-----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, WD9YpjUFKBRt0TQNBvqdtg2H2aAz2ZioWSEHR/OG3j3K0S7w2JmcfuPkVMo0gU6b bymGqbmpjrSvW/MtOvZeaA== 0000950156-98-000297.txt : 19980401 0000950156-98-000297.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950156-98-000297 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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: 98583159 BUSINESS ADDRESS: STREET 1: 9 MAIN ST CITY: BERLIN STATE: NH ZIP: 03750 BUSINESS PHONE: 6037521171 MAIL ADDRESS: STREET 1: 9 MAIN ST CITY: BERLIN STATE: NH ZIP: 03750 10-K 1 NORTHWAY FINANCIAL FORM 10-K - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. (Fee Required) For the fiscal year ended December 31, 1997 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) Commission File Number 000-23129 NORTHWAY FINANCIAL, INC ------------------------------------------------------ (Exact name of registrant as specified in its charter) New Hampshire 04-3368579 ------------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 Main Street Berlin, New Hampshire 03570 --------------------- ------ Address of principal executive offices (Zip Code) (603) 752-1171 -------------- (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $1.00 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by Reference in Part II of this Form 10-K or any amendment to this Form 10-K. [X] The number of shares of common stock held by nonaffiliates of the registrant as of March 20, 1998 was 1,506,519 for an aggregate market value of $46,702,089. At March 20, 1998, there were issued and outstanding 1,731,969 shares of common stock, par value $1.00 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for the 1998 Annual Meeting 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 .................................................. 6 ITEM 3 Legal Proceedings ........................................... 6 ITEM 4 Submission of Matters to a Vote of Security Holders ......... 7 PART II ITEM 5 Market for the Registrant's Common Stock and Related Security Holder Matters ................................... 7 ITEM 6 Selected Financial Data ..................................... 7 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 9 Financial Condition at December 31, 1997 ITEM 7A Quantitative and Qualitative Disclosures About Market Risk .. 9 ITEM 8 Financial Statements and Supplementary Material ............. 9 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................. 9 PART III ITEM 10 Directors and Executives Officers of the Registrant ......... 9 ITEM 11 Executive Compensation ...................................... 9 ITEM 12 Security Ownership of Certain Beneficial Owners and Management ................................................ 9 ITEM 13 Certain Relationships and Related Transactions .............. 10 PART IV ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................................... 11 Signatures .............................................. 12 FORWARD LOOKING INFORMATION - Certain statements in this Form 10-K are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward looking statements involve risks and uncertainties. Such Forward Looking Statements may include, but are not limited to, projections of revenue, income or loss, plans for future operations and acquisition, and plans related to products or services of Northway, BCB, or PNB (all as defined below) and are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of Northway, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward looking statements include, among other things, overall economic and business conditions, the demand for the Company's products and services, competitive factors in the industries in which the company competes, changes in government regulations and the timing, impact and other uncertainties of future acquisitions. PART 1 ITEM 1. BUSINESS General Description of Business Northway Financial, Inc. ("Northway") was incorporated on March 7, 1997, under the laws of the State of New Hampshire, for the purpose of becoming the holding company of The Berlin City Bank, a New Hampshire chartered bank headquartered in Berlin, New Hampshire ("BCB") pursuant to a reorganization transaction (the "BCB Reorganization") by and among Northway, BCB, and a subsidiary of BCB, and, thereafter, effecting the merger (the "Merger") by and among Northway, BCB and Pemi Bancorp, Inc. ("PEMI"), and its wholly owned subsidiary, Pemigewasset National Bank, a national bank headquartered in Plymouth, New Hampshire ("PNB"). The BCB Reorganization and the Merger became effective on September 30, 1997. As of such date, BCB and PNB became wholly owned subsidiaries of Northway. Unless the context otherwise requires, references herein to "Northway" include Northway Financial, Inc. and its consolidated subsidiaries. Northway is subject to regulation by the New Hampshire Bank Commissioner, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System. See "Supervision and Regulation." Northway, through its banking subsidiaries, provides a broad range of financial services principally to individuals and small- and medium-sized companies in New Hampshire, including those located in low- and moderate-income neighborhoods within Northway's defined Community Reinvestment Act Assessment Area. Description of Business Bank Activities 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, construction, real estate mortgages, and consumer loans including personal secured and unsecured loans, and lines of credit. The banks accept savings, time, demand, NOW and money market deposit accounts, and offer a variety of banking services including travelers checks, safe deposit boxes, Master Charge accounts, overdraft lines of credit and wire transfer services. The banks have 13 automatic teller machines to allow customers limited banking services on a 24 hour basis. The following information concerning Northway's investment activities, lending activities, asset quality and allowance for possible loan losses, should be read in conjunction with "Managements Discussion and Analysis of Financial Condition and Results of Operations," appearing under Item 7 and Northway's Consolidated Financial Statements and Notes thereto. Investment Activities The following table presents the carrying amount of Northway's investment securities available-for-sale and held-to-maturity as of December 31, 1997, 1996 and 1995 (dollars in thousands): 1997 1996 1995 --------- --------- ------- Available-for-sale: US Treasury and other US government agencies $11,929 $ 20,479 $ 18,353 Mortgage-backed securities(1) 31,235 48,348 45,461 Corporate notes 5,000 13,068 16,313 Foreign notes -- 1,000 1,999 Common and preferred stocks 2,796 2,284 295 State and political subdivisions 4,143 3,259 2,055 Other -- 190 323 ------- -------- --------- 55,103 88,628 84,799 ------- -------- --------- Held-to-maturity: US Treasury and other US government agencies $ -- $ 501 $ 1,302 Mortgage-backed securities(1) 8,400 9,943 11,981 State and political subdivisions 2,912 1,755 2,094 ------- -------- --------- 11,312 12,199 15,377 ------- -------- --------- Total Investment Securities $66,415 $100,827 $ 100,176 ======= ======== ========= (1) Includes Collateralized Mortgage Obligations. The following table sets forth the amortized cost of Northway's debt obligations maturing within stated periods and their related weighted average interest rates, reported on a tax equivalent basis, as of December 31, 1997 (dollars in thousands):
Maturities ----------------------------------------------------- One to Five to Over Available-for-sale: Within five ten ten Total one year years years years Cost -------- ------- ------- ------- ------- US Treasury and other US government agencies $ -- $3,876 $ 7,997 $ -- $11,873 Corporate notes 5,008 -- -- -- 5,008 Mortgage-backed securities (1) -- 1,325 7,790 22,422 31,537 State and political subdivisions -- 491 625 2,900 4,016 ------ ------ ------- ------- ------- $5,008 $5,692 $16,412 $25,322 $52,434 ====== ====== ======= ======= ======= Market value $5,001 $5,717 $16,339 $25,250 $52,307 ====== ====== ======= ======= ======= Weighted average yield 5.43% 6.55% 6.38% 6.08% 6.16% Maturities ----------------------------------------------------- One to Five to Over Held-to-maturity: Within five ten ten Total one year years years years Cost -------- ------- ------- ------- ------- Mortgage-backed securities(1) $ 113 $1,615 $ 3,003 $3,669 $ 8,400 State and political subdivisions 2,098 814 -- -- 2,912 ------ ------ ------ ------- ------- $2,211 $2,429 $ 3,003 $3,669 $11,312 ====== ====== ======= ====== ======= Market value $2,215 $2,454 $ 2,986 $3,642 $11,297 ====== ====== ======= ====== ======= Weighted average yield 6.55% 6.66% 6.70% 6.70% 6.67% (1) Includes Collateralized Mortgage Obligations
Lending Activities The following table sets forth information with respect to the composition of Northway's loan portfolio, excluding loans held for sale, as of December 31, 1997, 1996, 1995, 1994 and 1993 (dollars in thousands):
December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- --------- -------- -------- -------- Real estate: Residential $152,041 $ 145,847 $139,941 $143,193 $133,262 Commercial 56,204 43,901 37,595 34,120 29,190 Construction 5,664 2,329 363 517 907 Commercial 27,129 27,293 24,283 25,277 25,665 Installment 23,476 18,733 14,533 12,084 11,967 Other 2,769 2,999 2,277 4,038 3,844 -------- --------- -------- -------- -------- Total Loans 267,283 241,102 218,992 219,229 204,835 Less: Unearned income (526) (719) (1,014) (1,181) (823) Allowance for possible loan losses (4,156) (3,941) (3,866) (3,682) (3,706) -------- --------- -------- -------- -------- Net Loans $262,601 $236,442 $214,112 $214,366 $200,306 ======== ======== ======== ======== ========
The following table presents the maturity distribution of Northway's real estate construction and commercial loans at December 31, 1997 (dollars in thousands): Percent of Amount Total ------- ------ Within one year $ 3,622 11.05% One to five years 9,570 29.18 Over five years 19,601 59.77 ------- ------ $32,793 100.00% ======= ====== Northway's real estate construction and commercial loans due after one year at December 31, 1997 were comprised of the following (dollars in thousands): Amount ------- Fixed interest rate $ 8,848 Adjustable interest rate 20,323 ------- $27,171 ======= Asset Quality At December 31, 1997, the amount of interest on nonaccrual and restructured loans that would have been recorded had the loans been paying in accordance with their original terms during 1997 was approximately $290,000. The amount of interest income on these loans included in net income in 1997 was approximately $247,000. At December 31, 1997 the Company had classified certain loans totaling $813,000. Such loans represent a higher degree of risk and could become non-performing loans in the future. Analysis of the Allowance for Possible Loan Losses The following table reflects activity in Northway's allowance for possible loan losses for the years ended December 31, 1997 and 1996 (dollars in thousands):
Years ended December 31, -------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Balance at the beginning of period $3,941 $3,866 $3,682 $3,706 $3,517 Charge-offs: Real estate 452 583 456 563 736 Commercial 105 29 190 307 99 Installment loans to individuals 48 27 29 30 68 Credit card 1 11 21 20 48 Other 6 -- -- -- -- ------ ------ ------ ------ ------ Total 612 650 696 920 951 ------ ------ ------ ------ ------ Recoveries: Real estate 212 160 177 56 95 Commercial 55 11 28 136 35 Installment loans to individuals 19 28 11 26 20 Credit card 4 14 12 18 15 Other 2 -- -- -- -- ------ ------ ------ ------ ------ Total 292 213 228 236 165 ------ ------ ------ ------ ------ Net charge-offs 320 437 468 684 786 Provision charged to expense 535 512 652 660 975 ------ ------ ------ ------ ------ Balance at the end of period $4,156 $3,941 $3,866 $3,682 $3,706 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans 0.13% 0.20% 0.32% 0.45% 0.48%
Allocation of the Allowance for Possible Loan Losses The following table sets forth the breakdown of Northway's allowance for possible loan losses in Northway's portfolio by category of loan and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated (dollars in thousands):
December 31, ------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 --------------------- ---------------------- ----------------------- -------------------- -------------------- 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 $ 613 10.2% $ 582 11.3% $ 924 11.1% $1,344 11.5% $1,302 12.5% Real estate: Commercial & Construction 1,251 23.1 1,186 19.2 675 17.2 375 15.6 275 14.3 Residential 1,395 56.9 1,323 60.5 1,417 64.1 1,131 65.6 1,111 65.5 Installment 198 8.8 188 7.8 147 6.6 139 5.5 154 5.8 Other 55 1.0 52 1.2 53 1.0 53 1.8 213 1.9 Unallocated 644 N/A 610 N/A 650 N/A 640 N/A 651 N/A ------ ----- ------ ----- ------ ----- ------ ------ ------ ----- $4,156 100.0% $3,941 100.0% $3,866 100.0% $3,682 100.80% $3,706 100.0% ====== ===== ====== ===== ====== ===== ====== ====== ====== =====
Supervision and Regulation As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), Northway is subject to substantial regulation and supervision by the Federal Reserve Board and is required to file periodic reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also makes periodic inspections of Northway and its subsidiaries. Under the BHC Act, Northway is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing or controlling banks or furnishing services to, or acquiring premises for, its affiliated banks, except that Northway may engage in and own voting shares of companies engaging in certain activities determined by the Federal Reserve Board, by order or by regulation, to be so closely related to banking or to managing or controlling banks "as to be a proper incident thereto." PNB is a national banking association, organized pursuant to the provisions of the National Bank Act. As such, its primary regulatory authority is the Comptroller of the Currency of the United States (the "Comptroller"). The Comptroller regularly examines national banks and their operations. In addition, operations of national banks are subject to federal statutes and regulations. Such statutes and regulations relate to required reserves, investments, loans, mergers, payment of dividends, issuance of securities and many other aspects of operations. With respect to the ability of a national bank to pay dividends, the Comptroller's approval is required if the total dividends declared by a national bank in any year will exceed the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfer to surplus. The Comptroller also has authority to prohibit a national bank from engaging in unsafe or unsound practices in conducting the business of the Bank. PNB is also subject to applicable provisions of New Hampshire law insofar as they do not conflict with or are not otherwise preempted by federal banking law. BCB is organized under New Hampshire law and is subject to the regulations of the New Hampshire Bank Commissioner, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System. Various requirements and restrictions under the laws of the United States and the State of New Hampshire affect the operations of BCB, including maintaining adequate levels of capital, the payment of dividends, the nature and amount of loans which can be originated and the rate of interest that can be charged thereon, investments and other activities of BCB. 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. In recent years, intense market demands and economic pressures have eroded once clearly defined industry classifications and have forced the financial services institutions to diversify their services, increase returns on deposits, and become more cost effective as a result of competition with one another and with new types of financial services companies, including non-bank competitors. The present bank regulatory scheme is undergoing significant change, both as it affects the banking industry itself and as it affects competition between banks and non-bank financial institutions. There has been significant regulatory change in the bank mergers and acquisitions area, in the products and services banks can offer, and in the non-banking activities in which bank holding companies can engage. Banks are now actively competing with non-bank financial institutions for products such as money market funds. Federal banking laws now permit adequately capitalized bank holding companies to venture across state lines to offer banking services through bank subsidiaries to a wider geographic market. In light of this change in the law, it is possible for large organizations to enter many new markets including the markets served by Northway. Certain of these competitors, by virtue of their size and resources, may enjoy certain efficiencies and competitive advantages over Northway in pricing, delivery, and marketing of their products and services. It is not possible to assess what impact these changes in the regulatory scheme will have on Northway. Competition Northway's banking subsidiaries face significant competition in their respective market from commercial banks, savings banks, credit unions, consumer finance companies, insurance companies, "non-bank banks," mutual funds, government agencies, investment management companies, investment advisors, brokers and investment bankers. In addition, increasing consolidation within the banking and financial services industry, as well as increased competition from larger regional and out-of-state banking organizations and non-bank providers of various financial services, may adversely affect Northway's ability to achieve its' financial goals. Many of these large competitors have significantly more financial resources, larger market share and greater name recognition in the market areas served by Northway. Employees As of December 31, 1997, Northway and its subsidiaries had approximately 207 full-time and part-time employees. ITEM 2. PROPERTIES Northway operates 13 banking offices in the northern New Hampshire towns of Berlin, Conway (3), Gorham (2), Groveton, Littleton, West Plymouth, Plymouth, Campton, Ashland and North Woodstock. Ten of these offices, including its main offices in Berlin, New Hampshire and Plymouth, New Hampshire, are located in properties it owns. Northway leases two of its branches under five-year leases expiring on December 31, 2000 and June 1, 2001, respectively. Northway also operates a limited services facility at the Plymouth Regional High School. Eleven of Northway's branches have drive-up facilities and all are equipped with automated teller machines. ITEM 3. LEGAL PROCEEDINGS Northway is not a party to, nor are any of its subsidiaries the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS No matters were submitted to a vote of stockholders during the quarter ended December 31,1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Since the completion of the Merger, Northway's common stock has been traded on The Nasdaq Stock Market, Inc.'s National Market under the symbol "NWFI" The following table sets forth, for the periods indicated, the high and low closing sale prices for the common stock, as reported by the Nasdaq National Market, and the dividends paid on the common stock: Price Per Share ------------------------ Low High Dividends Per Share ------ ------ ------------------- 4th Quarter $30.00 $37.50 $0.55 On March 20, 1998, the closing sales price of the common stock on the Nasdaq National Market was $31.00 per share. As of such date, there were approximately 1,650 holders of record of the Northway common stock. Northway intends to continue to pay dividends subject to, among other things, the financial condition and earnings of Northway, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth the selected consolidated financial information of Northway for the five years in the period ended December 31, 1997. This selected consolidated financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Northway's Consolidated Financial Statements and related Notes. The selected consolidated financial data reflects the combined results of operation and financial position of Northway Financial, Inc. and Pemi Bancorp, Inc. restated for all periods presented pursuant to the pooling of interests method of accounting. See Note 23 to the Consolidated Financial Statements.
