10-K

UNITED STATES

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.

For the fiscal year ended December 31, 2005

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

Commission File Number 000-23129

NORTHWAY FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

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

(603) 752-1171

(Registrant’s telephone number, including area code)

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 if the registrant is a well-known seasoned issue, as defined in Rule 405 of the Securities Act. YES o NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

The number of shares of voting and nonvoting common stock, par value $1.00 per share, held by nonaffiliates of the registrant as of June 30, 2005 was 1,290,784 shares with an aggregate market value, computed by reference to the last reported sales price on the NASDAQ National Market on such date, of $41,305,088. Although directors and executive officers of the registrant were assumed to be “affiliates” of the registrant for purposes of this calculation, this classification is not to be interpreted as an admission of such status.

At March 25, 2006, there were 1,491,174 shares of common stock outstanding, par value $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for its 2006 Annual Meeting of Stockholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III.

NORTHWAY FINANCIAL, INC.

2005 FORM 10-K ANNUAL REPORT

	TABLE OF CONTENTS
	PART I
ITEM 1	Business	1
ITEM 1A	Risk Factors	9
ITEM 2	Properties	11
ITEM 3	Legal Proceedings	11
ITEM 4	Submission of Matters to a Vote of Security Holders	12
	PART II
ITEM 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
ITEM 6	Selected Financial Data	13
ITEM 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
ITEM 7A	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 8	Financial Statements and Supplementary Data	29
ITEM 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
ITEM 9A	Controls and Procedures	56
	PART III
ITEM 10	Directors and Executive Officers of the Registrant	56
ITEM 11	Executive Compensation	56
ITEM 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
ITEM 13	Certain Relationships and Related Transactions	56
ITEM 14	Principal Accountant Fees and Services	56
ITEM 15	Exhibits and Financial Statement Schedules	57
	Signatures	58

FORWARD-LOOKING STATEMENTS

Certain statements in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, but are not limited to, projections of revenue, income or loss, plans for future operations and acquisitions, projections based on assumptions regarding market and liquidity risk, and plans related to products or services of Northway Financial, Inc. (“Northway”) and its subsidiaries (the “Company”). Such forward-looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company. To the extent any such risks, uncertainties and contingencies are realized, the Company’s actual results, performance or achievements could differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements include, among other factors, the factors described under the caption “Risk Factors” in Item 1A of this report, overall economic and business conditions, economic and business conditions in the Company’s market areas, interest rate fluctuations, the demand for the Company’s products and services, competitive factors in the industries in which the Company competes, changes in government regulations, and the timing, impact and other uncertainties of future acquisitions.

In addition to the factors described above, the following are some additional factors that could cause our financial performance to differ from any forward-looking statement contained herein: i) changes in interest rates over the past year and the relative relationship between the various interest rate indices that the Company uses; ii) a determination in the financial market affecting the valuation of securities held in the Company’s investment portfolio; (iii) a change in product mix attributable to changing interest rates, customer preferences or competition; iv) a significant portion of the Company’s loan customers are in the hospitality business and therefore could be affected by a slower economy, adverse weather conditions and/or rising gasoline prices; and v) the effectiveness of advertising, marketing and promotional programs.

The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project” or the negative of such terms and other similar expressions which are predications of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known or unknown risks, uncertainties or other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The Company expressly disclaims any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Though the Company has attempted to list comprehensively the factors which might affect forward-looking statements, the Company wishes to caution you that other factors may in the future prove to be important in affecting the Company’s results of operations. New factors emerge from time to time and it is not possible for management to anticipate all of such factors, nor can it assess the impact of each such factor, or combination of factors, which may cause actual results to differ materially from forward-looking statements.

PART 1

ITEM 1. BUSINESS

Description of Business

Northway Financial, Inc. was incorporated on March 7, 1997, under the laws of the State of New Hampshire, for the purpose of becoming the holding company of The Berlin City Bank, a New Hampshire-chartered bank headquartered in Berlin, New Hampshire (“BCB”), pursuant to a reorganization transaction (the “BCB Reorganization”) by and among the Company, BCB, and a subsidiary of BCB, and, thereafter, the merger (the “Merger”) by and among the Company, BCB, Pemi Bancorp, Inc. (“PEMI”), and PEMI’s wholly owned subsidiary, The Pemigewasset National Bank of Plymouth, New Hampshire, 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 the Company. On October 1, 2005, BCB was renamed Northway Bank and PNB was merged into Northway Bank (“Bank”). Unless the context otherwise requires, references herein to the “Company" include Northway Financial, Inc. and its consolidated subsidiary.

The Company derives substantially all of its revenue and income from the furnishing of bank and bank-related services, principally to individuals and small and medium-sized companies in New Hampshire. The Bank operates as a typical community banking institution and does not engage in any specialized finance or capital market activities. The Company functions primarily as the holder of stock of its subsidiaries and assists the management of its subsidiaries as appropriate.

The Company is subject to regulation by the New Hampshire Bank Commissioner (the “Commissioner”), the Federal Deposit Insurance Corporation (the “FDIC”), and the Board of Governors of the Federal Reserve System. See "Supervision and Regulation."

1

The Bank is engaged in a general commercial banking business and offers commercial and construction loans, real estate mortgages, consumer loans, including personal secured and unsecured loans, and lines of credit.

During 1998 the Bank established an indirect lending business unit in Concord, New Hampshire. On August 25, 2004, the Company announced its exit from the indirect automobile lending line of business. Effective August 31, 2004, the Company ceased accepting applications from its dealer network. As of December 31, 2005 this line of business accounted for approximately 14% of the Company’s loan portfolio. The Bank will continue to service the existing portfolio of approximately 7,000 loans. The decision to exit this line of business was predicated on the low interest rate environment and competitive pressures. Over the next twelve months, cash flows from the existing portfolio are expected to be redeployed into commercial loans, residential mortgage loans, consumer loans, such as home equity loans and automobile loans, and the Company’s investment portfolio.

The Bank accepts savings, time, demand, NOW and money market deposit accounts, and offers a variety of banking services including safe deposit boxes, credit card accounts, official checks and money orders, overdraft lines of credit and wire transfer services.

Northway is a legal entity separate and distinct from its subsidiary. The right of Northway to participate in any distribution of assets or earnings of the subsidiary is subject to the prior claims of creditors of the subsidiary, except to the extent that claims, if any, of Northway itself as a creditor may be recognized. See “Supervision and Regulation.”

The following information concerning the Company’s investment activities, lending activities, asset quality and allowance for loan losses should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing under Item 7 of this report and the Company’s Consolidated Financial Statements and Notes thereto.

Investment Activities

The following table presents the carrying amount of the Company’s securities available-for-sale as of December 31, 2005, 2004 and 2003 (dollars in thousands):

	2005		2004		2003
U.S. Treasury and other
U.S. government agency securities	$	47,751	$	54,563	$	37,840
Mortgage-backed securities (1)		23,939		29,301		2,903
Marketable equity securities		2,809		1,931		2,766
Corporate bonds		5,569		12,287		21,983
State and political subdivision bonds and notes		23,176		3,051		2,590
Total securities	$	103,244	$	101,133	$	68,082

⁽¹⁾ Includes collateralized mortgage obligations of $8

The following table sets forth the amortized cost of the Company’s investment in debt securities maturing within stated periods and their related weighted average yields, reported on a tax equivalent basis, as of December 31, 2005 (dollars in thousands):

	Maturities
	Within one year			One to five years			Five to ten years			Over ten years			Total amortized cost
Available-for-sale:
U.S. Treasury and other
U.S. government agency securities	$	5,998		$	37,730		$	5,000		$	-		$	48,728
Mortgage-backed securities (1)		-			29			-			24,683			24,712
Corporate bonds		2,003			3,538			-			-			5,541
State and political subdivision bonds and notes		1,101			425			562			21,308			23,396
Total amortized cost	$	9,102		$	41,722		$	5,562		$	45,991		$	102,377
Market value	$	9,052		$	40,916		$	5,485		$	44,982		$	100,435
Weighted average yield		3.69	%		3.97	%		5.29	%		5.32	%		4.63	%

⁽¹⁾ Includes collateralized mortgage obligations of $8

2

Lending Activities

The following table sets forth information with respect to the composition of the Company’s loan portfolio, excluding loans held for sale, as of December 31, 2005, 2004, 2003, 2002 and 2001 (dollars in thousands):

	December 31,
	2005			2004		2003		2002		2001
Real estate:
Residential	$	158,729		$	147,333	$	129,493	$	114,526	$	109,261
Commercial		143,456			130,334		120,366		111,941		111,642
Construction		13,241			5,366		3,851		6,330		1,581
Commercial		27,349			27,013		24,528		23,885		22,727
Installment		35,786			29,345		30,291		40,169		28,210
Indirect installment		62,221			116,520		150,807		139,477		120,761
Other		19,507			18,901		14,530		9,652		6,303
Total loans		460,289			474,812		473,866		445,980		400,485
Less:
(Unamortized cost)/unearned income		(84	)		106		247		207		169
Allowance for loan losses		5,150			5,204		5,036		4,920		4,642
Total unearned income and allowance for loan losses		5,066			5,310		5,283		5,127		4,811
Net loans	$	455,223		$	469,502	$	468,583	$	440,853	$	395,674

The following table presents the maturity distribution of the Company’s real estate construction and commercial loans at December 31, 2005 (dollars in thousands):

	Amount		Percent of Total
Within one year	$	13,532		33.34	%
One to five years		12,324		30.36
Over five years		14,734		36.30
	$	40,590		100.00	%

The Company’s real estate construction and commercial loans due after one year at December 31, 2005 were comprised of the following (dollars in thousands):

	Amount
Fixed interest rate	$	10,004
Adjustable interest rate		17,054
	$	27,058

3

Analysis of the Allowance for Loan Losses

The following table reflects activity in the Company’s allowance for loan losses for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 (dollars in thousands):

	Years ended December 31,
	2005			2004			2003			2002			2001
Balance at the beginning of period	$	5,204		$	5,036		$	4,920		$	4,642		$	4,354
Charge-offs:
Real estate		8			56			-			83			110
Commercial		10			28			120			12			95
Installment loans to individuals		397			581			750			729			529
Total		415			665			870			824			734
Recoveries:
Real estate		44			162			25			64			35
Commercial		85			16			11			4			-
Installment loans to individuals		157			160			145			134			87
Total		286			338			181			202			122
Net charge-offs		129			327			689			622			612
Provision charged to expense		75			495			805			900			900
Balance at the end of period	$	5,150		$	5,204		$	5,036		$	4,920		$	4,642
Ratio of net charge-offs to average loans		0.03	%		0.07	%		0.15	%		0.15	%		0.15	%

Allocation of the Allowance for Loan Losses

The following table sets forth the breakdown of the Company’s allowance for loan losses in the Company’s portfolio by category of loan and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated (dollars in thousands):

	December 31,
	2005					2004					2003					2002					2001
	Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans
Real estate:
Residential	$	784		34.5	%	$	644		31.0	%	$	624		27.3	%	$	598		25.9	%	$	585		27.2	%
Commercial & construction		3,032		34.0			1,892		28.6			1,724		26.2			2,008		26.7			1,621		28.3
Commercial		278		6.0			174		5.7			155		5.2			216		5.4			208		5.7
Installment		985		21.3			2,398		30.7			2,505		38.2			2,084		40.6			1,719		37.2
Other		71		4.2			96		4.0			28		3.1			14		1.4			17		1.6
Unallocated		-		N/A			-		N/A			-		N/A			-		N/A			492		N/A
	$	5,150		100.0	%	$	5,204		100.0	%	$	5,036		100.0	%	$	4,920		100.0	%	$	4,642		100.0	%

Deposits

See “Financial Statements and Supplementary Data” in Item 8 of this report.

Supervision and Regulation

The business in which the Company is engaged is subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies. State and federal banking laws have as their principal objective either the maintenance of the safety and soundness of financial institutions and the federal deposit insurance system or the protection of consumers or classes of consumers, and depositors in particular, rather than the specific protection of stockholders of a bank or its parent company.

Set forth below is a brief description of certain laws and regulations that relate to the regulation of the Company. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation.

4

Regulation of the Company

General. As a registered bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”) and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (“FRB”). The Company is also subject to the laws of the State of New Hampshire.

The FRB has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals who violate the BHCA or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Under the BHCA, the Company may not generally engage in activities or acquire more than 5% of any class of voting securities of any company engaged in activities other than banking or activities that are closely related to banking. However, a bank holding company that has elected to be treated as a “financial holding company” may engage in activities that are financial in nature or incidental or complementary to such financial activities, as determined by the FRB alone, or together with the Secretary of the Department of the Treasury. The Company has not elected financial holding company status. Under certain circumstances, the Company may be required to give notice to or seek approval of the FRB before engaging in activities other than banking.

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”). Riegle-Neal permits adequately- or well-capitalized and adequately- or well-managed bank holding companies, as determined by the FRB, to acquire banks in any state subject to certain concentration limits and other conditions. Riegle-Neal also generally authorizes the interstate merger of banks. In addition, among other things, Riegle-Neal permits banks to establish new branches on an interstate basis provided that the law of the host state specifically authorizes such action. However, as a bank holding company, the Company is required to obtain prior FRB approval before acquiring more than 5% of a class of voting securities, or substantially all of the assets of a bank holding company, bank or savings association.

Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company, such as the Company, unless the FRB has been notified and has not objected to the transaction. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting securities of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, a company is required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting securities of a bank holding company, or otherwise obtaining control or a “controlling influence” over that bank holding company.

Bank Holding Company Dividends. The FRB has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be unsafe or unsound. The FRB has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition. The Company depends in part upon dividends received from its subsidiary bank to fund its activities, including the payment of dividends. As described below, the Federal Deposit Insurance Corporation (“FDIC”) and the Banks’ regulatory agencies may regulate the amount of dividends payable by the subsidiary banks. The inability of the Bank to pay a dividend may have an adverse effect on the Company.

Regulation of the Bank

The Bank is organized under New Hampshire law and is subject to the regulations of the Commissioner and the FDIC, including requirements and restrictions related to the maintenance of adequate levels of capital, the payment of dividends, investments, the nature and amount of loans which can be originated and the rate of interest that can be charged thereon, and other activities. Capital requirements applicable to the Bank are substantially similar to those adopted by the FRB regarding bank holding companies as described above.

Insurance of Accounts and FDIC Regulation. The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Bank Insurance Fund-member institutions. The FDIC has established a risk-based premium system under which the FDIC classifies institutions based on their capital ratios and on other relevant factors and generally assesses higher rates on those institutions that tend to pose greater risks to the federal deposit insurance funds. The Federal Deposit Insurance Act (“FDIA”) does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. During 2005, the Bank risk classification was A1, the most favorable rating, resulting in premiums totaling $63,000. As a result of general economic conditions, and a decline in the health of the banking industry, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. We cannot predict whether the FDIC will be required to increase deposit insurance assessments on the Banks above their current levels.

5

In February 2006, Congress enacted the Federal Deposit Insurance Reform Act of 2005 (the “FDIR Act”). As a result of the passage of the FDIR Act, over the course of the next year, among other things: (i) the BIF will be merged with the FDIC’s Savings Association Insurance Fund creating the Deposit Insurance Fund (the “DIF”); (ii) the $100,000 per account insurance level will be indexed to reflect inflation; (iii) deposit insurance coverage for certain retirement accounts will be increased to $250,000; and (iv) a cap will be placed on the level of the DIF and dividends will be paid to banks once the level of the DIF exceeds the specified threshold.

Bank Holding Company Support of Subsidiary Banks. Under FRB policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of FDIA, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.” The Bank is an FDIC-insured depository institution.

Regulatory Capital Requirements. The FRB and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth.

The FRB risk-based guidelines define a three-tier capital framework. Tier 1 capital includes common stockholders’ equity and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for loan losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the FRB and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is four percent and the minimum total capital ratio is eight percent. The Company’s tier 1 calculation as of December 31, 2005 equaled 13.07% and its total capital ratio as of December 31, 2005 was 15.24%.

The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets for the quarter. Although the stated minimum ratio is 100 to 200 basis points above three percent, banking organizations are required to maintain a ratio of at least five percent to be classified as “well capitalized”. The Company’s leverage ratio as of December 31, 2005 was 8.96%.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.

The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 risk-based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent and a leverage ratio of at least five percent and not be subject to a capital directive order.

6

Regulators also must take into consideration (a) concentrations of credit risk; (b) interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position); and (c) risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination. In addition, the Company, and any bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations. As of December 31, 2005, the most recent notification from the FDIC categorized the Bank as “well capitalized”.

In October 2005, the federal banking agencies issued an advance notice of proposed rulemaking (“ANPR”) concerning potential changes in the risk-based capital rules (“Basel IA”) that are designed to apply to, and potentially reduce the risk capital requirements of bank holding companies, such as the Company, that are not among the 20 or so larges US bank holding companies. It remains uncertain whether the Basel IA rules will be adopted and, even if adopted, how closely the final Basel IA rules will resemble the rules described in the ANPR and what the effective date of such rules will be. Accordingly, the Company is not yet in a position to determine the effect of such rules on its risk capital requirements.

Transactions with Affiliates. Under Sections 23A and 23B of the Federal Reserve Act and Regulation W thereunder, there are various legal restrictions on the extent to which a bank holding company and its non-bank subsidiaries may borrow, obtain credit from or otherwise engage in "covered transactions" with its FDIC insured depository institution subsidiaries. Such borrowings and other covered transactions by an insured depository institution subsidiary (and its subsidiaries) with its non-depository institution affiliates are limited to the following amounts: (a) in the case of one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed ten percent (10%) of the capital stock and surplus of the insured depository institution; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed twenty percent (20%) of the capital stock and surplus of the insured depository institution.

"Covered transactions" are defined by statute for these purposes to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the Federal Reserve Board, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Covered transactions are also subject to certain collateral security requirements. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.

Limitations on Bank Dividends. The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis.

Customer Information Security. The FDIC and other bank regulatory agencies have adopted final guidelines for establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the Gramm-Leach-Bliley Act of 1999 or “GLBA,” which establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework. Specifically, the Information Security Guidelines established by the GLBA require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The federal banking regulators have issued guidance for banks on response programs for unauthorized access to customer information. This guidance, among other things, requires notice to be sent to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.” Various states have enacted legislation concerning breaches of data security and various bills requiring consumer notice of data security breaches are being considered by Congress.

Privacy. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires financial institutions to explain to consumers their policies and procedures regarding the disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures.

USA Patriot Act. The USA Patriot Act of 2001, designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers, mutual funds, insurance companies and businesses of other types involved in the transfer of money. The USA Patriot Act, together with the implementing regulations of various federal regulatory agencies, have caused financial institutions, including banks, to adopt and implement additional, or amend existing, policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting, customer identity verification and customer risk analysis. The statute and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB (and other federal banking agencies) to evaluate the effectiveness of an applicant and a target institution in combating money laundering activities when considering applications filed under Section 3 of the BHCA or under the Bank Merger Act. Management believes that the Company is in compliance with all the requirements prescribed by the USA Patriot Act and all applicable final implementing regulations.

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The Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires lenders to identify the communities served by the institution's offices and other deposit taking facilities and to make loans and investments and provide services that meet the credit needs of these communities. Regulatory agencies examine each of the banks and rate such institutions’ compliance with CRA as "Outstanding", "Satisfactory", "Needs to Improve," or "Substantial Noncompliance". Failure of an institution to receive at least a "Satisfactory" rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in activities newly permitted as a financial holding company under the GLBA and acquisitions of other financial institutions. The FRB must take into account the record of performance of banks in meeting the credit needs of the entire community served, including low-and moderate-income neighborhoods. The Bank has achieved a rating of Satisfactory on their respective most recent examination. New Hampshire also has enacted substantially similar community reinvestment requirements. In 2005, the federal banking agencies adopted less burdensome CRA requirements for “intermediate - small banks,” which are banks with $250 million or more, but less than $1 billion in total assets, under which such banks, including Northway Bank, will be examined using only two tests, a Lending Test and a new Community Development Test, and will be relieved of certain data collection and reporting requirements.

Competition

The banking industry in the United States, which includes commercial banks, savings and loan associations, mutual savings banks, capital stock savings banks, credit unions, and bank and savings and loan holding companies, is part of the broader financial services industry which includes insurance companies, mutual funds, and the brokerage industry, among others. In recent years, intense market demands and economic pressures have eroded once clearly defined industry classifications and have forced financial services institutions to diversify their services, increase returns on deposits, and become more cost-effective as a result of competition with one another and with new types of financial services companies, including non-bank competitors.

The Company’s banking subsidiary faces significant competition in its markets from commercial banks, savings banks, credit unions, consumer finance companies, insurance companies, "non-bank banks," mutual funds, government agencies, investment management companies, investment advisors, brokers and investment bankers. In addition, increasing consolidation within the banking and financial services industry, as well as increased competition from larger regional and out-of-state banking organizations and non-bank providers of various financial services, may adversely affect the Company’s ability to achieve its financial goals. Federal banking laws permit adequately capitalized bank holding companies to venture across state lines to offer banking services through bank subsidiaries to a wider geographic market. Consequently, it is possible for large organizations to enter many new markets including the markets served by the Company. Certain of these competitors, by virtue of their size and resources, may enjoy certain efficiencies and competitive advantages over the Company in pricing, delivery, and marketing of their products and services. The Company’s long-term success depends on the ability of the Company’s banking subsidiaries to compete successfully with other financial institutions in their service areas. It is not possible to assess what impact these changes in the regulatory environment will have on the Company. Many of these large competitors have significantly more financial resources, larger market share and greater name recognition in the market areas served by the Company and its banking subsidiaries.

The Bank competes in this environment by providing a broad range of financial services, competitive interest rates and a personal level of service that, combined, tend to retain the loyalty of its customers in its market areas against competitors with far larger resources. To a lesser extent, convenience of branch locations and hours of operations are also considered competitive advantages of the Bank.

Employees

As of December 31, 2005 the Company has 234 full-time equivalent employees. The Company considers its employee relations to be good.

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Website Access to Company Reports

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Company’s website at www.northwaybank.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Also, copies of the Company’s annual report will be made available, free of charge, upon written request.

ITEM 1A. RISK FACTORS

Recent accounting changes could give rise to adverse changes in the regulatory capital treatment of our outstanding junior subordinated debenture, which, in turn, could adversely affect our regulatory capital position. In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) that addresses the consolidation rules to be applied to “variable interest entities” as defined in FIN 46. FIN 46, which applies to certain variable interest entities as of February 1, 2003 and to all variable interest entities as of December 14, 2003, provides that certain variable interest entities should not be treated as consolidated subsidiaries. Northway Capital Trust I and Northway Capital Trust II, our Delaware statutory business trusts, may constitute variable interest entities. Historically, issuer trusts, such as Northway Capital Trust I and Northway Capital Trust II that issued junior subordinated debentures have been consolidated by their parent companies. In addition, junior subordinated debentures have been treated as eligible for Tier 1 capital treatment by bank holding companies under the FRB’s rules and regulations relating to minority interests in equity accounts of consolidated subsidiaries. Accordingly, we have consolidated our existing issuer trusts in preparing our consolidated financial statements in the past, and our outstanding junior subordinated debentures have been treated as Tier 1 capital.

