<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
(Fee Required)
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(No Fee Required)
Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
------------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
--------------------- ------
Address of principal executive offices (Zip Code)
(603) 752-1171
--------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by Reference in Part II of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of common stock held by nonaffiliates of the
registrant as of March 20, 1998 was 1,506,519 for an aggregate market value of
$46,702,089.
At March 20, 1998, there were issued and outstanding 1,731,969 shares of
common stock, par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 1998 Annual Meeting are
incorporated by reference in Items 10, 11, 12 and 13 of Part III.
- -------------------------------------------------------------------------------
<PAGE>
FORM 10-K TABLE OF CONTENTS
NORTHWAY FINANCIAL, INC.
PART I
ITEM 1 Business .................................................... 1
ITEM 2 Properties .................................................. 6
ITEM 3 Legal Proceedings ........................................... 6
ITEM 4 Submission of Matters to a Vote of Security Holders ......... 7
PART II
ITEM 5 Market for the Registrant's Common Stock and Related
Security Holder Matters ................................... 7
ITEM 6 Selected Financial Data ..................................... 7
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 9
Financial Condition at December 31, 1997
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk .. 9
ITEM 8 Financial Statements and Supplementary Material ............. 9
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 9
PART III
ITEM 10 Directors and Executives Officers of the Registrant ......... 9
ITEM 11 Executive Compensation ...................................... 9
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management ................................................ 9
ITEM 13 Certain Relationships and Related Transactions .............. 10
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K ............................................... 11
Signatures .............................................. 12
<PAGE>
FORWARD LOOKING INFORMATION - Certain statements in this Form 10-K are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. All forward looking statements involve risks and
uncertainties. Such Forward Looking Statements may include, but are not limited
to, projections of revenue, income or loss, plans for future operations and
acquisition, and plans related to products or services of Northway, BCB, or PNB
(all as defined below) and are subject to known and unknown risks, uncertainties
and contingencies, many of which are beyond the control of Northway, which may
cause actual results, performance or achievements to differ materially from
anticipated results, performance or achievements. Factors that might affect such
forward looking statements include, among other things, overall economic and
business conditions, the demand for the Company's products and services,
competitive factors in the industries in which the company competes, changes in
government regulations and the timing, impact and other uncertainties of future
acquisitions.
PART 1
ITEM 1. BUSINESS
General Description of Business
Northway Financial, Inc. ("Northway") was incorporated on March 7,
1997, under the laws of the State of New Hampshire, for the purpose of becoming
the holding company of The Berlin City Bank, a New Hampshire chartered bank
headquartered in Berlin, New Hampshire ("BCB") pursuant to a reorganization
transaction (the "BCB Reorganization") by and among Northway, BCB, and a
subsidiary of BCB, and, thereafter, effecting the merger (the "Merger") by and
among Northway, BCB and Pemi Bancorp, Inc. ("PEMI"), and its wholly owned
subsidiary, Pemigewasset National Bank, a national bank headquartered in
Plymouth, New Hampshire ("PNB"). The BCB Reorganization and the Merger became
effective on September 30, 1997. As of such date, BCB and PNB became wholly
owned subsidiaries of Northway. Unless the context otherwise requires,
references herein to "Northway" include Northway Financial, Inc. and its
consolidated subsidiaries.
Northway is subject to regulation by the New Hampshire Bank
Commissioner, the Federal Deposit Insurance Corporation, and the Board of
Governors of the Federal Reserve System. See "Supervision and Regulation."
Northway, through its banking subsidiaries, provides a broad range of
financial services principally to individuals and small- and medium-sized
companies in New Hampshire, including those located in low- and moderate-income
neighborhoods within Northway's defined Community Reinvestment Act Assessment
Area.
Description of Business
Bank Activities
BCB, which was first organized in 1891, and PNB, which was first
organized in 1881, are engaged in a general commercial banking business and
offer commercial, construction, real estate mortgages, and consumer loans
including personal secured and unsecured loans, and lines of credit. The banks
accept savings, time, demand, NOW and money market deposit accounts, and offer a
variety of banking services including travelers checks, safe deposit boxes,
Master Charge accounts, overdraft lines of credit and wire transfer services.
The banks have 13 automatic teller machines to allow customers limited banking
services on a 24 hour basis.
<PAGE>
The following information concerning Northway's investment activities,
lending activities, asset quality and allowance for possible loan losses, should
be read in conjunction with "Managements Discussion and Analysis of Financial
Condition and Results of Operations," appearing under Item 7 and Northway's
Consolidated Financial Statements and Notes thereto.
Investment Activities
The following table presents the carrying amount of Northway's
investment securities available-for-sale and held-to-maturity as of December 31,
1997, 1996 and 1995 (dollars in thousands):
1997 1996 1995
--------- --------- -------
Available-for-sale:
US Treasury and other
US government agencies $11,929 $ 20,479 $ 18,353
Mortgage-backed securities(1) 31,235 48,348 45,461
Corporate notes 5,000 13,068 16,313
Foreign notes -- 1,000 1,999
Common and preferred stocks 2,796 2,284 295
State and political subdivisions 4,143 3,259 2,055
Other -- 190 323
------- -------- ---------
55,103 88,628 84,799
------- -------- ---------
Held-to-maturity:
US Treasury and other
US government agencies $ -- $ 501 $ 1,302
Mortgage-backed securities(1) 8,400 9,943 11,981
State and political subdivisions 2,912 1,755 2,094
------- -------- ---------
11,312 12,199 15,377
------- -------- ---------
Total Investment Securities $66,415 $100,827 $ 100,176
======= ======== =========
(1) Includes Collateralized Mortgage Obligations.
The following table sets forth the amortized cost of Northway's debt
obligations maturing within stated periods and their related weighted average
interest rates, reported on a tax equivalent basis, as of December 31, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
Maturities
-----------------------------------------------------
One to Five to Over
Available-for-sale: Within five ten ten Total
one year years years years Cost
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
US Treasury and other
US government agencies $ -- $3,876 $ 7,997 $ -- $11,873
Corporate notes 5,008 -- -- -- 5,008
Mortgage-backed
securities (1) -- 1,325 7,790 22,422 31,537
State and political subdivisions -- 491 625 2,900 4,016
------ ------ ------- ------- -------
$5,008 $5,692 $16,412 $25,322 $52,434
====== ====== ======= ======= =======
Market value $5,001 $5,717 $16,339 $25,250 $52,307
====== ====== ======= ======= =======
Weighted average yield 5.43% 6.55% 6.38% 6.08% 6.16%
<CAPTION>
Maturities
-----------------------------------------------------
One to Five to Over
Held-to-maturity: Within five ten ten Total
one year years years years Cost
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities(1) $ 113 $1,615 $ 3,003 $3,669 $ 8,400
State and political subdivisions 2,098 814 -- -- 2,912
------ ------ ------ ------- -------
$2,211 $2,429 $ 3,003 $3,669 $11,312
====== ====== ======= ====== =======
Market value $2,215 $2,454 $ 2,986 $3,642 $11,297
====== ====== ======= ====== =======
Weighted average yield 6.55% 6.66% 6.70% 6.70% 6.67%
(1) Includes Collateralized Mortgage Obligations
</TABLE>
Lending Activities
The following table sets forth information with respect to the composition of
Northway's loan portfolio, excluding loans held for sale, as of December 31,
1997, 1996, 1995, 1994 and 1993 (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $152,041 $ 145,847 $139,941 $143,193 $133,262
Commercial 56,204 43,901 37,595 34,120 29,190
Construction 5,664 2,329 363 517 907
Commercial 27,129 27,293 24,283 25,277 25,665
Installment 23,476 18,733 14,533 12,084 11,967
Other 2,769 2,999 2,277 4,038 3,844
-------- --------- -------- -------- --------
Total Loans 267,283 241,102 218,992 219,229 204,835
Less: Unearned income (526) (719) (1,014) (1,181) (823)
Allowance for possible loan losses (4,156) (3,941) (3,866) (3,682) (3,706)
-------- --------- -------- -------- --------
Net Loans $262,601 $236,442 $214,112 $214,366 $200,306
======== ======== ======== ======== ========
</TABLE>
The following table presents the maturity distribution of Northway's real estate
construction and commercial loans at December 31, 1997 (dollars in thousands):
Percent of
Amount Total
------- ------
Within one year $ 3,622 11.05%
One to five years 9,570 29.18
Over five years 19,601 59.77
------- ------
$32,793 100.00%
======= ======
Northway's real estate construction and commercial loans due after one year
at December 31, 1997 were comprised of the following (dollars in thousands):
Amount
-------
Fixed interest rate $ 8,848
Adjustable interest rate 20,323
-------
$27,171
=======
<PAGE>
Asset Quality
At December 31, 1997, the amount of interest on nonaccrual and restructured
loans that would have been recorded had the loans been paying in accordance with
their original terms during 1997 was approximately $290,000. The amount of
interest income on these loans included in net income in 1997 was approximately
$247,000.
At December 31, 1997 the Company had classified certain loans totaling
$813,000. Such loans represent a higher degree of risk and could become
non-performing loans in the future.
Analysis of the Allowance for Possible Loan Losses
The following table reflects activity in Northway's allowance for possible
loan losses for the years ended December 31, 1997 and 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at the beginning of period $3,941 $3,866 $3,682 $3,706 $3,517
Charge-offs:
Real estate 452 583 456 563 736
Commercial 105 29 190 307 99
Installment loans to individuals 48 27 29 30 68
Credit card 1 11 21 20 48
Other 6 -- -- -- --
------ ------ ------ ------ ------
Total 612 650 696 920 951
------ ------ ------ ------ ------
Recoveries:
Real estate 212 160 177 56 95
Commercial 55 11 28 136 35
Installment loans to individuals 19 28 11 26 20
Credit card 4 14 12 18 15
Other 2 -- -- -- --
------ ------ ------ ------ ------
Total 292 213 228 236 165
------ ------ ------ ------ ------
Net charge-offs 320 437 468 684 786
Provision charged to expense 535 512 652 660 975
------ ------ ------ ------ ------
Balance at the end of period $4,156 $3,941 $3,866 $3,682 $3,706
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.13% 0.20% 0.32% 0.45% 0.48%
</TABLE>
<PAGE>
Allocation of the Allowance for Possible Loan Losses
The following table sets forth the breakdown of Northway's allowance for
possible loan losses in Northway's portfolio by category of loan and the
percentage of loans in each category to total loans in the respective portfolios
at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------- ---------------------- ----------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
------- ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 613 10.2% $ 582 11.3% $ 924 11.1% $1,344 11.5% $1,302 12.5%
Real estate:
Commercial &
Construction 1,251 23.1 1,186 19.2 675 17.2 375 15.6 275 14.3
Residential 1,395 56.9 1,323 60.5 1,417 64.1 1,131 65.6 1,111 65.5
Installment 198 8.8 188 7.8 147 6.6 139 5.5 154 5.8
Other 55 1.0 52 1.2 53 1.0 53 1.8 213 1.9
Unallocated 644 N/A 610 N/A 650 N/A 640 N/A 651 N/A
------ ----- ------ ----- ------ ----- ------ ------ ------ -----
$4,156 100.0% $3,941 100.0% $3,866 100.0% $3,682 100.80% $3,706 100.0%
====== ===== ====== ===== ====== ===== ====== ====== ====== =====
</TABLE>
Supervision and Regulation
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended (the "BHC Act"), Northway is subject to substantial regulation
and supervision by the Federal Reserve Board and is required to file periodic
reports and such additional information as the Federal Reserve Board may
require. The Federal Reserve Board also makes periodic inspections of Northway
and its subsidiaries. Under the BHC Act, Northway is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5 percent of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing or controlling
banks or furnishing services to, or acquiring premises for, its affiliated
banks, except that Northway may engage in and own voting shares of companies
engaging in certain activities determined by the Federal Reserve Board, by order
or by regulation, to be so closely related to banking or to managing or
controlling banks "as to be a proper incident thereto."
PNB is a national banking association, organized pursuant to the provisions
of the National Bank Act. As such, its primary regulatory authority is the
Comptroller of the Currency of the United States (the "Comptroller"). The
Comptroller regularly examines national banks and their operations. In addition,
operations of national banks are subject to federal statutes and regulations.
Such statutes and regulations relate to required reserves, investments, loans,
mergers, payment of dividends, issuance of securities and many other aspects of
operations.
With respect to the ability of a national bank to pay dividends, the
Comptroller's approval is required if the total dividends declared by a national
bank in any year will exceed the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfer to surplus. The Comptroller also has authority to prohibit a national
bank from engaging in unsafe or unsound practices in conducting the business of
the Bank.
PNB is also subject to applicable provisions of New Hampshire law insofar as
they do not conflict with or are not otherwise preempted by federal banking law.
BCB is organized under New Hampshire law and is subject to the regulations of
the New Hampshire Bank Commissioner, the Federal Deposit Insurance Corporation,
and the Board of Governors of the Federal Reserve System. Various requirements
and restrictions under the laws of the United States and the State of New
Hampshire affect the operations of BCB, including maintaining adequate levels of
capital, the payment of dividends, the nature and amount of loans which can be
originated and the rate of interest that can be charged thereon, investments and
other activities of BCB.
