest expense increased $1,051,000, or 9 percent, during 1998 and $883,000, or 8 percent, in 1997. Excluding the one time amortization of reorganization cost and merger-related expenses, total noninterest expense increased $1,506,000, or 13 percent, during 1998 and $276,000, or 3 percent, in 1997. The increases in these expenses were due to the Company's plans to increase market share in existing markets and enter new markets. In 1998, these plans resulted in the opening of two branches and the creation of an indirect lending group.
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES (Dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------- -----------------------1998------------------- -------------------1997------------------- AVERAGE Average AVERAGE INCOME/ YIELD/ Average Income/ Yield/ BALANCE EXPENSE RATE Balance Expense Rate -------------- --------------- ------------- ------------------------------------------ Assets Interest earning assets: Federal funds sold $ 14,628 $ 769 5.26% $ 9,720 $ 528 5.43% Interest bearing deposits 87 6 6.90 114 8 7.02 Investment and mortgage- backed securities (1) (5) 69,854 4,272 6.12 89,366 5,498 6.15 Loans, net (1) (2) 274,826 24,351 8.86 257,747 23,350 9.06 ----------- ------------ ------------ ----------- Total interest earning assets (1) 359,395 29,398 8.18% 356,947 29,384 8.23% ------------ ======== ----------- ======== Cash and due from banks 11,967 10,804 Allowance for loan losses (4,323) (4,323) Premises and equipment 9,844 8,732 Other assets 6,400 5,604 ----------- ------------ Total assets $ 383,283 $ 377,764 =========== ============ Liabilities Interest bearing liabilities: Regular savings $ 65,126 $ 1,519 2.33% $ 63,661 $ 1,508 2.37% NOW and Super NOW 46,942 536 1.14 43,369 530 1.22 Money market accounts 22,467 622 2.77 22,348 613 2.74 Certificates of deposit 151,244 8,078 5.34 153,111 8,211 5.36 Repurchase agreements 8,469 431 5.09 7,796 404 5.18 Federal Home Loan Bank 5,972 360 6.03 12,139 728 6.00 Other Borrowed funds -- -- 215 13 6.05 ----------- ------------ ------------ ----------- Total interest bearing liabilities 300,220 11,546 3.85% 302,639 12,007 3.97% ------------ ======== ----------- ======== Noninterest bearing deposits 39,561 34,948 Other liabilities 3,825 3,906 ----------- ------------ Total liabilities 343,606 341,493 Stockholders' equity 39,677 36,271 ----------- ------------ Total liabilities and stockholders' equity $ 383,283 $ 377,764 =========== ============ Net interest income (1) $ 17,852 $ 17,377 ============ =========== Interest spread (3) 4.33% 4.26% ======== ======== Net interest margin (4) 4.97% 4.87% ======== ========
-------------------------1996------------------- Average Average Income/ Yield/ Balance Expense Rate --------------- ----------- ----------- Assets Interest earning assets: Federal funds sold $ 6,076 $ 325 5.35% Interest bearing deposits 2,103 124 5.90 Investment and mortgage- backed securities (1) (5) 112,443 6,693 5.95 Loans, net (1) (2) 227,288 21,143 9.30 ------------ ----------- Total interest earning assets (1) 347,910 28,285 8.13% ----------- ======== Cash and due from banks 9,346 Allowance for loan losses (3,982) Premises and equipment 8,409 Other assets 7,036 ------------ Total assets $ 368,719 ============ Liabilities Interest bearing liabilities: Regular savings $ 65,033 $ 1,551 2.38% NOW and Super NOW 42,438 533 1.26 Money market accounts 23,428 644 2.75 Certificates of deposit 155,223 8,651 5.57 Repurchase agreements 6,568 358 5.45 Federal Home Loan Bank 8,848 521 5.89 Other Borrowed funds -- -- ------------ ----------- Total interest bearing liabilities 301,538 12,258 4.07% ----------- ======== Noninterest bearing deposits 31,889 Other liabilities 3,253 ------------ Total liabilities 336,680 Stockholders' equity 32,039 ------------ Total liabilities and stockholders' equity $ 368,719 ============ Net interest income (1) $ 16,027 =========== Interest spread (3) 4.06% ======== Net interest margin (4) 4.61% ======== (1) Reported on a tax equivalent basis (2) Net of unearned income. Includes nonperforming loans (3) Interest spread equals the yield on interest earning assets minus the rate paid on interest bearing liabilities (4) The net interest margin equals net interest income divided by total average interest earning assets. (5) Average balances are calculated using the adjusted cost basis. CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS (In Thousands) - --------------------------------------------------------------------------------
1998 Compared to 1997 Increase (Decrease) --------------------------------------------------------------------- Due to Change in Volume Rate Mix Total Interest and dividend income: Federal funds sold $ 267 $ (17) $ (9) $ 241 Interest bearing deposits (2) -- -- (2) Investments and mortgage- backed securities (1,200) (33) 7 (1,226) Loans 1,547 (512) (34) 1,001 ------------- ------------ ------------ ------------ Total interest and dividend income 612 (562) (36) 14 ------------- ------------ ------------ ------------ Interest expense: Regular savings accounts 35 (23) (1) 11 NOW and Super NOW accounts 44 (35) (3) 6 Money market accounts 3 6 -- 9 Certificates of deposit (100) (33) -- (133) Repurchase agreements 35 (7) (1) 27 FHLB advances (370) 4 (2) (368) Other Borrowed funds (13) -- -- (13) ------------- ------------ ------------ ------------ Total interest expense (366) (88) (7) (461) ------------- ------------ ------------ ------------ Net interest and dividend income $ 978 $ (474) $ (29) $ 475 ============= ============ ============ ============ 1997 Compared to 1996 Increase (Decrease) --------------------------------------------------------------------- Due to Change In Volume Rate Mix Total Interest and dividend income: Federal funds sold $ 193 $ 6 $ 4 $ 203 Interest bearing deposits (117) 23 (22) (116) Investments and mortgage- backed securities (1,374) 225 (46) (1,195) Loans 2,833 (552) (74) 2,207 ------------- ------------ ------------ ------------ Total interest and dividend income 1,535 (298) (138) 1,099 ------------- ------------ ------------ ------------ Interest expense: Regular savings accounts (33) (10) -- (43) NOW and Super NOW accounts 11 (14) -- (3) Money market accounts (30) (1) -- (31) Certificates of deposit (117) (327) 4 (440) Repurchase agreements 67 (18) (3) 46 FHLB advances 194 10 3 207 Other Borrowed funds 13 -- -- 13 ------------- ------------ ------------ ------------ Total interest expense 105 (360) 4 (251) ------------- ------------ ------------ ------------ Net interest and dividend income $ 1,430 $ 62 $ (142) $ 1,350 ============ ============ ============ ============
The following table sets forth information relating to the Company's noninterest expense during the periods indicated. Years Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------- Salaries and employee benefits $ 6,762 $ 5,883 $ 5,423 Occupancy and equipment 2,080 1,714 1,759 Amortization of deposit purchase premium 301 301 513 Amortization of reorgan- ization cost 188 10 -- Directors' fees 138 266 303 Stationery and supplies 470 374 360 Merger related expenses -- 643 36 Other 2,971 2,668 2,582 ------- -------- -------- $12,910 $ 11,859 $ 10,976 ======= ======== ======== Salaries and employee benefits increased $879,000 or 15 percent, from 1997 to 1998 and by $460,000, or 8 percent, from 1996 to 1997. These increases reflect staff additions in connection with the expansion of the retail franchise, increased mortgage banking and commercial lending activities as well as normal salary and wage increases. The Company expects the increases in salary and employee benefits expenses resulting from the Company's expansion initiatives in 1998 to continue in 1999 while the anticipated increases in revenue resulting from such initiatives will not begin to be realized until the second half of 1999. Consequently, results of operations could be adversely affected in the short-term. Amortization of deposit purchase premium in 1998 of $301,000 is consistent with the amount incurred in 1997. The decrease of $212,000 to $301,000 in 1997 versus $513,000 expensed in 1996 resulted from the Company's decision in 1996 to accelerate the amortization of the premium associated with the purchase of Home Bank's deposits. Amortization of reorganization cost of $188,000 in 1998 and merger related expense of $643,000 in 1997 are primarily related to the creation of the holding company, the related stock split, and the merger. INCOME TAX EXPENSE The Company recognized $2,036,000, $2,274,000 and $1,974,000 in income tax expense for the years ended December 31, 1998, 1997, and 1996, respectively. The effective tax rate was 33.3% for 1998, 36.0% for 1997, and 33.9% for 1996. The Company recorded merger-related expenses of $643,000 in 1997. This one-time expense is non-deductible for tax calculations and was the principal reason for the increase in 1997's effective tax rate. For additional information relating to income taxes, see Note 16 to the Consolidated Financial Statements. FINANCIAL CONDITION ASSETS Total assets increased $26,106,000, or 7%, to $403,972,000 at December 31, 1998 versus $377,866,000 at December 31, 1997. The composition of earning assets has continued to change in order to meet corporate goals. BALANCE SHEET HIGHLIGHTS December 31, (In thousands) 1998 1997 Change - ------------------------------------------------------------------- Total assets $403,972 $377,866 $26,106 Earning assets 378,004 354,812 23,192 Securities 55,038 66,415 (11,377) Loans, net of unearned income 283,826 266,757 17,069 Deposits 350,921 322,063 28,858 Equity 40,956 37,526 3,430 SECURITIES The Company's investment securities are classified into one of two categories based on management's intent to hold the securities: (i) held-to-maturity securities, or (ii) securities available-for-sale. Securities designated to be held-to-maturity are reported at amortized cost. Securities classified as available-for-sale are required to be reported at fair value with unrealized gains and losses, net of taxes, excluded from earnings and shown separately as a component of Stockholders' Equity. The following table summarizes the Company's securities portfolio at December 31, 1998 and 1997, showing amortized cost and market value for each category: December 31, 1998 1997 Amortized Market Amortized Market (In thousands) Cost Value Cost Value - -------------------------------------------------------------------------------- Securities available-for-sale: US Treasury and Government Agencies $17,322 $17,391 $ 11,873 $ 11,929 Mortgage-backed securities 13,342 13,442 17,366 17,340 Collateralized mortgage obligations 11,118 11,070 14,171 13,895 Corporate and foreign notes -- -- 5,008 5,000 Common and preferred stocks 2,919 2,741 2,752 2,796 State and political subdivisions 3,676 3,885 4,016 4,143 ------- ------- -------- -------- Total securities available-for-sale $48,377 $48,529 $ 55,186 $ 55,103 ======= ======= ======== ======== Securities held-to-maturity: Mortgage-backed securities $ 5,501 5,485 8,400 8,354 State and political subdivisions 1,008 1,030 2,912 2,943 ------- ------- -------- -------- Total securities held-to- maturity $ 6,509 $ 6,515 $ 11,312 $ 11,297 ------- ------- -------- -------- Total securities $54,886 $ 55,044 $ 66,498 $ 66,400 ======= ======== ======== ======== Securities available-for-sale decreased $6,574,000 during 1998 to $48,529,000. The decrease in the portfolio reflects the Company's strategy to allow the securities portfolio amortization and sales to fund increased originations in the lending portfolios. The net unrealized gain on securities available-for-sale was $152,000 at December 31, 1998 as compared to a net unrealized loss of $83,000 in 1997. This was the result of a lower interest rate environment, and corresponding higher bond prices in 1998. The Company has a policy of purchasing securities primarily rated A or better by Moody's Investor Services and US Government securities to minimize credit risk. All securities, however, carry interest rate risk, which affect their market values such that as market yields increase, the value of the Company's securities decline and vise versa. Additionally, mortgage-backed securities carry prepayment risk where 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. Securities held to maturity comprise approximately 10 percent and 17 percent of the aggregate securities portfolio at December 31, 1998 and 1997, respectively. This is consistent with management's objective to maintain portfolio flexibility and liquidity by classifying most securities as available for sale. A portion of the securities portfolio is pledged to secure public deposits and short-term repurchase agreements. Refer to Note 3 for a further discussion of pledging. LOANS Loans increased 6 percent in 1998 with most of the increase concentrated in commercial loans. The growth in the loan portfolio resulted from the Company's ongoing efforts to increase the loan portfolio through the origination of loans. The following table presents the composition of the loan portfolio: Percent Percent (Dollars in thousands) 1998 of Total 1997 of Total - -------------------------------------------------------------------- Real estate Residential $146,603 51.6% $152,041 56.9% Commercial 77,680 27.4 61,873 23.1 Construction 4,118 1.4 5,664 2.1 Commercial 25,874 9.1 21,460 8.0 Installment 25,088 8.8 23,476 8.9 Other 4,795 1.7 2,769 1.0 -------- ----- -------- ----- $284,158 100.0% $267,283 100.0% ======== ===== ======== ===== The loan portfolio mix changed significantly during the year. As of December 31, 1998, total commercial real estate and commercial loans represented 36.5 percent of the Company's loan portfolio, while residential real estate loans represented 51.6 percent. This compares with a commercial real estate and commercial loan percentage of 31.1 percent and residential real estate loan percentage of 56.9 percent in 1997. The 1998 increase in commercial real estate and commercial loan percentage reflects management's commitment to diversify the loan portfolio. Commercial real estate loans consist of loans secured by income producing commercial real estate and commercial loans consist of loans that are either unsecured or are secured by inventories, receivables or other corporate assets, and many are additionally secured by the guarantee of the Small Business Administration. Commercial real estate and commercial loans increased by $20,221,000 in 1998 as compared to 1997. The Company continues to emphasize commercial real estate and commercial loans in order to reduce the relative concentration of its loan portfolio in other types of loans. Residential real estate loans decreased $5,438,000 in 1998, a 4 percent decrease from 1997. The Company's strategy generally is to originate fixed-rate residential loans for sale to investors in the secondary market. The Company generally retains adjustable-rate loans in its portfolio but will, occasionally, retain some fixed-rate mortgages. Installment loans consist primarily of loans originated directly by the Company. The increase of $1,612,000, or 7 percent, in 1998 is a result of growth in home equity loans, automobile loans and recreational vehicle loans. Increased growth in installment loans is consistent with the Company's strategy to increase the percentage of installment loans in its portfolio. The Company's loans are primarily secured by real estate 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 real estate acquired by foreclosure are susceptible to changing conditions in this market. NONPERFORMING ASSETS Nonperforming assets were $2,704,000, or 0.67% of total assets, at December 31, 1998 as compared to $2,050,000, or 0.53% of total assets, at December 31, 1997. Nonperforming assets are comprised primarily of nonperforming loans, real estate acquired by foreclosure and loans substantively repossessed. 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 are paying, but which have a weakness with respect to the collateral securing the loan. At December 31, 1998, nonperforming loans totaled $2,546,000, or 0.90% of total loans, compared to $1,828,000, or 0.70% of total loans, in 1997. Real estate acquired by foreclosure or substantively repossessed at December 31, 1998 was $158,000 compared to $222,000 in 1997. ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for loan losses to absorb future charge-offs of loans in the existing portfolio. When a loan, or portion thereof, is considered uncollectible, it is charged against the allowance. Recoveries of amounts previously charged-off are added to the reserve when collected. The adequacy of the allowance for loan losses is evaluated on a regular basis by management. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their effect on borrowers and the market area in general, and the performance of individual credits in relation to the contract terms. The provision for loan losses charged to earnings is based on management's judgement 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 $248,000 from December 31, 1997 to $4,404,000, or 1.55% of total loans, at December 31, 1998. The 1998 provision for loan losses was $540,000, $5,000 higher than the prior year level of $535,000. The increase was due primarily to the increased level of loans. DEPOSITS AND BORROWINGS Total deposits at December 31, 1998 were $350,921,000, an increase of $28,858,000, or 9%, as compared to the $322,063,000 reported at December 31, 1997. The increase in deposits was due to the opening of two branches during the year as well as the retention of a significant short term deposit at December 31, 1998. For additional information see Note 9 to the Consolidated Financial Statements. Components of Deposits - ------------------------------------------------------------------ December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------ Demand $ 45,808 $ 39,710 Regular savings, NOW & Money Market 152,094 130,664 Time 153,019 151,689 -------- --------- Total deposits $350,921 $322,063 ======== ======== Certificates of deposit of $100,000 or more are scheduled to mature as follows at December 31, 1998: (In thousands) - -------------------------------------- 3 months or less $ 3,164 Over 3 to 6 months 5,179 Over 6 to 12 months 10,163 Over 12 months 5,442 ------- $23,948 ======= The following table sets forth certain information concerning the Company borrowings at the dates indicated. December 31, (In thousands) 1998 1997 - --------------------------------------------------- FHLB advances $ 3,111 $ 9,322 Repurchase agreements 6,791 6,146 ------- ------- $ 9,902 $15,544 ======= ======= FHLB advances declined as a non-deposit related interest-bearing funding source for the Company in 1998. During 1998, FHLB borrowings totaled $3,111,000, a decrease of $6,211,000 from the $9,322,000 reported at December 31, 1997. For additional information regarding FHLB advances, see Note 10 to the Consolidated Financial Statements. The increase in securities sold under agreements to repurchase of $645,000 was attributable to an increase in the Company's relationship with its municipal customers. For additional discussion of securities sold under agreements to repurchase, see Note 11 to the Consolidated Financial Statements. CAPITAL The following table sets forth the Company's risk-based capital and leverage ratios: December 31, (Dollars in thousands) 1998 1997 - --------------------------------------------------- Risk-adjusted assets $241,943 $223,332 Tier 1 risk-based capital (4% minimum) 16.53% 16.31% Total risk-based capital (8% minimum) 17.78 17.56 Leverage ratio 10.25 9.67 The Company's capital serves to support growth and provide protection against loss to depositors and creditors. 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 ratio. Tier 1 capital consists of stockholders' equity, net of intangible assets. Tier 2 capital consists of a limited amount of loss reserves. Tier 1 capital, total capital and leverage ratio 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%, 4% and 8%, respectively. As of December 31, 1998, all of the subsidiary banks of the Company were "well capitalized" as defined under the FDIC Improvement Act. INTEREST RATE RISK Volatility in interest rates requires the Company to manage the interest rate risk which arises from differences in the time of repricing of assets and liabilities. Management monitors and adjusts the difference between interest-sensitive assets and interest-sensitive liabilities ("GAP" position) within various time frames. An institution with more assets repricing than liabilities within a given time frame is considered asset sensitive and in time frames with more liabilities repricing than assets it 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 net interest income under alternative balance sheet and interest rate scenarios. INTEREST RATE GAP ANALYSIS