On December 24, 2003, FASB issued a revision to FIN 46 (“FIN46R”), to clarify some of the provisions of FIN 46. Based on FIN46R, we deconsolidated our existing issuer trusts as of December 31, 2003, and restated our historical financial statements. The adoption of FIN46R results in the reclassification of the redeemable junior subordinated debentures from mezzanine capital to other liabilities as well as the reclassification of interest cost from minority interest to interest expense.

This deconsolidation could result in a change to the regulatory capital treatment of junior subordinated debentures issued by us and other U.S. bank holding companies. Specifically, it is possible that since the issuer trusts would no longer be consolidated by us the junior subordinated debentures issued by each such issuer trust would not be considered a minority interest in equity accounts of a consolidated subsidiary and therefore not be accorded Tier 1 capital treatment by the FRB. Trust preferred securities have historically been eligible for Tier 1 capital treatment by bank holding companies under FRB rules and regulations relating to minority interests in equity accounts of consolidated subsidiaries. Following the issuance of FIN 46, including the consolidation rules with respect to variable interest entities, the FRB requested public comment on a proposed rule that would limit trust preferred securities in the Tier 1 capital of bank holding companies, but with stricter limits and clearer qualitative standards. After considering the public comments, the FRB issued a final rule on March 1, 2005, which provides that after a five-year transition period ending on March 31, 2009, the aggregate amount of the trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill and intangibles. As of December 31, 2005, assuming the aggregate amount of the trust preferred securities is limited to 25% of Tier 1 capital, we would still exceed the regulatory required minimums for capital adequacy purposes.

We could be adversely impacted by changes in applicable regulations. We are subject to extensive federal and state laws and regulations and are subject to supervision, regulation and examination by various federal and state bank regulatory agencies. The restrictions imposed by such laws and regulations limit the manner in which we and our bank subsidiary may conduct business and obtain financing. There can be no assurance that any modification of these laws and regulations, or new legislation that may be enacted, in the future will not make compliance more difficult or expensive, restrict our ability to originate, broker or sell loans or otherwise adversely affect our operations. See “Supervision and Regulation” on page 4 of this report.

Our business is largely dependent upon the hospitality industry. A number of our loan customers are in the hospitality industry. The hospitality industry is dependent on personal discretionary spending levels. As a result, the hospitality industry may be adversely impacted by economic trends, including recession and increased unemployment. Additionally, unforeseen events including acts of terrorism, war, increases in fuel prices, travel-related accidents and unusual weather patterns also may adversely affect the hospitality industry. As a result, our business also is likely to be adversely affected by those events.

Interest rate volatility may adversely impact our results of operations. The principal component of our income stream is net interest and dividend income. Net interest and dividend income is the difference between interest and fee income on earning assets, such as loans and investments, and the interest expense paid on interest bearing liabilities, such as deposits and borrowed funds. Our net interest and dividend income may be significantly affected by changes in market interest rates. A decrease in interest rates could reduce our net interest and dividend income as the difference between interest and fee income and interest expense decreases. An increase in interest rates could also negatively impact our results of operations by reducing borrowers’ ability to repay their current loan obligations, resulting in increased loan defaults, foreclosures and write-offs and could necessitate increases to our allowance for loan losses.

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Our allowance for loan losses may not be adequate to cover actual losses. We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for potential loan losses based on several factors. If our assumptions are incorrect, our allowance for loan losses may be insufficient to cover our actual losses, which would have an adverse effect on our results of operations, and may cause us to increase the allowance in the future.

Changes in the securities market may adversely impact our results of operations. In recent years the securities market has experienced a significant downturn and will likely continue to experience volatility as a result of, among other things, global economic and political conditions. Continued declines in equity prices, as well as declines in the performance of certain sectors or specific companies, may result in a corresponding decline in the value of Company-held securities. The decline in the value of Company-held securities may decrease our earnings.

Our loans are concentrated in certain areas of New Hampshire and adverse conditions in those markets could adversely affect our operations. We are exposed to real estate and economic factors in the northern and central areas of New Hampshire, as virtually the entire loan portfolio is concentrated among borrowers in these markets. Further, because a substantial portion of the loan portfolio is secured by real estate in this area, the value of the associated collateral is also subject to regional real estate market conditions. Adverse economic, political or business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If these regions experience adverse economic, political or business conditions, we would likely experience higher rates of loss and delinquency on these mortgage loans than if the loans were more geographically diverse.

If we do not maintain net income growth, the market price of our common stock could be adversely affected. Our return on shareholders’ equity and other measures of profitability, which affect the market price of our common stock, depend in part on our continued growth and expansion. Our growth strategy has two principal components—internal growth and external growth. Our ability to generate internal growth is affected by the competitive factors described below as well as by the primarily rural characteristics and related demographic features of the markets we serve. Our ability to continue to identify and invest in suitable acquisition candidates on acceptable terms is crucial to our external growth. In pursuing acquisition opportunities, we may be in competition with other companies having similar growth strategies. As a result, we may not be able to identify or acquire promising acquisition candidates on acceptable terms. Competition for these acquisitions could result in increased acquisition prices and a diminished pool of acquisition opportunities. An inability to find suitable acquisition candidates at reasonable prices could slow our growth rate and have a negative effect on the market price of our common stock.

We experience strong competition within our markets, which may impact our profitability. Competition in the banking and financial services industry is strong. In our market areas, we compete for loans and deposits with local independent banks, thrift institutions, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally as well as nationally. Many of these competitors have substantially greater resources and lending limits than those of our subsidiaries and may offer services that our subsidiaries do not or cannot provide. Our long-term success depends on the ability of our subsidiaries to compete successfully with other financial institutions in their service areas. Because we maintain a smaller staff and have fewer financial and other resources than larger institutions with which we compete, we may be limited in our ability to attract customers. If we are unable to attract and retain customers, we may be unable to sustain growth in the loan portfolio and our results of operations and financial condition may otherwise be negatively impacted.

Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures. Our banking subsidiary has traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a less costly source of funds than borrowings because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at our banking subsidiary decreases relative to our overall banking operations, we may have to rely more heavily on borrowings as a source of funds in the future.

Our banking business is highly regulated. Bank holding companies, national banking associations and state-chartered banks operate in a highly regulated environment and are subject to supervision, regulation and examination by various federal and state bank regulatory agencies, as well as other governmental agencies in the states in which they operate. Federal and state laws and regulations govern numerous matters including changes in the ownership or control of banks and BHCs, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The FDIC possesses cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to BHCs. These and other restrictions limit the manner in which we may conduct business and obtain financing.

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Furthermore, our business is affected not only by general economic conditions, but also by the economic, fiscal and monetary policies of the United States and its agencies and regulatory authorities, particularly the FRB. The economic and fiscal policies of various governmental entities and the monetary policies of the FRB may affect the interest rates our bank subsidiaries must offer to attract deposits and the interest rates they must charge on loans, as well as the manner in which they offer deposits and make loans. These economic, fiscal and monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally, including our bank subsidiaries.

We could be held responsible for environmental liabilities of properties we acquire through foreclosure. If we are forced to foreclose on a defaulted mortgage loan to recover our investment, we may be subject to environmental liabilities related to the underlying real property. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties during our ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that we would not be fully liable for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property, or that we could recoup any of the costs from any third party.

To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. Although we do not have an aggressive acquisition strategy, we have acquired, and in the future, will continue to consider the acquisition of, other financial services companies. To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. These risks include the following:

· The risk that the acquired business will not perform in accordance with management’s expectations;

· The risk that difficulties will arise in connection with the integration of the operations of the acquired business with the operation of our businesses;

· The risk that management will divert its attention from other aspects of our business;

· The risk that we may lose key employees of the acquired business; and

· The risks associated with entering into geographic and product markets in which we have limited or no direct prior experience.

Due to the nature of our business, we may be subject to litigation from time to time, some of which may not be covered by insurance. Through our bank subsidiary, we operate in a highly regulated industry, and as a result, are subject to various regulations related to disclosures to our customers, our lending practices, and other fiduciary responsibilities. From time to time, we have been, and may become, subject to legal actions relating to our operations that have had, or could, involve claims for substantial monetary damages. Although we maintain insurance, the scope of this coverage may not provide us with full, or even partial, coverage in any particular case. As a result, a judgment against us in any such litigation could have a material adverse effect on our financial condition and results of operation.

Changes in tax legislation could have a material impact on our results of operations. Changes in tax legislation could have a material impact on our results of operations.

ITEM 2. PROPERTIES

The Company operates 18 branch offices and one commercial lending and administration facility that are located in the central and northern New Hampshire communities of Berlin, Conway (four offices), Gorham, Groveton, Littleton, West Ossipee, West Plymouth, Plymouth, Campton, Ashland, North Woodstock, Tilton, Franklin, Laconia, Belmont, and Pittsfield. Fourteen of these offices are located on properties the Company owns. The Company leases five of its branches under contracts that expire between April 30, 2006 and December 31, 2015. Furthermore, two of the leases have an option to renew for an additional five years. Seventeen of the Company’s branches have drive-up facilities and all are equipped with automated teller machines.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to, nor are any of its subsidiaries the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to the business.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter ended December 31, 2005.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is traded on The Nasdaq Stock Market, Inc.’s National Market under the symbol “NWFI”. The following table sets forth, for the periods indicated, the high and low closing sale prices for the common stock, as reported by The Nasdaq National Market, and the dividends paid on the common stock:

		Price Per Share				Dividends
		Low		High		Per Share
2005	4th Quarter	$	31.59	$	35.31	$	0.18
	3rd Quarter		30.27		35.56		0.18
	2nd Quarter		29.61		33.77		0.18
	1st Quarter		32.37		35.24		0.17
2004	4th Quarter	$	31.30	$	34.96	$	0.17
	3rd Quarter		29.30		35.12		0.17
	2nd Quarter		33.50		38.60		0.17
	1st Quarter		34.03		38.00		0.17

The Company intends to continue to pay dividends on a quarterly basis subject to, among other things, the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends.

On March 1, 2006, the closing sales price of the common stock on the Nasdaq National Market was $37.49 per share. As of such date, there were approximately 1,130 holders of record of the Company common stock.

The following table sets forth, for the periods indicated, information regarding stock repurchases:

Period	Total Number of Shares Purchased	Average Price Paid per Share	Maximum Number of Shares that May Yet Be Purchased Under the Plan
October 1, 2005 to October 31, 2005	-	-	81,515
November 1, 2005 to November 30, 2005	6,000	$33.50	75,515
December 1, 2005 to December 31, 2005	-	-	75,515
Total	6,000	$33.50

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth the selected consolidated financial information of the Company for the five years in the period ended December 31, 2005. This selected consolidated financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing under Item 7 of this report and “Financial Statements and Supplementary Data” appearing under Item 8 of this report.

At or for the years ended December 31,	2005			2004			2003			2002			2001
(Dollars in thousands, except per share data)
Balance Sheet Data:
Total assets	$	632,734		$	638,418		$	609,216		$	598,945		$	513,939
Securities available-for-sale, at fair value		103,244			101,133			68,082			87,776			55,564
Loans, net of unearned income		460,373			474,706			473,619			445,773			400,316
Allowance for loan losses		5,150			5,204			5,036			4,920			4,642
Other real estate owned		196			-			175			22
Unidentifiable intangible assets		-			-			-			-			8,080
Goodwill		10,152			10,152			10,152			10,152			-
Core deposit intangibles, net		1,995			2,949			3,903			4,857			-
Deposits		464,456			475,359			463,307			476,194			412,840
Long-term debt		105,620			98,620			87,620			66,620			48,028
Stockholders’ equity		50,250			49,510			47,872			44,266			43,339
Income Statement Data:
Net interest and dividend income	$	23,176		$	22,846		$	23,050		$	21,664		$	20,721
Provision for loan losses		75			495			805			900			900
Noninterest income		3,996			5,097			5,375			3,396			2,909
Noninterest expense		23,582			22,394			22,136			20,035			17,149
Net income		2,673			3,388			3,617			2,598			3,873
Per Common Share Data:
Net income - basic	$	1.78		$	2.26		$	2.40		$	1.71		$	2.55
Net income - assuming dilution		1.77			2.24			2.39			1.71			2.54
Cash dividends declared		0.71			0.68			0.68			0.68			0.68
Book value		33.70			32.93			31.92			29.19			28.68
Tangible book value		25.39			24.02			22.30			19.07			23.16
Selected Ratios:
Return on average assets		0.43	%		0.54	%		0.59	%		0.49	%		0.78	%
Return on average equity		5.33			6.97			7.82			5.86			9.14
Dividend payout		39.96			30.10			28.28			39.65			26.54
Average equity to average assets		7.99			7.75			7.61			8.33			8.58

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ITEM 7. 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. It is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. The discussion set forth below contains certain statements that may be considered “forward-looking statements.” Forward-looking statements involve risks, uncertainties and other factors that may cause the Company’s actual results to materially differ from those projected in the forwarding-looking statements. For further information regarding forward-looking statements, you should review the discussion under the caption “FORWARD-LOOKING STATEMENTS” on page 1 of this report.

OVERVIEW OF PERFORMANCE

The Company derives substantially all of its revenue and income from community bank-related activities. The Bank operates as a typical community banking institution and does not engage in any specialized finance or capital markets activities. Northway functions primarily as the holder of stock of its subsidiary and assists in the management of the operations of its subsidiary as appropriate.

The principal components of the Company’s income sources are net interest and dividend income. Net interest and dividend income is the difference between interest and fee income received on income earning assets, such as loans and investments, and the interest expense paid on interest bearing liabilities, such as deposits and borrowed funds. Our other sources of income include revenues from deposit account service fees and fee-based services, such as debit card and ATM fees and sales of securities.

Economic and industry factors that could cause the Company’s financial performance to differ from expected results include changes in applicable federal and state regulations, changes in the hospitality industry on which the Company’s business is largely dependent, interest rate volatility, significant changes in loan losses which may affect the Company’s allowance for loan losses and the related provision for loan losses, and changes in the securities market that would affect the performance of the Company’s investment portfolio. Management evaluates each of these factors on an ongoing basis to determine their impact and to effect any strategies necessary to mitigate these risks.

The Company reported net income of $2,673,000, or $1.78 per common share, in 2005 compared to net income of $3,388,000, or $2.26 per common share, in 2004 and $3,617,000, or $2.40 per common share, in 2003. Return on average equity was 5.33% in 2005, compared to 6.97% in 2004 and 7.82% in 2003. Return on average assets was 0.43% in 2005, compared to 0.54% in 2004 and 0.59% in 2003.

During 2005, the Company recorded an increase in net interest and dividend income of $330,000, as an increase in the average yield on earning assets of 0.33% and an increase in average earning assets of $2,079,000 was only partially offset by an increase in the cost of interest bearing liabilities of 0.31%. During 2005, interest income increased $1,827,000 due primarily to an improvement in the yield on loans as well as an increase in investment balances. Partially offsetting this, interest expense increased $1,497,000 as money market and certificates of deposit rates increased, keeping pace with the rise in interest rates. The Company recorded a reduction in the provision for loan losses of $420,000 as the total provision for 2005 was $75,000 compared to $495,000 for 2004. The decrease in the provision for loan losses was the result of an ongoing review of the adequacy of the allowance for loan losses. Noninterest income, excluding securities gains, increased $203,000 from last year due primarily to improvements in overdraft income, commissions on alternative investments and debit card fees, which was partially offset by decreases in gains on sales of loans and loan fees. During 2005, the Company realized net securities losses totaling $551,000 compared to net securities gains of $753,000 for the prior year. These net losses in 2005 were the result of the restructuring of the investment portfolio as well as the sale of corporate bonds at a loss of $499,000. Noninterest expense increased $1,188,000 due primarily to one-time costs of $1,161,000 associated with the merger of the two banks.

During 2004, the Company recorded a decrease in interest and dividend income of $1,230,000, as a decrease in the average yield on earning assets of 0.39% was only partially offset by an increase in average earning assets of $18,885,000. This was partially offset by the fact that the continuation of a low interest rate environment provided the Company further opportunity to reduce its average cost of interest bearing liabilities. During 2004, the cost of interest bearing liabilities decreased 0.25%, resulting in a decrease in interest expense of $1,026,000. The Company recorded a reduction in the provision for loan losses of $310,000 as the total provision for 2004 was $495,000 compared to $805,000 for 2003. The decrease in the provision for loan losses was the result of an ongoing review of the adequacy of the allowance for loan losses. Noninterest income, excluding securities gains, increased $491,000 from 2003. This reflects, in part, the impact of a new non-deposit product line introduced earlier in 2004, in addition to our continuing efforts to maximize all components of noninterest income, including the introduction of Bounce Protection™ in 2004. Less favorable market conditions for investment securities resulted in lower securities gains for 2004 than in 2003, as realized gains decreased $769,000 to $753,000. Noninterest expense increased $258,000 to $22,394,000 in 2004 compared to $22,136,000 in 2003 due primarily to an increase in salaries and benefits expense.

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NET INTEREST AND DIVIDEND INCOME ANALYSIS

Fluctuations in interest rates as well as changes in volume and mix of income earning assets and interest bearing liabilities can materially impact net interest and dividend income, the principal source of our income. The discussion of net interest and dividend income is presented on a taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among various taxable and tax-exempt assets.

The table below under the caption “Consolidated Average Balances, Interest and Dividend Income/Expense and Average Yields/Rates,” presents the average balances, income earned or interest paid, and average yields earned or rates paid on the Company’s assets and liabilities for the years ended December 31, 2005, 2004, and 2003.

Net interest and dividend income for 2005 increased $489,000, or 2%, compared to 2004. Interest and dividend income increased $1,986,000, or 7%, in 2005 compared to 2004. Rising interest rates resulted in an improvement in the yield on loans of 0.42% which was partially offset by a decline in average balances of $19,824,000, resulting in an increase in interest and fees on loans of $821,000. Further, the average balance of investments increased $23,097,000 resulting in an improvement in investment income of $966,000.

The increase in interest income was partially offset by an increase in interest expense of $1,497,000, or 20%, in 2005 compared to 2004. Interest expense increased due primarily to an increase in the cost of interest bearing liabilities of 0.31%. This increase was the result of an increase in rates paid on money market accounts, certificates of deposit, securities sold under agreements to repurchase, and junior subordinated debentures. These rates increased as a result of the increase in general interest rates during 2005.

Net interest and dividend income for 2004 decreased $162,000, or 1%, compared to 2003. Interest and dividend income decreased $1,188,000, or 4%, in 2004 compared to 2003. The continued suppression of market interest rates during 2004 resulted in a 0.39% decrease in the yield on average earning assets. A 0.48% decrease in the yield on loans was partially offset by an increase in average loan balances of $17,105,000. This resulted in a net decrease of $1,294,000, or 5%, in interest and fees on loans. The decrease in interest and fees on loans was partially offset by an increase in interest and dividend income on securities of $100,000, which was the result of an increase in average balances of $6,450,000 partially offset by a decrease in average yield of 0.22%.

Interest expense decreased $1,026,000, or 12%, in 2004 compared to 2003. The decrease in interest expense was due primarily to a 0.25% decrease in rates paid on interest bearing liabilities partially offset by an increase in average balances of $11,061,000. The increase in average balances was primarily the result of increases in average Federal Home Loan Bank (“FHLB”) advances of $17,473,000. Total average deposits, including noninterest bearing DDA, decreased $1,373,000 but a shift in the mix of deposits resulted in a decrease in time deposits of $20,791,000 partially offset by higher average balances in demand deposits, NOW accounts and savings accounts, which are all lower cost sources of funds for the Company.

The trend in net interest and dividend 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 and dividend 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 0.07% to 4.06% in 2005 after having decreased 0.17% to 3.99% in 2004. The increase in the net interest margin for 2005 was a direct result of the increase in the yield on earning assets, which increase was only partially offset by the increase in the cost of funds.

The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. The interest rate spread eliminates the impact of noninterest bearing funds and gives a direct perspective on the effect of interest rate fluctuations. During 2005, the net interest rate spread increased 0.02% to 3.80% as the yield on earning assets increased 0.33% and was only partially offset by an increase in the cost of interest bearing liabilities of 0.31%. During 2004, the net interest rate spread decreased 0.14% to 3.78% as the yield on earning assets declined 0.39% and was only partially offset by a decrease in the cost of interest bearing liabilities of 0.25%.

See the tables below under the captions “Consolidated Average Balances, Interest and Dividend Income/Expense and Average Yields/Rates” and “Consolidated Rate/Volume Variance Analysis” for more information.

15

CONSOLIDATED AVERAGE BALANCES, INTEREST AND DIVIDEND INCOME/EXPENSE

AND AVERAGE YIELDS/RATES

($000 Omitted)

For the Year Ended December 31,

	2005								2004								2003
	Average Balance			Income/ Expense		Average Yield/ Rate			Average Balance			Income/ Expense		Average Yield/ Rate			Average Balance			Income/ Expense		Average Yield/ Rate
Assets
Interest earning assets:
Federal funds sold	$	9,383		$	322		3.43	%	$	10,564		$	125		1.18	%	$	15,153		$	118		0.78	%
Interest bearing deposits		130			3		2.31			143			1		0.70			224			2		0.89
Securities (1) (2)		109,333			4,650		4.25			86,236			3,684		4.27			79,786			3,584		4.49
Loans, net (3) (4)		464,041			27,642		5.96			483,865			26,821		5.54			466,760			28,115		6.02
Total interest earning assets (5)		582,887			32,617		5.60			580,808			30,631		5.27			561,923			31,819		5.66
Cash and due from banks		14,942								15,637								14,907
Allowance for loan losses		(5,254	)							(5,104	)							(4,983	)
Premises and equipment, net		13,453								13,444								12,447
Other assets		21,750								22,574								23,753
Total assets	$	627,778							$	627,359							$	608,047
Liabilities
Interest bearing liabilities:
Regular savings	$	81,534			201		0.25		$	85,319			220		0.26		$	80,741			338		0.42
NOW and super NOW		96,713			356		0.37			97,170			334		0.34			87,212			285		0.33
Money market accounts		68,398			767		1.12			65,286			460		0.70			66,159			495		0.75
Certificates of deposit		135,751			2,769		2.04			140,614			2,136		1.52			161,405			3,304		2.05
Securities sold under agreements to repurchase		8,836			183		2.07			8,611			87		1.01			7,895			123		1.56
FHLB advances		84,437			3,189		3.78			80,744			3,115		3.86			63,271			2,876		4.55
Junior subordinated debentures		20,620			1,463		7.10			20,620			1,079		5.23			20,620			1,036		5.02
Total interest bearing liabilities		496,289			8,928		1.80			498,364			7,431		1.49			487,303			8,457		1.74
Noninterest bearing deposits		77,845								76,915								71,160
Other liabilities		3,466								3,475								3,307
Total liabilities		577,600								578,754								561,770
Stockholders' equity		50,178								48,605								46,277
Total liabilities and stockholders' equity	$	627,778							$	627,359							$	608,047
Net interest and dividend income (6)				$	23,689							$	23,200							$	23,362
Interest rate spread (7)							3.80	%							3.78	%							3.92	%
Net interest margin (8)							4.06	%							3.99	%							4.16	%

(1) Reported on a tax equivalent basis. Reported interest on securities of $4,465,000, $3,582,000 and $3,470,000 was adjusted by $185,000, $102,000 and $114,000, for 2005, 2004 and 2003, respectively, to reflect the tax equivalent adjustment.