The banking industry in the United States, which includes commercial banks,
savings and loan associations, mutual savings banks, capital stock savings
banks, credit unions, and bank and savings and loan holding companies, is part
of the broader financial services industry which includes insurance companies,
mutual funds, and the brokerage industry. In recent years, intense market
demands and economic pressures have eroded once clearly defined industry
classifications and have forced the financial services institutions to diversify
their services, increase returns on deposits, and become more cost effective as
a result of competition with one another and with new types of financial
services companies, including non-bank competitors.
The present bank regulatory scheme is undergoing significant change, both as
it affects the banking industry itself and as it affects competition between
banks and non-bank financial institutions. There has been significant regulatory
change in the bank mergers and acquisitions area, in the products and services
banks can offer, and in the non-banking activities in which bank holding
companies can engage. Banks are now actively competing with non-bank financial
institutions for products such as money market funds.
Federal banking laws now permit adequately capitalized bank holding companies
to venture across state lines to offer banking services through bank
subsidiaries to a wider geographic market. In light of this change in the law,
it is possible for large organizations to enter many new markets including the
markets served by Northway. Certain of these competitors, by virtue of their
size and resources, may enjoy certain efficiencies and competitive advantages
over Northway in pricing, delivery, and marketing of their products and
services. It is not possible to assess what impact these changes in the
regulatory scheme will have on Northway.
Competition
Northway's banking subsidiaries face significant competition in their
respective market from commercial banks, savings banks, credit unions, consumer
finance companies, insurance companies, "non-bank banks," mutual funds,
government agencies, investment management companies, investment advisors,
brokers and investment bankers. In addition, increasing consolidation within the
banking and financial services industry, as well as increased competition from
larger regional and out-of-state banking organizations and non-bank providers of
various financial services, may adversely affect Northway's ability to achieve
its' financial goals. Many of these large competitors have significantly more
financial resources, larger market share and greater name recognition in the
market areas served by Northway.
Employees
As of December 31, 1997, Northway and its subsidiaries had approximately 207
full-time and part-time employees.
ITEM 2. PROPERTIES
Northway operates 13 banking offices in the northern New Hampshire towns of
Berlin, Conway (3), Gorham (2), Groveton, Littleton, West Plymouth, Plymouth,
Campton, Ashland and North Woodstock. Ten of these offices, including its main
offices in Berlin, New Hampshire and Plymouth, New Hampshire, are located in
properties it owns. Northway leases two of its branches under five-year leases
expiring on December 31, 2000 and June 1, 2001, respectively. Northway also
operates a limited services facility at the Plymouth Regional High School.
Eleven of Northway's branches have drive-up facilities and all are equipped with
automated teller machines.
ITEM 3. LEGAL PROCEEDINGS
Northway is not a party to, nor are any of its subsidiaries the subject of,
any material pending legal proceedings, other than ordinary routine litigation
incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to a vote of stockholders during the quarter ended
December 31,1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Since the completion of the Merger, Northway's common stock has been traded
on The Nasdaq Stock Market, Inc.'s National Market under the symbol "NWFI" The
following table sets forth, for the periods indicated, the high and low closing
sale prices for the common stock, as reported by the Nasdaq National Market, and
the dividends paid on the common stock:
Price Per Share
------------------------
Low High Dividends Per Share
------ ------ -------------------
4th Quarter $30.00 $37.50 $0.55
On March 20, 1998, the closing sales price of the common stock on the Nasdaq
National Market was $31.00 per share. As of such date, there were approximately
1,650 holders of record of the Northway common stock.
Northway intends to continue to pay dividends subject to, among other things,
the financial condition and earnings of Northway, capital requirements, and
other factors, including applicable governmental regulations. No dividends will
be payable unless declared by the Board of Directors and then only to the extent
funds are legally available for the payment of such dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected consolidated financial
information of Northway for the five years in the period ended December 31,
1997. This selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Northway's Consolidated Financial Statements and
related Notes. The selected consolidated financial data reflects the combined
results of operation and financial position of Northway Financial, Inc. and Pemi
Bancorp, Inc. restated for all periods presented pursuant to the pooling of
interests method of accounting. See Note 23 to the Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
At or for the years ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $377,866 $372,581 $357,917 $349,447 $329,483
Investment securities available-for-sale 55,103 88,628 84,799 23,761 55,867
Investment securities held-to-maturity 11,312 12,199 15,377 81,021 40,727
Loans, net of unearned income 266,757 240,383 217,978 218,048 204,013
Allowance for possible loan losses 4,156 3,941 3,866 3,682 3,706
Real estate acquired by foreclosure
or substantively repossessed 222 202 492 665 1,351
Deposit purchase premium 1,161 1,462 1,800 2,122 --
Deposits 322,063 322,315 310,388 304,983 280,803
Securities sold under agreements
to repurchase 6,146 4,620 6,087 6,882 10,370
Stockholders' equity (1) 37,526 33,663 31,102 26,113 26,168
Income Statement Data:
Net interest and dividend income $ 17,027 $ 15,717 $ 15,493 $ 14,521 $ 12,542
Provision for possible loan losses 535 512 652 660 975
Noninterest income 1,680 1,602 1,257 1,399 1,841
Noninterest expense 11,859 10,976 10,613 10,271 9,520
Net income 4,039 3,857 3,596 3,276 2,775
Per Common Share Data:
Net income $ 2.33 $ 2.23 $ 2.08 $ 1.82 $ 1.54
Cash dividends declared 0.55 0.52 0.44 0.40 0.32
Book value (1) 21.67 19.44 17.96 14.79 14.57
Tangible Book Value (2) 21.00 18.59 16.92 13.59 14.57
Selected Ratios:
Return on average assets 1.07% 1.05% 1.02% 0.95% 0.85%
Return on average equity 11.14 12.04 12.71 11.75 10.74
Dividend payout 23.69 23.13 21.22 21.37 20.47
Average equity to average asset ratio 9.60 8.69 8.00 8.07 7.89
(1) Stockholders' equity as of December 31, 1997, 1996, and 1995 has been reduced by the unrealized loss on investment
securities "available-for- sale." Stockholders' equity as of December 31, 1994 and 1993 has been reduced by the
unrealized loss on investment securities "available-for- sale" and the unrealized loss on investment securities
transferred to "held-to-maturity." See Notes 1 and 3 to the Financial Statements.
(2) Stockholders' equity as of December 31, 1997, 1996, 1995 and 1994 has been reduced by deposit purchase premium.
</TABLE>
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which begin on page B-1 of this Annual Report on Form
10-K and is hereby incorporated by reference in this Item 7.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market
risk is included in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing under Item 7 of this Annual Report of Form
10-K and is hereby incorporated by reference in this Item 7A.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL
The Consolidated Financial Statements of Northway listed in the index
appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on
Form 10-K and are hereby incorporated by reference in this Item 8. See also
"Index to Consolidated Financial Statements" on page C-1 hereof.
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information set forth under the captions "Management and Certain Security
Holders," "Information Concerning Directors and Nominees" and "Executive
Officer" in Northway's definitive proxy statement to be delivered in connection
with its 1998 Annual Meeting of Stockholders.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Executive Officers and
Directors are required by the SEC regulation to furnish the Company with copies
of all Section 16(a) filings. Based solely on its review of the copies of such
forms received by it, the Company believes that, during 1997, all such filing
requirements applicable to its executive officers and directors were complied
with by such individuals.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" in Northway's
definitive proxy statement to be delivered in connection with its 1998 Annual
Meeting of Stockholders, provided however, that the "Report on Executive
Compensation" and the "Stock Price Performance Graph" contained in the 1998
Proxy Statement are not incorporated by reference therein.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth under the captions "Information Concerning Directors and
Nominees" and "Security Ownership of Management" in Northway's definitive proxy
statement to be delivered in connection with its 1998 Annual Meeting of
Stockholders.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth under the caption "Certain Relationships and Related
Transactions" in Northway's definitive proxy statement to be delivered in
connection with its 1998 Annual Meeting of Stockholders.
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the fiscal years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for
the fiscal years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
None
(3) The Exhibits which are filed with this report or which are
incorporated herein by reference are set forth in the Exhibit Index
which appears on page A-1 hereof, which Exhibit Index is
incorporated herein by reference.
(b) Northway filed no Reports on Form 8-K during the quarter ended December
31, 1997.
(c) See Item 14(a)(3) above
(d) See Item 8 to this Annual Report on Form 10-K
<PAGE>
NORTHWAY FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries. The discussion and analysis is intended to supplement and
highlight information contained in the accompanying consolidated financial
statements and the selected financial data presented elsewhere in this report.
Prior year information has been restated to reflect the 1997 acquisition of the
Pemi Bancorp which was accounted for using the pooling-of-interest accounting
method.
RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income of $4,039,000, or $2.33 per share in 1997
as compared to net income of $3,857,000, or $2.23 per share in 1996 and
$3,596,000, or $2.08 per share in 1995. Return on average assets was 1.07
percent in 1997, as compared to 1.05 percent and 1.01 percent for 1996 and 1995,
respectively. The improved results in 1997 were attributable to a substantial
increase in net interest income, which amounted to $1,310,000, and was offset in
part by merger-related expense of $643,000. The increase in 1996 was
attributable to improved net interest income and gains realized on the sale of
securities.
The Company's results of operations are affected not only by its net
interest income, but also by the level of its noninterest income, including
gains and losses on the sales of loans and securities, noninterest expenses,
provision for possible loan losses resulting from the Company's assessment of
the adequacy of the allowance for loan losses and income tax expense.
NET INTEREST INCOME ANALYSIS
Net interest income is the principal component of a financial institution's
income stream and represents the difference, or spread, between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially impact
net interest income. The discussion of net interest income is presented on a
taxable equivalent basis, unless otherwise noted, to facilitate performance
comparisons among various taxable and tax-exempt assets.
The table on page B-3 presents average balances, income earned or interest
paid, and average yields earned or rates paid on major categories of assets and
liabilities for the years ended December 31, 1997, 1996, and 1995.
Net interest income for 1997 increased 8 percent over 1996 while increasing
one percent in 1996 over 1995.
Interest income increased 4 percent in 1997 and 4 percent in 1996. Interest
income in 1997 grew as a result of a 3 percent increase in the volume of earning
assets, and as a result of the change in the mix of assets. A 13 percent
increase in the volume of average loans and a 26 basis point decrease in yield
accounted for the 10 percent increase in interest income on loans. Interest
income on investment and mortgage-backed securities decreased 18 percent from
1996 to 1997. This decrease resulted from a 21 percent decrease in the average
balance of total investment and mortgage-backed securities offset by a 20 basis
point increase in yield.
Total interest expense decreased by 2 percent in 1997 due to a 10 basis
point decrease paid on interest bearing liabilities combined with a modest
increase in average volume. Interest expense on certificates of deposit
decreased 5 percent as a result of a 21 basis point decrease in rate.
From 1995 to 1996, interest income increased 4 percent as a result of a 4
percent increase in the volume of earning assets. Interest income on loans rose
3 percent as a result of a 3 percent increase in average volume and a 4 basis
point increase in yield. Interest income on investment and mortgage-backed
securities increased 10 percent from 1995 to 1996 as a result of a 10 percent
increase in average volume.
An 18 basis point increase in the rate paid on interest bearing liabilities
combined with a 2 percent increase in average volume resulted in a 7 percent
increase in interest expense on interest bearing liabilities in 1996. A
substantial portion of the increase in total interest expense was due to a 14
percent increase in interest expense on certificates of deposit, resulting from
a 38 basis point increase in rate and a 6 percent increase in average volume.
The trend in net interest income is commonly evaluated in terms of average
rates using net interest margin and interest rate spread. The net interest
margin is computed by dividing fully taxable equivalent net interest income by
average total earning assets. This ratio represents the difference between the
average yield returned on average earning assets and the average rate paid for
all funds used to support those earning assets, including both interest bearing
and noninterest bearing sources of funds. The net interest margin increased 27
basis points to 4.93 percent in 1997 and after having decreased 9 basis points
to 4.66 percent in 1996. The increase in 1997's net interest margin was a
function of the downward pricing of interest bearing liabilities, specifically
certificates of deposit, the increase in average loan volumes, partially offset
by the lower yield on loans. At the same time, the portion of interest earning
assets funded by interest bearing liabilities in 1997 was 86 percent. In 1996
the portion of interest earning assets funded by interest bearing liabilities
was 88 percent.
The interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest bearing liabilities. The
interest rate spread eliminates the impact of noninterest bearing funds and
gives a direct perspective on the effect on interest rate movements. During
1997, the net interest rate spread increased 21 basis points to 4.37 percent
from the 1996 spread of 4.16 percent as the cost of interest bearing liabilities
declined while the yields earned on earning assets increased 11 basis points.
