-----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, Clez1RRnPQ1l+/dwrqLl7xJUbucVJeA9FH/tz0l3maj2aKqEy3xRrNIKUKQnSeEx 3IM279AECTHiBFGt/Ec0+A== 0000950156-98-000687.txt : 19981116 0000950156-98-000687.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950156-98-000687 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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-Q SEC ACT: SEC FILE NUMBER: 000-23129-33 FILM NUMBER: 98746839 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-Q 1 NORTHWAY FIN. FORM 10-Q 9-30-98 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________________to _______________________ Commission File Number 000-23129 NORTHWAY FINANCIAL, INC ------------------------------------------------------ (Exact name of registrant as specified in its charter) New Hampshire 04-3368579 (State or other jurisdiction of (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) No Change ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. At November 2, 1998, there were 1,731,969 shares of common stock outstanding, par value $1.00 per share. ================================================================================ INDEX NORTHWAY FINANCIAL, INC. PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 .......................................................... 3 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1998 and 1997 .......................... 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 ................................. 5 Notes to Consolidated Financial Statements ........................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings ................................................. 15 Item 2. Changes in Securities ............................................. 15 Item 3. Default Upon Senior Securities .................................... 15 Item 4. Submission of Matters to a Vote of Security Holders ............... 15 Item 5. Other Information ................................................. 15 Item 6. Exhibits and Reports on Form 8-K .................................. 15 Signatures........................................................... 16 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements. NORTHWAY FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS
SEP. 30, DEC. 31, (Dollars in thousands, except per share data) 1998 1997 - -------------------------------------------------------------------------------------------- (Unaudited) (Audited) Assets Cash and due from banks ...................................... $ 10,800 $ 12,086 Federal funds sold ........................................... 17,650 19,225 Interest bearing deposits .................................... 91 85 Investment securities available-for-sale ..................... 51,096 55,103 Investment securities held-to-maturity ....................... 13,031 11,312 Federal Reserve Bank stock, at cost .......................... 80 80 Federal Home Loan Bank stock, at cost ........................ 1,958 1,958 Loans held for sale .......................................... 622 292 Loans ........................................................ 279,833 267,283 Unearned income ............................................ (391) (526) Allowance for possible loan losses ......................... (4,386) (4,156) -------- -------- Loans, net ................................................. 275,056 262,601 -------- -------- Real estate acquired by foreclosure or substantively repossessed ............................... 145 222 Accrued interest receivable .................................. 1,910 1,971 Deferred income tax asset, net ............................... 1,375 1,500 Premises and equipment, net .................................. 9,944 9,187 Deposit purchase premium, net ................................ 935 1,161 Other assets ................................................. 5,265 1,083 -------- -------- Total assets ............................................. $389,958 $377,866 ======== ======== Liabilities and stockholders' equity Liabilities: Interest bearing deposits .................................. $288,381 $282,353 Non-interest bearing deposits .............................. 41,638 39,710 Repurchase agreements ...................................... 6,825 6,146 Federal Home Loan Bank advances ............................ 6,111 9,322 Other liabilities .......................................... 6,476 2,809 -------- -------- Total liabilities ........................................ 349,431 340,340 -------- -------- Stockholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized: none issued ................. -- -- Common stock, $1 par value; 9,000,000 shares authorized: 1,731,969 shares issued and outstanding ...... 1,732 1,732 Additional paid in capital ................................. 2,101 2,101 Retained earnings .......................................... 36,568 33,744 Unrealized gain (loss) on investment securities available- for-sale, net of tax ...................................... 126 (51) -------- -------- Total stockholders' equity ............................... 40,527 37,526 -------- -------- Total liabilities and stockholders' equity ............... $389,958 $377,866 ======== ======== The accompanying notes are an integral part of these financial statements.