(2) Average balances are calculated using the adjusted cost basis.

(3) Reported on a tax equivalent basis. Reported interest and fees on loans of $27,314,000, $26,569,000 and $27,917,000 was adjusted by $328,000, $252,000 and $198,000 for 2005, 2004 and 2003, respectively, to reflect the tax equivalent adjustment.

(4) Net of unamortized cost/unearned income. Includes loans held for sale and nonperforming loans.

(5) Reported on a tax equivalent basis. Reported interest and dividend income of $32,104,000, $30,277,000 and $31,507,000 was adjusted by $513,000, $354,000 and $312,000 for 2005, 2004 and 2003, respectively, to reflect the tax equivalent adjustment.

(6) Reported on a tax equivalent basis. Reported net interest and dividend income of $23,176,000, $22,846,000 and $23,050,000 was adjusted by $513,000, $354,000 and $312,000 for 2005, 2004 and 2003, respectively, to reflect the tax equivalent adjustment.

(7) Interest rate spread equals the yield on interest earning assets minus the rate paid on interest bearing liabilities.

(8) The net interest margin equals net interest and dividend income divided by total average interest earning assets.

16

CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS⁽¹⁾

	($000 Omitted)
	2005 Compared to 2004 Increase (Decrease) Due to Change In												2004 Compared to 2003 Increase (Decrease) Due to Change In
	Volume			Rate			Mix			Total			Volume			Rate			Mix			Total
Interest and dividend income:
Federal funds sold	$	(14	)	$	238		$	(27	)	$	197		$	(36	)	$	61		$	(18	)	$	7
Interest bearing deposits		-			2			-			2			(1	)		-			-			(1	)
Securities		987			(16	)		(5	)		966			290			(176	)		(14	)		100
Loans, net		(1,099	)		2,002			(82	)		821			1,030			(2,242	)		(82	)		(1,294	)
Total interest and dividend income		(126	)		2,226			(114	)		1,986			1,283			(2,357	)		(114	)		(1,188	)
Interest expense:
Regular savings		(10	)		(9	)		-			(19	)		19			(130	)		(7	)		(118	)
NOW and super NOW		(2	)		24			-			22			32			15			2			49
Money market accounts		22			272			13			307			(6	)		(29	)		-			(35	)
Certificates of deposit		(74	)		732			(25	)		633			(426	)		(852	)		110			(1,168	)
Securities sold under agreements to repurchase		2			91			3			96			11			(43	)		(4	)		(36	)
FHLB advances		143			(66	)		(3	)		74			794			(435	)		(120	)		239
Junior subordinated debentures		-			384			-			384			-			43			-			43
Total interest expense		81			1,428			(12	)		1,497			424			(1,431	)		(19	)		(1,026	)
Net interest and dividend income	$	(207	)	$	798		$	(102	)	$	489		$	859		$	(926	)	$	(95	)	$	(162	)

(1) Reported on a tax equivalent basis.

PROVISION FOR LOAN LOSSES

The provision for loan losses represents the annual cost of providing an allowance for losses inherent in the loan portfolio. The size of the provision for each year is determined by management based 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 provision for loan losses was $75,000 in 2005, a decrease of $420,000 from the provision recorded in 2004. The 2004 provision of $495,000 decreased $310,000 from the provision recorded in 2003. The provision for each of the three years was based upon a review of the adequacy of the allowance for loan losses, which is conducted on a quarterly basis. These reviews are based upon many factors, including the risk characteristics of the portfolio, trends in loan delinquencies, and an assessment of existing economic conditions. In addition, various regulatory agencies, as part of their examination process, review the Company’s allowance for loan losses and such review may result in changes to the allowance based on judgments different from those of management.

The decrease in the 2005 provision was due in part to a reduction in average loans of $19,824,000, which was primarily the result of a decrease in average indirect installment loans which declined $53,234,000. The decrease in the 2004 provision was due in part to a reduction in average impaired loans of $1,100,000 as well as the fact that the Company realized significant recoveries during 2004, which allowed the Company to maintain its coverage ratio.

Although management utilizes its best judgment in providing for losses, there can be no assurance that the Company will not have to change its provision for loan losses in subsequent periods. Management will continue to monitor the allowance for loan losses and modify the provision to the allowance for loan losses as appropriate. For additional information regarding estimates in the assessment of the allowance for loan losses see “Application of Critical Accounting Policies” below.

17

NONINTEREST INCOME

Noninterest income consists of revenues generated from a broad range of financial services and activities, including fee-based services and income earned through securities sales.

The following table sets forth the components of the Company’s noninterest income:

	($000 Omitted) Years Ended December 31,
	2005			2004		2003
Service charges and fees on deposit accounts	$	2,430		$	2,229	$	1,673
Loss (gain) on sales of securities available-for-sale, net		(551	)		753		1,522
Gain on sales of loans, net		260			374		422
Other		1,857			1,741		1,758
Total noninterest income	$	3,996		$	5,097	$	5,375

Fee income from service charges and fees on deposit accounts increased 9% in 2005, 33% in 2004 and 14% in 2003. The improvement in 2005 is due primarily to an increase in overdraft income due to the full year impact of the introduction of Bounce Protection™, an overdraft privilege program, in April 2004. The improvement in 2004 was due principally to increases in overdraft fee income as the Company introduced new fee schedules in December 2003. In addition, 2004 overdraft income was positively impacted by the Bounce Protection™ introduction. The improvement in 2003 was due principally to increases in overdraft fee income and service charge income resulting from the full year impact of the branch acquisitions completed in October 2002.

During 2005, the Company recognized a net loss on sales of securities of $551,000 compared to net gains on sales of securities of $753,000 in 2004 and $1,522,000 in 2003. Securities losses in 2005 were primarily due to the restructuring of the investment portfolio, which resulted in the sale of U.S. Government Agency bonds at a loss, as well as the sale of corporate bonds at a loss of $499,000. Securities gains in 2004 and 2003 were the result of improved market conditions for investment securities. Securities losses, net, in 2005 included $117,000 of net gains on sales of equity securities compared to net gains of $253,000 in 2004 and net losses of $147,000 in 2003. Net losses on the sales of debt securities totaled $668,000 in 2005 compared to net gains of $500,000 in 2004 and $1,669,000 in 2003.

Gains on sales of loans, net, decreased $114,000 in 2005 compared to 2004. Gains on sales of mortgage loans remained relatively unchanged at $112,000 from the prior year. Gains on sales of commercial loans declined $109,000 due to the fact that during 2004 the Company sold a portfolio of commercial loans guaranteed by the Small Business Administration for a gain of $178,000. Gains on sales of loans, net, decreased $48,000 in 2004 compared to 2003. Gains on sales of mortgage loans decreased $228,000 as the Company opted to retain a greater portion of fixed rate mortgages in portfolio in 2004 compared to 2003. This was partially offset by the Company’s sale of a portfolio of commercial loans guaranteed by the Small Business Administration for a gain of $178,000 in 2004. The low interest rate environment in 2003 resulted in significant mortgage refinancing activity. Therefore, during 2003 the Company decided to sell a portion of this loan volume in the secondary market based on the Company’s underwriting standards. The result of these sales was an increase in gain on sale of loans of $163,000 to $422,000 in 2003.

Other noninterest income (sources of which include debit card interchange fees, credit card merchant and fee income, automated teller machine fees, loan fees, safe deposit fees and commissions on alternative investment products) increased $116,000, or 7%, to $1,857,000 in 2005 following a decrease of $17,000, or 1%, to $1,741,000 in 2004 and an increase of $245,000, or 16%, to $1,758,000 in 2003. The increase in 2005 was due primarily to an increase in income from alternative investments products as well as an increase in debit card income. The decrease in 2004 compared to 2003 was due primarily to the recognition of approximately $191,000 in other loan fees resulting from transactions with Federal Home Loan Mortgage Corporation (“FHLMC”). This decrease was partially offset by the introduction of alternative investment products offered by the Company, which increased fee income by approximately $126,000. The increase in 2003 compared to 2002 was due primarily to the increase in other loan fees.

NONINTEREST EXPENSE

Total noninterest expense increased $1,188,000, or 5%, during 2005 following an increase $258,000, or 1%, during 2004 and an increase of $2,101,000, or 10%, during 2003. The increase in expenses during 2005 is due primarily to one-time merger related expenses of $1,161,000. The increase in expenses during 2004 was due primarily to an increase in salaries and employee benefits. The increase in expenses during 2003 was due in large part to the full year impact of the October 2002 branch purchases, which contributed to the overall increase in salaries and benefits expense, office occupancy and equipment expense and increased expenses associated with the amortization of core deposit intangibles.

18

NONINTEREST EXPENSE (CONTINUED)

The following table sets forth information relating to the Company's noninterest expense during the periods indicated:

	($000 Omitted) Years Ended December 31,
	2005		2004		2003
Salaries and employee benefits	$	11,592	$	11,981	$	11,426
Office occupancy and equipment		4,090		3,731		3,753
Amortization of core deposit intangibles		954		954		954
Write-down of equity securities		-		-		184
Professional fees		1,523		1,234		1,166
Advertising		757		326		304
Stationery and supplies		647		429		556
Telecommunications		619		595		571
ATM expense		321		295		442
Postage and shipping		317		348		378
Other		2,762		2,501		2,402
Total noninterest expense	$	23,582	$	22,394	$	22,136

Merger related expenses totaled $1,161,000 for 2005 and consisted primarily of advertising expense of $386,000, stationery and supplies of $337,000, equipment expense of $141,000, professional fees of $83,000, legal fees of $81,000 and state transfer tax of $71,000. These one-time costs related to marketing the Northway brand, replacing all existing forms, replacing all existing signage, transfer of real estate, and all necessary legal and computer systems issues related to the merger. These expenses are included in the table above in the appropriate expense categories.

Salaries and employee benefits decreased $389,000, or 3%, from 2004 to 2005 and increased $555,000, or 5%, from 2003 to 2004. The decrease in 2005 was due primarily to a focus on staffing levels, an increase in SFAS No. 91 credits associated with deferred loan origination costs, and a decrease in the expense related to the Supplemental Employee Retirement Plan (“SERP”). The increase in 2004 reflects staff additions in connection with the expansion of the retail franchise, increased lending activities and normal salary and wage increases. Also, during 2004 and 2003, the Company recorded a liability to deferred compensation related to the SERP. Refer to NOTE 15 to the Consolidated Financial Statements for a further discussion regarding the SERP.

Office occupancy and equipment expense increased $218,000, net of merger related expenses of $141,000, during 2005 compared to 2004 and decreased $22,000 from 2003 to 2004. The increase in 2005 was due primarily to increases in building maintenance costs as well as one-time expenses associated with the write-down of leasehold improvements associated with the closure of two supermarket branch facilities.

During 2005 and 2004, the Company recorded no write-down of equity securities compared to $184,000 in 2003. During 2003, five equity securities were determined to be other than temporarily impaired due to sustained weakness in their market sectors as well as weaknesses related to the individual companies.

INCOME TAX EXPENSE

The Company recognized $842,000, $1,666,000 and $1,867,000 in income tax expense for the years ended December 31, 2005, 2004 and 2003, respectively. The effective tax rate was 24.0% for 2005, 33.0% for 2004 and 34.1% for 2003. For additional information relating to income taxes, see NOTE 14 to the Consolidated Financial Statements.

19

ASSETS

Total assets decreased $5,684,000, or 1%, to $632,734,000 at December 31, 2005 compared to $638,418,000 at December 31, 2004. The following is a summary of significant balance sheet changes.

	($000 Omitted) December 31
	2005		2004		Change			% Change
Total assets	$	632,734	$	638,418	$	(5,684	)		(0.9)	%
Earning assets		582,558		592,973		(10,415	)		(1.8	)
Federal funds sold		14,775		10,975		3,800			34.6
Securities available-for-sale, at fair value (1)		108,785		107,013		1,772			1.7
Loans, net of unamortized cost/unearned income		460,373		474,706		(14,333	)		(3.0	)
Deposits		464,456		475,359		(10,903	)		(2.3	)
Borrowings		114,983		109,888		5,095			4.6
Stockholders’ equity		50,250		49,510		740			1.5

⁽¹⁾ 2005 includes Federal Home Loan Bank stock and 2004 includes Federal Home Loan Bank stock and Federal Reserve Bank stock.

The decrease in earning assets of $10,415,000 was due primarily to a decrease in loans partially offset by an increase in federal funds sold and securities available-for-sale. The decrease in earning assets was accompanied by a decline in deposits which was partially offset by an increase in borrowings.

SECURITIES AVAILABLE-FOR-SALE

The Company’s 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. At December 31, 2005 and 2004 the Company had no securities designated as held-to-maturity.

The following table summarizes the Company's securities portfolio at December 31, 2005 and 2004, showing amortized cost and fair value for each category:

	($000 Omitted) December 31,
	2005				2004
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available-for-sale:
U.S. Treasury and U.S. government agency securities	$	48,728	$	47,751	$	54,914	$	54,563
Mortgage-backed securities		24,704		23,931		29,447		29,291
Collateralized mortgage obligations		8		8		10		10
Marketable equity securities		2,695		2,809		1,827		1,931
Corporate bonds		5,541		5,569		12,001		12,287
State and political subdivision bonds and notes		23,396		23,176		2,966		3,051
Total securities available-for-sale	$	105,072	$	103,244	$	101,165	$	101,133

Total securities available-for-sale increased $2,111,000 during 2005 to $103,244,000. While the overall balance of the investment portfolio was relatively unchanged, the Company restructured a portion of portfolio as U.S. government agencies, mortgage-backed securities and corporate bond sales and maturities were redeployed to state and political subdivisions, which provide a higher yield to the Company.

The net unrealized loss on securities available-for-sale was $1,828,000 at December 31, 2005 compared to a net unrealized loss of $32,000 at December 31, 2004. At December 31, 2005, the net unrealized loss on debt securities was $1,942,000 and the net unrealized gain on marketable equity securities was $114,000. At December 31, 2004, the net unrealized loss on debt securities was $136,000 and the net unrealized gain on marketable equity securities was $104,000.

20

SECURITIES AVAILABLE-FOR-SALE (CONTINUED)

Due to the decline in the performance of securities in certain sectors and specific companies within those sectors, the Company determined, through the evaluations described in Note 1 to the Consolidated Financial Statements, that the market values of certain of its marketable equity securities were other than temporarily impaired. As a result, during 2003 net losses on sales of marketable equity securities amounted to $147,000 and write-downs of marketable equity securities amounted to $184,000.

At December 31, 2005, the Company’s investment in equity securities totaled $2,809,000. This amount is net of a market value adjustment of $114,000, of which the full amount was reflected as a gain in accumulated other comprehensive loss in stockholders’ equity.

The Company has a general policy of purchasing investment grade securities and U.S. government securities to minimize credit risk. All securities, however, carry interest rate risk, which affect their market values such that as market yields increase, the value of the Company's securities decline and vice versa. Additionally, mortgage-backed securities carry prepayment risk whereby expected yields may not be achieved due to the inability to reinvest proceeds from prepayment at comparable yields. Moreover, such mortgage-backed securities may not benefit from price appreciation in periods of declining rates to the same extent as the remainder of the portfolio.

A portion of the securities portfolio is pledged to secure public deposits, securities sold under agreements to repurchase, FHLB advances and treasury, tax and loan accounts. Refer to NOTE 3 to the Consolidated Financial Statements for a further discussion of pledging of securities.

LOANS

Gross loans decreased $14,523,000, or 3%, to $460,289,000 at December 31, 2005 compared to December 31, 2004. This decrease was due primarily to a decrease in indirect installment loans of $54,299,000, which was partially offset by increases in residential real estate, commercial real estate, construction loans and installment loans. Gross loans remained relatively unchanged in 2004, increasing $946,000 due primarily to increases in residential real estate, commercial real estate and commercial loans, partially offset by a decrease in indirect installment loans. The following table presents the composition of the loan portfolio as of December 31, 2005 and 2004:

	($000 Omitted)
	2005		Percent of Total			2004		Percent of Total
Real estate:
Residential	$	158,729		34.5	%	$	147,333		31.0	%
Commercial		143,456		31.1			130,334		27.5
Construction		13,241		2.9			5,366		1.1
Commercial		27,349		6.0			27,013		5.7
Installment		35,786		7.8			29,345		6.2
Indirect installment		62,221		13.5			116,520		24.5
Other		19,507		4.2			18,901		4.0
	$	460,289		100.0	%	$	474,812		100.0	%

During 2005, the loan portfolio mix continued to shift as runoff from the indirect installment loan portfolio was redeployed into residential real estate, commercial real estate, construction and installment loans. Indirect installment loans comprised 13.5% of the loan portfolio at December 31, 2005 as compared to 24.5% at the end of 2004. Effective August 31, 2004, the Company discontinued the origination of indirect installment loans; therefore, this portfolio continues to decrease. Residential real estate loans increased to account for 34.5% of the portfolio from 31.0% at December 31, 2004 due in part to the decision to retain high credit quality fixed-rate mortgages in the portfolio rather than sell in the secondary market. Commercial real estate and construction loans now comprise 31.1% and 2.9%, respectively of total loans compared to 27.5% and 1.1%, respectively at December 31, 2004 due to the continued efforts of our seasoned commercial lenders. Installment loans comprise 7.8% of the loan portfolio compared to 6.2% a year ago due primarily to an increase in fixed rate home improvement loans.

Commercial real estate loans consist of loans secured by income producing and owner-occupied commercial real estate and commercial loans consist of loans that are either unsecured or are secured by inventories, receivables or other corporate assets, and some are additionally secured by a guarantee of the federal Small Business Administration. Commercial real estate and commercial loans increased by $13,458,000 in 2005 as compared to 2004. The Company continues to emphasize commercial real estate and commercial loans in order to enhance earnings and maintain the balance of its portfolio.

21

LOANS (CONTINUED)

Residential real estate loans increased by $11,396,000, an 8% increase from 2004, compared to an increase of $17,840,000, or 14%, in 2004 compared to 2003. The Company originates both fixed-rate and adjustable-rate residential loans for its portfolio. Some fixed-rate residential loans are originated for sale to investors in the secondary market. The increase in residential real estate loans in 2005 and 2004 resulted primarily from the Company’s decision to retain a greater percentage of fixed-rate residential mortgage loans.

During 2005, installment loan balances increased $6,441,000, or 22%, from 2004, compared to a decrease of $946,000, or 3%, in 2004 compared to 2003. Indirect installment loans decreased by $54,299,000, or 47%, in 2005 compared to a decrease of $34,287,000, or 23%, in 2004. As previously mentioned, indirect installment originations ceased on August 31, 2004.

NONPERFORMING ASSETS

Nonperforming assets were $3,321,000, or 0.53%, of total assets, at December 31, 2005 compared to $2,949,000, or 0.46% of total assets, at December 31, 2004, an increase of $372,000, or 13%. However, during January 2006, nonperforming loans totaling $1,591,000 were paid in full. Nonperforming assets are comprised primarily of nonaccrual loans, other chattels owned and real estate acquired by foreclosure or a similar conveyance of title. The accrual of interest on a loan is discontinued when there is reasonable doubt as to its collectibility or whenever the payment of principal or interest is more than 90 days past due. However, there are loans within this nonaccrual classification that provide periodic payments, but which have a weakness with respect to the collateral securing the loan.

At December 31, 2005, nonaccrual loans totaled $3,013,000, or 0.66% of total loans, compared to $2,867,000, or 0.60% of total loans, in 2004. At December 31, 2005 other real estate owned totaled $196,000 compared to zero at December 31, 2004. Other chattels owned increased $30,000 to $112,000 at December 31, 2005 compared to $82,000 at December 31, 2004.

ALLOWANCE FOR LOAN LOSSES

The Company maintains an allowance for loan losses to absorb losses inherent in the existing loan portfolio. When a loan, or portion thereof, is considered uncollectible, it is charged against the allowance. Recoveries of amounts previously charged-off are added to the allowance when collected. The adequacy of the allowance for loan losses is evaluated on a regular basis by management. Factors considered in evaluating the adequacy of the allowance include previous loss experience, current economic conditions and their effect on borrowers and the market area in general, and the performance of individual credits in relation to the contract terms. In addition various federal and state regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company’s allowance for loan losses. For additional information regarding estimates in the assessment of the allowance for loan losses see “Application of Critical Accounting Policies-Allowance for Loan Losses” below.

The Company’s allowance for loan losses decreased $54,000 from December 31, 2004 to $5,150,000, or 1.12% of total loans, at December 31, 2005.

The following table sets forth the composition of the allowance for loan losses for the periods indicated:

	($000 Omitted) Years Ended December 31
	2005			2004			2003
Beginning allowance	$	5,204		$	5,036		$	4,920
Provision for loan losses		75			495			805
Loans charged-off		(415	)		(665	)		(870	)
Recoveries on loans previously charged-off		286			338			181
Net charge-offs		(129	)		(327	)		(689	)
Ending allowance	$	5,150		$	5,204		$	5,036
Allowance as a percentage of loans outstanding		1.12	%		1.10	%		1.06	%
Allowance as a percentage of nonperforming loans		170.93			181.51			123.16
Net charge-offs as a percentage of average loans		0.03			0.07			0.15

22

DEPOSITS

Total deposits at December 31, 2005 were $464,456,000, a decrease of $10,903,000, or 2%, compared to $475,359,000 at December 31, 2004. The decrease in deposits was due primarily to a decrease in savings, NOW and money market deposits partially offset by an increase in time deposits.