The decrease in 1996 was 18 basis points from 4.34 percent in 1995. See the
accompanying scheduled entitled "Consolidated Average Balances, Interest
Income/Expense and Average Yields/Rates" and "Consolidated Rate/Volume Variance
Analysis" for more information.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses is the annual cost of providing an
allowance or reserve for anticipated future losses on loans. The amount for each
year is dependent upon many factors including loan growth, net charge-offs,
changes in the composition of the loan portfolio, delinquencies, management's
assessment of loan portfolio quality, the value of collateral and general
economic factors.
The Company incurred a $535,000 provision for possible loan losses in 1997
reflecting an increase of $23,000 from 1996. In 1996, the provision for possible
loan losses decreased $140,000 from $652,000 in 1995 to $512,000 in 1996. The
allowance for possible loan losses as a percentage of nonperforming loans
increased to 227.35 percent at December 31, 1997 compared to 135.57 percent at
December 31, 1996.
Although management utilizes its best judgement in providing for possible
losses, there can be no assurance that the Company will not have to change its
provisions for possible loan losses in subsequent periods. Management will
continue to monitor the allowance for possible loan losses and make additional
provisions to the allowance as appropriate.
The following table sets forth the provisions and allowance for possible
loan losses for the periods indicated.
- ----------------------------------------------------------------------------
Years Ended December 31,
Dollars in thousands 1997 1996 1995
- ----------------------------------------------------------------------------
Beginning allowance $3,941 $3,866 $3,682
Provision for possible loan losses 535 512 652
Loans charged-off (612) (650) (696)
Recoveries 292 213 228
------ ------ ------
Net credit losses (320) (437) (468)
------ ------ ------
Ending allowance $4,156 $3,941 $3,866
====== ====== ======
Ending allowance as a percentage of loans 1.56% 1.64% 1.77%
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee-based services and profits
earned through investment and security sales.
Noninterest Income
- ----------------------------------------------------------------------------
Years Ended December 31,
Dollars in thousands 1997 1996 1995
- ----------------------------------------------------------------------------
Service Charges on deposit account and fees $ 831 $ 816 $ 803
Securities gains(losses), net 313 306 (75)
Other 536 480 529
------ ------ ------
Total noninterest income $1,680 $1,602 $1,257
====== ====== ======
Fee income from service charges on deposit accounts increased 2 percent in
1997 and 1996. The improvement in both years was influenced by the increase in
both the number of accounts and balances outstanding in transaction deposit
accounts.
Net securities gains were $313,000 in 1997, compared to $306,000 in 1996.
Investment securities gains in 1997 included net gains of $548,000 recorded on
sales of equity securities compared to $305,000 in 1996. The $75,000 net
security loss recorded in 1995 was realized primarily from the sale of
$4,000,000 of ten year US Treasury securities in the Company's
available-for-sale portfolio, the proceeds of which where then available for
reinvestment at higher yields.
Other noninterest income (sources of which includes credit card merchant
and fee income, automated teller fees, and safe deposit fees) increased $56,000,
or 12 percent in 1997 following a 9 percent decrease in 1996.
NONINTEREST EXPENSE
Total noninterest expense increased $883,000, or 8 percent, during 1997 and
$363,000, or 3 percent, in 1996. Excluding merger-related expenses in all
periods, and the one-time assessment of all SAIF-insured deposits to
recapitalize the SAIF in 1995, total noninterest expense increased $276,000, or
3 percent, during 1997 and $494,000, or 5 percent, in 1996. The increase in
these expenses were made in support of the Company's expansion plans to increase
market share in existing and new markets.
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------1997--------------- ----------1996----------- -----------1995------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------- -------- ------- --------- -------- --- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Federal funds sold $ 9,720 $ 528 5.43% $ 6,076 $ 325 5.35% $ 10,464 $ 603 5.76%
Interest bearing deposits 114 8 7.02 2,103 124 5.90 783 48 6.13
Investment and mortgage-
backed securities(1)(5) 89,366 5,498 6.15 112,443 6,693 5.95 102,215 6,074 5.94
Loans, net(1)(2) 253,424 23,350 9.21 223,306 21,143 9.47 216,837 20,457 9.43
-------- ------- -------- ------- -------- -------
Total interest earning
assets(1) 352,624 29,384 8.33% 343,928 28,285 8.22% 330,299 27,182 8.23%
Cash and due from banks 10,804 9,346 10,592
Premises and equipment 8,732 8,409 8,235
Other assets 5,604 7,036 4,660
-------- -------- --------
Total assets $377,764 $368,719 $353,786
======== ======== ========
Liabilities
Interest bearing liabilities:
Regular savings $ 63,661 $ 1,508 2.37% $ 65,033 $ 1,551 2.38% $ 66,019 $ 1,621 2.46%
NOW and Super NOW 43,369 530 1.22 42,438 533 1.26 42,306 678 1.60
Money market accounts 22,348 613 2.74 23,428 644 2.75 24,331 691 2.84
Certificates of deposit 153,111 8,211 5.36 155,223 8,651 5.57 145,811 7,564 5.19
Repurchase agreements 7,796 404 5.18 6,568 358 5.45 6,203 313 5.05
Federal Home Loan Bank 12,139 728 6.00 8,848 521 5.89 10,217 614 6.01
Other Borrowed funds 215 13 6.05 -- - -- -
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 302,639 12,007 3.97% 301,538 $12,258 4.07% 294,887 11,481 3.89%
------- ===== ------- ==== ------- ====
Noninterest bearing deposits 34,948 31,889 27,977
Other liabilities 3,906 3,253 2,633
-------- -------- --------
Total liabilities 341,493 336,680 325,497
Stockholders' equity 36,271 32,039 28,289
-------- -------- --------
Total liabilities and
stockholders' equity $377,764 $368,719 $353,786
======== ======== ========
Net interest income(1) $17,377 $16,027 $15,701
======= ======= =======
Interest spread(3) 4.37% 4.16% 4.34%
==== ==== ====
Net interest margin(4) 4.93% 4.66% 4.75%
==== ==== ====
(1) Reported on a tax equivalent basis
(2) Net of unearned income and allowance for possible loan losses. Includes nonperforming loans
(3) Interest spread equals the yield on interest earning asets minus the rate paid on interest bearing liabilities
(4) The net interest margin equals net interest income divided by total average interest earning assets.
(5) Average balances are calculated using the adjusted cost basis.
</TABLE>
<PAGE>
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS
(In Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
------------------------------------ --------------------------------
Due to Change In Due to Change In
Volume Rate Mix Total Volume Rate Mix Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Federal funds sold $ 193 $ 6 $ 4 $ 203 $ (252) $ (45) $ 19 $ (278)
Interest bearing deposits (117) 23 (22) (116) 81 (2) (3) 76
Investments and mortgage-
backed securities (1,374) 225 (46) (1,195) 608 10 1 619
Loans 2,852 (568) (77) 2,207 610 74 2 686
------- ----- ----- ------- ------ ----- ----- ------
Total interest and dividend income 1,554 (314) (141) 1,099 1,047 37 19 1,103
------- ----- ----- ------- ------ ----- ----- ------
Interest expense:
Regular savings accounts (33) (10) -- (43) (24) (47) 1 (70)
NOW accounts 11 (14) -- (3) 2 (147) -- (145)
Money market accounts (30) (1) -- (31) (26) (22) 1 (47)
Certificates of deposit (117) (327) 4 (440) 488 563 36 1,087
Repurchase agreements 67 (18) (3) 46 18 25 2 45
FHLB advances 194 10 3 207 (82) (12) 1 (93)
Other Borrowed funds 13 -- -- 13 -- -- -- 0
------- ----- ----- ------- ------ ----- ----- ------
Total interest expense 105 (360) 4 (251) 376 360 41 777
------- ----- ----- ------- ------ ----- ----- ------
Net interest and dividend income $1,449 $ 46 $(145) $ 1,350 $ 671 $(323) $ (22) $ 326
====== ===== ===== ======= ====== ===== ===== ======
</TABLE>
<PAGE>
The following table sets forth information relating to the Company's
noninterest expense during the periods indicated.
- -----------------------------------------------------------------------
Years Ended December 31,
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------
Salaries and employee benefits $ 5,883 $ 5,423 $ 5,140
Occupancy and equipment 1,714 1,759 1,632
Foreclosed real estate, net 68 51 7
Amortization of deposit purchase premium 301 513 322
Deposit and other assessments 50 17 585
Directors' fees 266 303 302
Stationery and supplies 374 360 341
Merger related expenses 643 36 --
Other 2,560 2,514 2,284
-------- ------- -------
$11,859 $10,976 $10,613
======= ======= =======
Salaries and employee benefits increased $460,000 or 8 percent, from 1996
to 1997 and by $283,000, or 6 percent from 1995 to 1996. These increases reflect
staff additions in connection with the expansion of the retail franchise,
increased mortgage banking and commercial lending activities as well as normal
salary and wage increases.
Amortization of deposit purchase premium increased by $191,000 to $513,000
in 1996 versus $322,000 expensed in 1995. The increase resulted from the
Company's decision to accelerate the amortization of the premium associated with
the purchase of HomeBank's deposits.
Deposit and other assessment expenses consist primarily of deposit
insurance paid by the Company to the Federal Deposit Insurance Corporation
("FDIC") for deposits insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"). SAIF deposits are those deposits acquired
in 1994 from the HomeBank. At December 31, 1996. The Company had approximately
88 percent of its deposits insured by BIF and 12 percent by SAIF. The $568,000
decrease in deposit and other assessment expenses in 1996 compared with 1995 is
directly attributable to the reduction in BIF insurance premiums from $0.23 per
$100 of deposits to $0.04 per $100 of deposits in June 1995 to $0.00 beginning
January 1996.
The Company, in the fourth quarter of 1995, accrued an estimated one-time
assessment on SAIF insured deposits of $167,000. During the second half of 1996,
the Company was actually assessed $137,000 for this one-time assessment, which
resulted in a credit to the accrual of $30,000.
Merger related expense of $643,000 in 1997 and $36,000 in 1996 are
primarily related to the merger, creation of the Holding Company, and the stock
split.
INCOME TAX EXPENSE
The Company recognized $2,274,000, $1,974,000 and $1,889,000 in income tax
expense for the years ended December 31, 1997, 1996, and 1995, respectively. The
effective tax rate was 36.0% for 1997, 33.9% for 1996, and 34.4% for 1995. The
Company recorded merger-related expenses of $643,000 in 1997. This one-time
expense is non-deductible for tax calculations and was the principal reason for
the increase in 1997's effective tax rate. For additional information relating
to income taxes. See Note 16 to the Consolidated Financial Statements.
FINANCIAL CONDITION
ASSETS
Total assets remained relatively unchanged at $377,866,000 at December 31,
1997. However, the composition of earning assets has changed significantly.
BALANCE SHEET HIGHLIGHTS
December 31,
Dollars in thousands 1997 1996 Change
- ----------------------------------------------------------------------------
Total assets $377,866 $372,581 $ 5,285
Earning assets 352,904 343,442 9,462
Securities 66,415 100,827 (34,412)
Loans, net of unearned income 266,757 240,383 26,374
Deposits 322,063 322,315 (252)
Equity 37,526 33,663 3,863
SECURITIES
The Company's investment securities are classified into one of two
categories based on management's intent to hold the securities: (i) held-to-
maturity securities, or (ii) securities available-for-sale. Securities
designated to be held-to-maturity are reported at amortized cost. Securities
classified as available-for-sale are required to be reported at fair value with
unrealized gains and losses, net of taxes, excluded from earnings and shown
separately as a component of Stockholders' Equity.
The following table summarizes the Company's securities portfolio at
December 31, 1997 and 1996, showing amortized cost and market value far each
category:
- -----------------------------------------------------------------------------
December 31, 1997 1996
Amortized Market Amortized Market
(Dollars in thousands) Cost Value Cost Value
- -----------------------------------------------------------------------------
Securities available-for-sale:
US Treasury and Government
Agencies $11,873 $11,929 $ 20,828 $ 20,479
Mortgage-backed securities 17,366 17,340 28,254 27,882
Collateralized mortgage
obligations 14,171 13,895 21,189 20,466
Corporate and foreign notes 5,008 5,000 14,128 14,068
Common and preferred stocks 2,752 2,796 2,221 2,284
State and political
subdivisions 4,016 4,143 3,219 3,259
Other -- -- 145 190
------- ------- -------- --------
Total securities
available-for-sale $55,186 $55,103 $ 89,984 $ 88,628
------- ------- -------- --------
Securities held-to-maturity:
US Treasury and Government
Agencies $ -- $ -- $ 501 $ 503
Mortgage-backed securities 8,400 8,354 9,943 9,809
State and political
subdivisions 2,912 2,943 1,755 1,793
------- ------- -------- --------
Total securities
held-to-maturity $11,312 $11,297 $ 12,199 $ 12,105
------- ------- -------- --------
Total securities $66,498 $66,400 $102,183 $100,733
======= ======= ======== ========
Securities available-for-sale decreased $33,525,000 during 1997 to
$55,103,000. The decrease in the portfolio reflects the Company's strategy to
allow the securities portfolio amortization and sales to fund increased
originations in the lending portfolios.