INTEREST SENSITIVITY PERIODS - ---------------------------------------------------------------------------------------------------------- December 31, 1998 3 months 4 to 12 12 to 24 2 to 5 After 5 (Dollars in thousands) or less months months years years Total Loans, net $102,402 $ 81,460 $ 34,452 $ 49,163 $ 17,216 $284,693 Federal funds sold 36,475 -- -- -- -- 36,475 Interest bearing deposits -- -- 92 -- -- 92 Securities 7,198 13,675 6,522 9,816 19,865 57,076 Other assets -- -- -- -- 25,636 25,636 -------- --------- ------- -------- -------- -------- Total assets $146,075 $ 95,135 $ 41,066 $ 58,979 $ 62,717 $403,972 -------- --------- ------- -------- -------- -------- Deposits $ 79,804 $ 109,487 $ 79,817 $ 36,005 $ 45,808 $350,921 Repurchase agreements 1,330 2,677 2,784 -- -- 6,791 Borrowed funds -- 833 750 1,528 -- 3,111 Other liabilities and stockholders' equity -- -- -- -- 43,149 43,149 -------- --------- ------- -------- -------- -------- Total liabilities and equity $ 81,134 $ 112,997 $ 83,351 $ 37,533 $ 88,957 $403,972 -------- --------- ------- -------- -------- -------- Gap for period $ 64,941 $ (17,862) $(42,285) $ 21,446 $ (26,240) -------- --------- -------- -------- --------- Cumulative gap $ 47,079 $ 4,794 $ 26,240 -- ========= ======== ======== ========= As a percent of total assets 16.1% 11.7% 1.2% 6.5%
Interest-rate gap analysis provides a static analysis of the repricing characteristics of the entire balance sheet. It is prepared by scheduling assets and liabilities into time bands based upon their next opportunity to reprice. For floating-rate instruments, the entire 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 non-contractual deposits such as demand deposits and interest-bearing checking, savings, and money market deposits. 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% of total assets. As of December 31, 1998, the estimated exposure was 11.7% asset-sensitive (see table above). The one-year gap currently exceeds 10% due to the fact that the Company has been accumulating cash in anticipation of increased loan volume due to its indirect lending initiative. 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 300 basis points, the most recent earnings simulation model projects net interest income for the next twelve months would increase by an amount equal to approximately 11.32%. The projection exceeds the Company's 10% policy limit due to the increased level of federal funds sold being maintained in anticipation of increased loan volume due to its indirect lending initiative. Additionally, duration and market value sensitivity are selectively utilized where they provide added value to the overall interest rate risk management process. 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 source of liquidity for the parent holding company is dividends from the subsidiary banks. As shown in the consolidated statements of cash flows, cash and cash equivalents increased by $20,020,000 during 1998. The principal cause for the increase was the deposit driven cash provided from financing activities of $22,509,000. Net cash used by investing activities of $6,732,000 was a result of continued loan growth offset by a net decline in investment securities. The net cash provided by operating activities provided the remainder of funding sources for 1998. The $4,243,000 of net cash provided by operating activities was attributable to net income of $4,068,000. CAPITAL EXPENDITURES AND COMMITMENTS During 1998, the Company incurred approximately $1,600,000 in capital expenditures. These expenditures included $216,000 for leasehold improvements and furniture and equipment for the Company's branch in Tilton, New Hampshire. The Company completed its branch located in Conway Village, New Hampshire spending $451,000 on buildings and $158,000 for the purchase of furniture and equipment. Approximately $730,000 was spent for the completion of the Company's upgrade of its existing computer system. The remaining expenditures were for normal upgrades to existing property and equipment. Capital expenditures in 1997 totaled approximately $1,500,000 and consisted of $310,000 for the purchase of land and partial construction of the Company's branch location in Conway Village, New Hampshire. In addition, approximately $1,093,000 was spent for the Company's upgrade of its existing computer system. The remaining expenditures were related to normal upgrades to existing property and equipment. During 1999, the Company's estimated capital expenditure projections, excluding Year 2000 related expenditures, total $775,000. Approximately $250,000 will be spent to provide generators to three locations, Berlin, Plymouth and Conway Village, New Hampshire. These generators are being purchased as part of the Company's Disaster Recovery Plan. The Company has also allocated $150,000 for furniture, fixtures, equipment and leasehold improvements related to the Company's planned supermarket branch location in Gorham, New Hampshire. The remaining monies will be spent for normal upgrades to existing property, plant and equipment. IMPACT OF THE YEAR 2000 ISSUE The statements in the following section include "Year 2000 readiness disclosures" within the meaning of the Year 2000 Information and Readiness Disclosure Act. There is considerable concern over the ability of many computer software programs to function when the year 2000 arrives. This concern arises because many existing programs use only the last two digits to refer to the year. As such, programs do not recognize the difference between a year that begins with "20" instead of the current "19." The Company has developed a Year 2000 strategic plan and a Year 2000 test plan. The Company appointed a dedicated Year 2000 project manager. Each of the Company's subsidiary banks have Year 2000 action teams. These teams and the Year 2000 project manager work together closely. The first phase of this project called for the identification of all information and non information technology systems, both in house and those provided by third party vendors. All systems have been identified. The second phase was to complete a risk analysis assessment of each information and non information technology system. This second phase is complete. The third phase is to renovate the information and non information technology systems to ensure Year 2000 compliance based upon conclusions reached in the risk analysis assessment phase. Renovation of the subsidiary banks' core operating hardware was completed on September 19, 1998. Renovation of the subsidiary banks' core operating software was completed on October 10, 1998. Renovations to the remaining operating systems are expected to be completed by March 31, 1999. The fourth phase is to validate the renovations to the system. The testing of the core operating systems was substantially completed by December 31, 1998. The Company has hired an outside independent third party to review the Company's validation and testing procedures. Testing and verification of the remaining systems are expected to be completed by March 31, 1999. The fifth phase is to implement the Year 2000 compliant systems. All systems are expected to be operating on a compliant basis by June 30, 1999. The Company has identified both customers and vendors with whom it has a material relationship and has determined that the risk that these third party relationships pose to the Company is considered low. For those customers where a borrowing relationship exists, the subsidiary banks have completed a customer risk assessment to determine the status of their Year 2000 efforts. The Company has developed a Year 2000 budget which includes administration, cost of new technology and the cost of testing. Total expenses from Year 2000 compliance are estimated to be $135,000. Actual expenses incurred in 1998 in association with Year 2000 compliance were $42,000 and 1999's projected expenses are $93,000. The development of a Business Resumption Contingency Plan, to deal with the Company's worst-case scenario, the loss of electric power, is well underway. Contingency Planning Teams have been appointed and are led by the Year 2000 project manager. An independent third party has been hired to assist the Company in preparing the contingency plan. There are four phases to the plan: organization planning guidelines, business impact analysis, business resumption contingency plan and validation of the plan. It is anticipated that the Business Resumption Contingency Plan will be completed by the regulatory milestone date of June 30, 1999. Should the Company's worst case scenario, the loss of electric power, occur, the Company will have in place an electric generator at its operation center. This should allow the Company to continue to run its core operating system. Transactions that would be per-formed at a number of the Company's locations would then have to be transported to the operations center for input. This would continue until such time as normal electric power is restored. The Year 2000 project manager provides progress reports to the Company's Executive Committee on a weekly basis. Additionally progress reports are presented to the Company's and the subsidiary banks' Boards of Directors on a monthly basis. The Company's subsidiary banks are subject to regulation by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, respectively. In the event the Company's efforts as described above fail to adequately resolve any such Year 2000 issues affecting the Company's subsidiary banks, the Company could be subject to formal supervisory or enforcement actions by their respective regulators. 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, plans related to products or services of the Company and its subsidiaries, and the statements made in the preceding Year 2000 discussion. 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, the demand for the Company's products and services, competitive factors in the industries in which the company competes, changes in government regulations, the timing, impact and other uncertainties of future acquisitions, and the Company's handling of the Year 2000 issues. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants....................................C-2 Consolidated Balance Sheets as of December 31, 1998 and 1997...............C-3 Consolidated Statements of Income for the fiscal years ended December 31, 1998, 1997 and 1996......................................C-4 Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended December 31, 1998, 1997 and 1996.................C-5 Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 1998, 1997 and 1996.........................C-6 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1998, 1997 and 1996......................................C-7 Notes to Consolidated Financial Statements..................................C-9 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- SHATSWELL, MacLEOD & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS THE BOARD OF DIRECTORS AND STOCKHOLDERS NORTHWAY FINANCIAL, INC. We have audited the accompanying consolidated balance sheets of Northway Financial, Inc. and Subsidiaries as of December 31, 1998 and 1997 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, 1998. 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 audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northway Financial, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts January 20, 1999
CONSOLIDATED BALANCE SHEETS Years Ended December 31, 1998 and 1997 (In thousands, except share data) - ------------------------------------------------------------------------------------------------------------------ 1998 1997 ----------------- ----------------- Assets Cash and due from banks (note 2) $ 14,856 $ 12,086 Federal funds sold 36,475 19,225 Interest bearing deposits 92 85 Investment securities available-for-sale, amortized cost of $48,377 in 1998 and $55,186 in 1997 (notes 3 and 11) 48,529 55,103 Investment securities held-to-maturity, market value of $6,515 in 1998 and $11,297 in 1997 (note 3) 6,509 11,312 Federal Home Loan Bank stock, at cost 1,958 1,958 Federal Reserve Bank stock, at cost 80 80 Loans held for sale 535 292 Loans (notes 4, 5 and 6) 284,158 267,283 Unearned income (332) (526) Allowance for loan losses (note 5) (4,404) (4,156) - ------------- ------------- Loans, net 279,422 262,601 Real estate acquired by foreclosure or substantively repossessed (note 7) 158 222 Accrued interest receivable 1,846 1,971 Deferred income tax asset, net (note 16) 1,222 1,500 Premises and equipment, net (note 8) 9,963 9,187 Deposit purchase premium, net (note 12) 860 1,161 Other assets 1,467 1,083 - ------------- ------------- Total assets $ 403,972 $ 377,866 ============= ============= Liabilities and Stockholders' Equity Liabilities: Deposits (note 9) $ 350,921 $ 322,063 Securities sold under agreements to repurchase (note 11) 6,791 6,146 Federal Home Loan Bank advances (note 10) 3,111 9,322 Other liabilities 2,193 2,809 - ------------- ------------- Total liabilities 363,016 340,340 - ------------- ------------- Commitments and contingencies (notes 8, 18, and 19) -- -- Stockholders' equity (note 14): Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued -- -- Common stock, $1.00 par value; 9,000,000 shares authorized, 1,731,969 issued and 1,729,969 outstanding in 1998 and 1,731,969 issued and outstanding in 1997 1,732 1,732 Surplus 2,101 2,101 Retained earnings 37,084 33,744 Treasury stock, at cost (2,000 shares) (55) -- Accumulated other comprehensive income (loss), net of tax (note 3) 94 (51) - ------------- ------------- Total stockholders' equity 40,956 37,526 - ------------- ------------- Total liabilities and stockholders' equity $ 403,972 $ 377,866 ============= =============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------------------------- 1998 1997 1996 --------- --------- --------- Interest and dividend income: Loans $ 24,313 $ 23,210 $ 21,079 Investment securities available-for-sale 3,311 4,301 5,398 Investment securities held-to-maturity 682 987 1,049 Federal funds sold 769 528 325 Interest bearing deposits 6 8 124 --------- --------- --------- Total interest and dividend income 29,081 29,034 27,975 --------- --------- --------- Interest expense: Deposits (note 9) 10,755 10,861 11,378 Borrowed funds 791 1,146 880 --------- --------- --------- Total interest expense 11,546 12,007 12,258 --------- --------- --------- Net interest and dividend income 17,535 17,027 15,717 Provision for loan losses (note 5) 540 535 512 --------- --------- --------- Net interest and dividend income after provision for loan losses 16,995 16,492 15,205 --------- --------- --------- Noninterest income: Service charges on deposit accounts and fees 843 831 816 Securities gains (losses), net (note 3) 496 313 306 Other 680 536 480 --------- --------- --------- Total noninterest income 2,019 1,680 1,602 --------- --------- --------- Noninterest expense: Salaries and employee benefits (note 17) 6,762 5,883 5,423 Office occupancy and equipment 2,080 1,714 1,759 Amortization of deposit purchase premium 301 301 513 Amortization of reorganization cost 188 10 -- Merger related expenses -- 643 36 Other (note 15) 3,579 3,308 3,245 --------- --------- --------- Total noninterest expense 12,910 11,859 10,976 --------- --------- --------- Income before income taxes 6,104 6,313 5,831 Income tax expense (note 16) 2,036 2,274 1,974 --------- --------- --------- Net income $ 4,068 $ 4,039 $ 3,857 ========= ========= ========= Earnings per common share $ 2.35 $ 2.33 $ 2.23 ========= ========= =========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Total Common Retained Treasury Income Stockholders' Stock Surplus Earnings Stock (Loss) Equity Balance at December 31, 1995 $ 1,732 $ 2,101 $27,697 $-- $ (433) $31,097 Net