At or for the years ended December 31, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Balance Sheet Data: Total assets $377,866 $372,581 $357,917 $349,447 $329,483 Investment securities available-for-sale 55,103 88,628 84,799 23,761 55,867 Investment securities held-to-maturity 11,312 12,199 15,377 81,021 40,727 Loans, net of unearned income 266,757 240,383 217,978 218,048 204,013 Allowance for possible loan losses 4,156 3,941 3,866 3,682 3,706 Real estate acquired by foreclosure or substantively repossessed 222 202 492 665 1,351 Deposit purchase premium 1,161 1,462 1,800 2,122 -- Deposits 322,063 322,315 310,388 304,983 280,803 Securities sold under agreements to repurchase 6,146 4,620 6,087 6,882 10,370 Stockholders' equity (1) 37,526 33,663 31,102 26,113 26,168 Income Statement Data: Net interest and dividend income $ 17,027 $ 15,717 $ 15,493 $ 14,521 $ 12,542 Provision for possible loan losses 535 512 652 660 975 Noninterest income 1,680 1,602 1,257 1,399 1,841 Noninterest expense 11,859 10,976 10,613 10,271 9,520 Net income 4,039 3,857 3,596 3,276 2,775 Per Common Share Data: Net income $ 2.33 $ 2.23 $ 2.08 $ 1.82 $ 1.54 Cash dividends declared 0.55 0.52 0.44 0.40 0.32 Book value (1) 21.67 19.44 17.96 14.79 14.57 Tangible Book Value (2) 21.00 18.59 16.92 13.59 14.57 Selected Ratios: Return on average assets 1.07% 1.05% 1.02% 0.95% 0.85% Return on average equity 11.14 12.04 12.71 11.75 10.74 Dividend payout 23.69 23.13 21.22 21.37 20.47 Average equity to average asset ratio 9.60 8.69 8.00 8.07 7.89 (1) Stockholders' equity as of December 31, 1997, 1996, and 1995 has been reduced by the unrealized loss on investment securities "available-for- sale." Stockholders' equity as of December 31, 1994 and 1993 has been reduced by the unrealized loss on investment securities "available-for- sale" and the unrealized loss on investment securities transferred to "held-to-maturity." See Notes 1 and 3 to the Financial Statements. (2) Stockholders' equity as of December 31, 1997, 1996, 1995 and 1994 has been reduced by deposit purchase premium.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See "Management's Discussion and Analysis of Financial Condition and Results of Operations" which begin on page B-1 of this Annual Report on Form 10-K and is hereby incorporated by reference in this Item 7. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information regarding quantitative and qualitative disclosures about market risk is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing under Item 7 of this Annual Report of Form 10-K and is hereby incorporated by reference in this Item 7A. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL The Consolidated Financial Statements of Northway listed in the index appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on Form 10-K and are hereby incorporated by reference in this Item 8. See also "Index to Consolidated Financial Statements" on page C-1 hereof. ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the information set forth under the captions "Management and Certain Security Holders," "Information Concerning Directors and Nominees" and "Executive Officer" in Northway's definitive proxy statement to be delivered in connection with its 1998 Annual Meeting of Stockholders. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive Officers and Directors are required by the SEC regulation to furnish the Company with copies of all Section 16(a) filings. Based solely on its review of the copies of such forms received by it, the Company believes that, during 1997, all such filing requirements applicable to its executive officers and directors were complied with by such individuals. ITEM 11 EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth under the caption "Executive Compensation" in Northway's definitive proxy statement to be delivered in connection with its 1998 Annual Meeting of Stockholders, provided however, that the "Report on Executive Compensation" and the "Stock Price Performance Graph" contained in the 1998 Proxy Statement are not incorporated by reference therein. 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 captions "Information Concerning Directors and Nominees" and "Security Ownership of Management" in Northway's definitive proxy statement to be delivered in connection with its 1998 Annual Meeting of Stockholders. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information set forth under the caption "Certain Relationships and Related Transactions" in Northway's definitive proxy statement to be delivered in connection with its 1998 Annual Meeting of Stockholders. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the fiscal years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: None (3) The Exhibits which are filed with this report or which are incorporated herein by reference are set forth in the Exhibit Index which appears on page A-1 hereof, which Exhibit Index is incorporated herein by reference. (b) Northway filed no Reports on Form 8-K during the quarter ended December 31, 1997. (c) See Item 14(a)(3) above (d) See Item 8 to this Annual Report on Form 10-K NORTHWAY FINANCIAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and its subsidiaries. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. Prior year information has been restated to reflect the 1997 acquisition of the Pemi Bancorp which was accounted for using the pooling-of-interest accounting method. RESULTS OF OPERATIONS OVERVIEW The Company reported net income of $4,039,000, or $2.33 per share in 1997 as compared to net income of $3,857,000, or $2.23 per share in 1996 and $3,596,000, or $2.08 per share in 1995. Return on average assets was 1.07 percent in 1997, as compared to 1.05 percent and 1.01 percent for 1996 and 1995, respectively. The improved results in 1997 were attributable to a substantial increase in net interest income, which amounted to $1,310,000, and was offset in part by merger-related expense of $643,000. The increase in 1996 was attributable to improved net interest income and gains realized on the sale of securities. 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, provision for possible loan losses resulting from the Company's assessment of the adequacy of the allowance for loan losses and income tax expense. NET INTEREST INCOME ANALYSIS Net interest income is the principal component of a financial institution's income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. The discussion of net interest income is presented on a taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among various taxable and tax-exempt assets. The table on page B-3 presents average balances, income earned or interest paid, and average yields earned or rates paid on major categories of assets and liabilities for the years ended December 31, 1997, 1996, and 1995. Net interest income for 1997 increased 8 percent over 1996 while increasing one percent in 1996 over 1995. Interest income increased 4 percent in 1997 and 4 percent in 1996. Interest income in 1997 grew as a result of a 3 percent increase in the volume of earning assets, and as a result of the change in the mix of assets. A 13 percent increase in the volume of average loans and a 26 basis point decrease in yield accounted for the 10 percent increase in interest income on loans. Interest income on investment and mortgage-backed securities decreased 18 percent from 1996 to 1997. This decrease resulted from a 21 percent decrease in the average balance of total investment and mortgage-backed securities offset by a 20 basis point increase in yield. Total interest expense decreased by 2 percent in 1997 due to a 10 basis point decrease paid on interest bearing liabilities combined with a modest increase in average volume. Interest expense on certificates of deposit decreased 5 percent as a result of a 21 basis point decrease in rate. From 1995 to 1996, interest income increased 4 percent as a result of a 4 percent increase in the volume of earning assets. Interest income on loans rose 3 percent as a result of a 3 percent increase in average volume and a 4 basis point increase in yield. Interest income on investment and mortgage-backed securities increased 10 percent from 1995 to 1996 as a result of a 10 percent increase in average volume. An 18 basis point increase in the rate paid on interest bearing liabilities combined with a 2 percent increase in average volume resulted in a 7 percent increase in interest expense on interest bearing liabilities in 1996. A substantial portion of the increase in total interest expense was due to a 14 percent increase in interest expense on certificates of deposit, resulting from a 38 basis point increase in rate and a 6 percent increase in average volume. The trend in net interest income is commonly evaluated in terms of average rates using net interest margin and interest rate spread. The net interest margin is computed by dividing fully taxable equivalent net interest income by average total earning assets. This ratio represents the difference between the average yield returned on average earning assets and the average rate paid for all funds used to support those earning assets, including both interest bearing and noninterest bearing sources of funds. The net interest margin increased 27 basis points to 4.93 percent in 1997 and after having decreased 9 basis points to 4.66 percent in 1996. The increase in 1997's net interest margin was a function of the downward pricing of interest bearing liabilities, specifically certificates of deposit, the increase in average loan volumes, partially offset by the lower yield on loans. At the same time, the portion of interest earning assets funded by interest bearing liabilities in 1997 was 86 percent. In 1996 the portion of interest earning assets funded by interest bearing liabilities was 88 percent. The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. The interest rate spread eliminates the impact of noninterest bearing funds and gives a direct perspective on the effect on interest rate movements. During 1997, the net interest rate spread increased 21 basis points to 4.37 percent from the 1996 spread of 4.16 percent as the cost of interest bearing liabilities declined while the yields earned on earning assets increased 11 basis points. The decrease in 1996 was 18 basis points from 4.34 percent in 1995. See the accompanying scheduled entitled "Consolidated Average Balances, Interest Income/Expense and Average Yields/Rates" and "Consolidated Rate/Volume Variance Analysis" for more information. PROVISION FOR POSSIBLE LOAN LOSSES The provision for possible loan losses is the annual cost of providing an allowance or reserve for anticipated future losses on loans. The amount 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 $535,000 provision for possible loan losses in 1997 reflecting an increase of $23,000 from 1996. In 1996, the provision for possible loan losses decreased $140,000 from $652,000 in 1995 to $512,000 in 1996. The allowance for possible loan losses as a percentage of nonperforming loans increased to 227.35 percent at December 31, 1997 compared to 135.57 percent at December 31, 1996. Although management utilizes its best judgement in providing for possible losses, there can be no assurance that the Company will not have to change its provisions for possible loan losses in subsequent periods. Management will continue to monitor the allowance for possible loan losses and make additional provisions to the allowance as appropriate. The following table sets forth the provisions and allowance for possible loan losses for the periods indicated. - ---------------------------------------------------------------------------- Years Ended December 31, Dollars in thousands 1997 1996 1995 - ---------------------------------------------------------------------------- Beginning allowance $3,941 $3,866 $3,682 Provision for possible loan losses 535 512 652 Loans charged-off (612) (650) (696) Recoveries 292 213 228 ------ ------ ------ Net credit losses (320) (437) (468) ------ ------ ------ Ending allowance $4,156 $3,941 $3,866 ====== ====== ====== Ending allowance as a percentage of loans 1.56% 1.64% 1.77% NONINTEREST INCOME Noninterest income consists of revenues generated from a broad range of financial services and activities including fee-based services and profits earned through investment and security sales. Noninterest Income - ---------------------------------------------------------------------------- Years Ended December 31, Dollars in thousands 1997 1996 1995 - ---------------------------------------------------------------------------- Service Charges on deposit account and fees $ 831 $ 816 $ 803 Securities gains(losses), net 313 306 (75) Other 536 480 529 ------ ------ ------ Total noninterest income $1,680 $1,602 $1,257 ====== ====== ====== Fee income from service charges on deposit accounts increased 2 percent in 1997 and 1996. The improvement in both years was influenced by the increase in both the number of accounts and balances outstanding in transaction deposit accounts. Net securities gains were $313,000 in 1997, compared to $306,000 in 1996. Investment securities gains in 1997 included net gains of $548,000 recorded on sales of equity securities compared to $305,000 in 1996. The $75,000 net security loss recorded in 1995 was realized primarily from the sale of $4,000,000 of ten year US Treasury securities in the Company's available-for-sale portfolio, the proceeds of which where then available for reinvestment at higher yields. Other noninterest income (sources of which includes credit card merchant and fee income, automated teller fees, and safe deposit fees) increased $56,000, or 12 percent in 1997 following a 9 percent decrease in 1996. NONINTEREST EXPENSE Total noninterest expense increased $883,000, or 8 percent, during 1997 and $363,000, or 3 percent, in 1996. Excluding merger-related expenses in all periods, and the one-time assessment of all SAIF-insured deposits to recapitalize the SAIF in 1995, total noninterest expense increased $276,000, or 3 percent, during 1997 and $494,000, or 5 percent, in 1996. The increase in these expenses were made in support of the Company's expansion plans to increase market share in existing and new markets. CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES (Dollars in thousands)
--------------1997--------------- ----------1996----------- -----------1995------------ 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 $ 9,720 $ 528 5.43% $ 6,076 $ 325 5.35% $ 10,464 $ 603 5.76% Interest bearing deposits 114 8 7.02 2,103 124 5.90 783 48 6.13 Investment and mortgage- backed securities(1)(5) 89,366 5,498 6.15 112,443 6,693 5.95 102,215 6,074 5.94 Loans, net(1)(2) 253,424 23,350 9.21 223,306 21,143 9.47 216,837 20,457 9.43 -------- ------- -------- ------- -------- ------- Total interest earning assets(1) 352,624 29,384 8.33% 343,928 28,285 8.22% 330,299 27,182 8.23% Cash and due from banks 10,804 9,346 10,592 Premises and equipment 8,732 8,409 8,235 Other assets 5,604 7,036 4,660 -------- -------- -------- Total assets $377,764 $368,719 $353,786 ======== ======== ======== Liabilities Interest bearing liabilities: Regular savings $ 63,661 $ 1,508 2.37% $ 65,033 $ 1,551 2.38% $ 66,019 $ 1,621 2.46% NOW and Super NOW 43,369 530 1.22 42,438 533 1.26 42,306 678 1.60 Money market accounts 22,348 613 2.74 23,428 644 2.75 24,331 691 2.84 Certificates of deposit 153,111 8,211 5.36 155,223 8,651 5.57 145,811 7,564 5.19 Repurchase agreements 7,796 404 5.18 6,568 358 5.45 6,203 313 5.05 Federal Home Loan Bank 12,139 728 6.00 8,848 521 5.89 10,217 614 6.01 Other Borrowed funds 215 13 6.05 -- - -- - -------- ------- -------- ------- -------- ------- Total interest bearing liabilities 302,639 12,007 3.97% 301,538 $12,258 4.07% 294,887 11,481 3.89% ------- ===== ------- ==== ------- ==== Noninterest bearing deposits 34,948 31,889 27,977 Other liabilities 3,906 3,253 2,633 -------- -------- -------- Total liabilities 341,493 336,680 325,497 Stockholders' equity 36,271 32,039 28,289 -------- -------- -------- Total liabilities and stockholders' equity $377,764 $368,719 $353,786 ======== ======== ======== Net interest income(1) $17,377 $16,027 $15,701 ======= ======= ======= Interest spread(3) 4.37% 4.16% 4.34% ==== ==== ==== Net interest margin(4) 4.93% 4.66% 4.75% ==== ==== ==== (1) Reported on a tax equivalent basis (2) Net of unearned income and allowance for possible loan losses. Includes nonperforming loans (3) Interest spread equals the yield on interest earning asets minus the rate paid on interest bearing liabilities (4) The net interest margin equals net interest income divided by total average interest earning assets. (5) Average balances are calculated using the adjusted cost basis.
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS (In Thousands)
- ----------------------------------------------------------------------------------------------------------------- 1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Increase (Decrease) ------------------------------------ -------------------------------- Due to Change In Due to Change In Volume Rate Mix Total Volume Rate Mix Total Interest and dividend income: Federal funds sold $ 193 $ 6 $ 4 $ 203 $ (252) $ (45) $ 19 $ (278) Interest bearing deposits (117) 23 (22) (116) 81 (2) (3) 76 Investments and mortgage- backed securities (1,374) 225 (46) (1,195) 608 10 1 619 Loans 2,852 (568) (77) 2,207 610 74 2 686 ------- ----- ----- ------- ------ ----- ----- ------ Total interest and dividend income 1,554 (314) (141) 1,099 1,047 37 19 1,103 ------- ----- ----- ------- ------ ----- ----- ------ Interest expense: Regular savings accounts (33) (10) -- (43) (24) (47) 1 (70) NOW accounts 11 (14) -- (3) 2 (147) -- (145) Money market accounts (30) (1) -- (31) (26) (22) 1 (47) Certificates of deposit (117) (327) 4 (440) 488 563 36 1,087 Repurchase agreements 67 (18) (3) 46 18 25 2 45 FHLB advances 194 10 3 207 (82) (12) 1 (93) Other Borrowed funds 13 -- -- 13 -- -- -- 0 ------- ----- ----- ------- ------ ----- ----- ------ Total interest expense 105 (360) 4 (251) 376 360 41 777 ------- ----- ----- ------- ------ ----- ----- ------ Net interest and dividend income $1,449 $ 46 $(145) $ 1,350 $ 671 $(323) $ (22) $ 326 ====== ===== ===== ======= ====== ===== ===== ======
The following table sets forth information relating to the Company's noninterest expense during the periods indicated. - ----------------------------------------------------------------------- Years Ended December 31, (In thousands) 1997 1996 1995 - ----------------------------------------------------------------------- Salaries and employee benefits $ 5,883 $ 5,423 $ 5,140 Occupancy and equipment 1,714 1,759 1,632 Foreclosed real estate, net 68 51 7 Amortization of deposit purchase premium 301 513 322 Deposit and other assessments 50 17 585 Directors' fees 266 303 302 Stationery and supplies 374 360 341 Merger related expenses 643 36 -- Other 2,560 2,514 2,284 -------- ------- ------- $11,859 $10,976 $10,613 ======= ======= ======= Salaries and employee benefits increased $460,000 or 8 percent, from 1996 to 1997 and by $283,000, or 6 percent from 1995 to 1996. These increases reflect staff additions in connection with the expansion of the retail franchise, increased mortgage banking and commercial lending activities as well as normal salary and wage increases. Amortization of deposit purchase premium increased by $191,000 to $513,000 in 1996 versus $322,000 expensed in 1995. The increase resulted from the Company's decision to accelerate the amortization of the premium associated with the purchase of HomeBank's deposits. Deposit and other assessment expenses consist primarily of deposit insurance paid by the Company to the Federal Deposit Insurance Corporation ("FDIC") for deposits insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"). SAIF deposits are those deposits acquired in 1994 from the HomeBank. At December 31, 1996. The Company had approximately 88 percent of its deposits insured by BIF and 12 percent by SAIF. The $568,000 decrease in deposit and other assessment expenses in 1996 compared with 1995 is directly attributable to the reduction in BIF insurance premiums from $0.23 per $100 of deposits to $0.04 per $100 of deposits in June 1995 to $0.00 beginning January 1996. The Company, in the fourth quarter of 1995, accrued an estimated one-time assessment on SAIF insured deposits of $167,000. During the second half of 1996, the Company was actually assessed $137,000 for this one-time assessment, which resulted in a credit to the accrual of $30,000. Merger related expense of $643,000 in 1997 and $36,000 in 1996 are primarily related to the merger, creation of the Holding Company, and the stock split. INCOME TAX EXPENSE The Company recognized $2,274,000, $1,974,000 and $1,889,000 in income tax expense for the years ended December 31, 1997, 1996, and 1995, respectively. The effective tax rate was 36.0% for 1997, 33.9% for 1996, and 34.4% for 1995. The Company recorded merger-related expenses of $643,000 in 1997. This one-time expense is non-deductible for tax calculations and was the principal reason for the increase in 1997's effective tax rate. For additional information relating to income taxes. See Note 16 to the Consolidated Financial Statements. FINANCIAL CONDITION ASSETS Total assets remained relatively unchanged at $377,866,000 at December 31, 1997. However, the composition of earning assets has changed significantly. BALANCE SHEET HIGHLIGHTS December 31, Dollars in thousands 1997 1996 Change - ---------------------------------------------------------------------------- Total assets $377,866 $372,581 $ 5,285 Earning assets 352,904 343,442 9,462 Securities 66,415 100,827 (34,412) Loans, net of unearned income 266,757 240,383 26,374 Deposits 322,063 322,315 (252) Equity 37,526 33,663 3,863 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, 1997 and 1996, showing amortized cost and market value far each category: - ----------------------------------------------------------------------------- December 31, 1997 1996 Amortized Market Amortized Market (Dollars in thousands) Cost Value Cost Value - ----------------------------------------------------------------------------- Securities available-for-sale: US Treasury and Government Agencies $11,873 $11,929 $ 20,828 $ 20,479 Mortgage-backed securities 17,366 17,340 28,254 27,882 Collateralized mortgage obligations 14,171 13,895 21,189 20,466 Corporate and foreign notes 5,008 5,000 14,128 14,068 Common and preferred stocks 2,752 2,796 2,221 2,284 State and political subdivisions 4,016 4,143 3,219 3,259 Other -- -- 145 190 ------- ------- -------- -------- Total securities available-for-sale $55,186 $55,103 $ 89,984 $ 88,628 ------- ------- -------- -------- Securities held-to-maturity: US Treasury and Government Agencies $ -- $ -- $ 501 $ 503 Mortgage-backed securities 8,400 8,354 9,943 9,809 State and political subdivisions 2,912 2,943 1,755 1,793 ------- ------- -------- -------- Total securities held-to-maturity $11,312 $11,297 $ 12,199 $ 12,105 ------- ------- -------- -------- Total securities $66,498 $66,400 $102,183 $100,733 ======= ======= ======== ======== Securities available-for-sale decreased $33,525,000 during 1997 to $55,103,000. The decrease in the portfolio reflects the Company's strategy to allow the securities portfolio amortization and sales to fund increased originations in the lending portfolios. The net unrealized loss on securities available-for-sale of $83,000 decreased $1,273,000 from the net unrealized loss of $1,356,000 in 1996. This was the result of a lower interest rate environment, and corresponding higher bond prices in 1997, as well as the decrease in the investment portfolio through the sales and amortization. The change in unrealized valuation to market value on securities available-for-sale also had an effect on increasing stockholders' investment by $781,000 from a year ago. The unrealized loss reported as part of stockholders' investment of $51,000, net of a $32,000 deferred tax benefit at December 31, 1997 was significantly less than the unrealized loss of $832,000, net of a $524,000 deferred tax benefit at December 31, 1996. The Company has a policy of purchasing securities primarily rated A or better by Moody's Investor Services and US Government securities to minimize credit risk. All securities, however, carry interest rate risk, which affect their market values such that as market yields increase, the value of the Company's securities decline and vise versa. Additionally, mortgage-backed securities carry prepayment risk where expected yields may not be achieved due to the inability to reinvest proceeds from prepayment at comparable yields. Moreover, such mortgage-backed securities may not benefit from price appreciation in periods of declining rates to the same extent as the remainder of the portfolio. LOANS Loans increased 10.9 percent in 1997 with much of the increase concentrated in commercial real estate and residential mortgage loans. The growth in the loan portfolio resulted from the Company's ongoing efforts to increase the loan portfolio through the origination of loans. The following table presents the composition of the loan portfolio: - ----------------------------------------------------------------------------- Percent Percent Dollars in thousands 1997 of Total 1996 of Total - ----------------------------------------------------------------------------- Real estate Residential $152,041 56.9% $145,847 60.5% Commercial 56,204 21.0 43,901 18.2 Construction 5,664 2.1 2,329 1.0 Commercial 27,129 10.1 27,293 11.3 Installment 23,476 8.9 18,733 7.8 Other 2,769 1.0 2,999 1.2 -------- ----- -------- ----- $267,283 100.0% $241,102 100.0% ======== ===== ======== ===== The loan portfolio mix changed significantly during the year. As of December 31, 1997, total commercial real estate loans represented 21.0 percent of the Company's loan portfolio, while residential real estate loans represented 56.9 percent. This compares with a commercial real estate loan percentage of 18.2 percent and residential real estate loan percentage of 60.5 percent in 1996. The 1997 increase in commercial real estate loan percentage reflects management's commitment to diversify the loan portfolio. Commercial real estate loans consist of loans secured by income producing commercial real estate and many are additionally secured by the guarantee of the Small Business Administration. Commercial real estate loans increased by $12,303,000 in 1997 as compared to 1996. The Company continues to emphasize commercial real estate loans in order to reduce its relative exposure of other types of loans. Residential real estate loans increased $6,194,000 in 1997, a 4.2 percent increase over 1996. The Company's strategy generally is to originate fixed-rate residential loans for sale to investors in the secondary market. The Company generally retains adjustable-rate loans in its portfolio but will, occasionally, retain some fixed-rate mortgages. Installment loans consist primarily of loans originated directly by the Company. The increase of $4,743,000 was primarily a result of growth in home equity loans, automobile loans and recreational vehicle loans. Increased growth in installment loans is consistent with the Company's strategy to increase the percentage of installment loans in its' portfolio. The Company's loans are primarily secured by real estate in New Hampshire. In addition, real estate acquired by foreclosure is located in this market. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of real estate acquired by foreclosure are susceptible to changing conditions in this market. NONPERFORMING ASSETS Nonperforming assets were $2,050,000, or 0.53% of total assets, at December 31, 1997 as compared to $3,154,000, or 0.85% of total assets, at December 31, 1996. Nonperforming assets are comprised primarily of nonperforming loans, real estate acquired by foreclosure and loan substantively repossessed. The accrual of interest on a loan is discontinued when there is reasonable doubt as to its collectibility or whenever the payment of principal or interest is more than 90 days past due. However, there are loans within this nonperforming classification that are paying, but which have a weakness with respect to the collateral securing the loan. At December 31, 1997, nonperforming loans totaled $1,828,000, or 0.70% of total loans, compared to $2,907,000, or 1.20% of total loans, in 1996. Real estate acquired by foreclosure or substantively repossessed at December 31, 1997 was $222,000 compared to $202,000 in 1996. ALLOWANCE FOR POSSIBLE LOAN LOSSES The Company maintains a reserve for possible 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 reserve. Recoveries of amounts previously charged-off are added to the reserve when collected. The adequacy of the allowance for possible 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 possible loan losses charged to earnings is based on management's judgement of the amount necessary to maintain the allowance at a level adequate to absorb possible losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company's allowance for possible loan losses. The Company 's reserve for possible loan losses increased $215,000 from December 31, 1996 to $4,156,000 at December 31, 1997. The 1997 provision for possible loan losses was $535,000, $23,000 higher than the prior year level of $512,000. The increase was due primarily to the increased level of loans. Management believes than an adequate allowance has been established for loans and that real estate acquired by foreclosure is being carried at the lower of cost or net fair value. DEPOSITS AND BORROWINGS Total deposits at December 31, 1997 were $322,063,000, approximately the same as the $322,315,000 reported at December 31, 1996. Components of Deposits - ----------------------------------------------------------------------------- December 31, (In thousands) 1997 1996 - ----------------------------------------------------------------------------- Demand $ 39,710 $ 35,328 Regular savings, NOW & Money Market 130,664 133,090 Time 151,689 153,897 -------- -------- Total deposits $322,063 $322,315 ======== ======== Certificates of deposit of $100,000 or more are scheduled to mature as follows at December 31, 1997: In thousands: 3 months or less $ 4,325 Over 3 to 6 months 4,149 Over 6 to 12 months 7,807 Over 12 months 4,100 ------- $20,381 The following tables sets forth certain information concerning the Company borrowings at the dates indicated. - ----------------------------------------------------------------------------- December 31, (In thousands) 1997 1996 - ----------------------------------------------------------------------------- FHLB advances $ 9,322 $ 8,703 Repurchase agreements 6,146 4,620 Other -- 221 ------- ------- $15,468 $13,544 FHLB advances were the largest non-deposit related interest-bearing funding source for the Company in 1997. During 1997, the balance of FHLB borrowings increased $619,000 from the $8,703,000 reported at December 31, 1996. For additional information regarding FHLB advances, see Note 10 to the Consolidated Financial Statements. The increase m securities sold under agreements to repurchase of $1,526,000 was attributable to an increase in our relationship with our municipal customers. For additional discussion of securities sold under agreements to repurchase see Note 11 to the Consolidated Financial Statements. CAPITAL - ----------------------------------------------------------------------------- December 31, (Dollars in thousands) 1997 1996 - ----------------------------------------------------------------------------- Risk-adjusted assets $223,332 $204,560 Tier 1 risk-based capital (4% minimum) 16.31% 16.15% Total risk-based capital (8% minimum) 17.56 17.40 Leverage ratio 9.67 8.99 The Company's capital serves to support growth and provide protection against loss to depositors and creditors. Equity capital represents the stockholders' investment in the Company. Management strives to maintain an optimal level of capital on which an attractive return to the stockholders will be realized over both the short-term and long-term, while serving depositors' and creditors' needs. The Company must also observe the minimum requirements enforced by the federal banking regulators. There are three capital requirements which banks and bank holding companies must meet: Tier 1, total capital (combination of Tier 1 and Tier 2 capital), and leverage ratio. Tier 1 consists of stockholders' equity, net of intangible assets. Tier 2 capital consists of a limited amount of loss reserves. Tier 1, total capital and leverage ratio do not include any adjustments for unrealized gains and losses relating to securities available-for-sale except net unrealized losses relating to marketable equity securities. The minimum requirements for the leverage ratio, risk- based Tier 1 capital and risk-based total capital are 4%, 4% and 8%, respectively. As of December 31, 1997, all of the subsidiary banks of the Company were "well capitalized" as defined under the FDIC Improvement Act. INTEREST RATE RISK Volatility in interest rates requires the Company to manage interest rate risk which arises from differences in the time of repricing of assets and liabilities. Management monitors and adjusts the difference between interest-sensitive assets and interest-sensitive liabilities ("GAP" position) within various time frames. An institution with more assets repricing than liabilities within a given time frame is considered asset sensitive and in time frames with more liabilities repricing than assets it is liability sensitive. Within GAP limits established by the Board of Directors. the Company seeks to balance the objective of insulating the net interest margin from rate exposure with that of taking advantage of anticipated changes in rates in order to enhance income. Interest rate risk is managed by the Company's Asset/Liability Committee which formulates strategies based on a desirable level of interest rate risk. In setting desirable levels of interest rate risk, the Committee evaluates the impact on earnings and capital considering the current outlook on interest rates, potential changes in the outlook on interest rates and regional economies, liquidity, business strategies and other factors. The Asset/Liability Committee uses three key measurements to monitor interest rate risk: (i) the interest-rate sensitivity "gap" analysis (ii) a "rate shock" to measure earnings volatility due to an immediate increase or decrease in market rates of interest; and (iii) simulation of net interest income under alternative balance sheet and interest rate scenarios. INTEREST RATE GAP ANALYSIS
Interest Sensitivity Periods - ------------------------------------------------------------------------------------------------------------------------- December 31, 1997 3 months 4 to 12 12 to 24 2 to 5 After 5 (Dollars in thousands) or less months months years years Total - ------------------------------------------------------------------------------------------------------------------------- Loans, net $ 87,981 $ 73,343 $ 32,328 $ 56,431 $ 17,492 $267,575 Federal funds sold 19,225 -- -- -- -- 19,225 Interest bearing deposits -- -- 85 -- -- 85 Securities 7,433 10,991 6,460 22,240 21,329 68,453 Other assets -- -- -- -- 22,528 22,528 -------- -------- -------- -------- -------- -------- Total assets $114,639 $ 84,334 $ 38,873 $ 78,671 $ 61,349 $377,866 -------- -------- -------- -------- -------- -------- Deposits $ 78,793 $103,169 $ 50,285 $ 13,151 $ 76,665 $322,063 Repurchase agreements 789 5,275 82 -- -- 6,146 Borrowed funds 4,041 5,171 82 28 -- 9,322 Other liabilities and stockholders' equity -- -- -- -- 40,335 40,335 -------- -------- -------- -------- -------- -------- Total liabilities and equity $ 83,623 $113,615 $ 50,449 $ 13,179 $117,000 $377,866 Gap for period $ 31,016 $(29,281) $(11,576) $ 65,492 $(55,651) Cumulative gap $ 1,735 $ (9,841) $ 55,651 -- ======== ======== ======== ======== As a percent of total assets 8.2% 0.5% (2.6)% 14.7%
Interest-rate gap analysis provides a static analysis of the repricing characteristics of the entire balance sheet. It is prepared by scheduling assets and liabilities into time bands based upon their next opportunity to reprice. For floating-rate instruments, the entire balances are placed at the next date on which their rates could be reset; and for fixed-rate instruments, the balances are placed in time bands according to their principal repayment schedules. It is necessary to apply further assumptions to refine this process. For instance, in order to recognize the potential for mortgage-related instruments to experience early payments of principal, a prepayment assumption based on management's expectations is layered on top of the scheduled principal payments. Other categories that are scheduled using management assumptions include non-contractual deposits such as demand deposits and interest-bearing checking, savings, and money market deposits. These allocations are management's current estimate of the sensitivity of the rates and balances of these accounts to changes in market interest rates. The Company's limits on interest-rate risk specify that the cumulative one-year gap should be less than 10% of total assets. As of December 31, 1997, the estimated exposure was 0.5 % asset-sensitive (see above table). A more dynamic and detailed analysis of the earnings sensitivity of the balance sheet is provided through simulation analysis. The Company uses computer simulations to determine the impact on net interest income of various interest rate scenarios, balance sheet trends and strategies. These simulations incorporate assumptions about balance sheet dynamics such as loan and deposit growth, loan and deposit pricing, changes in funding mix, and asset and liability repricing and maturity characteristics. Simulations based on numerous assumptions are run under various interest rate scenarios to determine the impact on net interest income and capital. From these scenarios, interest rate risk is quantified and appropriate strategies are developed and implemented. Utilizing an immediate rate shock simulation where interest rates increase 300 basis points, the most recent earnings simulation model projects net interest income for the next twelve months would increase by an amount equal to approximately 2.8%. The projection is within the Company's 10% policy limit. Additionally, duration and market value sensitivity are selectively utilized where they provide added value to the overall interest rate risk management process. LIQUIDITY RASK 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 their contractual maturity, the repayment of borrowings as they mature. 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 liabilities. These include brokered deposits, core 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, capital injections to the subsidiary banks, and the payment of general corporate expenses. The primary source of liquidity for the parent holding company is dividends from the subsidiary banks. As shown in the consolidated statements of cash flows, cash and cash equivalents increased by $14,029,000 during 1997. Net cash provided by investing activities of $8,144,000 consisted primarily of maturities and sales of investment securities of $55,118,000, offset by the increase in net loans originated of $26,901,000 and the purchase of investment securities of $23,086,000. The net cash provided by operating activities provided the remainder of funding sources for 1997. The $5,516,000 of net cash provided by operating activities was attributable to net income of $4,039,000. IMPACT OF THE YEAR 2000 ISSUE The Company has developed plans and is addressing issues related to the impact on its computer system of the year 2000. Financial and operational systems have been assessed and plans have been developed to address systems modification requirements. The financial impact of making the required system changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. FORWARD LOOKING INFORMATION Certain statements in this Form 10-K are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward looking statements involve risks and uncertainties. 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 Northway, BCB, or PNB and are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward looking statements include, among other things, overall economic and business conditions, the demand for the Company's products and services, competitive factors in the industries in which the company competes, changes in government regulations and the timing, impact and other uncertainties of future acquisitions. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants ................................ C-2 Consolidated Balance Sheets as of December 31, 1997 and 1996 ........... C-3 Consolidated Statements of Income for the fiscal years ended December 31, 1997, 1996 and 1995 .................................. C-4 Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended December 31, 1997, 1996 and 1995 ............. C-5 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1997, 1996 and 1995 .................................. C-6 Notes to Consolidated Financial Statements .............................. C-8 SHATSWELL, MacLE0D & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS 83 PINE STREET WEST PEABODY, MASSACHUSETTS 01980-3635 TELEPHONE (978) 535-0206 FACSIMILE (978) 535-9908 The Board of Directors and Stockholders Northway Financial, Inc. Berlin, New Hampshire INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Northway Financial, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northway Financial, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. The accompanying restated consolidated financial statements for the year ended December 31, 1995 include the consolidated financial statements of Pemi Bancorp, Inc. for that year. We previously audited and reported on such statements. Separate financial statements of The Berlin City Bank, also included in the accompanying restated consolidated financial statements for the year ended December 31, 1995, were audited by other auditors whose report dated January 19, 1996 expressed an unqualified opinion on those statements. We audited the combination of the accompanying consolidated financial statements for the year ended December 31, 1995 after the restatement for the 1997 pooling of interests. In our opinion, such consolidated statements have been properly combined on the basis described in Note 23 of the notes to the consolidated financial statements. /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts January 16, 1998
CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (in thousands, except per share data) - --------------------------------------------------------------------------------------- 1997 1996 -------- -------- Assets Cash and due from banks (note 2) $ 12,086 $ 14,257 Federal funds sold 19,225 3,025 Interest bearing deposits 85 279 Investment securities available-for-sale, amortized cost of $55,186 in 1997 and $89,984 in 1996 (notes 3 and 11) 55,103 88,628 Investment securities held-to-maturity, market value of $11,297 in 1997 and $12,105 in 1996 (note 3) 11,312 12,199 Federal Home Loan Bank stock, at cost (note 3) 1,958 1,822 Federal Reserve Bank stock, at cost 80 80 Loans held for sale 292 58 Loans (notes 4, 5 and 6) 267,283 241,102 Unearned income (526) (719) Allowance for possible loan losses (note 5) (4,156) (3,941) -------- -------- Loans, net 262,601 236,442 Real estate acquired by foreclosure or substantively repossessed (note 7) 222 202 Accrued interest receivable 1,971 2,611 Deferred income tax asset, net (note 16) 1,500 2,048 Premises and equipment, net (note 8) 9,187 8,765 Deposit purchase premium, net 1,161 1,462 Other assets 1,083 703 -------- -------- Total assets $377,866 $372,581 ======== ======== Liabilities and Stockholders' Equity Liabilities: Deposits (note 9) $322,063 $322,315 Securities sold under agreements to repurchase (note 11) 6,146 4,620 Federal Home Loan Bank advances (note 10) 9,322 8,703 Other borrowings -- 221 Other liabilities 2,809 3,059 -------- -------- Total liabilities 340,340 338,918 -------- -------- Commitments and contingencies (notes 8, 18, and 19) -- -- Stockholders' equity (note 14): Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued -- -- Common stock, $1.00 par value; 9,000,000 shares authorized, 1,731,969 issued and outstanding 1,732 1,732 Surplus 2,101 2,101 Retained earnings 33,744 30,662 Unrealized loss on investment securities available-for-sale, net of tax (note 3) (51) (832) -------- -------- Total stockholders' equity 37,526 33,663 -------- -------- Total liabilities and stockholders' equity $377,866 $372,581 ======== ========
See accompanying notes to financial statements. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1997, 1996 and 1995 (in thousands, except per share data) - ------------------------------------------------------------------------------ 1997 1996 1995 -------- -------- -------- Interest and dividend income: Loans $ 23,210 $ 21,079 $ 20,366 Investment securities available-for-sale 4,301 5,398 1,534 Investment securities held-to-maturity 987 1,049 4,423 Federal funds sold 528 325 603 Interest bearing deposits 8 124 48 -------- -------- -------- Total interest and dividend income 29,034 27,975 26,974 -------- -------- -------- Interest expense: Deposits (note 9) 10,861 11,378 10,554 Borrowed funds 1,146 880 927 -------- -------- -------- Total interest expense 12,007 12,258 11,481 -------- -------- -------- Net interest and dividend income 17,027 15,717 15,493 Provision for possible loan losses (note 5) 535 512 652 -------- -------- -------- Net interest and dividend income after provision for possible loan losses 16,492 15,205 14,841 -------- -------- -------- Noninterest income: Service charges on deposit accounts and fees 831 816 803 Securities gains (losses), net (note 3) 313 306 (75) Other 536 480 529 -------- -------- -------- Total noninterest income 1,680 1,602 1,257 -------- -------- -------- Noninterest expense: Salaries and employee benefits (note 17) 5,883 5,423 5,140 Office occupancy and equipment 1,714 1,759 1,632 Foreclosed real estate, net 68 51 7 Amortization of deposit purchase premium 301 513 322 Merger related expenses 643 36 -- Other (note 15) 3,250 3,194 3,512 -------- -------- -------- Total noninterest expense 11,859 10,976 10,613 -------- -------- -------- Income before income taxes 6,313 5,831 5,485 Income tax expense (note 16) 2,274 1,974 1,889 -------- -------- -------- Net income $ 4,039 $ 3,857 $ 3,596 ======== ======== ======== Earnings per common share $ 2.33 $ 2.23 $ 2.08 ======== ======== ======== See accompanying notes to financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995 (in thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------------ Unrealized Unrealized Loss on Loss on Investment Investment Securities Securities Trans. to Total Common Retained Available- Held-To- Stockholders' Stock Surplus Earnings For-Sale Maturity Equity --------- -------- --------- ------- -------- -------- Balance at December 31, 1994 $ 1,732 $ 2,418 $ 24,864 $ (726) $ (2,180) $ 26,108 --------- -------- --------- ------- -------- -------- Net income -- -- 3,596 -- -- 3,596 Cash dividends declared ($0.44 per share) -- -- (763) -- -- (763) Decrease in unrealized loss on investment securities, net of tax -- -- -- 293 2,180 2,473 PNB treasury stock purchased -- (317 -- -- -- (317) --------- -------- --------- ------- -------- -------- Balance at December 31, 1995 1,732 2,101 27,697 (433) -- 31,097 Net income -- -- 3,857 -- -- 3,857 Cash dividends declared ($0.52 per share) -- -- (892) -- -- (892) Increase in unrealized loss on investment securities, net of tax -- -- -- (399) -- (399) --------- -------- --------- ------- -------- -------- Balance at December 31, 1996 1,732 2,101 30,662 (832) -- 33,663 Net income -- -- 4,039 -- -- 4,039 Cash dividends declared ($0.55 per share) -- -- (957) -- -- (957) Decrease in unrealized loss on investment securities, net of tax -- -- -- 781 -- 781 --------- -------- --------- ------- -------- -------- Balance at December 31, 1997 $ 1,732 $ 2,101 $ 33,744 $ (51) $ -- $ 37,526 ========= ======== ========= ======= ======== ========
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995 (in thousands) - ------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 -------- -------- ------- Cash flows from operating activities: Net income $ 4,039 $ 3,857 $ 3,596 Adjustments to reconcile net income to net cash provided by operating activities: Provision for: Possible loan losses 535 512 652 Depreciation and amortization 992 1,173 911 Deferred income taxes 56 (11) (195) Write down of real estate acquired by foreclosure 58 54 84 (Gains) losses on sales of investment securities available-for-sale, net (313) (306) 75 Loss on sale of premises and equipment 45 -- -- Accretion of (discount) and amortization of premium on investment and mortgage-backed securities, net 230 449 384 Decrease in unearned income, net (193) (294) (167) Gains on sales of real estate acquired by foreclosure or substantively repossessed (56) (88) (153) Net (increase) decrease in loans held for sale (234) 86 (144) (Increase) decrease in accrued interest receivable 640 (5) (206) (Increase) decrease in other assets (380) (130) 157 Increase in other liabilities 97 186 277 -------- -------- ------- Net cash provided by operating activities 5,516 5,483 5,271 -------- -------- ------- Cash flows from investing activities: Net (increase) decrease in interest bearing deposits 194 2,195 (2,405) Proceeds from sales of investment securities available-for-sale 28,446 3,223 13,454 Proceeds from sales of investment securities held-to-maturity -- -- 1,536 Proceeds from maturities of investment securities held-to-maturity 8,855 9,956 4,222 Proceeds from maturities of investment securities available-for-sale 17,817 11,137 3,896 Purchase of investment securities available-for-sale (15,050) (23,305) (15,416) Purchase of Federal Home Loan Bank stock (136) -- (144) Purchase of investment securities held-to-maturity (8,036) (6,910) (2,516) Principal payments received on investment securities held-to-maturity -- 35 88 Principal payments received on investment securities available-for-sale 3,735 4,413 2,910 Net increase in loans (26,901) (22,706) (293) Proceeds from sales of real estate acquired by foreclosure or substantively repossessed and principal payments received on OREO 378 486 304 Proceeds from sale of premises and equipment 296 -- -- Additions to premises and equipment (1,454) (1,099) (381) -------- -------- ------- Net cash (used in) provided by investing activities 8,144 (22,575) 5,255 -------- -------- ------- Cash flows from financing activities: Net increase (decrease) in demand deposits NOW, savings and money market accounts 1,957 7,676 (12,763) Net increase (decrease) in time deposits (2,208) (2,507) 18,168 Cash received from acquisition of branch -- 6,355 -- Advances from Federal Home Loan Bank 42,467 39,814 37,654 Repayment of Federal Home Loan Bank advances (41,848) (38,603) (39,154) Net increase (decrease) in repurchase agreements 1,526 (1,467) (795) Net increase (decrease) in other borrowed funds (221) 221 -- Purchases of treasury stock -- -- (317) Cash dividends paid (1,304) (802) (748) Net cash provided by financing activities 369 10,687 2,045 -------- -------- ------- Net increase (decrease) in cash and cash equivalents 14,029 (6,405) 12,571 Cash and cash equivalents at beginning of period 17,282 23,687 11,116 -------- -------- ------- Cash and cash equivalents at end of period $ 31,311 $ 17,282 $23,687 ======== ======== ======= Cash paid during the year for: Interest $ 11,802 $ 11,957 $10,892 ======== ======== ======= Income taxes $ 2,383 $ 2,104 2,445 ======== ======== ======= Supplemental disclosures of non-cash activities: Loans transferred to real estate acquired by foreclosure or substantively repossessed $ 603 $ 305 $ 75 ======== ======== ======= Loans transferred to other personal property owned $ 19 $ -- $ -- ======== ======== ======= Loans charged off, net of recoveries $ 320 $ 437 $ 468 ======== ======== ======= Financed sales of real estate acquired by foreclosure $ 203 $ 141 $ 13 ======== ======== ======= Investment securities held-to-maturity transferred to available-for-sale, net $ -- $ -- $63,207 ======== ======== =======
See accompanying notes to financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996, and 1995 - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Northway Financial, Inc. (the Company) is a New Hampshire corporation formed on September 30, 1997. Prior to its becoming a holding company on September 30, 1997, as described in Note 23, the Company had no operations other than those of an organizational nature. Subsequent thereto, the Company's only business activity is to own all of the shares of The Berlin City Bank (BCB) and The Pemigewasset National Bank (PNB). The Company's headquarters are in Berlin, New Hampshire. The Berlin City Bank (BCB) is a state chartered Trust Company under the laws of the State of New Hampshire and is headquartered in Berlin, New Hampshire. BCB is engaged principally in the business of attracting deposits from the general public and investing those deposits in real estate loans, consumer loans, and small business loans. The Pemigewasset National Bank (PNB) is a federally chartered bank which was incorporated in 1881 and is headquartered in Plymouth, New Hampshire. PNB operates its business from five banking offices located in New Hampshire. PNB is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and real estate loans, and in consumer loans and small business loans. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, BCB and PNB. All significant intercompany accounts and transactions have been eliminated in the consideration. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and judgments that affect the reported amounts of assets and liabilities as of the dates of the balance sheets, and income and expense for the periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change in the near-term related to the determination of the allowance for possible loan losses and valuation of real estate acquired by foreclosure. The Company's loans are primarily secured by real estate in New Hampshire. In addition, real estate acquired by foreclosure is located in this market. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio and the recovery of real estate acquired by foreclosure are susceptible to changing conditions in this market. A description of the significant accounting policies follows. Reclassifications Certain amounts in the prior year's financial statements have been reclassified to conform with the current year's presentation. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Interest Bearing Deposits Interest bearing deposits are stated at cost, which approximates market value. Investment and Mortgage-Backed Securities Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of estimated income taxes. Premiums and discounts are amortized and accreted primarily on the level yield method over the contractual life of the securities adjusted for expected prepayments. If a decline in the fair value below the adjusted cost basis of an investment or mortgage-backed security is judged to be other than temporary, the cost basis of the investment is written down to fair value as the new cost basis and the amount of the write down in included as a charge against securities gains, net. Gains and losses on sales of investment securities are recognized at the time of the sale on a specific identification basis. Loans Held for Sale Loans held for sale in the secondary market are generally identified as such at origination and are stated at the lower of aggregate cost or market. Market value is based on outstanding investor commitments. When loans are sold, a gain or loss is recognized to the extent that the sale proceeds exceed or are less that 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 loans using a method the result of which approximates that of the interest method. Loans are placed on nonaccrual when payment of principal or interest is considered to be in doubt or is past due 90 days or more. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Previously accrued income on nonaccrual loans that has not been collected is reversed from current income, and subsequent cash receipts are recorded as income. Loans are returned to accrual status when collection of all contractual principal and interest is reasonably assured and there has been sustained repayment performance. Allowance for Possible Loan Losses The allowance for possible 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 possible 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 possible 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 possible loan losses. Such agencies may require the Banks to recognize additions to the allowance based on judgements different from those of management. On January 1, 1995, the Company adopted a new method of measuring loan impairment in accordance with two pronouncements issued by the Financial Accounting Standards Board. Under this new method, creditors are required to account for impaired loans at the present value of the expected future cash flows discounted at the loan's effective interest rate. Impairment on troubled debt restructurings is measured at present value using the loan's premodification interest rate. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when the lender is in possession of the collateral. The effect of adopting this new method of accounting did not have a material effect on the Company's financial condition or results of operations. Commercial, commercial real estate and individually significant mortgage and consumer loans are considered impaired, and are placed on nonaccrual, when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Mortgage and consumer loans which are not individually significant are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. The amount of impairment for all impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Real Estate Acquired by Foreclosure or Substantively Repossessed Real Estate Acquired by Foreclosure is comprised of properties acquired either through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and for which the Company has taken physical possession. The Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor's assets, regardless of whether or not foreclosure proceedings take place. Both in-substance foreclosures and real estate formally acquired in settlement of loans are initially recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received. Subsequent to foreclosure or classification as in-substance foreclosure, such assets are carried at the lower of cost or fair value minus costs to sell. Gains and losses upon disposition are reflected in operations as realized. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the respective assets. Amortization of leasehold improvements is accumulated on a straight-line basis over the lesser of the term of the respective lease or the asset's useful life. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Pension Costs The Company funds accrued pension costs under a noncontributory pension plan covering substantially all employees. Earnings Per Share In the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings per Share" (EPS) issued by the Financial Accounting Standards Board. SFAS No. 128 requires restatement of all prior-period EPS presented that were not in accordance with SFAS No. 128. This statement simplifies the standards for computing earnings per share. It replaces the presentation of primary EPS with a presentation of Basic EPS which excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS, if applicable, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The adoption of SFAS No. 128 had no material effect on the Company's 1997 financial statements and EPS for prior period financial statements did not need to be restated. NOTE 2 CASH AND DUE FROM BANKS Cash and due from banks at December 31, 1997 and 1996 includes $2,284,000 and $2,006,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. NOTE 3 INVESTMENT AND MORTGAGE-BACKED SECURITIES In 1995, the Financial Accounting Standards Board allowed a one-time reassessment of the appropriateness of the classifications of all securities held at a date between November 15, 1995 and December 31, 1995. In accordance with this assessment, the Company reclassified on December 29, 1995 approximately $62,000,000 from investment securities held-to-maturity to investment securities available-for-sale. At the time of reclassification, there were $118,000 in unrealized gains and $864,000 in unrealized losses relating to the securities transferred. The amortized cost, gross unrealized gains, gross unrealized losses and market value of investment and mortgage-backed securities at December 31, 1997 follows: (in thousands) Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------ Available-for-sale: US Treasury and other US government agencies $11,873 $ 66 $ 10 $11,929 Corporate notes 5,008 3 11 5,000 Common and preferred stocks 2,752 206 162 2,796 Mortgage-backed securities 17,366 99 125 17,340 Collateralized mortgage obligations 14,171 -- 276 13,895 State and political subdivisions 4,016 127 -- 4,143 ------- ---- ---- ------- $55,186 $501 $584 $55,103 ======= ==== ==== ======= Held-to-maturity: Mortgage-backed securities $ 8,400 $ 20 $ 66 $ 8,354 State and political subdivisions 2,912 31 -- 2,943 ------- ---- ---- ------- $11,312 $ 51 $ 66 $11,297 ======= ==== ==== ======= The amortized cost, gross unrealized gains, gross unrealized losses and market value of investment and mortgage-backed securities at December 31, 1996 follows: (in thousands) Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------ Available-for-sale: US Treasury and other US government agencies $20,828 $ 29 $ 378 $20,479 Corporate notes 13,125 9 66 13,068 Foreign 1,003 -- 3 1,000 Common and preferred stocks 2,221 118 55 2,284 Mortgage-backed securities 28,254 101 473 27,882 Collateralized mortgage obligations 21,189 -- 723 20,466 State and political subdivisions 3,219 45 5 3,259 Other 145 45 -- 190 ------- ---- ------ ------- $89,984 $347 $1,703 $88,628 ======= ==== ====== ======= Held-to-maturity: US Treasury and other US government agencies $ 501 $ 2 $ -- $ 503 Mortgage-backed securities 9,943 18 152 9,809 State and political subdivisions 1,755 38 -- 1,793 ------- ---- ------ ------- $12,199 $ 58 $ 152 $12,105 ======= ==== ====== ======= The contractual maturity distribution of investments in debt obligations at December 31, 1997 follows: (in thousands) Available-for-sale One to Five to Over Within five ten ten Total one year years years years Cost -------- ------ ------- ----- ----- US Treasury and other US government agencies $ -- $3,876 $ 7,997 $ -- $11,873 Corporate notes 5,008 -- -- -- 5,008 Mortgage-backed securities -- 1,325 1,863 14,178 17,366 Collateralized mort- gage obligations -- -- 5,927 8,244 14,171 State and political subdivisions -- 491 625 2,900 4,016 ------ ------ ------- ------- ------- $5,008 $5,692 $16,412 $25,322 $52,434 ====== ====== ======= ======= ======= Market value $5,001 $5,717 $16,339 $25,250 $52,307 ====== ====== ======= ======= ======= Held-to-maturity One to Five to Over Within five ten ten Total one year years years years Cost -------- ------ ------- ----- ----- Mortgage-backed securities $ 113 $1,615 $ 3,003 $ 3,669 $ 8,400 State and political subdivisions 2,098 814 -- -- 2,912 ------ ------ ------- ------- -------- $2,211 $2,429 $ 3,003 $ 3,669 $11,312 ====== ====== ======= ======= ======= Market value $2,215 $2,454 $ 2,986 $ 3,642 $11,297 ====== ====== ======= ======= ======= Actual maturities of state and political subdivisions, mortgage-backed securities and collateralized mortgage obligations will differ from the maturities presented because borrowers have the right to prepay obligations without prepayment penalties. An analysis of gross realized gains and losses on investment and mortgage-backed securities sold during the years ended December 31 follows: (in thousands) 1997 1996 1995 --------------------------------------------------------------- Realized Realized Realized Realized Realized Realized Gains Losses Gains Losses Gains Losses -------- -------- -------- -------- -------- -------- Investments: Debt $ 31 $178 $ 1 $-- $ 75 $222 Equity 548 -- 325 20 5 -- Mortgage-backed securities available-for-sale 88 176 -- -- 67 -- ---- ---- ---- --- ---- ---- $667 $354 $326 $20 $147 $222 ==== ==== ==== === ==== ==== Investment securities totaling $24,588,000 and $16,028,000 were pledged to secure public deposits, repurchase agreements and treasury, tax and loan accounts at December 31, 1997 and 1996, respectively. As members of the Federal Home Loan Bank of Boston (the "FHLB"), the Banks are required to invest in $100 par value stock of the FHLB in an amount equal to 1% of their outstanding home loans, .3% of total assets, or 5% of the their advances from the FHLB, whichever is higher. If redeemed the Banks will receive an amount equal to the par value of the stock. NOTE 4 LOANS Loans at December 31 were comprised of the following: (in thousands) 1997 1996 -------- -------- Real Estate: Residential $152,041 $145,847 Commercial 56,204 43,901 Construction 5,664 2,329 Commercial 27,129 27,293 Installment 23,476 18,733 Other 2,769 2,999 -------- -------- Total loans 267,283 241,102 Less: Unearned income (526) (719) Allowance for possible loan losses (note 5) (4,156) (3,941) -------- $262,601 $236,442 ======== ======== Loans are granted in the ordinary course of business to directors, officers, and their immediate families and to organizations in which such persons have more than a 10% ownership interest. These loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than the normal risk of collectability or present other unfavorable features. An analysis of activity in such loans for the years ended December 31, 1997 and 1996 follows: (in thousands) 1997 1996 ------ ------ Balance at beginning of year $1,345 $1,819 New loans 1,090 168 Repayments (778) (472) Change in status of officers and directors (25) (170) Balance at end of year $1,632 $1,345 The Company's lending activities are conducted principally in New Hampshire. The Company grants single family residential loans, commercial real estate loans, including loans on resorts and motels, vacation condominium loans, time share loans, commercial loans and a variety of consumer loans. In addition, the Company grants loans for the construction of residential homes, vacation condominiums, commercial real estate properties, and for land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of the single family residential, vacation condominium and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers' geographic areas and real estate values. The ability and willingness of commercial real estate, commercial and construction loans borrowers to honor their repayment commitments is generally dependent on the health of the real estate economic sector in the borrowers' geographic areas and the general economy. Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of the loans totaled $4,715,000 and $3,476,000 at December 31, 1997 and 1996, respectively. Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122) became effective as of January 1, 1996. As of January 1, 1997, SFAS No. 122 was superceded by Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." (SFAS No. 125). In 1997 and 1996 the Company sold mortgage loans totaling $2,209,000 and $2,528,000 and retained the servicing rights. The fair value of those rights under SFAS No. 125 and SFAS No. 122 is not material and has not been recognized in the 1997 and 1996 financial statements. NOTE 5 ALLOWANCE FOR POSSIBLE LOAN LOSSES Changes in the allowance for possible loan losses at December 31 follows: (in thousands) 1997 1996 1995 ------ ------ ------ Balance at beginning of year $3,941 $3,866 $3,682 Provision charged to expense 535 512 652 Recoveries on loans previously charged-off 292 213 228 Loans charged-off (612) (650) (696) ------ ------ Balance at end of year $4,156 $3,941 $3,866 ====== ====== ====== NOTE 6 IMPAIRED LOANS Effective January 1, 1995, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," and FASB No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These statements require changes in both the disclosure and impairment measurement of non-performing loans. Certain loans which had previously been reported as non-performing loans are now required to be disclosed as impaired loans. Restructured, accruing loans entered into prior to the adoption of these statements are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms at adoption of FASB No. 114. Restructured, accruing loans entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure these loans may be removed from the impaired loan disclosure provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms. At December 31, 1997 and 1996, 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 $1,184,000 and $1,473,000, respectively. The gross interest income that would have been recorded in the years ended December 31, 1997 and 1996 if such restructured loans had been current in accordance with their original terms was $111,000 and $139,000, respectively. The amount of interest income on such restructured loans that was included in net income for the years ended December 31, 1997 and 1996 was $96,000 and $121,000, respectively. The recorded investment in loans that are considered to be impaired under FASB No. 114 was $211,000 and $561,000 for the years ended December 31, 1997 and 1996, respectively, for which the related allowance for loan losses is $0 and $9,000, 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, 1997 and 1996 was approximately $555,000 and $1,005,000, respectively. For the twelve months ended December 31, 1997 and 1996 the Company recognized interest income on those impaired loans of $16,000 and $55,000 which included $4,000 and $55,000 of interest income recognized using the cash basis of income recognition, respectively. NOTE 7 REAL ESTATE ACQUIRED BY FORECLOSURE Real estate acquired by foreclosure or substantively repossessed at December 31 follows: (in thousands) 1997 1996 ---- ---- Condominiums $ 96 $ 46 Residential homes 112 97 Land 14 59 ---- ---- $222 $202 ==== ==== The aforementioned balances include $59,000 and $46,000 of collateral substantively repossessed at December 31, 1997 and 1996, respectively. Sales by the Company resulted in gains of $56,000, $88,000 and $153,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Write downs on real estate acquired by foreclosure totaled $58,000, $54,000 and $84,000 for the years ended December 31, 1997, 1996, and 1995, respectively. NOTE 8 PREMISES AND EQUIPMENT A summary of premises and equipment at December 31 follows: (in thousands) 1997 1996 ------- ------- Land $ 1,615 $ 1,512 Buildings 7,029 7,321 Construction in progress 516 -- Equipment 4,586 4,000 ------- ------- 13,746 12,833 Less accumulated depreciation and amortization (4,559) (4,068) ------- $ 9,187 $ 8,765 ======= ======= The Company leases two of its locations under non-cancellable operating leases. Minimum lease payments in future periods under non-cancellable operating leases at December 31, 1997 are as follows: 1998 $ 51,000 1999 51,000 2000 51,000 2001 10,500 --------- $163,500 The terms of one 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. Both leases contain a provision that the Company shall pay its pro-rata share of operating costs, including real estate taxes. A lease under which the Company was paying rent for a location no longer in use expired in 1996. Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to $57,000, $52,000 and $113,000, respectively. NOTE 9 DEPOSITS Deposits at December 31 were as follows: (dollars in thousands) 1997 1996 --------------------- --------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------ -------- ------ ------- Non-certificate deposits: Regular savings $ 62,825 2.37% $ 65,401 2.36% NOW and Super NOW 46,419 1.28 44,494 1.28 Money market 21,420 2.77 23,195 2.83 Demand deposits 39,710 -- 35,328 -- -------- -------- 170,374 1.57 168,418 1.64 -------- -------- Certificates of deposit: Less than $100,000 131,308 5.43 134,065 5.47 $100,000 and over 20,381 5.39 19,832 5.40 -------- -------- 151,689 5.43 153,897 5.46 -------- -------- Total deposits $322,063 3.39% $322,315 3.47% ======== ======== Included above are $0 and $297,000 in brokered certificates of deposit at December 31, 1997 and 1996, respectively. For time deposits as of December 31, 1997, the aggregate amount of maturities for each of the following five years ended December 31, are: (in thousands) 1998 $123,043 1999 25,244 2000 2,136 2001 1,157 2002 109 -------- $151,689 ======== NOTE 10 ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB). The components of these borrowings are as follows as of December 31, 1997: (dollars in thousands) Weighted Average Rate to Maturity Date Balance Maturity ------------- ------- -------- 1998 $9,212 5.92% 1999 82 7.43 2002 28 6.78 ------ Total $9,322 ====== Advances are secured by the Company's stock in that institution, its residential real estate mortgage portfolio and the remaining US government and agencies not otherwise pledged. Information about short-term advances included above is as follows: (dollars in thousands) December 31, ------------------------ 1997 1996 ---- ---- Outstanding at end of period $ 9,212 $4,711 Approximate maximum outstanding at any month end 12,221 5,900 Average amounts outstanding during the period 9,019 7,473 Weighted average interest rate during the period 5.98% 5.82% Weighted average interest rate at end of period 5.92 6.21 NOTE 11 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase at December 31 are summarized as follows: (dollars in thousands) 1997 1996 1995 ------ ------ ----- Outstanding at December 31 $6,146 $4,620 $6,087 Maturity date 2/98-12/98 2/97-5/98 2/96-12/98 Weighted average interest rate at end of year 5.57% 5.50% 5.56% Maximum amount outstanding at any month end $9,161 $7,784 $9,028 Daily average outstanding $7,796 $6,565 $6,151 Weighted average interest rate for the year 5.18% 5.45% 4.98% Investment securities with a total book value and accrued interest of $20,633,000, $14,393,000 and $17,122,000 were pledged as collateral and held by a Correspondent Bank under the Company's control to secure the agreements at December 31, 1997, 1996, and 1995, respectively. The market value of the collateral at December 31, 1997, 1996 and 1995 was $20,107,000, $13,998,000, and $16,871,000, respectively. NOTE 12 ACQUISITIONS On July 22, 1994, the Company acquired $33.2 million in deposits from the Resolution Trust Corporation. The Company paid a deposit purchase premium of $2.3 million. This premium is being amortized to noninterest expense over seven years by use of the straight line method. On April 22, 1996, the Company purchased certain assets and assumed deposits from First New Hampshire Bank's branch office in Campton, New Hampshire. On that day, the Company recorded the following entries to record this transaction. (in thousands) Loans $ 4 Premises and equipment 225 Deposit purchase premium 175 Cash 6,355 Other liabilities 1 Deposits 6,758 This transaction was accounted for using the purchase method of accounting. The results of operations of the acquired branch are included in the 1996 income statement of the Company from the date of the transaction. The deposit purchase premium of $175,000 is being amortized to noninterest expense over ten years using the straight line method. Management reviews the carrying value of this intangible asset on an ongoing basis, taking into consideration any events and circumstances that might have diminished such value. NOTE 13 LINES OF CREDIT As members of the Federal Home Loan Bank of Boston, the Banks have access to pre-approved lines of credit. At December 31, 1997 the Banks' available line of credit totaled $9.9 million. In addition, the Banks have a credit line totaling $2.0 million with another commercial bank. At December 31, 1997 and 1996 there was no amount outstanding on lines of credit. NOTE 14 STOCKHOLDERS' EQUITY Federal Regulations prohibit banking companies from paying dividends on their stock if the effect would cause stockholders' equity to be reduced below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements. At December 31, 1997, the Company was in compliance with all regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 1997, the most recent notifications from the Federal Deposit Insurance Corporation categorized the Banks as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions' categories. The Banks' actual capital amounts and ratios are also presented in the tables. (dollars in thousands) To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes: Provisions: ------------------ -------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1997: Risk-Based Total Capital: Consolidated $39,217 17.56% $17,867 >=8% N/A The Berlin City Bank 25,166 17.68 11,388 >=8 $14,235 >=10% The Pemigewasset National Bank 13,631 16.90 6,453 >=8 8,066 >=10 Risk-Based Tier 1 Capital: Consolidated 36,425 16.31 8,933 >=4 N/A The Berlin City Bank 22,387 15.73 5,694 >=4 8,541 >=6 The Pemigewasset National Bank 12,619 15.65 3,226 >=4 4,840 >=6 Leverage: Consolidated 36,425 9.67 15,064 >=4 N/A The Berlin City Bank 22,387 9.14 9,794 >=4 12,243 >=5 The Pemigewasset National Bank 12,619 9.33 5,278 >=4 6,598 >=5 As of December 31, 1996: Risk-Based Total Capital: Consolidated $35,593 17.40% $16,365 >=8% N/A The Berlin City Bank 22,583 17.44 10,357 >=8 $12,946 >=10% The Pemigewasset National Bank 12,964 17.35 5,978 >=8 7,473 >=10 Risk-Based Tier 1 Capital: Consolidated 33,036 16.15 8,182 >=4 N/A The Berlin City Bank 20,965 16.19 5,178 >=4 7,768 >=6 The Pemigewasset National Bank 12,025 16.01 3,004 >=4 4,506 >=6 Leverage: Consolidated 33,036 8.99 14,690 >=4 N/A The Berlin City Bank 20,965 8.63 9,722 >=4 12,153 >=5 The Pemigewasset National Bank 12,025 9.46 5,083 >=4 6,354 >=5 NOTE 15 OTHER NONINTEREST EXPENSE The major components of other noninterest expense for the years ended December 31 follows: (in thousands) 1997 1996 1995 ----- ------ ------ Deposit and other assessments $ 50 $ 17 $ 585 Directors' fees 266 303 302 Stationery and supplies 374 360 341 Other 2,560 2,514 2,284 ------ ------ ------ $3,250 $3,194 $3,512 ====== ====== ====== NOTE 16 FEDERAL AND STATE TAXES The components of federal and state tax expense at December 31 are as follows: (in thousands) 1997 1996 1995 ------ ------ ------ Current: Federal $2,025 $1,732 $1,824 State 193 253 260 ------ ------ ------ 2,218 1,985 2,084 ------ ------ ------ Deferred: Federal 45 (8) (159) State 11 (3) (36) ------ ------ ------ 56 (11) (195) ------ ------ ------ Net $2,274 $1,974 $1,889 ====== ====== ====== The temporary differences (the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases) that give rise to significant portions of the deferred income tax asset and deferred income tax liability at December 31 are as follows: (in thousands) 1997 1996 ------ ------ Deferred income tax assets: Allowance for possible loan losses $1,149 $1,145 Loan origination fees 155 178 Interest on nonaccrual loans 193 250 Foreclosed property valuation 19 33 Unrealized holding loss on investment securities available-for-sale 32 524 Deposit purchase premium 280 229 Supplemental insurance 57 48 Other 47 37 ------ ------ 1,932 2,444 Deferred income liabilities: Depreciation (380) (338) Pension (52) (58) ------ ------ (432) (396) Deferred income tax asset, net $1,500 $2,048 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, 1997, 1996 and 1995 differs from the "expected" federal income tax expense at the 34% statutory rate for the following reasons: 1997 1996 1995 ---- ---- ---- Expected federal income taxes 34.0% 34.0% 34.0% Municipal income (3.6) (3.5) (2.4) State tax expense net of federal benefit 3.2 2.6 2.4 Other 2.4 0.8 0.4 ---- ---- ---- 36.0% 33.9% 34.4% ==== ==== ==== NOTE 17 PENSION PLAN The Company has two non-contributory defined benefit pension plans covering substantially all employees. The Company contributes to the pension plans annually to provide for current benefits, as well as expected future benefits. The following table sets forth the funded status of the plans and amounts recognized in the Company's balance sheet as of December 31: (in thousands) 1997 1996 ------- ------- Vested benefits $ 2,718 $ 2,417 Non-vested benefits 89 69 ------- ------- Accumulated benefit obligation $ 2,807 $ 2,486 ======= ======= Estimated projected benefit obligation $(3,586) $(3,191) Estimated fair value of plan assets 3,419 2,946 Deficiency of estimated fair value of plan assets over estimated projected benefit obligation (167) (245) Past service cost 16 17 Unrecognized net loss 409 408 Unrecognized net transition asset (28) (32) ------- ------- Prepaid pension cost $ 230 $ 148 ======= ======= Net periodic pension cost included the following components for the years ended December 31: (in thousands) 1997 1996 1995 ----- ----- ----- Service cost-benefits earned $ 202 $ 200 $ 162 Interest cost on projected benefit obligation 232 204 170 Return on plan assets (loss) (435) (216) (372) Net amortization and deferral 199 (16) 186 ----- ----- ----- Pension expense $ 198 $ 172 $ 146 ===== ===== ===== Plan obligations were computed using the following for the year ended December 31: 1997 1996 -------------- -------------- BCB PNB BCB PNB --- --- --- --- Discount rate 7.0% 8.0% 7.0% 8.0% Estimated return on plan assets 9.0 8.0 9.0 8.0 Future salary increases 5.0 4.0 5.0 4.0 Plan assets are primarily invested in US Treasuries, US Government Agencies, and FHLB securities. PNB has a 401(k) plan. To be eligible, employees must have attained age twenty-one, completed six months of service and be credited with 1,000 hours of service. PNB matches 25% of employee contributions on the first 4% of compensation deposited as elective contributions. The 401(k) matching expense was $15,000, $14,000 and $16,000 for the years ended December 31, 1997, 1996, and 1995, respectively. NOTE 18 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet credit risk at December 31 are as follows: (in thousands) 1997 1996 ---- ---- Financial instrument whose contract amounts represent credit risk: Unadvanced portions of home equity loans $ 1,863 $ 1,568 Unadvanced portions of lines of credit 16,930 12,187 Unadvanced portions of commercial real estate loans 1,585 45 Commitments to originate loans 8,713 9,208 Standby letters of credit 491 585 Commitments to originate loans, unadvanced portions of home equity loans, lines of credit and commercial real estate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without having been drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. NOTE 19 LITIGATION In the ordinary course of business, the Company is involved in routine litigation. Based on its review of such litigation, management does not foresee any material effect on the Company's financial position or results of operations. NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and due from banks, interest-bearing deposits, and federal funds sold: The carrying amounts reported in the balance sheets for cash and short-term instruments approximates those assets' fair values. Investment and mortgage-backed securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. FHLB and FRB Stock: The carrying amount reported in the balance sheets for Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") Stock approximates their fair value. If redeemed, the Company will receive an amount equal to the par value of the stocks. Loans 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 and mortgagors' escrow accounts: The fair value of demand deposits (e.g. NOW and Super NOW checking, regular savings, money market accounts and mortgagors' escrow accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits. Repurchase agreements: The fair value of the Company's repurchase agreements is estimated using discounted cash flow analysis, based on the Company's current rate for similar repurchase agreements. Federal Home Loan Bank Advances: The fair value of FHLB advances were determined by discounting the anticipated future cash payments by using the rates currently available to the Company for debt with similar terms and remaining maturities. Other borrowings: The carrying amount reported in the balance sheet approximates fair value. The estimated fair values of the Company's financial instruments are as follows: (in thousands) 1997 1996 ------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial assets: Cash and due from banks $ 12,086 $ 12,086 $ 14,257 $ 14,257 Federal funds sold 19,225 19,225 3,025 3,025 Interest bearing deposits 85 85 279 279 Investment securities available-for-sale 55,103 55,103 88,628 88,628 Investment securities held-to-maturity 11,312 11,297 12,199 12,105 FHLB stock 1,958 1,958 1,822 1,822 FRB stock 80 80 80 80 Loans held for sale 292 292 58 58 Loans, net 262,601 262,164 236,442 235,745 Accrued interest receivable 1,971 1,971 2,611 2,611 Financial liabilities: Deposits 322,063 322,379 322,315 323,248 Repurchase agreements 6,146 6,150 4,620 4,638 FHLB advances 9,322 9,325 8,703 8,717 Other borrowings 0 0 221 221 The carrying amounts of financial instruments shown in the above table are included in the balance sheets under the indicated captions. At December 31, 1997, all the Company's financial instruments were held for purposes other than trading. At December 31, 1997, the Company had no derivative financial instruments subject to the provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for some of the Company's financial instruments, fair value estimates are based on judgements regarding future expected loss experience, cash flows, current economic conditions, risk characteristics, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt, and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. The fair value amounts presented do not represent the underlying value of the Company because fair values of certain other financial instruments, assets and liabilities have not been determined. NOTE 21 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (in thousands, except earnings per share) Summarized quarterly financial data for 1997 and 1996 follows: 1997 Quarters Ended ------------------- Mar 31 Jun 30 Sep 30 Dec 31 ------ ------ ------ ------ Interest and dividend income $6,961 $7,245 $7,427 $7,401 Interest expense 2,918 3,036 3,054 2,999 ------ ------ ------ ------ Net interest income 4,043 4,209 4,373 4,402 Provision for possible loan losses 120 135 140 140 Noninterest income 538 491 349 302 Noninterest expense 2,970 2,907 2,971 3,011 ------ ------ ------ ------ Income before taxes 1,491 1,658 1,611 1,553 Income tax expense 413 598 578 685 ------ ------ ------ ------ Net income $1,078 $1,060 $1,033 $ 868 ====== ====== ====== ====== Earnings per share $ 0.62 $ 0.61 $ 0.60 $ 0.50 ====== ====== ====== ====== 1996 Quarters Ended ------------------- Mar 31 Jun 30 Sep 30 Dec 31 ------ ------ ------ ------ Interest and dividend income $6,819 $6,963 $7,035 $7,158 Interest expense 3,068 3,075 3,078 3,037 ------ ------ ------ ------ Net interest income 3,751 3,888 3,957 4,121 Provision for possible loan losses 126 126 134 126 Noninterest income 350 404 398 450 Noninterest expense 2,579 2,647 2,738 3,012 ------ ------ ------ ------ Income before taxes 1,396 1,519 1,483 1,433 Income tax expense 480 510 495 489 ------ ------ ------ ------ Net income $ 916 $1,009 $ 988 $ 944 ====== ====== ====== ====== Earnings per share $ 0.53 $ 0.58 $ 0.57 $ 0.55 ====== ====== ====== ====== NOTE 22 CONDENSED PARENT ONLY FINANCIAL STATEMENTS Condensed financial statements of Northway Financial, Inc. as of December 31, 1997 and 1996 and for the three years ended December 31, 1997 follow: (in thousands) Balance Sheets 1997 1996 ---- ---- Assets Cash and cash equivalents $ 1,412 $ 394 Investment in subsidiary, The Berlin City Bank 23,232 21,454 Investment in subsidiary, The Pemigewasset National Bank 12,884 12,165 ------- ------- $37,528 $34,013 ======= ======= Liabilities