The net unrealized loss on securities available-for-sale of $83,000
decreased $1,273,000 from the net unrealized loss of $1,356,000 in 1996. This
was the result of a lower interest rate environment, and corresponding higher
bond prices in 1997, as well as the decrease in the investment portfolio through
the sales and amortization.
The change in unrealized valuation to market value on securities
available-for-sale also had an effect on increasing stockholders' investment by
$781,000 from a year ago. The unrealized loss reported as part of stockholders'
investment of $51,000, net of a $32,000 deferred tax benefit at December 31,
1997 was significantly less than the unrealized loss of $832,000, net of a
$524,000 deferred tax benefit at December 31, 1996.
The Company has a policy of purchasing securities primarily rated A or
better by Moody's Investor Services and US Government securities to minimize
credit risk. All securities, however, carry interest rate risk, which affect
their market values such that as market yields increase, the value of the
Company's securities decline and vise versa. Additionally, mortgage-backed
securities carry prepayment risk where expected yields may not be achieved due
to the inability to reinvest proceeds from prepayment at comparable yields.
Moreover, such mortgage-backed securities may not benefit from price
appreciation in periods of declining rates to the same extent as the remainder
of the portfolio.
LOANS
Loans increased 10.9 percent in 1997 with much of the increase concentrated
in commercial real estate and residential mortgage loans. The growth in the loan
portfolio resulted from the Company's ongoing efforts to increase the loan
portfolio through the origination of loans. The following table presents the
composition of the loan portfolio:
- -----------------------------------------------------------------------------
Percent Percent
Dollars in thousands 1997 of Total 1996 of Total
- -----------------------------------------------------------------------------
Real estate
Residential $152,041 56.9% $145,847 60.5%
Commercial 56,204 21.0 43,901 18.2
Construction 5,664 2.1 2,329 1.0
Commercial 27,129 10.1 27,293 11.3
Installment 23,476 8.9 18,733 7.8
Other 2,769 1.0 2,999 1.2
-------- ----- -------- -----
$267,283 100.0% $241,102 100.0%
======== ===== ======== =====
The loan portfolio mix changed significantly during the year. As of
December 31, 1997, total commercial real estate loans represented 21.0 percent
of the Company's loan portfolio, while residential real estate loans represented
56.9 percent. This compares with a commercial real estate loan percentage of
18.2 percent and residential real estate loan percentage of 60.5 percent in
1996. The 1997 increase in commercial real estate loan percentage reflects
management's commitment to diversify the loan portfolio.
Commercial real estate loans consist of loans secured by income producing
commercial real estate and many are additionally secured by the guarantee of the
Small Business Administration. Commercial real estate loans increased by
$12,303,000 in 1997 as compared to 1996. The Company continues to emphasize
commercial real estate loans in order to reduce its relative exposure of other
types of loans.
Residential real estate loans increased $6,194,000 in 1997, a 4.2 percent
increase over 1996. The Company's strategy generally is to originate fixed-rate
residential loans for sale to investors in the secondary market. The Company
generally retains adjustable-rate loans in its portfolio but will, occasionally,
retain some fixed-rate mortgages.
Installment loans consist primarily of loans originated directly by the
Company. The increase of $4,743,000 was primarily a result of growth in home
equity loans, automobile loans and recreational vehicle loans. Increased growth
in installment loans is consistent with the Company's strategy to increase the
percentage of installment loans in its' portfolio.
The Company's loans are primarily secured by real estate in New Hampshire.
In addition, real estate acquired by foreclosure is located in this market.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of real estate acquired by foreclosure
are susceptible to changing conditions in this market.
NONPERFORMING ASSETS
Nonperforming assets were $2,050,000, or 0.53% of total assets, at December
31, 1997 as compared to $3,154,000, or 0.85% of total assets, at December 31,
1996.
Nonperforming assets are comprised primarily of nonperforming loans, real
estate acquired by foreclosure and loan substantively repossessed. The accrual
of interest on a loan is discontinued when there is reasonable doubt as to its
collectibility or whenever the payment of principal or interest is more than 90
days past due. However, there are loans within this nonperforming classification
that are paying, but which have a weakness with respect to the collateral
securing the loan.
At December 31, 1997, nonperforming loans totaled $1,828,000, or 0.70% of
total loans, compared to $2,907,000, or 1.20% of total loans, in 1996.
Real estate acquired by foreclosure or substantively repossessed at
December 31, 1997 was $222,000 compared to $202,000 in 1996.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company maintains a reserve for possible loan losses to absorb future
charge-offs of loans in the existing portfolio. When a loan, or portion thereof,
is considered uncollectible, it is charged against the reserve. Recoveries of
amounts previously charged-off are added to the reserve when collected. The
adequacy of the allowance for possible loan losses is evaluated on a regular
basis by management. Factors considered in evaluating the adequacy of the
allowance include previous loss experience, current economic conditions and
their effect on borrowers and the market area in general, and the performance of
individual credits in relation to the contract terms. The provision for possible
loan losses charged to earnings is based on management's judgement of the amount
necessary to maintain the allowance at a level adequate to absorb possible
losses. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the adequacy of the Company's allowance
for possible loan losses.
The Company 's reserve for possible loan losses increased $215,000 from
December 31, 1996 to $4,156,000 at December 31, 1997. The 1997 provision for
possible loan losses was $535,000, $23,000 higher than the prior year level of
$512,000. The increase was due primarily to the increased level of loans.
Management believes than an adequate allowance has been established for
loans and that real estate acquired by foreclosure is being carried at the lower
of cost or net fair value.
DEPOSITS AND BORROWINGS
Total deposits at December 31, 1997 were $322,063,000, approximately
the same as the $322,315,000 reported at December 31, 1996.
Components of Deposits
- -----------------------------------------------------------------------------
December 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------
Demand $ 39,710 $ 35,328
Regular savings, NOW & Money Market 130,664 133,090
Time 151,689 153,897
-------- --------
Total deposits $322,063 $322,315
======== ========
Certificates of deposit of $100,000 or more are scheduled to mature as
follows at December 31, 1997:
In thousands:
3 months or less $ 4,325
Over 3 to 6 months 4,149
Over 6 to 12 months 7,807
Over 12 months 4,100
-------
$20,381
The following tables sets forth certain information concerning the Company
borrowings at the dates indicated.
- -----------------------------------------------------------------------------
December 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------
FHLB advances $ 9,322 $ 8,703
Repurchase agreements 6,146 4,620
Other -- 221
------- -------
$15,468 $13,544
FHLB advances were the largest non-deposit related interest-bearing funding
source for the Company in 1997. During 1997, the balance of FHLB borrowings
increased $619,000 from the $8,703,000 reported at December 31, 1996. For
additional information regarding FHLB advances, see Note 10 to the Consolidated
Financial Statements.
The increase m securities sold under agreements to repurchase of $1,526,000
was attributable to an increase in our relationship with our municipal
customers. For additional discussion of securities sold under agreements to
repurchase see Note 11 to the Consolidated Financial Statements.
CAPITAL
- -----------------------------------------------------------------------------
December 31,
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------
Risk-adjusted assets $223,332 $204,560
Tier 1 risk-based capital (4% minimum) 16.31% 16.15%
Total risk-based capital (8% minimum) 17.56 17.40
Leverage ratio 9.67 8.99
The Company's capital serves to support growth and provide protection
against loss to depositors and creditors. Equity capital represents the
stockholders' investment in the Company. Management strives to maintain an
optimal level of capital on which an attractive return to the stockholders will
be realized over both the short-term and long-term, while serving depositors'
and creditors' needs.
The Company must also observe the minimum requirements enforced by the
federal banking regulators. There are three capital requirements which banks and
bank holding companies must meet: Tier 1, total capital (combination of Tier 1
and Tier 2 capital), and leverage ratio. Tier 1 consists of stockholders'
equity, net of intangible assets. Tier 2 capital consists of a limited amount of
loss reserves. Tier 1, total capital and leverage ratio do not include any
adjustments for unrealized gains and losses relating to securities
available-for-sale except net unrealized losses relating to marketable equity
securities. The minimum requirements for the leverage ratio, risk- based Tier 1
capital and risk-based total capital are 4%, 4% and 8%, respectively. As of
December 31, 1997, all of the subsidiary banks of the Company were "well
capitalized" as defined under the FDIC Improvement Act.
INTEREST RATE RISK
Volatility in interest rates requires the Company to manage interest rate
risk which arises from differences in the time of repricing of assets and
liabilities. Management monitors and adjusts the difference between
interest-sensitive assets and interest-sensitive liabilities ("GAP" position)
within various time frames. An institution with more assets repricing than
liabilities within a given time frame is considered asset sensitive and in time
frames with more liabilities repricing than assets it is liability sensitive.
Within GAP limits established by the Board of Directors. the Company seeks to
balance the objective of insulating the net interest margin from rate exposure
with that of taking advantage of anticipated changes in rates in order to
enhance income.
Interest rate risk is managed by the Company's Asset/Liability Committee
which formulates strategies based on a desirable level of interest rate risk. In
setting desirable levels of interest rate risk, the Committee evaluates the
impact on earnings and capital considering the current outlook on interest
rates, potential changes in the outlook on interest rates and regional
economies, liquidity, business strategies and other factors.
The Asset/Liability Committee uses three key measurements to monitor
interest rate risk: (i) the interest-rate sensitivity "gap" analysis (ii) a
"rate shock" to measure earnings volatility due to an immediate increase or
decrease in market rates of interest; and (iii) simulation of net interest
income under alternative balance sheet and interest rate scenarios.
INTEREST RATE GAP ANALYSIS
<TABLE>
<CAPTION>
Interest Sensitivity Periods
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1997 3 months 4 to 12 12 to 24 2 to 5 After 5
(Dollars in thousands) or less months months years years Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 87,981 $ 73,343 $ 32,328 $ 56,431 $ 17,492 $267,575
Federal funds sold 19,225 -- -- -- -- 19,225
Interest bearing deposits -- -- 85 -- -- 85
Securities 7,433 10,991 6,460 22,240 21,329 68,453
Other assets -- -- -- -- 22,528 22,528
-------- -------- -------- -------- -------- --------
Total assets $114,639 $ 84,334 $ 38,873 $ 78,671 $ 61,349 $377,866
-------- -------- -------- -------- -------- --------
Deposits $ 78,793 $103,169 $ 50,285 $ 13,151 $ 76,665 $322,063
Repurchase agreements 789 5,275 82 -- -- 6,146
Borrowed funds 4,041 5,171 82 28 -- 9,322
Other liabilities and stockholders' equity -- -- -- -- 40,335 40,335
-------- -------- -------- -------- -------- --------
Total liabilities and equity $ 83,623 $113,615 $ 50,449 $ 13,179 $117,000 $377,866
Gap for period $ 31,016 $(29,281) $(11,576) $ 65,492 $(55,651)
Cumulative gap $ 1,735 $ (9,841) $ 55,651 --
======== ======== ======== ========
As a percent of total assets 8.2% 0.5% (2.6)% 14.7%
</TABLE>
Interest-rate gap analysis provides a static analysis of the repricing
characteristics of the entire balance sheet. It is prepared by scheduling assets
and liabilities into time bands based upon their next opportunity to reprice.
For floating-rate instruments, the entire balances are placed at the next date
on which their rates could be reset; and for fixed-rate instruments, the
balances are placed in time bands according to their principal repayment
schedules. It is necessary to apply further assumptions to refine this process.
For instance, in order to recognize the potential for mortgage-related
instruments to experience early payments of principal, a prepayment assumption
based on management's expectations is layered on top of the scheduled principal
payments. Other categories that are scheduled using management assumptions
include non-contractual deposits such as demand deposits and interest-bearing
checking, savings, and money market deposits. These allocations are management's
current estimate of the sensitivity of the rates and balances of these accounts
to changes in market interest rates.
The Company's limits on interest-rate risk specify that the cumulative
one-year gap should be less than 10% of total assets. As of December 31, 1997,
the estimated exposure was 0.5 % asset-sensitive (see above table).
A more dynamic and detailed analysis of the earnings sensitivity of the
balance sheet is provided through simulation analysis. The Company uses computer
simulations to determine the impact on net interest income of various interest
rate scenarios, balance sheet trends and strategies. These simulations
incorporate assumptions about balance sheet dynamics such as loan and deposit
growth, loan and deposit pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations based on numerous
assumptions are run under various interest rate scenarios to determine the
impact on net interest income and capital. From these scenarios, interest rate
risk is quantified and appropriate strategies are developed and implemented.
Utilizing an immediate rate shock simulation where interest rates increase
300 basis points, the most recent earnings simulation model projects net
interest income for the next twelve months would increase by an amount equal to
approximately 2.8%. The projection is within the Company's 10% policy limit.