NORTHWAY FINANCIAL, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, (Dollars in thousands, except per share data) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Interest and dividend income: Loans ....................................................... $ 6,208 $ 6,056 $ 18,107 $ 17,217 Investment securities available-for-sale .................... 836 928 2,547 3,387 Investment securities held-to-maturity ...................... 169 245 530 695 Federal funds sold .......................................... 163 196 547 328 Interest bearing deposits ................................... 2 2 4 6 ---------- ---------- ---------- ---------- Total interest and dividend income ....................... 7,378 7,427 21,735 21,633 ---------- ---------- ---------- ---------- Interest expense: Deposits ................................................... 2,717 2,745 8,077 8,119 Borrowed funds ............................................. 213 309 646 889 ---------- ---------- ---------- ---------- Total interest expense ................................... 2,930 3,054 8,723 9,008 ---------- ---------- ---------- ---------- Net interest and dividend income ......................... 4,448 4,373 13,012 12,625 Provision for possible loan losses ............................ 135 140 405 395 ---------- ---------- ---------- ---------- Net interest and dividend income after provision for possible loan losses ..................... 4,313 4,233 12,607 12,230 ---------- ---------- ---------- ---------- Noninterest income: Service charges on deposit accounts and fees ............... 206 201 623 623 Securities gains, net ...................................... 16 20 408 350 Other ...................................................... 175 128 463 405 ---------- ---------- ---------- ---------- Total noninterest income ................................. 397 349 1,494 1,378 ---------- ---------- ---------- ---------- Noninterest expense: Salaries and employee benefits ............................. 1,650 1,407 4,783 4,162 Office occupancy and equipment ............................. 492 428 1,414 1,290 Amortization of deposit purchase premium ................... 75 75 226 226 Merger related expenses .................................... -- 308 -- 822 Other ...................................................... 930 753 2,686 2,348 ---------- ---------- ---------- ---------- Total noninterest expense ................................ 3,147 2,971 9,109 8,848 ---------- ---------- ---------- ---------- Income before income tax expense ......................... 1,563 1,611 4,992 4,760 Income tax expense ............................................ 516 578 1,683 1,589 ---------- ---------- ---------- ---------- Net income ............................................... $ 1,047 $ 1,033 $ 3,309 $ 3,171 ========== ========== ========== ========== Comprehensive net income .................................. $ 1,182 $ 1,474 $ 3,486 $ 3,688 ========== ========== ========== ========== Per share data: Earnings per common share .................................. $ 0.60 $ 0.60 $ 1.91 $ 1.83 Weighted average number of common shares ................... 1,731,969 1,731,969 1,731,969 1,731,969 The accompanying notes are an integral part of these financial statements.
NORTHWAY FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 1998 1997 -------------------------- (Dollars in Thousands) Cash flows from operating activities: Net income .............................................................. $ 3,309 $ 3,171 Adjustments to reconcile net income to net cash provided by operating activities: Provision for: Possible loan losses .............................................. 405 395 Depreciation and amortization ..................................... 828 743 Deferred income taxes ............................................. 5 83 Write down of real estate acquired by foreclosure ................. 5 5 Gains on sales of investment securities available-for-sale, net .... (408) (350) Loss on sale of premises and equipment, net ........................ -- 50 Accretion of (discount) and amortization of premium on investment and mortgage-backed securities, net ............................... 97 187 Decrease in unearned income, net .................................... (135) (150) Gains on sales of real estate acquired by foreclosure or substantively repossessed ........................................................ (83) (36) Decrease in accrued income receivable ............................... 61 473 Increase in other assets ............................................ (4,182) (2,152) Increase in other liabilities ....................................... 3,667 1,899 -------- -------- Net cash provided by operating activities ......................... 3,569 4,318 -------- -------- Cash flows from investing activities: Net (increase) decrease in interest bearing deposits .................... (6) 196 Proceeds from sales of investment securities available-for-sale ......... 3,059 19,189 Proceeds from maturities of investment securities held-to-maturity ...... 4,686 1,793 Proceeds from maturities of investment securities available-for-sale .... 