income -- -- 3,857 -- -- 3,857 Net change in unrealized loss on securities available-for-sale, net of tax -- -- -- -- (399) (399) Cash dividends declared ($0.52 per share) -- -- (892) -- -- (892) ------- ------- ------- ------- ------- ------- Balance at December 31, 1996 1,732 2,101 30,662 -- (832) 33,663 Net income -- -- 4,039 -- -- 4,039 Net change in unrealized loss on securities available-for-sale, net of tax -- -- -- -- 781 781 Cash dividends declared ($0.55 per share) -- -- (957) -- -- (957) ------- ------- ------- ------- ------- ------- Balance at December 31, 1997 1,732 2,101 33,744 -- (51) 37,526 Net income -- -- 4,068 -- -- 4,068 Net change in unrealized loss on securities available-for-sale, net of tax -- -- -- -- 145 145 Treasury stock purchased -- -- -- (55) -- (55) Cash dividends declared ($0.42 per share) -- -- (728) -- -- (728) ------- ------- ------- ------- ------- ------- Balance at December 31, 1998 $ 1,732 $ 2,101 $37,084 $ (55) $ 94 $40,956 ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - -------------------------------------------------------------------------------- For the years ended December 31, 1996 Net income $ 3,857 Other comprehensive income: Net unrealized holding loss on securities available-for-sale, net of tax benefit of $259 (399) -------- Comprehensive income $ 3,458 ======== 1997 Net income $ 4,039 Other comprehensive income: Net unrealized holding gain on securities available-for-sale, net of tax expense of $492 781 -------- Comprehensive income $ 4,820 ======== 1998 Net income $ 4,068 Other comprehensive income: Net unrealized holding gain on securities available-for-sale, net of tax expense 145 -------- Comprehensive income $ 4,213 ======== Reclassification disclosure for the year ended December 31, 1998: Net unrealized gains on available-for-sale securities $ 731 Less reclassification adjustment for realized gains in net income 496 -------- Other comprehensive income before income tax effect 235 Income tax expense 90 -------- Other comprehensive income, net of tax $ 145 ======== See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 --------------------------------------- Cash flows from operating activities: Net income $ 4,068 $ 4,039 $ 3,857 Adjustments to reconcile net income to net cash provided by operating activities: Provision for: Loan losses 540 535 512 Depreciation and amortization 1,122 992 1,173 Deferred income taxes 188 56 (11) Write down of real estate acquired by foreclosure 5 58 54 Gains on sales of investment securities available-for-sale, net (496) (313) (306) Loss on sale of premises and equipment -- 45 -- Amortization of premium and accretion of (discount) on investment and mortgage-backed securities, net 116 230 449 Decrease in unearned income, net (194) (193) (294) Gains on sales of real estate acquired by foreclosure or substantively repossessed (45) (56) (88) Net (increase) decrease in loans held for sale (243) (234) 86 Decrease (increase) in accrued interest receivable 125 640 (5) Increase in other assets (327) (380) (130) (Decrease) increase in other liabilities (616) 97 186 ---------- --------- -------- Net cash provided by operating activities 4,243 5,516 5,483 ---------- --------- -------- Cash flows from investing activities: Net (increase) decrease in interest bearing deposits (7) 194 2,195 Proceeds from sales of investment securities available-for-sale 4,344 28,446 3,223 Proceeds from maturities of investment securities held-to-maturity 7,487 8,855 9,956 Proceeds from maturities of investment securities available-for-sale 20,107 17,817 11,137 Purchase of investment securities available-for-sale (24,558) (15,050) (23,305) Purchase of Federal Home Loan Bank stock -- (136) -- Purchase of investment securities held-to-maturity (7,017) (8,036) (6,910) Principal payments received on investment securities held-to-maturity 4,269 -- 35 Principal payments received on investment securities available-for-sale 7,360 3,735 4,413 Net increase in loans (17,473) (26,901) (22,706) Proceeds from sales of real estate acquired by foreclosure or substantively repossessed and principal payments received on OREO 353 378 486 Proceeds from sale of premises and equipment -- 296 -- Additions to premises and equipment (1,597) (1,454) (1,099) ---------- --------- -------- Net cash (used)/provided by investing activities (6,732) 8,144 (22,575) ---------- --------- -------- Cash flows from financing activities: Net increase in demand deposits NOW, savings and money market accounts 27,528 1,957 7,676 Net increase (decrease) in time deposits 1,330 (2,208) (2,507) Cash received from acquisition of branch -- -- 6,355 Advances from Federal Home Loan Bank 3,327 42,467 39,814 Repayment of Federal Home Loan Bank advances (9,538) (41,848) (38,603) Net increase (decrease) in repurchase agreements 645 1,526 (1,467) Net (decrease) increase in other borrowed funds -- (221) 221 Purchases of treasury stock (55) -- -- Cash dividends paid (728) (1,304) (802) ---------- --------- -------- Net cash provided by financing activities 22,509 369 10,687 ---------- --------- -------- Net increase (decrease) in cash and cash equivalents 20,020 14,029 (6,405) Cash and cash equivalents at beginning of period 31,311 17,282 23,687 ---------- --------- -------- Cash and cash equivalents at end of period $ 51,331 $ 31,311 $ 17,282 ========== ========= ======== Cash paid during the year for: Interest $ 12,068 $ 11,802 $ 11,957 ========== ========= ======== Income taxes $ 2,097 $ 2,383 $ 2,104 ========== ========= ======== Supplemental disclosures of non-cash activities: Loans transferred to real estate acquired by foreclosure or substantively repossessed $ 524 $ 603 $ 305 ========== ========= ======== Loans transferred to other personal property owned $ 57 $ 19 $ -- ========== ========= ======== Loans charged off, net of recoveries $ 292 $ 320 $ 437 ========== ========= ======== Financed sales of real estate acquired by foreclosure $ 231 $ 203 $ 141 ========== ========= ======== Real estate acquired by foreclosure or substantively repossessed transferred to loans $ 44 $ -- $ -- ========== ========= ========
See accompanying notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997, and 1996 - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Northway Financial, Inc. (the Company) is a New Hampshire corporation formed on September 30, 1997. Prior to its becoming a holding company on September 30, 1997, as described in Note 23, the Company had no operations other than those of an organizational nature. Subsequent thereto, the Company's only business activity is to own all of the shares of The Berlin City Bank (BCB) and The Pemigewasset National Bank (PNB). The Company's headquarters are in Berlin, New Hampshire. The Berlin City Bank (BCB) is a state chartered Trust Company under the laws of the State of New Hampshire and is headquartered in Berlin, New Hampshire. BCB is engaged principally in the business of attracting deposits from the general public and investing those deposits in real estate loans, consumer loans, and small business loans. The Pemigewasset National Bank (PNB) is a federally chartered bank headquartered in Plymouth, New Hampshire. PNB operates its business from five banking offices located in New Hampshire. PNB is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and real estate loans, and in consumer loans and small business loans. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, BCB and PNB. 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 balance sheets, 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 real estate acquired by foreclosure. The Company's loans are primarily secured by real estate 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 real estate acquired by foreclosure are susceptible to changing conditions in this market. A description of the significant accounting policies follows. 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 and federal funds sold. INTEREST BEARING DEPOSITS Interest bearing deposits are stated at cost, which approximates market value. INVESTMENT AND MORTGAGE-BACKED 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; debt and equity securities that are bought and held principally for the purpose of selling in the near term are 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. 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 or mortgage-backed security is judged to be other than temporary, the cost basis of the investment is written down to fair value as the new cost basis and the amount of the write down in included as a charge against securities gains, net. Gains and losses on sales of investment securities are recognized at the time of the sale on a specific identification basis. LOANS HELD FOR SALE Loans held for sale in the secondary market 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, and discounts on purchased loans. This income is deferred and recognized as adjustments to loan income over the contractual life of the related notes using a method the result of which approximates that of the interest method. Loans are placed on nonaccrual when payment of principal or interest is considered to be in doubt or is past due 90 days or more. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Previously accrued income on nonaccrual loans that has not been collected is reversed from current income, and subsequent cash receipts are recorded as income. Loans are returned to accrual status when collection of all contractual principal and interest is reasonably assured and there has been sustained repayment performance. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered adequate by management on the basis of many factors including the risk characteristics of the portfolio, trends in loan delinquencies and an assessment of existing economic conditions. Management believes that the allowance for loan losses is adequate. Additions to the allowance are charged to earnings; realized losses, net of recoveries, are charged directly to the allowance. While management uses available information in establishing the allowance for loan losses, future additions to the allowance may be necessary if economic conditions differ substantially from the estimates used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the banks' allowances for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on judgements different from those of management. Commercial, commercial real estate and individually significant mortgage and consumer loans are considered impaired, and are placed on nonaccrual, when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Mortgage and consumer loans which are not individually significant are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. The amount of impairment for all impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. REAL ESTATE ACQUIRED BY FORECLOSURE OR SUBSTANTIVELY REPOSSESSED Real Estate Acquired by Foreclosure 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 in-substance repossessed or foreclosed if the Company receives physical possession of the debtor's assets, regardless of whether or not foreclosure proceedings take place. Both in-substance foreclosures and real estate formally acquired in settlement of loans are initially recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received. Subsequent to foreclosure or classification as in-substance foreclosure, such assets are carried at the lower of cost or fair value minus costs to sell. Gains and losses upon disposition are reflected in operations as realized. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets. Amortization of leasehold improvements is accumulated on a straight-line basis over the lesser of the term of the respective lease or the asset's useful life. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. 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. PENSION COSTS The Company funds accrued pension costs under a noncontributory pension plan covering substantially all employees. EARNINGS PER SHARE In the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings per Share" (EPS) issued by the Financial Accounting Standards Board. This statement simplifies the standards for computing earnings per share. It replaces the presentation of primary EPS with a presentation of Basic EPS which excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS, if applicable, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The adoption of SFAS No. 128 had no material effect on the Company's 1998 and 1997 financial statements and EPS for 1996 financial statements did not need to be restated. NOTE 2 CASH AND DUE FROM BANKS Cash and due from banks at December 31, 1998 and 1997 includes $2,308,000 and $2,284,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. NOTE 3 INVESTMENT AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and market value of investment and mortgage-backed securities at December 31, 1998 follows: (In thousands) Gross Gross Amortized Unrealized unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------ Available-for-sale: US Treasury and other US government agencies $17,322 $ 93 $ 24 $17,391 Common and preferred stocks 2,919 118 296 2,741 Mortgage-backed securities 13,342 120 20 13,442 Collateralized mortgage obligations 11,118 14 62 11,070 State and political subdivisions 3,676 209 -- 3,885 ------- ----- ------ ------- $48,377 $ 554 $ 402 $48,529 ======= ===== ====== ======= Held-to-maturity: Mortgage-backed securities $ 5,501 $ 16 $ 32 $ 5,485 State and political subdivisions 1,008 22 -- 1,030 ------- ----- ------ ------- $ 6,509 $ 38 $ 32 $ 6,515 ======= ===== ====== ======= The amortized cost, gross unrealized gains, gross unrealized losses and market value of investment and mortgage-backed securities at December 31, 1997 follows: (In thousands) Gross Gross Amortized Unrealized unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------ Available-for-sale: US Treasury and other US government agencies $11,873 $ 66 $ 10 $11,929 Corporate notes 5,008 3 11 5,000 Common and preferred stocks 2,752 206 162 2,796 Mortgage-backed securities 17,366 99 125 17,340 Collateralized mortgage obligations 14,171 -- 276 13,895 State and political subdivisions 4,016 127 -- 4,143 ------- ----- ------ ------- $55,186 $ 501 $ 584 $55,103 ======= ===== ====== ======= Held-to-maturity: Mortgage-backed securities $ 8,400 $ 20 $ 66 $ 8,354 State and political subdivisions 2,912 31 -- 2,943 ------- ----- ------ ------- $11,312 $ 51 $ 66 $11,297 ======= ===== ====== ======= The contractual maturity distribution of investments in debt obligations at December 31, 1998 follows: (In thousands)
One to Five to Over Within five ten ten Total one year years years years cost ------- ------ ------- ------- ------- Available-for-sale: US Treasury and other US government agencies $ 500 $6,002 $10,820 $ -- $17,322 Mortgage-backed securities 142 1,219 929 11,052 13,342 Collateralized mortgage obligations -- -- 9,453 1,665 11,118 State and political subdivisions -- 662 222 2,792 3,676 ------- ------ ------- ------- ------- $ 642 $7,883 $21,424 $15,509 $45,458 ======= ====== ======= ======= ======= Market value $ 642 $7,962 $21,451 $15,733 $45,788 ======= ====== ======= ======= ======= One to Five to Over Within five ten ten Total one year years years years cost ------- ------ ------- ------- ------- Held-to-maturity: Mortgage-backed securities $ 22 $ 695 $ 2,629 $ 2,155 $ 5,501 State and political subdivisions 225 783 -- -- 1,008 ------- ------ ------- ------- ------- $ 247 $1,478 $ 2,629 $ 2,155 $ 6,509 ======= ====== ======= ======= ======== Market value $ 247 $1,503 $ 2,630 $ 2,135 $ 6,515 ======= ====== ======= ======= ========
Actual maturities of state and political subdivisions, mortgage-backed securities and collateralized mortgage obligations will differ from the maturities presented because borrowers have the right to prepay obligations without prepayment penalties. An analysis of gross realized gains and losses on investment and mortgage-backed securities sold during the years ended December 31 follows: (In thousands)
1998 1997 1996 ----------------- ------------------ ------------------- Realized Realized Realized Realized Realized Realized Gains Losses Gains Losses Gains Losses ------- ------ ----- ---- ------ ------- Investments: Debt $ -- $ -- $ 31 $178 $ 1 $ -- Equity 523 22 548 -- 325 20 Mortgage-backed securities available-for-sale -- 5 88 176 -- -- ------- ------ ----- ---- ------ ------- $ 523 $ 27 $ 667 $354 $ 326 $ 20 ======= ====== ===== ==== ====== =======