Additionally, duration and market value sensitivity are selectively
utilized where they provide added value to the overall interest rate risk
management process.
LIQUIDITY RASK
Liquidity risk management involves the Company's and its' subsidiaries
ability to raise funds in order to meet their existing and anticipated financial
obligations. These obligations are the withdrawal of deposits on demand or, at
their contractual maturity, the repayment of borrowings as they mature. The
ability to fund new and existing loan commitments and the ability to take
advantage of new business opportunities. Liquidity may be provided through
amortization, maturity or sale of assets such as loans and securities
available-for-sale, liability sources such as increased deposits, utilization of
the FHLB credit facility, purchased or other borrowed funds, and access to the
capital markets. Liquidity targets are subject to change based on economic and
market conditions and are controlled and monitored by the Company's
Asset/Liability Committee. At the bank level liquidity is managed by measuring
the net amount of marketable assets after deducting pledged assets, plus lines
of credit, primarily with the FHLB, which are available to fund liquidity
requirements. Management then measures the adequacy of that aggregate amount
relative to the aggregate amount of liabilities deemed to be sensitive or
volatile liabilities. These include brokered deposits, core deposits in excess
of $100,000, term deposits with short maturities, and credit commitments
outstanding.
Additionally, the parent holding company requires cash for various
operating needs including dividends to shareholders, capital injections to the
subsidiary banks, and the payment of general corporate expenses. The primary
source of liquidity for the parent holding company is dividends from the
subsidiary banks.
As shown in the consolidated statements of cash flows, cash and cash
equivalents increased by $14,029,000 during 1997. Net cash provided by investing
activities of $8,144,000 consisted primarily of maturities and sales of
investment securities of $55,118,000, offset by the increase in net loans
originated of $26,901,000 and the purchase of investment securities of
$23,086,000. The net cash provided by operating activities provided the
remainder of funding sources for 1997. The $5,516,000 of net cash provided by
operating activities was attributable to net income of $4,039,000.
IMPACT OF THE YEAR 2000 ISSUE
The Company has developed plans and is addressing issues related to the
impact on its computer system of the year 2000. Financial and operational
systems have been assessed and plans have been developed to address systems
modification requirements. The financial impact of making the required system
changes is not expected to be material to the Company's consolidated financial
position, results of operations or cash flows.
FORWARD LOOKING INFORMATION
Certain statements in this Form 10-K are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. All
forward looking statements involve risks and uncertainties. Such Forward Looking
Statements may include, but are not limited to, projections of revenue, income
or loss, plans for future operations and acquisitions and plans related to
products or services of Northway, BCB, or PNB and are subject to known and
unknown risks, uncertainties and contingencies, many of which are beyond the
control of the Company, which may cause actual results, performance or
achievements to differ materially from anticipated results, performance or
achievements. Factors that might affect such forward looking statements include,
among other things, overall economic and business conditions, the demand for the
Company's products and services, competitive factors in the industries in which
the company competes, changes in government regulations and the timing, impact
and other uncertainties of future acquisitions.
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY MATERIAL
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants ................................ C-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ........... C-3
Consolidated Statements of Income for the fiscal years
ended December 31, 1997, 1996 and 1995 .................................. C-4
Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended December 31, 1997, 1996 and 1995 ............. C-5
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1997, 1996 and 1995 .................................. C-6
Notes to Consolidated Financial Statements .............................. C-8
<PAGE>
SHATSWELL, MacLE0D & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 PINE STREET
WEST PEABODY, MASSACHUSETTS 01980-3635
TELEPHONE (978) 535-0206
FACSIMILE (978) 535-9908
The Board of Directors and Stockholders
Northway Financial, Inc.
Berlin, New Hampshire
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Northway
Financial, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Northway Financial, Inc. and Subsidiaries as of December 31, 1997 and 1996 and
the results of their operations and their cash flows for the years ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
The accompanying restated consolidated financial statements for the year ended
December 31, 1995 include the consolidated financial statements of Pemi Bancorp,
Inc. for that year. We previously audited and reported on such statements.
Separate financial statements of The Berlin City Bank, also included in the
accompanying restated consolidated financial statements for the year ended
December 31, 1995, were audited by other auditors whose report dated January 19,
1996 expressed an unqualified opinion on those statements. We audited the
combination of the accompanying consolidated financial statements for the year
ended December 31, 1995 after the restatement for the 1997 pooling of interests.
In our opinion, such consolidated statements have been properly combined on the
basis described in Note 23 of the notes to the consolidated financial
statements.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 16, 1998
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996 (in thousands, except per share data)
- ---------------------------------------------------------------------------------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Cash and due from banks (note 2) $ 12,086 $ 14,257
Federal funds sold 19,225 3,025
Interest bearing deposits 85 279
Investment securities available-for-sale, amortized cost of
$55,186 in 1997 and $89,984 in 1996 (notes 3 and 11) 55,103 88,628
Investment securities held-to-maturity, market value of
$11,297 in 1997 and $12,105 in 1996 (note 3) 11,312 12,199
Federal Home Loan Bank stock, at cost (note 3) 1,958 1,822
Federal Reserve Bank stock, at cost 80 80
Loans held for sale 292 58
Loans (notes 4, 5 and 6) 267,283 241,102
Unearned income (526) (719)
Allowance for possible loan losses (note 5) (4,156) (3,941)
-------- --------
Loans, net 262,601 236,442
Real estate acquired by foreclosure or substantively
repossessed (note 7) 222 202
Accrued interest receivable 1,971 2,611
Deferred income tax asset, net (note 16) 1,500 2,048
Premises and equipment, net (note 8) 9,187 8,765
Deposit purchase premium, net 1,161 1,462
Other assets 1,083 703
-------- --------
Total assets $377,866 $372,581
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $322,063 $322,315
Securities sold under agreements to repurchase (note 11) 6,146 4,620
Federal Home Loan Bank advances (note 10) 9,322 8,703
Other borrowings -- 221
Other liabilities 2,809 3,059
-------- --------
Total liabilities 340,340 338,918
-------- --------
Commitments and contingencies (notes 8, 18, and 19) -- --
Stockholders' equity (note 14):
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued -- --
Common stock, $1.00 par value; 9,000,000 shares
authorized, 1,731,969 issued and outstanding 1,732 1,732
Surplus 2,101 2,101
Retained earnings 33,744 30,662
Unrealized loss on investment securities available-for-sale,
net of tax (note 3) (51) (832)
-------- --------
Total stockholders' equity 37,526 33,663
-------- --------
Total liabilities and stockholders' equity $377,866 $372,581
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per share data)
- ------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Interest and dividend income:
Loans $ 23,210 $ 21,079 $ 20,366
Investment securities available-for-sale 4,301 5,398 1,534
Investment securities held-to-maturity 987 1,049 4,423
Federal funds sold 528 325 603
Interest bearing deposits 8 124 48
-------- -------- --------
Total interest and dividend income 29,034 27,975 26,974
-------- -------- --------
Interest expense:
Deposits (note 9) 10,861 11,378 10,554
Borrowed funds 1,146 880 927
-------- -------- --------
Total interest expense 12,007 12,258 11,481
-------- -------- --------
Net interest and dividend income 17,027 15,717 15,493
Provision for possible loan losses (note 5) 535 512 652
-------- -------- --------
Net interest and dividend income after
provision for possible loan losses 16,492 15,205 14,841
-------- -------- --------
Noninterest income:
Service charges on deposit accounts and fees 831 816 803
Securities gains (losses), net (note 3) 313 306 (75)
Other 536 480 529
-------- -------- --------
Total noninterest income 1,680 1,602 1,257
-------- -------- --------
Noninterest expense:
Salaries and employee benefits (note 17) 5,883 5,423 5,140
Office occupancy and equipment 1,714 1,759 1,632
Foreclosed real estate, net 68 51 7
Amortization of deposit purchase premium 301 513 322
Merger related expenses 643 36 --
Other (note 15) 3,250 3,194 3,512
-------- -------- --------
Total noninterest expense 11,859 10,976 10,613
-------- -------- --------
Income before income taxes 6,313 5,831 5,485
Income tax expense (note 16) 2,274 1,974 1,889
-------- -------- --------
Net income $ 4,039 $ 3,857 $ 3,596
======== ======== ========
Earnings per common share $ 2.33 $ 2.23 $ 2.08
======== ======== ========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995 (in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
Unrealized
Unrealized Loss on
Loss on Investment
Investment Securities
Securities Trans. to Total
Common Retained Available- Held-To- Stockholders'
Stock Surplus Earnings For-Sale Maturity Equity
--------- -------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 1,732 $ 2,418 $ 24,864 $ (726) $ (2,180) $ 26,108
--------- -------- --------- ------- -------- --------
Net income -- -- 3,596 -- -- 3,596
Cash dividends declared ($0.44 per share) -- -- (763) -- -- (763)
Decrease in unrealized loss on
investment securities, net of tax -- -- -- 293 2,180 2,473
PNB treasury stock purchased -- (317 -- -- -- (317)
--------- -------- --------- ------- -------- --------
Balance at December 31, 1995 1,732 2,101 27,697 (433) -- 31,097
Net income -- -- 3,857 -- -- 3,857
Cash dividends declared ($0.52 per share) -- -- (892) -- -- (892)
Increase in unrealized loss on
investment securities, net of tax -- -- -- (399) -- (399)
--------- -------- --------- ------- -------- --------
Balance at December 31, 1996 1,732 2,101 30,662 (832) -- 33,663
Net income -- -- 4,039 -- -- 4,039
Cash dividends declared ($0.55 per share) -- -- (957) -- -- (957)
Decrease in unrealized loss on
investment securities, net of tax -- -- -- 781 -- 781
--------- -------- --------- ------- -------- --------
Balance at December 31, 1997 $ 1,732 $ 2,101 $ 33,744 $ (51) $ -- $ 37,526
========= ======== ========= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995 (in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,039 $ 3,857 $ 3,596
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for:
Possible loan losses 535 512 652
Depreciation and amortization 992 1,173 911
Deferred income taxes 56 (11) (195)
Write down of real estate acquired by foreclosure 58 54 84
(Gains) losses on sales of investment securities available-for-sale, net (313) (306) 75
Loss on sale of premises and equipment 45 -- --
Accretion of (discount) and amortization of premium on investment and
mortgage-backed securities, net 230 449 384
Decrease in unearned income, net (193) (294) (167)
Gains on sales of real estate acquired by foreclosure or substantively
repossessed (56) (88) (153)
Net (increase) decrease in loans held for sale (234) 86 (144)
(Increase) decrease in accrued interest receivable 640 (5) (206)
(Increase) decrease in other assets (380) (130) 157
Increase in other liabilities 97 186 277
-------- -------- -------
Net cash provided by operating activities 5,516 5,483 5,271
-------- -------- -------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits 194 2,195 (2,405)
Proceeds from sales of investment securities available-for-sale 28,446 3,223 13,454
Proceeds from sales of investment securities held-to-maturity -- -- 1,536
Proceeds from maturities of investment securities held-to-maturity 8,855 9,956 4,222
Proceeds from maturities of investment securities available-for-sale 17,817 11,137 3,896
Purchase of investment securities available-for-sale (15,050) (23,305) (15,416)
Purchase of Federal Home Loan Bank stock (136) -- (144)
Purchase of investment securities held-to-maturity (8,036) (6,910) (2,516)
Principal payments received on investment securities held-to-maturity -- 35 88
Principal payments received on investment securities available-for-sale 3,735 4,413 2,910
Net increase in loans (26,901) (22,706) (293)
Proceeds from sales of real estate acquired by foreclosure or substantively
repossessed and principal payments received on OREO 378 486 304
Proceeds from sale of premises and equipment 296 -- --
Additions to premises and equipment (1,454) (1,099) (381)
-------- -------- -------
Net cash (used in) provided by investing activities 8,144 (22,575) 5,255
-------- -------- -------
Cash flows from financing activities:
Net increase (decrease) in demand deposits NOW, savings and money market
accounts 1,957 7,676 (12,763)
Net increase (decrease) in time deposits (2,208) (2,507) 18,168
Cash received from acquisition of branch -- 6,355 --
Advances from Federal Home Loan Bank 42,467 39,814 37,654
Repayment of Federal Home Loan Bank advances (41,848) (38,603) (39,154)
Net increase (decrease) in repurchase agreements 1,526 (1,467) (795)
Net increase (decrease) in other borrowed funds (221) 221 --
Purchases of treasury stock -- -- (317)
Cash dividends paid (1,304) (802) (748)
Net cash provided by financing activities 369 10,687 2,045
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 14,029 (6,405) 12,571
Cash and cash equivalents at beginning of period 17,282 23,687 11,116
-------- -------- -------
Cash and cash equivalents at end of period $ 31,311 $ 17,282 $23,687
======== ======== =======
Cash paid during the year for:
Interest $ 11,802 $ 11,957 $10,892
======== ======== =======
Income taxes $ 2,383 $ 2,104 2,445
======== ======== =======
Supplemental disclosures of non-cash activities:
Loans transferred to real estate acquired by foreclosure or substantively
repossessed $ 603 $ 305 $ 75
======== ======== =======
Loans transferred to other personal property owned $ 19 $ -- $ --
======== ======== =======
Loans charged off, net of recoveries $ 320 $ 437 $ 468
======== ======== =======
Financed sales of real estate acquired by foreclosure $ 203 $ 141 $ 13
======== ======== =======
Investment securities held-to-maturity transferred to available-for-sale,
net $ -- $ -- $63,207
======== ======== =======
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Northway Financial, Inc. (the Company) is a New Hampshire corporation formed
on September 30, 1997. Prior to its becoming a holding company on September 30,
1997, as described in Note 23, the Company had no operations other than those of
an organizational nature. Subsequent thereto, the Company's only business
activity is to own all of the shares of The Berlin City Bank (BCB) and The
Pemigewasset National Bank (PNB). The Company's headquarters are in Berlin, New
Hampshire.