and Stockholders' Equity Accrued expenses $ 2 $ 350 ------- ------- Total liabilities 2 350 ------- ------- Stockholders' equity: Common Stock 1,732 1,732 Additional paid-in-capital 2,101 2,101 Retained earnings 33,744 30,662 Unrealized loss on investment securities available-for-sale, net of tax (51) (832) ------- ------- Total Stockholders' Equity 37,526 33,663 ------- ------- $37,528 $34,013 Statements of Income 1997 1996 1995 ------ ------ ------ Dividends from subsidiaries $1,973 $ 892 $ 965 Management fee income from subsidiary 25 36 21 ------ ------ ------ 1,998 928 986 General and administrative expense 217 36 21 ------ ------ ------ Income before income tax expense and equity in undistributed net income of subsidiaries 1,781 892 965 Income tax expense 3 -- -- ------ ------ ------ Income before equity in undistributed net income of subsidiaries 1,778 892 965 Equity in undistributed net income of subsidiaries 2,261 2,965 2,631 ------ ------ ------ Net income $4,039 $3,857 $3,596 ====== ====== ====== Statements of Cash Flows 1997 1996 1995 ------- ------- ------- Cash flows from operating activities: Net income $ 4,039 $ 3,857 $ 3,596 Adjustments to reconcile net income to net cash provided by operating activities: Increase in other assets -- 2 238 Decrease in accrued expenses (1) -- -- Undistributed net income of subsidiaries (2,261) (2,965) (2,631) ------- ------- ------- Net cash provided by operating activities 1,777 894 1,203 ------- ------- ------- Cash flows from financing activities: Cash received from BCB 245 -- -- Purchase of treasury stock -- -- (317) Dividends paid (1,004) (802) (748) ------- ------- ------- Net cash used in financing activities (759) (802) (1,065) ------- ------- ------- Net increase in cash and equivalents 1,018 92 138 Cash and cash equivalents at beginning of year 394 302 164 ------- ------- ------- Cash and cash equivalents at end of year $ 1,412 $ 394 $ 302 ======= ======= ======= NOTE 23 FORMATION OF HOLDING COMPANY On September 30, 1997, The Berlin City Bank and Pemi Bancorp, Inc. (Parent company of The Pemigewasset National Bank), in accordance with an Agreement and Plan of Merger dated as of March 14, 1997, merged with the result that Northway Financial, Inc. became the bank holding company for The Berlin City Bank and The Pemigewasset National Bank. Each of such banks became wholly-owned subsidiaries of Northway Financial, Inc. To reflect the transaction, Northway Financial, Inc. issued 1,731,969 shares of its common stock. Shareholders of The Berlin City Bank and Pemi Bancorp, Inc. received 16 shares and 1.0419 shares, respectively, of Northway Financial, Inc. for each share they held of The Berlin City Bank and Pemi Bancorp, Inc., respectively. The formation of the holding company was accounted for as a pooling of interest. Accordingly, the historical book values of the assets and liabilities of The Berlin City Bank and Pemi Bancorp, Inc. as previously reported on their balance sheets, were carried over to the Company's consolidated balance sheet. No goodwill or other intangibles were created. The formation of the holding company is reflected in the accompanying consolidated financial statements as though The Berlin City Bank and Pemi Bancorp, Inc. had operated as a combined entity for all periods presented. The results of operations of the two companies for the period January 1, 1997 to September 30, 1997 are summarized as follows: The Berlin Pemi Bancorp, City Bank Inc. --------- ---- Net interest and dividend income $8,010 $4,615 Net income 2,388 783 The following tables set forth reconciliations of net interest and dividend income and net income previously reported by The Berlin City Bank and Pemi Bancorp, Inc. with the combined amounts presented in the accompanying consolidated financial statements of income for the years ended December 31, 1996 and 1995: (in thousands) Pemi The Berlin Bancorp, City Bank Inc. Combined --------- ---- -------- Year Ended December 31, 1996 Net interest and dividend income $9,671 $6,046 $15,717 Net income 2,580 1,277 3,857 Year Ended December 31, 1995 Net interest and dividend income $9,684 $5,809 $15,493 Net income 2,321 1,275 3,596 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 26, 1998 BY: /S/ William J. Woodward ----------------------- William J. Woodward President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /S/ William J. Woodward Chairman of the Board, March 27, 1998 - ---------------------------- Presidentand Chief Executive William J. Woodward Officer (Principal Executive Officer) /S/ Fletcher W. Adams Vice Chairman of the Board March 27, 1998 - ---------------------------- Fletcher W. Adams /S/ John D. Morris Director March 27, 1998 - ---------------------------- John D. Morris /S/ John H. Noyes Director March 27, 1998 - ---------------------------- John H. Noyes /S/ Barry J. Kelley Director March 27, 1998 - ---------------------------- Barry J. Kelley /S/ Randall G. Labnon Director March 27, 1998 - ---------------------------- Randall G. Labnon /S/ Andrew L. Morse Director March 27, 1998 - ---------------------------- Andrew L. Morse /S/ Peter H. Bornstein Director March 27, 1998 - ---------------------------- Peter H. Bornstein /S/ Charles H. Clifford, Jr. Director March 27, 1998 - ---------------------------- Charles H. Clifford, Jr. /S/ Arnold P. Hanson, Jr. Director March 27, 1998 - ---------------------------- Arnold P. Hanson, Jr. /S/ Donald R. Hatt Senior Executive Vice President March 27, 1998 - ---------------------------- Donald R. Hatt /S/ David J. O'Connor Executive Vice President, Chief March 27, 1998 - ---------------------------- Financial Officer and Treasurer David J. O'Connor (Principal Financial and Accounting Officer) INDEX OF EXHIBITS Exhibit Number Description of Exhibit - ------------- ---------------------- 2.1 Agreement and Plan of Merger, dated as of March 14, 1997, by and among Northway Financial, Inc., The Berlin City Bank, Pemi Bancorp, Inc. and Pemigewasset National Bank (the "Merger Agreement") (incorporated by reference to Exhibit 2.1 to Registration Statement No. 333-33033) 3.1 Amended and Restated Articles of Incorporation of Northway Financial, Inc. (incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-33033) 3.2 By-laws of Northway Financial, Inc.(1) 4 Form of Certificate representing Northway Common Stock (reference is also made to Exhibits 3.1 and 3.2) (incorporated by reference to Exhibit 4 to Registration Statement No. 333-33033) 10.1 Employment Agreement for William J. Woodward(1)(2) 10.2 Employment Agreement for Fletcher W. Adams(1)(2) 21 List of Subsidiaries(1) 23.1 Consent of Shatswell, MacLeod & Company, P.C.(1) 27 Financial Data Schedule(1) - ------------------ (1) Filed herewith (2) Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report EX-3.2 2 BY-LAWS OF NORTHWAY FINANCIAL, INC. Exhibit 3.2 BY-LAWS OF NORTHWAY FINANCIAL, INC. ARTICLE I Shareholders SECTION 1. Annual Meeting. The annual meeting of shareholders shall be held at the hour, date and place within or without the United States which is fixed by the majority of the Board of Directors, the Chairman of the Board, if one is elected, or the President, which time, date and place may subsequently be changed at any time by vote of the Board of Directors. If no annual meeting has been held for a period of thirteen months after the Corporation's last annual meeting of shareholders, a special meeting in lieu thereof may be held, and such special meeting shall have, for the purposes of these By-laws or otherwise, all the force and effect of an annual meeting. Any and all references hereafter in these By-laws to an annual meeting or annual meetings also shall be deemed to refer to any special meeting(s) in lieu thereof. SECTION 2. Matters to be Considered at Annual Meetings. At any annual meeting of shareholders or any special meeting in lieu of annual meeting of shareholders (the "Annual Meeting"), only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before such Annual Meeting. To be considered as properly brought before an Annual Meeting, business must be: (a) specified in the notice of meeting, (b) otherwise properly brought before the meeting by, or at the direction of, the Board of Directors, or (c) otherwise properly brought before the meeting by any holder of record (both as of the time notice of such proposal is given by the shareholder as set forth below and as of the record date for the Annual Meeting in question) of any shares of capital stock of the Corporation entitled to vote at such Annual Meeting who complies with the requirements set forth in this Section 2. In addition to any other applicable requirements, for business to be properly brought before an Annual Meeting by a shareholder of record of any shares of capital stock entitled to vote at such Annual Meeting, such shareholder shall: (i) give timely notice as required by this Section 2 to the Secretary of the Corporation and (ii) be present at such meeting, either in person or by a representative. For the first Annual Meeting following the date the Corporation becomes a reporting company under Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), a shareholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (x) the 75th day prior to the scheduled date of such Annual Meeting or (y) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For all subsequent Annual Meetings, a shareholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 75 days nor more than 120 days prior to the anniversary date of the immediately preceding Annual Meeting (the "Anniversary Date"); provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a shareholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (1) the 75th day prior to the scheduled date of such Annual Meeting or (2) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For purposes of these By-laws, "public announcement" shall mean: (a) disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service, (b) a report or other document filed publicly with the Securities and Exchange Commission (including, without limitation, a Form 8-K), or (c) a letter or report sent to shareholders of record of the Corporation at the time of the mailing of such letter or report. A shareholder's notice to the Secretary shall set forth as to each matter proposed to be brought before an Annual Meeting: (i) a brief description of the business the shareholder desires to bring before such Annual Meeting and the reasons for conducting such business at such Annual Meeting, (ii) the name and address, as they appear on the Corporation's stock transfer books, of the shareholder proposing such business, (iii) the class and number of shares of the Corporation's capital stock beneficially owned by the shareholder proposing such business, (iv) the names and addresses of the beneficial owners, if any, of any capital stock of the Corporation registered in such shareholder's name on such books, and the class and number of shares of the Corporation's capital stock beneficially owned by such beneficial owners, (v) the names and addresses of other shareholders known by the shareholder proposing such business to support such proposal, and the class and number of shares of the Corporation's capital stock beneficially owned by such other shareholders, and (vi) any material interest of the shareholder proposing to bring such business before such meeting (or any other shareholders known to be supporting such proposal) in such proposal. If the Board of Directors or a designated committee thereof determines that any shareholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2 or that the information provided in a shareholder's notice does not satisfy the information requirements of this Section 2 in any material respect, such proposal shall not be presented for action at the Annual Meeting in question. If neither the Board of Directors nor such committee makes a determination as to the validity of any shareholder proposal in the manner set forth above, the presiding officer of the Annual Meeting shall determine whether the shareholder proposal was made in accordance with the terms of this Section 2. If the presiding officer determines that any shareholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2 or that the information provided in a shareholder's notice does not satisfy the information requirements of this Section 2 in any material respect, such proposal shall not be presented for action at the Annual Meeting in question. If the Board of Directors, a designated committee thereof, or the presiding officer determines that a shareholder proposal was made in accordance with the requirements of this Section 2, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the meeting with respect to such proposal. Notwithstanding the foregoing provisions of this By-law, a shareholder shall also comply with all applicable requirements of the Exchange Act, and the rules and regulations thereunder with respect to the matters set forth in this Section 2, and nothing in this Section 2 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 3. Special Meetings. Except as otherwise required by law and subject to the rights, if any, of the holders of any series of Preferred Stock, special meetings of the shareholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office, or upon delivery of written demand therefor to the Secretary describing the purpose or purposes for which it is to be held by the holders of not less than ten percent (10%) of the shares entitled to vote at the meeting. SECTION 4. Matters to be Considered at Special Meetings. No business other than specified in the call for the meeting shall be transacted at any special meeting of the shareholders. SECTION 5. Notice of Meetings; Adjournments. A written notice of each Annual Meeting stating the hour, date, and place of such Annual Meeting shall be given by the Secretary or an Assistant Secretary (or other person authorized by these By-laws or by law) not less than 10 days nor more than 60 days before the Annual Meeting, to each shareholder entitled to vote thereat and to each shareholder who, by law or under the Articles of Incorporation of the Corporation (as the same may hereafter be amended and/or restated, the "Articles of Incorporation") or under these By-laws, is entitled to such notice, by delivering such notice to him or by mailing it, postage prepaid, addressed to such shareholder at the address of such shareholder as it appears on the Corporation's stock transfer books. Such notice shall be deemed to be delivered when hand delivered to such address or deposited in the mail so addressed, with postage prepaid. Notice of all special meetings of shareholders shall be given in the same manner as provided for Annual Meetings, except that the written notice of all special meetings shall state the purpose or purposes for which the meeting has been called. Notice of an Annual Meeting or special meeting of shareholders need not be given to a shareholder if a written waiver of notice is signed before or after such meeting by such shareholder or if such shareholder attends such meeting, unless such attendance was for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any Annual Meeting or special meeting of shareholders need be specified in any written waiver of notice. The Board of Directors may postpone and reschedule any previously scheduled Annual Meeting or special meeting of shareholders and any record date with respect thereto, regardless of whether any notice or public announcement with respect to any such meeting has been sent or made pursuant to Section 2 of this Article I or Section 3 of Article II hereof or otherwise. In no event shall the public announcement of an adjournment, postponement, or rescheduling of any previously scheduled meeting of shareholders commence a new time period for the giving of a shareholder's notice under Section 2 of Article I and Section 3 of Article II of these By-laws. When any meeting is convened, the presiding officer may adjourn the meeting if (a) no quorum is present for the transaction of business, (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the shareholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to shareholders, or (c) the Board of Directors determines that adjournment is otherwise in the best interests of the Corporation. When any Annual Meeting or special meeting of shareholders is adjourned to another hour, date, or place, notice need not be given of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken of the hour, date, and place to which the meeting is adjourned; provided, however, that if the adjournment is for more than 120 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record entitled to vote thereat and each shareholder who, by law or under the Articles of Incorporation or these By-laws, is entitled to such notice. SECTION 6. Quorum. A majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of shareholders. If less than a quorum is present at a meeting, the holders of voting stock representing a majority of the voting power present at the meeting or the presiding officer may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except as provided in Section 5 of this Article I. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 7. Voting and Proxies. Shareholders shall have one vote for each share of stock entitled to vote owned by them of record according to the books of the Corporation, unless otherwise provided by law or by the Articles of Incorporation. Shareholders may vote either in person or by written proxy, but no proxy shall be voted or acted upon after eleven months from its date, unless the proxy expressly provides for a longer period. Proxies shall be filed with the Secretary of the meeting before being voted. Except as otherwise limited therein or as otherwise provided by law, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. The Corporation, if acting in good faith, may accept a proxy with respect to stock held in the name of two or more persons if executed by or on behalf of any one of them. SECTION 8. Action at Meeting. When a quorum is present, any matter before any meeting of shareholders shall be decided by the affirmative vote of the majority of shares present in person or represented by proxy at such meeting and entitled to vote on such matter, except where a larger vote is required by law, by the amended and restated Articles of Incorporation, or by these By-laws. Any election by shareholders shall be determined by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors, except where a larger vote is required by law, by the Articles of Incorporation, or by these By-laws. The Corporation shall not directly or indirectly vote any shares of its own stock; provided, however, that the Corporation may vote shares which it holds in a fiduciary capacity to the extent permitted by law. SECTION 9. Shareholder Lists. The Secretary or an Assistant Secretary (or the Corporation's transfer agent or other person authorized by these By-laws or by law) shall prepare and make available for inspection, within two business days after notice of the Annual Meeting or special meeting for which the list was prepared and continuing through such Annual Meeting or special meeting, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order and by voting group and class and series, if applicable, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, or such shareholder's agent or attorney, for any purpose germane to the meeting, during ordinary business hours, upon written demand, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the hour, date, and place of the meeting during the whole time thereof, and may be inspected by any shareholder, and any such shareholder's agent or attorney, who is present. SECTION 10. Presiding Officer. The Chairman of the Board, if one is elected, or if not elected or in his or her absence, the Vice-Chairman, shall preside at all Annual Meetings or special meetings of shareholders and shall have the power, among other things, to adjourn such meeting at any time and from time to time, subject to Sections 5 and 6 of this Article I. The order of business and all other matters of procedure at any meeting of the shareholders shall be determined by the presiding officer. SECTION 11. Voting Procedures and Inspectors of Elections. The Corporation shall, in advance of any meeting of shareholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of shareholders, the presiding officer shall appoint one or more inspectors to act at the meeting. Any inspector may, but need not, be an officer, employee, or agent of the Corporation. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall perform such duties as are required by the New Hampshire Business Corporation Act, as amended from time to time (the "NHBCA"), including the counting of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. The presiding officer may review all determinations made by the inspectors, and in so doing the presiding officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determinations made by the inspectors. All determinations by the inspectors and, if applicable, the presiding officer, shall be subject to further review by any court of competent jurisdiction. ARTICLE II Directors SECTION 1. Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors, except as otherwise provided by the Articles of Incorporation or required by law. SECTION 2. Number and Terms. At the effective date of these By-laws, the number of directors of the Corporation shall be ten. Thereafter, the number of directors of the Corporation shall be no less than eight and no more than thirteen. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time during the three year period following the effective date of these By-laws by the Board pursuant to a resolution adopted by two-thirds of the entire Board of Directors and thereafter by a majority of the entire Board. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. The affirmative vote of two-thirds of the directors of the Corporation shall be required to amend or repeal or adopt any provision in contravention of or inconsistent with the required directors' vote to fix the number of directors during the three-year period following the effective date of these By-laws as set forth in the third sentence of this Section 2. SECTION 3. Director Nominations. Nominations of candidates for election as directors of the Corporation at any Annual Meeting may be made only (a) by, or at the direction of, a [majority] of the Board of Directors or (b) by any holder of record (both as of the time notice of such nomination is given by the shareholder as set forth below and as of the record date for the Annual Meeting in question) of any shares of the capital stock of the Corporation entitled to vote at such Annual Meeting who complies with the timing, informational, and other requirements set forth in this Section 3. Any shareholder who has complied with the timing, informational, and other requirements set forth in this Section 3 and who seeks to make such a nomination, or his, her, or its representative, must be present in person at the Annual Meeting. Only persons nominated in accordance with the procedures set forth in this Section 3 shall be eligible for election as directors at an Annual Meeting. Nominations, other than those made by, or at the direction of, the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section 3. For the first Annual Meeting following the date the Corporation becomes a reporting company under Section 13(a) or Section 15(d) of the Exchange Act, a shareholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (i) the 75th day prior to the scheduled date of such Annual Meeting or (ii) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For all subsequent Annual Meetings, a shareholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 75 days nor more than 120 days prior to the Anniversary Date; provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a shareholder's notice shall be timely if delivered to, or mailed and received by, the Corporation at its principal executive office not later than the close of business on the later of (x) the 75th day prior to the scheduled date of such Annual Meeting or (y) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. A shareholder's notice to the Secretary shall set forth as to each person whom the shareholder proposes to nominate for election or re-election as a director: (1) the name, age, business address, and residence address of such person, (2) the principal occupation or employment of such person, (3) the class and number of shares of the Corporation's capital stock which are beneficially owned by such person on the date of such shareholder notice, and (4) the consent of each nominee to serve as a director if elected. A shareholder's notice to the Secretary shall further set forth as to the shareholder giving such notice: (a) the name and address, as they appear on the Corporation's stock transfer books, of such shareholder and of the beneficial owners (if any) of the Corporation's capital stock registered in such shareholder's name and the name and address of other shareholders known by such shareholder to be supporting such nominee(s), (b) the class and number of shares of the Corporation's capital stock which are held of record, beneficially owned, or represented by proxy by such shareholder and by any other shareholders known by such shareholder to be supporting such nominee(s) on the record date for the Annual Meeting in question (if such date shall then have been made publicly available) and on the date of such shareholder's notice, and (c) a description of all arrangements or understandings between such shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such shareholder. If the Board of Directors or a designated committee thereof determines that any shareholder nomination was not made in accordance with the terms of this Section 3 or that the information provided in a shareholder's notice does not satisfy the informational requirements of this Section 3 in any material respect, then such nomination shall not be considered at the Annual Meeting in question. If neither the Board of Directors nor such committee makes a determination as to whether a nomination was made in accordance with the provisions of this Section 3, the presiding officer of the Annual Meeting shall determine whether a nomination was made in accordance with such provisions. If the presiding officer determines that any shareholder nomination was not made in accordance with the terms of this Section 3 or that the information provided in a shareholder's notice does not satisfy the informational requirements of this Section 3 in any material respect, then such nomination shall not be considered at the Annual Meeting in question. If the Board of Directors, a designated committee thereof, or the presiding officer determines that a nomination was made in accordance with the terms of this Section 3, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the meeting with respect to such nominee. Notwithstanding anything to the contrary in the second paragraph of this Section 3, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased pursuant to Section 2 of Article II and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 75 days prior to the Anniversary Date, a shareholder's notice required by this Section 3 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if such notice shall be delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which such public announcement is first made by the Corporation. No person shall be elected by the shareholders as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. Election of directors at an Annual Meeting need not be by written ballot, unless otherwise provided by the Board of Directors, or presiding officer at such Annual Meeting. If written ballots are to be used, ballots bearing the names of all the persons who have been nominated for election as directors at the Annual Meeting in accordance with the procedures set forth in this Section shall be provided for use at the Annual Meeting. SECTION 4. Qualification. No director need be a resident of the State of New Hampshire, but directors must own qualifying shares of the Corporation with a fair market value at the time of such director's election of $5,000. SECTION 5. Vacancies. For a period of three years following the effective date of the Agreement and Plan of Merger by and among The Berlin City Bank, Northway Financial, Inc., Pemigewasset National Bank and Pemi Bancorp., Inc., dated as of March 14, 1997 (the "Merger Agreement"), subject to the rights, if any, of the holders of any series of Preferred Stock to elect directors and to fill vacancies in the Board of Directors relating thereto: (i) any vacancy in the Board of Directors occurring as a result of an increase in the size of the Board of Directors or the death, resignation, disqualification, or removal of a director nominated by Pemi Bancorp, Inc. pursuant to Section 1.09 of the Merger Agreement shall be filled solely by the affirmative vote of two-thirds of the remaining directors then in office, even if less than a quorum of the Board of Directors, and (ii) all other vacancies in the Board of Directors shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum of the Board of Directors. Thereafter, subject to the rights, if any, of the holders of any series of Preferred Stock to elect directors and to fill vacancies on the Board of Directors relating thereto, any and all vacancies in the Board of Directors, however occurring, including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification, or removal of a director, shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum of the Board of Directors. Any director appointed to fill a vacancy in accordance with the preceding provisions of this Section shall hold office until the next Annual Meeting and until such director's successor shall have been duly elected and qualified or until his or her earlier death, disqualification, resignation, or removal. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect directors, when the number of directors is increased or decreased, the Board of Directors shall determine the class or classes to which the increased or decreased number of directors shall be apportioned; provided, however, that no decrease in the number of directors shall shorten the term of any incumbent director. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled. The affirmative vote of two-thirds of the directors of the Corporation shall be required to amend or repeal or adopt any provision in contravention or inconsistent with clause (i) of the first sentence of this Section 5 of Article II. SECTION 6. Removal. Directors may be removed from office in the manner provided in the Articles of Incorporation. SECTION 7. Resignation. A director may resign at any time by giving written notice to the Chairman of the Board, if one is elected, the President, or the Secretary. A resignation shall be effective upon receipt, unless the resignation otherwise provides. SECTION 8. Regular Meetings. The regular annual meeting of the Board of Directors shall be held, without notice other than this Section 8, on the same date and at the same place as the Annual Meeting following the close of such meeting of shareholders. Other regular meetings of the Board of Directors may be held at such hour, date, and place as the Board of Directors may by resolution from time to time determine without notice other than such resolution. SECTION 9. Special Meetings. Special meetings of the Board of Directors may be called, orally or in writing, by or at the request of a majority of the directors, the Chairman of the Board, if one is elected, or the President. The person calling any such special meeting of the Board of Directors may fix the hour, date, and place thereof. SECTION 10. Notice of Meetings. Notice of the hour, date, and place of all special meetings of the Board of Directors shall be given to each director by the Secretary or an Assistant Secretary, or in case of the death, absence, incapacity, or refusal of such persons, by the Chairman of the Board, if one is elected, or the President or such other officer designated by the Chairman of the Board, if one is elected, or the President. Notice of any special meeting of the Board of Directors shall be given to each director in person, by telephone, or by facsimile, telex, telecopy, telegram, or other written form of electronic communication, sent to his or her business or home address, at least 24 hours in advance of the meeting, or by written notice mailed to his or her business or home address, at least 48 hours in advance of the meeting. Such notice shall be deemed to be delivered when hand delivered to such address, read to such director by telephone, deposited in the mail so addressed, with postage thereon prepaid if mailed, dispatched or transmitted if faxed, telexed or telecopied, or when delivered to the telegraph company if sent by telegram. When any Board of Directors meeting, either regular or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the hour, date, or place of any meeting adjourned for less than 30 days or of the business to be transacted thereat, other than an announcement at the meeting at which such adjournment is taken of the hour, date, and place to which the meeting is adjourned. A written waiver of notice signed before or after a meeting by a director and filed with the records of the meeting shall be deemed to be equivalent to notice of the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting at the beginning of the meeting or promptly upon his or her arrival to the transaction of any business because such meeting is not lawfully called or convened and does not thereafter vote for or assent to action taken at the meeting. Except as otherwise required by law, by the Articles of Incorporation, or by these Bylaws, neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 11. Quorum. At any meeting of the Board of Directors, a majority of the directors then in office shall constitute a quorum for the transaction of business, but if less than a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except as provided in Section 10 of this Article II. Any business which might have been transacted at the meeting as originally noticed may be transacted at such adjourned meeting at which a quorum is present. SECTION 12. Action at Meeting. At any meeting of the Board of Directors at which a quorum is present, a majority of the directors present may take any action on behalf of the Board of Directors, unless otherwise required by law, by the Articles of Incorporation, or by these Bylaws. SECTION 13. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors unanimously consent thereto in writing. Such action shall be evidenced by one or more written consents describing the action taken, signed by each director, and filed with the records of the meetings of the Board of Directors and shall be treated for all purposes as a vote at a meeting of the Board of Directors. SECTION 14. Manner of Participation. Directors may participate in meetings of the Board of Directors by means of conference telephone or similar communications equipment by means of which all directors participating in the meeting can hear each other, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for purposes of these By-laws. SECTION 15. Committees. The Board of Directors, by vote of a majority of the directors then in office, may elect from its number one or more committees, including, without limitation, an Executive Committee, a Compensation Committee, and an Audit Committee, each of which must contain two or more members, and may delegate thereto some or all of its powers except those which by law, by the Articles of Incorporation, or by these By-laws may not be delegated. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of Directors may abolish any such committee at any time. Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall report its action to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, to the extent permitted by law, but no such rescission shall have retroactive effect. SECTION 16. Compensation of Directors. Directors shall receive such compensation for their services as shall be determined by a majority of the Board of Directors provided that directors who are serving the Corporation as employees and who receive compensation for their services as such shall not receive any salary or other compensation for their services as directors of the Corporation. ARTICLE III Officers SECTION 1. Enumeration. The officers of the Corporation shall consist of a Chairman, a Vice-Chairman, a President, a Treasurer, a Secretary, and such other officers, including, without limitation, a Chairman of the Board of Directors, a Chief Executive Officer, and one or more Vice Presidents (including Executive Vice Presidents or Senior Vice Presidents), Assistant Vice Presidents, Assistant Treasurers, and Assistant Secretaries, as the Board of Directors may determine. SECTION 2. Election. At the regular annual meeting of the Board of Directors following the Annual Meeting of shareholders, the Board of Directors shall elect the President, the Treasurer, and the Secretary. Other officers may be elected by the Board of Directors at such regular annual meeting of the Board of Directors or at any other regular or special meeting. SECTION 3. Qualification. No officer need be a shareholder or a director. Any person may occupy more than one office of the Corporation at any time. Any officer may be required by the Board of Directors to give bond for the faithful performance of his or her duties in such amount and with such sureties as the Board of Directors may determine. SECTION 4. Tenure. Except as otherwise provided by the Articles of Incorporation or by these By-laws, each of the officers of the Corporation shall hold office until the regular annual meeting of the Board of Directors following the next Annual Meeting of shareholders and until his or her successor is elected and qualified or until his or her earlier death, disqualification, resignation, or removal. SECTION 5. Resignation. Any officer may resign at any time by delivering his or her written resignation to the Corporation addressed to the President or the Secretary, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. SECTION 6. Removal. Except as otherwise provided by law, the Board of Directors may remove any officer at any time with or without cause by the affirmative vote of two-thirds of the directors then in office. SECTION 7. Absence or Disability. In the event of the absence or disability of any officer, the Board of Directors may designate another officer to act temporarily in place of such absent or disabled officer. SECTION 8. Vacancies. Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors. SECTION 9. President. The President shall, subject to the direction of the Board of Directors, have general supervision and control of the Corporation's business. The President shall have such other powers and perform such other duties as the Board of Directors may from time to time designate. SECTION 10. Chairman of the Board. The Chairman of the Board, if one is elected, shall preside, when present, at all meetings of the shareholders and of the Board of Directors. The Chairman of the Board shall have such other powers and shall perform such other duties as the Board of Directors may from time to time designate. SECTION 11. Vice-Chairman of the Board. The Vice-Chairman of the Board, if one is elected, shall, in the absence of the Chairman, preside at all meetings of the shareholders and the Board of Directors. The Vice-Chairman shall perform the duties and have the powers of the President or the Chief Executive Officer if he or she is absent and shall have such other powers and shall perform such other duties as the Board of Directors may from time to time designate. The affirmative vote of two-thirds of the directors of the Corporation shall be required to amend or repeal or adopt any provision in contravention of or inconsistent with this Section 11 during the three-year period following the effective date of these By-laws. SECTION 12. Chief Executive Officer. The Chief Executive Officer, if one is elected, shall have such powers and shall perform such duties as the Board of Directors may from time to time designate. SECTION 13. Vice Presidents and Assistant Vice Presidents. Any Vice President (including any Executive Vice President or Senior Vice President) and any Assistant Vice President shall have such powers and shall perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate. SECTION 14. Treasurer and Assistant Treasurers. The Treasurer shall, subject to the direction of the Board of Directors and except as the Board of Directors or the Chief Executive Officer may otherwise provide, have general charge of the financial affairs of the Corporation and shall cause to be kept accurate books of account. The Treasurer shall have custody of all funds, securities, and valuable documents of the Corporation. He or she shall have such other duties and powers as may be designated from time to time by the Board of Directors or the Chief Executive Officer. Any Assistant Treasurer shall have such powers and perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate. SECTION 15. Secretary and Assistant Secretaries. The Secretary shall record all the proceedings of the meetings of the shareholders and the Board of Directors (including committees of the Board) in books kept for that purpose. In his or her absence from any such meeting, a temporary secretary chosen at the meeting shall record the proceedings thereof. The Secretary shall have charge of the stock ledger (which may, however, be kept by any transfer or other agent of the Corporation). The Secretary shall have custody of the seal of the Corporation, if any, and the Secretary, or an Assistant Secretary, shall have authority to affix it to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or that of an Assistant Secretary. The Secretary shall have such other duties and powers as may be designated from time to time by the Board of Directors or the Chief Executive Officer. In the absence of the Secretary, any Assistant Secretary may perform his or her duties and responsibilities. Any Assistant Secretary shall have such powers and perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate. SECTION 16. Other Powers and Duties. Subject to these By-laws and to such limitations as the Board of Directors may from time to time prescribe, the officers of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors or the Chief Executive Officer. ARTICLE IV Capital Stock SECTION 1. Certificates of Stock. Each shareholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the Chairman of the Board of Directors, the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. The Corporation seal and the signatures by the Corporation's officers, the transfer agent, or the registrar may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law. SECTION 2. Transfers. Subject to any restrictions on transfer and unless otherwise provided by the Board of Directors, shares of stock may be transferred only on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate theretofore properly endorsed or accompanied by a written assignment or power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such proof of the authenticity of signature as the Corporation or its transfer agent may reasonably require. SECTION 3. Record Holders. Except as may otherwise be required by law, by the Articles of Incorporation, or by these By-laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge, or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-laws. It shall be the duty of each shareholder to notify the Corporation of his or her post office address and any changes thereto. SECTION 4. Record Date. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than seventy days prior to such meeting or other action. If no record date is fixed: (i) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held and (ii) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 5. Replacement of Certificates. In case of the alleged loss, destruction, or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe. ARTICLE V Indemnification SECTION 1. Definitions. For purposes of this Article: (a) "Director" means an individual who is or was on the Board of Directors of the Corporation or an individual who, while a director of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee, benefit plan, or other enterprise; (b) "Disinterested Director" means, with respect to each Proceeding in respect of which indemnification is sought hereunder, a Director of the Corporation who is not and was not a Party to such Proceeding; (c) "Expenses" means all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of expert witnesses, private investigators, and professional advisors (including, without limitation, accountants and investment bankers), travel expenses, duplicating costs, printing and binding costs, costs of preparation of demonstrative evidence and other courtroom presentation aids and devices, costs incurred in connection with document review, organization, imaging, and computerization, telephone charges, postage, delivery service fees, and all other disbursements, costs, or expenses of the type customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, settling, or otherwise participating in, a Proceeding; (d) "Liability" means the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable Expenses incurred in connection with a Proceeding; (e) "Non-Officer Employee" means an individual who is or was an employee of the Corporation but who is not or was not a Director or Officer, or an individual who, while a Non-Officer Employee of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee, benefit plan, or other enterprise; (f) "Party" includes any individual who was, is, or is threatened to be made a named defendant or respondent in a Proceeding. (g) "Proceeding" means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, inquiry, investigation, administrative hearing, or other proceeding, whether civil, criminal, administrative, arbitrative, or investigative and whether formal or informal; (h) "Officer" means an individual who is or was appointed by the Board of Directors of the Corporation or an individual who, while an Officer of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee, benefit plan, or other enterprise; SECTION 2. Indemnification of Directors and Officers. Subject to the operation of Section 4 of this Article V, each Director and Officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the NHBCA, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment) against any and all Expenses and Liabilities that are incurred by such Director or Officer or on such Director or Officer's behalf in connection with any Proceeding or any claim, issue, or matter therein, which such Director or Officer is a Party to or participant in by reason of such Director or Officer's status as a Director or Officer, if such Director or Officer acted in good faith and in a manner such Director or Officer reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The rights of indemnification provided by this Section 2 shall continue as to a Director or Officer after he or she has ceased to be a Director or Officer and shall inure to the benefit of his or her heirs, executors, administrators, and personal representatives. Notwithstanding the foregoing, the Corporation shall indemnify any Director or Officer seeking indemnification in connection with a Proceeding initiated by such Director or Officer only if such Proceeding was authorized by the Board of Directors of the Corporation. SECTION 3. Indemnification of Non-Officer Employees. Subject to the operation of Section 4 of this Article V, each Non-Officer Employee may, in the discretion of the Board of Directors of the Corporation, be indemnified by the Corporation to the fullest extent authorized by the NHBCA, as the same exists or may hereafter be amended, against any or all Expenses and Liabilities that are incurred by such Non-Officer Employee or on such Non-Officer Employee's behalf in connection with any Proceeding, or any claim, issue, or matter therein, which such Non-Officer Employee is a Party to or participant in by reason of such Non-Officer Employee's status as a Non-Employee Officer, if such Non-Officer Employee acted in good faith and in a manner such Non-Officer Employee reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The rights of indemnification provided by this Section 3 shall continue as to a Non-Officer Employee after he or she has ceased to be a Non-Officer Employee and shall inure to the benefit of his or her heirs, personal representatives, executors, and administrators. Notwithstanding the foregoing, the Corporation may indemnify any Non-Officer Employee seeking indemnification in connection with a Proceeding initiated by such Non-Officer Employee only if such Proceeding was authorized by the Board of Directors of the Corporation. SECTION 4. Good Faith. Unless ordered by a court, no indemnification shall be provided pursuant to this Article V to a Director, to an Officer or to a Non-Officer Employee unless a determination shall have been made that such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal Proceeding, such person had no reasonable cause to believe his or her conduct was unlawful. Such determination shall be made by (a) a majority vote of the Disinterested Directors, even though less than a quorum of the Board of Directors, (b) if there are no such Disinterested Directors, or if a majority of Disinterested Directors so direct, by independent legal counsel in a written opinion, or (c) by the shareholders of the Corporation provided that shares owned by or voted under the control of Directors who are not Disinterested Directors may not be voted in the determination. SECTION 5. Advancement of Expenses to Directors Prior to Final Disposition. The Corporation shall advance all Expenses incurred by or on behalf of any Director in connection with any Proceeding in which such Director is involved by reason of such Director's status as a Director within ten days after the receipt by the Corporation of a written statement from such Director requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Director and shall be preceded or accompanied by (i) a written affirmation of such Director's good faith belief that such Director has met the standard of conduct set forth in Section 2 above, and (ii) a written undertaking by or on behalf of such Director to repay any Expenses so advanced if it shall ultimately be determined that such Director is not entitled to be indemnified against such Expenses. SECTION 6. Advancement of Expenses to Officers and Non-Officer Employees Prior to Final Disposition. The Corporation may, in the discretion of the Board of Directors of the Corporation, advance any or all Expenses incurred by or on behalf of any Officer or Non-Officer Employee in connection with any Proceeding in which such Officer or Non-Officer Employee is involved by reason of such Officer or Non-Officer Employee's status as an Officer or Non-Officer Employee upon the receipt by the Corporation of a statement or statements from such Officer or Non-Officer Employee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Officer or Non-Officer Employee and shall be preceded or accompanied by (i) a written affirmation of such Officer's or Non-Officer Employee's good faith belief that he or she has met the standard of conduct set forth in Section 2 or Section 3, hereof, as the case may be, and (ii) a written undertaking by or on behalf of such Officer or Non-Officer Employee to repay any Expenses so advanced if it shall ultimately be determined that such Officer or Non-Officer Employee is not entitled to be indemnified against such Expenses. SECTION 7. Contractual Nature of Rights. The foregoing provisions of this Article V shall be deemed to be a contract between the Corporation and each Director and Officer who serves in such capacity at any time while this Article V is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any Proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. If a claim for indemnification or advancement of Expenses hereunder by a Director or Officer is not paid in full by the Corporation within (a) 60 days after the Corporation's receipt of a written claim for indemnification, or (b) in the case of a Director, 10 days after the Corporation's receipt of documentation of Expenses and the required undertaking, such Director or Officer may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, such Director or Officer shall also be entitled to be paid the expenses of prosecuting such claim. The failure of the Corporation (including its Board of Directors or any committee thereof, independent legal counsel, or shareholders) to make a determination concerning the permissibility of such indemnification or, in the case of a Director, advancement of Expenses, under this Article V shall not be a defense to the action and shall not create a presumption that such indemnification or advancement is not permissible. SECTION 8. Non-Exclusivity of Rights. The rights to indemnification and advancement of Expenses set forth in this Article V shall not be exclusive of any other right which any Director, Officer, or Non-Officer Employee may have or hereafter acquire under any statute, provision of the Corporation's Articles of Incorporation, or these By-laws, or pursuant to any agreement, vote of shareholders or Disinterested Directors or otherwise. SECTION 9. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer, or Non-Officer Employee against any liability of any character asserted against or incurred by the Corporation or any such Director, Officer, or Non-Officer Employee, or arising out of any such person's status as such Director, Officer, or Non-Officer Employee, whether or not the Corporation would have the power to indemnify such person against such liability under the NHBCA or the provisions of this Article V. ARTICLE VI Miscellaneous Provisions SECTION 1. Fiscal Year. Except as otherwise determined by the Board of Directors, the fiscal year of the Corporation shall end on the last day of December of each year. SECTION 2. Seal. The Board of Directors shall have power to adopt and alter the seal of the Corporation. SECTION 3. Execution of Instruments. All deeds, leases, transfers, contracts, bonds, notes, and other obligations to be entered into by the Corporation in the ordinary course of its business without director action may be executed on behalf of the Corporation by the Chairman of the Board, if one is elected, the President, or the Treasurer or any other officer, employee, or agent of the Corporation as the Board of Directors or Executive Committee may authorize. SECTION 4. Voting of Securities. Unless the Board of Directors otherwise provides, the Chairman of the Board, if one is elected, the President, or the Treasurer may waive notice of and act on behalf of this Corporation, or appoint another person or persons to act as proxy or attorney in fact for this Corporation with or without discretionary power and/or power of substitution, at any meeting of shareholders or shareholders of any other corporation or organization, any of whose securities are held by this Corporation. SECTION 5. Resident Agent. The Board of Directors may appoint a resident agent upon whom legal process may be served in any action or proceeding against the Corporation. SECTION 6. Corporate Records. The original or attested copies of the Articles of Incorporation, By-laws, and records of all meetings of the incorporators, shareholders, and the Board of Directors and the stock transfer books, which shall contain the names of all shareholders, their record addresses, and the amount of stock held by each, may be kept outside the State of New Hampshire and shall be kept at the principal office of the Corporation and at such other place or places as may be designated from time to time by the Board of Directors. SECTION 7. Amendment of By-laws. (a) Amendment by Directors. Except as provided otherwise by law or elsewhere in these By-laws, these By-laws may be amended or repealed by the Board of Directors by the affirmative vote of a majority of the directors then in office. (b) Amendment by Shareholders. These By-laws may be amended or repealed at any Annual Meeting of shareholders, or special meeting of shareholders called for such purpose, by the affirmative vote of at least two-thirds of the shares present in person or represented by proxy at such meeting and entitled to vote on such amendment or repeal, voting together as a single class; provided, however, that if the Board of Directors recommends that shareholders approve such amendment or repeal at such meeting of shareholders, such amendment or repeal shall only require the affirmative vote of the majority of the shares present in person or represented by proxy at such meeting and entitled to vote on such amendment or repeal, voting together as a single class. Adopted September 16, 1997 and effective as of September 16, 1997. EX-10.1 3 EMPLOYMENT AGREEMENT FOR WILLIAM J. WOODWARD Exhibit 10.1 EMPLOYMENT AGREEMENT This AGREEMENT (the "Agreement") is made as of September 30, 1997 (the "Effective Date"), by and between Northway Financial, Inc., a New Hampshire chartered corporation ("Northway"), The Berlin City Bank, a New Hampshire chartered bank and wholly owned subsidiary of Northway with its principal offices located in Berlin, New Hampshire (Northway and The Berlin City Bank shall hereinafter collectively be referred to as the "Employer"), and William J. Woodward (the "Executive"). In consideration of the mutual covenants contained in this Agreement, the Employer and the Executive agree as follows: 1. Employment. The Employer agrees to employ the Executive and the Executive agrees to be employed by the Employer on the terms and conditions set forth in this Agreement. 2. Capacity. The Executive shall serve the Employer as Chairman, President and Chief Executive Officer, subject to election by the Board of Directors of Northway or The Berlin City Bank, as the case may be (the "Board of Directors"), and as a member of the Board of Directors, subject to election by the shareholders of the Employer. The Executive shall also serve the Employer in such other or additional offices as the Executive may be requested to serve by the Board of Directors. In such capacity or capacities, the Executive shall perform such services and duties in connection with the business, affairs and operations of the Employer as may be assigned or delegated to the Executive from time to time by or under the authority of the Board of Directors. 