Investment securities totaling $22,414,000 and $24,588,000 were pledged to secure public deposits, repurchase agreements and treasury, tax and loan accounts at December 31, 1998 and 1997, respectively. NOTE 4 LOANS Loans at December 31 were comprised of the following: (In thousands) 1998 1997 -------- -------- Real Estate: Residential $146,603 $152,041 Commercial 77,680 61,873 Construction 4,118 5,664 Commercial 25,874 21,460 Installment 25,088 23,476 Other 4,795 2,769 -------- -------- Total loans 284,158 267,283 Less: Unearned income (332) (526) Allowance for loan losses (note 5) (4,404) (4,156) -------- -------- $279,422 $262,601 ======== ======== Loans are granted in the ordinary course of business to directors, officers, and their immediate families and to organizations in which such persons have more than a 10% ownership interest. These loans were 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 collectability or present other unfavorable features. An analysis of activity in such loans for the years ended December 31, 1998 and 1997 follows: (In thousands) 1998 1997 -------- -------- Balance at beginning of year $ 1,692 $ 1,361 New loans 867 1,138 Repayments (947) (782) Change in status of officers and directors (63) (25) -------- -------- Balance at end of year $ 1,549 $ 1,692 ======== ======== 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. Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of the loans totaled $12,007,000 and $4,715,000 at December 31, 1998 and 1997, respectively. In 1998 and 1997 the Company sold mortgage loans totaling $7,787,000 and $2,209,000 and retained the servicing rights. The fair value of those rights is not material and has not been recognized in the 1998 and 1997 financial statements. NOTE 5 ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses at December 31 follows: (In thousands) 1998 1997 1996 -------- -------- -------- Balance at beginning of year $ 4,156 $ 3,941 $ 3,866 Provision charged to expense 540 535 512 Recoveries on loans previously charged-off 232 292 213 Loans charged-off (524) (612) (650) -------- -------- -------- Balance at end of year $ 4,404 $ 4,156 $ 3,941 ======== ======== ======== NOTE 6 IMPAIRED LOANS 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 FASB 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, 1998 and 1997, loans restructured in a troubled debt restructuring before January 1, 1995, the effective date of SFAS No. 114, that are not impairedbased on the terms specified by the restructuring agreement totaled $1,151,000 and $1,184,000, respectively. The gross interest income that would have been recorded in the years ended December 31, 1998 and 1997 if such restructured loans had been current in accordance with their original terms was $105,000 and $111,000, respectively. The amount of interest income on such restructured loans that was included in net income for the years ended December 31, 1998 and 1997 was $90,000 and $96,000, respectively. The recorded investment in loans that are considered to be impaired under FASB No. 114 was $415,000 and $211,000 for the years ended December 31, 1998 and 1997, respectively, for which the related allowance for loan losses is $19,000 and $0, respectively. All of the Company's impaired loans are collateralized and therefore all impaired loans are measured by the difference between the fair value of the collateral and the recorded amount of the loan. The average recorded investment in impaired loans during the twelve months ended December 31, 1998 and 1997 was approximately $316,000 and $555,000, respectively. For the twelve months ended December 31, 1998 and 1997 the Company recognized interest income on those impaired loans of $10,000 and $16,000 which included $0 and $4,000 of interest income recognized using the cash basis of income recognition, respectively. NOTE 7 REAL ESTATE ACQUIRED BY FORECLOSURE Real estate acquired by foreclosure or substantively repossessed at December 31 follows: (In thousands) 1998 1997 -------- -------- Commercial real estate $ 100 $ -- Residential homes 28 112 Mobile home on land 30 -- Condominiums -- 96 Land -- 14 -------- -------- $ 158 $ 222 ======== ======== The aforementioned balances include $58,000 and $59,000 of collateral substantively repossessed at December 31, 1998 and 1997, respectively. Sales by the Company resulted in gains of $45,000, $56,000, and $88,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Write downs on real estate acquired by foreclosure totaled $5,000, $58,000, and $54,000 for the years ended December 31, 1998, 1997, and 1996, respectively. NOTE 8 PREMISES AND EQUIPMENT A summary of premises and equipment at December 31 follows: (In thousands) 1998 1997 -------- -------- Land $ 1,615 $ 1,615 Buildings 7,788 7,029 Construction in progress 111 516 Equipment 5,675 4,586 -------- -------- 15,189 13,746 Less accumulated depreciation and amortization (5,226) (4,559) -------- -------- $ 9,963 $ 9,187 ======== ======== The Company leases four of its locations under non-cancellable operating leases. Minimum lease payments in future periods under non-cancellable operating leases at December 31, 1998 are as follows: 1999 139,137 2000 139,733 2001 94,409 2002 50,000 2003 24,722 -------- $448,001 ======== The terms of two of the leases provide that the Company can, at the end of the initial five year term, renew the lease under two five-year options. All leases contain a provision that the Company shall pay its pro-rata share of operating costs, including real estate taxes. A lease under which the Company was paying rent for a location no longer in use expired in 1996. Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted to $91,000, $57,000, and $52,000, respectively. NOTE 9 DEPOSITS Deposits at December 31 were as follows: (Dollars in thousands) 1998 1997 ------------------- ----------------------- Weighted Weighted Average Average Amount Rate Amount Rate -------- ---- -------- ---- Non-certificate deposits: Regular savings $ 63,536 2.04% $ 62,825 2.37% NOW and Super NOW 50,730 0.99 46,419 1.28 Money market 37,828 2.54 21,420 2.77 Demand deposits 45,808 -- 39,710 -- -------- -------- 197,902 1.40 170,374 1.57 -------- -------- Certificates of deposit: Less than $100,000 129,071 5.13 131,308 5.43 $100,000 and over 23,948 5.14 20,381 5.39 -------- -------- 153,019 5.14 151,689 5.43 -------- -------- Total deposits $350,921 3.03% $322,063 3.39% ======== ======== On December 31, 1998, BCB accepted a temporary money market deposit in the amount of $14,500,000. This account was closed on January 6, 1999. For time deposits as of December 31, 1998, the aggregate amount of maturities for each of the following five years ended December 31, are: (In thousands) 1999 117,964 2000 30,841 2001 3,691 2002 433 2003 90 -------- $153,019 ======== NOTE 10 ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB). The components of these borrowings are as follows as of December 31, 1998: (Dollars in thousands) Weighted Average Rate to Maturity Date Balance Maturity ------------- ------- -------- 1999 833 5.87% 2000 750 5.83 2001 1,500 5.95 2002 28 6.78 ------ TOTAL $3,111 ====== Advances are secured by the Company's stock in that institution, its residential real estate mortgage portfolio and the remaining US government and agency securities not otherwise pledged. Information about short-term advances included above is as follows: (Dollars in thousands) December 31, ---------------------------- 1998 1997 -------- -------- Outstanding at end of period $ 833 $ 9,212 Approximate maximum out- standing at any month end 8,054 12,221 Average amounts outstanding during the period 4,951 9,019 Weighted average interest rate during the period 6.47% 5.98% Weighted average interest rate at end of period 5.91 5.92 NOTE 11 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase at December 31 are summarized as follows: (Dollars in thousands) 1998 1997 1996 ------- ------ ------ Outstanding at December 31 $ 6,791 $6,146 $4,620 Maturity date 1/99-4/00 2/98-12/98 2/97-5/98 Weighted average interest rate at end of year 4.97% 5.57% 5.50% Maximum amount out- standing at any month end $10,396 $9,161 $7,784 Daily average outstanding $ 8,469 $7,796 $6,565 Weighted average interest rate for the year 5.09% 5.18% 5.45% Investment securities with a total book value and accrued interest of $16,964,000, $20,633,000 and $14,393,000 were pledged as collateral and held by a Correspondent Bank under the Company's control to secure the agreements at December 31, 1998, 1997, and 1996, respectively. The market value of the collateral at December 31, 1998, 1997 and 1996 was $16,821,000, $20,107,000, and $13,998,000, respectively. NOTE 12 ACQUISITIONS On July 22, 1994, the Company acquired $33.2 million in deposits from the Resolution Trust Corporation. The Company paid a deposit purchase premium of $2.3 million. This premium is being amortized to noninterest expense over seven years by use of the straight line method. On April 22, 1996, the Company purchased certain assets and assumed deposits from First New Hampshire Bank's branch office in Campton, New Hampshire. On that day, the Company recorded the following entries to record this transaction: (In thousands) Loans $ 4 Premises and equipment 225 Deposit purchase premium 175 Cash 6,355 Other liabilities 1 Deposits 6,758 This transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branch are included in the 1996 income statement of the Company from the date of the transaction. The deposit purchase premium of $175,000 is being amortized to noninterest expense over ten years using the straight line method. Management reviews the carrying value of this intangible asset on an ongoing basis, taking into consideration any events and circumstances that might have diminished such value. NOTE 13 LINES OF CREDIT As members of the Federal Home Loan Bank of Boston, the Banks have access to pre-approved lines of credit. At December 31, 1998 the Banks' available line of credit totaled $10.2 million. In addition, the Banks have a credit line totaling $2.0 million with another commercial bank. At December 31, 1998 and 1997 there was no amount outstanding on lines of credit. NOTE 14 STOCKHOLDERS' EQUITY 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. At December 31, 1998, the Company was in compliance with all regulatory capital requirements. 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 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). Management believes, as of December 31, 1998, that the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notifications from the Federal Deposit Insurance Corporation categorized the Banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions' categories. The Banks' actual capital amounts and ratios are also presented in the tables. (Dollars in thousands)
To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes: Provisions: ---------------------------- -------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1998: Risk-based Total Capital: Consolidated $ 43,016 17.78% $ 18,870 >=8% N/A the Berlin City Bank 26,204 16.64 12,598 >=8 $ 15,747 >=10% the Pemigewasset National Bank 14,344 17.33 6,621 >=8 8,277 >=10 Risk-based Tier 1 Capital: Consolidated 40,002 16.53 9,435 >=4 N/A the Berlin City Bank 24,221 15.38 6,299 >=4 9,448 >=6 the Pemigewasset National Bank 13,307 16.08 3,311 >=4 4,966 >=6 Leverage: Consolidated 40,002 10.25 15,550 >=4 N/A the Berlin City Bank 24,221 9.26 10,468 >=4 13,085 >=5 the Pemigewasset National Bank 13,307 10.05 5,297 >=4 6,622 >=5 As of December 31, 1997: Risk-Based Total Capital: Consolidated $ 39,217 17.56% $ 17,867 >=8% N/A The Berlin City Bank 25,166 17.68 11,388 >=8 $ 14,235 >=10% The Pemigewasset National Bank 13,631 16.90 6,453 >=8 8,066 >=10 Risk-Based Tier 1 Capital: Consolidated 36,425 16.31 8,933 >=4 N/A The Berlin City Bank 22,387 15.73 5,694 >=4 8,541 >=6 The Pemigewasset National Bank 12,619 15.65 3,226 >=4 4,840 >=6 Leverage: Consolidated 36,425 9.67 15,064 >=4 N/A The Berlin City Bank 22,387 9.14 9,794 >=4 12,243 >=5 The Pemigewasset National Bank 12,619 9.33 5,278 >=4 6,598 >=5
Under the National Bank Act, the approval of the Office of the Comptroller of the Currency ("OCC") is required if dividends declared by Pemigewasset National Bank ("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, 1998, PNB could, without approval of the OCC, declare dividends aggregating $2,077,000. NOTE 15 OTHER NONINTEREST EXPENSE The major components of other noninterest expense for the years ended December 31 follows: (In thousands) 1998 1997 1996 -------- -------- -------- Directors' fees $ 138 $ 266 $ 303 Stationery and supplies 470 374 360 Other 2,971 2,668 2,582 -------- -------- -------- $ 3,579 $ 3,308 $ 3,245 ======== ======== ======== NOTE 16 FEDERAL AND STATE TAXES The components of federal and state tax expense at December 31 are as follows: (In thousands) 1998 1997 1996 -------- -------- -------- Current: Federal $ 1,628 $ 2,025 $ 1,732 State 220 193 253 -------- -------- -------- 1,848 2,218 1,985 -------- -------- -------- Deferred: Federal 154 45 (8) State 34 11 (3) -------- -------- -------- 188 56 (11) -------- -------- -------- Total $ 2,036 $ 2,274 $ 1,974 ======== ======== ======== 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: (In thousands) 1998 1997 -------- -------- Deferred income tax assets: Allowance for loan losses $ 1,297 $ 1,149 Loan origination fees 91 155 Interest on nonaccrual loans 18 193 Foreclosed property valuation -- 19 Unrealized holding loss on investment securities available-for-sale -- 32 Deposit purchase premium 338 280 Supplemental insurance 53 57 Other 57 47 -------- -------- 1,854 1,932 -------- -------- Deferred income liabilities: Depreciation (454) (380) Pension (120) (52) Unrealized holding gain on investment securities available-for-sale (58) -- -------- -------- (632) (432) -------- -------- Deferred income tax asset, net $ 1,222 $ 1,500 ======== ======== 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, 1998, 1997 and 1996 differs from the "expected" federal income tax expense at the 34% statutory rate for the following reasons: 1998 1997 1996 -------- -------- -------- Expected federal income taxes 34.0% 34.0% 34.0% Municipal income (3.6) (3.6) (3.5) State tax expense net of federal benefit 2.8 3.2 2.6 Other 0.1 2.4 0.8 -------- -------- -------- 33.3% 36.0% 33.9% ======== ======== ======== NOTE 17 PENSION PLANS The Company has two non-contributory defined benefit pension plans covering substantially all employees. The Company contributes to the pension plans annually to provide for current benefits, as well as expected future benefits. The following table sets forth information about the plans as of December 31 and for the years then ended: (Dollars in thousands) 1998 1997 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 3,587 $ 3,191 Service cost 218 202 Interest cost 268 233 Actuarial gain 204 162 Benefits paid (289) (201) -------- -------- Benefit obligation at end of year 3,988 3,587 -------- -------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 3,419 2,946 Actual return on plan assets 333 394 Employer contribution 303 280 Benefits paid (289) (201) -------- -------- Fair value of plan assets at end of year 3,766 3,419 -------- -------- Funded status (222) (168) Unrecognized net actuarial loss 560 409 Unrecognized prior service cost (8) (11) -------- -------- Prepaid benefit cost $ 330 $ 230 ======== ======== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 1998 1997 ------------------------ BCB PNB BCB PNB Discount rate 7% 8% 7% 8% Expected return on plan assets 9% 8% 9% 8% Rate of compensation increase 5% 4% 5% 4% COMPONENTS OF NET PERIODIC BENEFIT COST 1998 1997 1996 -------- -------- -------- Service cost $ 218 $ 202 $ 199 Interest cost 268 232 204 Expected return on plan assets (296) (246) (234) Amortization of prior service cost 1 1 1 Recognized net actuarial loss 16 13 5 Recognized transition amount (4) (4) (4) -------- -------- -------- Net periodic benefit cost $ 203 $ 198 $ 171 ======== ======== ======== Plan assets as of December 31, 1998 and 1997 include a savings account at BCB totaling $798,000 and $162,000, respectively. PNB has a 401(k) plan. To be eligible, employees must have attained age twenty-one, completed six months of service and be credited with 1,000 hours of service. PNB matches 25% of employee contributions on the first 4% of compensation deposited as elective contributions. The 401(k) matching expense was $15,000, $15,000, and $14,000 for the years ended December 31, 1998, 1997, and 1996, respectively. NOTE 18 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: (In thousands) 1998 1997 -------- -------- Financial instrument whose contract amounts represent credit risk: Unadvanced portions of home equity loans $ 2,381 $ 1,863 Unadvanced portions of lines of credit 10,691 16,930 Unadvanced portions of commercial real estate loans 1,757 1,585 Commitments to originate loans 13,460 8,713 Standby letters of credit 520 491 Commitments to originate loans, unadvanced portions of home equity loans, lines of credit and commercial real estate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without having been drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness 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 19 LITIGATION In the ordinary course of business, the Company is involved in routine litigation. Based on its review of such litigation, management does not foresee any material effect on the Company's financial position or results of operations. NOTE 20 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 due from banks, interest-bearing deposits, and federal funds sold: The carrying amounts reported in the balance sheets for cash and short-term instruments approximates those assets' fair values. Investment and mortgage-backed 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 FRB Stock: The carrying amount reported in the balance sheets for Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") Stock approximates their fair value. If redeemed, the Company will receive an amount equal to the par value of the stocks. 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 and mortgagors' escrow accounts: The fair value of demand deposits (e.g. NOW and Super NOW 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. Repurchase agreements: The fair value of the Company's repurchase agreements is estimated using discounted cash flow analysis, based on the Company's current rate for similar repurchase agreements. Federal Home Loan Bank Advances: The fair value of FHLB advances 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: (In thousands) Loans held for sale: The carrying amount reported in the balance sheet approximates fair value. 