The Berlin City Bank (BCB) is a state chartered Trust Company under the laws
of the State of New Hampshire and is headquartered in Berlin, New Hampshire. BCB
is engaged principally in the business of attracting deposits from the general
public and investing those deposits in real estate loans, consumer loans, and
small business loans.
The Pemigewasset National Bank (PNB) is a federally chartered bank which was
incorporated in 1881 and is headquartered in Plymouth, New Hampshire. PNB
operates its business from five banking offices located in New Hampshire. PNB is
engaged principally in the business of attracting deposits from the general
public and investing those deposits in residential and real estate loans, and in
consumer loans and small business loans.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, BCB and PNB. All significant intercompany
accounts and transactions have been eliminated in the consideration.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry.
In preparing the financial statements, management is required to make
estimates and judgments that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets, and income and expense for
the periods. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change in the near-term related
to the determination of the allowance for possible loan losses and valuation of
real estate acquired by foreclosure.
The Company's loans are primarily secured by real estate in New Hampshire. In
addition, real estate acquired by foreclosure is located in this market.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of real estate acquired by foreclosure
are susceptible to changing conditions in this market. A description of the
significant accounting policies follows.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current year's presentation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold.
Interest Bearing Deposits
Interest bearing deposits are stated at cost, which approximates market
value.
Investment and Mortgage-Backed Securities
Debt securities that the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at amortized cost;
debt and equity securities that are bought and held principally for the purpose
of selling in the near term are classified as trading and reported at fair
value, with unrealized gains and losses included in earnings; and debt and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of estimated income taxes.
Premiums and discounts are amortized and accreted primarily on the level
yield method over the contractual life of the securities adjusted for expected
prepayments.
If a decline in the fair value below the adjusted cost basis of an investment
or mortgage-backed security is judged to be other than temporary, the cost basis
of the investment is written down to fair value as the new cost basis and the
amount of the write down in included as a charge against securities gains, net.
Gains and losses on sales of investment securities are recognized at the time
of the sale on a specific identification basis.
Loans Held for Sale
Loans held for sale in the secondary market are generally identified as such
at origination and are stated at the lower of aggregate cost or market. Market
value is based on outstanding investor commitments. When loans are sold, a gain
or loss is recognized to the extent that the sale proceeds exceed or are less
that the carrying value of the loans. Gains and losses are determined using the
specific identification method. All loans sold are without recourse to the
Company.
Loans
Loans are carried at the principal amounts outstanding, net of any unearned
income. Unearned income includes loan origination fees, net of direct loan
origination costs, and discounts on purchased loans. This income is deferred and
recognized as adjustments to loan income over the contractual life of the
related loans using a method the result of which approximates that of the
interest method.
Loans are placed on nonaccrual when payment of principal or interest is
considered to be in doubt or is past due 90 days or more. The Company may choose
to place a loan on nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired, if (i) it is
probable that the Company will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is not a commercial, commercial
real estate or an individually significant mortgage or consumer loan. Previously
accrued income on nonaccrual loans that has not been collected is reversed from
current income, and subsequent cash receipts are recorded as income. Loans are
returned to accrual status when collection of all contractual principal and
interest is reasonably assured and there has been sustained repayment
performance.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level considered
adequate by management on the basis of many factors including the risk
characteristics of the portfolio, trends in loan delinquencies and an assessment
of existing economic conditions. Management believes that the allowance for
possible loan losses is adequate. Additions to the allowance are charged to
earnings; realized losses, net of recoveries, are charged directly to the
allowance.
While management uses available information in establishing the allowance for
possible loan losses, future additions to the allowance may be necessary if
economic conditions differ substantially from the estimates used in making the
evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the banks' allowances for
possible loan losses. Such agencies may require the Banks to recognize additions
to the allowance based on judgements different from those of management.
On January 1, 1995, the Company adopted a new method of measuring loan
impairment in accordance with two pronouncements issued by the Financial
Accounting Standards Board. Under this new method, creditors are required to
account for impaired loans at the present value of the expected future cash
flows discounted at the loan's effective interest rate. Impairment on troubled
debt restructurings is measured at present value using the loan's
premodification interest rate. In addition, criteria for classification of a
loan as in-substance foreclosure has been modified so that such classification
need be made only when the lender is in possession of the collateral. The effect
of adopting this new method of accounting did not have a material effect on the
Company's financial condition or results of operations.
Commercial, commercial real estate and individually significant mortgage and
consumer loans are considered impaired, and are placed on nonaccrual, when it is
probable that the Company will not be able to collect all amounts due according
to the contractual terms of the loan agreement. Mortgage and consumer loans
which are not individually significant are measured for impairment collectively.
Loans that experience insignificant payment delays and insignificant shortfalls
in payment amounts generally are not classified as impaired. The amount of
impairment for all impaired loans is determined by the difference between the
present value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loan. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Real Estate Acquired by Foreclosure or Substantively Repossessed
Real Estate Acquired by Foreclosure is comprised of properties acquired
either through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure, and for which the Company has taken physical possession. The
Company classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets, regardless of
whether or not foreclosure proceedings take place.
Both in-substance foreclosures and real estate formally acquired in
settlement of loans are initially recorded at the lower of the carrying value of
the loan or the fair value of the property constructively or actually received.
Subsequent to foreclosure or classification as in-substance foreclosure, such
assets are carried at the lower of cost or fair value minus costs to sell. Gains
and losses upon disposition are reflected in operations as realized.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the respective assets.
Amortization of leasehold improvements is accumulated on a straight-line
basis over the lesser of the term of the respective lease or the asset's useful
life.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and the respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Pension Costs
The Company funds accrued pension costs under a noncontributory pension plan
covering substantially all employees.
Earnings Per Share
In the year ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS No. 128) "Earnings per Share" (EPS)
issued by the Financial Accounting Standards Board. SFAS No. 128 requires
restatement of all prior-period EPS presented that were not in accordance with
SFAS No. 128. This statement simplifies the standards for computing earnings per
share. It replaces the presentation of primary EPS with a presentation of Basic
EPS which excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS, if applicable, reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The adoption of SFAS No.
128 had no material effect on the Company's 1997 financial statements and EPS
for prior period financial statements did not need to be restated.
NOTE 2 CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 1997 and 1996 includes $2,284,000 and
$2,006,000, respectively, which is subject to withdrawals and usage restrictions
to satisfy the reserve requirements of the Federal Reserve Bank.
NOTE 3 INVESTMENT AND MORTGAGE-BACKED SECURITIES
In 1995, the Financial Accounting Standards Board allowed a one-time
reassessment of the appropriateness of the classifications of all securities
held at a date between November 15, 1995 and December 31, 1995. In accordance
with this assessment, the Company reclassified on December 29, 1995
approximately $62,000,000 from investment securities held-to-maturity to
investment securities available-for-sale. At the time of reclassification, there
were $118,000 in unrealized gains and $864,000 in unrealized losses relating to
the securities transferred.
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investment and mortgage-backed securities at December 31, 1997
follows: (in thousands)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
Available-for-sale:
US Treasury and other US government
agencies $11,873 $ 66 $ 10 $11,929
Corporate notes 5,008 3 11 5,000
Common and preferred stocks 2,752 206 162 2,796
Mortgage-backed securities 17,366 99 125 17,340
Collateralized mortgage obligations 14,171 -- 276 13,895
State and political subdivisions 4,016 127 -- 4,143
------- ---- ---- -------
$55,186 $501 $584 $55,103
======= ==== ==== =======
Held-to-maturity:
Mortgage-backed securities $ 8,400 $ 20 $ 66 $ 8,354
State and political subdivisions 2,912 31 -- 2,943
------- ---- ---- -------
$11,312 $ 51 $ 66 $11,297
======= ==== ==== =======
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investment and mortgage-backed securities at December 31, 1996
follows: (in thousands)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
Available-for-sale:
US Treasury and other US government
agencies $20,828 $ 29 $ 378 $20,479
Corporate notes 13,125 9 66 13,068
Foreign 1,003 -- 3 1,000
Common and preferred stocks 2,221 118 55 2,284
Mortgage-backed securities 28,254 101 473 27,882
Collateralized mortgage obligations 21,189 -- 723 20,466
State and political subdivisions 3,219 45 5 3,259
Other 145 45 -- 190
------- ---- ------ -------
$89,984 $347 $1,703 $88,628
======= ==== ====== =======
Held-to-maturity:
US Treasury and other US government
agencies $ 501 $ 2 $ -- $ 503
Mortgage-backed securities 9,943 18 152 9,809
State and political subdivisions 1,755 38 -- 1,793
------- ---- ------ -------
$12,199 $ 58 $ 152 $12,105
======= ==== ====== =======
The contractual maturity distribution of investments in debt obligations at
December 31, 1997 follows: (in thousands)
Available-for-sale
One to Five to Over
Within five ten ten Total
one year years years years Cost
-------- ------ ------- ----- -----
US Treasury and other
US government agencies $ -- $3,876 $ 7,997 $ -- $11,873
Corporate notes 5,008 -- -- -- 5,008
Mortgage-backed securities -- 1,325 1,863 14,178 17,366
Collateralized mort-
gage obligations -- -- 5,927 8,244 14,171
State and political
subdivisions -- 491 625 2,900 4,016
------ ------ ------- ------- -------
$5,008 $5,692 $16,412 $25,322 $52,434
====== ====== ======= ======= =======
Market value $5,001 $5,717 $16,339 $25,250 $52,307
====== ====== ======= ======= =======
Held-to-maturity
One to Five to Over
Within five ten ten Total
one year years years years Cost
-------- ------ ------- ----- -----
Mortgage-backed
securities $ 113 $1,615 $ 3,003 $ 3,669 $ 8,400
State and political
subdivisions 2,098 814 -- -- 2,912
------ ------ ------- ------- --------
$2,211 $2,429 $ 3,003 $ 3,669 $11,312
====== ====== ======= ======= =======
Market value $2,215 $2,454 $ 2,986 $ 3,642 $11,297
====== ====== ======= ======= =======
Actual maturities of state and political subdivisions, mortgage-backed
securities and collateralized mortgage obligations will differ from the
maturities presented because borrowers have the right to prepay obligations
without prepayment penalties.
An analysis of gross realized gains and losses on investment and
mortgage-backed securities sold during the years ended December 31 follows: (in
thousands)
1997 1996 1995
---------------------------------------------------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
-------- -------- -------- -------- -------- --------
Investments:
Debt $ 31 $178 $ 1 $-- $ 75 $222
Equity 548 -- 325 20 5 --
Mortgage-backed
securities
available-for-sale 88 176 -- -- 67 --
---- ---- ---- --- ---- ----
$667 $354 $326 $20 $147 $222
==== ==== ==== === ==== ====
Investment securities totaling $24,588,000 and $16,028,000 were pledged to
secure public deposits, repurchase agreements and treasury, tax and loan
accounts at December 31, 1997 and 1996, respectively.
As members of the Federal Home Loan Bank of Boston (the "FHLB"), the Banks
are required to invest in $100 par value stock of the FHLB in an amount equal to
1% of their outstanding home loans, .3% of total assets, or 5% of the their
advances from the FHLB, whichever is higher. If redeemed the Banks will receive
an amount equal to the par value of the stock.
NOTE 4 LOANS
Loans at December 31 were comprised of the following: (in thousands)
1997 1996
-------- --------
Real Estate:
Residential $152,041 $145,847
Commercial 56,204 43,901
Construction 5,664 2,329
Commercial 27,129 27,293
Installment 23,476 18,733
Other 2,769 2,999
-------- --------
Total loans 267,283 241,102
Less: Unearned income (526) (719)
Allowance for possible loan losses (note 5) (4,156) (3,941)
--------
$262,601 $236,442
======== ========
Loans are granted in the ordinary course of business to directors, officers,
and their immediate families and to organizations in which such persons have
more than a 10% ownership interest. These loans were made on substantially the
same terms, including interest rate and collateral, as those prevailing at the
same time for comparable transactions with unrelated persons and did not involve
more than the normal risk of collectability or present other unfavorable
features.