The following table sets forth the components of deposits for the periods indicated:

	($000 Omitted) December 31,
	2005		2004
Demand	$	77,436	$	78,669
Regular savings, NOW and money market		238,689		263,685
Time		148,331		133,005
Total deposits	$	464,456	$	475,359

At December 31, 2005, time deposits of $100,000 or more are scheduled to mature as follows:

	($000 Omitted)
3 months or less	$	6,503
Over 3 to 6 months		3,612
Over 6 to 12 months		15,662
Over 12 months		2,520
	$	28,297

BORROWINGS

At December 31, 2005 short-term borrowings consisted of securities sold under agreements to repurchase of $9,363,000 compared to $11,268,000 for 2004.

Long-term debt in 2005 consists of FHLB term advances of $85,000,000 as well as $20,620,000 of junior subordinated debentures, compared to $78,000,000 of FHLB term advances and $20,620,000 of junior subordinated debentures in 2004. Seven of the long-term term FHLB advances are callable quarterly with their next call dates in January, February and March 2006. The increase in FHLB advances is the result of new advances totaling $13,000,000, which was partially offset by the maturity of $6,000,000 in advances.

Junior subordinated debentures consist of two issues of floating rate trust preferred securities acquired during April and July 2002 in the amount of $7,217,000 and $13,403,000, respectively, due in 2032. These trust preferred securities were offered for the purpose of providing capital to the subsidiary bank to ensure adequate capital following the recent branch acquisitions and for general corporate purposes. As of December 31, 2005, of the $20,620,000 principal amount outstanding, $16,583,000 qualified as Tier 1 capital and $4,037,000 was allocated to Tier 2 capital.

See NOTES 9 and 10 to the Consolidated Financial Statements for additional information regarding the Company’s borrowings.

The following table sets forth certain information concerning the Company’s borrowings at the dates indicated:

	($000 Omitted) December 31,
	2005		2004
Short-term borrowings	$	9,363	$	11,268
Long-term debt		105,620		98,620
	$	114,983	$	109,888

At December 31, 2005, long-term debt is scheduled to mature as follows:

	($000 Omitted)
Less than one year	$	31,000
One to three years		22,000
Three to five years		26,000
Over five years		26,620
	$	105,620

23

OFF-BALANCE SHEET ARRANGEMENTS

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 balance sheet instruments.

Financial instruments with off-balance sheet credit risk at December 31, 2005 and 2004 totaled $60,418,000 and $60,290,000, respectively.

At December 31, 2005, the Bank had commitments to purchase state and political subdivision bonds totaling $2,206,000.

On December 13, 2005, the Bank entered into an agreement with Washington Mutual Bank to purchase two branches located in Belmont and Tilton, New Hampshire. The Bank expects to acquire approximately $31,000,000 of deposits and $10,000,000 of loans. The transaction is expected to close on or about April 7, 2006.

See NOTE 16 to the Consolidated Financial Statements for additional information regarding off-balance sheet arrangements.

CAPITAL

The Company's stockholders’ equity serves to support growth and provide depositors and other creditors protection against loss. Equity capital represents the stockholders’ investment in the Company. Management strives to maintain an optimal level of capital on which an attractive return to the stockholders will be realized over both the short-term and long-term, while serving depositors’ and creditors’ needs.

The Company must also observe the minimum requirements enforced by the federal banking regulators. There are three capital requirements that banks and bank holding companies must meet: Tier 1 capital, total capital (combination of Tier 1 capital and Tier 2 capital), and leverage (Tier 1 capital to average assets) ratios. Tier 1 capital consists of stockholders’ equity, net of intangible assets as well as a portion of junior subordinated debentures. Tier 2 capital consists of a limited amount of allowance for loan losses and the portion of junior subordinated debentures not allocated to Tier 1 capital. Tier 1 capital, total capital and leverage ratios do not include any adjustments for unrealized gains and losses relating to securities available-for-sale except net unrealized losses relating to marketable equity securities. The minimum requirements for the leverage ratio, risk-based Tier 1 capital and risk-based total capital are 4%, 4% and 8%, respectively. As of December 31, 2005 and 2004, the Bank was “well capitalized” as defined under FDIC regulations.

The following table sets forth the Company’s risk-based capital and leverage ratios:

	($000 Omitted) December 31,
	2005			2004
Risk-adjusted assets	$	426,731		$	446,807
Tier 1 capital (to average assets)		8.96	%		8.43	%
Tier 1 capital (to risk weighted assets)		13.07			11.80
Total capital (to risk weighted assets)		15.24			13.94

Total stockholders’ equity includes a $1,104,000 negative adjustment for accumulated other comprehensive loss, net of tax, at December 31, 2005 and a $691,000 negative adjustment for accumulated other comprehensive loss, net of tax, at December 31, 2004. At December 31, 2005, this adjustment was comprised solely of a net unrealized loss on securities available-for-sale, net of taxes.

The Company intends to continue to pay dividends on a quarterly basis subject to the financial condition and earnings of the Company, capital requirements, and other factors, including applicable governmental regulations. No dividends will be payable unless declared by the Board of Directors and then only to the extent funds are legally available for the payment of such dividends.

24

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s accounting policies are more fully described in NOTE 1 of the Consolidated Financial Statements. As disclosed in NOTE 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Allowance for Loan Losses. The allowance for loan losses, which is established through a charge to the provision for loan losses, is estimated at the Bank based on estimates of losses related to customer loan balances. In establishing the appropriate provisions for customer loan balances, the Company makes assumptions with respect to their future collectibility. The Company’s assumptions are based on an individual assessment of the customer’s credit quality as well as subjective factors and trends, including the credit rating of the loans. Generally, these individual credit assessments occur prior to the inception of the credit exposure and at regular reviews during the life of the exposure and consider (a) the customer’s ability to meet and sustain their financial commitments; (b) a customer’s current and projected financial condition; (c) the positive or negative effects of the current and projected industry outlook; and (d) the economy in general. Once the Company considers all of these factors, a determination is made as to the probability of default. An appropriate provision is made, which takes into account the severity of the likely loss on the outstanding loan balances based on the Company’s experience in collecting these amounts. The Company’s level of allowance for loan losses fluctuates depending upon all of the factors mentioned above. The use of different estimates or assumptions could produce different provisions for loan losses.

Goodwill and Core Deposit Intangibles. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets.” Under SFAS No. 142, the Company is required to perform annual impairment tests of its goodwill and intangible assets and more frequently in certain circumstances. The Company has elected to test for goodwill and intangible asset impairment in the fourth quarter of each year. In that goodwill is carried on the books of the Bank and the Company owns 100% of their outstanding stock, there is no market value for their common stock. The Company utilizes a multiple of earnings approach in analyzing the valuation of goodwill. Core deposit intangibles are carried on the books of the Bank as well. The valuation of core deposit intangibles incorporate deposits acquired compared with current deposit levels, considers deposit outflow assumptions made at acquisition as well as other factors.

The most recent impairment test of goodwill and core deposit intangibles indicated that no adjustments were required. The Company cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and core deposit intangibles that totaled $10,152,000 and $1,995,000, respectively, at December 31, 2005. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company’s customer base, or the impact of changes in federal and state laws and regulations.

Pension Benefits. The Company maintains a trusteed non-contributory pension plan (the “Plan”) covering substantially all full-time employees. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the Plan. Key factors include assumptions about the expected rates of return on plan assets and discount rates. The Company considers market conditions, including changes in investment returns and interest rates, in making these assumptions.

The Company determines the expected long-term rate of return on plan assets based on the building block method, which consists of aggregating the expected rates of return for each component of the plan’s asset mix. Plan assets are comprised primarily of mutual funds including bond funds, US equity funds, international equity funds, real estate funds and short-term money market funds. The Company uses historic plan asset returns combined with current market conditions to estimate the rate of return. The expected rate of return on plan assets is a long-term assumption and generally does not change annually. The discount rate reflects the market rate for high-quality fixed income debt instruments on the Company’s annual measurement date (December 31) and is subject to change each year.

Unrecognized actuarial gains and losses are being recognized over approximately a 17-year period, which represents the expected remaining service life of the employee group. Unrecognized actuarial gains and losses arise from several factors including experience and assumption changes in the obligations and from the difference between expected returns and actual returns on plan assets. These unrecognized losses will be systematically recognized as an increase in future net periodic pension expense in accordance with FAS 87, “Employers’ Accounting for Pensions.”

The actuarial assumptions used by the Company in determining its pension benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. While the Company believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect the Company’s financial position or results of operations.

25

APPLICATION OF CRITICAL ACCOUNTING POLICIES (CONTINUED)

Mortgage Servicing Rights (MSR or MSRs). Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and original loan terms (primarily 15 and 30 year). Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. In periods of falling market interest rates, accelerated loan prepayment speeds can adversely impact the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets were to increase in the future, the Company can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. When the book value of an individual stratum exceeds its fair value, an impairment reserve must be recognized. Future changes in management's assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact the Company's financial condition and results of operations either positively or adversely.

MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process which is governed by policies established by the Company’s Boards of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Company's Asset Liability Committee (“ALCO”). In this capacity ALCO develops guidelines and strategies impacting the Company's asset/liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends.

Interest Rate Risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and interest expenses associated with the Company's financial instruments also change, thereby impacting net interest income ("NII"), the primary component of the Company's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling 2-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest--bearing liabilities reflected on the Company's balance sheet. 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.

This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a 1-year horizon given both an immediate 300 basis point, or 3%, upward and downward shift in interest rates. Given the current level of interest rates, the Company has modeled an upward shift in rates of 300 basis points and a downward shift in rates of 200 basis points. Using an immediate rate shock simulation where interest rates increase 300 basis points, the December 31, 2005 earnings simulation model projects that net interest income for the twelve months ending December 31, 2006 would decrease by an amount equal to approximately 3.00%. In addition, utilizing an immediate rate shock simulation where interest rates decrease 200 basis points, the December 31, 2005 earnings simulation model projects that net interest income for the twelve months ending December 31, 2006 would decrease by an amount equal to approximately 7.14%.

Using an immediate rate shock simulation where interest rates increase 300 basis points, the December 31, 2005 earnings simulation model projected that net interest income for the twelve months ending December 31, 2007 would decrease by an amount equal to approximately 4.79%. In addition, utilizing an immediate rate shock simulation where interest rates decrease 200 basis points, the December 31, 2005 earnings simulation model projected that net interest income for the twelve months ending December 31, 2007 would increase by an amount equal to approximately 7.45%. The projected results are within Company’s ALCO policy limits for both years.

26

MARKET RISK (CONTINUED)

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cashflows-. The assumptions differed in each of the periods included in the sensitivity analysis above. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

The most significant factors affecting the changes in market risk exposure during 2005 compared to 2004 was the increase in interest rates, changes in the yield curve for investment securities, the increase in the aggregate principal amount in fixed-rate loans extended by the Bank, the aggregate increase in securities available-for-sale, the decrease in total deposits, and the increase in long-term debt.

LIQUIDITY RISK

Liquidity risk management involves the Company’s ability to raise funds in order to meet its existing and anticipated financial obligations. These obligations are the withdrawal of deposits on demand or at contractual maturity, the repayment of debt as it matures, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. Liquidity may be provided through amortization, maturity or sale of assets such as loans and securities available-for-sale, liability sources such as increased deposits, utilization of the FHLB credit facility, purchased or other borrowed funds, and access to the capital markets. Liquidity targets are subject to change based on economic and market conditions and are controlled and monitored by ALCO. At the bank level, liquidity is managed by measuring the net amount of marketable assets after deducting pledged assets, plus lines of credit, primarily with the FHLB, which are available to fund liquidity requirements. Management then measures the adequacy of that aggregate amount relative to the aggregate amount of liabilities deemed to be sensitive or volatile. These include brokered deposits, deposits in excess of $100,000, term deposits with short maturities, and credit commitments outstanding.

Additionally, the Company requires cash for various operating needs including dividends to stockholders, the purchase of treasury stock, capital injections to the Bank, and the payment of general corporate expenses. The primary sources of liquidity for the Company are dividends from the Bank and reimbursement for services performed on behalf of the Bank. Additionally, the Company may utilize outside sources of funding such as the issuance of the trust preferred securities.

Cash and cash equivalents increased $4,593,000 during 2005. Cash provided from investing activities totaled $7,631,000 with lending activities providing $13,631,000, net, and investment activities using $7,173,000, net. Cash used by financing activities totaled $7,340,000. This cash consisted of a decrease in deposits of $10,903,000, a decrease in repurchase agreements of $1,905,000, advances of $13,000,000 from the FHLB advances partially offset by the repayment of maturing FHLB advances in the amount of $6,000,000. The net cash provided by operating activities totaled $4,302,000 and consisted primarily of net income of $2,673,000 and a decrease in other assets and other liabilities, net.

27

CAPITAL EXPENDITURES AND COMMITMENTS

During 2005, the Company incurred approximately $1,257,000 in capital expenditures, which included new signage related to the name change and merger of PNB into the Bank, ATM upgrades, security camera upgrades, renovations to the Belmont facility, renovations to the Berlin facility due to the relocation of item processing, as well as the normal replacement of, or upgrades in, existing property and equipment. During 2005, the Company disposed of assets with a total net book value of approximately $1,747,000, which consisted primarily of the West Plymouth branch facility.

During 2004, the Company incurred approximately $2,267,000 in capital expenditures, which included improvements and office furnishing for the commercial lending and administration facility in North Conway, New Hampshire, an upgrade to the AS400 computer system and the normal replacement of, or upgrades in, existing property and equipment.

The Company’s estimated capital expenditures for 2006 total $2,900,000. This budget includes purchasing buildings and equipment for a pending acquisition of two branches, renovations for thirteen branch locations, new item processing equipment, and various software upgrades.

28

CONTRACTUAL OBLIGATIONS

The table below contains information on the Company’s contractual obligations as of the fiscal year ended December 31, 2005:

	($000 Omitted)
Contractual Obligations	Total		Less Than One Year		1-3 Years		3-5 Years		More than Five Years
FHLB Advances	$	85,000	$	31,000	$	22,000	$	26,000	$	6,000
Junior subordinated debentures		20,620		-		-		-		20,620
Total	$	105,620	$	31,000	$	22,000	$	26,000	$	26,620

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 report and is hereby incorporated by reference in this Item 7A.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME

	($000 Omitted, Except Per Share Data)
FOR THE YEAR ENDED DECEMBER 31,	2005			2004		2003
Interest and dividend income
Interest and fees on loans	$	27,314		$	26,569	$	27,917
Interest on debt securities available-for-sale:
Taxable		3,843			3,201		3,075
Tax-exempt		299			142		158
Dividends		323			239		237
Interest on federal funds sold		322			125		118
Interest on interest-bearing deposits		3			1		2
Total interest and dividend income		32,104			30,277		31,507
Interest expense
Interest on deposits		4,092			3,150		4,422
Interest on short-term borrowings		257			110		126
Interest on long-term debt		4,579			4,171		3,909
Total interest expense		8,928			7,431		8,457
Net interest and dividend income		23,176			22,846		23,050
Provision for loan losses		75			495		805
Net interest and dividend income after provision for loan losses		23,101			22,351		22,245
Noninterest income
Service charges and fees on deposit accounts		2,430			2,229		1,673
(Loss) gain on sales of securities available-for-sale, net		(551	)		753		1,522
Gain on sales of loans, net		260			374		422
Other		1,857			1,741		1,758
Total noninterest income		3,996			5,097		5,375
Noninterest expense
Salaries and employee benefits		11,592			11,981		11,426
Office occupancy and equipment		4,090			3,731		3,753
Amortization of core deposit intangibles		954			954		954
Write-down of equity securities		-			-		184
Other		6,946			5,728		5,819
Total noninterest expense		23,582			22,394		22,136
Income before income tax expense		3,515			5,054		5,484
Income tax expense		842			1,666		1,867
Net income	$	2,673		$	3,388	$	3,617
Basic earnings per common share	$	1.78		$	2.26	$	2.40
Earnings per common share assuming dilution	$	1.77		$	2.24	$	2.39

See Notes to Consolidated Financial Statements

30

CONSOLIDATED BALANCE SHEETS

	($000 Omitted)
AS OF DECEMBER 31,	2005			2004
Assets
Cash and cash equivalents
Cash and due from banks and interest-bearing deposits	$	14,587		$	13,794
Federal funds sold		14,775			10,975
Total cash and cash equivalents		29,362			24,769
Securities available-for-sale, at fair value		103,244			101,133
Federal Home Loan Bank stock		5,541			5,515
Federal Reserve Bank stock		-			365
Loans held-for-sale		453			311
Loans, net before allowance for loan losses		460,373			474,706
Less: allowance for loan losses		5,150			5,204
Net loans		455,223			469,502
Premises and equipment, net		11,735			13,701
Other real estate owned		196			-
Goodwill		10,152			10,152
Core deposit intangibles, net		1,995			2,949
Other assets		14,833			10,021
Total assets	$	632,734		$	638,418
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	77,436		$	78,669
Regular savings, NOW and money market deposit accounts		238,689			263,685
Certificates of deposit (in denominations of $100,000 or more)		28,297			18,935
Other time		120,034			114,070
Total deposits		464,456			475,359
Short-term borrowings		9,363			11,268
Long-term debt		105,620			98,620
Other liabilities		3,045			3,661
Total liabilities		582,484			588,908
Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000 shares authorized; none issued		-			-
Common stock, $1.00 par value; 9,000,000 shares authorized; 1,731,969 shares issued and 1,491,174 shares outstanding in 2005 and 1,503,574 shares outstanding in 2004		1,732			1,732
Additional paid-in capital		2,064			2,075
Retained earnings		54,089			52,484
Treasury stock (240,795 shares at December 31, 2005 and 228,395 shares at December 31, 2004)		(6,531	)		(6,090	)
Accumulated other comprehensive loss, net of tax		(1,104	)		(691	)
Total stockholders’ equity		50,250			49,510
Total liabilities and stockholders’ equity	$	632,734		$	638,418

See Notes to Consolidated Financial Statements

31

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

	($000 Omitted)
												Accumulated
			Additional									Other			Total
	Common		Paid-In			Retained			Treasury			Comprehensive			Stockholders'
	Stock		Capital			Earnings			Stock			Income (Loss)¹			Equity
Balance at December 31, 2002	$	1,732	$	2,088		$	47,523		$	(5,711	)	$	(1,366	)	$	44,266
Net income - 2003		-		-			3,617			-			-			3,617
Net change in unrealized gain (loss) on securities available-for-sale, net of tax		-		-			-			-			1,110			1,110
Net change in unfunded pension accumulated benefit obligation, net of tax		-		-			-			-			405			405
Treasury stock purchased		-		-			-			(502	)		-			(502	)
Cash dividends declared ($0.68 per share)		-		-			(1,024	)		-			-			(1,024	)
Balance at December 31, 2003		1,732		2,088			50,116			(6,213	)		149			47,872
Net income - 2004		-		-			3,388			-			-			3,388
Net change in unrealized gain (loss) on securities available-for-sale, net of tax		-		-			-			-			(889	)		(889	)
Net change in unfunded pension accumulated benefit obligation, net of tax		-		-			-			-			49			49
Exercise of stock options, net of tax benefit		-		(13	)		-			123			-			110
Cash dividends declared ($0.68 per share)		-		-			(1,020			-			-			(1,020	)
Balance at December 31, 2004		1,732		2,075			52,484			(6,090	)		(691	)		49,510
Net income - 2005		-		-			2,673			-			-			2,673
Net change in unrealized gain (loss) on securities available-for-sale, net of tax		-		-			-			-			(1,085	)		(1,085	)
Net change in unfunded pension accumulated benefit obligation, net of tax		-		-			-			-			672			672
Exercise of stock options, net of tax benefit		-		(11	)		-			122			-			111
Treasury stock purchased		-		-			-			(563	)		-			(563	)
Cash dividends declared ($0.71 per share)		-		-			(1,068	)		-			-			(1,068	)
Balance at December 31, 2005	$	1,732	$	2,064		$	54,089		$	(6,531	)	$	(1,104	)	$	50,250

¹ Accumulated other comprehensive loss as of December 31, 2005 consists of net unrealized holding losses on available-for-sale securities of $1,104, net of tax. Accumulated other comprehensive loss as of December 31, 2004 consists of net unrealized holding losses on available-for-sale securities of $19, net of tax, and net unfunded pension accumulated benefit obligation of $672, net of tax. Accumulated other comprehensive income as of December 31, 2003 consists of net unrealized holding gains on available-for-sale securities of $870, net of tax, and net unfunded pension accumulated benefit obligation of $721, net of tax.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31,	2005			2004			2003
Net income	$	2,673		$	3,388		$	3,617
Other comprehensive (loss) income
Net unrealized holding (losses) gains on securities available-for-sale		(2,347	)		(720	)		2,662
Reclassification adjustment for realized losses (gains) in net income		551			(753	)		(1,338	)
Net unrealized (losses) gains on securities		(1,796	)		(1,473	)		1,324
Minimum pension liability adjustment		1,018			74			615
Other comprehensive (loss) income		(778	)		(1,399	)		1,939
Income tax (benefit) expense		(365	)		(559	)		424
Other comprehensive (loss) income, net of tax		(413	)		(840	)		1,515
Comprehensive income	$	2,260		$	2,548		$	5,132

See Notes to Consolidated Financial Statements

32

CONSOLIDATED STATEMENTS OF CASH FLOWS

	($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31,	2005			2004			2003
Cash flows from operating activities:
Net income	$	2,673		$	3,388		$	3,617
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		75			495			805
Depreciation and amortization		2,367			2,369			2,381
Deferred income tax (benefit) expense		(4	)		43			(249	)
Write-down of equity securities		-			-			184
Loss (gain) on sales of securities available-for-sale, net		551			(753	)		(1,522	)
Loss on sale, disposal and write-down of premises and equipment		57			9			28
Amortization of premiums and accretion of discounts on securities, net		54			90			408
Change in unearned income/unamortized cost, net		(190	)		(141	)		40
Accretion of discount on loans acquired		(140	)		(160	)		(106	)
Loss (gain) on sales of other real estate owned and other personal property, net		-			9			(58	)
Net (increase) decrease in loans held-for-sale		(142	)		200			158
Net change in other assets and other liabilities		(999	)		587			1,488
Net cash provided by operating activities		4,302			6,136			7,174
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale		16,002			16,964			24,520
Proceeds from maturities of securities available-for-sale		17,315			25,690			76,716
Purchases of securities available-for-sale		(40,829	)		(76,515	)		(80,314	)
Purchases of Federal Home Loan Bank stock		(26	)		(810	)		(73	)
Purchases of Federal Reserve Bank stock		-			-			(285	)
Proceeds from sales of Federal Reserve Bank stock		365			-			-
Loan originations and principal collections, net		13,345			(7,142	)		(28,494	)
Recoveries of previously charged-off loans		286			338			181
Proceeds from sale of commercial loans		-			5,088			-
Proceeds from sales of and payments received on other real estate owned		25			-			285
Proceeds from sales of and payments received on other personal property		652			604			822
Disposal of (additions to) premises and equipment, net		496			(2,267	)		(1,810	)
Purchase of company owned life insurance policies		-			(400	)		(800	)
Net cash provided by (used by) investing activities		7,631			(38,450	)		(9,252	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(10,903	)		12,052			(12,887	)
Net (decrease) increase in short-term borrowings		(1,905	)		3,867			(850	)
Advances from Federal Home Loan Bank (FHLB)		13,000			20,000			28,000
Repayment of FHLB advances		(6,000	)		(9,000	)		(7,000	)
Exercise of stock options		99			99			-
Purchases of treasury stock		(563	)		-			(502	)
Cash dividends paid		(1,068	)		(1,020	)		(1,024	)
Net cash (used by) provided by financing activities		(7,340	)		25,998			5,737
Net increase (decrease) in cash and cash equivalents		4,593			(6,316	)		3,659
Cash and cash equivalents at beginning of year		24,769			31,085			27,426
Cash and cash equivalents at end of year	$	29,362		$	24,769		$	31,085

See Notes to Consolidated Financial Statements

33

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

	($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31,	2005		2004		2003
Supplemental disclosures of cash flows:
Interest paid	$	8,662	$	7,519	$	8,617
Income taxes paid		1,106		2,090		1,610
Loans transferred to other real estate owned		221		-		46
Loans transferred to other personal property		682		603		824
Amount due from customer for pending municipal security maturity		3,000		-		-

See Notes to Consolidated Financial Statements

34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Northway is a bank holding company formed in 1997 under the laws of New Hampshire and is registered under the Bank Holding Company Act of 1956. Northway’s only business activity has been to own all of the shares of, and provide management, capital and operational support to Northway Bank (“Bank”), formerly known as The Berlin City Bank, and its Delaware statutory business trusts Northway Capital Trust I and Northway Capital Trust II. October 1, 2005 The Berlin City Bank was renamed Northway Bank and The Pemigewasset National Bank of Plymouth, New Hampshire was merged into Northway Bank. The Company’s headquarters are in Berlin, New Hampshire. The banking subsidy is engaged principally in the business of attracting deposits from the general public and investing those deposits in securities, commercial loans, real estate loans, and consumer loans.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation.

