-----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, O0i77PadwAcQ9/X6oNPLIMs84Ytendc3bMSmArt/QxV55ckTXaMS/xu3TUgvnq9I 4ODKIWc+x1h3i9OKuA7HxA== 0000950156-01-000176.txt : 20010330 0000950156-01-000176.hdr.sgml : 20010330 ACCESSION NUMBER: 0000950156-01-000176 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 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: 1583143 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 0001.txt 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, 2000 [ ] 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 III 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 15, 2001 was 1,308,482 for an aggregate market value of $31,482,077. At March 15, 2001, there were 1,532,823 shares of common stock outstanding, par value $1.00 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Stockholders are incorporated by reference in Item 1 of Part I and Items 7 and 8 of Part II. Portions of the registrant's proxy statement for its 2001 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.....................................................8 ITEM 3 Legal Proceedings..............................................8 ITEM 4 Submission of Matters to a Vote of Security Holders............8 PART II ------- ITEM 5 Market for the Registrant's Common Stock and Related Security Holder Matters........................................8 ITEM 6 Selected Financial Data........................................9 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................11 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk....11 ITEM 8 Financial Statements and Supplementary Material...............11 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................11 PART III -------- ITEM 10 Directors and Executive Officers of the Registrant............11 ITEM 11 Executive Compensation........................................11 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 Certain statements in this report are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements may include, but are not limited to, projections of revenue, income or loss, plans for future operations and acquisitions, and plans related to products or services of the Company and its subsidiaries. Such forward looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company. To the extent any such risks, uncertainties and contingencies are realized, the Company's actual results, performance or achievements could differ materially from anticipated results, performance or achievements. Factors that might affect such forward looking statements include, among other things, overall economic and business conditions, interest rate fluctuations, the demand for the Company's products and services, competitive factors in the industries in which the Company competes, changes in government regulations, and the timing, impact and other uncertainties of future acquisitions. In addition to the factors described above, the following are some additional factors that could cause our financial performance to differ from any forward looking statement contained herein: i) changes in interest rates and the relative relationship between the various interest rate indices that the Company uses; ii) a change in product mix attributable to changing interest rates, customer preferences or competition; iii) a significant portion of the Company's loan customers are in the hospitality business and therefore could be affected by a slower economy, adverse weather conditions and/or rising gasoline prices; and iv) the effectiveness of advertising, marketing and promotional programs. The words "believe," "expect," "anticipate," "intend," "estimate," "project" and other expressions which are predications of or indicate future events and trends and which do not relate to historical matters identify forward looking statements. Reliance should not be placed on forward looking statements because they involve known or unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward looking statements. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise. Though the Company has attempted to list comprehensively the factors which might affect forward looking statements, the Company wishes to caution investors that other factors may in the future prove to be important in affecting the Company's results of operations. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from forward looking statements. PART 1 ------ ITEM 1. BUSINESS - ----------------- Description of Business - ----------------------- Northway Financial, Inc. (the "Company") 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 the Company, BCB, and a subsidiary of BCB, and, thereafter, effecting the merger (the "Merger") by and among the Company, 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 the Company. Unless the context otherwise requires, references herein to the "Company" include Northway Financial, Inc. and its consolidated subsidiaries. The Company 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. The Company functions primarily as the holder of stock of its subsidiaries and assists the management of its subsidiaries as appropriate. The Company 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, the Company, through the BCB subsidiary, established an indirect lending business unit in Concord, New Hampshire. The unit has substantially increased the volume of secured consumer installment loans originated for the Banks and for sale to third parties. 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, credit card accounts, overdraft lines of credit and wire transfer services. The Banks have 18 automatic teller machines to allow customers limited banking services on a 24 hour basis. The Company is a legal entity separate and distinct from its subsidiaries. The right of the Company 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 the Company itself as a creditor may be recognized. See "Supervision and Regulation". The following information concerning the Company'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 the Company's Consolidated Financial Statements and Notes thereto. Investment Activities The following table presents the carrying amount of the Company's investment securities available-for-sale and held-to-maturity as of December 31, 2000, 1999 and 1998 (dollars in thousands): 2000 1999 1998 --------- --------- --------- Available-for-sale: US Treasury and other US government agencies $28,780 $26,449 $17,391 Mortgage-backed securities(1) 14,652 18,813 24,512 Marketable equity securities 2,409 2,780 2,741 Nonmarketable equity securities 5,424 4,456 2,038 Corporate bonds 1,003 -- -- State and political subdivisions 3,444 3,500 3,885 ------- ------- ------- 55,712 55,998 50,567 ------- ------- ------- Held-to-maturity: Mortgage-backed securities(1) $ 2,252 $ 3,601 $ 5,501 State and political subdivisions 500 1,550 1,008 ------- ------- ------- 2,752 5,151 6,509 ------- ------- ------- Total investment securities $58,464 $61,149 $57,076 ======= ======= ======= (1) Includes Collateralized Mortgage Obligations. The following table sets forth the amortized cost of the Company's debt obligations maturing within stated periods and their related weighted average yields, reported on a tax equivalent basis, as of December 31, 2000 (dollars in thousands):
Maturities -------------------------------------- One to Five to Over Within five ten ten Total One year years years years Cost -------- ------ ------- ----- ----- Available-for-sale: US Treasury and other US government agencies $500 $18,496 $ 8,888 $ 999 $28,883 Mortgage-backed securities (1) 52 599 12,427 1,669 14,747 Corporate bonds -- 1,006 -- -- 1,006 State and political subdivisions -- 465 1,006 1,895 3,366 ---- ------- ------- ------ ------- $552 $20,566 $22,321 $4,563 $48,002 ==== ======= ======= ====== ======= Market value $551 $20,466 $22,252 $4,610 $47,879 ==== ======= ======= ====== ======= Weighted average yield 4.92% 6.21% 6.21% 7.18% 6.29% Held-to-maturity: Mortgage-backed securities (1) $ 28 $ 337 $ 629 $1,258 $2,252 State and political subdivisions -- -- -- 500 500 ---- ------- ------- ------ ------- $ 28 $ 337 $ 629 $1,758 $2,752 ==== ======= ======= ====== ======= Market value $ 28 $ 338 $ 624 $1,741 $2,731 ==== ======= ======= ====== ======= Weighted average yield 9.86% 8.60% 7.10% 7.52% 7.58%
(1) Includes Collateralized Mortgage Obligations Lending Activities - ------------------ The following table sets forth information with respect to the composition of the Company's loan portfolio, excluding loans held for sale, as of December 31, 2000, 1999, 1998, 1997 and 1996 (dollars in thousands):
December 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Real estate: Residential $129,805 $139,389 $146,603 $152,041 $145,847 Commercial 100,608 93,061 77,680 61,873 43,901 Construction 5,752 4,360 4,118 5,664 2,329 Commercial 22,270 28,833 25,874 21,460 27,293 Installment 28,177 24,147 25,070 23,476 18,733 Indirect installment 99,359 76,431 18 -- -- Other 7,881 7,369 4,795 2,769 2,999 -------- -------- -------- -------- -------- Total loans 393,852 373,590 284,158 267,283 241,102 Less: Unearned income 594 824 332 526 719 Allowance for loan losses 4,354 4,887 4,404 4,156 3,941 -------- -------- -------- -------- -------- 4,948 5,711 4 ,736 4,682 4 ,660 -------- -------- -------- -------- -------- Net loans $388,904 $367,879 $279,422 $262,601 $236,442 ======== ======== ======== ======== ========
The following table presents the maturity distribution of the Company's real estate construction and commercial loans at December 31, 2000 (dollars in thousands): Percent of Amount Total ------- -------- Within one year $ 4,738 16.91% One to five years 9,107 32.50 Over five years 14,177 50.59 ------- ------- $28,022 100.00% ======= ======= The Company's real estate construction and commercial loans due after one year at December 31, 2000 were comprised of the following (dollars in thousands): Amount ------- Fixed interest rate $ 9,332 Adjustable interest rate 13,952 ------- $23,284 ======= Analysis of the Allowance for Loan Losses - ----------------------------------------- The following table reflects activity in the Company's allowance for loan losses for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 (dollars in thousands):
Years ended December 31, ------------------------------------------ 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Balance at the beginning of period $4,887 $4,404 $4,156 $3,941 $3,866 Charge-offs: Real estate 213 159 383 452 583 Commercial 1,006 25 67 105 29 Installment loans to individuals 424 120 74 48 27 Credit card -- -- -- 1 11 Other -- -- -- 6 -- ------ ------ ------ ------ ------ Total 1,643 304 524 612 650 ------ ------ ------ ------ ------ Recoveries: Real estate 32 213 115 212 160 Commercial -- 21 98 55 11 Installment loans to individuals 96 12 17 19 28 Credit card 2 1 2 4 14 Other -- -- -- 2 -- ------ ------ ------ ------ ------ Total 130 247 232 292 213 ------ ------ ------ ------ ------ Net charge-offs 1,513 57 292 320 437 Provision charged to expense 980 540 540 535 512 ------ ------ ------ ------ ------ Balance at the end of period $4,354 $4,887 $4,404 $4,156 $3,941 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans 0.39% 0.02% 0.11% 0.12% 0.20%
Allocation of the Allowance for Loan Losses - ------------------------------------------- The following table sets forth the breakdown of the Company's allowance for loan losses in the Company'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, ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------- -------------------- -------------------- -------------------- --------------------- 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 $ 719 5.7% $ 530 7.7% $ 651 9.1% $ 613 8.0% $ 821 1.3% Real estate: Commercial & Construction 1,009 27.0 1,773 26.1 1,325 28.8 1,251 25.3 1,186 9.2 Residential 1,159 32.9 503 37.3 1,478 51.6 1,395 56.5 1,323 60.5 Installment 1,440 32.4 1,125 26.9 210 8.8 198 8.8 188 7.8 Other 26 2.0 60 2.0 58 1.7 55 1.0 52 1.2 Unallocated -- N/A 896 N/A 682 N/A 644 N/A 650 N/A ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $4,354 100.0% $4,887 100.0% $4,404 100.0% $4,156 100.0% $3,941 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Deposits - -------- The information set forth on page 29 of the Company's 2000 Annual Report to Stockholders is incorporated herein by reference. Supervision and Regulation - -------------------------- General - ------- In addition to state and federal laws generally applicable to businesses and employers, the Company, PNB and BCB are further regulated by federal and state laws and regulations applicable to financial institutions and their parent companies. State and federal banking laws have as their principal objective either the maintenance of safety and soundness of financial institutions and the federal deposit insurance system or the protection of consumers or classes of consumers, rather than the protection of stockholders of a bank or its parent company. To the extent the following discussion describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. The Company - ----------- As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), the Company is subject to substantial regulation and supervision by the Board of Governors of the Federal Reserve Board (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 the Company and its subsidiaries. Under the BHC Act, the Company 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 the Company 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." The Gramm-Leach-Bliley Act (the "Act") established a comprehensive framework to permit affiliations among banks, securities firms, insurance firms and other financial companies by substantially modifying the BHC Act to authorize bank holding companies that qualify and elect to become "financial holding companies" to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity and allowing subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. The activities of bank holding companies would continue to be limited to activities authorized currently under the BHC Act. The Company is qualified but has not elected to become a "financial holding company" at this time and is therefore subject to the restrictions of the BHC Act as outlined above. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHC Act. These capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items (the "Total Risk-Based Capital Ratio"), with at least one-half of that amount consisting of Tier I, or core capital, and the remaining amount consisting of Tier II, or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included in Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital (defined by reference to the risk-based capital guidelines) to total assets (the "Leverage Ratio") of 3.0%. Total assets for this purposes does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Leverage Ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those, which are not experiencing or anticipating significant growth. The Company, however, expects to be subjected to required ratios of 4% to 5% or more. The Company is currently in compliance with both the Risk-Based Capital Ratio and the Leverage Ratio requirements. At December 31, 2000, we had a Tier I Risk-Based Capital Ratio and a Total Risk-Based Capital Ratio equal to 10.37% and 11.60%, respectively, and a Leverage Ratio equal to 7.42%. U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision, currently are considering changes to the risk-based capital adequacy framework which ultimately could affect the appropriate capital guidelines. The Act and its implementing regulations also contain several other provisions that will affect the operations of the Company's banking subsidiaries. These include new customer privacy regulations and requirements, and an increase in disclosure requirements for The Community Reinvestment Act's ("CRA") related activities. The Company is in the process of developing practices and procedures to comply with these provisions and expects to have them in place within the mandated deadlines required by the Act. PNB - --- PNB is a national banking association, organized under 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 capital and reserves, investments, loans, mergers, payment of dividends, issuance of securities and many other aspects of operations. Capital requirements applicable to PNB are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies as described above. The Comptroller's approval is required for a national bank to pay dividends 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 - --- 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, investments, the nature and amount of loans which can be originated and the rate of interest that can be charged thereon, and other activities. Capital requirements applicable to BCB are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies as described above. Both BCB and PNB are subject to the provisions of the 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 communities 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 substantial noncompliance is subject to civil money penalties or a cease and desist order under Section 8 of the Federal Deposit Insurance Act ("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. Formation of a "financial holding company" under the Act is also dependent of the maintenance of a "satisfactory" CRA rating. 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 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. Government Monetary Policy - -------------------------- The Company'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 the Company 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 the Company and its subsidiaries. Competition - ----------- The Company'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 the Company's ability to achieve its financial goals. 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 the Company. Certain of these competitors, by virtue of their size and resources, may enjoy certain efficiencies and competitive advantages over the Company in pricing, delivery, and marketing of their products and services. It is not possible to assess what impact these changes in the regulatory environment will have on the Company. Many of these large competitors have significantly more financial resources, larger market share and greater name recognition in the market areas served by the Company. 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, 2000, the Company and its subsidiaries had approximately 240 full-time equivalent employees. The Company considers its employee relations to be good. ITEM 2. PROPERTIES - ------------------- The Company operates 18 branch offices and a loan origination facility in the central and northern New Hampshire towns of Berlin, Conway (4), Gorham (2), Groveton, Littleton, West Ossipee, West Plymouth, Plymouth, Campton, Ashland, North Woodstock, Tilton (2), Franklin and Concord. The Company also operates a limited services facility at the Plymouth Regional High School. Thirteen of these offices, including its main offices in Berlin, New Hampshire and Plymouth, New Hampshire, are located in properties it owns. The Company leases five of its branches and the loan origination facility under five-year leases expiring between May 31, 2001 and November 20, 2004. Thirteen of the Company's branches have drive-up facilities and all are equipped with automated teller machines. ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Company 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 SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the quarter ended December 31, 2000. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER - ------------------------------------------------------------------------------ MATTERS - ------- The Company's common stock is traded on The Nasdaq Stock Market, Inc.'s National Market under the symbol "NWFI." The following table sets forth, for the periods indicated, the high and low closing sale prices for the common stock, as reported by the Nasdaq National Market, and the dividends paid on the common stock: Price Per Share -------------------------------------- Low High Dividends Per Share -------- ------- ------------------- 2000 4th Quarter $21.50 $24.13 $0.15 3rd Quarter $22.13 $24.75 $0.15 2nd Quarter $20.00 $23.50 $0.15 1st Quarter $20.00 $26.38 $0.15 1999 4th Quarter $26.00 $28.75 $0.14 3rd Quarter $26.00 $29.75 $0.14 2nd Quarter $25.25 $30.25 $0.14 1st Quarter $29.75 $31.00 $0.14 On March 15, 2001, the closing sales price of the common stock on the Nasdaq National Market was $24.06 per share. As of such date, there were approximately 1,445 holders of record of the Company common stock. The Company intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The following table sets forth the selected consolidated financial information of the Company for the five years in the period ended December 31, 2000. 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 the Company's Consolidated Financial Statements and Notes thereto. As a result of the Merger described under Item 1, the selected consolidated financial data for 1997 and 1996 reflects the combined results of operations and financial position of the Company and PEMI restated for such periods pursuant to the pooling of interests method of accounting.