An analysis of activity in such loans for the years ended December 31, 1997
and 1996 follows: (in thousands)
1997 1996
------ ------
Balance at beginning of year $1,345 $1,819
New loans 1,090 168
Repayments (778) (472)
Change in status of officers and directors (25) (170)
Balance at end of year $1,632 $1,345
The Company's lending activities are conducted principally in New Hampshire.
The Company grants single family residential loans, commercial real estate
loans, including loans on resorts and motels, vacation condominium loans, time
share loans, commercial loans and a variety of consumer loans. In addition, the
Company grants loans for the construction of residential homes, vacation
condominiums, commercial real estate properties, and for land development. Most
loans granted by the Company are secured by real estate collateral. The ability
and willingness of the single family residential, vacation condominium and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity within the borrowers' geographic areas
and real estate values. The ability and willingness of commercial real estate,
commercial and construction loans borrowers to honor their repayment commitments
is generally dependent on the health of the real estate economic sector in the
borrowers' geographic areas and the general economy.
Mortgage loans serviced for others are not included in the accompanying
balance sheets. The unpaid principal balances of the loans totaled $4,715,000
and $3,476,000 at December 31, 1997 and 1996, respectively.
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" (SFAS No. 122) became effective as of January 1, 1996. As of
January 1, 1997, SFAS No. 122 was superceded by Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." (SFAS No. 125). In 1997
and 1996 the Company sold mortgage loans totaling $2,209,000 and $2,528,000 and
retained the servicing rights. The fair value of those rights under SFAS No. 125
and SFAS No. 122 is not material and has not been recognized in the 1997 and
1996 financial statements.
NOTE 5 ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses at
December 31 follows: (in thousands)
1997 1996 1995
------ ------ ------
Balance at beginning of year $3,941 $3,866 $3,682
Provision charged to expense 535 512 652
Recoveries on loans previously charged-off 292 213 228
Loans charged-off (612) (650) (696)
------ ------
Balance at end of year $4,156 $3,941 $3,866
====== ====== ======
NOTE 6 IMPAIRED LOANS
Effective January 1, 1995, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan," and FASB No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." These
statements require changes in both the disclosure and impairment measurement of
non-performing loans. Certain loans which had previously been reported as
non-performing loans are now required to be disclosed as impaired loans.
Restructured, accruing loans entered into prior to the adoption of these
statements are not required to be reported as impaired loans unless such loans
are not performing in accordance with the restructured terms at adoption of FASB
No. 114. Restructured, accruing loans entered into subsequent to the adoption of
these statements are reported as impaired loans. In the year subsequent to
restructure these loans may be removed from the impaired loan disclosure
provided that the loan bears a market rate of interest at the time of
restructure and is performing under the restructured terms.
At December 31, 1997 and 1996, loans restructured in a troubled debt
restructuring before January 1, 1995, the effective date of SFAS No. 114, that
are not impaired based on the terms specified by the restructuring agreement
totaled $1,184,000 and $1,473,000, respectively. The gross interest income that
would have been recorded in the years ended December 31, 1997 and 1996 if such
restructured loans had been current in accordance with their original terms was
$111,000 and $139,000, respectively. The amount of interest income on such
restructured loans that was included in net income for the years ended December
31, 1997 and 1996 was $96,000 and $121,000, respectively.
The recorded investment in loans that are considered to be impaired under
FASB No. 114 was $211,000 and $561,000 for the years ended December 31, 1997 and
1996, respectively, for which the related allowance for loan losses is $0 and
$9,000, respectively. All of the Company's impaired loans are collateralized and
therefore all impaired loans are measured by the difference between the fair
value of the collateral and the recorded amount of the loan. The average
recorded investment in impaired loans during the twelve months ended December
31, 1997 and 1996 was approximately $555,000 and $1,005,000, respectively. For
the twelve months ended December 31, 1997 and 1996 the Company recognized
interest income on those impaired loans of $16,000 and $55,000 which included
$4,000 and $55,000 of interest income recognized using the cash basis of income
recognition, respectively.
NOTE 7 REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure or substantively repossessed at December
31 follows: (in thousands)
1997 1996
---- ----
Condominiums $ 96 $ 46
Residential homes 112 97
Land 14 59
---- ----
$222 $202
==== ====
The aforementioned balances include $59,000 and $46,000 of collateral
substantively repossessed at December 31, 1997 and 1996, respectively.
Sales by the Company resulted in gains of $56,000, $88,000 and $153,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
Write downs on real estate acquired by foreclosure totaled $58,000, $54,000
and $84,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
NOTE 8 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows: (in thousands)
1997 1996
------- -------
Land $ 1,615 $ 1,512
Buildings 7,029 7,321
Construction in progress 516 --
Equipment 4,586 4,000
------- -------
13,746 12,833
Less accumulated depreciation and amortization (4,559) (4,068)
-------
$ 9,187 $ 8,765
======= =======
The Company leases two of its locations under non-cancellable operating
leases. Minimum lease payments in future periods under non-cancellable operating
leases at December 31, 1997 are as follows:
1998 $ 51,000
1999 51,000
2000 51,000
2001 10,500
---------
$163,500
The terms of one of the leases provide that the Company can, at the end of
the initial five year term, renew the lease under two five-year options. Both
leases contain a provision that the Company shall pay its pro-rata share of
operating costs, including real estate taxes. A lease under which the Company
was paying rent for a location no longer in use expired in 1996.
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to
$57,000, $52,000 and $113,000, respectively.
NOTE 9 DEPOSITS
Deposits at December 31 were as follows: (dollars in thousands)
1997 1996
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ -------
Non-certificate deposits:
Regular savings $ 62,825 2.37% $ 65,401 2.36%
NOW and Super NOW 46,419 1.28 44,494 1.28
Money market 21,420 2.77 23,195 2.83
Demand deposits 39,710 -- 35,328 --
-------- --------
170,374 1.57 168,418 1.64
-------- --------
Certificates of deposit:
Less than $100,000 131,308 5.43 134,065 5.47
$100,000 and over 20,381 5.39 19,832 5.40
-------- --------
151,689 5.43 153,897 5.46
-------- --------
Total deposits $322,063 3.39% $322,315 3.47%
======== ========
Included above are $0 and $297,000 in brokered certificates of deposit at
December 31, 1997 and 1996, respectively.
For time deposits as of December 31, 1997, the aggregate amount of maturities
for each of the following five years ended December 31, are: (in thousands)
1998 $123,043
1999 25,244
2000 2,136
2001 1,157
2002 109
--------
$151,689
========
NOTE 10 ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB). The components of these borrowings are as follows as of December 31,
1997: (dollars in thousands)
Weighted
Average
Rate to
Maturity Date Balance Maturity
------------- ------- --------
1998 $9,212 5.92%
1999 82 7.43
2002 28 6.78
------
Total $9,322
======
Advances are secured by the Company's stock in that institution, its
residential real estate mortgage portfolio and the remaining US government and
agencies not otherwise pledged.
Information about short-term advances included above is as follows: (dollars
in thousands)
December 31,
------------------------
1997 1996
---- ----
Outstanding at end of period $ 9,212 $4,711
Approximate maximum outstanding at any month end 12,221 5,900
Average amounts outstanding during the period 9,019 7,473
Weighted average interest rate during the period 5.98% 5.82%
Weighted average interest rate at end of period 5.92 6.21
NOTE 11 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31 are summarized
as follows: (dollars in thousands)
1997 1996 1995
------ ------ -----
Outstanding at December 31 $6,146 $4,620 $6,087
Maturity date 2/98-12/98 2/97-5/98 2/96-12/98
Weighted average interest rate at
end of year 5.57% 5.50% 5.56%
Maximum amount outstanding at
any month end $9,161 $7,784 $9,028
Daily average outstanding $7,796 $6,565 $6,151
Weighted average interest rate
for the year 5.18% 5.45% 4.98%
Investment securities with a total book value and accrued interest of
$20,633,000, $14,393,000 and $17,122,000 were pledged as collateral and held by
a Correspondent Bank under the Company's control to secure the agreements at
December 31, 1997, 1996, and 1995, respectively. The market value of the
collateral at December 31, 1997, 1996 and 1995 was $20,107,000, $13,998,000, and
$16,871,000, respectively.
NOTE 12 ACQUISITIONS
On July 22, 1994, the Company acquired $33.2 million in deposits from the
Resolution Trust Corporation. The Company paid a deposit purchase premium of
$2.3 million. This premium is being amortized to noninterest expense over seven
years by use of the straight line method.
On April 22, 1996, the Company purchased certain assets and assumed deposits
from First New Hampshire Bank's branch office in Campton, New Hampshire. On that
day, the Company recorded the following entries to record this transaction. (in
thousands)
Loans $ 4
Premises and equipment 225
Deposit purchase premium 175
Cash 6,355
Other liabilities 1
Deposits 6,758
This transaction was accounted for using the purchase method of accounting.
The results of operations of the acquired branch are included in the 1996 income
statement of the Company from the date of the transaction.
The deposit purchase premium of $175,000 is being amortized to noninterest
expense over ten years using the straight line method.
Management reviews the carrying value of this intangible asset on an ongoing
basis, taking into consideration any events and circumstances that might have
diminished such value.
NOTE 13 LINES OF CREDIT
As members of the Federal Home Loan Bank of Boston, the Banks have access to
pre-approved lines of credit. At December 31, 1997 the Banks' available line of
credit totaled $9.9 million.
In addition, the Banks have a credit line totaling $2.0 million with another
commercial bank.
At December 31, 1997 and 1996 there was no amount outstanding on lines of
credit.
NOTE 14 STOCKHOLDERS' EQUITY
Federal Regulations prohibit banking companies from paying dividends on their
stock if the effect would cause stockholders' equity to be reduced below
applicable regulatory capital requirements or if such declaration and payment
would otherwise violate regulatory requirements. At December 31, 1997, the
Company was in compliance with all regulatory capital requirements.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Banks' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Banks' assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Banks'
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal
Deposit Insurance Corporation categorized the Banks as well-capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized the Banks must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' categories.
The Banks' actual capital amounts and ratios are also presented in the
tables. (dollars in thousands)
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes: Provisions:
------------------ -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Risk-Based Total Capital:
Consolidated $39,217 17.56% $17,867 >=8% N/A
The Berlin City Bank 25,166 17.68 11,388 >=8 $14,235 >=10%
The Pemigewasset
National Bank 13,631 16.90 6,453 >=8 8,066 >=10
Risk-Based Tier 1 Capital:
Consolidated 36,425 16.31 8,933 >=4 N/A
The Berlin City Bank 22,387 15.73 5,694 >=4 8,541 >=6
The Pemigewasset
National Bank 12,619 15.65 3,226 >=4 4,840 >=6
Leverage:
Consolidated 36,425 9.67 15,064 >=4 N/A
The Berlin City Bank 22,387 9.14 9,794 >=4 12,243 >=5
The Pemigewasset
National Bank 12,619 9.33 5,278 >=4 6,598 >=5
As of December 31, 1996:
Risk-Based Total Capital:
Consolidated $35,593 17.40% $16,365 >=8% N/A
The Berlin City Bank 22,583 17.44 10,357 >=8 $12,946 >=10%
The Pemigewasset
National Bank 12,964 17.35 5,978 >=8 7,473 >=10
Risk-Based Tier 1 Capital:
Consolidated 33,036 16.15 8,182 >=4 N/A
The Berlin City Bank 20,965 16.19 5,178 >=4 7,768 >=6
The Pemigewasset
National Bank 12,025 16.01 3,004 >=4 4,506 >=6
Leverage:
Consolidated 33,036 8.99 14,690 >=4 N/A
The Berlin City Bank 20,965 8.63 9,722 >=4 12,153 >=5
The Pemigewasset
National Bank 12,025 9.46 5,083 >=4 6,354 >=5
NOTE 15 OTHER NONINTEREST EXPENSE
The major components of other noninterest expense for the years ended
December 31 follows: (in thousands)
1997 1996 1995
----- ------ ------
Deposit and other assessments $ 50 $ 17 $ 585
Directors' fees 266 303 302
Stationery and supplies 374 360 341
Other 2,560 2,514 2,284
------ ------ ------
$3,250 $3,194 $3,512
====== ====== ======
NOTE 16 FEDERAL AND STATE TAXES
The components of federal and state tax expense at December 31 are as
follows: (in thousands)
1997 1996 1995
------ ------ ------
Current:
Federal $2,025 $1,732 $1,824
State 193 253 260
------ ------ ------
2,218 1,985 2,084
------ ------ ------
Deferred:
Federal 45 (8) (159)
State 11 (3) (36)
------ ------ ------
56 (11) (195)
------ ------ ------
Net $2,274 $1,974 $1,889
====== ====== ======
The temporary differences (the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases) that give rise to significant portions of the deferred income tax asset
and deferred income tax liability at December 31 are as follows: (in thousands)
1997 1996
------ ------
Deferred income tax assets:
Allowance for possible loan losses $1,149 $1,145
Loan origination fees 155 178
Interest on nonaccrual loans 193 250
Foreclosed property valuation 19 33
Unrealized holding loss on investment securities
available-for-sale 32 524
Deposit purchase premium 280 229
Supplemental insurance 57 48
Other 47 37
------ ------
1,932 2,444
Deferred income liabilities:
Depreciation (380) (338)
Pension (52) (58)
------ ------
(432) (396)
Deferred income tax asset, net $1,500 $2,048
The primary sources of recovery of the deferred income tax asset are taxes
paid that are available for carryback and the expectation that the deductible
temporary differences will reverse during periods in which the Company generates
taxable income.