Northway Capital Trust I and Northway Capital Trust II, subsidiaries of the Company, were formed to sell capital securities to the public through a third party trust pool. In accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), these subsidiaries have not been included in the consolidated financial statements.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America 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 consolidated balance sheets, and income and expense for the periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change in the near-term relate to the determination of the allowance for loan losses.

Reclassifications

Certain amounts in the prior years’ financial statements have been reclassified to conform with the current year’s presentation.

Cash and Cash Equivalents

For purposes of the statement of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits, and federal funds sold.

Securities

Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; if debt and equity securities are bought and held principally for the purpose of selling in the near term they would be classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated income taxes. At this time, the Company has not established a trading account.

Premiums and discounts are amortized and accreted primarily on the level yield method over the contractual life of the securities adjusted for expected prepayments.

If a decline in the fair value below the adjusted cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value as the new cost basis and the amount of the write-down is included in noninterest expense.

Gains and losses on sales of securities available-for-sale are recognized at the time of the sale on a specific identification basis.

35

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans Held-for-Sale

Loans held-for-sale are generally identified as such at origination and are stated at the lower of aggregate cost or market. Market value is based on outstanding investor commitments. When loans are sold, a gain or loss is recognized to the extent that the sale proceeds exceed or are less than the carrying value of the loans. Gains and losses are determined using the specific identification method. All loans sold are without recourse to the Company.

Loans

Loans are carried at the principal amounts outstanding, net of any unearned income or unamortized cost, premiums on originated loans and discounts on acquired loans. Unearned income and unamortized cost includes loan origination fees, net of direct loan origination costs. This income or expense is deferred and recognized as adjustments to loan income over the contractual life of the related notes using a method the result of which approximates that of the interest method.

Loans are placed on nonaccrual when payment of principal or interest is considered to be in doubt or is past due 90 days or more. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. Previously accrued income on nonaccrual loans that has not been collected is reversed from current income, and subsequent cash receipts are recorded as income if principal on the loans is deemed collectible. Loans are returned to accrual status when collection of all contractual principal and interest is reasonably assured and there has been sustained repayment performance.

The Company’s loans are primarily secured by real estate in New Hampshire. In addition, other real estate owned is located in this market. Accordingly, the ultimate collectibility of a substantial portion of the Company’s loan portfolio and the recovery of other real estate owned are susceptible to changing conditions in this market.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered adequate by management on the basis of many factors including the risk characteristics of the portfolio, trends in loan delinquencies and an assessment of existing economic conditions. Additions to the allowance are charged to earnings; realized losses, net of recoveries, are charged directly to the allowance.

While management uses available information in establishing the allowance for loan losses, future additions to the allowance may be necessary if economic conditions differ substantially from the estimates used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

Commercial, commercial real estate and individually significant mortgage and consumer loans are considered impaired, and are placed on nonaccrual, when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Mortgage and consumer loans, which are not individually significant, are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. The amount of impairment for all impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan.

When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Servicing Assets

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

36

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. Estimated lives are thirty-nine years for buildings, ten to fifteen years for building improvements and three to seven years for furniture and equipment.

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, not to exceed ten years.

Other Real Estate Owned

Other real estate owned is comprised of properties acquired either through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and for which the Company has taken physical possession. The Company classifies loans as repossessed or foreclosed if the Company receives physical possession of the debtor’s assets, regardless of whether or not foreclosure proceedings take place.

Assets acquired through foreclosure or a similar conveyance of title are initially recorded at the lower of the carrying value of the loan or the fair value, less estimated costs to sell, of the property constructively or actually received. Gains and losses upon disposition are reflected in the statement of income as realized.

Advertising

The Company directly expenses costs associated with advertising as they are incurred.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Stock-Based Compensation

At December 31, 2005, the Company has a stock-based employee compensation plan which is described more fully in NOTE 15. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, to stock-based employee compensation.

		($000 Omitted, except per share data)
		2005		2004		2003
Net income	As reported	$	2,673	$	3,388	$	3,617
Deduct: Total stock-based employee compensation expense determined under fair value based methods awards, net of related tax effects			-		-		39
	Pro forma	$	2,673	$	3,388	$	3,578
Earnings per common share	As reported	$	1.78	$	2.26	$	2.40
	Pro forma		1.78		2.26		2.37
Earnings per common share	As reported	$	1.77	$	2.24	$	2.39
(assuming dilution)	Pro forma		1.77		2.24		2.36

37

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS, if applicable, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Earnings per common share have been computed based on the following:

	($000 Omitted) Years Ended December 31,
	2005		2004		2003
Net income	$	2,673	$	3,388	$	3,617
Less: Preferred stock dividends		-		-		-
Net income applicable to common stock	$	2,673	$	3,388	$	3,617
Average number of common shares outstanding		1,502.1		1,500.1		1,504.4
Effect of dilutive options		9.3		11.6		7.8
Average number of common shares outstanding used to calculate diluted earnings per common share		1,511.4		1,511.7		1,512.2

Recent Accounting Pronouncements

In December 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances cannot be created nor "carried over" in the initial accounting for loans acquired in a transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment of a Loan." This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The adoption of SOP 03-3 did not have a material impact on the Company's financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).  This Statement revises FASB Statement No. 123, “Accounting for Stock Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. This Statement is effective for the Company as of the beginning of the first interim reporting period that begins after December 15, 2005. The Company does not believe the adoption of this Statement will have a material impact on the Company’s financial position or results of operations.

NOTE 2 CASH AND DUE FROM BANKS

There was no cash due from banks at December 31, 2005 subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. At December 31, 2004, there was $3,753,000, which was subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank.

38

NOTE 3 SECURITIES AVAILABLE-FOR-SALE

The amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities at December 31, 2005 and 2004 follows:

	($000 Omitted)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2005
U.S. Treasury and other U.S. government agency securities	$	48,728	$	-	$	977	$	47,751
Marketable equity securities		2,695		178		64		2,809
Mortgage-backed securities		24,704		1		774		23,931
Collateralized mortgage obligations		8		-		-		8
Corporate bonds		5,541		37		9		5,569
State and political subdivision bonds and notes		23,396		45		265		23,176
	$	105,072	$	261	$	2,089	$	103,244
December 31, 2004
U.S. Treasury and other U.S. government agency securities	$	54,914	$	1	$	352	$	54,563
Marketable equity securities		1,827		136		32		1,931
Mortgage-backed securities		29,447		92		248		29,291
Collateralized mortgage obligations		10		-		-		10
Corporate bonds		12,001		293		7		12,287
State and political subdivision bonds and notes		2,966		85		-		3,051
	$	101,165	$	607	$	639	$	101,133

The contractual maturity distribution of investments in debt obligations at December 31, 2005 follows:

	($000 Omitted)
	Within One Year		One to Five Years		Five to Ten Years		Over Ten Years		Total Amortized Cost
U.S. Treasury and other U.S. government agency securities	$	5,998	$	37,730	$	5,000	$	-	$	48,728
Mortgage-backed securities		-		29		-		24,675		24,704
Collateralized mortgage obligations		-		-		-		8		8
Corporate bonds		2,003		3,538		-		-		5,541
State and political subdivision bonds and notes		1,101		425		562		21,308		23,396
Total amortized cost	$	9,102	$	41,722	$	5,562	$	45,991	$	102,377
Fair value	$	9,052	$	40,916	$	5,485	$	44,982	$	100,435

Actual maturities of state and political subdivision bonds and notes, 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 sales of securities available-for-sale during the years ended December 31, follows:

	($000 Omitted)
	2005				2004				2003
	Realized Gains		Realized Losses		Realized Gains		Realized Losses		Realized Gains		Realized Losses
Marketable equity securities	$	221	$	104	$	402	$	149	$	97	$	244
U.S. Treasury and other U.S. government agency securities		-		200		5		-		15		-
Mortgage-backed securities		12		11		-		-		-		-
Corporate bonds		30		499		539		50		1,682		28
State and political subdivision bonds and notes		-		-		6		-		-		-
	$	263	$	814	$	952	$	199	$	1,794	$	272

39

NOTE 3 SECURITIES AVAILABLE-FOR-SALE (CONTINUED)

The tax (benefit) provision applicable to these net realized (losses)/gains amounted to $(218,000), $298,000 and $603,000 for 2005, 2004, and 2003, respectively.

Securities with a carrying amount totaling $73,651,000 and $72,106,000 were pledged to secure public deposits, securities sold under agreements to repurchase, FHLB advances and treasury, tax and loan accounts at December 31, 2005 and 2004, respectively.

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows as of December 31, 2005:

	($000 Omitted)
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury and other U.S. government agency securities	$	13,774	$	218	$	33,977	$	759	$	47,751	$	977
Marketable equity securities		881		53		64		11		945		64
Mortgage-backed securities		5,806		97		18,095		677		23,901		774
Corporate bonds		1,525		9		-		-		1,525		9
State and political subdivision bonds and notes		17,026		265		-		-		17,026		265
Total temporarily impaired securities	$	39,012	$	642	$	52,136	$	1,447	$	91,148	$	2,089

At December 31, 2005, securities with a total fair value of $91,149,000 were in a loss position. These securities included twenty U.S. government agency securities with a fair value of $47,751,000 and an unrealized loss of $977,000. These securities had an unrealized loss due to the current interest rate environment. As these securities are guaranteed by U.S. government agencies such as FHLB, FHLMC or FNMA there is no credit risk associated with them. These securities are not other-than-temporarily impaired as the Company has the ability and the intent to hold these securities until recovery to cost basis.

Mortgage-backed securities with a fair value of $23,901,000 had an unrealized loss of $774,000 at December 31, 2005. As with the U.S. government agency securities, these securities have an unrealized loss due to the current interest rate environment. As all of these mortgage-backed securities are guaranteed by U.S. government agencies such as FHLMC, GNMA or FNMA there is no credit risk associated with them. These securities have not been classified as other-than-temporarily impaired as the Company has the ability and intent to hold these securities until recovery to cost basis.

Nineteen marketable equity securities with a fair value of $945,000 had an unrealized loss of $64,000 at December 31, 2005. Marketable equity securities are subject to internal testing on a quarterly basis to determine impairment. Testing includes review of industry analyst reports, credit ratings, sector analysis and earnings projections. Based upon the December 31, 2005 review, these securities were not determined to be other-than-temporarily impaired.

Two corporate bond securities with a fair value of $1,525,000 had an unrealized loss of $9,000 at December 31, 2005. Corporate bond securities are subject to internal testing on a quarterly basis to determine other-than-temporary impairment. Based upon the December 31, 2005 review, these securities were not determined to be other-than-temporarily impaired.

Thirty-six state and political subdivision securities with a fair value of $17,026,000 had an unrealized loss of $265,000 at December 31, 2005. As all of these state and political subdivision securities are guaranteed by municipalities there is minimal credit risk associated with them. These securities have not been classified as other-than-temporarily impaired as the Company had the ability to hold these securities until recovery to cost basis.

40

NOTE 4 LOANS

Loan balances were comprised of the following:

	($000 Omitted)
December 31,	2005			2004
Real estate:
Residential	$	158,729		$	147,333
Commercial		143,456			130,334
Construction		13,241			5,366
Commercial		27,349			27,013
Installment		35,786			29,345
Indirect installment		62,221			116,520
Other		19,507			18,901
Total loans		460,289			474,812
Less:
(Unamortized cost) unearned income		(84	)		106
Allowance for loan losses		5,150			5,204
Total (unamortized cost) unearned income and allowance for loan losses		5,066			5,310
Net loans	$	455,223		$	469,502

Total loans above are net of unearned discount on loans acquired in the amount of $275,000 and $415,000 at December 31, 2005 and 2004, respectively. In addition, total loans above are net of unamortized premium on indirect installment loans originated in the amount of $789,000 and $2,005,000 at December 31, 2005 and 2004, respectively.

Loans are made in the ordinary course of business to directors, executive officers, and their immediate families and to organizations in which such persons have more than a 10% ownership interest. These loans are made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with unrelated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. Total loans to such persons and their companies amounted to $544,000 as of December 31, 2005. During 2005, principal payments were $125,000 and principal advances amounted to $156,000.

The Company’s lending activities are conducted principally in New Hampshire. Although the loan portfolio is diversified, a portion of its debtors’ ability to repay is dependent upon the economic conditions prevailing in New Hampshire. The Company maintains significant credit relationships with borrowers in the hotel and motel industry. The aggregate loan balances to these industries totaled $67,152,000 at December 31, 2005 and $59,730,000 at December 31, 2004.

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans total $39,219,000 and $43,979,000 at December 31, 2005 and 2004, respectively. The Company sold $15,705,000 of mortgage loans in 2005 and $15,228,000 of mortgage loans and $5,088,000 of SBA guaranteed commercial loans in 2004.

The Company capitalized $79,000 and $80,000 of servicing rights and amortized $144,000 and $168,000 of total servicing rights in 2005 and 2004, respectively. The impairment valuation allowance of mortgage servicing rights was reduced by $3,000 and $2,000 in 2005 and 2004, respectively. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. The amount of the impairment recognized is the amount by which the capitalized mortgage servicing rights exceed their fair value. At December 31, 2005 and 2004, respectively, the carrying amount of servicing rights was $236,000 and $298,000, and is included in other assets. At December 31, 2005 and 2004, respectively, the fair value of servicing rights was $389,000 and $415,000.

Restructured, accruing loans entered into prior to the adoption of SFAS No. 114 and 118 are not required to be reported as impaired loans unless such loans are not performing in accordance with the restructured terms at adoption of SFAS No. 114. Restructured, accruing loans entered into subsequent to the adoption of these statements are reported as impaired loans. In the year subsequent to restructure these loans may be removed from the impaired loan disclosure provided that the loan bears a market rate of interest at the time of restructure and is performing under the restructured terms.

At December 31, 2005 and 2004, 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 $0 and $838,000, respectively. The gross interest income that would have been recorded in the year ended December 31, 2004 if such restructured loans had been current in accordance with their original terms was $60,000. The amount of interest income recognized on such restructured loans for the year ended December 31, 2004 was $43,000.

41

NOTE 4 LOANS (CONTINUED)

At December 31, 2005 and 2004, nonperforming loans totaled $3,013,000 and $2,867,000, respectively. No nonperforming loans were past due 90 days or more and still accruing interest at December 31, 2005 and 2004. During January 2006, nonperforming loans totaling $1,591,000 were paid in full.

The recorded investment in loans that are considered to be impaired under SFAS No. 114 was $2,082,000 and $1,914,000 at December 31, 2005 and 2004, respectively, for which the related allowance for loan losses is $0 and $307,000 as of December 31, 2005 and 2004, 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, 2005 and 2004 was approximately $2,147,000 and $2,305,000, respectively. For the twelve months ended December 31, 2005 and 2004 the Company recognized interest income on impaired loans of $97,000 and $147,000, respectively, which included $88,000 and $128,000 of interest income recognized using the cash-basis method of income recognition, respectively.

NOTE 5 ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the years ended December 31, follows:

	($000 Omitted)
	2005			2004			2003
Balance at beginning of year	$	5,204		$	5,036		$	4,920
Provision for loan losses		75			495			805
Recoveries on loans previously charged-off		286			338			181
Loans charged-off		(415	)		(665	)		(870	)
Balance at end of year	$	5,150		$	5,204		$	5,036

NOTE 6 PREMISES AND EQUIPMENT

A summary of premises and equipment follows:

	($000 Omitted) December 31,
	2005		2004
Land	$	2,455	$	2,650
Buildings		9,718		11,509
Leasehold improvements		120		365
Construction in progress		129		36
Equipment		9,359		8,906
		21,781		23,466
Less accumulated depreciation and amortization		10,046		9,765
	$	11,735	$	13,701

Depreciation expense for the years ended December 31, 2005, 2004 and 2003 amounted to $1,413,000, $1,415,000 and $1,427,000, respectively.

The Company leases five of its branch locations and an automobile under non-cancelable operating leases. In addition, the Company leases one storage facility under a non-cancelable lease and one storage facility as a tenant-at-will. Minimum lease payments in future periods under non-cancelable operating leases at December 31, 2005 are as follows:

	($000 Omitted)
2006	$	195
2007		151
2008		52
2009		22
2010		22
Thereafter		112
	$	554

42

NOTE 6 PREMISES AND EQUIPMENT (CONTINUED)

The terms of two of the leases provide that the Company can, at the end of the current five-year term, renew the lease under one five-year option. The terms of a third lease provide that the Company can, at the end of a ten-year term, renew the lease under two five-year options. All branch leases contain a provision that the Company shall pay its pro-rata share of operating costs. Additionally, two of the leases require that the Company pay all real estate taxes. The automobile lease contains a purchase option at the end of the lease term.

Rent expense for the years ended December 31, 2005, 2004, and 2003 amounted to $359,000, $404,000 and $421,000, respectively.

NOTE 7 OTHER REAL ESTATE OWNED

Other real estate owned consists of real estate acquired by foreclosure or a similar conveyance of title. At December 31, 2005 other real estate owned was comprised of commercial real estate of $196,000. At December 31, 2004, the Company had no other real estate owned.

Sales of other real estate owned by the Company resulted in no gains or losses for each of the years ended December 31, 2005, 2004, 2003, respectively.

There were no write-downs on other real estate owned for the years ended December 31, 2005, 2004, and 2003.

NOTE 8 DEPOSITS

The aggregate amount of maturities for time deposits as of December 31, 2005 for each of the following five years is as follows:

	($000 Omitted)
2006	$	134,786
2007		12,042
2008		1,078
2009		298
2010		127
	$	148,331

Deposits from related parties held by the Bank at December 31, 2005 and 2004 amounted to $3,785,000 and $2,953,000, respectively.

NOTE 9 SHORT-TERM BORROWINGS

Short-term borrowings consist of securities sold under agreements to repurchase. The securities sold under agreements to repurchase as of December 31, 2005 and 2004 are securities sold on a short term basis by the Company that have been accounted for not as sales but as borrowings. The underlying securities associated with securities sold under agreements to repurchase are under the control of the Company. The purchasers have agreed to sell to the Company substantially identical securities at the maturity of the agreements.

NOTE 10 LONG-TERM DEBT

Long-term debt at December 31, 2005 and 2004 consisted of FHLB advances of $85,000,000 and $78,000,000, respectively, as well as $20,620,000 of junior subordinated debentures, for each year.

As of December 31, 2005, contractual principal payments due under long-term debt, which consists of FHLB advances and junior subordinated debentures, are as follows:

	($000 Omitted)
2006	$	31,000
2007		15,000
2008		7,000
2009		19,000
2010		7,000
2011 and years thereafter		26,620
	$	105,620

43

NOTE 10 LONG-TERM DEBT (CONTINUED)

The FHLB long-term debt consisted of twenty eight separate advances. Seven of these advances are callable with the following rates and terms:

($000 Omitted)
Amount	Rate	Maturity Date	Next Call Date
$ 5,000	6.11%	03/28/07	03/28/06
7,000	5.54	11/02/09	02/01/06
7,000	5.57	11/09/09	02/09/06
5,000	5.91	12/17/09	03/17/06
2,000	4.80	12/27/10	03/26/06
3,000	4.50	01/24/11	01/22/06
1,000	4.58	02/07/11	02/06/06
$30,000

The remaining twenty one advances, totaling $55,000,000, are at rates ranging from 1.96% to 4.46% with a weighted average rate of 2.81%.

The $20,620,000 of junior subordinated debentures consists of the following two issues:

On April 10, 2002, the Company completed the private placement of $7,217,000 aggregate liquidation amount of floating rate trust preferred securities (the “Trust I Capital Securities”) issued by its Delaware statutory business trust, Northway Capital Trust I (“Capital Trust I”). The Trust I Capital Securities were sold to a pooled investment vehicle. The proceeds from the sale of the Trust I Capital Securities, which included the proceeds from the sale by Capital Trust I of its common securities to the Company, were invested in Floating Rate Junior Subordinated Debt Securities of the Company due 2032 (the “Trust I Junior Subordinated Debt”), which were issued pursuant to an Indenture, dated April 10, 2002, between the Company and Wilmington Trust Company, as Trustee. Both the Trust I Capital Securities and the Trust I Junior Subordinated Debt have a floating rate, which resets semi-annually, equal to six-month LIBOR plus 3.70%, with a ceiling of 11.00% for the first five years. Currently, the interest rate on these securities is 8.15%. Payments of distributions and other amounts due on the Trust I Capital Securities are irrevocably guaranteed by the Company, to the extent that Capital Trust I has funds available for the payments of such distributions, pursuant to a Guarantee Agreement, dated April 10, 2002, between the Company and Wilmington Trust Company, as Guarantee Trustee. The Trust I Junior Subordinated Debt and the Trust I Capital Securities may be redeemed at the option of the Company on fixed semi-annual dates beginning on April 22, 2007.