At or for the years ended December 31, 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Balance Sheet Data: Total assets $485,144 $462,552 $403,972 $377,866 $372,581 Investment securities available-for-sale 55,712 55,998 50,567 57,141 90,530 Investment securities held-to-maturity 2,752 5,151 6,509 11,312 12,199 Loans, net of unearned income 393,258 372,766 283,826 266,757 240,383 Allowance for loan losses 4,354 4,887 4,404 4,156 3,941 Other real estate owned 25 115 158 222 202 Deposit assumption premium 5,098 1,271 860 1,161 1,462 Deposits (1) 391,772 343,029 350,921 322,063 322,315 Securities sold under agreements to repurchase 9,390 7,468 6,791 6,146 4,620 Stockholders' equity 41,562 39,286 40,956 37,526 33,663 Income Statement Data: Net interest and dividend income $ 21,253 $ 19,342 $ 17,536 $ 17,027 $ 15,717 Provision for loan losses 980 540 540 535 512 Noninterest income 2,688 2,722 2,018 1,680 1,602 Noninterest expense 16,695 15,798 12,910 11,859 10,976 Net income 4,159 3,764 4,068 4,039 3,857 Per Common Share Data: Net income $ 2.61 $ 2.25 $ 2.35 $ 2.33 $ 2.23 Cash dividends declared 0.60 0.56 0.42 0.55 0.52 Book value 26.74 24.32 23.67 21.67 19.44 Tangible book value 23.41 23.54 23.18 21.00 18.59 Selected Ratios: Return on average assets 0.86% 0.90% 1.06% 1.07% 1.05% Return on average equity 10.29 9.37 10.25 11.14 12.04 Dividend payout 22.96 25.03 17.90 23.69 23.13 Average equity to average assets 8.31 9.62 10.35 9.60 8.69
(1) 1998 includes a short-term money market deposit of $14,500. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS - --------------------- The information set forth on pages 8 through 18 of the Company's 2000 Annual Report to Stockholders is incorporated herein by reference. 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 information set forth on pages 19 through 41 of the Company's 2000 Annual Report to Stockholders is incorporated herein by reference. ITEM 9. CHANGES IN 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 the Company's definitive proxy statement to be delivered in connection with its 2001 Annual Meeting of Stockholders. 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 the Company's definitive proxy statement to be delivered in connection with its 2001 Annual Meeting of Stockholders, provided however, that the "Report of the Human Resources and Compensation Committee 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 the Company's definitive proxy statement to be delivered in connection with its 2001 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 the Company's definitive proxy statement to be delivered in connection with its 2001 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: Auditor's Independent Report set forth on Page 18 of the Company's 2000 Annual Report to Stockholders Consolidated Statements of Financial Condition as of December 31, 2000 and 1999 set forth on Page 20 of the Company's 2000 Annual Report to Stockholders Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 set forth on Page 19 of the Company's 2000 Annual Report to Stockholders Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2000, 1999 and 1998 set forth on Page 21 of the Company's 2000 Annual Report to Stockholders Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999 and 1998 set forth on Page 21 of the Company's 2000 Annual Report to Stockholders Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 set forth on Page 22 of the Company's 2000 Annual Report to Stockholders Notes to Consolidated Financial Statements set forth on Pages 23 through 39 of the Company's 2000 Annual Report to Stockholders (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. The Exhibit Index is incorporated herein by reference. (b) The Company filed no Reports on Form 8-K during the quarter ended December 31, 2000. (c) See Item 14(a)(3) above (d) See Item 8 to this Annual Report on Form 10-K 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 20, 2001 BY: /S/ William J. Woodward --------------------------------- William J. Woodward Chairman of the Board, President & Chief Executive Officer (Principal Executive Officer) March 20, 2001 BY: /S/George L. Fredette --------------------------------- Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 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 20, 2001 - ---------------------------- and CEO William J. Woodward /S/ Fletcher W. Adams Vice Chairman of the Board March 19, 2001 - ---------------------------- Fletcher W. Adams /S/ John D. Morris Director March 20, 2001 - ---------------------------- John D. Morris /S/ John H. Noyes Director March 20, 2001 - ---------------------------- John H. Noyes /S/ Barry J. Kelley Director March 20, 2001 - ---------------------------- Barry J. Kelley /S/ Randall G. Labnon Director March 20, 2001 - ---------------------------- Randall G. Labnon Director March __, 2001 - ---------------------------- Stephen G. Boucher /S/ Peter H. Bornstein Director March 20, 2001 - ---------------------------- Peter H. Bornstein /S/ Charles H. Clifford, Jr. Director March 20, 2001 - ---------------------------- Charles H. Clifford, Jr. /S/ Arnold P. Hanson, Jr. Director March 14, 2001 - ---------------------------- Arnold P. Hanson, Jr. /S/ Bruce W. Keough Director March 17, 2001 - ---------------------------- Bruce W. Keough 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 the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 4 Form of Certificate representing the Company Common Stock (reference is also made to Exhibits 3.1 and 3.2) (incorporated by reference to Exhibit 4 to Registration Statement No. 333-33033). 10.1 Employment Agreement for William J. Woodward (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.2 Employment Agreement for Fletcher W. Adams (incorporated by reference to Exhibit 10.2 to the Company'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. (incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998).(2) 10.4 Amendment to the Employment Agreement for Fletcher W. Adams. (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). (2) 10.5 Northway Financial, Inc. 1999 Stock Option and Grant Plan (incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-83571 dated July 23,1999). (2) 10.6 Employment Agreement for George L. Fredette (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended 1999). (2) 10.7 Form of Key Employee Agreement (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended 1999). (2) 10.8 Form of Collateral Assignment Split Dollar Agreement.(1)(2) 13 Northway Financial, Inc. Annual Report to Stockholders(1) 21 List of Subsidiaries(1) 23 Consent of Shatswell, MacLeod & Company, P.C. (1) (1) Filed herewith (2) (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-10.8 2 0002.txt FORM OF COLLATERAL ASSIGNMENT SPLIT $ AGREEMENT Exhibit 10.8 Form of Collateral Assignment Split Dollar Agreement COLLATERAL ASSIGNMENT SPLIT DOLLAR AGREEMENT This Agreement entered into as of _______________, by and between __________(the "Employee") and The Berlin City Bank (the "Bank"). Whereas, the Bank wishes to provide life insurance coverage on behalf of the Employee; and Whereas, Employee will be the sole owner and possessor of the Policy and will assign an interest in the Policy's death benefit and cash value to the Bank as collateral to secure repayment of Bank's premium payments with respect to the Policy; and Whereas, it is the intent of the Bank and Employee to define the limited extent of the Bank's security interest in the Policy; Now therefore, the Bank and Employee hereby agree as follows: 1. Interests in the Policy The Policy, which is the subject of this Split Dollar Agreement, is ____________________ (the "Insurer") Policy Number ____________________ on the life of the Employee. The Bank's interest in the cash surrender value of the Policy (the "Bank's Interest") shall be equal to the total amount of the premium payments made on the Policy (including any contributions to any trust in the event of a Change in Control as defined below) accumulated at interest at a rate of 3.6% per annum. The Employee's interest in the cash value of the Policy (the "Employee's Interest") shall be equal to the remaining cash surrender value of the Policy, if any, in excess of the Bank's Interest. 2. Premium Payments During the term of the Agreement, on or before the due date of each premium payment on the Policy, or within the grace period provided therein, the Bank will pay the entire annual premium due on the Policy for a period of five (5) years. The Employee shall have imputed income each year that this Agreement remains in force in an amount equal to the annual cost of current death benefit protection on the life of the Employee, measured by the lower of (a) the PS 58 rate, as set forth in Revenue Ruling 55-747 (or the corresponding applicable provision of any future Revenue Ruling), or (b) the Insurer's current published premium rate for annually renewable term insurance for standard risks. In the event of a Change of Control of Northway Financial, Inc. (the "Company"), the Bank shall pay to a grantor trust established by the Bank for the benefit of creditors of the Bank and the Employee, within 30 days, an amount equal to the present value of the remaining unpaid premiums due on the Policy during the remainder of the first five (5) policy years, based on the then current assumptions used by the Insurer to establish a pre-paid premium account with respect to the Policy. 3. Death Benefit Amounts Upon the death of the Employee, and subject to the minimum death benefits available to the Employee as described below, the death benefit payable to the Bank under this Agreement shall be equal to the Bank's Interest in the Policy as defined in Section 1 above. Upon the death of the Employee, the death benefit payable to the Employee's designated beneficiaries shall be equal to the total death proceeds under the Policy less the amount payable to the Bank as defined above, except that the minimum death benefit payable to the Employee's designated beneficiaries shall be twenty-five thousand dollars ($25,000). Employee understands that sufficiency of cash value in the Policy to provide expected amounts of death benefit under this Agreement may vary as a result of Policy performance and duration of premium payments and this is in no event guaranteed by the Bank or the Insurer. The Bank makes no representations or warranty as to the merits or risks of the investment performance of the Policy. 4. Ownership and Rights in the Policy The Policy will be owned exclusively by the Employee or the Employee's Assignee (for the purposes of this Agreement, Employee's Assignee shall be included in the definition of Employee, unless the context clearly suggests otherwise). While this Agreement is in effect, the Bank has a security interest in the Policy limited exclusively to: (a) that portion of the cash surrender value of the Policy equal to the Bank's Interest in the Policy; or (b) an amount of the death benefit as defined above in Section 3. The Employee's rights in the Policy include the right to make any investment choices permitted by the Policy with respect to the cash values of the Policy, the ability to irrevocably assign any of the Employee's rights under the Policy, with the consent of the Bank and the Insurer and to select and change beneficiaries to receive Employee's death benefits. The Employee will not be permitted to borrow against, or totally surrender the Policy as long as the Collateral Assignment remains in force without the express written consent of the Bank. The Employee shall not be permitted to receive a distribution from the cash value of the Policy while the Agreement remains in force, except in accordance with the following rules: the Employee may request and receive a cash withdrawal only from the Employee's Interest in the cash surrender value of the Policy in accordance with the provisions of the Policy without the consent of the Bank, but in no event shall such distribution be permitted prior to the later of termination of the Employee's service with the Bank, or the fifth anniversary of this Agreement, and in no event shall such distribution cause the remaining cash surrender value to be less than the Bank's Interest. Any other rights in the Policy other than those specifically mentioned in this Agreement must be exercised with the written consent of both the Employee and the Bank. 5. Assignment of Policy to Secure Bank's Payments To secure the Bank's Interest in the Policy under this Agreement, Employee will collaterally assign the Policy to the Bank by signing the separate Collateral Assignment. The Collateral Assignment cannot be altered without the Bank's, Employee's and Insurer's written consent. 6. Termination of Split Dollar Agreement This Agreement, and all obligations of the Bank to pay premiums under it, will terminate upon the earliest to occur of the following: (a) Death of the Employee; (b) Written agreement of both the Employee and the Bank to terminate this Agreement; (c) Termination of Employee's employment for Cause; (d) Failure of the Employee to contribute any amounts that the Bank would otherwise be required to withhold after retirement; and, (e) Failure of the Employee to complete all necessary requirements for the Insurer to issue a policy. Upon termination of this Agreement, the Bank shall receive the Bank's Interest in the Policy as soon as is practical, but in no event shall receipt be later than sixty (60) days from the earliest of the dates listed above. In the event of termination of this Agreement for reason other than the death of the Employee, the Bank's Interest in the Policy under this Agreement shall be satisfied either directly from the cash value of the Policy or by direct payment by the Employee, at the discretion of the Employee. In this event, the recovery of the Bank's Interest shall be limited to the cash surrender value of the Policy as that time. In the event of termination of this Agreement by reason of the death of the Employee, the Bank's Interest in the Policy and under this Agreement shall be satisfied through direct payment from the Insurer from the Policy proceeds. 7. Payment of Proceeds or Cash Surrender Value to Bank Upon receipt on the Bank's Interest in the Policy, as provided above, whether from the Policy, or from the Employee, the Bank will release the Collateral Assignment. Upon satisfaction of the Bank's Interest in the Policy, the Employee shall have unrestricted ownership to the Policy. Upon termination of this Agreement by reason of the death of the Employee, the Insurer in satisfaction of the Employee's obligations, will issue a check directly to the Bank as collateral assignee in an amount set forth in Section 3 above. 8. Miscellaneous (a) Not an Employment Agreement. This Agreement does not in any way constitute an employment agreement, and the Bank reserves the right to terminate Employee's employment to the same extent as though this Agreement did not exist. This Agreement may be amended at any time by written agreement signed on behalf of the Bank and by the Employee. (b) Change in Control. For purposes of this Agreement, a Change in Control shall mean the occurrence of any one of the following events: (i) any "Person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act") other than the Company, any of its Subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its Subsidiaries), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the "beneficial owner" ( as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities having the right to vote in an election of the Company's Board of Directors ("Voting Securities") (in such case other than as a result of an acquisition of securities directly from the Company); or (ii) persons who, as of the date hereof, constitute the Company's Board of Directors (the "Incumbent Directors") 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 Board, provided that any person becoming a director of the Company subsequent to the date hereof shall be considered an Incumbent Director if such person's election was approved by or such person was nominated for election by either (A) a vote of at least a majority of the Incumbent Directors or (B) a vote of at least a majority of the Incumbent Directors who are members of a nominating committee comprised, in the majority, of Incumbent Directors; but provided further, that any such person whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of members of the Board of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation, shall not be considered an Incumbent Director; or (iii) the stockholders of the Company shall approve (A) any consolidation or merger of the Company where the stockholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more than 50% of the voting shares of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company or (C) any plan or proposal for the liquidation or dissolution of the Company. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred for purposes of the foregoing clause (i) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Voting Securities outstanding increases the proportionate number of shares of Voting Securities beneficially owned by any person to 25 percent or more of the combined voting power of all then outstanding Voting Securities; provided, however, that if any person referred to in this sentence shall thereafter become the beneficial owner of any additional shares of Voting Securities (other than pursuant to a stock split, stock dividend, or similar transaction or as result of any acquisition of securities directly from the Company) and immediately thereafter beneficially owns 25% or more of the combined voting power of all then outstanding securities. (c) Termination for Cause. For purpose of this Agreement, whether an Employee has had his employment terminated for Cause shall be determined in the sole discretion of the Bank and shall mean a termination of employment by reason of a finding that the Employee (i) acted dishonestly or engaged in willful misconduct in the performance of his duties for the Bank; (ii) breached a fiduciary duty to the Bank for personal profit to himself; or (iii) willfully violated any law, rule or regulation (other than traffic violations or similar offenses) or any final cease and desist order. (d) Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Bank and its successors and assigns, and to the Employee and the Employee's assigns, heirs, executor or personal representative, and beneficiaries. (e) Notices. Any notice, consent or demand required or permitted under this Agreement shall be made in writing and shall be signed by the party making the notice, consent, or demand. Such notice shall be sent by United States certified mail, postage pre-paid and shall be sent to the other party's last known address as shown on the records of the Bank. The date of such mailing shall be deemed to be the date of such notice consent or demand. (f) Governing Law. This Agreement shall be governed by and be construed in accordance with the laws of the State of New Hampshire. 9. Claims Procedures Any person or entity claiming a benefit, requesting an interpretation or ruling under this Agreement, or requesting information under the Agreement (hereinafter referred to as "Claimant") shall present the request in writing to the Bank, which shall respond in writing as soon as practicable. If the claim or request is denied, the written notice of denial shall state the reason for denial, with specific reference to the provisions on which the denial is based, a description of any additional material or information required and an explanation of why it is necessary, and an explanation of the claims review procedure. Review of Claim. Any Claimant whose claim or request is denied or who has not received a response within sixty (60) days may request a review by notice given in writing to the Bank. Such request must be made within sixty (60) days after receipt by the Claimant of the written notice of denial, or in the event Claimant has not received a response sixty (60) days after receipt by the Bank of Claimant's claim or request. The claim or request shall be reviewed by the Bank which may, but shall not be required to, grant the Claimant a hearing. On review, the Claimant may have representation, examine pertinent documents, and submit issues and comments in writing. Final Decision. The decision on review shall normally be made within sixty (60) days after the Bank's receipt of Claimant's claim or request. If an extension of time is required for a hearing or other special circumstances, the Claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reason and the relevant provisions. All decisions on review shall be final and bind all parties concerned. IN WITNESS WHEREOF, the Bank and the Employee have signed this Agreement, which is effective as of the effective date of the Policy described herein. THE BERLIN CITY BANK By: - --------------------------- --------------------------- Attest Title --------------------------- Date EMPLOYEE - --------------------------- --------------------------- Witness --------------------------- Date EX-13 3 0003.txt NORTHWAY FINANCIAL, INC. ANNUAL REPORT Exhibit 13 Northway Financial, Inc. Annual Report to Stockholders Northway Financial, Inc. and Subsidiaries NORTHWAY FINANCIAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------- The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of Northway Financial, Inc. ("the Company") and its subsidiaries. It is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. FORWARD LOOKING INFORMATION --------------------------- Certain statements in this report are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements may include, but are not limited to, projections of revenue, income or loss, plans for future operations and acquisitions, and plans related to products or services of the Company and its subsidiaries. Such forward looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company. To the extent any such risks, uncertainties and contingencies are realized, the Company's actual results, performance or achievements could differ materially from anticipated results, performance or achievements. Factors that might affect such forward looking statements include, among other things, overall economic and business conditions, interest rate fluctuations, the demand for the Company's products and services, competitive factors in the industries in which the company competes, changes in government regulations, and the timing, impact and other uncertainties of future acquisitions. In addition to the factors described above, the following are some additional factors that could cause our financial performance to differ from any forward looking statement contained herein: i) changes in interest rates and the relative relationship between the various interest rate indices that the Company uses; ii) a change in product mix attributable to changing interest rates, customer preferences or competition; iii) a significant portion of the Company's loan customers are in the hospitality business and therefore could be affected by a slower economy, adverse weather conditions and/or rising gasoline prices; and iv) the effectiveness of advertising, marketing and promotional programs. The words "believe," "expect," "anticipate," "intend," "estimate," "project" and other expressions which are predications of or indicate future events and trends and which do not related to historical matters identify forward looking statements. Reliance should not be placed on forward looking statements because they involve known or unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward looking statements. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise. Though the Company has attempted to list comprehensively the factors which might affect forward looking statements, the Company wishes to caution investors that other factors may in the future prove to be important in affecting the Company's results of operations. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from forward looking statements. OVERVIEW OF PERFORMANCE ----------------------- Northway and its bank subsidiaries derive substantially all of their revenue and income from the furnishing of bank and bank-related services, principally to individuals and small and medium sized companies in New Hampshire. The Banks operate as typical community banking institutions and do not engage in any specialized finance or capital market activities. Northway functions primarily as the holder of stock of its subsidiaries and assists the management of its subsidiaries as appropriate. The Company reported net income of $4,159,000, or $2.61 per share, in 2000 as compared to net income of $3,764,000, or $2.25 per share, in 1999 and $4,068,000, or $2.35 per share, in 1998. Return on average equity was 10.29 percent in 2000, as compared to 9.37 percent and 10.25 percent for 1999 and 1998, respectively. Return on average assets was 0.86 percent in 2000, as compared to 0.90 percent and 1.06 percent for 1999 and 1998, respectively. During the year 2000, the Company continued the implementation of its growth initiatives and purchased a branch in West Ossipee, New Hampshire. During 1999, the Company opened two new branches, purchased an additional two branches and began operations at the indirect lending business unit created at the end of 1998. In addition, the Company has standardized products and procedures at the subsidiary banks to ensure that the Company achieves its long term goals. The leveraging strategies and strategic investments made over the last several years resulted in increased net interest income which caused an increase in 2000 earnings as compared to 1999. The Company's results of operations are affected not only by its net interest income, but also by the level of its noninterest income, including gains and losses on the sales of loans and securities, noninterest expenses, changes in the provision for loan losses resulting from the Company's periodic assessment of the adequacy of its allowance for loan losses and income tax expense. Northway Financial, Inc. and Subsidiaries NET INTEREST INCOME ANALYSIS ---------------------------- Net interest income is the principal component of a financial institution's income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The discussion of net interest income is presented on a taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among various taxable and tax-exempt assets. The table on page ten presents average balances, income earned or interest paid, and average yields earned or rates paid on major categories of assets and liabilities for the years ended December 31, 2000, 1999, and 1998. Net interest income for 2000 increased $1,833,000, or 9 percent, over 1999 while increasing $1,843,000, or 10 percent, in 1999 over 1998. Interest income increased $6,312,000, or 20 percent, in 2000 versus 1999 after increasing $1,875,000, or 6 percent, in 1999 versus 1998. Earning assets on average increased by $66,610,000, or 17 percent, during 2000, creating a favorable volume variance. In addition, a rising rate environment caused a 21 basis point increase in the average yield of earning assets as a whole. A $70,589,000, or 22 percent, increase in the volume of average loans, combined with a 9 basis point increase in yield, accounted for a $6,291,000, or 23 percent, increase in interest income on loans. Interest income on investment securities decreased $235,000, or 6 percent, from 1999 to 2000. This decrease resulted from a 10 percent decrease in the average balance of total investment securities. The decrease in average balances was partially offset by a 26 basis point increase in yield. Interest expense increased $4,479,000, or 39 percent, in 2000 versus 1999 after remaining relatively unchanged in 1999 versus 1998. The increase in interest expense was due primarily to an increase in average interest bearing liabilities of $61,203,000, or 19 percent, and to a 60 basis point increase in rates paid on interest bearing liabilities. The increase in interest bearing liabilities is directly related to the increase in average loans outstanding. Federal Home Loan Bank ("FHLB") advances, the most expensive source of funds, increased by $46,751,000 on average, and were a significant source of funds for loan growth. Interest income increased $1,875,000, or 6 percent, in 1999 versus 1998. Earning assets on average increased by $34,214,000, or 10%, during 1999, however, the mix of earnings assets continued to evolve creating a favorable volume variance. This favorable volume variance was partially offset by a 23 basis point decline in average yield on earning assets as a whole. A $46,024,000, or 17 percent, increase in the volume of average loans, partially offset by a 45 basis point decrease in yield, accounted for the $2,617,000, or 11 percent, increase in interest income on loans. Interest income on investments and securities decreased $202,000, or 5 percent, from 1998 to 1999. This decrease resulted from a 3 percent decrease in the average balance of total investments and securities and an 11 basis point decrease in yield. Total interest expense was relatively unchanged in 1999 due primarily to a 31 basis point decrease in rates paid on interest bearing liabilities which offset a 9% increase in average volume. The composition of interest bearing liabilities helped keep down interest cost as the average balances of all categories of low cost funds increased, offsetting increases in average balances of categories of high cost funds. The most expensive source of funds, FHLB advances and other borrowed funds, increased by a combined $17,445,000 and were a significant source of funding for loan growth. The trend in net interest income is commonly evaluated in terms of average rates using net interest margin and interest rate spread. The net interest margin is computed by dividing fully taxable equivalent net interest income by average total earning assets. This ratio represents the difference between the average yield returned on average earning assets and the average rate paid for all funds used to support those earning assets, including both interest bearing and noninterest bearing sources of funds. The net interest margin decreased 32 basis points to 4.68 percent in 2000 after having increased 3 basis points to 5.00 percent in 1999. The decrease in 2000's net interest margin was a function of a significant increase in average volumes for both interest earning assets and interest bearing liabilities. The net interest spread on the additional volumes was less than existing spread causing the overall margin to decline. This type of strategy is known as a "leveraging" and is designed to increase net interest income and earnings as a whole. The portion of interest earning assets funded by interest bearing liabilities in 2000 was 84 percent versus 83 percent in 1999 and 84 percent in 1998. The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. The interest rate spread eliminates the impact of noninterest bearing funds and gives a direct perspective on the effect of interest rate movements. During 2000, the net interest rate spread decreased 38 basis points to 4.03 percent as the cost of interest bearing liabilities rose 60 basis points while yields on earning assets rose 21 basis points. During 1999, the net interest rate spread increased 8 basis points to 4.41 percent from the 1998 spread of 4.33 percent as the cost of interest bearing liabilities declined 31 basis points while the yields earned on earning assets decreased 23 basis points. See the accompanying schedules entitled "Consolidated Average Balances, Interest Income/Expense and Average Yields/Rates" and "Consolidated Rate/Volume Variance Analysis" for more information. Northway Financial, Inc. and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES ------------------------------------------------------------------------------- ($000 Omitted) 2000 1999 1998 -------------------------------- --------------------------------- ------------------------------ Average Average Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate -------- -------- ---- -------- -------- ---- -------- -------- ---- Assets Interest earning assets: Federal funds sold $ 7,374 $ 480 6.51% $ 4,865 $ 228 4.69% $ 14,628 $ 769 5.26% Interest bearing deposits 262 12 4.58 161 8 4.97 98 7 7.14 Investments (1) (2) 61,555 3,835 6.27 67,744 4,070 6.01 69,854 4,272 6.12 Loans, net (1) (3) 391,439 33,259 8.50 320,850 26,968 8.41 274,826 24,351 8.86 -------- -------- -------- -------- -------- -------- Total interest earning assets (1) 460,630 37,586 8.17 393,620 31,274 7.95 359,406 29,399 8.18 -------- ---- -------- ---- -------- ---- Cash and due from banks 13,045 12,800 11,956 Allowance for loan losses (4,417) (4,653) (4,323) Premises and equipment 10,531 10,125 9,844 Other assets 6,577 5,637 6,400 -------- -------- -------- Total assets $486,366 $417,529 $383,283 ======== ======== ======== Liabilities Interest bearing liabilities: Regular savings $ 65,438 1,254 1.92 $ 68,333 1,319 1.93 $ 65,126 1,518 2.33 NOW and super NOW 52,888 447 0.85 49,832 433 0.87 46,942 536 1.14 Money market accounts 26,670 1,000 3.75 23,765 592 2.49 22,467 622 2.77 Certificates of deposit 163,917 8,649 5.28 152,353 7,514 4.93 151,244 8,079 5.34 Securities sold under agreements to repurchase 9,240 509 5.51 9,267 432 4.66 8,469 431 5.09 FHLB advances 70,017 4,198 6.00 23,266 1,279 5.50 5,972 360 6.03 Other borrowed funds -- -- -- 151 9 5.96 -- -- -- -------- -------- -------- -------- -------- -------- Total interest bearing liabilities 388,170 16,057 4.14 326,967 11,578 3.54 300,220 11,546 3.85 Noninterest bearing deposits 53,275 46,459 39,561 Other liabilities 4,508 3,931 3,825 -------- -------- -------- Total liabilities 445,953 377,357 343,606 Stockholders' equity 40,413 40,172 39,677 -------- -------- -------- Total liabilities and stockholders' equity $486,366 $417,529 $383,283 ======== ======== ======== Net interest and dividend income (1) $21,529 $ 19,696 $ 17,853 ======= ======== ======== Interest rate spread (4) 4.03% 4.41% 4.33% ==== ==== ==== Net interest margin (5) 4.68% 5.00% 4.97% ==== ==== ==== (1) Reported on a tax equivalent basis. (2) Average balances are calculated using the adjusted cost basis. (3) Net of unearned income. Includes nonperforming loans. (4) Interest rate spread equals the yield on interest earning assets minus the rate paid on interest bearing liabilities. (5) The net interest margin equals net interest income divided by total average interest earning assets.