18,000 15,323 Purchase of investment securities available-for-sale .................... (19,974) (9,898) Purchase of investment securities held-to-maturity ...................... (6,827) (6,456) Principal payments received on mortgage-backed securities ............... 3,951 2,596 Net increase in loans ................................................... (12,987) (24,548) Net increase in loans held for resale ................................... (330) (236) Proceeds from sales of real estate acquired by foreclosure or substantively repossessed .............................. 418 214 Proceeds from sale of premises and equipment ............................ -- 290 Additions to premises and equipment ..................................... (1,359) (925) -------- -------- Net cash used in financing activities ............................. (11,369) (2,462) -------- -------- Cash flows from financing activities: Net increase (decrease) in deposits ..................................... 7,956 (3,706) Advances from Federal Home Loan Bank .................................... 3,041 31,083 Repayment of Federal Home Loan Bank advances ............................ (6,252) (27,396) Increase in federal funds purchased ..................................... -- 50 Net increase in repurchase agreements ................................... 679 2,726 Cash dividends .......................................................... (485) (405) -------- -------- Net cash provided by financing activities ......................... 4,939 2,352 -------- -------- Net increase (decrease) in cash and cash equivalents ...................... (2,861) 4,208 Cash and cash equivalents at beginning of period .................. 31,311 17,282 -------- -------- Cash and cash equivalents at end of period ........................ $ 28,450 $ 21,490 ======== ======== Cash paid during the year for: Interest ................................................................ $ 9,153 $ 9,058 ======== ======== Income taxes ............................................................ $ 1,628 $ 1,078 ======== ======== Supplemental disclosures of non-cash activities: Loans transferred to real estate acquired by foreclosure or substantively repossessed ........................................................... $ 336 $ 510 ======== ======== Loans charged off, net of recoveries .................................... $ 175 $ 322 ======== ======== Financed sales of real estate acquired by foreclosure ................... $ 267 $ 193 ======== ======== The accompanying notes are an integral part of these financial statements.
NORTHWAY FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1998 1. Basis of Presentation. The unaudited consolidated financial statements of Northway Financial, Inc. and its two wholly owned bank subsidiaries (collectively "the Corporation") included herein have been prepared by the Corporation in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The Corporation, however, believes that the disclosures are adequate to make the information presented not misleading. All prior period amounts in the Form 10Q have been restated to reflect the reorganization of the Corporation on September 30, 1997 into a multi-bank holding company. Refer to Note 4 for further discussion of the holding company reorganization and merger transactions. The amounts shown reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial statements for the periods reported. The results of operations for the three and nine month periods ended September 30, 1998 and 1997 are not necessarily indicative of the results of operations to be expected for the full year or any other interim periods. 2. Allowance for Possible Loan Losses Analysis of the allowance for possible loan losses for the three month and nine month periods ended September 30, 1998 and 1997 is as follows: Nine Months Three Months Ended Ended September 30, September 30, 1998 1997 1998 1997 ------ ------ ------ ------ (Dollars in thousands) Balance beginning of period $4,156 $3,941 $4,344 $3,920 ------ ------ ------ ------ Chargeoffs 381 505 131 149 Recoveries 206 183 38 103 ------ ------ ------ ------ Net chargeoffs 175 322 93 46 ------ ------ ------ ------ Provision for possible loan losses 405 395 135 140 ------ ------ ------ ------ Balance at end of period $4,386 $4,014 $4,386 $4,014 ====== ====== ====== ====== NORTHWAY FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1998 3. Commitments and Contingencies At September 30, 1998, the Corporation had the following off-balance sheet financial instruments with contract amounts which represent credit risk: Contract or Notional Amount (Dollars in thousands) Commitments to extend credit $35,010 Standby letters of credit and financial guarantees written $ 709 Commercial letters of credit $ -0- Foreign exchange contracts $ -0- 4. Formation of Northway Financial, Inc. Northway Financial, Inc. ("Northway") is a New Hampshire corporation organized on March 7, 1997 for the purpose of becoming the holding company for The Berlin City Bank ("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") between Northway and Pemi Bancorp, Inc. ("PEMI"), pursuant to which Northway also became the holding company for PEMI's wholly owned subsidiary, Pemigewasset National Bank ("PNB"). The BCB Reorganization