On July 11, 2002, the Company completed the private placement of $13,403,000 aggregate liquidation amount of floating rate trust preferred securities (the “Trust II Capital Securities”) issued by its Delaware statutory business trust, Northway Capital Trust II (the “Capital Trust II”). The Trust II Capital Securities were sold to a pooled investment vehicle. The proceeds from the sale of the Trust II Capital Securities, which include the proceeds from the sale by Capital Trust II of its common securities to the Company, were invested in Floating Rate Junior Subordinated Debt Securities of the Company due 2032 (the “Trust II Junior Subordinated Debt”), which were issued pursuant to an Indenture, dated July 11, 2002, between the Company and Wilmington Trust Company, as Trustee. Both the Trust II Capital Securities and the Trust II Junior Subordinated Debt have a floating rate, which resets quarterly, equal to three-month LIBOR plus 3.65%, with a ceiling of 12.50% for the first five years. Currently, the interest rate on these securities is 7.80%. Payments of distributions and other amounts due on the Trust II Capital Securities are irrevocably guaranteed by the Company, to the extent that Capital Trust II has funds available for the payments of such distributions, pursuant to a Guarantee Agreement, dated July 11, 2002, between the Company and Wilmington Trust Company, as Guarantee Trustee. The Trust II Junior Subordinated Debt and the Trust II Capital Securities may be redeemed at the option of the Company on fixed quarterly dates beginning on July 7, 2007.

44

NOTE 11 GOODWILL AND OTHER INTANGIBLE ASSETS

At December 31, 2005, the Company has goodwill and core deposit intangibles totaling $12,147,000. Core deposit intangibles are being amortized over their useful lives and goodwill is tested for impairment at least annually.

The changes in the carrying amount of goodwill and core deposit intangibles for the years ended December 31, 2005 and 2004 are as follows:

	($000 Omitted)
	Goodwill		Core Deposit Intangibles
Balance, December 31, 2003	$	10,152	$	3,903
Amortization expense		-		(954	)
Balance, December 31, 2004		10,152		2,949
Amortization expense		-		(954	)
Balance, December 31, 2005	$	10,152	$	1,995

Estimated annual amortization expense:

	($000 Omitted)
	Goodwill		Core Deposit Intangibles
2006		-	$	927
2007		-		320
2008		-		320
2009		-		320
2010		-		108

The following table reflects the gross carrying amount and accumulated amortization of core deposit intangibles as of December 31, 2005:

	($000 Omitted)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangibles	$	5,332	$	3,337	$	1,995

Management reviews the carrying amount of intangible assets on an ongoing basis, taking into consideration any events and circumstances that might have diminished such amount. During 2005 and 2004, the Company reviewed the carrying amount of intangible assets and determined that no impairment was required.

NOTE 12 REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2005, the most recent notification from the FDIC categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios above regulatory prescribed minimum levels. There are no conditions or events since that notification that management believes have changed the Bank’s category. Management believes, as of December 31, 2005 and 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

45

NOTE 12 REGULATORY MATTERS (CONTINUED)

These minimum capital amounts and ratios, as well as the Company’s and Bank’s actual capital amounts and ratios, are presented in the following table:

	($000 Omitted)
	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2005
Tier 1 capital (to average assets)
Consolidated	$	55,765		8.96	%	$	24,888		>4.00	%		N/A
Northway Bank		50,450		8.19			24,644		>4.00		$	30,806		>5.00	%
Total capital (to risk weighted assets)
Consolidated		65,025		15.24			34,138		>8.00			N/A
Northway Bank		55,673		13.25			33,623		>8.00			42,029		>10.00
Tier 1 capital (to risk weighted assets)
Consolidated		55,765		13.07			17,069		>4.00			N/A
Northway Bank		50,450		12.00			16,812		>4.00			25,217		>6.00
As of December 31, 2004
Tier 1 capital (to average assets)
Consolidated		52,736		8.43			25,014		>4.00			N/A
Northway Bank		48,150		7.72			24,940		>4.00			31,176		>5.00
Total capital (to risk weighted assets)
Consolidated		62,305		13.94			35,745		>8.00			N/A
Northway Bank		53,437		12.14			35,206		>8.00			44,007		>10.00
Tier 1 capital (to risk weighted assets)
Consolidated		52,736		11.80			17,872		>4.00			N/A
Northway Bank		48,150		10.94			17,603		>4.00			26,404		>6.00

Federal regulations prohibit banking companies from paying dividends on their stock if the effect would cause stockholders' equity to be reduced below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements.

As of December 31, 2005, the Bank is restricted from declaring dividends to the Company in an amount greater than approximately $22,050,000, as such declaration would decrease capital below the Bank’s required minimum level of regulatory capital.

NOTE 13 OTHER NONINTEREST EXPENSE

The major components of other noninterest expense for the years ended December 31, are as follows:

	($000 Omitted)
	2005		2004		2003
Professional fees	$	1,523	$	1,234	$	1,166
Advertising		757		326		304
Stationery and supplies		647		429		556
Telecommunications		619		595		571
ATM expense		321		295		442
Postage and shipping		317		348		378
Other		2,762		2,501		2,402
	$	6,946	$	5,728	$	5,819

46

NOTE 14 FEDERAL AND STATE TAXES

The components of federal and state tax expense for the years ended December 31, are as follows:

	($000 Omitted)
	2005			2004			2003
Current
Federal	$	820		$	1,289		$	1,713
State		26			334			403
		846			1,623			2,116
Deferred
Federal		2			44			(181	)
State		(6	)		(1	)		(37	)
		(4	)		43			(218	)
Change in valuation allowance		-			-			(31	)
		(4	)		43			(249	)
Total	$	842		$	1,666		$	1,867

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 net deferred income tax asset at December 31, are as follows:

	($000 Omitted)
	2005			2004
Deferred income tax assets
Allowance for loan losses	$	2,072		$	1,988
Interest on nonaccrual loans		46			19
Loan origination costs, net		-			4
Unrealized holding loss on securities available-for-sale		724			13
Capital loss carryforward		24			70
Minimum pension liability adjustment		-			346
Amortization of goodwill and core deposit intangible		3			130
Supplemental pension		325			250
Other		9			10
		3,203			2,830
Deferred income tax liabilities
Depreciation		(621	)		(801	)
Prepaid pension		(454	)		(246	)
Mortgage and consumer servicing rights		(94	)		(118	)
		(1,169	)		(1,165	)
Deferred income tax asset, net	$	2,034		$	1,665

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, 2005, 2004 and 2003 differs from the "expected" federal income tax expense at the 34% statutory rate for the following reasons:

	2005			2004			2003
Expected federal income taxes		34.0	%		34.0	%		34.0	%
Interest on municipal securities available-for-sale and municipal loans		(9.4	)		(4.5	)		(3.3	)
State tax expense, net of federal benefit		0.4			4.3			4.4
Valuation allowance for securities		-			-			(0.6	)
Other		(1.0	)		(0.8	)		(0.4	)
Effective tax rates		24.0	%		33.0	%		34.1	%

47

NOTE 15 EMPLOYEE BENEFITS

Pension Plan

The Company maintains a trusteed non-contributory pension plan (the “Plan”) covering substantially all full-time employees. Assuming retirement at age 65 after 30 years or more of service, the benefits are computed as the sum of one percent of final average earnings up to a covered compensation limit, plus 0.65 percent of final average earnings in excess of covered compensation, times years of service, up to 30. Final average earnings are defined as the five consecutive years out of the employee’s last ten years of employment during which compensation is highest. The amounts contributed to the Plan are determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only benefits attributed to service to date but also for those expected to be earned in the future.

The following table sets forth information about the Plan as of December 31, using a measurement date of December 31, and for the years then ended:

	($000 Omitted)
	2005			2004			2003
Change in benefit obligation
Benefit obligation at beginning of year	$	5,805		$	4,901		$	4,356
Service cost		515			481			444
Interest cost		346			303			266
Actuarial loss (gain)		235			233			(46	)
Benefits paid		(311	)		(113	)		(119	)
Benefit obligation at end of year		6,590			5,805			4,901
Change in plan assets
Fair value of plan assets at beginning of year		4,601			3,652			2,685
Actual return on plan assets		295			401			540
Employer contributions		1,145			661			546
Benefits paid		(311	)		(113	)		(119	)
Fair value of plan assets at end of year		5,730			4,601			3,652
Funded status at end of year		( 860	)		(1,204	)		(1,249	)
Unrecognized transition asset		-			-			(1	)
Unrecognized net actuarial loss		2,989			2,803			2,824
Unrecognized prior service cost		(792	)		(877	)		(961	)
Net amount recognized	$	1,337		$	722		$	613
Amounts recognized in the consolidated balance sheets consist of:
Accrued benefit liability	$	-		$	(1,018	)	$	(1,092	)
Accumulated other comprehensive loss, before income tax benefit		-			1,018			1,092
Prepaid benefit cost		1,337			722			613
Net amount recognized	$	1,337		$	722		$	613

The accumulated benefit obligation for the plan was $5,475,000 and $4,896,000 at December 31, 2005 and 2004, respectively.

	($000 Omitted)
Components of net periodic benefit cost	2005			2004			2003
Service cost	$	515		$	481		$	444
Interest cost		346			303			266
Expected return on plan assets		(384	)		(288	)		(211	)
Amortization of prior service cost		(85	)		(84	)		(84	)
Amortization of net actuarial loss		138			141			172
Recognized transition amount		-			(1	)		(5	)
Net periodic benefit cost	$	530		$	552		$	582

48

NOTE 15 EMPLOYEE BENEFITS (CONTINUED)

Assumptions used to determine benefit obligations and benefit cost as of and for the years ending December 31,	2005			2004			2003
Discount rate:
Benefit obligation		5.75	%		6.00	%		6.25	%
Benefit cost		6.00			6.25			6.25
Long-term rate of return on plan assets		8.00			8.00			8.00
Rate of compensation increase		3.50			3.50			4.00

The expected long-term rate of return for the plan’s total assets is based on the expected return of asset categories identified below, weighted based on the target allocations for each class. Equity funds are expected to return 8% to 10% over the long-term and bond funds and short-term money markets are expected to return between 4% and 6%.

At December 31, 2005 and 2004, the comprehensive loss for the unfunded pension accumulated benefit obligation was $0 and $672,000, net of taxes, respectively.

The Company’s pension plan actual asset allocations by asset category are as follows:

	Plan Assets at December 31,
	2005			2004			2003
Asset Category
Mutual funds:
Bond funds		32.7	%		32.6	%		32.3	%
Equity securities		42.5			43.6			43.9
Real estate funds		8.5			9.4			8.8
Short-term money market		16.3			14.4			15.0
Total		100.0	%		100.0	%		100.0	%

The investment policy, as established by the Company, is to provide for a moderate growth of capital with a moderate level of volatility by investing assets per the target allocations as follows:

	2005			2004			2003
Asset Category
Mutual funds:
Bond funds		40-60	%		40-60	%		40.0	%
Equity securities		30-50			30-50			50.0
Real estate funds		0-15			0-15			10.0

The assets will be re-allocated quarterly to meet the above target allocations. The investment policy is reviewed on an annual basis, under the advisement of the Company’s certified investment advisor, to determine if the policy should be changed.

The plan assets do not include any Company common stock at December 31, 2005 and 2004.

The Company does not expect to make a contribution to its pension plan in 2006.

Estimated future benefit payments, which reflect future service, as appropriate, are as follows for the years ended December 31:

	($000 Omitted)
2006	$	158
2007		166
2008		196
2009		228
2010		251
2011-2015		2,134

401(k) Plan

The Company offers a contributory 401(k) Plan. Under the Northway Financial, Inc. 401(k) and Profit Sharing Plan (the “401K Plan”) employees must have attained age 21, completed six months of service and be credited with 1,000 hours of service in order to participate. Employees of the Company are eligible to participate. Under the 401K Plan, the Company matches 50 percent of the first 4 percent of employee contributions. Total 401(k) matching expense in 2005, 2004 and 2003 amounted to $139,000, $143,000 and $130,000, respectively, and Profit Sharing contribution expense for 2005, 2004, and 2003 was $0, $38,000, and $0, respectively.

49

NOTE 15 EMPLOYEE BENEFITS (CONTINUED)

Supplemental Executive Retirement Plan (SERP)

Effective May 29, 2003, the existing Executive Life program sponsored by the Company was terminated and replaced with a SERP. The existing Split Dollar Life Insurance policy designed to support the Executive Life program is now fully owned by Northway. This policy will be maintained by Northway and is used as the benchmark for the SERP.

The total retirement SERP benefit is as follows: Upon Mr. Woodward’s termination of employment for reasons other than death or for cause, the account balance is paid out to him in ten (10) equal annual installments on the first day of the month following the month in which employment is terminated. Upon death after retirement, the unpaid account balance, if any, is paid out in a lump sum to the named beneficiary. During retirement, an additional retirement payment, based on the policy gains associated with the prior calendar year, will also be paid on an annual basis until the executive’s death. In the event of Mr. Woodward’s death while employed by the Company, the SERP permits a death benefit of $2,000,000 be paid to his beneficiary.

Stock-Based Compensation

The Board of Directors (the “Committee”) administers the 1999 Stock Option and Grant Plan (the “1999 Plan”) which is described below.

Under the 1999 Plan, the Committee may select the individuals to whom awards may from time to time be granted; determine the time or times of grant; and determines the extent, if any, of incentive stock options, non-qualified stock options, restricted stock awards, unrestricted stock awards, performance share awards, or any combination of the foregoing.

The 1999 Plan expires in February 2009. The aggregate number of shares of the Company’s common stock which may be issued upon the exercise of options granted under the 1999 Plan is 175,000. The option price is fixed by the Committee at the time of the grant and may not be less than 100 percent of the fair market value of the stock, as determined by the Committee, in good faith as of the grant date. Each option may be exercised at such times as shall be determined by the Committee at or after the grant date; provided, however, that no option may be exercised ten years after the date of grant. The fair value of each option granted is estimated on grant date using the Black-Scholes option pricing model.

A summary of the status of the Company’s 1999 Plan as of December 31, 2005, 2004 and 2003 and changes during the years then ended is presented below:

	2005					2004					2003
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of year		38,000		$	24.96		42,000		$	24.93		42,000	$	24.93
Exercised		(4,000	)		24.64		(4,000	)		24.64		-		-
Outstanding, end of year		34,000		$	25.00		38,000		$	24.96		42,000	$	24.93
Options exercisable at year-end		34,000					38,000					42,000

The following table summarizes information about fixed stock options outstanding as of December 31, 2005:

Options Outstanding			Options Exercisable
Weighted Average Exercise Price	Number Outstanding as of 12/31/05	Weighted Average Remaining Contractual Life	Number Exercisable as of 12/31/05	Weighted Average Exercise Price
$28.00	15,000	3.50 years	15,000	$28.00
22.63	19,000	4.63 years	19,000	22.63
$25.00	34,000	4.13 years	34,000	$25.00

50

NOTE 15 EMPLOYEE BENEFITS (CONTINUED)

Change in Control

The Company and its subsidiaries have entered into Key Employee agreements with the specific Executive Officers as well as other Senior Officers of the Company. These agreements provide for payments, under certain circumstances, to the officer upon the officer’s termination after a change in control. Payments will be made under these agreements upon the officer’s termination or resignation in connection with certain specified actions adverse to the officer’s employment status after a change in control. The amount of such payments ranges from 1.0 to 1.5 times such officer’s annual compensation.

NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. 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:

	($000 Omitted)
	2005		2004
Financial instrument whose contract amounts represent credit risk:
Unadvanced portions of home equity loans	$	18,718	$	17,748
Unadvanced portions of lines of credit		7,897		9,216
Unadvanced portions of commercial real estate loans		2,467		1,888
Unadvanced portions of Bounce Protection™		11,294		12,091
Commitments to originate all other loans		19,971		15,952
Commitments to originate municipal notes		-		2,995
Standby letters of credit		71		400

Commitments to originate loans and municipal notes, unadvanced portions of home equity loans, lines of credit and commercial real estate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without having been drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Unadvanced portions of Bounce Protection™ represent the unused portion of the Bank’s overdraft privilege program.

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. As of December 31, 2005 and 2004, the maximum potential amount of the Company’s obligation was $71,000 and $400,000, respectively, for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

At December 31, 2005, the Bank had commitments to purchase state and political subdivision bonds totaling $2,206,000.

On December 13, 2005, the Bank entered into an agreement with Washington Mutual Bank to purchase two branch locations located in Belmont and Tilton, New Hampshire. The Bank expects to acquire approximately $31,000,000 of deposits and $10,000,000 of loans. This transaction is expected to close on or about April 7, 2006.

51

NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximates the fair value of those assets.

Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

FHLB and Federal Reserve Bank (“FRB”) Stock: The carrying amounts reported in the consolidated balance sheets for FHLB and FRB Stock approximates their fair value. If redeemed, the Company will receive an amount equal to the par value of the stocks.

Loans held-for-sale: Fair values for loans held-for-sale are estimated based on outstanding investor commitments, or in the absence of such commitments, are based on current investor yield requirements.

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 values 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 discounted cash flow analysis or the estimated fair value of the underlying collateral where applicable.

Accrued interest receivable: The carrying value of accrued interest receivable approximates its fair value because of the short-term nature of this financial instrument.

Deposits: The fair value of demand deposits (e.g. NOW and super NOW checking, noninterest bearing checking, regular savings, money market accounts and mortgagors’ escrow accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits.

Short-term borrowings: The carrying value of short-term borrowings approximates its fair value because of the short-term nature of these financial instruments.

Long-term debt: The fair values of long-term debt are 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.

Junior subordinated debentures: The fair values of junior subordinated debentures 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.

Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. See NOTE 16 for further information.

The estimated fair values of the Company’s financial instruments are as follows:

	($000 Omitted) December 31,
	2005				2004
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	29,362	$	29,362	$	24,769	$	24,769
Securities available-for-sale		103,244		103,244		101,133		101,133
FHLB stock		5,541		5,541		5,515		5,515
FRB stock		-		-		365		365
Loans held-for-sale		453		461		311		314
Loans, net		455,223		445,529		469,502		466,679
Accrued interest receivable		2,614		2,614		2,405		2,405

52

NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

	($000 Omitted) December 31,
	2005				2004
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial liabilities:
Deposits	$	464,456	$	463,159	$	475,359	$	475,952
Short-term borrowings		9,363		9,363		11,268		11,268
Long-term debt		85,000		84,296		78,000		78,494
Junior subordinated debentures		20,620		20,908		20,620		21,270

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions except that accrued interest receivable is included with other assets and junior subordinated debentures is included with long-term debt.

At December 31, 2005 and 2004, all the Company’s financial instruments were held for purposes other than trading.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for some of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. The fair value amounts presented do not represent the underlying value of the Company because fair values of certain other financial instruments, assets and liabilities have not been determined.

NOTE 18 CONDENSED PARENT ONLY FINANCIAL STATEMENTS

Condensed financial statements of Northway Financial, Inc. (Parent Company only) as of December 31, 2005 and 2004 and for the three years ended December 31, 2005 follow:

Balance Sheets

	($000 Omitted)
	2005			2004
Assets
Cash and cash equivalents	$	3,780		$	3,843
Investment in subsidiary, Northway Bank		61,517			61,261
Investment in unconsolidated subsidiaries, Northway Capital Trust I & II		620			620
Equipment, net		1,571			2,058
Due from subsidiary		540			808
Other assets		4,751			4,117
Total assets	$	72,779		$	72,707
Liabilities and stockholders’ equity
Accrued expenses	$	540		$	571
Other liabilities		1,369			2,006
Junior subordinated debentures		20,620			20,620
Total liabilities		22,529			23,197
Stockholders’ equity:
Common stock		1,732			1,732
Additional paid-in capital		2,064			2,075
Retained earnings		54,089			52,484
Treasury stock		(6,531	)		(6,090	)
Accumulated other comprehensive loss		(1,104	)		(691	)
Total stockholders’ equity		50,250			49,510
Total liabilities and stockholders’ equity	$	72,779		$	72,707

53

NOTE 18 CONDENSED PARENT ONLY FINANCIAL STATEMENTS (CONTINUED)

Statements of Income

	($000 Omitted)
	2005			2004			2003
Income:
Dividends from subsidiary	$	2,036		$	2,030		$	1,820
Interest income		120			48			54
Management fee income from subsidiary		8,750			9,576			9,112
Other		202			178			57
		11,108			11,832			11,043
Expense:
Interest expense		1,463			1,079			1,036
Salaries and employee benefits		5,495			5,639			5,130
Office occupancy and equipment expense		1,107			1,204			1,223
Professional fees		741			925			933
Other		1,408			1,825			1,830
		10,214			10,672			10,152
Income before income tax benefit and equity in undistributed net income of subsidiary		894			1,160			891
Income tax benefit		(438	)		(345	)		(316	)
Income before equity in undistributed net income of subsidiary		1,332			1,505			1,207
Equity in undistributed net income of subsidiary		1,341			1,883			2,410
Net income	$	2,673		$	3,388		$	3,617

Statements of Cash Flows

	($000 Omitted)
	2005			2004			2003
Cash flows from operating activities:
Net income	$	2,673		$	3,388		$	3,617
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		630			603			467
Decrease (increase) in amount due from subsidiary		268			170			(463	)
Increase in other assets		(622	)		(305	)		(1,271	)
Increase in accrued expenses and other liabilities		4			535			662
Loss on disposal of assets		2			-			27
Undistributed net income of subsidiary		(1,341	)		(1,883	)		(2,410	)
Net cash provided by operating activities		1,614			2,508			629
Cash flows from investing activities:
Capital contributions to subsidiary		-			-			(1,000	)
Additions to premises and equipment		(145	)		(869	)		(466	)
Purchase of company owned life insurance		-			(400	)		(800	)
Net cash used by investing activities		( 145	)		(1,269	)		(2,266	)
Cash flows from financing activities:
Exercise of stock options		99			99			-
Purchases of treasury stock		(563	)		-			(502	)
Cash dividends paid		(1,068	)		(1,020	)		(1,024	)
Net cash used by financing activities		(1,532	)		( 921	)		(1,526	)
Net (decrease) increase in cash and cash equivalents		(63	)		318			(3,163	)
Cash and cash equivalents at beginning of year		3,843			3,525			6,688
Cash and cash equivalents at end of year	$	3,780		$	3,843		$	3,525

54

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Summarized quarterly financial data for 2005 and 2004 follows:

	($000 Omitted, except earnings per share)
	2005 Quarters Ended
	Mar 31		Jun 30		Sep 30		Dec 31
Interest and dividend income	$	7,833	$	7,742	$	8,177	$	8,352
Interest expense		1,896		2,068		2,342		2,622
Net interest and dividend income		5,937		5,674		5,835		5,730
Provision for loan losses		75		-		-		-
Noninterest income		987		1,295		1,337		377
Noninterest expense		5,612		5,752		5,946		6,272
Income before taxes		1,237		1,217		1,226		(165
Income tax expense		414		313		349		(234
Net income	$	823	$	904	$	877	$	69
Basic earnings per common share	$	0.55	$	0.60	$	0.58	$	0.05
Earnings per common share assuming dilution	$	0.54	$	0.60	$	0.58	$	0.05

	2004 Quarters Ended
	Mar 31		Jun 30		Sep 30		Dec 31
Interest and dividend income	$	7,371	$	7,571	$	7,595	$	7,740
Interest expense		1,827		1,873		1,867		1,864
Net interest and dividend income		5,544		5,698		5,728		5,876
Provision for loan losses		150		120		120		105
Noninterest income		1,296		1,264		1,443		1,094
Noninterest expense		5,608		5,702		5,567		5,517
Income before taxes		1,082		1,140		1,484		1,348
Income tax expense		353		392		507		414
Net income	$	729	$	748	$	977	$	934
Basic earnings per common share	$	0.49	$	0.50	$	0.65	$	0.62
Earnings per common share assuming dilution	$	0.49	$	0.49	$	0.64	$	0.62

55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shatswell, MacLeod & Company, P.C.