Northway Financial, Inc. and Subsidiaries CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS ------------------------------------------
(000 Omitted) 2000 Compared to 1999 1999 Compared to 1998 Increase (Decrease) Due to Change In Increase (Decrease) Due to Change In ----------------------------------------- ------------------------------------------- Volume Rate Mix Total Volume Rate Mix Total ------ ---- --- ----- ------ ---- --- ----- Interest and dividend income: Federal funds sold $ 117 $ 89 $ 46 $ 252 $ (513) $ (84) $ 56 $ (541) Interest bearing deposits 5 (1) -- 4 -- 1 -- 1 Investments (372) 151 (14) (235) (129) (75) 2 (202) Loans 5,933 293 65 6,291 4,078 (1,251) (210) 2,617 ------ ----- ----- ------ ------ ------- ----- ------ Total interest and dividend income 5,683 532 97 6,312 3,436 (1,409) (152) 1,875 ------ ----- ----- ------ ------ ------- ----- ------ Interest expense: Regular savings (56) (9) -- (65) 75 (261) (13) (199) NOW and super NOW 27 (12) (1) 14 33 (128) (8) (103) Money market accounts 72 299 37 408 36 (62) (4) (30) Certificates of deposit 570 525 40 1,135 59 (620) (4) (565) Securities sold under agreements to repurchase (1) 78 -- 77 40 (36) (3) 1 FHLB advances 2,570 116 233 2,919 1,042 (32) (91) 919 Other borrowed funds -- -- (9) (9) -- -- 9 9 ------ ----- ----- ------ ------ ------- ----- ------ Total interest expense 3,182 997 300 4,479 1,285 (1,139) (114) 32 ------ ----- ----- ------ ------ ------- ----- ------ Net interest and dividend income $2,501 $(465) $(203) $1,833 $2,151 $ (270) $ (38) $1,843 ====== ===== ===== ====== ====== ======= ===== ======
PROVISION FOR LOAN LOSSES ------------------------- The provision for loan losses represents the annual cost of providing an allowance, or reserve, for losses on loans. The size of the provision for each year is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of collateral and general economic factors. The Company incurred a $980,000 provision for loan losses in 2000, an increase of $440,000 from the $540,000 incurred in both 1999 and 1998. The increase is due directly to the growth of the loan portfolio over the last two years. Although management utilizes its best judgment in providing for losses, there can be no assurance that the Company will not have to change its provisions for loan losses in subsequent periods. Management will continue to monitor the allowance for loan losses and make additional provisions to the allowance as appropriate. NONINTEREST INCOME ------------------ Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services and income earned through investment and security sales. The following table sets forth the components of the Company's noninterest income: ($000 Omitted) Years Ended December 31, 2000 1999 1998 - ------------------------ ---- ---- ---- Service charges and fees on deposit accounts $1,049 $ 935 $ 843 Securities gains, net 512 709 496 Other 1,127 1,078 679 ------ ------ ------ Total noninterest income $2,688 $2,722 $2,018 ====== ====== ====== Northway Financial, Inc. and Subsidiaries NONINTEREST INCOME (CONTINUED) ------------------------------ Fee income from service charges on deposit accounts increased 12 percent in 2000, 11 percent in 1999 and 1 percent in 1998. The improvement in 2000 is due to higher balances outstanding as a result of branch purchases and openings over the last two years as well as a product and fee standardization effort completed during the year. The increase in 1999 was principally a result of the decision to increase fees for the first time in years. The increase in 1998 was due to an increase in the number of transaction deposit accounts. Net securities gains were $512,000 in 2000, compared to $709,000 in 1999. Investment securities gains in 2000 reflected net gains of $512,000 recorded on sales of equity securities compared to $679,000 in 1999. In 1998 net securities gains were $496,000 and included net gains on sales of equity securities of $501,000. Other noninterest income (sources of which include the creation of mortgage servicing assets, debit card interchange fees, credit card merchant and fee income, automated teller fees, safe deposit fees, etc.) increased $49,000, or 5 percent, to $1,127,000 in 2000 following a $399,000, or 59 percent increase, to $1,078,000 in 1999. Noninterest income had a 27 percent increase in 1998. NONINTEREST EXPENSE ------------------- Total noninterest expense increased $879,000, or 6 percent, during 2000 following an increase of $2,888,000, or 22 percent, during 1999 and $1,051,000, or 9 percent, in 1998. The increases in these expenses were due to the Company's initiatives to standardize product offerings at the subsidiary banks, to increase market share in existing markets and enter new markets. In 2000 the Company acquired a branch in West Ossipee, New Hampshire. In both 1999 and 1998 two branches were opened and over the two year period an indirect lending group was created and began operations. In addition, during 1999, two branches were purchased. The following table sets forth information relating to the Company's noninterest expense during the periods indicated: ($000 Omitted) Years Ended December 31, 2000 1999 1998 - ------------------------ ---- ---- ---- Salaries and employee benefits $ 8,868 $ 8,448 $ 6,757 Occupancy and equipment 2,708 2,541 2,080 Amortization of deposit assumption premium 513 357 301 Professional fees 1,073 1,091 702 Stationery and supplies 605 565 470 Other 2,928 2,796 2,600 ------- ------- ------- $16,695 $15,798 $12,910 ======= ======= ======= Salaries and employee benefits increased $420,000, or 5 percent, from 1999 to 2000, $1,691,000, or 25 percent, from 1998 to 1999, and by $879,000, or 15 percent, from 1997 to 1998. These increases reflect staff additions in connection with the expansion of the retail franchise, increased lending activities and normal salary and wage increases. The expansion initiatives also caused occupancy and equipment expense to increase $167,000, or 7 percent, from 1999 to 2000, $461,000, or 22 percent, from 1998 to 1999, and $366,000, or 21 percent, from 1997 to 1998. Amortization of deposit assumption premium in 2000 increased $156,000, or 44 percent. This was due to the West Ossipee branch acquisition on August 25, 2000 as well as incurring a full year of amortization on the branches acquired in 1999. In 1999 deposit assumption premium amortization increased $56,000, or 19 percent, to $357,000 versus $301,000 in 1998 as a result of the acquisition of two branches on July 9, 1999. INCOME TAX EXPENSE ------------------ The Company recognized $2,107,000, $1,962,000 and $2,036,000 in income tax expense for the years ended December 31, 2000, 1999 and 1998, respectively. The effective tax rate was 33.6% for 2000, 34.3% for 1999, and 33.3% for 1998. The decrease in the effective tax rate in 2000 is due to the fact that the Company has obtained a number of State of New Hampshire tax credits related to economic development grants. The increase in the effective tax rate for 1999 over 1998 is due to the fact that during 1999 New Hampshire adopted a new tax law that increased the rate of the Business Profits Tax from seven to eight percent of income. For additional information relating to income taxes, see Note 14 to the Consolidated Financial Statements. Northway Financial, Inc. and Subsidiaries ASSETS ------ Total assets increased $22,592,000, or 5 percent, to $485,144,000 at December 31, 2000 versus $462,552,000 at December 31, 1999. The composition of earning assets has continued to change in order to meet corporate goals. BALANCE SHEET HIGHLIGHTS ($000 Omitted) Years Ended December 31, 2000 1999 Change - ------------------------ ---- ---- ------ Total assets $485,144 $462,552 $22,592 Earning assets 452,255 434,134 18,121 Securities 58,464 61,149 (2,685) Loans, net of unearned income 393,258 372,766 20,492 Deposits 391,772 343,029 48,743 Equity 41,562 39,286 2,276 SECURITIES ---------- The Company's investment securities are classified into one of two categories based on management's intent to hold the securities: (i) "held-to-maturity" securities, or (ii) securities "available-for-sale." Securities designated to be held-to-maturity are reported at amortized cost. Securities classified as available-for-sale are required to be reported at fair value with unrealized gains and losses, net of taxes, excluded from earnings and shown separately as a component of stockholders' equity. The following table summarizes the Company's securities portfolio at December 31, 2000 and 1999, showing amortized cost and market value for each category:
($000 Omitted) December 31, 2000 1999 - ---------------- --------------------- ---------------------- Amortized Market Amortized Market Cost Value Cost Value ---- ----- ---- ----- Securities available-for-sale: US Treasury and US government agencies $28,883 $28,780 $27,466 $26,449 Mortgage-backed securities 7,513 7,475 9,179 8,855 Collateralized mortgage obligations 7,234 7,177 10,139 9,958 Marketable equity securities 3,180 2,409 2,999 2,780 Non-marketable equity securities 5,424 5,424 4,456 4,456 Corporate bonds 1,006 1,003 -- -- State and political subdivisions 3,366 3,444 3,478 3,500 ------- ------- ------- ------- Total securities available-for-sale $56,606 $55,712 $57,717 $55,998 ------- ------- ------- ------- Securities held-to-maturity: Mortgage-backed securities $ 1,760 $ 1,740 $ 2,285 $ 2,247 Collateralized mortgage obligations 492 488 1,316 1,297 State and political subdivisions 500 503 1,550 1,551 ------- ------- ------- ------- Total securities held-to-maturity $ 2,752 $ 2,731 $ 5,151 $ 5,095 ------- ------- ------- ------- Total securities $59,358 $58,443 $62,868 $61,093 ======= ======= ======= =======
Securities available-for-sale decreased slightly during 2000. The net unrealized loss on securities available-for-sale was $894,000 at December 31, 2000 as compared to $1,719,000 in 1999. This was the result of a lower interest rate environment, and corresponding higher bond prices in 2000. Increases in bond values were somewhat offset by a weak equity market during 2000. The Company has a policy of purchasing debt securities primarily rated A or better by Moody's Investor Services and US Government securities to minimize credit risk. All securities, however, carry interest rate risk, which affect their market values such that as market yields increase, the value of the Company's securities decline and vice versa. Additionally, mortgage-backed securities carry prepayment risk whereby expected yields may not be achieved due to the inability to reinvest proceeds from prepayment at comparable yields. Moreover, such mortgage-backed securities may not benefit from price appreciation in periods of declining rates to the same extent as the remainder of the portfolio. Northway Financial, Inc. and Subsidiaries SECURITIES (CONTINUED) ---------------------- Securities held-to-maturity comprise approximately 5 percent and 8 percent of the aggregate securities portfolio at December 31, 2000 and 1999, respectively. This is consistent with management's objective to maintain portfolio flexibility and liquidity by classifying most securities as available-for-sale. A portion of the securities portfolio is pledged to secure public deposits, short-term securities sold under agreements to repurchase and treasury, tax and loan accounts. Refer to Note 3 for a further discussion of pledging. LOANS ----- Loans increased 5 percent in 2000 largely as a result of the increase in indirect installment loans. The growth in the loan portfolio resulted from the Company's ongoing efforts to increase the loan portfolio through the origination of loans. The following table presents the composition of the loan portfolio: ($000 Omitted) Percent Percent 2000 of Total 1999 of Total ---- -------- ---- -------- Real estate: Residential $129,805 33.0% $139,389 37.3% Commercial 100,608 25.5 93,061 24.9 Construction 5,752 1.5 4,360 1.2 Commercial 22,270 5.7 28,833 7.7 Installment 28,177 7.1 24,147 6.5 Indirect installment 99,359 25.2 76,431 20.4 Other 7,881 2.0 7,369 2.0 -------- ----- -------- ----- $393,852 100.0% $373,590 100.0% ======== ===== ======== ===== The loan portfolio mix continued to change during the year. Indirect installment loans continue to be a focus of the Company along with commercial real estate and commercial loans. Indirect installment loans now comprise 25.2 percent of the loan portfolio versus 20.4 percent at the end of 1999. Residential real estate loans declined to 33.0 percent of the portfolio from 37.3 percent on December 31, 1999. The Company wishes to maintain a balanced portfolio and is working to maintain a portfolio mix of approximately one-third each of residential real estate, commercial and commercial real estate, and consumer and other loans. Commercial real estate loans consist of loans secured by income producing commercial real estate and commercial loans consist of loans that are either unsecured or are secured by inventories, receivables or other corporate assets, and many are additionally secured by the guarantee of the Small Business Administration. Commercial real estate and commercial loans increased by $984,000 in 2000 as compared to 1999. The Company continues to emphasize commercial real estate and commercial loans in order to enhance earnings and maintain the balance of its portfolio. Residential real estate loans decreased $9,584,000 in 2000, a 7 percent decrease from 1999. The Company's strategy generally is to originate fixed-rate residential loans for sale to investors in the secondary market. The Company generally retains adjustable-rate loans in its portfolio but will, occasionally, retain some fixed-rate mortgages. Installment loans consist primarily of loans originated directly by the Company, however, as part of the West Ossipee branch acquisition the Company purchased loans totaling approximately $6,197,000. The increase in installment loans of $4,030,000, or 17 percent, in 2000 is a result of this purchase. Indirect installment loans increased $22,928,000, or 30 percent, in 2000. The increase is consistent with the Company's balanced portfolio strategy. The Company's loans are primarily secured by real estate and automobiles located in New Hampshire. In addition, real estate acquired by foreclosure is located in this market. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of other real estate acquired by foreclosure are susceptible to changing conditions in this market. Northway Financial, Inc. and Subsidiaries NONPERFORMING ASSETS -------------------- Nonperforming assets were $1,070,000, or 0.22 percent of total assets, at December 31, 2000 as compared to $4,727,000, or 1.02 percent of total assets, at December 31, 1999. This decrease was due primarily to the sale on February 29, 2000 of approximately $1,200,000 of nonperforming loans and the resolution of a large nonperforming credit. In the course of resolving this credit the Company incurred charge-offs of $1,100,000 and received cash totaling $2,300,000. Nonperforming assets are comprised primarily of nonperforming loans, other chattels owned and real estate acquired by foreclosure or a similar conveyance of title. The accrual of interest on a loan is discontinued when there is reasonable doubt as to its collectibility or whenever the payment of principal or interest is more than 90 days past due. However, there are loans within this nonperforming classification that provide periodic payments, but which have a weakness with respect to the collateral securing the loan. At December 31, 2000, nonperforming loans totaled $957,000, or 0.24 percent of total loans, compared to $4,578,000, or 1.23 percent of total loans, in 1999. Other real estate owned at December 31, 2000 was $25,000 compared to $115,000 at December 31, 1999. ALLOWANCE FOR LOAN LOSSES ------------------------- The Company maintains an allowance for loan losses to absorb future charge-offs of loans in the existing portfolio. When a loan, or portion thereof, is considered uncollectible, it is charged against the allowance. Recoveries of amounts previously charged-off are added to the reserve when collected. The adequacy of the allowance for loan losses is evaluated on a regular basis by management. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their effect on borrowers and the market area in general, and the performance of individual credits in relation to the contract terms. The provision for loan losses charged to earnings is based on management's judgment of the amount necessary to maintain the allowance at a level adequate to absorb possible losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company's allowance for loan losses. The Company's allowance for loan losses decreased $533,000 from December 31, 1999 to $4,354,000, or 1.11 percent of total loans, at December 31, 2000. The decline is a result of the resolution of a large nonperforming credit. The 2000 provision for loan losses was $980,000, $440,000 higher than the prior year level of $540,000. The increase was due primarily to the increased level of loans. The following table sets forth the composition of the allowance for loan losses for the periods indicated: ($000 Omitted) Years Ended December 31, 2000 1999 1998 - ------------------------ ---- ---- ---- Beginning allowance $4,887 $4,404 $4,156 Provision for loan losses 980 540 540 Loans charged-off (1,643) (304) (524) Recoveries 130 247 232 ------- ------ ------ Net charge-offs (1,513) (57) (292) ------- ------ ------ Ending allowance $ 4,354 $4,887 $4,404 ======= ====== ====== Allowance as a percentage of loans outstanding 1.11% 1.31% 1.55% Allowance as a percentage of nonperforming loans 454.96 106.75 172.98 Net charge-offs as a percentage of average loans 0.39 0.02 0.11 DEPOSITS AND BORROWINGS ----------------------- Total deposits at December 31, 2000 were $391,772,000, an increase of $48,743,000, or 14 percent, as compared to the$343,029,000 at December 31, 1999. The increase in deposits was due to the acquisition of a branch in August 2000, which netted the Company additional deposits of approximately $27,782,000, and higher interest rates paid on time deposit and money market accounts. ($000 Omitted) Components of Deposits December 31, 2000 1999 - ------------ ---- ---- Demand $ 56,745 $ 49,925 Regular savings, NOW and money market 152,022 142,659 Time 183,005 150,445 -------- -------- Total deposits $391,772 $343,029 ======== ======== At December 31, 2000, time deposits of $100,000 or more are scheduled to mature as follows: ($000 Omitted) 3 months or less $ 6,931 Over 3 to 6 months 13,156 Over 6 to 12 months 7,207 Over 12 months 1,553 ------- $28,847 ======= At December 31, 2000 short-term borrowings consisted of FHLB advances of $2,950,000 and securities sold under agreements to repurchase of $9,390,000 compared to $9,950,000 and $7,468,000, respectively, for 1999. Long-term debt consisted solely of FHLB term advances of $35,528,000 as compared to $58,528,000 in 1999. Many of the long-term term advances, however, are callable with call dates ranging from February 2001 to November 2001. The decrease