1998 1997 ----------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: Cash and due from banks $ 14,856 $ 14,856 $ 12,086 $ 12,086 Federal funds sold 36,475 36,475 19,225 19,225 Interest bearing deposits 92 92 85 85 Investment securities available-for-sale 48,529 48,529 55,103 55,103 Investment securities held-to-maturity 6,509 6,515 11,312 11,297 FHLB stock 1,958 1,958 1,958 1,958 FRB stock 80 80 80 80 Loans held for sale 535 535 292 292 Loans, net 279,422 280,754 262,601 262,164 Accrued interest receivable 1,846 1,846 1,971 1,971 Financial liabilities: Deposits 350,921 351,775 322,063 322,379 Repurchase agreements 6,791 6,827 6,146 6,150 FHLB advances 3,111 3,135 9,322 9,325 The carrying amounts of financial instruments shown in the above table are included in the balance sheets under the indicated captions. At December 31, 1998, all the Company's financial instruments were held for purposes other than trading. At December 31, 1998, 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 judgements 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 judgement 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 21 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (In thousands, except earnings per share) Summarized quarterly financial data for 1998 and 1997 follows: 1998 Quarters Ended ----------------------------------------------- Mar 31 Jun 30 Sep 30 Dec 31 -------- -------- -------- -------- Interest and dividend income $ 7,168 $ 7,189 $ 7,379 $ 7,345 Interest expense 2,910 2,884 2,930 2,822 -------- -------- -------- -------- Net interest income 4,258 4,305 4,449 4,523 Provision for loan losses 135 135 135 135 Noninterest income 636 461 397 525 Noninterest expense 2,899 3,062 3,148 3,801 -------- -------- -------- -------- Income before taxes 1,860 1,569 1,563 1,112 Income tax expense 652 515 516 353 -------- -------- -------- -------- Net income $ 1,208 $ 1,054 $ 1,047 $ 759 ======== ======== ======== ======== Earnings per share $ 0.70 $ 0.61 $ 0.60 $ 0.44 ======== ======== ======== ======== 1997 Quarters Ended ----------------------------------------------- Mar 31 Jun 30 Sep 30 Dec 31 -------- -------- -------- -------- Interest and dividend income $ 6,961 $ 7,245 $ 7,427 $ 7,401 Interest expense 2,918 3,036 3,054 2,999 -------- -------- -------- -------- Net interest income 4,043 4,209 4,373 4,402 Provision for loan losses 120 135 140 140 Noninterest income 538 491 349 302 Noninterest expense 2,970 2,907 2,971 3,011 -------- -------- -------- -------- Income before taxes 1,491 1,658 1,611 1,553 Income tax expense 413 598 578 685 -------- -------- -------- -------- Net income $ 1,078 $ 1,060 $ 1,033 $ 868 ======== ======== ======== ======== Earnings per share $ 0.62 $ 0.61 $ 0.60 $ 0.50 ======== ======== ======== ======== NOTE 22 CONDENSED PARENT ONLY FINANCIAL STATEMENTS Condensed financial statements of Northway Financial, Inc. as of December 31, 1998 and 1997 and for the three years ended December 31, 1998 follow: (In thousands) Balance Sheets 1998 1997 ---- ---- Assets Cash and cash equivalents $ 2,322 $ 1,412 Investment in subsidiary, The Berlin City Bank 25,024 23,232 Investment in subsidiary, The Pemigewasset National Bank 13,636 12,884 Other assets 1 -- -------- -------- $ 40,983 $ 37,528 ======== ======== Liabilities and Stockholders' Equity Accrued expenses $ 27 $ 2 -------- -------- Total liabilities 27 2 -------- -------- Stockholders' equity: Common Stock 1,732 1,732 Additional paid-in-capital 2,101 2,101 Retained earnings 37,084 33,744 Treasury stock (55) -- Accumulated other comprehensive income 94 (51) -------- -------- Total Stockholders' Equity 40,956 37,526 -------- -------- $ 40,983 $ 37,528 ======== ======== Statements of Income 1998 1997 1996 -------- -------- -------- Dividends from subsidiaries $ 1,686 $ 1,973 $ 892 Interest income 43 -- -- Management fee income from subsidiary -- 25 36 -------- -------- -------- 1,729 1,998 928 General and administrative expense 70 217 36 -------- -------- -------- Income before income tax expense (benefit) and equity in undistributed net income of subsidiaries 1,659 1,781 892 Income tax expense (benefit) (9) 3 -- -------- -------- -------- Income before equity in undistributed net income of subsidiaries 1,668 1,778 892 Equity in undistributed net income of subsidiaries 2,400 2,261 2,965 -------- -------- -------- Net income $ 4,068 $ 4,039 $ 3,857 ======== ======== ======== Statements of Cash Flows 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net income $ 4,068 $ 4,039 $ 3,857 Adjustments to reconcile net income to net cash provided by operating activities: Increase in other assets -- -- 2 Increase (decrease) in accrued expenses 25 (1) -- Undistributed net income of subsidiaries (2,400) (2,261) (2,965) -------- -------- -------- Net cash provided by operating activities 1,693 1,777 894 -------- -------- -------- Cash flows from financing activities: Cash received from BCB -- 245 -- Purchase of treasury stock (55) -- -- Dividends paid (728) (1,004) (802) -------- -------- -------- Net cash used in financing activities (783) (759) (802) -------- -------- -------- Net increase in cash and equivalents 910 1,018 92 Cash and cash equivalents at beginning of year 1,412 394 302 -------- -------- -------- Cash and cash equivalents at end of year $ 2,322 $ 1,412 $ 394 ======== ======== ======== NOTE 23 FORMATION OF HOLDING COMPANY On September 30, 1997, The Berlin City Bank and Pemi Bancorp, Inc. (Parent company of The Pemigewasset National Bank), in accordance with an Agreement and Plan of Merger dated as of March 14, 1997, merged with the result that Northway Financial, Inc. became the bank holding company for The Berlin City Bank and The Pemigewasset National Bank. Each of such banks became wholly-owned subsidiaries of Northway Financial, Inc. To reflect the transaction, Northway Financial, Inc. issued 1,731,969 shares of its common stock. Shareholders of The Berlin City Bank and Pemi Bancorp, Inc. received 16 shares and 1.0419 shares, respectively, of Northway Financial, Inc. for each share they held of The Berlin City Bank and Pemi Bancorp, Inc., respectively. The formation of the holding company was accounted for as a pooling of interest. Accordingly, the historical book values of the assets and liabilities of The Berlin City Bank and Pemi Bancorp, Inc. as previously reported on their balance sheets, were carried over to the Company's consolidated balance sheet. No goodwill or other intangibles were created. The formation of the holding company is reflected in the accompanying consolidated financial statements as though The Berlin City Bank and Pemi Bancorp, Inc. had operated as a combined entity for all periods presented. The results of operations of the two companies for the period January 1, 1997 to September 30, 1997 are summarized as follows: (In thousands) The Berlin Pemi Bancorp, City Bank Inc. ---------- ------------- Net interest and dividend income $8,010 $4,615 Net income 2,388 783 The following tables set forth reconciliations of net interest and dividend income and net income previously reported by The Berlin City Bank and Pemi Bancorp, Inc. with the combined amounts presented in the accompanying consolidated financial statements of income for the year ended December 31, 1996: (In thousands) Pemi The Berlin Bancorp, City Bank Inc. Combined --------- -------- -------- Net interest and dividend income $9,671 $6,046 $15,717 Net income 2,580 1,277 3,857 SIGNATURES Pursuant to requirements of Section 13 or 15(d) 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. March 29, 1999 BY: /S/ William J. Woodward ----------------------- William J. Woodward President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/ William J. Woodward Chairman of the Board, President March 29, 1999 ----------------------- and Chief Executive Officer William J. Woodward (Principal Executive Officer) /S/ Fletcher W. Adams Vice Chairman of the March 29, 1999 ----------------------- Board Fletcher W. Adams /S/ John D. Morris Director March 29, 1999 ----------------------- John D. Morris /S/ John H. Noyes Director March 29, 1999 ----------------------- John H. Noyes /S/ Barry J. Kelley Director March 29, 1999 ----------------------- Barry J. Kelley /S/ Randall G. Labnon Director March 29, 1999 ----------------------- Randall G. Labnon /S/ Andrew L. Morse Director March 29, 1999 ----------------------- Andrew L. Morse /S/ Peter H. Bornstein Director March 29, 1999 ----------------------- Peter H. Bornstein /S/ Charles H. Clifford, Jr. Director March 29, 1999 ----------------------- Charles H. Clifford, Jr. /S/ Arnold P. Hanson, Jr. Director March 29, 1999 ----------------------- Arnold P. Hanson, Jr. /S/ Donald R. Hatt Senior Executive Vice March 29, 1999 ----------------------- President Donald R. Hatt Director /S/ George L. Fredette Senior Vice President, Chief March 29, 1999 ----------------------- Financial Officer and Treasurer George L. Fredette (Principal Financial and Accounting Officer) INDEX OF EXHIBITS Exhibit Number Description of Exhibit - -------------- ---------------------- 2.1 Agreement and Plan of Merger, dated as of March 14, 1997, by and among Northway Financial, Inc., The Berlin City Bank, Pemi Bancorp, Inc. and Pemigewasset National Bank (the "Merger Agreement") (incorporated by reference to Exhibit 2.1 to Registration Statement No. 333-33033) 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 Northway's Annual Report on Form 10-K for the year ended December 31, 1997). 4 Form of Certificate representing Northway 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 Northway's Annual Report on Form 10-K for the year ended December 31, 1997). 10.2 Employment Agreement for Fletcher W. Adams (incorporated by reference to Exhibit 10.2 to Northway's Annual Report on Form 10-K for the year ended December 31, 1997). 10.3 Amendment to the Employment agreement for William J. Woodward. (1)(2) 10.4 Amendment to the Employment agreement for Fletcher W. Adams. (1)(2) 10.5 Employment agreement for Donald R. Hatt. (1)(2) 10.6 Employment agreement for Paul M. Ferguson. (1)(2) 21 List of Subsidiaries(1) 23.1 Consent of Shatswell, MacLeod & Company, P.C.(1) 27 Financial Data Schedule(1) - ------------------ (1) Filed herewith (2) Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report EX-10.3 2 AMENDMENT TO EMPLOYMENT AGREEMENT - W. J. WOODWARD Exhibit 10.3 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement ("Amendment") is entered into by and among Northway Financial, Inc., a New Hampshire chartered corporation ("Northway"), The Berlin City Bank, a New Hampshire chartered bank and wholly owned subsidiary of Northway with its principal office located in New Hampshire (Northway and The Berlin City Bank are hereinafter collectively referred to as the "Employer"), and William J. Woodward (the "Executive"). WHEREAS, the Employer and the Executive are parties to an Employment Agreement dated September 30, 1997 (the "Employment Agreement"); and WHEREAS, the Employer and the Executive have determined that it is in their mutual best interest to amend the Employment Agreement as set forth below; NOW, THEREFORE, the Employer and the Executive agree as follows: The Employment Agreement is amended by adding the following to the end of Section 7(d) ("Noncompetition and Nonsolicitation"): Notwithstanding the foregoing, in the event that the Executive becomes entitled to Termination Benefits pursuant to Section 6(f) ("Termination Following a Change of Control"), this Section 7(d) shall not apply to the Executive with respect to the Executive's activities during any period following the termination of the Executive's employment. This Amendment shall be effective as of January 1, 1999 (the "Effective Date"). IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Employer, by its duly authorized officer, and by the Executive, as of the Effective Date. NORTHWAY FINANCIAL, INC. Attest: By: Fletcher W. Adams ------------------- By: /S/ Donald R. Hatt Name: Fletcher W. Adams -------------------- Title: Vice Chairman Name: Donald R. Hatt Title: Senior Executive Vice President and Chief Financial Officer THE BERLIN CITY BANK By: /S/ William J. Woodward ------------------- Name: William J. Woodward Title: President and Chief Executive Officer EXECUTIVE /S/ William J. Woodward ---------------------- William J. Woodward EX-10.4 3 AMENDMENT TO EMPLOYMENT AGREEMENT - F. W. ADAMS Exhibit 10.4 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement ("Amendment") is entered into by and among Northway Financial, Inc., a New Hampshire chartered corporation ("Northway"), Pemigewasset National Bank, a national bank and wholly owned subsidiary of Northway with its principal office located in New Hampshire (Northway and Pemigewasset National Bank are hereinafter collectively referred to as the "Employer"), and Fletcher Adams (the "Executive"). WHEREAS, the Employer and the Executive are parties to an Employment Agreement dated September 30, 1997 (the "Employment Agreement"); and WHEREAS, the Employer and the Executive have determined that it is in their mutual best interest to amend the Employment Agreement as set forth below; NOW, THEREFORE, the Employer and the Executive agree as follows: The Employment Agreement is amended by adding the following to the end of Section 7(d) ("Noncompetition and Nonsolicitation"): Notwithstanding the foregoing, in the event that the Executive becomes entitled to Termination Benefits pursuant to Section 6(f) ("Termination Following a Change of Control"), this Section 7(d) shall not apply to the Executive with respect to the Executive's activities during any period following the termination of the Executive's employment. This Amendment shall be effective as of January 1, 1999 (the "Effective Date"). IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Employer, by its duly authorized officer, and by the Executive, as of the Effective Date. NORTHWAY FINANCIAL, INC. Attest: By: /S/ William J. Woodward ------------------- By: /S/ Donald R. Hatt Name: William J. Woodward ---------------- Title: President and Chief Name: Donald R. Hatt Executive Officer Title: Senior Executive Vice President PEMIGEWASSET NATIONAL BANK By: /S/ Fletcher W. Adams ------------------ Name: Fletcher W. Adams Title: President and Chief Executive Officer EXECUTIVE /S/ Fletcher W. Adams ------------------- Fletcher W. Adams EX-10.5 4 EMPLOYMENT AGREEMENT - D. R. HATT Exhibit 10.5 EMPLOYMENT AGREEMENT This AGREEMENT (the "Agreement") is made as of November 12, 1997 (the "Effective Date"), by and between Northway Financial, Inc., a New Hampshire chartered corporation (the "Employer") and Donald R. Hatt (the "Executive"). In consideration of the mutual covenants contained in this Agreement, the Employer and the Executive agree as follows: A. Employment. The Employer agrees to employ the Executive and the Executive agrees to be employed by the Employer on the terms and conditions set forth in this Agreement. For the purposes of complying with and administering its compensation obligations under this Agreement, the Employer may, at its option, engage its subsidiary, The Berlin City Bank (the "Bank"), to serve, for such period as the Employer determines to be necessary, as a joint employer of the Executive under this Agreement and the Executive accepts any such employment by the Bank. B. Capacity. The Executive shall serve the Employer as Senior Executive Vice President/Chief Operating Officer, subject to election by the Board of Directors of the Employer (the "Board of Directors"). The Executive shall also serve the Employer in such other or additional offices as the Executive may be requested to serve by the Chief Executive Officer (the "CEO") or the Board of Directors. In such capacity or capacities, the Executive shall perform such services and duties in connection with the business, affairs and operations of the Employer as may be assigned or delegated to the Executive from time to time by or under the authority of the CEO or the Board of Directors. C. Term. Subject to the provisions of Section 6, the term of employment pursuant to this Agreement (the "Term") shall be for two (2) years from the Effective Date and shall be renewed automatically for periods of one (1) year commencing at the first anniversary of the Effective Date and on each subsequent anniversary thereafter, unless either the Executive or the Employer gives written notice to the other not less than sixty (60) days prior to the date of any such anniversary of such party's election not to extend the Term. D. Compensation and Benefits. The regular compensation and benefits payable to the Executive under this Agreement shall be as follows: 1. Salary. For all services rendered by the Executive under this Agreement, the Employer shall pay the Executive a salary (the "Salary") at an annual rate of $150,000, subject to increase from time to time in the discretion of the Board of Directors. The Salary shall be payable in periodic installments in accordance with the Employer's usual practice for its senior executives. 2. Bonus or Similar Incentive Programs. The Executive shall be entitled to participate in any incentive or bonus program established by the Board of Directors to include the Executive's position, with such terms as may be established in the sole discretion of the Board of Directors. 3. Regular Benefits. The Executive shall also be entitled to participate in any employee benefit plans, medical insurance plans, life insurance plans, disability income plans, retirement plans, vacation plans, expense reimbursement plans and other benefit plans which the Employer may from time to time have in effect for all or most of its senior executives; provided that until a package of benefit plans is established by the Employer, the Executive shall be entitled to participate in benefit plans in effect for all or most of the senior executives of the Bank. Such participation shall be subject to the terms of the applicable plan documents, generally applicable policies of the Employer, applicable law and the discretion of the Board of Directors or any administrative or other committee provided for in or contemplated by any such plan. Nothing contained in this Agreement shall be construed to create any obligation on the part of the Employer to establish any such plan or to maintain the effectiveness of any such plan which may be in effect from time to time. 4. Relocation Costs. To reduce the Executive's expense associated with relocation, the Employer shall provide the following to the Executive: a) Duplicate Residence Allowance. The Employer shall pay to the Executive a Duplicate Residence Allowance effective for the lesser of (A) such period as the Executive maintains residences in both North Carolina and northern New Hampshire; or (B) nine (9) months. The Duplicate Residence Allowance for any month shall equal the lesser of (Y) One Thousand Dollars ($1,000); or (Z) the Executive's monthly rental or mortgage payment plus the cost of electricity for a northern New Hampshire residence for such month. b) Relocation Allowance. In lieu of any relocation cost reimbursement other than the Duplicate Residence Allowance, the Employer shall pay to the Executive (A) Fifteen Thousand Dollars ($15,000) promptly after the execution of this Agreement; and (B) Fifteen Thousand Dollars ($15,000) upon the Executive's relocation to a permanent residence in northern New Hampshire. 