Certified Public Accountants

83 Pine Street

West Peabody, Massachusetts 01960

The Board of Directors and Stockholders

Northway Financial, Inc.

Berlin, New Hampshire

We have audited the accompanying consolidated balance sheets of Northway Financial, Inc. and Subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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, 2005 and 2004 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

	SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 24, 2006

56

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2005. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2005. There were no changes in the Company’s internal control over financial reporting during the fourth quarter 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference to the information set forth under the captions “Information Concerning Directors and Nominees,” “Executive Officers” and “Audit and Compliance Committee” in the Company’s definitive proxy statement to be delivered in connection with its 2006 Annual Meeting of Stockholders.

Furthermore, the Company has adopted a code of ethics that applies to all of its directors, officers and employees. The Company has filed a copy of this Code of Ethics as Exhibit 14 to this Form 10-K. The Company has also made the Code of Ethics available on its website at www.northwaybank.com.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the information set forth under the caption “Executive Compensation” in the Company’s definitive proxy statement to be delivered in connection with its 2006 Annual Meeting of Stockholders, provided however, that the “Report of the Human Resources, Compensation and Nominating Committee on Executive Compensation” and the “Stock Price Performance Graph” contained in such proxy statement are not incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the information set forth under the captions "Security Ownership of Management and Principal Stockholders,” “Information Concerning Directors and Nominees” and “Equity Compensation Plan Information” in the Company’s definitive proxy statement to be delivered in connection with its 2006 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the information set forth under the caption “Certain Relationships and Related Transactions” in the Company’s definitive proxy statement to be delivered in connection with its 2006 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the information set forth under the caption “Fees Paid to Independent Auditors” in the Company’s definitive proxy statement to be delivered in connection with its 2006 Annual Meeting of Stockholders.

57

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	(1)	The following financial statements are filed as part of this Report on Form 10-K:
			Report of Independent Registered Public Accounting Firm
			Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003
			Consolidated Balance Sheets as of December 31, 2005 and 2004
			Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, 2004, and 2003
			Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004 and 2003
			Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
			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. The Exhibit Index is incorporated herein by reference.

58

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 24, 2006	BY:	/S/ William J. Woodward
		William J. Woodward
		Chairman of the Board, President & Chief
		Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/S/ William J. Woodward	Chairman of the Board, President	March 24, 2006
William J. Woodward	and CEO (Principal Executive Officer)
/S/ Richard P. Orsillo	Senior Vice President and Chief	March 24, 2006
Richard P. Orsillo	Financial Officer (Principal Financial
	and Accounting Officer)
/S/ John H. Noyes	Director	March 23, 2006
John H. Noyes
/S/ Barry J. Kelley	Director	March 23, 2006
Barry J. Kelley
/S/ Randall G. Labnon	Director	March 24, 2006
Randall G. Labnon
/S/ Brien L. Ward	Director	March 23, 2006
Brien L. Ward
/S/ Arnold P. Hanson, Jr.	Director	March 23, 2006
Arnold P. Hanson, Jr.
/S/ Frederick C. Anderson	Director	March 23, 2006
Frederick C. Anderson

59

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 the Company Common Stock (reference is also made to Exhibits 3.1 and 3.2) (incorporated by reference to Exhibit 4 to Registration Statement No. 333-33033).
10.1	Employment Agreement for William J. Woodward. (1)(2)
10.3	Amendment to the Employment Agreement for William J. Woodward. (1)(2)
10.5	Northway Financial, Inc. 1999 Stock Option and Grant Plan (incorporated by reference to Exhibit 4.1 to Registration Statement No. 333-83571 dated July 23,1999). (2)
10.7	Form of Key Employee Agreement. (1)(2)
10.8	Supplemental Executive Retirement Plan. (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended 2003).
11	Statement re: Computation of Per Share Earnings(1)
14	Code of Ethics(1)
21	List of Subsidiaries(1)
23	Consent of Shatswell, MacLeod & Company, P.C. (1)
31.1	Certification of President of Northway Financial, Inc., pursuant to rules 13(a)-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
31.2	Certification of Chief Financial Officer of Northway Financial, Inc., pursuant to rules 13(a)-15(e) and 5d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
32.1	Certification of President of Northway Financial, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
32.2	Certification of Chief Financial Officer of Northway Financial, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)

⁽¹⁾ Filed herewith.

⁽²⁾ Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 15(a) of this report.

60 

EX-3.2

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

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)

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-10.3

Exhibit 10.3

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment to Employment Agreement (“Amendment”) is entered into by and among Northway Financial, Inc., a New Hampshire chartered corporation (“Northway”), The Berlin City Bank, a New Hampshire chartered bank and wholly owned subsidiary of Northway with its principal office located in New Hampshire (Northway and The Berlin City Bank are hereinafter collectively referred to as the “Employer”), and William J. Woodward (the “Executive”).

WHEREAS, the Employer and the Executive are parties to an Employment Agreement dated September 30, 1997 (the “Employment Agreement”); and

WHEREAS, the Employer and the Executive have determined that it is in their mutual best interest to amend the Employment Agreement as set forth below;

NOW, THEREFORE, the Employer and the Executive agree as follows:

The Employment Agreement is amended by adding the following to the end of Section 7(d) (“Noncompetition and Nonsolicitation”):

Notwithstanding the foregoing, in the event that the Executive becomes entitled to Termination Benefits pursuant to Section 6(f) (“Termination Following a Change of Control”), this Section 7(d) shall not apply to the Executive with respect to the Executive’s activities during any period following the termination of the Executive’s employment.

This Amendment shall be effective as of January 1, 1999 (the “Effective Date”).

IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument by the Employer, by its duly authorized officer, and by the Executive, as of the Effective Date.

			NORTHWAY FINANCIAL, INC.
Attest:
By:	/S/	Donald R. Hatt	By:	Fletcher W. Adams
Name:		Donald R. Hatt	Name: Fletcher W. Adams
Title:		Senior Executive Vice President	Title: Vice Chairman
		and Chief Financial Officer
			THE BERLIN CITY BANK
			By:	/S/ William J. Woodward
			Name: William J. Woodward
			Title: President and Chief Executive Officer
			EXECUTIVE
			/S/ William J. Woodward
			William J. Woodward

EX-10.7

Exhibit 10.7

FORM OF KEY EMPLOYEE AGREEMENT

THIS AGREEMENT is made as of the day of , by and among The Berlin City Bank, a New Hampshire bank with its main office in Berlin, New Hampshire (the "Subsidiary"), Northway Financial, Inc. a New Hampshire corporation ("Northway") (Northway and the Subsidiary shall be hereinafter collectively referred to as the "Company"), and _______., a resident of _______ _____________ (the "Executive").

WHEREAS in order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 1) in an objective manner and in consideration of the services to be rendered by the Executive to the Company and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Company, the Company is willing to provide, subject to the terms of this Agreement, certain severance benefits to protect the Executive from the consequences of a Terminating Event (as defined in Section 1) occurring subsequent to a Change in Control; and

WHEREAS, in consideration of the continued employment of the Executive by the Company, the entering into by Northway of that certain stock option agreement between Northway and the Executive of even date herewith providing for participation by the Executive in Northway's 1999 Stock Option and Grant Plan, the severance benefits provided subject to the terms herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Executive, the Executive agrees to be bound by certain restrictions contained herein regarding competition, Confidential Information (as defined in Section 1) and proprietary rights.

1. Certain Definitions. For the purposes of this Agreement, the following terms shall have the following respective meanings:

(a) "Change in Control" shall be deemed to have occurred in any one of the following events:

(i) if there has occurred a change in control of either Northway or the Subsidiary which Northway would be required to report in response to Item 1 (or, in the case of the Subsidiary, Item 2) of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission, pursuant to the 1934 Act, which are intended to serve similar purposes;

(ii) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of Northway or the Subsidiary representing 25% or more of the total number of votes that may be cast for the election of directors of Northway or the Subsidiary, as the case may be;

(iii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who are Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of Northway or the Subsidiary. For this purpose, a "Continuing Director" shall mean (a) an individual who was a director of Northway or the Subsidiary at the beginning of such period or (b) any new director (other than a director designated by a person who has entered into an agreement with Northway or the Subsidiary to effect a transaction described in clause (ii), (iv) or (v) of this Section 1(a)) whose election by the Board or nomination for election by Northway's or the Subsidiary's stockholders was approved by a vote of at least two-thirds (2/3) of the directors of Northway or the Subsidiary, as appropriate, then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved;

(iv) the stockholders of Northway approve a merger or consolidation of Northway or the Subsidiary with any other corporation or bank, other than (a) 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 80% of the combined voting power of the voting securities of Northway or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of Northway (or similar transaction) in which no "person" (as defined above) acquires more than 30% of the combined voting power of Northway's then outstanding securities; or

(v) the stockholders of Northway or the Subsidiary approve a plan of complete liquidation of Northway or the Subsidiary or an agreement for the sale or disposition by Northway or the Subsidiary of all or substantially all of Northway's or the Subsidiary's assets;

(b) "Company-Related Inventions and Developments" means all Inventions and Developments which either (i) relate at the time of conception or development to the actual or demonstrably anticipated business or research and development activities of the Company; (ii) result from or relate to any work performed for the Company, whether or not during normal business hours; (iii) are developed on Company work time; or (iv) are developed through the use of Confidential Information, or the Company's equipment, software, or other facilities or resources;

(c) "Confidential Information" means information belonging to the Company, whether reduced to writing (or in a form from which such information can be obtained, translated, or derived into reasonably usable form), or maintained in the mind or memory of the Executive, which derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure or use of such information, including without limitation, financial information, reports, and forecasts; inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software or related code; 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 Company. Confidential Information includes information developed by the Executive in the course of his employment by the Company, as well as other information to which the Executive may have access in connection with his employment. Confidential Information also includes the confidential information of others with which the Executive has a business relationship. Notwithstanding the foregoing, Confidential Information does not include information in the public domain, unless due to breach of the duties of the Executive under Section 5 below;

(d) "Customer" means any person or entity who (i) is receiving Services, directly or indirectly, from the Company on the date of termination of employment of the Executive with the Company, (ii) received Services, directly or indirectly, from the Company or the Executive at any time during the two year period immediately preceding the date of termination of employment of the Executive with the Company, (iii) was solicited, directly or indirectly, in whole or in part, by the Executive on behalf of the Company to provide Services within two years preceding the termination of employment of the Executive with the Company, or (iv) anyone solicited, directly or indirectly, in whole or in part, on behalf of the Company to provide Services within two years preceding the termination of employment of the Executive with the Company;

(e) "Inventions and Developments" means any and all inventions, developments, creative works and useful ideas of any description whatsoever, whether or not patentable, including without limitation, discoveries and improvements which consist of or relate to any form of Confidential Information;

(f) "Restricted Term" means the aggregate period equal to the period during which the Executive is employed by the Company, plus a period of 1.5 years immediately following the termination of employment of the Executive with the Company;

(g) "Services" means banking and bank-related services, and such other services that are similar to and competitive with services the Company may provide or develop plans to provide during the employment of the Executive;

(h) "Terminating Event" shall mean:

(i) termination by either of Northway or the Subsidiary of the employment of the Executive with either of Northway or the Subsidiary for any reason other than (A) death, (B) deliberate dishonesty of the Executive with respect to Northway or the Subsidiary or any subsidiary or affiliate of either, or (C) conviction of the Executive of a crime involving moral turpitude, or

(ii) resignation of the Executive from the employ of both of Northway and the Subsidiary, while the Executive is not receiving payments or benefits from either of Northway or the Subsidiary by reason of the Executive's disability, subsequent to the occurrence of any of the following events:

(A) a significant change in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or

(B) a determination by the Executive that, as a result of a Change in Control, he is unable to exercise the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to such Change in Control; or

(C) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Company and all management personnel of any person in control of the Company; or

(D) the failure by the Company to pay to the Executive any portion of his current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within seven (7) days of the date such compensation is due; or

(E) the failure by the Company to continue in effect any material compensation, incentive, bonus or benefit plan in which the Executive participates immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; or

(F) the failure by the Company to continue to provide the Executive with benefits substantially similar to those available to the Executive under any of the life insurance, medical, health and accident, or disability plans or any other material benefit plans in which the Executive was participating at the time of the Change in Control, or the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or

(G) the failure of the Company to obtain a satisfactory agreement from any successor(s) to assume and agree to perform this Agreement.

2. Severance Payments. In the event a Terminating Event occurs within one (1) year after a Change in Control, the Company shall pay to the Executive, in periodic installments in accordance with the Company's usual practice for its senior executives, for a period of 1.5 years from the date of such Terminating Event, a annualized amount equal to the annual compensation paid by the Company to the Executive which was includible in the gross income of the Executive for the calendar year ending before the date on which the Change in Control occurs; provided, that if the Executive is in breach of his obligations under Section 7, the Company may withhold amounts otherwise due to the Executive under this Section 2 until the Executive has cured such breach or is otherwise in compliance with Section 7.

3. Limitation on Benefits.

(a) It is the intention of the Executive and the Company that no payments by the Company to or for the benefit of the Executive under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the Company by reason of the operation of Section 280G of the Internal Revenue Code of 1986 , as amended (the "Code") relating to parachute payments. 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, any such payments exceed the amount which can be deducted by the Company, such payments shall be reduced to the maximum amount which can be deducted by the Company. 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 Company 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 than no such payments shall be non-deductible to the Company by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within 45 days after the Company has sent him written notice of the need for such reduction, the Company may determine the method of such reduction in its sole discretion.

(b) If any dispute between the Company and the Executive as to any of the amounts to be determined under this Section 3, or the method of calculating such amounts, cannot be resolved by the Company and the Executive, either the Company or the Executive after giving three days written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Company and the Executive. The determination of such partner as to the amount to be determined under Section 3(a) and the method of calculating such amounts shall be final and binding on both the Company and the Executive. The Company shall bear the costs of any such determination.

4. Extent of Service. During the Executive's employment with the Company, the Executive shall, subject to the direction and supervision of the Company, devote his full business time, best efforts and business judgment, skill and knowledge to the advancement of the Company's interests and to the discharge of his duties and responsibilities under this Agreement. The Executive shall not engage in any other business activity, except as may be approved by the Company; provided that nothing in this Agreement shall be construed as preventing the Executive from:

(a) investing his assets in any company or other entity in a manner not prohibited by Section 7 below and in such form or manner as shall not require any material activities on his 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 ability of the Executive to fulfill his duties and responsibilities under this Agreement.

5. Confidentiality. The Executive acknowledges and agrees that his employment creates a relationship of confidence and trust with the Company with respect to all Confidential Information. At all times, both during the Executive's employment with the Company and after the termination of such employment, the Executive shall keep in confidence and trust all such Confidential Information, and shall not use or disclose any such Confidential Information without the written consent of the Company, except as may be necessary in the ordinary course of performing his duties to the Company. In furtherance of the foregoing:

(a) Documents, Records, etc. All documents, records, data, apparatus, equipment and physical property, whether or not pertaining to Confidential Information or Company-Related Inventions and Developments, which are furnished to the Executive by the Company or are produced by the Executive in connection with his employment shall be and remain the sole property of the Company. The Executive shall return to the Company all such materials and property, including any material or medium from which any Confidential Information may be ascertained or derived, as and when requested by the Company. In any event, the Executive shall return all such materials and property immediately upon termination of his employment for any reason. The Executive shall not retain any such material or property or any copies, compilations, or analyses thereof after such termination.

(b) Assignment of Inventions and Developments. The Executive agrees that all Company-Related Inventions and Developments which he conceives or develops, in whole or in part, either alone or jointly with others, during the term of his employment with the Company shall be the sole property of the Company. The Company shall be the sole owner of all patents, copyrights and other proprietary rights in and with respect to such Company-Related Inventions and Developments. To the fullest extent permitted by law, such Company-Related Inventions and Developments shall be deemed works made for hire. The Executive hereby transfers and assigns to the Company any proprietary rights which he may have or acquire in any such Company-Related Inventions and Developments, and the Executive hereby waives any other special rights which he may have or accrue therein. The Executive agrees to execute any documents and take any actions that may be required to effect and confirm such transfer, assignment and waiver. The provisions of this Section 5(b) shall apply to all Company-Related Inventions and Developments which are conceived or developed by the Executive during the term of his employment with the Company, whether or not further development or reduction to practice may take place after termination of such employment, for which purpose it shall be presumed that any Company-Related Inventions and Developments conceived by the Executive which are reduced to practice within one year after termination of the employment of the Executive were conceived during the term of the Executive's employment with the Company unless the Executive is able to establish a later conception date by clear and convincing evidence. THE EXECUTIVE HEREBY REPRESENTS AND WARRANTS TO THE COMPANY THAT ALL INVENTIONS AND DEVELOPMENTS MADE BY THE EXECUTIVE PRIOR TO HIS EMPLOYMENT BY THE COMPANY ARE DISCLOSED IN EXHIBIT A ATTACHED TO THIS AGREEMENT. The Executive agrees promptly to disclose to the Company, or to persons designated by the Company, all Company-Related Inventions and Developments which are or may be subject to the provisions of this Section 5(b). The Executive further agrees to assist the Company, at the Company's request from time to time and at its expense, to obtain and enforce patents, copyrights or other proprietary rights with respect to Company-Related Inventions and Developments in any and all countries and the Executive agrees that he shall execute all documents reasonably necessary or appropriate for this purpose. This obligation of the Executive shall survive the termination of employment of the Executive, provided that the Company shall compensate the Executive at a reasonable rate after such termination for time actually spent by the Executive at the Company's request on such assistance. In the event that the Company is unable for any reason to secure the Executive's signature to any document reasonably necessary or appropriate for any of the foregoing purposes (including renewals, extensions, continuations, divisions or continuations in part), the Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as the Executive's agents and attorneys-in-fact to act for the Executive and on behalf of the Executive, but only for the purpose of executing and filing any such document and doing all other lawfully permitted acts to accomplish the foregoing purposes, with the same legal force and effect as if it had been executed or done by the Executive.

6. Nonsolicitation of Customers. During the Restricted Term, regardless of the reason for termination of the employment of the Executive, the Executive shall not, directly or indirectly, in any capacity:

(a) solicit the business or patronage of any Customer for any other person or entity engaged in or for the purpose of providing Services;

(b) divert, entice, or otherwise take away from the Company the business or patronage of any Customer, or attempt to do so;

(c) solicit or induce any Customer to terminate or reduce its relationship with the Company;

(d) provide or assist with the provision of Services to a Customer (except in his capacity as an employee of the Company); or

(e) refer a Customer to another provider of Services.

7. Unfair Competition. During the Restricted Term, regardless of the reason for termination of employment of the Executive, the Executive shall not, directly or indirectly, in any capacity, whether as owner, partner, director, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate, assist or invest in any business activity anywhere in the State of New Hampshire, or any county in another state that is contiguous to a county where Northway or any of its subsidiaries or affiliates has an office, where the Company directly or indirectly provides or uses Services or the Company is preparing to provide Services, if such business activity involves the development, production, sale, provision or marketing of Services or products or services like or similar to, or otherwise competitive with the Services. The foregoing shall not prevent the Executive from owning up to one percent of the outstanding securities of a publicly-held corporation which competes with the Company, or from being employed by or affiliated or associated with any person or entity after termination of the employment of the executive with the Company so long as the Executive does not have any direct or indirect involvement on behalf of any such person or entity with respect to developing, producing, selling, providing or marketing Services. Notwithstanding any provision of this Agreement to the contrary, in the event a Terminating Event occurs following a Change in Control, the Executive shall not be subject to the restrictions outlined above in this Section 7 for a period in excess of six (6) months from the date of such Terminating Event.

8. Nonsolicitation of Employees. During the Restricted Term, regardless of the reason for termination of the employment of the Executive, the Executive shall not directly or indirectly, in any capacity:

(a) hire or employ, directly or indirectly, through any enterprise with which the Executive is associated, any current employee or agent of the Company or any individual who had been employed by or served as an agent to the Company within one year preceding the date of termination of employment of the Executive; or

(b) recruit, solicit or induce (or in any way assist another person or enterprise in recruiting, soliciting or inducing) any employee or an agent of the Company to terminate his or her employment or other relationship with the Company.

9. Acknowledgments. The Executive acknowledges and agrees that the restrictions set forth in Sections 5, 6, 7 and 8 are intended to protect the Company's interest in its Confidential Information and its commercial relationships and goodwill (with its customers, prospective customers, vendors, consultants and employees), or developed while the Executive was employed by the Company, and are reasonable and appropriate for these purposes.

10.Disclosure of Agreement. The Executive agrees that he shall disclose the existence and terms of this Agreement to any prospective company, partner, co-venturer, investor or lender prior to entering into an employment, partnership or other business relationship with such person or entity.

11.Third-Party Agreements and Rights. The Executive hereby confirms that he is not bound by the terms of any agreement with any previous company or other party which restricts in any way his use or disclosure of information or his engagement in any business. The Executive hereby represents and warrants to the Company that the execution by the Executive of this Agreement, the employment by the Executive with the Company and the performance of the proposed duties of the Executive for the Company will not violate any obligations the Executive may have to any such previous company or other party. In the Executive's work for the Company, the Executive agrees that he shall not disclose or make use of any information in violation of any agreements with or rights of any such previous company or other party, and he shall not bring to the premises of the Company any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party.