and the Merger were consummated on September 30, 1997. The Merger was treated as a "pooling of interests" for accounting purposes. BCB is a trust company chartered under the laws of the State of New Hampshire. BCB has eight banking offices in New Hampshire through which it provides a range of bank-related services. PNB is a national banking association organized under the laws of the United States. PNB has six banking offices in New Hampshire through which it provides a range of bank-related services. NORTHWAY FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1998 5. Supplemental Disclosure of Separate Results The Corporation's consolidated financial statements for periods prior to the Merger reflect the combined results of The Berlin City Bank and Pemi Bancorp, Inc. Supplemental disclosure of the separate results of BCB and PEMI for periods prior to the Merger are as follows: Berlin City Pemi Northway Bank Bancorp Financial ----------- ------- --------- (In thousands except per share data) July 1, 1997 to September 30, 1997 Net interest income $ 2,770 $ 1,603 $ 4,373 Net income 756 277 1,033 Net income per share $ 0.44 $ 0.16 $ 0.60 January 1, 1997 to September 30, 1997 Net interest income $ 8,010 $ 4,615 $12,625 Net income 2,388 783 3,171 Net income per share $ 1.38 $ 0.45 $ 1.83 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Introduction The following discussion and analysis and related consolidated financial statements include Northway Financial, Inc. and its wholly-owned subsidiaries, The Berlin City Bank and Pemigewasset National Bank (collectively the "Corporation"). Certain statements in this Form 10-Q (including, without limitation, the discussion concerning Year 2000 compliance), in the Corporation's press releases, and in oral statements made by or with the approval of an authorized executive officer of the Corporation, constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act") and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, promulgated thereunder. The words "believe," "expect," "anticipate," "intend," "estimate," "project" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Corporation to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Corporation undertakes no obligation to publicly update or revise any forward- looking statement, whether as a result of new information, future events or otherwise. The following important factors, among others, may have affected the Corporation and its subsidiaries in the past and could in the future affect the actual results of operations of the Corporation, and could cause the actual results of operations for subsequent periods to differ materially from those set forth in, contemplated by, or underlying any forward-looking statement made herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Corporation must comply, including the effect of the cost of such compliance; (ii) the timely resolution of the Year 2000 issue by the Corporation and its customers and suppliers, (iii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Corporation's organization, compensation and benefit plans; (iv) the effect on the competitive position of the Corporation's subsidiaries within their respective market areas resulting from increased consolidation within the banking industry and increased competition from larger regional and out-of-state banking organizations, as well as from nonbank providers of various financial services; (v) the effect of unforeseen changes in interest, loan default and charge-off rates; (vi) changes in deposit levels necessitating increased borrowing to fund loans and investments; (vii) the effect of changes in the business cycle and downturns in the New Hampshire, New England, and national economies; (viii) the factors detailed in the section titled "Risk Factors" in the Corporation's Proxy Statement/Prospectus, dated Aug. 12, 1997; and (ix) changes in the assumptions used in making such forward-looking statements. Though the Corporation has attempted to list comprehensively these important factors, the Corporation wishes to caution investors that other factors may in the future prove to be important in affecting the Corporation's results of operations. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from forward looking statements. Financial Condition The Corporation's total assets at September 30, 1998 were $390 million compared to $378 million at December 31, 1997, a $12 million increase. Net loans, including loans held for sale, increased $12.8 million and investment securities decreased $2.3 million. Cash and cash equivalents decreased $2.9 million to $28.5 million. Total deposits increased $8.0 million. Federal Home Loan Bank advances decreased $3.2 million, and repurchase agreements increased $0.7 million. Other assets and other liabilities increased $4.2 million and $3.7 million respectively, primarily due to pending securities purchases at quarter end. The Corporation maintains an allowance for possible loan losses to absorb future chargeoffs of loans in the existing portfolio. The allowance is increased when a loan loss provision is recorded in the income statement. When a loan, or portion thereof, is considered uncollectible, it is charged against