in FHLB advances is directly attributable to the increase in deposits. See Notes 9 and 10 to the Consolidated Financial Statements for additional information. The following table sets forth certain information concerning the Company's borrowings at the dates indicated: ($000 Omitted) December 31, 2000 1999 - ------------ ---- ---- Short-term borrowings $12,340 $17,418 Long-term debt 35,528 58,528 ------- ------- $47,868 $75,946 ======= ======= Northway Financial, Inc. and Subsidiaries CAPITAL ------- The following table sets forth the Company's risk-based capital and leverage ratios: ($000 Omitted) December 31, 2000 1999 - ------------ ---- ---- Risk-adjusted assets $353,146 $329,369 Tier 1 capital (to average assets) 7.42% 8.47% Tier 1 capital (to risk weighted assets) 10.37 11.80 Total capital (to risk weighted assets) 11.60 13.05 The Company's capital serves to support growth and provide depositors and other creditors protection against loss. Equity capital represents the stockholders' investment in the Company. Management strives to maintain an optimal level of capital on which an attractive return to the stockholders will be realized over both the short-term and long-term, while serving depositors' and creditors' needs. The Company must also observe the minimum requirements enforced by the federal banking regulators. There are three capital requirements that banks and bank holding companies must meet: Tier 1 capital, total capital (combination of Tier 1 capital and Tier 2 capital), and leverage (Tier 1 capital to average assets) ratios. Tier 1 capital consists of stockholders' equity, net of intangible assets. Tier 2 capital consists of a limited amount of loss reserves. Tier 1 capital, total capital and leverage ratios do not include any adjustments for unrealized gains and losses relating to securities available-for-sale except net unrealized losses relating to marketable equity securities. The minimum requirements for the leverage ratio, risk-based Tier 1 capital and risk-based total capital are 4 percent, 4 percent and 8 percent, respectively. As of December 31, 2000, the subsidiary banks of the Company were "well capitalized" as defined under Federal Deposit Insurance Corporation ("FDIC") regulations. The Company intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends. INTEREST RATE RISK ------------------ Volatility in interest rates requires the Company to manage interest rate risk, which arises from differences in the timing of repricing of assets and liabilities. Management monitors and adjusts the difference between interest sensitive assets and interest sensitive liabilities ("GAP" position) within various time frames. An institution with more assets repricing than liabilities within a given time frame is considered asset sensitive and in time frames with more liabilities repricing than assets is liability sensitive. Within GAP limits established by the Board of Directors, the Company seeks to balance the objective of insulating the net interest margin from rate exposure with that of taking advantage of anticipated changes in rates in order to enhance income. Interest rate risk is managed by the Company's Asset/Liability Committee, which formulates strategies based on a desirable level of interest rate risk. In setting desirable levels of interest rate risk, the Committee evaluates the impact on earnings and capital caused by the current outlook on interest rates, potential changes in the outlook on interest rates and regional economies, liquidity, business strategies and other factors. The Asset/Liability Committee uses three key measurements to monitor interest rate risk: (i) the interest rate sensitivity GAP analysis; (ii) a rate shock to measure earnings volatility due to an immediate increase or decrease in market rates of interest; and (iii) simulation of changes in net interest income under alternative balance sheet and interest rate scenarios. Northway Financial, Inc. and Subsidiaries INTEREST RATE RISK (CONTINUED) ------------------------------ The following table presents the Company's interest rate GAP analysis:
($000 Omitted) Balance Maturing or Subject to Repricing 3 months 4 to 12 12 to 24 2 to 5 After 5 December 31, 2000 or less months months years years Total - ----------------- ------- ------ ------ ----- ----- ----- Loans, net $109,516 $118,126 $ 75,844 $ 73,780 $ 16,221 $393,487 Securities 21,368 14,879 7,696 8,352 6,169 58,464 Other assets -- -- -- -- 33,193 33,193 -------- -------- -------- -------- -------- -------- Total assets $130,884 $133,005 $ 83,540 $ 82,132 $ 55,583 $485,144 -------- -------- -------- -------- -------- -------- Deposits $105,980 132,713 $ 61,938 $ 34,397 $ 56,744 $391,772 Securities sold under agreements to repurchase 6,748 2,642 -- -- -- 9,390 Borrowed funds 2,950 1,500 3,028 12,000 19,000 38,478 Other liabilities and stockholders' equity -- -- -- -- 45,504 45,504 -------- -------- -------- -------- -------- -------- Total liabilities and equity $115,678 $136,855 $ 64,966 $ 46,397 $121,248 $485,144 -------- -------- -------- -------- -------- -------- GAP for period $ 15,206 $ (3,850) $ 18,574 $ 35,735 $(65,665) -------- -------- -------- -------- -------- Cumulative GAP $ 15,206 $ 11,356 $ 29,930 $ 65,665 $ - ======== ======== ======== ======== ======== Cumulative GAP as a percent of total assets 3.1% 2.3% 6.2% 13.5%
Interest rate GAP analysis provides a static analysis of the repricing characteristics of the entire balance sheet. It is prepared by scheduling assets and liabilities into time bands based upon their next opportunity to reprice. For floating rate instruments, all balances are placed at the next date on which their rates could be reset; and for fixed rate instruments, the balances are placed in time bands according to their principal repayment schedules. It is necessary to apply further assumptions to refine this process. For instance, in order to recognize the potential for mortgage related instruments to experience early payments of principal, a prepayment assumption based on management's expectations is layered on top of the scheduled principal payments. Other categories that are scheduled using management assumptions include noncontractual deposits such as demand deposit, NOW, savings, and money market deposit accounts. These allocations are management's current estimate of the sensitivity of the rates and balances of these accounts to changes in market interest rates. The Company's limits on interest rate risk specify that the cumulative one-year GAP should be less than 10 percent of total assets. As of December 31, 2000, the estimated exposure was 2.3 percent asset sensitive (see table above). A more dynamic and detailed analysis of the earnings sensitivity of the balance sheet is provided through simulation analysis. The Company uses computer simulations to determine the impact on net interest income of various interest rate scenarios, balance sheet trends and strategies. These simulations incorporate assumptions about balance sheet dynamics such as loan and deposit growth, loan and deposit pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Simulations based on numerous assumptions are run under various interest rate scenarios to determine the impact on net interest income and capital. From these scenarios, interest rate risk is quantified and appropriate strategies are developed and implemented. Utilizing an immediate rate shock simulation where interest rates increase 200 basis points, the December 31, 2000 earnings simulation model projects that net interest income for the next twelve months would decrease by an amount equal to approximately 2.19 percent. In addition, utilizing an immediate rate shock stimulation where interest rates decrease 200 basis points, the December 31, 2000 earnings simulation model projects that net interest income for the next twelve months would decrease by an amount equal to approximately 1.96 percent. Both the up and down rate shock simulations are within the Company's 10 percent policy limit. Northway Financial, Inc. and Subsidiaries LIQUIDITY RISK -------------- Liquidity risk management involves the Company's and its subsidiaries' ability to raise funds in order to meet their existing and anticipated financial obligations. These obligations are the withdrawal of deposits on demand or at contractual maturity, the repayment of debt as it matures, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. Liquidity may be provided through amortization, maturity or sale of assets such as loans and securities available-for-sale, liability sources such as increased deposits, utilization of the FHLB credit facility, purchased or other borrowed funds, and access to the capital markets. Liquidity targets are subject to change based on economic and market conditions and are controlled and monitored by the Company's Asset/Liability Committee. At the bank level, liquidity is managed by measuring the net amount of marketable assets after deducting pledged assets, plus lines of credit, primarily with the FHLB, which are available to fund liquidity requirements. Management then measures the adequacy of that aggregate amount relative to the aggregate amount of liabilities deemed to be sensitive or volatile. These include brokered deposits, deposits in excess of $100,000, term deposits with short maturities, and credit commitments outstanding. Additionally, the parent holding company requires cash for various operating needs including dividends to shareholders, the purchase of treasury stock, capital injections to the subsidiary banks, and the payment of general corporate expenses. The primary sources of liquidity for the parent holding company are dividends from the subsidiary banks and reimbursement for services performed on behalf of the banks. As shown in the consolidated statements of cash flows, cash and cash equivalents decreased by $686,000 during 2000. The principal cause for the decrease was cash used for investing activities which totaled $19,231,000 with lending activities utilizing $17,047,000. Cash provided by financing activities of $14,060,000 was provided by a branch acquisition and deposit growth, which was partially offset by a decline in FHLB advances. The net cash provided by operating activities provided the remainder of funding sources for 2000. The $4,485,000 of net cash provided by operating activities was primarily attributable to net income of $4,159,000. CAPITAL EXPENDITURES AND COMMITMENTS ------------------------------------ During 2000, the Company incurred approximately $2,052,000 in capital expenditures. These expenditures included $301,000 for land, buildings, furniture and equipment for the branch purchased in West Ossipee, New Hampshire. The Company has begun construction of a new branch located in Tilton, New Hampshire, spending $714,000 on land and construction in progress. Approximately $336,000 was spent for the purchase of a new computer system. The remaining expenditures were for normal maintenance and replacement of, or upgrades to, existing property and equipment. During 1999, the Company incurred approximately $1,400,000 in capital expenditures. These expenditures included $189,000 and $193,000, respectively, for leasehold improvements and furniture and equipment for the Company's supermarket branches in Gorham and North Conway, New Hampshire. The Company also purchased its Tilton and Franklin, New Hampshire branch offices from Vermont National Bank for$185,000 and $75,000, respectively. Approximately $93,000 was spent on expenditures for furniture and equipment for Tilton and $86,000 for Franklin. The remaining expenditures were for normal maintenance and replacement of, or upgrades to, existing property and equipment. During 2001, the Company's estimated capital expenditure projections total $1,756,000. Approximately $758,000 will be spent to complete the construction of the Tilton branch. The Company has budgeted approximately $717,000 for technology projects including internet banking, upgrades to the data communication network, corporate intranet and a branch wide-area-network. Currently the Company has committed to only the internet banking project, while the other projects are still in the cost/benefit stage and may or may not be implemented. The remaining expenditures will be incurred for normal maintenance and replacement of, or upgrades to, existing property and equipment. Northway Financial, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME --------------------------------- ($000 Omitted, Except Per Share Data) FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans $33,145 $26,865 $24,313 Interest on Debt Securities: Taxable 2,971 3,109 3,322 Tax-Exempt 249 472 479 Dividends 453 238 192 Interest on Federal Funds Sold 480 228 769 Interest on Interest Bearing Deposits 12 8 7 - ----------------------------------------------------------------------------- TOTAL INTEREST AND DIVIDEND INCOME 37,310 30,920 29,082 - ----------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits: Regular Savings, NOW and Money Market Deposit Accounts 2,701 2,344 2,676 Certificates of Deposit (in Denominations of $100,000 or More) 1,259 1,169 1,176 Other Time 7,390 6,345 6,903 Interest on Short-Term Borrowings 1,819 954 751 Interest on Long-Term Debt 2,888 766 40 - ----------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 16,057 11,578 11,546 - ----------------------------------------------------------------------------- Net Interest and Dividend Income 21,253 19,342 17,536 Provision for Loan Losses 980 540 540 - ----------------------------------------------------------------------------- NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 20,273 18,802 16,996 - ----------------------------------------------------------------------------- NONINTEREST INCOME Service Charges and Fees on Deposit Accounts 1,049 935 843 Securities Gains and Losses, Net 512 709 496 Other 1,127 1,078 679 - ----------------------------------------------------------------------------- TOTAL NONINTEREST INCOME 2,688 2,722 2,018 - ----------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and Employee Benefits 8,868 8,448 6,757 Office Occupancy and Equipment 2,708 2,541 2,080 Amortization of Deposit Assumption Premium 513 357 301 Other 4,606 4,452 3,772 - ----------------------------------------------------------------------------- TOTAL NONINTEREST EXPENSE 16,695 15,798 12,910 - ----------------------------------------------------------------------------- Income Before Income Taxes 6,266 5,726 6,104 Income Tax Expense 2,107 1,962 2,036 - ----------------------------------------------------------------------------- NET INCOME $ 4,159 $ 3,764 $ 4,068 - ----------------------------------------------------------------------------- Earnings Per Common Share and Earnings Per Common Share Assuming Dilution $ 2.61 $ 2.25 $ 2.35 - ----------------------------------------------------------------------------- See Notes to Consolidated Financial Statements Northway Financial, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ---------------------------------------------- ($000 Omitted) AS OF DECEMBER 31, 2000 1999 - ----------------------------------------------------------------------------- ASSETS Cash and Cash Equivalents: Cash and Due from Banks and Interest Bearing Deposits $ 15,401 $ 16,087 Securities Available-for-Sale 55,712 55,998 Securities Held-to-Maturity (Fair Value of $2,731 in 2000 and $5,095 in 1999) 2,752 5,151 Loans Held-for-Sale 229 54 Loans, Net Before Allowance for Loan Losses 393,258 372,766 Less: Allowance for Loan Losses (4,354) (4,887) - ----------------------------------------------------------------------------- Net Loans 388,904 367,879 Bank Premises and Equipment, Net 11,000 10,387 Other Real Estate Owned 25 115 Deposit Assumption Premium 5,098 1,271 Other Assets 6,023 5,610 - ----------------------------------------------------------------------------- TOTAL ASSETS $485,144 $462,552 - ----------------------------------------------------------------------------- LIABILITIES Deposits: Demand $ 56,745 $ 49,925 Regular Savings, NOW and Money Market Deposit Accounts 152,022 142,659 Certificates of Deposit (In Denominations of $100,000 or More) 28,847 22,074 Other Time 154,158 128,371 - ----------------------------------------------------------------------------- Total Deposits 391,772 343,029 - ----------------------------------------------------------------------------- Short-Term Borrowings 12,340 17,418 Accrued Taxes and Other Liabilities 3,942 4,291 Long-Term Debt 35,528 58,528 - ----------------------------------------------------------------------------- TOTAL LIABILITIES 443,582 423,266 - ----------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred Stock, $1.00 Par Value; 1,000,000 Shares Authorized; None Issued -- -- Common Stock, $1.00 Par Value; 9,000,000 Shares Authorized; 1,731,969 Issued and 1,559,369 Outstanding at December 31, 2000 and 1,615,169 Outstanding at December 31, 1999 1,732 1,732 Surplus 2,101 2,101 Retained Earnings 43,110 39,906 Treasury Stock (172,600 Shares at December 31, 2000 and 116,800 Shares at December 31, 1999) (4,708) (3,398) Accumulated Other Comprehensive Loss, Net of Tax (673) (1,055) - ----------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 41,562 39,286 - ----------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $485,144 $462,552 - ----------------------------------------------------------------------------- See Notes to Consolidated Financial Statements Northway Financial, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ----------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- (000 Omitted) Accumulated Other Comprehensive Total Common Retained Treasury Income Stockholders' Stock Surplus Earnings Stock (Loss) Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $1,732 $2,101 $33,744 $ -- $ (51) $37,526 Net Income - 1998 -- -- 4,068 -- -- 4,068 Net Change in Accumulated Other Comprehensive Income (Loss), Net of Tax -- -- -- -- 145 145 Treasury Stock Purchased -- -- -- (55) -- (55) Cash Dividends Declared ($0.42 Per Share) -- -- (728) -- -- (728) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 1,732 2,101 37,084 (55) 94 40,956 Net Income - 1999 -- -- 3,764 -- -- 3,764 Net Change in Accumulated Other Comprehensive Income (Loss), Net of Tax -- -- -- -- (1,149) (1,149) Treasury Stock Purchased -- -- -- (3,343) -- (3,343) Cash Dividends Declared ($0.56 Per Share) -- -- (942) -- -- (942) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 1,732 2,101 39,906 (3,398) (1,055) 39,286 Net Income - 2000 -- -- 4,159 -- -- 4,159 Net Change in Unrealized Loss on Securities Available-for-Sale, Net of Tax -- -- -- -- 512 512 Net Change in Unfunded Pension Accumulated Benefit Obligation, Net of Tax -- -- -- -- (130) (130) Treasury Stock Purchased -- -- -- (1,310) -- (1,310) Cash Dividends Declared ($0.60 Per Share) -- -- (955) -- -- (955) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 $1,732 $2,101 $43,110 $(4,708) $ (673) $41,562 - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive loss as of December 31, 2000 consists of net unrealized holding losses on available-for-sale securities of $543, net of taxes, and unfunded pension accumulated benefit obligation of $130, net of taxes. Accumulated other comprehensive income (loss) as of December 31, 1999 and 1998 consists of net unrealized holding gains (losses) on available-for-sale securities, net of taxes. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ----------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- ($000) FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 4,159 $ 3,764 $ 4,068 Other Comprehensive Income (Loss): Net Unrealized Gains (Losses) on Available-for-Sale Securities 1,336 (1,162) 731 Reclassification Adjustment for Realized Gains in Net Income 512 709 496 - ----------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities 824 (1,871) 235 Minimum Pension Liability Adjustment (197) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) 627 (1,871) 235 Income Tax Expense (Benefit) 245 (722) 90 - ----------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss), Net of Tax 382 (1,149) 145 - ----------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 4,541 $ 2,615 $ 4,213 - ----------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements
Northway Financial, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
(000 Omitted) FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 4,159 $ 3,764 $ 4,068 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Loan Losses 980 540 540 Depreciation and Amortization 1,512 1,290 1,122 Deferred Income Tax Expense (Benefit) 263 (342) 188 Write-Down of Other Real Estate Owned -- 47 5 Gains on Sales of Investment Securities Available-for-Sale, Net (512) (709) (496) Gains on Sale of Nonperforming and Reperforming Loans (71) -- -- Loss on Disposal and Writedown of Premises and Equipment 90 -- -- Amortization of Premiums and Accretion of Discounts on Securities, Net 1 76 116 (Decrease) Increase in Unearned Income, Net (230) 308 (194) Gains on Sales of Other Real Estate Owned (64) (7) (45) Net (Increase) Decrease in Loans Held-for-Sale (175) 481 (243) Other Liabilities Assumed Net of Other Assets Acquired in Branch Transaction 12 1 -- Net Change in Other Assets and Other Liabilities (1,480) 1,239 (818) - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,485 6,688 4,243 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Sales of Investment Securities Available-for-Sale 2,609 6,157 4,344 Proceeds from Maturities of Investment Securities Held-to-Maturity 3,936 13,074 11,756 Proceeds from Maturities of Investment Securities Available-For-Sale 6,483 9,979 27,467 Purchase of Investment Securities Available-for-Sale (7,453) (21,813) (24,558) Purchase of Investment Securities Held-to-Maturity (1,555) (11,716) (7,017) Net Increase in Loans (17,047) (89,709) (17,473) Loans Aquired in Branch Transaction (6,197) -- -- Proceeds from Sales of Nonperforming and Reperforming Loans 1,551 -- -- Proceeds from Sales of and Payments Received on Other Real Estate Owned 144 282 353 Premises and Equipment Acquired in Branch Transaction (301) (292) -- Additions to Premises and Equipment (1,401) (1,064) (1,597) - ----------------------------------------------------------------------------------------------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (19,231) (95,102) (6,725) - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits 20,961 (25,903) 28,858 Deposits Assumed in Branch Transaction, Net of Assumption Premium 23,442 17,222 -- Advances from FHLB 21,000 57,000 2,250 Repayment of FHLB Advances (44,000) (750) (82) Net (Decrease) Increase in Short-term FHLB Advances (7,000) 9,117 (8,379) Net Increase in Securities Sold Under Agreements to Repurchase 1,922 677 645 Purchases of Treasury Stock (1,310) (3,343) (55) Cash Dividends Paid (955) (942) (728) - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 14,060 53,078 22,509 - ----------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (686) (35,336) 20,027 Cash and Cash Equivalents at Beginning of Year 16,087 51,423 31,396 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,401 $ 16,087 $ 51,423 - ----------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flows: Interest Paid $ 15,525 $ 11,242 $ 12,068 Taxes Paid 1,817 2,043 2,097 Loans Transferred to Other Real Estate Owned 47 410 524 Loans Transferred to Other Personal Property 650 125 57 Loans Charged-Off, Net of Recoveries 1,513 57 292 Financed Sales of Other Real Estate Owned 22 131 231 Other Real Estate Owned Transferred to Loans -- -- 44 (Decrease) Increase in Amount Due to Broker (992) 992 -- See Notes to Consolidated Financial Statements
Northway Financial, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------- NATURE OF OPERATIONS Northway Financial, Inc. is a bank holding company formed in 1997 under the laws of New Hampshire and is registered under the Bank Holding Company Act of 1956. The Company's only business activity has been to own all of the shares of, and provide management and operational support to, The Berlin City Bank ("BCB") and The Pemigewasset National Bank ("PNB"). The Company's headquarters are in Berlin, New Hampshire. The subsidiaries are engaged principally in the business of attracting deposits from the general public and investing those deposits in investment securities, commercial loans, real estate loans, and consumer loans. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and judgments that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition, and income and expense for the periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change in the near-term relate to the determination of the allowance for loan losses and valuation of other real estate owned. RECLASSIFICATIONS Certain amounts in the prior years' financial statements have been reclassified to conform with the current year's presentation. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest bearing deposits. SECURITIES Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; if debt and equity securities are bought and held principally for the purpose of selling in the near term they would be classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of estimated income taxes. At this time, the Company has not established a trading account. Premiums and discounts are amortized and accreted primarily on the level yield method over the contractual life of the securities adjusted for expected prepayments. If a decline in the fair value below the adjusted cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value as the new cost basis and the amount of the write down in included as a charge against securities gains, net. Gains and losses on sales of investment securities are recognized at the time of the sale on a specific identification basis. LOANS HELD-FOR-SALE Loans held-for-sale are generally identified as such at orig-ination and are stated at the lower of aggregate cost or market. Market value is based on outstanding investor commitments. When loans are sold, a gain or loss is recognized to the extent that the sale proceeds exceed or are less than the carrying value of the loans. Gains and losses are determined using the specific identification method. All loans sold are without recourse to the Company. LOANS Loans are carried at the principal amounts outstanding, net of any unearned income. Unearned income includes loan origination fees, net of direct loan origination costs, and discounts on purchased loans. This income is deferred and recognized as adjustments to loan income over the contractual life of the related notes using a method the result of which approximates that of the interest method. Loans are placed on nonaccrual when payment of principal or interest is considered to be in doubt or is past due 90 days or more. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Previously accrued income on nonaccrual loans that has not been collected is reversed from current income, and subsequent cash receipts are recorded as income. Loans are returned to accrual status when collection of all contractual principal and interest is reasonably assured and there has been sustained repayment performance. The Company's loans are primarily secured by real estate in New Hampshire. In addition, other real estate owned is located in this market. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of other real estate owned are susceptible to changing conditions in this market. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered adequate by management on the basis of many factors including the risk characteristics of the portfolio, trends in loan delinquencies and an assessment of existing economic conditions. Management believes that the allowance for loan losses is adequate. Additions to the allowance are charged to earnings; realized losses, net of recoveries, are charged directly to the allowance. While management uses available information in establishing the allowance for loan losses, future additions to the allowance may be necessary if economic conditions differ substantially from the estimates used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowances for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on judgements different from those of management. Commercial, commercial real estate and individually significant mortgage and consumer loans are considered impaired, and are placed on nonaccrual, when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Mortgage and consumer loans, which are not individually significant, are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. The amount of impairment for all impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. OTHER REAL ESTATE OWNED Other real estate owned is comprised of properties acquired either through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and for which the Company has taken physical possession. The Company classifies loans as repossessed or foreclosed if the Company receives physical possession of the debtor's assets, regardless of whether or not foreclosure proceedings take place. Assets acquired through foreclosure or a similar conveyance of title are initially recorded at the lower of the carrying value of the loan or the fair value, less estimated costs to sell, of the property constructively or actually received. Gains and losses upon disposition are reflected in operations as realized. PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets. Amortization of leasehold improvements is accumulated on a straight-line basis over the lesser of the term of the respective lease or the asset's useful life. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK-BASED COMPENSATION The Company recognizes stock-based compensation using the "intrinsic value" approach as set forth in Accounting Principles Board ("APB") Opinion No. 25 rather than the "fair value" method introduced in SFAS No. 123. Entities electing to continue following APB Opinion No. 25 must make pro forma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting in SFAS No. 123 had been applied. The Company has made the pro forma disclosures required by SFAS No. 123. EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS, if applicable, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The stock options granted in 2000 and 1999 had no dilutive effect on EPS. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 2000. This Statement establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative as follows: (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows of a forecasted transaction, or (3) a hedge of the foreign currency exposure of an unrecognized firm commitment, an available-for-sale security, a foreign currency denominated forecasted transaction, or a net investment in a foreign operation. The Statement generally provides for matching the timing of the recognition of the gain or loss on derivatives designated as hedging instruments with the recognition of the changes in the fair value of the item being hedged. Depending on the type of hedge, such recognition will be in either net income or other comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value will be recognized in net income in the period of change. Management adopted this pronouncement on January 1, 2001. Statement No. 133 allows for a one-time change in the classification of securities in the investment portfolio. Therefore, in conjunction with the adoption of Statement No. 133, the Company will transfer all securities held-to-maturity to the available-for-sale category at their market value of $2,731,000 as of January 1, 2001. In connection with the transfer, the Company will record in comprehensive income an unrealized holding loss of approximately $13,000, net of tax effect. Under Statement No. 133, this transfer will not call into question the Company's intent to hold other debt securities to maturity in the future. Management does not anticipate that this statement will have any other material impact on the consolidated financial statements. NOTE 2 CASH AND DUE FROM BANKS ------------------------------ Cash and due from banks at December 31, 2000 and 1999 includes $4,903,000 and $3,338,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. NOTE 3 SECURITIES ----------------- The amortized cost, gross unrealized gains, gross unrealized losses and market value of investment securities at December 31, 2000 and 1999 follows:
Securities Available-for-Sale: ($000 Omitted) Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------ December 31, 2000 - ----------------------------- US Treasury and other US government agencies $28,883 $ 71 $ 174 $28,780 Marketable equity securities 3,180 88 859 2,409 Non-marketable equity securities 5,424 -- -- 5,424 Mortgage-backed securities 7,513 9 47 7,475 Collateralized mortgage obligations 7,234 -- 57 7,177 Corporate bonds 1,006 -- 3 1,003 State and political subdivisions 3,366 78 -- 3,444 ------- ----- ------ ------- $56,606 $ 246 $1,140 $55,712 ======= ===== ====== ======= December 31, 1999 - ----------------------------- US Treasury and other US government agencies $27,466 $ 2 $1,019 $26,449 Marketable equity securities 2,999 141 360 2,780 Non-marketable equity securities 4,456 -- -- 4,456 Mortgage-backed securities 9,179 7 331 8,855 Collateralized mortgage obligations 10,139 -- 181 9,958 State and political subdivisions 3,478 37 15 3,500 ------- ----- ------ ------- $57,717 $ 187 $1,906 $55,998 ======= ===== ====== ======= Securities Held-to-maturity: ($000 Omitted) Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------ December 31, 2000 - -------------------------- Mortgage-backed securities $ 1,760 $ 2 $ 22 $ 1,740 Collateralized mortgage obligations 492 -- 4 488 State and political subdivisions 500 3 -- 503 ------- ----- ------ ------- $ 2,752 $ 5 $ 26 $ 2,731 ======= ===== ====== ======= December 31, 1999 - -------------------------- Mortgage-backed securities $ 2,285 $ 3 $ 41 $ 2,247 Collateralized mortgage obligations 1,316 -- 19 1,297 State and political subdivisions 1,550 3 2 1,551 ------- ----- ------ ------- $ 5,151 $ 6 $ 62 $ 5,095 ======= ===== ====== ======= The contractual maturity distribution of investments in debt obligations at December 31, 2000 follows: ($000 Omitted) One to Five to Over Within Five Ten Ten Total One Year Years Years Years Cost -------- ----- ----- ----- ---- Available-for-Sale: US Treasury and other US government agencies $500 $18,496 $ 8,888 $ 999 $28,883 Mortgage-backed securities 52 599 5,737 1,125 7,513 Collateralized mortgage obligations -- -- 6,690 544 7,234 Corporate bonds -- 1,006 -- -- 1,006 State and political subdivisions -- 465 1,006 1,895 3,366 ---- ------- ------- ------ ------- $552 $20,566 $22,321 $4,563 $48,002 ==== ======= ======= ====== ======= Market value $551 $20,466 $22,252 $4,610 $47,879 ==== ======= ======= ====== ======= Held-to-Maturity: Mortgage-backed securities $ 28 $ 337 $ 173 $1,222 $ 1,760 Collateralized mortgage obligations -- -- 456 36 492 State and political subdivisions -- -- -- 500 500 ---- ------- ------- ------ ------- $ 28 $ 337 $ 629 $1,758 $ 2,752 ==== ======= ======= ====== ======= Market value $ 28 $ 338 $ 624 $1,741 $ 2,731 ==== ======= ======= ====== ======= Actual maturities of state and political subdivisions, mortgage-backed securities and collateralized mortgage obligations will differ from the maturities presented because borrowers have the right to prepay obligations without prepayment penalties. An analysis of gross realized gains and losses on investment securities available-for-sale sold during the years ended December 31, follows: ($000 Omitted) 2000 1999 1998 -------------------------- -------------------------- -------------------------- Realized Realized Realized Realized Realized Realized Gains Losses Gains Losses Gains Losses Equity $517 $5 $720 $41 $523 $22 Mortgage-backed securities -- -- 30 -- -- 5 ---- -- ---- --- ---- --- $517 $5 $750 $41 $523 $27 ==== == ==== === ==== ===