5. Taxation of Payments and Benefits. The Employer shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Employer to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 6. Exclusivity of Salary and Benefits. Unless approved by the Board of Directors, the Executive shall not be entitled to any payments or benefits other than those provided under this Agreement. E. Extent of Service. During the Executive's employment under this Agreement, the Executive shall, subject to the direction and supervision of the CEO or the Board of Directors, devote the Executive's best efforts and business judgment, skill and knowledge to the advancement of the Employer's interests and to the discharge of the Executive's duties and responsibilities under this Agreement. The Executive shall not engage in any other business activity, except as may be approved by the CEO or the Board of Directors; provided that nothing in this Agreement shall be construed as preventing the Executive from: 1. investing the Executive's assets in any company or other entity in a manner not prohibited by Section 7(d) and in such form or manner as shall not require any material activities on the Executive's part in connection with the operations or affairs of the companies or other entities in which such investments are made; or 2. engaging in religious, charitable or other community or non-profit activities that do not impair the Executive's ability to fulfill the Executive's duties and responsibilities under this Agreement. F. Termination and Termination Benefits. Notwithstanding the provisions of Section 3, the Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 6. 1. Termination by the Employer for Cause. The Executive's employment under this Agreement may be terminated for cause without further liability on the part of the Employer effective immediately upon a majority vote of the Board of Directors and written notice to the Executive. Only the following shall constitute "cause" for such termination: a) dishonest statements or acts of the Executive with respect to the business of the Employer or any affiliate of the Employer; b) the commission by or indictment of the Executive for (A) a felony or (B) any misdemeanor involving moral turpitude, deceit, dishonesty or fraud ("indictment," for these purposes, meaning an indictment, probable cause hearing or any other procedure pursuant to which an initial determination of probable or reasonable cause with respect to such offense is made); c) material failure to perform to the reasonable satisfaction of the Board of Directors a substantial portion of the Executive's duties and responsibilities assigned or delegated under this Agreement, which failure continues, in the reasonable judgment of the Board of Directors, for sixty (60) days after written notice given to the Executive by the Board of Directors; d) gross negligence, willful misconduct or insubordination of the Executive with respect to the Employer or any affiliate of the Employer; or e) material breach by the Executive of any of the Executive's obligations under this Agreement. 2. Termination by the Executive. The Executive's employment under this Agreement may be terminated by the Executive by written notice to the Board of Directors or the CEO at least thirty (30) days prior to such termination. 3. Termination by the Employer Without Cause. Subject to the payment of Termination Benefits pursuant to Section 6(d), the Executive's employment under this Agreement may be terminated by the Employer without cause upon written notice to the Executive by a majority vote of the Board of Directors. 4. Certain Termination Benefits. Unless otherwise specifically provided in this Agreement or otherwise required by law, all compensation and benefits payable to the Executive under this Agreement shall terminate on the date of termination of the Executive's employment under this Agreement. Notwithstanding the foregoing, in the event of termination of the Executive's employment with the Employer pursuant to Section 6(c) above, the Employer shall provide to the Executive the following termination benefits ("Termination Benefits"): a) continuation of the Executive's Salary at the rate then in effect pursuant to Section 4(a); and b) continuation of group health plan benefits to the extent authorized by and consistent with 29 U.S.C. Section 1161 et seq. (commonly known as "COBRA"), with the cost of the regular premium for such benefits shared in the same relative proportion by the Employer and the Executive as in effect on the date of termination. The Termination Benefits set forth in (i) and (ii) above shall continue effective until the expiration of the Term; provided that in the event that the Executive commences any employment or self-employment during the period during which the Executive is entitled to receive Termination Benefits (the "Termination Benefits Period"), the remaining amount of Salary due pursuant to Section 6(d)(i) for the period from the commencement of such employment or self-employment to the end of the Termination Benefits Period shall be reduced by one-half of the salary or other cash compensation the Executive receives from such employment or self-employment attributable to services performed during the Termination Benefits Period and, if the Executive receives benefits from such employment or self-employment comparable to those benefits provided by the Employer, the payments provided under Section 6(d)(ii) shall cease effective as of the date of commencement of such employment or self-employment. The Employer's liability for Salary continuation pursuant to Section 6(d)(i) shall be reduced by the amount of any severance pay due or otherwise paid to the Executive pursuant to any severance pay plan or stay bonus plan of the Employer. Notwithstanding the foregoing, nothing in this Section 6(d) shall be construed to affect the Executive's right to receive COBRA continuation entirely at the Executive's own cost to the extent that the Executive may continue to be entitled to COBRA continuation after the Executive's right to cost sharing under Section 6(d)(ii) ceases. The Executive shall be obligated to give prompt notice of the date of commencement of any employment or self-employment during the Termination Benefits Period and shall respond promptly to any reasonable inquiries concerning any employment or self-employment in which the Executive engages during the Termination Benefits Period. 1. Disability. If the Executive shall be disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions under this Agreement with or without reasonable accommodation, the Board of Directors by a majority vote may remove the Executive from any responsibilities and/or reassign the Executive to another position with the Employer for the remainder of the Term or during the period of such disability. Notwithstanding any such removal or reassignment, the Executive shall continue to receive the Executive's full Salary (less any disability pay or sick pay benefits to which the Executive may be entitled under the Employer's policies) and benefits under Section 4 of this Agreement (except to the extent that the Executive may be ineligible for one or more such benefits under applicable plan terms) for a period of time equal to the lesser of (i) one (1) year; or (ii) the remainder of the Term. If any question shall arise as to whether during any period the Executive is disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions with or without reasonable accommodation, the Executive may, and at the request of the Employer shall, submit to the Employer a certification in reasonable detail by a physician selected by the Employer to whom the Executive or the Executive's guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Employer's determination of such issue shall be binding on the Executive. Nothing in this Section 6(e) shall be construed to waive the Executive's rights, if any, under existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. Section 2601 et seq. and the Americans with Disabilities Act, 42 U.S.C. Section 12101 et seq. 2. Termination Following a Change of Control. If there is a Change of Control, as defined in Section 6(f)(i) below, during the Term, the provisions of this Section 6(f) shall apply and shall continue to apply throughout the remainder of the Term. If (1) the Executive's employment is terminated by the Employer or the Executive following the occurrence of any of the events listed in Section 6(f)(ii) below or the Executive's employment is terminated without cause (in accordance with Section 6(c) above); and (2) such termination occurs both within twelve (12) months following a Change of Control and during the Term, then the Employer shall provide the Executive (or the Executive's estate, if applicable) with Termination Benefits for two (2) years from the date of termination of the Executive's employment. To the extent that Termination Benefits would otherwise be due to the Executive, this Section 6(f) shall not be construed to require the provision of any additional pay or benefits to the Executive. a) Change of Control shall mean the occurrence of one or more of the following events: (1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) (other than the Employer, any trustee or other fiduciary holding securities under an employee benefit plan of the Employer, or any corporation owned, directly or indirectly, by the stockholders of the Employer, in substantially the same proportions as their ownership of stock of the Employer), directly or indirectly, of securities of the Employer, representing fifty percent (50%) or more of the combined voting power of the Employer's then outstanding securities; or (2) persons who, as of the Effective Date, constituted the Employer's Board of Directors (the AIncumbent Board") cease for any reason including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Employer's Board of Directors, provided that any person becoming a director of the Employer subsequent to the Effective Date whose election was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Section 6(f), be considered a member of the Incumbent Board; or (3) the stockholders of the Employer approve a merger or consolidation of the Employer with any other corporation or other entity, other than (1) a merger or consolidation which would result in the voting securities of the Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Employer or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Employer (or similar transaction) in which no "person" (as hereinabove defined) acquires more than fifty percent (50%) of the combined voting power of the Employer's then outstanding securities; or (4) the stockholders of the Employer approve a plan of complete liquidation of the Employer or an agreement for the sale or disposition by of all or substantially all of the Employer's assets. a) The events referred to in Section 6(f) above shall be as follows: (5) a reduction of the Executive's salary other than a reduction that (1) is based on the Employer's financial performance or (2) is similar to the reduction made to the salaries provided to all or most other senior executives of the Employer; or (6) a significant change in the Executive's responsibilities and/or duties which constitutes, when compared to the Executive's responsibilities and/or duties before the Change of Control, a demotion. a) The Executive shall provide the Employer with reasonable notice and an opportunity to cure any of the events listed in Section 6(f)(ii) and shall not be entitled to compensation pursuant to this Section 6(f) unless the Employer fails to cure within a reasonable period; and b) It is the intention of the Executive and of the Employer that no payments by the Employer to or for the benefit of the Executive under this Agreement or any other agreement or plan, if any, pursuant to which the Executive is entitled to receive payments or benefits shall be nondeductible to the Employer by reason of the operation of Section 280G of the Code relating to parachute payments or any like statutory or regulatory provision. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G or any like statutory or regulatory provision, any such payments exceed the amount which can be deducted by the Employer, such payments shall be reduced to the maximum amount which can be deducted by the Employer. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Employer with interest thereon at the applicable Federal rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be nondeductible to the Employer by reason of the operation of said Section 280G or any like statutory or regulatory provision. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G or any like statutory or regulatory provision, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five (45) days after the Employer has given notice of the need for such reduction, the Employer may determine the method of such reduction in its sole discretion. G. Confidential Information, Noncompetition and Cooperation. 1. Confidential Information. As used in this Agreement, "Confidential Information" means information belonging to the Employer which is of value to the Employer in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Employer. Confidential Information includes, without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Employer. Confidential Information includes information developed by the Executive in the course of the Executive's employment by the Employer, as well as other information to which the Executive may have access in connection with the Executive's employment. Confidential Information also includes the confidential information of others with which the Employer has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of the Executive's duties under Section 7(b). 2. Confidentiality. The Executive understands and agrees that the Executive's employment creates a relationship of confidence and trust between the Executive and the Employer with respect to all Confidential Information. At all times, both during the Executive's employment with the Employer and after its termination, the Executive will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Employer, except as may be necessary in the ordinary course of performing the Executive's duties to the Employer. 3. Documents, Records, etc. All documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, which are furnished to the Executive by the Employer or are produced by the Executive in connection with the Executive's employment will be and remain the sole property of the Employer. The Executive will return to the Employer all such materials and property as and when requested by the Employer. In any event, the Executive will return all such materials and property immediately upon termination of the Executive's employment for any reason. The Executive will not retain with the Executive any such material or property or any copies thereof after such termination. 4. Noncompetition and Nonsolicitation. During the Term, and for one (1) year thereafter (or during the Termination Benefits Period, if longer), the Executive (i) will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate, assist or invest in any Competing Business (as hereinafter defined); (ii) will refrain from directly or indirectly employing, attempting to employ, recruiting or otherwise soliciting, inducing or influencing any person to leave employment with the Employer (other than terminations of employment of subordinate employees undertaken in the course of the Executive's employment with the Employer); and (iii) will refrain from soliciting or encouraging any customer or supplier to terminate or otherwise modify adversely its business relationship with the Employer; provided, however, that the foregoing restriction shall not apply in the event the Executive's employment under this Agreement is terminated pursuant to Section 6(c) hereof. The Executive understands that the restrictions set forth in this Section 7(d) are intended to protect the Employer's interest in its Confidential Information and established employee, customer and supplier relationships and goodwill, and agrees that such restrictions are reasonable and appropriate for this purpose. For purposes of this Agreement, the term "Competing Business" shall mean a business conducted anywhere in the State of New Hampshire which is competitive with any business which the Employer or any of its affiliates conducts or proposes to conduct at any time during the employment of the Executive. Notwithstanding the foregoing, the Executive may own up to one percent (1%) of the outstanding stock of a publicly held corporation which constitutes or is affiliated with a Competing Business. Nowithstanding the foregoing, in the event that the Executive becomes entitled to Termination Benefits pursuant to Section 6(f) ("Termination Following a Change of Control"), this Section 7(d) shall not apply to the Executive with respect to the Executive's activities during any period following the termination of the Executive's employment. 5. Third-Party Agreements and Rights. The Executive hereby confirms that the Executive is not bound by the terms of any agreement with any previous employer or other party which restricts in any way the Executive's use or disclosure of information or the Executive's engagement in any business. The Executive represents to the Employer that the Executive's execution of this Agreement, the Executive's employment with the Employer and the performance of the Executive's proposed duties for the Employer will not violate any obligations the Executive may have to any such previous employer or other party. In the Executive's work for the Employer, the Executive will not disclose or make use of any information in violation of any agreements with or rights of any such previous employer or other party, and the Executive will not bring to the premises of the Employer any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. 6. Litigation and Regulatory Cooperation. During and after the Executive's employment, the Executive shall cooperate fully with the Employer in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Employer which relate to events or occurrences that transpired while the Executive was employed by the Employer. The Executive's full cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Employer at mutually convenient times. During and after the Executive's employment, the Executive also shall cooperate fully with the Employer in connection with any investigation or review of any federal, state or local regulatory authority as any such investigation or review relates to events or occurrences that transpired while the Executive was employed by the Employer. The Employer shall reimburse the Executive for any reasonable out-of-pocket expenses incurred in connection with the Executive's performance of obligations pursuant to this Section 7(f). 