this allowance. Recoveries of amounts previously charged off are added to the allowance when collected. At September 30, 1998 the allowance for possible loan losses was $4.4 million, or 1.57% of total loans, as compared to $4.2 million, or 1.55% of total loans at December 31, 1997. The adequacy of the allowance for possible loan losses was based on an evaluation by each bank's management and Board of Directors of current and anticipated economic conditions, changes in the diversification, size and risk within the loan portfolio, and other factors. Nonperforming loans totaled $2.7 million as of September 30, 1998, compared to $1.8 million at December 31, 1997. The ratio of nonperforming loans to total loans was 0.96% as of September 30, 1998 compared to 0.70% at December 31, 1997 and the ratio of nonperforming assets to total assets was 0.69% as of September 30, 1998 compared to 0.53% at December 31, 1997. Results of Operations The Corporation reported net income of $1.0 million, or $0.60 per common share, for the three months ended September 30, 1998, the same as the three months ended September 30, 1997. Net interest income increased $75,000 to $4.4 million which was the result of a reduction in interest expense associated primarily with a decrease in borrowed funds. Noninterest income increased $48,000 primarily as a result of an increase in gains on loan sales. Noninterest expense was $3.1 million for the third quarter 1998, an increase of $176,000 over the same period last year. The increase was principally attributable to increases in salaries and benefits expense, professional fees, and equipment expense. These increases were partially offset by the fact that there were no merger related expenses in 1998 compared to expenses of $308,000 in the third quarter of 1997. The provision for possible loan losses decreased to $135,000 for the three months ended September 30, 1998 as compared to $140,000 in 1997. The Corporation generated net income of $3.3 million, or $1.91 per common share, for the nine month period ended September 30, 1998 compared to net income of $3.2 million, or $1.83 per common share, for the same period in 1997. Net interest income for the nine months ended September 30, 1998 was $13.0 million, an increase of $387,000 over the same period in 1997. This improvement is primarily due to the shift of assets from investment securities into loans as well as a decrease in the Corporation's cost of funds and a lower level of FHLB advances. Noninterest income for the nine months ended September 30, 1998 increased $116,000 to $1.5 million primarily as a result of increased securities gains and improved gains on sales of loans. Total noninterest expense was $9.1 million for the nine months ended September 30, 1998 compared to $8.8 million for the same period last year. Increases in salaries and benefits expense, professional fees, and equipment expense were partially offset by a decrease in merger related expenses of $822,000. These increased expenses are a direct result of new branch openings, increases in lending staff, and the costs associated with converting to a new computer system. The provision for possible loan losses increased to $405,000 for the nine months ended September 30, 1998 from the $395,000 reported for the comparable period in 1997. Liquidity Liquidity risk management refers to the Corporation'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 Corporation's Asset/Liability Committee. At the subsidiary 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 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. Capital The Corporation's Tier 1 and Total Risk Based Capital ratios were 16.62% and 17.87%, respectively, at September 30, 1998. The Corporation's leverage ratio at September 30, 1998 was 10.06%. As of September 30, 1998, the capital ratios of the Corporation and all its subsidiary banks exceeded the minimum capital ratio requirements of the "well capitalized" category under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Impact of the Year 2000 The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. The Corporation has developed a Year 2000 strategic plan and a Year 2000 test plan. The Corporation has also appointed a dedicated Year 2000 project manager. Each of the Corporation's subsidiary banks have Year 2000 action teams. These teams and the Year 2000 project manager work together closely. The first phase of this project was to identify all information and non information technology systems, both in house and those provided by third party vendors. All systems have been identified. The second phase was to complete a risk analysis assessment of each information and non information technology system. This second phase is complete. The third phase is to renovate the information and non information technology systems based upon conclusions reached in the risk analysis assessment phase. Renovation of the Corporations' core operating hardware was completed on September 19, 1998. Renovation of the Corporations' core operating software was completed on October 10, 1998. Renovations to the remaining operating systems will be completed by March 31, 1999. The fourth phase is to validate the renovations to the