The tax provision applicable to these net realized gains and losses amounted to $201,000, $278,000 and $192,000 for 2000, 1999, and 1998, respectively. Investment securities with a carrying amount totaling $18,729,000 and $22,805,000 were pledged to secure public deposits, securities sold under agreements to repurchase and treasury, tax and loan accounts at December 31, 2000 and 1999, respectively. NOTE 4 LOANS ------------ Loan balances were comprised of the following: ($000 Omitted) December 31, 2000 1999 - -------------------------------------------------------------------------------- Real estate: Residential $129,805 $139,389 Commercial 100,608 93,061 Construction 5,752 4,360 Commercial 22,270 28,833 Installment 28,177 24,147 Indirect installment 99,359 76,431 Other 7,881 7,369 -------- -------- Total loans 393,852 373,590 Less: Unearned income 594 824 Allowance for loan losses 4,354 4,887 -------- -------- 4,948 5,711 -------- -------- $388,904 $367,879 ======== ======== Loans are made in the ordinary course of business to directors, executive officers, and their immediate families and to organizations in which such persons have more than a 10 percent ownership interest. These loans are made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. An analysis of activity in such loans for the years ended December 31, 2000 and 1999 follows: ($000 Omitted) 2000 1999 ---- ---- Balance at beginning of year $ 800 $ 1,121 Advances 283 530 Repayments (83) (431) Change in status of executive officers and directors -- (420) -------- -------- Balance at end of year $ 1,000 $ 800 ======== ======== The Company's lending activities are conducted principally in New Hampshire. Although the loan portfolio is diversified, a portion of its debtors' ability to repay is dependent upon the economic conditions prevailing in New Hampshire. The Company maintains significant credit relationships with borrowers in the hotel and motel industry. The aggregate loan balances to these industries totaled $61,272,000 at December 31, 2000. Loans serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans total $28,932,000 and $18,755,000 at December 31, 2000 and 1999, respectively. The Company sold $2,196,000 of mortgage loans and $10,716,000 of indirect installment loans in 2000 and $8,306,000 of mortgage loans in 1999. The Company capitalized $22,000 and $83,000 of servicing rights and amortized $14,000 and $7,000 of those rights in 2000 and 1999, respectively. There is no valuation allowance for mortgage servicing rights, because their fair value approximates their carrying amount of $84,000 and $76,000 at December 31, 2000 and 1999, respectively. Mortgage servicing rights are carried in other assets. Restructured, accruing loans entered into prior to the adoption of SFAS No. 114 and 118 are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms at adoption of SFAS No. 114. Restructured, accruing loans entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure these loans may be removed from the impaired loan disclosure provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. At December 31, 2000 and 1999, loans restructured in a troubled debt restructuring before January 1, 1995, the effective date of SFAS No. 114, that are not impaired based on the terms specified by the restructuring agreement totaled $1,010,000 and $1,035,000, respectively. The gross interest income that would have been recorded in the years ended December 31, 2000 and 1999 if such restructured loans had been current in accordance with their original terms was $143,000 and $133,000, respectively. The amount of interest income recognized on such restructured loans for the years ended December 31, 2000 and 1999 was $94,000 and $88,000, respectively. The recorded investment in loans that are considered to be impaired under SFAS No. 114 was $197,000 and $3,139,000 at December 31, 2000 and 1999, respectively, for which the related allowance for loan losses is $0 and $1,000,000, respectively. All of the Company's impaired loans are collateralized and therefore all impaired loans are measured by the difference between the fair value of the collateral and the recorded amount of the loan. The average recorded investment in impaired loans during the twelve months ended December 31, 2000 and 1999 was approximately $1,996,000 and $120,000, respectively. For the twelve months ended December 31, 2000 and 1999 the Company recognized interest income on impaired loans of $78,000 and $11,000, respectively, which included $72,000 and $0 of interest income recognized using the cash-basis method of income recognition, respectively. NOTE 5 ALLOWANCE FOR LOAN LOSSES -------------------------------- Changes in the allowance for loan losses for the years ended December 31, follows: ($000 Omitted) 2000 1999 1998 ------- ------ ------ Balance at beginning of year $4,887 $4,404 $4,156 Provision charged to expense 980 540 540 Recoveries on loans previously charged-off 130 247 232 Loans charged-off (1,643) (304) (524) ------- ------ ------ Balance at end of year $4,354 $4,887 $4,404 ======= ====== ====== NOTE 6 OTHER REAL ESTATE OWNED ------------------------------ Other real estate owned consists of real estate acquired by foreclosure or a similar conveyance of title. Other real estate owned at December 31, follows: ($000 Omitted) 2000 1999 ----- ----- Commercial real estate $-- $ 40 Residential real estate 25 75 --- ---- $25 $115 === ==== Sales of other real estate owned by the Company resulted in gains of $64,000, $7,000, and $45,000 for the years ended December 31, 2000, 1999, and 1998, respectively. Write downs on other real estate owned totaled $0, $47,000, and $5,000 for the years ended December 31, 2000, 1999, and 1998, respectively. NOTE 7 PREMISES AND EQUIPMENT ----------------------------- A summary of premises and equipment at December 31, follows: ($000 Omitted) 2000 1999 ---- ---- Land $ 2,294 $ 1,650 Buildings 8,585 8,309 Construction in progress 138 4 Equipment 5,483 4,935 ------- ------- 16,500 14,898 Less accumulated depreciation and amortization 5,500 4,511 ------- ------- $11,000 $10,387 ======= ======= Depreciation expense for the years ended December 31, 2000, 1999 and 1998 amounted to $999,000, $933,000, and $821,000, respectively. The Company leases six of its locations under non-cancellable operating leases. Minimum lease payments in future periods under non-cancellable operating leases at December 31, 2000 are as follows: ($000 Omitted) 2001 $234 2002 177 2003 155 2004 63 2005 -- ----- $629 ==== The terms of four of the leases provide that the Company can, at the end of the initial five-year term, renew the lease under two five-year options. All leases contain a provision that the Company shall pay its pro-rata share of operating costs, including all real estate taxes. Rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to $256,000, $190,000 and $91,000, respectively. NOTE 8 DEPOSITS --------------- The aggregate amount of maturities for time deposits as of December 31, 2000, for each of the following five years ended December 31, are as follows: ($000 Omitted) 2001 $168,268 2002 11,996 2003 2,098 2004 412 2005 231 -------- $183,005 ======== NOTE 9 SHORT-TERM BORROWINGS ---------------------------- Short-term borrowings, which include securities sold under agreements to repurchase and FHLB advances with maturities of less than one year, and their related average interest rates for the years ended December 31, 2000, 1999 and 1998 are as follows:
($000 Omitted) Amount outstanding at December 31, 2000 1999 1998 - ---------------------------------------------- ---------------- ---------------- --------------- Avg. Avg. Avg. Int. Int. Int. Amount Rate Amount Rate Amount Rate ------- ---- ------- ---- ------- ---- FHLB advances $ 2,950 6.67% $ 9,950 4.60% $ 833 5.91% Securities sold under agreements to repurchase 9,390 6.06 7,468 4.88 6,791 4.97 ------- ---- ------- ---- ------- ---- $12,340 6.21% $17,418 4.72% $ 7,624 5.07% ======= ==== ======= ==== ======= ==== Maximum amount outstanding at any month end $41,199 $33,729 $17,608 Average amount outstanding during the year 28,575 6.37% 20,442 4.67% 13,420 5.60%
The underlying securities associated with securities sold under agreements to repurchase are under the control of the Company. NOTE 10 LONG-TERM DEBT ---------------------- Long-term debt at December 31, 2000 and 1999 consisted of FHLB advances of $35,528,000 and $58,528,000, respectively. As of December 31, 2000, contractual principal payments due under long-term debt were as follows: ($000 Omitted) 2001 $ 1,500 2002 3,028 2003 -- 2004 5,000 2005 -- 2006 and years thereafter 26,000 ------- $35,528 ======= The FHLB long-term debt consisted of nine separate advances with the following terms: ($000 Omitted) Amount Rate Maturity Date Call Date - ------- ---- ------------- --------- $ 1,500 5.95% 07/30/01 N/A 28 6.78 04/04/02 N/A 3,000 6.76 04/08/02 N/A 5,000 5.79 08/30/04 08/30/01 5,000 6.11 03/28/07 03/28/01 7,000 5.54 11/02/09 02/01/01 7,000 5.57 11/09/09 11/09/01 5,000 5.91 12/17/09 06/18/01 2,000 4.80 12/27/10 06/26/01 - ------- $35,528 ======= NOTE 11 ACQUISITIONS -------------------- On August 25, 2000, the Company acquired certain assets and assumed the deposits of a branch office of The Bank of New Hampshire located in West Ossipee, New Hampshire. As a result of this purchase the Company made the following entries to record this transaction: ($000 Omitted) Cash $16,952 Loans 6,197 Deposit assumption premium 4,340 Premises and equipment 301 Other assets 38 Miscellaneous expense 8 Deposits 27,782 Other liabilities 50 Other income 4 This transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branch is included in the 2000 consolidated statement of income of the Company from the date of the transaction. The deposit assumption premium of $4,340,000 is being amortized to noninterest expense over fifteen years using the straight line method. On July 9, 1999, the Company acquired certain assets and assumed deposits from branch offices of Vermont National Bank located in Tilton and Franklin, New Hampshire. As a result of the purchase, the Company made the following entries to record this transaction: ($000 Omitted) Cash $16,931 Deposit assumption premium 789 Premises and equipment 292 Prepaid expenses 5 Interest expense 3 Deposits 18,011 Other income 3 Other liabilities 6 This transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branches are included in the 1999 consolidated statement of income of the Company from the date of the transaction. The deposit assumption premium of $789,000 is being amortized to noninterest expense over seven years using the straight line method. Management reviews the carrying amount of intangible assets on an ongoing basis, taking into consideration any events and circumstances that might have diminished such amount. NOTE 12 STOCKHOLDERS' EQUITY ---------------------------- The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2000, the most recent notification from the FDIC categorized the Banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or events since that notification that management believes have changed the Company's and Banks' categories. Management believes, as of December 31, 2000 and 1999, that the Company and the Banks met all capital adequacy requirements to which they are subject. These minimum capital amounts and ratios, as well as the Company's and Banks' actual capital amounts and ratios, are presented in the following table:
($000 Omitted) To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions ----------------- ----------------- ------------------ As of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio - -------------------------------------- ------ ----- ------ ----- ------ ----- Tier 1 capital (to average assets) Consolidated $36,628 7.42% $19,749 ->4.00% N/A The Berlin City Bank 23,127 6.98 13,252 ->4.00 $16,565 ->5.00% The Pemigewasset National Bank 13,216 7.93 6,669 ->4.00 8,336 ->5.00 Total capital (to risk weighted assets) Consolidated 40,982 11.60 28,252 ->8.00 N/A The Berlin City Bank 25,999 11.32 18,376 ->8.00 22,971 ->10.00 The Pemigewasset National Bank 14,645 11.73 9,985 ->8.00 12,481 ->10.00 Tier 1 capital (to risk weighted assets) Consolidated 36,628 10.37 14,126 ->4.00 N/A The Berlin City Bank 23,127 10.07 9,188 ->4.00 13,782 ->6.00 The Pemigewasset National Bank 13,216 10.59 4,992 ->4.00 7,488 ->6.00 As of December 31, 1999 - -------------------------------------- Tier 1 capital (to average assets) Consolidated $38,852 8.47% $18,356 ->4.00% N/A The Berlin City Bank 25,664 8.20 12,513 ->4.00 $15,641 ->5.00% The Pemigewasset National Bank 12,986 8.69 5,980 ->4.00 7,475 ->5.00 Total capital (to risk weighted assets) Consolidated 42,969 13.05 26,350 ->8.00 N/A The Berlin City Bank 28,420 12.93 17,581 ->8.00 21,976 ->10.00 The Pemigewasset National Bank 14,283 13.78 8,293 ->8.00 10,366 ->10.00 Tier 1 capital (to risk weighted assets) Consolidated 38,852 11.80 13,175 ->4.00 N/A The Berlin City Bank 25,664 11.68 8,790 ->4.00 13,186 ->6.00 The Pemigewasset National Bank 12,986 12.53 4,146 ->4.00 6,220 ->6.00
Federal regulations prohibit banking companies from paying dividends on their stock if the effect would cause stockholders' equity to be reduced below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements. Under the National Bank Act, the approval of the Office of the Comptroller of the Currency ("OCC") is required if dividends declared by PNB in any year exceed the net profits of that year, as defined, combined with the retained net profit for the two preceding years. At December 31, 2000, PNB could, without approval of the OCC, declare dividends aggregating $1,148,000. As of December 31, 2000, BCB is restricted from declaring dividends to the Company in an amount greater than approximately $6,563,000, as such declaration would decrease capital below BCB's required minimum level of regulatory capital. NOTE 13 OTHER NONINTEREST EXPENSE --------------------------------- The major components of other noninterest expense for the years ended December 31, are as follows: ($000 Omitted) 2000 1999 1998 ------ ------ ------ Professional fees $1,073 $1,091 $ 702 Stationary and supplies 605 565 470 Other 2,928 2,796 2,600 ------ ------ ------ $4,606 $4,452 $3,772 ====== ====== ====== NOTE 14 FEDERAL AND STATE TAXES ------------------------------- The components of federal and state tax expense for the years ended December 31, are as follows: ($000 Omitted) 2000 1999 1998 ------ ------ ------ Current Federal $1,657 $1,932 $1,628 State 187 372 220 ------ ------ ------ 1,844 2,304 1,848 ====== ====== ====== Deferred Federal 210 (248) 154 State 53 (94) 34 ------ ------ ------ 263 (342) 188 ------ ------ ------ Total $2,107 $1,962 $2,036 ====== ====== ====== The temporary differences (the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases) that give rise to significant portions of the deferred income tax asset and deferred income tax liability at December 31, are as follows: ($000 Omitted) 2000 1999 ---- ---- Deferred income tax asset Allowance for loan losses $1,461 $1,653 Other 52 - Interest on nonaccrual loans 73 165 Deferred origination costs - 38 Unrealized holding loss on investment securities available-for-sale 351 664 Minimum pension liability adjustment 67 - Deposit assumption premium 488 390 Prepaid pension 16 24 Supplemental pension 50 51 ------ ------ 2,558 2,985 ------ ------ Deferred income liabilities: Loan origination costs, net (20) (3) Depreciation (604) (542) Mortgage servicing rights (33) (30) ------ ------ (657) (575) Deferred income tax asset, net $1,901 $2,410 ====== ====== The primary sources of recovery of the deferred income tax asset are taxes paid that are available for carryback and the expectation that the deductible temporary differences will reverse during periods in which the Company generates taxable income. Total income tax expense for the years ended December 31, 2000, 1999 and 1998 differs from the "expected" federal income tax expense at the 34% statutory rate for the following reasons: 2000 1999 1998 ---- ---- ---- Expected federal income taxes 34.0% 34.0% 34.0% Municipal income (2.5) (3.9) (3.6) State tax expense, net of federal benefit 2.4 3.5 2.8 Other (0.3) 0.7 0.1 ---- ---- ---- Effective tax rates 33.6% 34.3% 33.3% ==== ==== ==== NOTE 15 EMPLOYEE BENEFITS ------------------------- Pension Plan The Company maintains a trusteed non-contributory pension plan (the "Plan") covering substantially all full-time employees. Assuming retirement at age 65 after 30 years or more of service, the benefits are computed as the sum of 1 percent of final average earnings up to a covered compensation limit, plus 65 percent of final average earnings in excess of covered compensation, times years of service, up to 30. Final average earnings are defined as the five consecutive years out of the employees last ten years of employment during which compensation is highest. The amounts contributed to the Plan are determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only benefits attributed to service to date but also for those expected to be earned in the future. Assets of the Plan are primarily invested in common stock, US Government and Agency securities and high quality corporate bonds. The following table sets forth information about the Plan as of December 31, and for the years then ended: ($000 Omitted) 2000 1999 ---- ---- Change in benefit obligation - ---------------------------- Benefit obligation at beginning of year $2,967 $3,988 Service cost 245 238 Interest cost 230 244 Actuarial gain (loss) 173 (672) Benefits paid (331) (831) ------ ------ Benefit obligation at end of year $3,284 $2,967 ====== ====== Change in plan assets - --------------------- Fair value of plan assets at beginning of year $3,121 $3,766 Actual return on plan assets 53 186 Benefits paid (331) (831) ------ ------ Fair value of plan assets at end of year $2,843 $3,121 ====== ====== ($000 Omitted) 2000 1999 ---- ---- Funded status - ------------- Funded status $ (441) $ 154 Unrecognized transition asset (14) - Unrecognized net actuarial loss 1,675 1,338 Unrecognized prior service cost (1,224) (1,309) ------- ------- Net amount recognized $ (4) $ 183 ======= ======= Amounts recognized in the consolidated statements of financial position consists of: - ----------------------------------------------- Accrued benefit cost $ (4) $ - Accrued benefit liability (197) - Accumulated other comprehensive income 197 - Prepaid benefit cost - 183 ------- ------- Net amount recognized $ (4) $ 183 ======= ======= Weighted-average assumptions as of December 31, 2000 1999 - ------------------------------ ------ ------ Discount rate 7.50% 7.75% Expected return on plan assets 8.50 8.50 Rate of compensation increase 4.50 4.50 ($000 Omitted) Components of net periodic benefit cost 2000 1999 1998 - --------------------------------------- ---- ---- ---- Service cost $ 245 $ 238 $ 218 Interest cost 230 244 268 Expected return on plan assets (261) (316) (296) Amortization of prior service cost (85) (85) 1 Recognized net actuarial loss 62 70 16 Recognized transition amount (4) (4) (4) ----- ----- ----- Net periodic benefit cost $ 187 $ 147 $ 203 ===== ===== ===== 401(k) Plan On July 1, 1999, the PNB 401(k) plan was amended and restated as the Northway Financial, Inc. 401(k) and Profit Sharing Plan (the "401K Plan"). Under the 401K Plan employees must have attained age 21, completed six months of service and be credited with 1,000 hours of service in order to participate. Employees of the Company, PNB and BCB are eligible to participate. Under the 401K Plan, employers match 50% of the first 4% of employee contributions. Total 401(k) matching expense in 2000 and 1999 amounted to $110,000 and $73,000, respectively, and the Profit Sharing contribution expense was $60,000 and $54,000, respectively. Prior to July 1, 1999, PNB had a 401(k) plan. To be eligible, employees must have attained age 21, completed six months of service and be credited with 1,000 hours of service. PNB matched 25% of employee contributions on the first 4% of compensation deposited as elective contributions. The 401(k) matching expense was $0 and $15,000 for the years ended December 31, 1999 and 1998, respectively. STOCK-BASED COMPENSATION As indicated in Note 1, the Company applies APB Opinion 25 and related interpretations in accounting for stock options. Accordingly, no compensation cost has been recognized for its fixed stock options granted. Had compensation cost been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: ($000 Omitted, except per share data) 2000 1999 ---- ---- Net income As reported $4,159 $3,764 Pro forma 4,112 3,528 Earnings per share As reported $ 2.61 $ 2.25 Pro forma 2.58 2.11 The Board of Directors (the "Committee") administers the 1999 Stock Option and Grant Plan (the "1999 Plan") which is described below. The 1999 Plan was approved by shareholders on May 18, 1999. Under the 1999 Plan, the Committee may select the individuals to whom awards may from time to time be granted; determine the time or times of grant, and the extent, if any, of incentive stock options, non-qualified stock options, restricted stock awards, unrestricted stock awards, performance share awards, or any combination of the foregoing. The 1999 Plan expires in February 2009. The aggregate number