12.Litigation and Regulatory Cooperation. During and after the employment of the Executive by the Company, the Executive shall cooperate fully with the Company 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 Company which relate to events or occurrences that transpired while the Executive was employed by the Company. The full cooperation of the Executive in connection with such claims or actions shall include, but shall 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 Company at mutually convenient times. During and after the employment of the Executive by the Company, the Executive shall cooperate fully with the Company 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 Company. The Company shall reimburse the Executive for any reasonable out-of-pocket expenses incurred in connection with the performance by the Executive of obligations pursuant to this Section 12.

13.Injunction. The Executive acknowledges and agrees that it would be difficult to measure any damages caused to the Company which might result from any breach by the Executive of the promises set forth in this Agreement, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, the Executive agrees that if the Executive breaches, or threatens to breach, any portion of this Agreement, the Company shall be entitled, in addition to, and not in substitution for, all other remedies that it may have, at law or in equity, to an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage to the Company.

14.Severability. The parties hereto agree that if any provisions of this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deleted from the Agreement, but such deletion is to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made, and the validity or enforceability of any other provision hereof shall not be affected thereby. The parties hereto further agree that to the extent any provision hereof is deemed unenforceable by virtue of its scope in terms of area or length of time or for any other reason, but may be made enforceable by limitations thereon, such provision shall be enforceable to the fullest extent permissible under the laws and public policies applied in the jurisdiction in which enforcement is sought.

15.Entire Agreement. This Agreement contains the entire and only agreement between the parties hereto respecting the subject matter hereof and supersedes all prior agreements and understandings between the parties as to the subject matter hereof.

16.Survival of Obligations; Extension. The Executive acknowledges and agrees that his obligations under this Agreement shall survive the termination of his employment with the Company regardless of the manner of or reasons for such termination, and regardless of whether such termination constitutes a breach of this Agreement or of any other agreement the Executive may have with the Company.

17.Assignment. The Executive shall not make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of Northway, and without such consent any attempted transfer shall be null and void and of no effect. The Company shall not make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the Executive, and without such consent any attempted transfer shall be null and void and of no effect; provided, that the Company may assign all or any portion of its rights under this Agreement: (a) to any of its affiliates, (b) by operation of law to any corporation or other entity with or into which the Company may be merged or consolidated, or (c) to any corporation or other entity to which the Company transfers all or substantially all of its assets; provided such corporation or other entity assumes this Agreement and all obligations and undertakings of the Company hereunder.

18.Binding Effect. This Agreement shall inure to the benefit of, and be binding upon, and enforceable against Northway, the Subsidiary and the Executive , their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Company of all payments due to him under this Agreement, the Company shall continue such payments to the Executive's beneficiary designated in writing to the Company prior to his death (or to his estate, if he fails to make such designation).

19.Amendment. This Agreement may not be amended except in a writing signed by all parties hereto.

20.No Contract of Employment. Nothing in this Agreement shall be construed as a contract of employment between the Executive and the Company or as a commitment on the part of the Company to retain the Executive in any capacity for any period of time.

21.Notices. Any notices, requests, demands and other communications provided for by this Agreement will be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the address set out below the signature of the Executive below and, in the case of any notice to the Company, at the main office of Northway, to the attention of its President and Chief Executive Officer.

22.Governing Law. The validity, construction, and enforceability of this Agreement shall be governed by and construed in all respects in accordance with the laws of the State of New Hampshire without giving effect to the conflict of laws provisions thereof. This Agreement is executed under seal.

23.Term. This Agreement shall take effect as of the date hereof and shall terminate upon expiry of the Restricted Term.

24.Withholding. All payments made by the Company under this Agreement shall be net of any tax or other amounts required to be withheld by the Company under applicable law.

25.Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the State of New Hampshire by three arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Concord. Such arbitration shall be conducted in the City of Concord in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 25. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the Executive's rights under this Agreement, the Company shall pay (or the Executive shall be entitled to recover from the Company, as the case may be) the Executive's reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances of recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. This provision shall not apply to Section 3(b), except in the event that the Company and the Executive cannot agree on the selection of the accounting partner described in said Section 3(b).

26.Allocation of Obligations. Northway and the Subsidiary shall allocate among themselves which party shall be responsible for paying the severance payments and other benefits directed by this Agreement. The payment by either party of such severance payments and other benefits shall satisfy the obligations of the non-paying party under this Agreement. Both Northway and the Subsidiary shall be jointly liable in the event of a failure by both parties to pay such severance payments and other benefits.

27.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.

28.Election of Remedies. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not constitute a breach by the Executive of any employment agreement between the Company and the Executive and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Company's benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under any employment agreement he may then have with the Company; provided, however, that if there is a Terminating Event under Section 1 hereof, the Executive may elect either to receive the severance payment provided under Section 2 or such termination benefits as he may under any such employment agreement, but may not elect to receive both.

29.Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by duly authorized representatives of each of Northway and the Subsidiary.

IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by Northway, by its duly authorized officer, by the Subsidiary, by its duly authorized officer, and by the Executive, as of the date first above written.

WITNESS:
ATTEST:		THE BERLIN CITY BANK
	By:
	Title:
			Clerk

EX-11

Exhibit 11

Statement Re Computation of per share earnings

Twelve Months Ended December 31, 2005
Basic Earnings Per Share:
Net Income	$2,672,796	=	$1.78
Weighted Average Number of Common Shares	1,502,121
Diluted Earnings Per Share:
Net Income	$2,672,796	=	$2,672,796	=	$1.77
Weighted Average Number of Common Shares	1,502,121+9,231		1,511,352
Adjusted for Effect of Outstanding Options
Three Months Ended December 31, 2005
Basic Earnings Per Share:
Net Income	$69,094	=	$0.05
Weighted Average Number of Common Shares	1,493,587
Diluted Earnings Per Share:
Net Income	$69,094	=	$69,094	=	$0.05
Weighted Average Number of Common Shares	1,493,587+9,313		1,502,900
Adjusted for Effect of Outstanding options

EX-14

Exhibit 14

ETHICS AND CONFLICT OF INTEREST POLICY

NORTHWAY FINANCIAL, INC.

AND SUBSIDIARIES

	TABLE OF CONTENTS
I.	INTRODUCTION	2
II.	CONFLICTS OF INTEREST	2
III.	CERTAIN CONFLICT OF INTEREST SITUATIONS	4
IV.	CONFIDENTIALITY	5
V.	COMPLIANCE WITH LAWS, RULES AND REGULATIONS	6
VI.	ACCURACY OF RECORDS; QUALITY OF PUBLIC DISCLOSURES	6
VII.	ELECTRONIC COMMUNICATIONS, VOICE MAIL AND COMPUTER SYSTEMS	6
VIII.	INTERNET USAGE	7
IX.	COMPLIANCE PROCEDURES	7
X.	REVIEW	8

I. Introduction

This policy is established to ensure that employees, directors, officers and agents of Northway Bank (the “Bank”) recognize the position of trust they occupy. It is intended to outline some examples of the types of behaviors and dealings by persons in a position of trust which can result in an abuse or undermining of that trust, and ultimately confidence, in the Bank.

This policy applies to the employees, directors, officers, and agents of the Bank (hereinafter “Bank officials”).It is in addition to other Bank policies and/or agreements and is not intended to reduce or limit other obligations that you may have to the Bank.

II. Conflicts of Interest

A. Bank officials are expected to conduct themselves in an honest, responsible and professional manner. It is also expected that they will remain free of influences and perceived influences that may result in a loss of objectivity regarding Bank business, including, but not limited to, its customers and suppliers. A “conflict of interest” occurs when a director’s, officer’s or employee’s personal interest interferes with the Bank’s interests. Conflicts of interest may arise in many situations. For example, conflicts of interest can arise when a director, officer or employee takes an action or has an outside interest, responsibility or obligation that may make it difficult for him or her to perform the responsibilities of his or her position objectively and/or effectively in the Bank’s best interests. Conflicts of interest may also occur when a director, officer or employee or his or her immediate family member receives some personal benefit (whether improper or not) as a result of the director’s, officer’s or employee’s position with the Bank. Bank officials should exercise good judgment at all times and bring to the attention of the Audit and Compliance Committee of the Board of Directors any potentially compromising scenarios and disclose all possible conflicts.

B. Bank officials are prohibited from self-dealing or otherwise trading on their positions with the Bank or accepting from one doing or seeking to do business with Bank a business opportunity not available to other persons or that is made available because of such officials' position with the Bank. Bank officials must disclose to the Audit and Compliance Committee of the Board of Directors all potential conflicts of interest, including those in which they have been inadvertently placed. Ethical requirements include, but are not limited to, the following:

(1) Bank officials may not receive non-public information from another financial institution for the purpose of personal benefit or gain;

(2) Bank officials may not borrow from customers or vendors, except from those normally engaging in lending as a primary business function under terms available to the general public;

(3) Bank officials may not lend funds to customers or vendors when based on obvious family or personal relationship and it is clear that the relationship is the motivating factor;

(4) Bank officials may not perform any type of transaction involving their own or immediate family member’s account. This includes not only financial transactions but inputting and maintaining account information, etc.

(5) Bank officials may not purchase assets from the Bank, directly or indirectly, without an independent appraisal of the assetand approval of the Board of Directors or appropriate senior management officials;

(6) Bank officials may not conduct personal business from the Bank or use Bank equipment, supplies, employees, etc. to conduct non-Bank business;

(7) Bank officials may not recommend attorneys, accountants, insurance brokers or agents, stockbrokers, real estate agents and the like unless several names are given without favoritism;

(8) Bank officials may not advise customers regarding the law, tax problems, tax return preparation, or investment decisions, unless required in the ordinary course of his/her duties;

(9) Bank officials may not accept fees for speeches given or for articles written as a representative of the Bank;

(10) Bank officials shall respond candidly to inquiries from outside independent auditors, internal auditors, or state and federal bank examiners, shall conceal no adverse data, and shall offer any information to assist in a proper evaluation;

(11) Bank officials shall notify the Human Resources Manager immediately should they become involved in civil or criminal proceedings;

(12) Bank officials may not receive any fee or other benefit from any borrower or loan applicant as an inducement to making the loan;

(13) No Bank official may negotiate loans in his/her own behalf with himself/herself.

C. In addition, as required under Bank Bribery Law at 18 U.S.C. § 215, any employee, officer, director, agent, or attorney of a bank is prohibited from:

(1) Soliciting for themselves or for a third party (other than the Bank itself) anything of value from anyone in return for any business, service or confidential information of the Bank; and

(2) Accepting anything of value (other than a bona fide salary, wages and fees referred to in 18 USC 215(c)) from anyone in connection with the business of the Bank, either before or after a transaction is discussed or consummated.

III. Certain Conflict of Interest Situations

A. Gifts, Gratuities & Entertainment

Solicitation or acceptance of gifts, gratuities, special favors and/or entertainment from prospective, current or former Bank customers, suppliers, and other persons or entities doing business with or seeking to do business with the Bank, or which could be viewed in any way as seeking to influence bank business is prohibited. The following specific transactions are exceptions to the above rule:

(a) Acceptance of gifts, gratuities, amenities, or favors based on obvious family or personal relationships where it is clear that the relationship is the motivating factor;

(b) Acceptance of meals, refreshments, entertainment, accommodations, or travel arrangements of a value of less than fifty dollars ($50.00) in the course of holding business discussions or fostering better business relations;

(c) Acceptance of loans from other banks or financial institutions on customary terms to finance proper and usual activities, except where prohibited by law;

(d) Acceptance of advertising or promotional material of less than fifty dollars ($50.00) in value such as pens, pencils, note pads, key chains, calendars, and similar items;

(e) Acceptance of discounts or rebates on merchandise or services that do not exceed in value those available to other customers;

(f) Acceptance of gifts of reasonable value, excluding monetary gifts, that relate to commonly recognized events such as promotions, new jobs, weddings, retirements, holidays, or birthdays where the circumstances make clear the event motivates the gift giving and whose value does not exceed fifty dollars ($50.00);

(g) Acceptance of civic, charitable, education, or religious awards recognizing service and or;

(h) Other circumstances individually pre-approved in writing by the President after full written disclosure of all circumstances and compliance with applicable state and federal laws.

If a Bank official is offered or receives something of value from a customer or vendor beyond what is authorized above, then the Bank official must disclose that fact and all circumstances in writing to the Bank President. Any incident deemed to be a threat to the integrity of the Bank shall be reported promptly to the Audit and Compliance Committee of the Board of Directors.

B. Outside Activities/Employment

A serious threat to the Bank occurs when its officials become involved in outside business interests or employment that gives rise to a conflict of interest.

Because of the confidential nature of bank business and the highly regulated nature of the banking industry, and the possibility for conflicts of interest, all Bank officials considering outside business interests or employment (any activity to supplement income) must have prior written approval from the Human Resources Manager. Failure to obtain written approval from the Human Resources Manager regarding outside employment may result in disciplinary action up to and including immediate discharge.

With regard to other activities, including, but not limited to, service on boards, community service, etc., Bank officials must notify their immediate supervisor, and in the case of Directors, the Chairperson of the Board, of their proposed outside employment and/or activities and obtain written approval to participate in such employment/activities.

Approval will not be unreasonably withheld. However, should approval be granted, it may be withdrawn at any time by a majority vote of the disinterested members of the Boards of Directors when it is determined that the outside activity/employment is interfering with the performance of duties and responsibilities to the Bank, or if it presents a real or perceived conflict of interest or is otherwise deemed inconsistent with the best interests of the Bank.

IV. Confidentiality

Bank officials are in daily contact with and have access to or exposure to confidential and privileged information about bank business. It is imperative that such information be maintained confidentially and not be used, divulged or disclosed in a manner other than for legitimate bank purposes.

The protection of confidential business information is vital to the interests and the success of the Bank. Bank officials have access to confidential information, including but not limited to, compensation data, customer lists, personal and financial information, marketing strategies, pending projects and proposals and other proprietary and business information. Bank official access to such information is solely the result of their employment or relationship with the Bank and it is to be used only in a manner consistent with their duties. No Bank official may use, reproduce, disseminate or divulge any information contained in the records of the Bank to any other employee or non-employee, except as is necessary to perform his/her duties, with the prior written consent of the the Bank, or as otherwise required by law. This includes, but is not limited to the use, reproduction, dissemination and divulgence of information about the Bank official personally, which is not otherwise protected under state and/or federal law. Any use, reproduction, dissemination, disclosure or divulgence to the press or to a third party deemed to be a competitor will be in violation of this policy.

All information concerning customers must be kept confidential. Bank officials are not authorized to discuss or disclose information concerning a customer's account(s), financial condition, etc., except as is necessary to perform their bank duties or as otherwise required by law.

Even the appearance of inappropriate conduct can harm the reputation of the Bank as much as actual misconduct. If a Bank official questions the propriety of an action, then either the action should be avoided or it should be discussed with the Bank Chairman or the Human Resources Manager.

The Bank will maintain a copy of this policy statement in their official records. All new and existing Bank officials will be required to sign an acknowledgment indicating receipt of this policy statement and to any subsequent material changes thereto. The Bank will maintain written reports of any disclosure made by their Bank officials in connection with this policy.

V. Compliance with Laws, Rules and Regulations

The Bank seeks to conduct its business in compliance with applicable laws, rules and regulations. No director, officer or employee shall engage in any unlawful activity in conducting the Bank’s businesses or in performing his or her day-to-day duties, nor shall any director, officer or employee instruct others to do so.

VI. Accuracy of Records; Quality of Public Disclosures

The integrity, reliability and accuracy in all material respects of the Bank’s books, records and financial statements is fundamental to our continued success. No transaction may be entered into with the intent to document or record it in a deceptive or unlawful manner and no false or artificial documentation or book entry is to be made for any transaction. The Bank’s books and record must accurately record all funds, assets and transactions.

The Bank is committed to providing its shareholders with complete and accurate information about its financial condition and results of operations as required by the securities laws of the United States. The reports and documents that the Bank files with or submits to the Securities and Exchange Commission, and the earnings releases and similar public communications made by the Bank must include fair, timely and understandable disclosure. Officers and employees who are responsible for these filings and disclosures, including the Bank’s principal executive, financial and accounting officers, must use reasonable judgment and perform their responsibilities honestly, ethically and objectively in order to ensure that this disclosure policy is fulfilled. The Bank’s senior management is primarily responsible for monitoring the Bank’s public disclosure.

VII. Electronic Communications, Voice Mail and Computer Systems

The Bank maintains electronic communications systems such as e-mail, Internet, Intranet, Remote Access, faxes and on-line services and also provide voice mail and computer systems to support its businesses and its employees in the performance of their jobs. These services are to be used for business purposes only. The Bank reserves the right to limit or terminate an employee’s access to these systems at its discretion.

The use of the Bank’s electronic communication, voice mail and/or computer systems is not private. The Bank reserves the right to access, audit, read, review, monitor, use and disclose any and all information and messages on these systems whether passworded or not at any time for any reason and without notice, permission or other restrictions. Employees should be aware that even when data, a message and/or document, etc. is “erased” or “deleted” it may still be possible to retrieve it and therefore even erasure or deletion does not render data, message(s) or document(s) private.

The electronic communication, voice mail and computer system hardware and software, all data, messages and documentation composed, sent, received and generated on these systems are all the property of the Bank and can be read, retrieved and disclosed by the Bank at its discretion, whether or not the messages are otherwise protected by a password or code. Employees are prohibited from receiving, sending and/or downloading discriminatory, offensive or harassing messages or information. Employees are prohibited from accessing, reading or disclosing electronic communication, voice mail, and computer system messages or information not intended for their review and/or receipt. A violation of this policy may result in disciplinary action up to and including immediate termination from employment.

All software used on the Bank microcomputers (PCs) are the exclusive property of the Bank under appropriate licensing agreements, and as such, fall under all U.S. copyright laws. All officers and employees are charged with ensuring compliance with such agreements and laws, and further are prohibited from viewing, copying, reproducing, translating, transmitting, or reducing to any paper or electronic media, any programs or personal data files that reside on another employee’s PC, without the permission of the SVP/Senior Technology Officer.

VIII. Internet Usage

The Bank has developed an Internet Access Policy. The policy has procedures for:

· Obtaining access and usage of the Internet

· Monitoring Internet Access and usage

· Downloading software from the Internet

· E-mail

· Training

· Consequences for failure to comply with policy guidelines

· Internal monitoring and audit

IX. Compliance Procedures

Monitoring Compliance and Disciplinary Action

The Bank’s management, under the supervision of its Board of Directors or a committee thereof or, in the case of accounting, internal accounting controls or auditing matters, the Audit and Compliance Committee of the Board of Directors, shall take reasonable steps from time to time to (i) monitor compliance with this policy, including the establishment of monitoring systems that are reasonably designed to investigate and detect conduct in violation of this policy, and (ii) when appropriate, impose and enforce appropriate disciplinary measures for violations of this policy.

Reportingof Concerns

All potential conflicts of interestor other potential violations of this policy (including those in which Bank officials have been inadvertently placed due to either business or personal relationships with customers, suppliers, business associates or competitors of the Bank must be reported to the Audit and Compliance Committee of the Board of Directors, and, in the case of directors, to the Chairman of the Bank’s Board. Employees may communicate their concerns to theChairman of theAudit and Compliance Committee of the Board of Directors by notifying their immediate supervisor, the Human Resources Manager, other appropriate person. In the event individuals do not feel comfortable making their report internally, they may utilize the Bank’s outside confidential reporting service vendor, MySafeWorkplace. They can be contacted as follows:

MySafeWorkplace

1-800-650-7005

www.MySafeWorkplace.com

15000 West 6^th Avenue, Suite 150

Golden, CO 80401

The Bank’s management shall periodically report to the Audit and Compliance Committee of the Board of Directors on these compliance efforts, including, without limitation, periodic reporting of alleged violations of this policy and the actions taken with respect to any such violation.

Bank officials reporting potential conflicts or other information under this policy will be required to complete a "Disclosure Form". A copy will be maintained in the Bank official's file with Human Resources.

Any concerns or questions with respect to accounting, internal accounting controls or auditing mattersshould be directed to the Audit and Compliance Committee of the Board of Directors, in accordance with the Bank’s Audit and Compliance Committee Complaint Procedures. Under these procedures, concerns may be reported to an appropriate person who can relay them to the Chairman of the Audit and Compliance Committee of the Board of Directors, such as a supervisor or member of the Human Resources Department,. Concerns may also be lodged confidentially by contacting the Bank’s confidential reporting service vendor, MySafeWorkplace, at 1-800-650-7005 or www.mysafeworkplace.com.

The Bank expressly forbids any retaliation against any Bank official who, acting in good faith, reports suspected misconduct. Any person(s) who participates in such retaliation is subject to disciplinary action, including termination.

X. Review

The Bank will review this policy on an annual basis.

NORTHWAY BANK

AND SUBSIDIARIES

ETHICS AND CONFLICT OF INTEREST POLICY

ACKNOWLEDGMENT

I, _______________________, hereby acknowledge that I have received, read and understand the “Ethics and Conflict of Interest Policy” provided to me. I also acknowledge my responsibilities as an employee of the organization which is, at all times, to adhere to these policies. I understand a violation of this policy may result in disciplinary action up to and including immediate termination from employment.

Signature of Employee Date

EX-21

Exhibit 21

List of Subsidiaries

Northway Financial, Inc 2005 Annual report on Form 10-K Subsidiaries of the Registrant
Name of Significant Subsidiary	% Owned	Jurisdiction of Incorporation
Northway Bank	100	New Hampshire
Northway Capital Trust I	100	Delaware
Northway Capital Trust II	100	Delaware

EX-23

Exhibit 23

Consent

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report on Form 10-K of Northway Financial, Inc. of our report dated January 24, 2006, relating to the consolidated statements of financial condition of Northway Financial, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005.

	/S/ Shatswell, MacLeod & Company, P.C.
	SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 24, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, William J. Woodward, certify that:

1. I have reviewed this annual report on Form 10-K of Northway Financial, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 24, 2006
	/s/ WILLIAM J. WOODWARD
	William J. Woodward
	Chairman of the Board, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Richard P. Orsillo, certify that:

1. I have reviewed this annual report on Form 10-K of Northway Financial, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 24, 2006
	/s/ RICHARD P. ORSILLO
	Richard P. Orsillo
	Senior Vice Presidentand Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Northway Financial, Inc. (the “Company”) for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned President and Chief Executive Officer for the Company, certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

	/s/ WILLIAM J. WOODWARD
	William J. Woodward
	Chairman of the Board, President and Chief Executive Officer
Date: March 24, 2006

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Northway Financial, Inc. (the “Company”) for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Financial Officer and Treasurer for the Company, certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

	/s/ RICHARD P. ORSILLO
	Richard P. Orsillo
	Senior Vice President, Chief Financial Officer and Treasurer
Date: March 24, 2006