systems. The testing and validating of the core operating systems are ongoing and expected to be completed by December 31, 1998. The Corporation has hired an outside independent third party to review the Corporation's validation and testing procedures. Testing and validation of the remaining systems is currently 20% complete, and the estimated completion date is March 31, 1999. The fifth phase is to implement the Year 2000 compliant systems. It is estimated that all systems will be operating on a compliant basis by June 30, 1999, although there can be no assurances in this regard. The Corporation has identified both customers and vendors with whom it, BCB or PEMI have a material relationship. Two vendors are considered to have material third party relationships with the Corporation. These two vendors provide the hardware and software, respectfully, used to run the Corporations' core operating systems. The risk that these third party relationships pose to the Corporation is considered low, primarily due to the fact that renovation, testing and validation of the core operating system is expected to be substantially complete by December 31, 1998. For those customers where a borrowing relationship exists, BCB and PEMI have each completed a customer risk assessment to determine the status of their Year 2000 efforts. BCB and PEMI have each allocated a portion of their reserve for loan and lease losses for those relationships where a determination has been made that the risk of the customer not being compliant with Year 2000 is high or medium and where the ability of such customers to service their debt is unknown at this time. The Corporation has developed a Year 2000 budget which includes administration, cost of new technology and the cost of testing. This budget indicates that the costs associated with Year 2000 compliance have not been and do not appear likely to be material to the Corporation's consolidated financial position, results of operations or cash flows. The Corporation does not currently have a contingency plan in place should the Corporation's worst case scenario, loss of electric power, occur. However, the Corporation has commenced developing a contingency plan. A contingency planning team has been appointed and is led by the Year 2000 project manager. The Corporation has hired an outside independent third party to assist the Corporation in preparing the contingency plan. There are four phases to the plan, the first two, organization planning guidelines and business impact analysis, are currently being developed. Completion of these two phases is expected to be completed by November 16, 1998. After these are complete, the third and fourth phases, the business resumption contingency plan and validation of the plan, will commence. The contingency plan will be substantially complete by December 31, 1998. Should the Corporation's worst case scenario, the loss of electric power, occur the Corporation will have in place an electric generator at its operations center. This will allow the Corporation to continue to run its core operating system. Transactions that would be performed at a number of the Corporation's locations would then have to be transported to the operations center for input. This would continue until such time as normal electric power is restored. The Year 2000 project manager provides progress reports to the Corporation's Executive Committee on a weekly basis. Additional progress reports are presented to the Boards of Directors of the Corporation, BCB and PEMI on a monthly basis. BCB and PEMI are subject to regulation by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, respectively. In the event the Corporation's efforts as described above fail to adequately resolve any such Year 2000 issues affecting BCB or PEMI, BCB or PEMI could be subject to formal supervisory or enforcement actions by their respective regulators. Item 3. Quantitative and Qualitative Disclosures About Market Risk For information regarding quantitative and qualitative disclosures about market risk, see the Corporation's discussion under Item 7A of its Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Between December 31, 1997 and September 30, 1998, there were no material changes in the Corporation's market risk. PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number (27) Financial Data Schedule (b) The Corporation did not file any Reports on Form 8-K during the quarter ended September 30, 1998. SIGNATURES Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHWAY FINANCIAL, INC. November 13, 1998 BY: \S\ William J. Woodward -------------------------------- William J. Woodward President & CEO November 13, 1998 BY: \S\ Donald R. Hatt ------------------------------------- Donald R. Hatt Senior Executive Vice President & COO (Principal Financial Officer) EX-27 2 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 9-MOS DEC-31-1997 SEP-30-1998 10,800 91 17,650 0 51,096 13,031 13,050 280,064 4,386 389,958 330,019 6,825 6,476 6,111 0 0 1,732 38,795 389,958 18,107 3,077 551 21,735 8,077 8,723 13,012 405 408 9,109 4,992 4,992 0 0 3,309 1.91 1.91 8.23 2,663 0 1,15 929 4,156 381 206 4,386 3,728 0 658
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