of shares of the Company's common stock which may be issued upon the exercise of options granted under the 1999 Plan is 175,000. The option price is fixed by the Committee at the time of the grant and may not be less than 100% of the fair market value of the stock, as determined by the Committee, in good faith as of the grant date. Each option may be exercised at such times as shall be determined by the Committee at or after the grant date; provided, however, that no option may be exercised ten years after the date of grant. The fair value of each option granted is estimated on grant date using the Black-Scholes option pricing model. The weighted average dividend yield was 2.5% and 2.0% and the weighted average risk-free interest rate was 6.01% and 6.03% for 2000 and 1999, respectively. In addition, the expected volatility was 23% and the expected life was 8 years for both 2000 and 1999. A summary of the status of the Company's 1999 Plan as of December 31, 2000 and 1999 and changes during the years then ended is presented below: 2000 1999 ---------------------- ---------------------- Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Outstanding, beginning of year 26,000 $28.00 - $ - Granted 28,500 22.63 26,000 28.00 Forfeited (5,000) 28.00 - - ------ ------ Outstanding, end of year 49,500 $24.91 26,000 $28.00 ====== ====== Options exercisable at year-end 28,125 24,000 Per share weighted-average fair value of options granted during the year $6.55 $9.07 The following table summarizes information about fixed stock options outstanding as of December 31, 2000: Options Outstanding Options Exercisable ------------------------------------ ------------------------ Weighted Number Average Number Weighted Outstanding Remaining Exercisable Average Exercise as of Contractual as of Exercise Price 12/31/00 Life 12/31/00 Price ------ ------ ---------- ------ ------ $28.00 21,000 8.50 years 21,000 $28.00 22.63 28,500 9.63 years 7,125 22.63 ------ ------ $24.91 49,500 9.15 years 28,125 $26.35 ====== ====== CHANGES IN CONTROL The Company and its subsidiaries have entered into employment agreements with certain officers. These agreements provide for the payment, under certain circumstances, to the officer upon the officer's termination after a change of control. The amount of such payments is set forth in their individual agreements. NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK --------------------------------------------------------- The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The amounts of those instru-ments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet credit risk at December 31, are as follows: ($000 Omitted) 2000 1999 ---- ---- Financial instrument whose contract amounts represent credit risk: Unadvanced portions of home equity loans $5,314 $ 3,165 Unadvanced portions of lines of credit 7,983 9,612 Unadvanced portions of commercial real estate loans 622 2,034 Commitments to originate loans 6,887 17,249 Commitments to originate municipal notes 5,420 675 Standby letters of credit 645 531 Commitments to originate loans, unadvanced portions of home equity loans, lines of credit and commercial real estate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without having been drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS ------------------------------------------- The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximates the fair value of those assets. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. FHLB and Federal Reserve Bank ("FRB") Stock: The carrying amount reported in the balance sheets for FHLB and FRB Stock approximates their fair value. If redeemed, the Company will receive an amount equal to the par value of the stocks. Loans held-for-sale: The carrying amount reported in the balance sheet approximates fair value. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value of nonaccrual loans was estimated using the estimated fair value of the underlying collateral. The fair value of commitments to originate loans and outstanding letters of credit were considered in estimating the fair value of loans. As the undisbursed lines of credit are at floating rates, there is no fair value adjustment. Accrued interest receivable: The carrying value of accrued interest receivable approximates its fair value because of the short term nature of this financial instrument. Deposits: The fair value of demand deposits (e.g. NOW and Super NOW checking, non-interest bearing checking, regular savings, money market accounts and mortgagors' escrow accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits. Short-term borrowings: The carrying value of short-term bor-rowings approximates its fair value because of the short-term nature of these financial instruments. Long-term debt: The fair values of long-term debt were determined by discounting the anticipated future cash payments by using the rates currently available to the Company for debt with similar terms and remaining maturities. The estimated fair values of the Company's financial instruments are as follows: ($000 Omitted) 2000 1999 ------------------- --------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial assets: Cash and cash equivalents $ 15,401 $ 15,401 $ 16,087 $ 16,087 Investment securities available-for-sale 50,513 50,513 51,692 51,692 Investment securities held-to-maturity 2,752 2,731 5,151 5,095 FHLB stock 5,119 5,119 4,226 4,226 FRB stock 80 80 80 80 Loans held-for-sale 229 229 54 54 Loans, net 388,904 387,938 367,879 366,596 Accrued interest receivable 2,909 2,909 2,439 2,439 Financial liabilities: Deposits 391,772 391,671 343,029 343,782 Short-term borrowings 12,340 12,340 17,418 17,418 Long-term debt 35,528 35,555 58,528 58,231 The carrying amounts of financial instruments shown in the above table are included in the consolidated statements of financial condition under the indicated captions except that (1) FHLB stock and FRB stock are included with investment securities available-for-sale in the statements; and (2) accrued interest receivable is included with other assets in the statement. At December 31, 2000, all the Company's financial instruments were held for purposes other than trading. At December 31, 2000, the Company had no derivative financial instruments subject to the provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for some of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. The fair value amounts presented do not represent the underlying value of the Company because fair values of certain other financial instruments, assets and liabilities have not been determined. NOTE 18 CONDENSED PARENT ONLY FINANCIAL STATEMENTS -------------------------------------------------- Condensed financial statements of Northway Financial, Inc. (Parent Company only) as of December 31, 2000 and 1999 and for the three years ended December 31, 2000 follow: STATEMENTS OF FINANCIAL CONDITION ($000 Omitted) 2000 1999 ------- ------- Assets - -------------------------------------------------------- Cash and cash equivalents $ 232 $ 372 Investment in subsidiary, The Berlin City Bank 27,496 25,394 Investment in subsidiary, The Pemigewasset National Bank 13,911 13,691 Equipment, net 432 16 Due from subsidiaries 448 - Other assets 442 43 ------- ------- Total assets $42,961 $39,516 ======= ======= Liabilities and stockholders' equity - -------------------------------------------------------- Accrued expenses $ 499 $ 116 Other liabilities 220 114 Borrowings from subsidiary 680 - ------- ------- Total liabilities 1,399 230 ------- ------- Stockholders' equity: Common stock 1,732 1,732 Additional paid-in-capital 2,101 2,101 Retained earnings 43,110 39,906 Treasury stock (4,708) (3,398) Accumulated other comprehensive (loss) income (673) (1,055) ------- ------- Total stockholders' equity 41,562 39,286 ------- ------- Total liabilities and stockholders' equity $42,961 $39,516 ======= ======= STATEMENTS OF INCOME ($000 Omitted) 2000 1999 1998 ---- ---- ---- Dividends from subsidiaries $ 2,450 $ 2,922 $ 1,686 Interest income 22 50 43 Fee income from subsidiary banks 5,252 -- -- Other -- 70 -- ------- ------- ------- 7,724 3,042 1,729 ------- ------- ------- Interest expense 7 -- -- Salaries and employee benefits 3,507 -- -- Equipment expense 552 5 -- Professional fees 628 142 34 Other 735 709 36 ------- ------- ------- 5,429 856 70 ------- ------- ------- Income before income tax (benefit) expense and equity in undistributed net income of subsidiaries 2,295 2,186 1,659 Income tax (benefit) expense (53) (250) (9) ------- ------- ------- Income before equity in undistributed net income of subsidiaries 2,348 2,436 1,668 Equity in undistributed net income of subsidiaries 1,811 1,328 2,400 ------- ------- ------- Net income $ 4,159 $ 3,764 $ 4,068 ======= ======= ======= STATEMENTS OF CASH FLOWS ($000 Omitted) 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $ 4,159 $ 3,764 $ 4,068 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35 3 -- Due from subsidiaries (448) -- -- Increase in other assets (332) (58) -- Increase in accrued expenses and other liabilities 293 218 25 Loss on sale of assets 18 -- -- Undistributed net income of subsidiaries (1,811) (1,328) (2,400) ------- ------- ------- Net cash provided by operating activities 1,914 2,599 1,693 ------- ------- ------- Cash flows from investing activities: Additions to premises and equipment (469) (19) -- ------- ------- ------- Net cash used in investing activities (469) (19) -- ------- ------- ------- Cash flows from financing activities: Proceeds from advances from subsidiaries 1,565 -- -- Repayments of advances from subsidiaries (885) -- -- Cash paid to BCB -- (245) -- Purchases of treasury stock (1,310) (3,343) (55) Dividends paid (955) (942) (728) ------- ------- ------- Net cash used in financing activities (1,585) (4,530) (783) ------- ------- ------- Net (decrease) increase in cash and cash equivalents (140) (1,950) 910 Cash and cash equivalents at beginning of year 372 2,322 1,412 ------- ------- ------- Cash and cash equivalents at end of year $ 232 $ 372 $ 2,322 ======= ======= ======= QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Summarized quarterly financial data for 2000 and 1999 follows: ($000 Omitted, except earnings per share) 2000 Quarters Ended - ------------------------------------------------------------------------------- Mar 31 Jun 30 Sep 30 Dec 31 ------ ------ ------ ------ Interest and dividend income $8,839 $9,127 $9,709 $9,635 Interest expense 3,556 4,004 4,300 4,197 ------ ------ ------ ------ Net interest income 5,283 5,123 5,409 5,438 Provision for loan losses 245 255 255 225 Noninterest income 558 660 722 748 Noninterest expense 4,054 4,081 4,307 4,253 ------ ------ ------ ------ Income before taxes 1,542 1,447 1,569 1,708 Income tax expense 538 435 537 597 ------ Net income $1,004 $1,012 $1,032 $1,111 ====== ====== ====== ====== Earnings per share $ 0.62 $ 0.63 $ 0.65 $ 0.71 ====== ====== ====== ====== 1999 Quarters Ended - ------------------------------------------------------------------------------- Mar 31 Jun 30 Sep 30 Dec 31 ------ ------ ------ ------ Interest and dividend income $7,023 $7,320 $7,938 $8,639 Interest expense 2,658 2,705 2,879 3,336 ------ ------ ------ ------ Net interest income 4,365 4,615 5,059 5,303 Provision for loan losses 135 135 135 135 Noninterest income 718 614 655 735 Noninterest expense 3,731 3,785 4,140 4,142 ------ ------ ------ ------ Income before taxes 1,217 1,309 1,439 1,761 Income tax expense 399 470 483 610 ------ Net income $ 818 $ 839 $ 956 $1,151 ====== ====== ====== ====== Earnings per share $ 0.48 $ 0.50 $ 0.57 $ 0.70 ====== ====== ====== ====== MARKET INFORMATION (UNAUDITED) Northway's common stock is traded on The Nasdaq Stock Market, Inc.'s National Market under the symbol "NWFI." The following table sets forth, for the periods indicated, the high and low closing sale prices for the common stock, as reported by the Nasdaq National Market, and the dividends paid on the common stock: Price Per Share --------------- Low High Dividends Per Share --- ---- ------------------- 2000 4th Quarter $21.50 $24.13 $0.15 3rd Quarter $22.13 $24.75 $0.15 2nd Quarter $20.00 $23.50 $0.15 1st Quarter $20.00 $26.38 $0.15 1999 4th Quarter $26.00 $28.75 $0.14 3rd Quarter $26.00 $29.75 $0.14 2nd Quarter $25.25 $30.25 $0.14 1st Quarter $29.75 $31.00 $0.14 The Company intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends. MANAGEMENT'S STATEMENT OF RESPONSIBILITY ---------------------------------------- Responsibility for the financial information presented in the Annual Report rests with Northway Financial, Inc.'s management. The Company believes that the consolidated financial statements reflect fairly the substance of transactions and present fairly the Company's financial position and results of operations in conformity with generally accepted accounting principles appropriate in the circumstances, applying certain estimates and judgments as required. In meeting its responsibilities for the reliability of the consolidated financial statements, the Company depends on its system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with the appropriate corporate authorizations and recorded properly to permit the preparation of consolidated financial statements in accordance with generally accepted accounting principles. Although accounting control procedures are designed to achieve these objectives, it must be recognized that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. The Company believes that its accounting controls provide reasonable assurance that errors and irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. An important element of the system is a continuing and extensive internal audit program. The Board of Directors of the Company has an Audit Committee composed entirely of directors who are not officers or employees of the Company. The Committee meets periodically and privately with management, the internal auditor, and the independent public accountants to consider audit results and to discuss internal accounting controls, auditing, and financial reporting matters. Shatswell, MacLeod & Company, P.C., independent certified public accountants, have been engaged to render an independent professional opinion of the Company's consolidated financial statements. Their audit is conducted in accordance with generally accepted auditing standards and forms the basis for their report as to the fair presentation, in the consolidated financial statements, of the Company's financial position, operating results and cash flows. William J. Woodward George L. Fredette President and Chief Executive Officer Senior Vice President and Chief Financial Officer January 18, 2001 INDEPENDENT AUDITORS' REPORT ---------------------------- Shatswell, MacLeod & Company, P.C. Certified Public Accountants 83 Pine Street West Peabody, Massachusetts 01960 The Board of Directors and Stockholders Northway Financial, Inc. Berlin, New Hampshire We have audited the accompanying consolidated statements of financial condition of Northway Financial, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northway Financial, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with generally accepted accounting principles. SHATSELL, MacLEOD, & COMPANY, P.C. West Peabody, Massachusetts January 18, 2001 NORTHWAY FINANCIAL, INC. BOARD OF DIRECTORS ------------------------------------------- BOARD OF DIRECTORS OFFICERS Fletcher W. Adams Vice Chairman William J. Woodward Northway Financial, Inc. Chairman of the Board, Chairman of the Board and President President and CEO Pemigewasset National Bank Fletcher W. Adams Peter H. Bornstein Vice Chairman Attorney and Partner Bergeron, Hanson, Bornstein & Carlson George L. Fredette Senior Vice President, CFO Stephen G. Boucher and Treasurer President Airmar Technology Corp. Richard P. Orsillo Vice President Charles H. Clifford, Jr. Corporate Controller Retired Businessman Joseph N. Rozek Arnold P. Hanson, Jr. Assistant Secretary President Isaacson Structural Steel, Inc. Barry J. Kelley President White Mountain Lumber Co. Bruce W. Keough Private Investor Randall G. Labnon General Manager Town and Country Motor Inn John D. Morris Retired Businessman John H. Noyes President Noyes Insurance Agency, Inc. President Central Square Insurance, Inc. William J. Woodward Chairman of the Board, President and CEO Northway Financial, Inc. The Berlin City Bank SUBSIDIARY BANK DIRECTORS ------------------------- THE BERLIN CITY BANK PEMIGEWASSET NATIONAL BANK Frederick Anderson Fletcher W. Adams General Manager and CEO Vice Chairman NH Electric Cooperative, Inc. Northway Financial, Inc. Chairman of the Board and President Peter H. Bornstein Pemigewasset National Bank Attorney and Partner Bergeron, Hanson, Bornstein & Carlson Frederick C. Anderson General Manager and CEO Stephen G. Boucher NH Electric Cooperative, Inc. President Airmar Technology Corp. Charles H. Clifford, Jr. Retired Businessman Arnold P. Hanson, Jr. President John H. Noyes Isaacson Structural Steel, Inc. President Noyes Insurance Agency, Inc. Barry J. Kelley President President Central Square Insurance, Inc. White Mountain Lumber Co. Brien L. Ward Bruce W. Keough Attorney Private Investor William J. Woodward Randall G. Labnon Chairman of the Board, General Manager President and CEO Town and Country Motor Inn Northway Financial, Inc. The Berlin City Bank John D. Morris Retired Businessman Brien L. Ward Attorney William J. Woodward Chairman of the Board, President and CEO Northway Financial, Inc. The Berlin City Bank INFORMATION FOR STOCKHOLDERS ---------------------------- TRANSFER AGENT INDEPENDENT AUDITORS Boston EquiServe, LP Shatwell, MacLeod & Company, P.C. Investor Relations 83 Pine Street P.O. Box 8040 West Peabody, Massachusetts 01960-3635 Mail Stop 45-02-64 Boston, Massachusetts 02266-8040 FINANCIAL INFORMATION MARKET MAKERS FOR FINANCIAL DOCUMENTS, INCLUDING THE ANNUAL REPORT, QUARTERLY The following companies have REPORTS TO THE SECURITIES AND generally been market makers for EXCHANGE COMMISSION ON FORM 10-K OR Northway Financial, Inc. common stock FORM 10-Q, CONTACT: as of March 31, 2001. GEORGE L. FREDETTE Ryan Beck & Co., Inc. SENIOR VICE PRESIDENT AND CFO Monroe Securities, Inc. NORTHWAY FINANCIAL, INC. Spear, Leeds, and Kellogg 9 MAIN STREET BERLIN, NEW HAMPSHIRE 03570 EX-21.1 4 0004.txt LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries Northway Financial, Inc. 2000 Annual report on Form 10-K Subsidiaries of the Registrant Jurisdiction of Name of Significant Subsidiary % Owned Incorporation - ------------------------------ ------- ------------- Berlin City Bank 100 New Hampshire Pemigewasset National Bank 100 United States EX-23 5 0005.txt CONSENT Exhibit 23 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 18, 2001, relating to the consolidated statements of financial condition of Northway Financial, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000. /S/ Shatswell, Macleod & Company, P.C. -------------------------------------- SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts March 9, 2001 -----END PRIVACY-ENHANCED MESSAGE-----