3. Term. Subject to the provisions of Section 6, the term of employment pursuant to this Agreement (the "Term") shall be for three (3) years from the Effective Date and shall be renewed automatically for periods of one (1) year commencing at the first anniversary of the Effective Date and on each subsequent anniversary thereafter, unless either the Executive or the Employer gives written notice to the other not less than sixty (60) days prior to the date of any such anniversary of such party's election not to extend the Term. 4. Compensation and Benefits. The regular compensation and benefits payable to the Executive under this Agreement shall be as follows: (a) Salary. For all services rendered by the Executive under this Agreement, the Employer shall pay the Executive a salary (the "Salary") at an annual rate consistent with the letter agreement, dated March 14, 1997, by and between Fletcher W. Adams and William J. Woodward and attached hereto as Exhibit A, subject to increase from time to time in the discretion of the Board of Directors. The Salary shall be payable in periodic installments in accordance with the Employer's usual practice for its senior executives. (b) Bonus or Similar Incentive Programs. The Executive shall be entitled to participate in any incentive or bonus program established by the Board of Directors with such terms as may be established in the sole discretion of the Board of Directors; or (c) Regular Benefits. The Executive shall also be entitled to participate in any employee benefit plans, medical insurance plans, life insurance plans, disability income plans, retirement plans, vacation plans, expense reimbursement plans and other benefit plans which the Employer may from time to time have in effect for all or most of its senior executives. Such participation shall be subject to the terms of the applicable plan documents, generally applicable policies of the Employer, applicable law and the discretion of the Board of Directors or any administrative or other committee provided for in or contemplated by any such plan. Nothing contained in this Agreement shall be construed to create any obligation on the part of the Employer to establish any such plan or to maintain the effectiveness of any such plan which may be in effect from time to time. (d) Taxation of Payments and Benefits. The Employer shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Employer to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. (e) Exclusivity of Salary and Benefits. Unless approved by the Board of Directors, the Executive shall not be entitled to any payments or benefits other than those provided under this Agreement. 5. Extent of Service. During the Executive's employment under this Agreement, the Executive shall, subject to the direction and supervision of the Board of Directors, devote the Executive's, best efforts and business judgment, skill and knowledge to the advancement of the Employer's interests and to the discharge of the Executive's duties and responsibilities under this Agreement. The Executive shall not engage in any other business activity, except as may be approved by the Board of Directors; provided that nothing in this Agreement shall be construed as preventing the Executive from: (a) investing the Executive's assets in any company or other entity in a manner not prohibited by Section 7(d) and in such form or manner as shall not require any material activities on the Executive's part in connection with the operations or affairs of the companies or other entities in which such investments are made; or (b) engaging in religious, charitable or other community or non-profit activities that do not impair the Executive's ability to fulfill the Executive's duties and responsibilities under this Agreement; or (c) continuing to advise and consult regularly the activities of Vaillancourt & Woodward, Inc. in his current positions with the same, provided that such advice and consultation does not unreasonably interfere with the performance of the Executive's duties hereunder. 6. Termination and Termination Benefits. Notwithstanding the provisions of Section 3, the Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 6. (a) Termination by the Employer for Cause. The Executive's employment under this Agreement may be terminated for cause without further liability on the part of the Employer effective immediately upon a two-thirds (2/3) vote of the Board of Directors and written notice to the Executive. Only the following shall constitute "cause" for such termination: (i) dishonest statements or acts of the Executive with respect to the business of the Employer or any affiliate of the Employer; (ii) the commission by or indictment of the Executive for (A) a felony or (B) any misdemeanor involving moral turpitude, deceit, dishonesty or fraud ("indictment," for these purposes, meaning an indictment, probable cause hearing or any other procedure pursuant to which an initial determination of probable or reasonable cause with respect to such offense is made); (iii) material failure to perform to the reasonable satisfaction of the Board of Directors a substantial portion of the Executive's duties and responsibilities assigned or delegated under this Agreement, which failure continues, in the reasonable judgment of the Board of Directors, for sixty (60) days after written notice given to the Executive by the Board of Directors; (iv) gross negligence, willful misconduct or insubordination of the Executive with respect to the Employer or any affiliate of the Employer; or (v) material breach by the Executive of any of the Executive's obligations under this Agreement. (b) Termination by the Executive. The Executive's employment under this Agreement may be terminated by the Executive by written notice to the Board of Directors at least thirty (30) days prior to such termination. (c) Termination by the Employer Without Cause. Subject to the payment of Termination Benefits pursuant to Section 6(d), the Executive's employment under this Agreement may be terminated by the Employer without cause upon written notice to the Executive by a two-thirds (2/3) vote of the Board of Directors. (d) Certain Termination Benefits. Unless otherwise specifically provided in this Agreement or otherwise required by law, all compensation and benefits payable to the Executive under this Agreement shall terminate on the date of termination of the Executive's employment under this Agreement. Notwithstanding the foregoing, in the event of termination of the Executive's employment with the Employer pursuant to Section 6(c) above, the Employer shall provide to the Executive the following termination benefits ("Termination Benefits"): (i) continuation of the Executive's Salary at the rate then in effect pursuant to Section 4(a); and (ii) continuation of group health plan benefits to the extent authorized by and consistent with 29 U.S.C. ss. 1161 et seq. (commonly known as "COBRA"), with the cost of the regular premium for such benefits shared in the same relative proportion by the Employer and the Executive as in effect on the date of termination. The Termination Benefits set forth in (i) and (ii) above shall continue effective until the expiration of the Term; provided that in the event that the Executive commences any employment or self-employment during the period during which the Executive is entitled to receive Termination Benefits (the "Termination Benefits Period"), the remaining amount of Salary due pursuant to Section 6(d)(i) for the period from the commencement of such employment (other than in connection with the activities of Vaillancourt & Woodward, Inc.) or self-employment to the end of the Termination Benefits Period shall be reduced by one-half of the salary the Executive receives from such employment or self-employment and, if the Executive receives benefits from such employment or self-employment comparable to those benefits provided by the Employer, the payments provided under Section 6(d)(ii) shall cease effective as of the date of commencement of such employment or self-employment. The Employer's liability for Salary continuation pursuant to Section 6(d)(i) shall be reduced by the amount of any severance pay due or otherwise paid to the Executive pursuant to any severance pay plan or stay bonus plan of the Employer. Notwithstanding the foregoing, nothing in this Section 6(d) shall be construed to affect the Executive's right to receive COBRA continuation entirely at the Executive's own cost to the extent that the Executive may continue to be entitled to COBRA continuation after the Executive's right to cost sharing under Section 6(d)(ii) ceases. The Executive shall be obligated to give prompt notice of the date of commencement of any employment or self-employment during the Termination Benefits Period and shall respond promptly to any reasonable inquiries concerning any employment or self-employment in which the Executive engages during the Termination Benefits Period. (e) Disability. If the Executive shall be disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions under this Agreement with or without reasonable accommodation, the Board of Directors of Northway by a two-thirds (2/3) vote may remove the Executive from any responsibilities and/or reassign the Executive to another position with the Employer for the remainder of the Term or during the period of such disability. Notwithstanding any such removal or reassignment, the Executive shall continue to receive the Executive's full Salary (less any disability pay or sick pay benefits to which the Executive may be entitled under the Employer's policies) and benefits under Section 4 of this Agreement (except to the extent that the Executive may be ineligible for one or more such benefits under applicable plan terms) for a period of time equal to the lesser of (i) one (1) year; or (ii) the remainder of the Term. If any question shall arise as to whether during any period the Executive is disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions with or without reasonable accommodation, the Executive may, and at the request of the Employer shall, submit to the Employer a certification in reasonable detail by a physician selected by the Employer to whom the Executive or the Executive's guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Employer's determination of such issue shall be binding on the Executive. Nothing in this Section 6(e) shall be construed to waive the Executive's rights, if any, under existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. ss.2601 et seq. and the Americans with Disabilities Act, 42 U.S.C. ss.12101 et seq. (f) Termination Following a Change of Control. If there is a Change of Control, as defined in Section 6(f)(i) below, during the Term, the provisions of this Section 6(f) shall apply and shall continue to apply throughout the remainder of the term of this Agreement. If, within eighteen (18) months following a Change of Control, the Executive's employment is terminated by the Employer or the Executive following the occurrence of any of the events listed in Section 6(f)(ii) below or if the Executive's employment is terminated without cause (in accordance with Section 6(c) above), in lieu of any payments under Section 6(d) above, the Employer shall pay to the Executive (or the Executive's estate, if applicable) a lump sum amount equal to 2.99 times the Executive's "base amount" within the meaning of Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). (i) Change of Control shall mean the occurrence of one or more of the following events: (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) (other than the Employer, any trustee or other fiduciary holding securities under an employee benefit plan of the Employer, or any corporation owned, directly or indirectly, by the stockholders of the Employer, in substantially the same proportions as their ownership of stock of Northway), directly or indirectly, of securities of Northway, representing fifty percent (50%) or more of the combined voting power of Northway's then outstanding securities; or (B) persons who, as of the Effective Date, constituted Northway's Board of Directors (the "Incumbent Board") cease for any reason including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of Northway's Board of Directors, provided that any person becoming a director of Northway subsequent to the Effective Date whose election was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Section 6(f), be considered a member of the Incumbent Board; or (C) the stockholders of Northway approve a merger or consolidation of Northway with any other corporation or other entity, other than (1) a merger or consolidation which would result in the voting securities of Northway outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of Northway or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of Northway (or similar transaction) in which no "person" (as hereinabove defined) acquires more than fifty percent (50%) of the combined voting power of Northway's then outstanding securities; or (D) the stockholders of Northway approve a plan of complete liquidation of Northway or an agreement for the sale or disposition by Northway of all or substantially all of Northway's assets. (ii) The events referred to in Section 6(f) above shall be as follows: (A) a reduction of the Executive's salary other than a reduction that (1) is based on the Employer's financial performance or (2) is similar to the reduction made to the salaries provided to all or most other senior executives of the Employer; or (B) a significant change in the Executive's responsibilities and/or duties which constitutes, when compared to the Executive's responsibilities and/or duties before the Change of Control, a demotion; or (C) a material loss of title or office; or (D) the relocation of the offices at which the Executive is principally employed as of the Change of Control to a location more than fifty (50) miles from such offices, which relocation is not approved by the Executive. (iii) The Executive shall provide the Employer with reasonable notice and an opportunity to cure any of the events listed in Section 6(f)(ii) and shall not be entitled to compensation pursuant to this Section 6(f) unless the Employer fails to cure within a reasonable period; and (iv) It is the intention of the Executive and of the Employer that no payments by the Employer to or for the benefit of the Executive under this Agreement or any other agreement or plan, if any, pursuant to which the Executive is entitled to receive payments or benefits shall be nondeductible to the Employer by reason of the operation of Section 280G of the Code relating to parachute payments or any like statutory or regulatory provision. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G or any like statutory or regulatory provision, any such payments exceed the amount which can be deducted by the Employer, such payments shall be reduced to the maximum amount which can be deducted by the Employer. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Employer with interest thereon at the applicable Federal rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be nondeductible to the Employer by reason of the operation of said Section 280G or any like statutory or regulatory provision. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G or any like statutory or regulatory provision, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five (45) days after the Employer has given notice of the need for such reduction, the Employer may determine the method of such reduction in its sole discretion. 7. Confidential Information, Noncompetition and Cooperation. (a) Confidential Information. As used in this Agreement, "Confidential Information" means information belonging to the Employer which is of value to the Employer in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Employer. Confidential Information includes, without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Employer. Confidential Information includes information developed by the Executive in the course of the Executive's employment by the Employer, as well as other information to which the Executive may have access in connection with the Executive's employment. Confidential Information also includes the confidential information of others with which the Employer has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of the Executive's duties under Section 7(b). (b) Confidentiality. The Executive understands and agrees that the Executive's employment creates a relationship of confidence and trust between the Executive and the Employer with respect to all Confidential Information. At all times, both during the Executive's employment with the Employer and after its termination, the Executive will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Employer, except as may be necessary in the ordinary course of performing the Executive's duties to the Employer. (c) Documents, Records, etc. All documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, which are furnished to the Executive by the Employer or are produced by the Executive in connection with the Executive's employment will be and remain the sole property of the Employer. The Executive will return to the Employer all such materials and property as and when requested by the Employer. In any event, the Executive will return all such materials and property immediately upon termination of the Executive's employment for any reason. The Executive will not retain with the Executive any such material or property or any copies thereof after such termination. (d) Noncompetition and Nonsolicitation. During the Term and for one (1) year thereafter (or during the Termination Benefits Period, if longer), the Executive (i) will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate, assist or invest in any Competing Business (as hereinafter defined); (ii) will refrain from directly or indirectly employing, attempting to employ, recruiting or otherwise soliciting, inducing or influencing any person to leave employment with the Employer (other than terminations of employment of subordinate employees undertaken in the course of the Executive's employment with the Employer); and (iii) will refrain from soliciting or encouraging any customer or supplier to terminate or otherwise modify adversely its business relationship with the Employer; provided, however, that the foregoing one-year restriction shall not apply in the event the Executive's employment under this Agreement is terminated pursuant to Section 6(c) hereof. The Executive understands that the restrictions set forth in this Section 7(d) are intended to protect the Employer's interest in its Confidential Information and established employee, customer and supplier relationships and goodwill, and agrees that such restrictions are reasonable and appropriate for this purpose. For purposes of this Agreement, the term "Competing Business" shall mean a business (other than Vaillancourt & Woodward, Inc.) conducted anywhere in the State of New Hampshire which is competitive with any business which the Employer or any of its affiliates conducts or proposes to conduct at any time during the employment of the Executive. Notwithstanding the foregoing, the Executive may own up to one percent (1%) of the outstanding stock of a publicly held corporation which constitutes or is affiliated with a Competing Business. (e) Third-Party Agreements and Rights. The Executive hereby confirms that the Executive is not bound by the terms of any agreement with any previous employer or other party which restricts in any way the Executive's use or disclosure of information or the Executive's engagement in any business. The Executive represents to the Employer that the Executive's execution of this Agreement, the Executive's employment with the Employer and the performance of the Executive's proposed duties for the Employer will not violate any obligations the Executive may have to any such previous employer or other party. In the Executive's work for the Employer, the Executive will not disclose or make use of any information in violation of any agreements with or rights of any such previous employer or other party, and the Executive will not bring to the premises of the Employer any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. (f) Litigation and Regulatory Cooperation. During and after the Executive's employment, the Executive shall cooperate fully with the Employer in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Employer which relate to events or occurrences that transpired while the Executive was employed by the Employer. The Executive's full cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Employer at mutually convenient times. During and after the Executive's employment, the Executive also shall cooperate fully with the Employer in connection with any investigation or review of any federal, state or local regulatory authority as any such investigation or review relates to events or occurrences that transpired while the Executive was employed by the Employer. The Employer shall reimburse the Executive for any reasonable out-of-pocket expenses incurred in connection with the Executive's performance of obligations pursuant to this Section 7(f). (g) Injunction. The Executive agrees that it would be difficult to measure any damages caused to the Employer which might result from any breach by the Executive of the promises set forth in this Section 7, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, subject to Section 8 of this Agreement, the Executive agrees that if the Executive breaches, or proposes to breach, any portion of this Agreement, the Employer shall be entitled, in addition to all other remedies that it may have, to an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage to the Employer. 8. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof or otherwise arising out of the Executive's employment or the termination of that employment (including, without limitation, any claims of unlawful employment discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such an agreement, under the auspices of the American Arbitration Association ("AAA") in Boston, Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA, including, but not limited to, the rules and procedures applicable to the selection of arbitrators, except that the arbitrator shall apply the law as established by decisions of the U.S. Supreme Court, the Court of Appeals for the First Circuit and the U.S. District Court for the District of New Hampshire in deciding the merits of claims and defenses under federal law or any state or federal anti-discrimination law, and any awards to the Executive for violation of any anti-discrimination law shall not exceed the maximum award to which the Executive could be entitled under the applicable (or most analogous) federal anti-discrimination or civil rights laws. In the event that any person or entity other than the Executive or the Employer may be a party with regard to any such controversy or claim, such controversy or claim shall be submitted to arbitration subject to such other person or entity's agreement. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This Section 8 shall be specifically enforceable. Notwithstanding the foregoing, this Section 8 shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a preliminary injunction in circumstances in which such relief is appropriate; provided that any other relief shall be pursued through an arbitration proceeding pursuant to this Section 8. 9. Consent to Jurisdiction. To the extent that any court action is permitted consistent with or to enforce Section 8 of this Agreement, the parties hereby consent to the jurisdiction of the Superior Court of the State of New Hampshire and the United States District Court for the District of New Hampshire. Accordingly, with respect to any such court action, the Executive (a) submits to the personal jurisdiction of such courts; (b) consents to service of process; and (c) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction or service of process. 10. Integration. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties with respect to any related subject matter. 11. Assignment; Successors and Assigns, etc. Neither the Employer nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided that the Employer may assign its rights under this Agreement without the consent of the Executive in the event that the Employer shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity, or transfer all or substantially all of its properties or assets to any other corporation, partnership, organization or other entity. This Agreement shall inure to the benefit of and be binding upon the Employer and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. 12. Enforceability. If any portion or provision of this Agreement (including, without limitation, any portion or provision of any section of this Agreement) shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 13. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 14. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally recognized overnight courier service or by registered or certified mail, postage prepaid, return receipt requested, to the Executive at the last address the Executive has filed in writing with the Employer or, in the case of the Employer, at its main offices, attention of the Board of Directors, and shall be effective on the date of delivery in person or by courier or three (3) days after the date mailed. 15. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Employer. 16. Governing Law. This is a New Hampshire contract and shall be construed under and be governed in all respects by the laws of the State of New Hampshire, without giving effect to the conflict of laws principles of such State. 17. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute one and the same document. (The rest of this page is left intentionally blank) CONFIDENTIAL AND NOT FOR DISTRIBUTION FOR CLIENT USE ONLY MEMORANDUM TO: TA Associates, Inc. FROM: John LeClaire, John Egan, Kevin Dennis and Jeff Hadden GPH Private Equity/Emerging Companies Group RE: Leveraged Recaps DATE: March 24, 1998 ----------------------------------------- Many of our recent private equity transactions have involved leveraged recap transaction structures. This memorandum summarizes the principles that have emerged as the guidelines for structuring these transactions. It is envisioned that we will supplement these guidelines as appropriate based on future transaction experience.1 ANALYTICAL FRAMEWORK Leveraged recap accounting is related to the SEC's rules for so called "push-down" accounting (SAB Topic 5J). These rules require that an acquiror "push-down" purchase accounting to the financial statements of its target when the acquiror purchases "substantially all" of the target's stock in a purchase transaction. This results in a new basis in the target's assets, the elimination of the target's retained earnings, and in most cases the addition of goodwill to the target's books. This goodwill reduces the target's future reported earnings for GAAP purposes. Conversely, leveraged recap accounting will apply, and goodwill on the target's balance sheet will be avoided, when pre-transaction stockholders continue to maintain a significant interest following the transaction as "substantial investors." IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Employer, by its duly authorized officer, and by the Executive, as of the Effective Date. NORTHWAY FINANCIAL, INC. Attest: By: /s/ David J. O'Connor By: /s/ Fletcher W. Adams ------------------------------- --------------------------- Name: David J. O'Connor Name: Fletcher W. Adams Title: Executive Vice President Title: Vice Chairman and Chief Financial Officer THE BERLIN CITY BANK Attest: By: /s/ David J. O'Connor By: /s/ William J. Woodward ------------------------------- --------------------------- Name: David J. O'Connor Name: William J. Woodward Title: Executive Vice President Title: President and Chief and Chief Financial Officer Executive Officer EMPLOYEE /s/ William J. Woodward --------------------------- William J. Woodward EX-10.2 4 EMPLOYMENT AGREEMENT FOR FLETCHER W. ADAMS Exhibit 10.2 EMPLOYMENT AGREEMENT This AGREEMENT (the "Agreement") is made as of September 30, 1997 (the "Effective Date"), by and between Northway Financial, Inc., a New Hampshire chartered corporation ("Northway"), Pemigewasset National Bank, a national bank and wholly owned subsidiary of Northway with its principal office located in New Hampshire (Northway and Pemigewasset National Bank shall hereinafter collectively be referred to as the "Employer"), and Fletcher W. Adams (the "Executive"). In consideration of the mutual covenants contained in this Agreement, the Employer and the Executive agree as follows: 1. Employment. The Employer agrees to employ the Executive and the Executive agrees to be employed by the Employer on the terms and conditions set forth in this Agreement. 