7. Injunction. The Executive agrees that it would be difficult to measure any damages caused to the Employer which might result from any breach by the Executive of the promises set forth in this Section 7, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, subject to Section 8 of this Agreement, the Executive agrees that if the Executive breaches, or proposes to breach, any portion of this Agreement, the Employer shall be entitled, in addition to all other remedies that it may have, to an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage to the Employer. H. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof or otherwise arising out of the Executive's employment or the termination of that employment (including, without limitation, any claims of unlawful employment discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such an agreement, under the auspices of the American Arbitration Association ("AAA") in Boston, Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA, including, but not limited to, the rules and procedures applicable to the selection of arbitrators. In the event that any person or entity other than the Executive or the Employer may be a party with regard to any such controversy or claim, such controversy or claim shall be submitted to arbitration subject to such other person or entity's agreement. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This Section 8 shall be specifically enforceable. Notwithstanding the foregoing, this Section 8 shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a preliminary injunction in circumstances in which such relief is appropriate; provided that any other relief shall be pursued through an arbitration proceeding pursuant to this Section 8. I. Consent to Jurisdiction. To the extent that any court action is permitted consistent with or to enforce Section 8 of this Agreement, the parties hereby consent to the jurisdiction of the Superior Court of the State of New Hampshire and the United States District Court for the District of New Hampshire. Accordingly, with respect to any such court action, the Executive (a) submits to the personal jurisdiction of such courts; (b) consents to service of process; and (c) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction or service of process. J. Integration. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties with respect to any related subject matter. K. Assignment; Successors and Assigns, etc. Neither the Employer nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided that the Employer may assign its rights under this Agreement without the consent of the Executive in the event that the Employer shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity, or transfer all or substantially all of its properties or assets to any other corporation, partnership, organization or other entity. This Agreement shall inure to the benefit of and be binding upon the Employer and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. L. Enforceability. If any portion or provision of this Agreement (including, without limitation, any portion or provision of any section of this Agreement) shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. M. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. N. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally recognized overnight courier service or by registered or certified mail, postage prepaid, return receipt requested, to the Executive at the last address the Executive has filed in writing with the Employer or, in the case of the Employer, at its main offices, attention of the Board of Directors or the CEO, and shall be effective on the date of delivery in person or by courier or three (3) days after the date mailed. O. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Employer. P. Governing Law. This is a New Hampshire contract and shall be construed under and be governed in all respects by the laws of the State of New Hampshire, without giving effect to the conflict of laws principles of such State. Q. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute one and the same document. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Employer, by its duly authorized officer, and by the Executive, as of the Effective Date. NORTHWAY FINANCIAL, INC. Attest: By: /S/ William J. Woodward ----------------------- By: /S/ Joe N. Rozek Name: William J. Woodward ------------------- Title: President and CEO Name: Joe N. Rozek Title: Assistant to the Office of the Chairman of the Board EMPLOYEE /S/ Donald R. Hatt ------------------- Donald R. Hatt EX-10.6 5 EMPLOYMENT AGREEMENT - P. M. FERGUSON Exhibit 10.6 EMPLOYMENT AGREEMENT This AGREEMENT (the "Agreement") is made as of August 31, 1998 (the "Effective Date"), by and between Northway Financial, Inc. ("Northway"), a New Hampshire chartered corporation and its subsidiary, Pemigewasset National Bank ("PNB") (collectively referred to as the "Employer") and Paul M. Ferguson (the "Executive"). The Employer may, in its discretion, administer and discharge any of its obligations through Northway, PNB, or both entities. In consideration of the mutual covenants contained in this Agreement, the Employer and the Executive agree as follows: 1. Employment. The Employer agrees to employ the Executive and the Executive agrees to be employed by the Employer on the terms and conditions set forth in this Agreement. 2. Capacity. The Executive shall serve as Executive Vice President and Chief Operating Officer of PNB ("EVP/COO"), subject to election by the Boards of Directors of both Northway and PNB (the "Boards of Directors"). The Executive shall also serve the Employer in such other or additional offices as the Executive may be requested to serve by the Chief Executive Officer of PNB (the "CEO") or the Chairman of Northway (the "Chairman"). In such capacity or capacities, the Executive shall perform such services and duties in connection with the business, affairs and operations of the Employer as may be assigned or delegated to the Executive from time to time by or under the authority of the CEO or the Chairman. Notwithstanding the foregoing, after the Executive becomes Chief Executive Officer of PNB pursuant to Section 4 below, all references to "CEO" in this Agreement shall thereafter mean the Chairman of PNB. 3. Term. Subject to the provisions of Section 7, the term of employment pursuant to this Agreement (the "Term") shall be for two (2) years from the Effective Date and shall be renewed automatically for periods of one (1) year commencing at the first anniversary of the Effective Date and on each subsequent anniversary thereafter, unless either the Executive or the Employer gives written notice to the other not less than sixty (60) days prior to the date of any such anniversary of such party's election not to extend the Term. 4. Promotions. Subject to the Executive's satisfactory performance on a continuing basis, as determined in the discretion of the Employer, and further subject to the approval of the Boards of Directors, the Executive shall be promoted to the following positions in the following time frames: (a) the Executive shall be promoted to the position of President and Chief Operating Officer of PNB in May, 1999; and (b) when PNB's current President and Chief Executive Officer, Fletcher Adams, retires, the Executive shall be promoted to the position of President and Chief Executive Officer of PNB. The Employer states that as of the date of execution of this Agreement, Mr. Adams has stated an intention to retire in the year 2000. 5. Compensation and Benefits. The regular compensation and benefits payable to the Executive under this Agreement shall be as follows: 1. Salary. For all services rendered by the Executive under this Agreement, the Employer shall pay the Executive an initial salary (the "Salary") at an annual rate of $117,500, subject to such increases in conjunction with the promotions described above in Section 4 that the Employer, in its judgment, determines to be appropriate based upon the accompanying changes in the Executive's responsibilities, and further subject to any other increases that the Employer may, in its discretion, determine to be appropriate from time to time. The Salary shall be payable in periodic installments in accordance with the Employer's usual practice for its senior executives. 2. Bonus or Similar Incentive Programs. The Executive shall be entitled to participate in any incentive or bonus program established by the Northway Board of Directors to include the Executive's position, with such terms as may be established in the sole discretion of the Boards of Directors. 3. Regular Benefits. The Executive shall also be entitled to participate in any employee benefit plans, medical insurance plans, life insurance plans, disability income plans, retirement plans, vacation plans, expense reimbursement plans and other benefit plans in effect and generally applicable to the senior executives of PNB. Such participation shall be subject to the terms of the applicable plan documents, generally applicable policies of the Employer, applicable law and the discretion of the Boards of Directors or any administrative or other committee provided for in or contemplated by any such plan. Nothing contained in this Agreement shall be construed to create any obligation on the part of the Employer to establish any such plan or to maintain the effectiveness of any such plan which may be in effect from time to time. 4. Relocation Costs. To reduce the Executive's expense associated with relocation, the Employer shall provide the following to the Executive: a) Temporary Housing Allowance. The Employer shall pay to the Executive a monthly Temporary Housing Allowance effective for the lesser of (A) such period following the Effective Date until the Executive obtains, by purchase or lease, a permanent residence in the Plymouth, New Hampshire area; or (B) six (6) months following the Effective Date. The Temporary Housing Allowance for any month shall equal the lesser of (Y) Seven Hundred Dollars ($700); or (Z) the Executive's monthly rental or mortgage payment plus the cost of electricity for a Plymouth, New Hampshire area residence for such month. b) Relocation Allowance. In lieu of any relocation cost reimbursement other than the Temporary Housing Allowance, the Employer shall pay to the Executive a relocation allowance to cover all of the costs that the Executive may incur in connection with the transition from his current residence in Mount Vernon, New Hampshire to a permanent residence in the Plymouth, New Hampshire area. The Relocation Allowance shall be in the amount of up to Twenty Thousand Dollars ($20,000) to be paid as follows: (A) Ten Thousand Dollars ($10,000) promptly after the Effective Date; and (B) Ten Thousand Dollars ($10,000) promptly after the Executive obtains, by purchase or lease, a permanent residence in the Plymouth, New Hampshire area, provided that such relocation occurs not later than six (6) months after the Effective Date. Such amounts may be used for purposes related to the relocation as determined in the Executive's discretion. 5. Taxation of Payments and Benefits. The Employer shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Employer to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 6. Exclusivity of Salary and Benefits. Unless approved by the Boards of Directors, the Executive shall not be entitled to any payments or benefits other than those provided under this Agreement. 6. Extent of Service. During the Executive's employment under this Agreement, the Executive shall, subject to the direction and supervision of the CEO or the Chairman, devote the Executive's best efforts and business judgment, skill and knowledge to the advancement of the Employer's interests and to the discharge of the Executive's duties and responsibilities under this Agreement. The Executive shall not engage in any other business activity, except as may be approved by the CEO or the Chairman; provided that nothing in this Agreement shall be construed as preventing the Executive from: (a) investing the Executive's assets in any company or other entity in a manner not prohibited by Section 8(d) and in such form or manner as shall not require any material activities on the Executive's part in connection with the operations or affairs of the companies or other entities in which such investments are made; or (b) engaging in religious, charitable or other community or non-profit activities that do not impair the Executive's ability to fulfill the Executive's duties and responsibilities under this Agreement. 7. Termination and Termination Benefits. Notwithstanding the provisions of Section 3, the Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 7. (a) Termination by the Employer for Cause. The Executive's employment under this Agreement may be terminated for cause without further liability on the part of the Employer effective immediately upon a majority vote of either Board of Directors and written notice to the Executive. Only the following shall constitute "cause" for such termination: a) dishonest statements or acts of the Executive with respect to the business of Northway, PNB, or any affiliate of either of them; b) the commission by or indictment of the Executive for (A) a felony or (B) any misdemeanor involving moral turpitude, deceit, dishonesty or fraud ("indictment," for these purposes, meaning an indictment, probable cause hearing or any other procedure pursuant to which an initial determination of probable or reasonable cause with respect to such offense is made); c) material failure to perform to the reasonable satisfaction of either Board of Directors a substantial portion of the Executive's duties and responsibilities assigned or delegated under this Agreement, which failure continues, in the reasonable judgment of the Board of Directors that is taking such action, for sixty (60) days after written notice given to the Executive by such Board of Directors; d) gross negligence, willful misconduct or insubordination of the Executive with respect to the Employer or any affiliate of the Employer; or e) material breach by the Executive of any of the Executive's obligations under this Agreement. (b) Termination by the Executive. The Executive's employment under this Agreement may be terminated by the Executive by written notice to the CEO or the Chairman at least thirty (30) days prior to such termination. (c) Termination by the Employer Without Cause. Subject to the payment of Termination Benefits pursuant to Section 7(d), the Executive's employment under this Agreement may be terminated by the Employer without cause upon written notice to the Executive by a majority vote of either Board of Directors. (d) Certain Termination Benefits. Unless otherwise specifically provided in this Agreement or otherwise required by law, all compensation and benefits payable to the Executive under this Agreement shall terminate on the date of termination of the Executive's employment under this Agreement. Notwithstanding the foregoing, in the event of termination of the Executive's employment with the Employer pursuant to Section 7(c) above, the Employer shall provide to the Executive the following termination benefits ("Termination Benefits"): (i) continuation of the Executive's Salary at the rate then in effect pursuant to Section 5(a); and (ii) continuation of group health plan benefits to the extent authorized by and consistent with 29 U.S.C. Section 1161 et seq. (commonly known as "COBRA"), with the cost of the regular premium for such benefits shared in the same relative proportion by the Employer and the Executive as in effect on the date of termination. The Termination Benefits set forth in (i) and (ii) above shall continue effective until the expiration of the Term; provided that in the event that the Executive commences any employment or self-employment during the period during which the Executive is entitled to receive Termination Benefits (the "Termination Benefits Period"), the remaining amount of Salary due pursuant to Section 7(d)(i) for the period from the commencement of such employment or self-employment to the end of the Termination Benefits Period shall be reduced by one-half of the salary or other cash compensation the Executive receives from such employment or self-employment attributable to services performed during the Termination Benefits Period and, if the Executive receives benefits from such employment or self-employment comparable to those benefits provided by the Employer, the payments provided under Section 7(d)(ii) shall cease effective as of the date of commencement of such employment or self-employment. The Employer's liability for Salary continuation pursuant to Section 7(d)(i) shall be reduced by the amount of any severance pay due or otherwise paid to the Executive pursuant to any severance pay plan or stay bonus plan of the Employer. Notwithstanding the foregoing, nothing in this Section 7(d) shall be construed to affect the Executive's right to receive COBRA continuation entirely at the Executive's own cost to the extent that the Executive may continue to be entitled to COBRA continuation after the Executive's right to cost sharing under Section 7(d)(ii) ceases. The Executive shall be obligated to give prompt notice of the date of commencement of any employment or self-employment during the Termination Benefits Period and shall respond promptly to any reasonable inquiries concerning any employment or self-employment in which the Executive engages during the Termination Benefits Period. (e) Disability. If the Executive shall be disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions under this Agreement with or without reasonable accommodation, either Board of Directors by a majority vote may remove the Executive from any responsibilities and/or reassign the Executive to another position with the Employer for the remainder of the Term or during the period of such disability. Notwithstanding any such removal or reassignment, the Executive shall continue to receive the Executive's