2. Capacity. The Executive shall serve Northway as Vice Chairman and Pemigewasset National Bank as President and Chief Executive Officer subject to election by the Board of Directors of Northway or Pemigewasset National Bank, as the case may be (the "Board of Directors"), and as a member of the Board of Directors, subject to election by the shareholders of Northway and Pemigewasset National Bank respectively. The Executive shall also serve the Employer in such other or additional offices as the Executive may be requested to serve by the Chief Executive Officer of Northway or the Board of Directors. In such capacity or capacities, the Executive shall perform such services and duties from Employer's Plymouth, New Hampshire office in connection with the business, affairs and operations of the Employer as may be assigned or delegated to the Executive from time to time by or under the authority of the Chief Executive Officer of Northway or the Board of Directors. 3. Term. Subject to the provisions of Section 6, the term of employment pursuant to this Agreement (the "Term") shall be for three (3) years from the Effective Date and shall be renewed automatically for periods of one (1) year commencing at the first anniversary of the Effective Date and on each subsequent anniversary thereafter, unless either the Executive or the Employer gives written notice to the other not less than sixty (60) days prior to the date of any such anniversary of such party's election not to extend the Term. 4. Compensation and Benefits. The regular compensation and benefits payable to the Executive under this Agreement shall be as follows: (a) Salary. For all services rendered by the Executive under this Agreement, the Employer shall pay the Executive a salary (the "Salary") at an annual rate consistent with the letter agreement, dated March 14, 1997, by and between Fletcher W. Adams and William J. Woodward and attached hereto as Exhibit A, subject to increase from time to time in the discretion of the Board of Directors. The Salary shall be payable in periodic installments in accordance with the Employer's usual practice for its senior executives. (b) Bonus or Similar Incentive Programs. The Executive shall be entitled to participate in any incentive or bonus program established by the Board of Directors with such terms as may be established in the sole discretion of the Board of Directors. (c) Regular Benefits. The Executive shall also be entitled to participate in any employee benefit plans, medical insurance plans, life insurance plans, disability income plans, retirement plans, vacation plans, expense reimbursement plans and other benefit plans which the Employer may from time to time have in effect for all or most of its senior executives. Such participation shall be subject to the terms of the applicable plan documents, generally applicable policies of the Employer, applicable law and the discretion of the Board of Directors or any administrative or other committee provided for in or contemplated by any such plan. Nothing contained in this Agreement shall be construed to create any obligation on the part of the Employer to establish any such plan or to maintain the effectiveness of any such plan which may be in effect from time to time. (d) Taxation of Payments and Benefits. The Employer shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Agreement to the extent that it reasonably and in good faith believes that it is required to make such deductions, withholdings and tax reports. Payments under this Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Agreement shall be construed to require the Employer to make any payments to compensate the Executive for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. (e) Exclusivity of Salary and Benefits. Unless approved by the Board of Directors, the Executive shall not be entitled to any payments or benefits other than those provided under this Agreement. 5. Extent of Service. During the Executive's employment under this Agreement, the Executive shall, subject to the direction and supervision of the Chief Executive Officer of Northway or the Board of Directors, devote the Executive's, best efforts and business judgment, skill and knowledge to the advancement of the Employer's interests and to the discharge of the Executive's duties and responsibilities under this Agreement. The Executive shall not engage in any other business activity, except as may be approved by the Board of Directors; provided that nothing in this Agreement shall be construed as preventing the Executive from: (a) investing the Executive's assets in any company or other entity in a manner not prohibited by Section 7(d) and in such form or manner as shall not require any material activities on the Executive's part in connection with the operations or affairs of the companies or other entities in which such investments are made; or (b) engaging in religious, charitable or other community or non-profit activities that do not impair the Executive's ability to fulfill the Executive's duties and responsibilities under this Agreement. 6. Termination and Termination Benefits. Notwithstanding the provisions of Section 3, the Executive's employment under this Agreement shall terminate under the following circumstances set forth in this Section 6. (a) Termination by the Employer for Cause. The Executive's employment under this Agreement may be terminated for cause without further liability on the part of the Employer effective immediately upon a two-thirds (2/3) vote of the Board of Directors and written notice to the Executive. Only the following shall constitute "cause" for such termination: (i) dishonest statements or acts of the Executive with respect to the business of the Employer or any affiliate of the Employer; (ii) the commission by or indictment of the Executive for (A) a felony or (B) any misdemeanor involving moral turpitude, deceit, dishonesty or fraud ("indictment," for these purposes, meaning an indictment, probable cause hearing or any other procedure pursuant to which an initial determination of probable or reasonable cause with respect to such offense is made); (iii) material failure to perform to the reasonable satisfaction of the Board of Directors a substantial portion of the Executive's duties and responsibilities assigned or delegated under this Agreement, which failure continues, in the reasonable judgment of the Board of Directors, for sixty (60) days after written notice given to the Executive by the Board of Directors; (iv) gross negligence, willful misconduct or insubordination of the Executive with respect to the Employer or any affiliate of the Employer; or (v) material breach by the Executive of any of the Executive's obligations under this Agreement. (b) Termination by the Executive. The Executive's employment under this Agreement may be terminated by the Executive by written notice to the Board of Directors at least thirty (30) days prior to such termination. (c) Termination by the Employer Without Cause. Subject to the payment of Termination Benefits pursuant to Section 6(d), the Executive's employment under this Agreement may be terminated by the Employer without cause upon written notice to the Executive by a two-thirds (2/3) vote of the Board of Directors. (d) Certain Termination Benefits. Unless otherwise specifically provided in this Agreement or otherwise required by law, all compensation and benefits payable to the Executive under this Agreement shall terminate on the date of termination of the Executive's employment under this Agreement. Notwithstanding the foregoing, in the event of termination of the Executive's employment with the Employer pursuant to Section 6(c) above, the Employer shall provide to the Executive the following termination benefits ("Termination Benefits"): (i) continuation of the Executive's Salary at the rate then in effect pursuant to Section 4(a); and (ii) continuation of group health plan benefits to the extent authorized by and consistent with 29 U.S.C. ss. 1161 et seq. (commonly known as "COBRA"), with the cost of the regular premium for such benefits shared in the same relative proportion by the Employer and the Executive as in effect on the date of termination. The Termination Benefits set forth in (i) and (ii) above shall continue effective until the expiration of the Term; provided that in the event that the Executive commences any employment or self-employment during the period during which the Executive is entitled to receive Termination Benefits (the "Termination Benefits Period"), the remaining amount of Salary due pursuant to Section 6(d)(i) for the period from the commencement of such employment or self-employment to the end of the Termination Benefits Period shall be reduced by one-half of the salary the Executive receives from such employment or self- employment and, if the Executive receives benefits from such employment or self- employment comparable to those benefits provided by the Employer, the payments provided under Section 6(d)(ii) shall cease effective as of the date of commencement of such employment or self-employment. The Employer's liability for Salary continuation pursuant to Section 6(d)(i) shall be reduced by the amount of any severance pay due or otherwise paid to the Executive pursuant to any severance pay plan or stay bonus plan of the Employer. Notwithstanding the foregoing, nothing in this Section 6(d) shall be construed to affect the Executive's right to receive COBRA continuation entirely at the Executive's own cost to the extent that the Executive may continue to be entitled to COBRA continuation after the Executive's right to cost sharing under Section 6(d)(ii) ceases. The Executive shall be obligated to give prompt notice of the date of commencement of any employment or self-employment during the Termination Benefits Period and shall respond promptly to any reasonable inquiries concerning any employment or self-employment in which the Executive engages during the Termination Benefits Period. (e) Disability. If the Executive shall be disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions under this Agreement with or without reasonable accommodation, the Board of Directors of Northway by a two-thirds (2/3) vote may remove the Executive from any responsibilities and/or reassign the Executive to another position with the Employer for the remainder of the Term or during the period of such disability. Notwithstanding any such removal or reassignment, the Executive shall continue to receive the Executive's full Salary (less any disability pay or sick pay benefits to which the Executive may be entitled under the Employer's policies) and benefits under Section 4 of this Agreement (except to the extent that the Executive may be ineligible for one or more such benefits under applicable plan terms) for a period of time equal to the lesser of (i) one (1) year; or (ii) the remainder of the Term. If any question shall arise as to whether during any period the Executive is disabled so as to be unable to perform the essential functions of the Executive's then existing position or positions with or without reasonable accommodation, the Executive may, and at the request of the Employer shall, submit to the Employer a certification in reasonable detail by a physician selected by the Employer to whom the Executive or the Executive's guardian has no reasonable objection as to whether the Executive is so disabled or how long such disability is expected to continue, and such certification shall for the purposes of this Agreement be conclusive of the issue. The Executive shall cooperate with any reasonable request of the physician in connection with such certification. If such question shall arise and the Executive shall fail to submit such certification, the Employer's determination of such issue shall be binding on the Executive. Nothing in this Section 6(e) shall be construed to waive the Executive's rights, if any, under existing law including, without limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. ss.2601 et seq. and the Americans with Disabilities Act, 42 U.S.C. ss.12101 et seq. (f) Termination Following a Change of Control. If there is a Change of Control, as defined in Section 6(f)(i) below, during the Term, the provisions of this Section 6(f) shall apply and shall continue to apply throughout the remainder of the term of this Agreement. If, within eighteen (18) months following a Change of Control, the Executive's employment is terminated by the Employer or the Executive following the occurrence of any of the events listed in Section 6(f)(ii) below or if the Executive's employment is terminated without cause (in accordance with Section 6(c) above), in lieu of any payments under Section 6(d) above, the Employer shall pay to the Executive (or the Executive's estate, if applicable) a lump sum amount equal to 2.99 times the Executive's "base amount" within the meaning of Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). (i) Change of Control shall mean the occurrence of one or more of the following events: (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) (other than the Employer, any trustee or other fiduciary holding securities under an employee benefit plan of the Employer, or any corporation owned, directly or indirectly, by the stockholders of the Employer, in substantially the same proportions as their ownership of stock of Northway), directly or indirectly, of securities of Northway, representing fifty percent (50%) or more of the combined voting power of Northway's then outstanding securities; or (B) persons who, as of the Effective Date, constituted Northway's Board of Directors (the "Incumbent Board") cease for any reason including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of Northway's Board of Directors, provided that any person becoming a director of Northway subsequent to the Effective Date whose election was approved by at least a majority of the directors then comprising the Incumbent Board shall, for purposes of this Section 6(f), be considered a member of the Incumbent Board; or (C) the stockholders of Northway approve a merger or consolidation of Northway with any other corporation or other entity, other than (1) a merger or consolidation which would result in the voting securities of Northway outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of Northway or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of Northway (or similar transaction) in which no "person" (as hereinabove defined) acquires more than fifty percent (50%) of the combined voting power of Northway's then outstanding securities; or (D) the stockholders of Northway approve a plan of complete liquidation of Northway or an agreement for the sale or disposition by Northway of all or substantially all of Northway's assets. (ii) The events referred to in Section 6(f) above shall be as follows: (A) a reduction of the Executive's salary other than a reduction that (1) is based on the Employer's financial performance or (2) is similar to the reduction made to the salaries provided to all or most other senior executives of the Employer; or (B) a significant change in the Executive's responsibilities and/or duties which constitutes, when compared to the Executive's responsibilities and/or duties before the Change of Control, a demotion; or (C) a material loss of title or office; or (D) the relocation of the offices at which the Executive is principally employed as of the Change of Control to a location more than fifty (50) miles from such offices, which relocation is not approved by the Executive. (iii) The Executive shall provide the Employer with reasonable notice and an opportunity to cure any of the events listed in Section 6(f)(ii) and shall not be entitled to compensation pursuant to this Section 6(f) unless the Employer fails to cure within a reasonable period; and (iv) It is the intention of the Executive and of the Employer that no payments by the Employer to or for the benefit of the Executive under this Agreement or any other agreement or plan, if any, pursuant to which the Executive is entitled to receive payments or benefits shall be nondeductible to the Employer by reason of the operation of Section 280G of the Code relating to parachute payments or any like statutory or regulatory provision. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G or any like statutory or regulatory provision, any such payments exceed the amount which can be deducted by the Employer, such payments shall be reduced to the maximum amount which can be deducted by the Employer. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Employer with interest thereon at the applicable Federal rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be nondeductible to the Employer by reason of the operation of said Section 280G or any like statutory or regulatory provision. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G or any like statutory or regulatory provision, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five (45) days after the Employer has given notice of the need for such reduction, the Employer may determine the method of such reduction in its sole discretion. 7. Confidential Information, Noncompetition and Cooperation. (a) Confidential Information. As used in this Agreement, "Confidential Information" means information belonging to the Employer which is of value to the Employer in the course of conducting its business and the disclosure of which could result in a competitive or other disadvantage to the Employer. Confidential Information includes, without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the management of the Employer. Confidential Information includes information developed by the Executive in the course of the Executive's employment by the Employer, as well as other information to which the Executive may have access in connection with the Executive's employment. Confidential Information also includes the confidential information of others with which the Employer has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of the Executive's duties under Section 7(b). (b) Confidentiality. The Executive understands and agrees that the Executive's employment creates a relationship of confidence and trust between the Executive and the Employer with respect to all Confidential Information. At all times, both during the Executive's employment with the Employer and after its termination, the Executive will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Employer, except as may be necessary in the ordinary course of performing the Executive's duties to the Employer. (c) Documents, Records, etc. All documents, records, data, apparatus, equipment and other physical property, whether or not pertaining to Confidential Information, which are furnished to the Executive by the Employer or are produced by the Executive in connection with the Executive's employment will be and remain the sole property of the Employer. The Executive will return to the Employer all such materials and property as and when requested by the Employer. In any event, the Executive will return all such materials and property immediately upon termination of the Executive's employment for any reason. The Executive will not retain with the Executive any such material or property or any copies thereof after such termination. (d) Noncompetition and Nonsolicitation. During the Term and for one (1) year thereafter (or during the Termination Benefits Period, if longer), the Executive (i) will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate, assist or invest in any Competing Business (as hereinafter defined); (ii) will refrain from directly or indirectly employing, attempting to employ, recruiting or otherwise soliciting, inducing or influencing any person to leave employment with the Employer (other than terminations of employment of subordinate employees undertaken in the course of the Executive's employment with the Employer); and (iii) will refrain from soliciting or encouraging any customer or supplier to terminate or otherwise modify adversely its business relationship with the Employer; provided, however, that the foregoing one-year restriction shall not apply in the event the Executive's employment under this Agreement is terminated pursuant to Section 6(c) hereof. The Executive understands that the restrictions set forth in this Section 7(d) are intended to protect the Employer's interest in its Confidential Information and established employee, customer and supplier relationships and goodwill, and agrees that such restrictions are reasonable and appropriate for this purpose. For purposes of this Agreement, the term "Competing Business" shall mean a business conducted anywhere in the State of New Hampshire which is competitive with any business which the Employer or any of its affiliates conducts or proposes to conduct at any time during the employment of the Executive. Notwithstanding the foregoing, the Executive may own up to one percent (1%) of the outstanding stock of a publicly held corporation which constitutes or is affiliated with a Competing Business. (e) Third-Party Agreements and Rights. The Executive hereby confirms that the Executive is not bound by the terms of any agreement with any previous employer or other party which restricts in any way the Executive's use or disclosure of information or the Executive's engagement in any business. The Executive represents to the Employer that the Executive's execution of this Agreement, the Executive's employment with the Employer and the performance of the Executive's proposed duties for the Employer will not violate any obligations the Executive may have to any such previous employer or other party. In the Executive's work for the Employer, the Executive will not disclose or make use of any information in violation of any agreements with or rights of any such previous employer or other party, and the Executive will not bring to the premises of the Employer any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. (f) Litigation and Regulatory Cooperation. During and after the Executive's employment, the Executive shall cooperate fully with the Employer in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of the Employer which relate to events or occurrences that transpired while the Executive was employed by the Employer. The Executive's full cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of the Employer at mutually convenient times. During and after the Executive's employment, the Executive also shall cooperate fully with the Employer in connection with any investigation or review of any federal, state or local regulatory authority as any such investigation or review relates to events or occurrences that transpired while the Executive was employed by the Employer. The Employer shall reimburse the Executive for any reasonable out-of-pocket expenses incurred in connection with the Executive's performance of obligations pursuant to this Section 7(f). (g) Injunction. The Executive agrees that it would be difficult to measure any damages caused to the Employer which might result from any breach by the Executive of the promises set forth in this Section 7, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, subject to Section 8 of this Agreement, the Executive agrees that if the Executive breaches, or proposes to breach, any portion of this Agreement, the Employer shall be entitled, in addition to all other remedies that it may have, to an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage to the Employer. 8. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof or otherwise arising out of the Executive's employment or the termination of that employment (including, without limitation, any claims of unlawful employment discrimination whether based on age or otherwise) shall, to the fullest extent permitted by law, be settled by arbitration in any forum and form agreed upon by the parties or, in the absence of such an agreement, under the auspices of the American Arbitration Association ("AAA") in Boston, Massachusetts in accordance with the Employment Dispute Resolution Rules of the AAA, including, but not limited to, the rules and procedures applicable to the selection of arbitrators, except that the arbitrator shall apply the law as established by decisions of the U.S. Supreme Court, the Court of Appeals for the First Circuit and the U.S. District Court for the District of New Hampshire in deciding the merits of claims and defenses under federal law or any state or federal anti-discrimination law, and any awards to the Executive for violation of any anti-discrimination law shall not exceed the maximum award to which the Executive could be entitled under the applicable (or most analogous) federal anti-discrimination or civil rights laws. In the event that any person or entity other than the Executive or the Employer may be a party with regard to any such controversy or claim, such controversy or claim shall be submitted to arbitration subject to such other person or entity's agreement. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. This Section 8 shall be specifically enforceable. Notwithstanding the foregoing, this Section 8 shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a preliminary injunction in circumstances in which such relief is appropriate; provided that any other relief shall be pursued through an arbitration proceeding pursuant to this Section 8. 9. Consent to Jurisdiction. To the extent that any court action is permitted consistent with or to enforce Section 8 of this Agreement, the parties hereby consent to the jurisdiction of the Superior Court of the State of New Hampshire and the United States District Court for the District of New Hampshire. Accordingly, with respect to any such court action, the Executive (a) submits to the personal jurisdiction of such courts; (b) consents to service of process; and (c) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction or service of process. 10. Integration. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements between the parties with respect to any related subject matter. 11. Assignment; Successors and Assigns, etc. Neither the Employer nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided that the Employer may assign its rights under this Agreement without the consent of the Executive in the event that the Employer shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity, or transfer all or substantially all of its properties or assets to any other corporation, partnership, organization or other entity. This Agreement shall inure to the benefit of and be binding upon the Employer and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. 12. Enforceability. If any portion or provision of this Agreement (including, without limitation, any portion or provision of any section of this Agreement) shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 13. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 14. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by a nationally recognized overnight courier service or by registered or certified mail, postage prepaid, return receipt requested, to the Executive at the last address the Executive has filed in writing with the Employer or, in the case of the Employer, at Northway's main offices, attention of the Chief Executive Officer of Northway, and shall be effective on the date of delivery in person or by courier or three (3) days after the date mailed. 15. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Employer. 16. Governing Law. This is a New Hampshire contract and shall be construed under and be governed in all respects by the laws of the State of New Hampshire, without giving effect to the conflict of laws principles of such State. 17. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute one and the same document. (The rest of this page is left intentionally blank) IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Employer, by its duly authorized officer, and by the Executive, as of the Effective Date. NORTHWAY FINANCIAL, INC. Attest: By: /s/ David J. O'Connor By: /s/ William J. Woodward ------------------------------- ----------------------------- Name: David J. O'Connor Name: William J. Woodward Title: Executive Vice President Title: President and Chief and Chief Financial Officer Executive Officer PEMIGEWASSET NATIONAL BANK Attest: By: /s/ Keith L. Philbrick By: /s/ Fletcher W. Adams ------------------------------- ----------------------------- Name: Keith L. Philbrick Name: Fletcher W. Adams Title: Chief Financial Officer Title: President and Chief Executive Officer EMPLOYEE /s/ Fletcher W. Adams --------------------------- Fletcher W. Adams EX-21 5 LIST OF SUBSIDIARIES Exhibit 21 LIST OF SUBSIDIARIES Name Jurisdiction of Organization - ---- ---------------------------- The Berlin City Bank New Hampshire Pemigewasset National Bank United States EX-23.1 6 CONSENT OF SHATSWELL, MACLEOD & COMPANY, P.C. EXHIBIT 23.1 SHATSWELL, MacLEOD & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS 83 PINE STREET WEST PEABODY, MASSACHUSETTS 01960-3635 TELEPHONE (978) 535-0206 FACSIMILE (978) 535-9908 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 16, 1998. /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacCLEOD & COMPANY, P.C. West Peabody, Massachusetts March 26, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND INCOME STATEMENT AND FROM THE MANAGEMENT DISCUSSION AND ANALYSIS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND MANAGEMENT DISCUSSION. 1,000 YEAR DEC-31-1997 DEC-31-1997 12,086 85 19,225 0 55,103 11,312 11,297 267,283 4,156 377,866 322,063 6,146 2,809 9,322 0 0 1,732 25,794 377,866 23,210 5,288 536 29,034 10,861 12,007 17,027 535 313 11,859 6,313 6,313 0 0 4,039 2.33 2.33 8.33 1,828 0 1,184 813 3,941 612 292 4,156 3,512 0 644
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