full Salary (less any disability pay or sick pay benefits to which the Executive may be entitled under the Employer's policies) and benefits under Section 5 of this Agreement (except to the extent that the Executive may be ineligible for one or more such benefits under applicable plan terms) for a period of time equal to the lesser of (i) one (1) year; or (ii) the remainder of the Term. If any question shall arise as to whether during any period the Executive is disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions with or without reasonable accommodation, the Executive may, and at the request of the Employer shall, submit to the Employer a certification in reasonable detail by a physician selected by the Employer to whom the Executive or the Executive's guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Employer's determination of such issue shall be binding on the Executive. Nothing in this Section 7(e) shall be construed to waive the Executive's rights, if any, under existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. Section 2601 et seq. and the Americans with Disabilities Act, 42 U.S.C. Section 12101 et seq. (f) Termination Following a Change of Control. If there is a Change of Control, as defined in Section 7(f)(i) below, during the Term, the provisions of this Section 7(f) shall apply and shall continue to apply throughout the remainder of the Term. If (1) the Executive's employment is terminated by the Employer or the Executive following the occurrence of any of the events listed in Section 7(f)(ii) below or the Executive's employment is terminated without cause (in accordance with Section 7(c) above); and (2) such termination occurs both within twelve (12) months following a Change of Control and during the Term, then the Employer shall provide the Executive (or the Executive's estate, if applicable) with Termination Benefits for two (2) years from the date of termination of the Executive's employment. To the extent that Termination Benefits would otherwise be due to the Executive, this Section 7(f) shall not be construed to require the provision of any additional pay or benefits to the Executive. (i) Change of Control shall mean the occurrence of one or more of the following events: (1) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) (other than Northway, any trustee or other fiduciary holding securities under an employee benefit plan of Northway, or any corporation owned, directly or indirectly, by the stockholders of Northway, in substantially the same proportions as their ownership of stock of Northway), directly or indirectly, of securities of Northway, representing fifty percent (50%) or more of the combined voting power of Northway's then outstanding securities; or (2) persons who, as of the Effective Date, constituted Northway's Board of Directors (the "Incumbent Board") cease for any reason including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of Northway's Board of Directors, provided that any person becoming a director of Northway subsequent to the Effective Date whose election was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Section 7(f), be considered a member of the Incumbent Board; or (3) the stockholders of Northway approve a merger or consolidation of Northway with any other corporation or other entity, other than (1) a merger or consolidation which would result in the voting securities of Northway outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of Northway or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of Northway (or similar transaction) in which no "person" (as hereinabove defined) acquires more than fifty percent (50%) of the combined voting power of Northway's then outstanding securities; or (4) the stockholders of Northway approve a plan of complete liquidation of Northway or an agreement for the sale or disposition by of all or substantially all of Northway's assets. (ii) The events referred to in Section 7(f) above shall be as follows: (A) a reduction of the Executive's salary other than a reduction that (1) is based on Northway's or PNB's financial performance or (2) is similar to the reduction made to the salaries provided to all or most other senior executives of Northway or PNB; or (B) a significant change in the Executive's responsibilities and/or duties which constitutes, when compared to the Executive's responsibilities and/or duties before the Change of Control, a demotion. (iii) The Executive shall provide Northway with reasonable notice and an opportunity to cure any of the events listed in Section 7(f)(ii) and shall not be entitled to compensation pursuant to this Section 7(f) unless Northway fails to cure within a reasonable period; and (iv) It is the intention of the Executive and of Northway that no payments by Northway to or for the benefit of the Executive under this Agreement or any other agreement or plan, if any, pursuant to which the Executive is entitled to receive payments or benefits shall be nondeductible to Northway by reason of the operation of Section 280G of the Code relating to parachute payments or any like statutory or regulatory provision. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G or any like statutory or regulatory provision, any such payments exceed the amount which can be deducted by Northway, such payments shall be reduced to the maximum amount which can be deducted by Northway. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to Northway with interest thereon at the applicable Federal rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be nondeductible to Northway by reason of the operation of said Section 280G or any like statutory or regulatory provision. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G or any like statutory or regulatory provision, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five (45) days after Northway has given notice of the need for such reduction, Northway may determine the method of such reduction in its sole discretion. 8. Confidential Information, Noncompetition and Cooperation. (a) Confidential Information. As used in this Agreement, "Confidential Information" means information belonging to the Employer which is of value to the Employer in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Employer. Confidential Information includes, without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Employer. Confidential Information includes information developed by the Executive in the course of the Executive's employment by the Employer, as well as other information to which the Executive may have access in connection with the Executive's employment. Confidential Information also includes the confidential information of others with which the Employer has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of the Executive's duties under Section 8(b). (b) Confidentiality. The Executive understands and agrees that the Executive's employment creates a relationship of confidence and trust between the Executive and the Employer with respect to all Confidential Information. At all times, both during the Executive's employment with the Employer and after its termination, the Executive will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Employer, except as may be necessary in the ordinary course of performing the Executive's duties to the Employer. (c) Documents, Records, etc. All documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, which are furnished to the Executive by the Employer or are produced by the Executive in connection with the Executive's employment will be and remain the sole property of the Employer. The Executive will return to the Employer all such materials and property as and when requested by the Employer. In any event, the Executive will return all such materials and property immediately upon termination of the Executive's employment for any reason. The Executive will not retain with the Executive any such material or property or any copies thereof after such termination. (d) Noncompetition and Nonsolicitation. During the Term, and for one (1) year thereafter (or during the Termination Benefits Period, if longer), the Executive (i) will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate, assist or invest in any Competing Business (as hereinafter defined); (ii) will refrain from directly or indirectly employing, attempting to employ, recruiting or otherwise soliciting, inducing or influencing any person to leave employment with Northway or PNB (other than terminations of employment of subordinate employees undertaken in the course of the Executive's employment with the Employer); and (iii) will refrain from soliciting or encouraging any customer or supplier to terminate or otherwise modify adversely its business relationship with Northway or PNB; provided, however, that the restrictions set forth in the foregoing sentence shall not apply in the event that the Executive's employment under this Agreement is terminated pursuant to Section 7(c) ("Termination by the Employer Without Cause"). The Executive understands that the restrictions set forth in this Section 8(d) are intended to protect the Employer's interest in its Confidential Information and established employee, customer and supplier relationships and goodwill, and agrees that such restrictions are reasonable and appropriate for this purpose. For purposes of this Agreement, the term "Competing Business" shall mean a business conducted anywhere in the State of New Hampshire which is competitive with any business which Northway, PNB, or any of the affiliates of either of them conducts or proposes to conduct at any time during the employment of the Executive. Notwithstanding the foregoing, the Executive may own up to one percent (1%) of the outstanding stock of a publicly held corporation which constitutes or is affiliated with a Competing Business. Notwithstanding the foregoing, in the event that the Executive becomes entitled to Termination Benefits pursuant to Section 7(f) ("Termination Following a Change of Control"), this Section 8(d) shall not apply to the Executive with respect to the Executive's activities during any period following the termination of the Executive's employment. (e) Third-Party Agreements and Rights. The Executive hereby confirms that the Executive is not bound by the terms of any agreement with any previous employer or other party which restricts in any way the Executive's use or disclosure of information or the Executive's engagement in any business. The Executive represents to the Employer that the Executive's execution of this Agreement, the Executive's employment with the Employer and the performance of the Executive's proposed duties for the Employer will not violate any obligations the Executive may have to any such previous employer or other party. In the Executive's work for the Employer, the Executive will not disclose or make use of any information in violation of any agreements with or rights of any such previous employer or other party, and the Executive will not bring to the premises of the Employer any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. (f) Litigation and Regulatory Cooperation. During and after the Executive's employment, the Executive shall cooperate fully with the Employer in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Employer which relate to events or occurrences that transpired while the Executive was employed by the Employer. The Executive's full cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Employer at mutually convenient times. During and after the Executive's employment, the Executive also shall cooperate fully with the Employer in connection with any investigation or review of any federal, state or local regulatory authority as any such investigation or review relates to events or occurrences that transpired while the Executive was employed by the Employer. The Employer shall reimburse the Executive for any reasonable out-of-pocket expenses incurred in connection with the Executive's performance of obligations pursuant to this Section 8(f). (g) Injunction. The Executive agrees that it would be difficult to measure any damages caused to the Employer which might result from any breach by the Executive of the promises set forth in this Section 8, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, subject to Section 9 of this Agreement, the Executive agrees that if the Executive breaches, or proposes to breach, any portion of this Agreement, the Employer shall be entitled, in addition to all other remedies that it may have, to an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage to the Employer. 9. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof or otherwise arising out of the Executive's employment or the termination of that employment (including, without limitation, any claims of unlawful employment discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such an agreement, under the auspices of the American Arbitration Association ("AAA") in Boston, Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA, including, but not limited to, the rules and procedures applicable to the selection of arbitrators. In the event that any person or entity other than the Executive or the Employer may be a party with regard to any such controversy or claim, such controversy or claim shall be submitted to arbitration subject to such other person or entity's agreement. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This Section 9 shall be specifically enforceable. Notwithstanding the foregoing, this Section 9 shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a preliminary injunction in circumstances in which such relief is appropriate; provided that any other relief shall be pursued through an arbitration proceeding pursuant to this Section 9. 10. Consent to Jurisdiction. To the extent that any court action is permitted consistent with or to enforce Section 9 of this Agreement, the parties hereby consent to the jurisdiction of the Superior Court of the State of New Hampshire and the United States District Court for the District of New Hampshire. Accordingly, with respect to any such court action, the Executive (a) submits to the personal jurisdiction of such courts; (b) consents to service of process; and (c) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction or service of process. 11. Integration. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties with respect to any related subject matter. 12. Assignment; Successors and Assigns, etc. Neither the Employer nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided that the Employer may assign its rights under this Agreement without the consent of the Executive in the event that the Employer shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity, or transfer all or substantially all of its properties or assets to any other corporation, partnership, organization or other entity. This Agreement shall inure to the benefit of and be binding upon the Employer and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. 13. Enforceability. If any portion or provision of this Agreement (including, without limitation, any portion or provision of any section of this Agreement) shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 14. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 15. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally recognized overnight courier service or by registered or certified mail, postage prepaid, return receipt requested, to the Executive at the last address the Executive has filed in writing with the Employer or, in the case of the Employer, at its main offices, attention of the Boards of Directors or the CEO, and shall be effective on the date of delivery in person or by courier or three (3) days after the date mailed. 16. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Employer. 17. Governing Law. This is a New Hampshire contract and shall be construed under and be governed in all respects by the laws of the State of New Hampshire, without giving effect to the conflict of laws principles of such State. 18. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute one and the same document. 19. Legal and Regulatory Limitations. All Termination Benefits and all other obligations of the Employer to the Executive referred to above in this Agreement are subject to any applicable legal or regulatory limitations or approvals applicable to Northway and/or any subsidiary of Northway, including, without implication of limitation, PNB. IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by Northway and PNB, each by an authorized officer, and by the Executive, as of the Effective Date. NORTHWAY FINANCIAL, INC. Attest: By: /S/ William J. Woodward ----------------------- Name: William J. Woodward Title: President and CEO By: /S/ Joe N. Rozek ------------------ Name: Joe N. Rozek Title: Assistant to the Office of the Chairman of the Board PEMIGEWASSET NATIONAL BANK By: /S/ Fletcher W. Adams --------------------- Name: Fletcher W. Adams Title: President and CEO EXECUTIVE /S/ Paul M. Ferguson --------------------------- Paul M. Ferguson EX-21 6 LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries Northway Financial, Inc. 1998 Annual report on Form 10-K Subsidiaries of the Registrant Jurisdiction of Name of Significant Subsidiary % Owned Incorporation - ------------------------------ ------- ------------- Berlin City Bank 100 United States Pemigewasset National Bank 100 United States EX-23.1 7 CONSENT OF SHATSWELL, MACLEOD & COMPANY, P.C. Exhibit 23.1 Consent CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report on Form 10-K of Northway Financial, Inc. of our report dated January 20, 1999, relating to the consolidated balance sheets of Northway Financial, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998. /S/ Shatswell, Macleod & Company, P.C. -------------------------------------- SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts March 25, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
9 1,000 12-Mos Dec-31-1998 Dec-31-1998 14,856 92 36,475 0 48,529 6,509 6,515 283,826 4,404 403,972 350,921 6,791 2,193 3,111 0 0 1,732 39,224 403,972 24,313 3,993 775 29,081 10,755 11,546 17,535 540 496 12,910 6,104 4,068 0 0 4,068 2.35 2.35 4.97 2,546 0 1,151 567 4,156 540 232 4,404 3,722 0 682
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