Total income tax expense for the years ended December 31, 1997, 1996 and 1995
differs from the "expected" federal income tax expense at the 34% statutory rate
for the following reasons:
1997 1996 1995
---- ---- ----
Expected federal income taxes 34.0% 34.0% 34.0%
Municipal income (3.6) (3.5) (2.4)
State tax expense net of federal benefit 3.2 2.6 2.4
Other 2.4 0.8 0.4
---- ---- ----
36.0% 33.9% 34.4%
==== ==== ====
NOTE 17 PENSION PLAN
The Company has two non-contributory defined benefit pension plans covering
substantially all employees. The Company contributes to the pension plans
annually to provide for current benefits, as well as expected future benefits.
The following table sets forth the funded status of the plans and amounts
recognized in the Company's balance sheet as of December 31: (in thousands)
1997 1996
------- -------
Vested benefits $ 2,718 $ 2,417
Non-vested benefits 89 69
------- -------
Accumulated benefit obligation $ 2,807 $ 2,486
======= =======
Estimated projected benefit obligation $(3,586) $(3,191)
Estimated fair value of plan assets 3,419 2,946
Deficiency of estimated fair value of plan assets
over estimated projected benefit obligation (167) (245)
Past service cost 16 17
Unrecognized net loss 409 408
Unrecognized net transition asset (28) (32)
------- -------
Prepaid pension cost $ 230 $ 148
======= =======
Net periodic pension cost included the following
components for the years ended December 31: (in
thousands)
1997 1996 1995
----- ----- -----
Service cost-benefits earned $ 202 $ 200 $ 162
Interest cost on projected benefit obligation 232 204 170
Return on plan assets (loss) (435) (216) (372)
Net amortization and deferral 199 (16) 186
----- ----- -----
Pension expense $ 198 $ 172 $ 146
===== ===== =====
Plan obligations were computed using the following for the year ended December
31:
1997 1996
-------------- --------------
BCB PNB BCB PNB
--- --- --- ---
Discount rate 7.0% 8.0% 7.0% 8.0%
Estimated return on plan assets 9.0 8.0 9.0 8.0
Future salary increases 5.0 4.0 5.0 4.0
Plan assets are primarily invested in US Treasuries, US Government Agencies, and
FHLB securities.
PNB has a 401(k) plan. To be eligible, employees must have attained age
twenty-one, completed six months of service and be credited with 1,000 hours of
service. PNB matches 25% of employee contributions on the first 4% of
compensation deposited as elective contributions. The 401(k) matching expense
was $15,000, $14,000 and $16,000 for the years ended December 31, 1997, 1996,
and 1995, respectively.
NOTE 18 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance sheet credit risk at December 31 are
as follows: (in thousands)
1997 1996
---- ----
Financial instrument whose contract amounts represent
credit risk:
Unadvanced portions of home equity loans $ 1,863 $ 1,568
Unadvanced portions of lines of credit 16,930 12,187
Unadvanced portions of commercial real estate loans 1,585 45
Commitments to originate loans 8,713 9,208
Standby letters of credit 491 585
Commitments to originate loans, unadvanced portions of home equity loans,
lines of credit and commercial real estate loans are agreements to lend to a
customer provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without having been drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan commitments to customers.
NOTE 19 LITIGATION
In the ordinary course of business, the Company is involved in routine
litigation. Based on its review of such litigation, management does not foresee
any material effect on the Company's financial position or results of
operations.
NOTE 20 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and due from banks, interest-bearing deposits, and federal funds sold:
The carrying amounts reported in the balance sheets for cash and short-term
instruments approximates those assets' fair values.
Investment and mortgage-backed securities: Fair values for investment
securities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
FHLB and FRB Stock: The carrying amount reported in the balance sheets for
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") Stock
approximates their fair value. If redeemed, the Company will receive an amount
equal to the par value of the stocks.
Loans held for sale: The carrying amount reported in the balance sheet
approximates fair value.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair value for other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The fair value of nonaccrual loans was
estimated using the estimated fair value of the underlying collateral. The fair
value of commitments to originate loans and outstanding letters of credit were
considered in estimating the fair value of loans. As the undisbursed lines of
credit are at floating rates, there is no fair value adjustment.
Accrued interest receivable: The carrying value of accrued interest
receivable approximates its fair value because of the short term nature of this
financial instrument.
Deposits and mortgagors' escrow accounts: The fair value of demand deposits
(e.g. NOW and Super NOW checking, regular savings, money market accounts and
mortgagors' escrow accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e. their carrying amounts). Fair values for
certificates of deposit are estimated using a discounted cash flow technique
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities of time deposits.
Repurchase agreements: The fair value of the Company's repurchase agreements
is estimated using discounted cash flow analysis, based on the Company's current
rate for similar repurchase agreements.
Federal Home Loan Bank Advances: The fair value of FHLB advances were
determined by discounting the anticipated future cash payments by using the
rates currently available to the Company for debt with similar terms and
remaining maturities.
Other borrowings: The carrying amount reported in the balance sheet
approximates fair value.
The estimated fair values of the Company's financial instruments are as
follows: (in thousands)
1997 1996
-------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and due from banks $ 12,086 $ 12,086 $ 14,257 $ 14,257
Federal funds sold 19,225 19,225 3,025 3,025
Interest bearing deposits 85 85 279 279
Investment securities
available-for-sale 55,103 55,103 88,628 88,628
Investment securities
held-to-maturity 11,312 11,297 12,199 12,105
FHLB stock 1,958 1,958 1,822 1,822
FRB stock 80 80 80 80
Loans held for sale 292 292 58 58
Loans, net 262,601 262,164 236,442 235,745
Accrued interest receivable 1,971 1,971 2,611 2,611
Financial liabilities:
Deposits 322,063 322,379 322,315 323,248
Repurchase agreements 6,146 6,150 4,620 4,638
FHLB advances 9,322 9,325 8,703 8,717
Other borrowings 0 0 221 221
The carrying amounts of financial instruments shown in the above table are
included in the balance sheets under the indicated captions.
At December 31, 1997, all the Company's financial instruments were held for
purposes other than trading.
At December 31, 1997, the Company had no derivative financial instruments
subject to the provisions of SFAS No. 119 "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments."
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for some of the Company's financial
instruments, fair value estimates are based on judgements regarding future
expected loss experience, cash flows, current economic conditions, risk
characteristics, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt, and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered. The fair value amounts presented do not
represent the underlying value of the Company because fair values of certain
other financial instruments, assets and liabilities have not been determined.
NOTE 21 QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
(in thousands, except earnings per share)
Summarized quarterly financial data for 1997 and 1996 follows:
1997 Quarters Ended
-------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $6,961 $7,245 $7,427 $7,401
Interest expense 2,918 3,036 3,054 2,999
------ ------ ------ ------
Net interest income 4,043 4,209 4,373 4,402
Provision for possible loan losses 120 135 140 140
Noninterest income 538 491 349 302
Noninterest expense 2,970 2,907 2,971 3,011
------ ------ ------ ------
Income before taxes 1,491 1,658 1,611 1,553
Income tax expense 413 598 578 685
------ ------ ------ ------
Net income $1,078 $1,060 $1,033 $ 868
====== ====== ====== ======
Earnings per share $ 0.62 $ 0.61 $ 0.60 $ 0.50
====== ====== ====== ======
1996 Quarters Ended
-------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $6,819 $6,963 $7,035 $7,158
Interest expense 3,068 3,075 3,078 3,037
------ ------ ------ ------
Net interest income 3,751 3,888 3,957 4,121
Provision for possible loan losses 126 126 134 126
Noninterest income 350 404 398 450
Noninterest expense 2,579 2,647 2,738 3,012
------ ------ ------ ------
Income before taxes 1,396 1,519 1,483 1,433
Income tax expense 480 510 495 489
------ ------ ------ ------
Net income $ 916 $1,009 $ 988 $ 944
====== ====== ====== ======
Earnings per share $ 0.53 $ 0.58 $ 0.57 $ 0.55
====== ====== ====== ======
NOTE 22 CONDENSED PARENT ONLY FINANCIAL STATEMENTS
Condensed financial statements of Northway Financial, Inc. as of December 31,
1997 and 1996 and for the three years ended December 31, 1997 follow: (in
thousands)
Balance Sheets
1997 1996
---- ----
Assets
Cash and cash equivalents $ 1,412 $ 394
Investment in subsidiary, The Berlin
City Bank 23,232 21,454
Investment in subsidiary, The
Pemigewasset National Bank 12,884 12,165
------- -------
$37,528 $34,013
======= =======
Liabilities and Stockholders' Equity
Accrued expenses $ 2 $ 350
------- -------
Total liabilities 2 350
------- -------
Stockholders' equity:
Common Stock 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 33,744 30,662
Unrealized loss on investment securities
available-for-sale, net of tax (51) (832)
------- -------
Total Stockholders' Equity 37,526 33,663
------- -------
$37,528 $34,013
Statements of Income
1997 1996 1995
------ ------ ------
Dividends from subsidiaries $1,973 $ 892 $ 965
Management fee income from subsidiary 25 36 21
------ ------ ------
1,998 928 986
General and administrative expense 217 36 21
------ ------ ------
Income before income
tax expense and equity in undistributed
net income of subsidiaries 1,781 892 965
Income tax expense 3 -- --
------ ------ ------
Income before equity in undistributed
net income of subsidiaries 1,778 892 965
Equity in undistributed net income of
subsidiaries 2,261 2,965 2,631
------ ------ ------
Net income $4,039 $3,857 $3,596
====== ====== ======
Statements of Cash Flows
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net income $ 4,039 $ 3,857 $ 3,596
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in other assets -- 2 238
Decrease in accrued expenses (1) -- --
Undistributed net income of
subsidiaries (2,261) (2,965) (2,631)
------- ------- -------
Net cash provided by operating
activities 1,777 894 1,203
------- ------- -------
Cash flows from financing activities:
Cash received from BCB 245 -- --
Purchase of treasury stock -- -- (317)
Dividends paid (1,004) (802) (748)
------- ------- -------
Net cash used in financing
activities (759) (802) (1,065)
------- ------- -------
Net increase in cash and equivalents 1,018 92 138
Cash and cash equivalents at beginning
of year 394 302 164
------- ------- -------
Cash and cash equivalents at end
of year $ 1,412 $ 394 $ 302
======= ======= =======
NOTE 23 FORMATION OF HOLDING COMPANY
On September 30, 1997, The Berlin City Bank and Pemi Bancorp, Inc. (Parent
company of The Pemigewasset National Bank), in accordance with an Agreement and
Plan of Merger dated as of March 14, 1997, merged with the result that Northway
Financial, Inc. became the bank holding company for The Berlin City Bank and The
Pemigewasset National Bank. Each of such banks became wholly-owned subsidiaries
of Northway Financial, Inc. To reflect the transaction, Northway Financial, Inc.
issued 1,731,969 shares of its common stock. Shareholders of The Berlin City
Bank and Pemi Bancorp, Inc. received 16 shares and 1.0419 shares, respectively,
of Northway Financial, Inc. for each share they held of The Berlin City Bank and
Pemi Bancorp, Inc., respectively. The formation of the holding company was
accounted for as a pooling of interest. Accordingly, the historical book values
of the assets and liabilities of The Berlin City Bank and Pemi Bancorp, Inc. as
previously reported on their balance sheets, were carried over to the Company's
consolidated balance sheet. No goodwill or other intangibles were created. The
formation of the holding company is reflected in the accompanying consolidated
financial statements as though The Berlin City Bank and Pemi Bancorp, Inc. had
operated as a combined entity for all periods presented.
The results of operations of the two companies for the period January 1, 1997
to September 30, 1997 are summarized as follows:
The Berlin Pemi Bancorp,
City Bank Inc.
--------- ----
Net interest and dividend income $8,010 $4,615
Net income 2,388 783
The following tables set forth reconciliations of net interest and dividend
income and net income previously reported by The Berlin City Bank and Pemi
Bancorp, Inc. with the combined amounts presented in the accompanying
consolidated financial statements of income for the years ended December 31,
1996 and 1995: (in thousands)
Pemi
The Berlin Bancorp,
City Bank Inc. Combined
--------- ---- --------
Year Ended December 31, 1996
Net interest and dividend income $9,671 $6,046 $15,717
Net income 2,580 1,277 3,857
Year Ended December 31, 1995
Net interest and dividend income $9,684 $5,809 $15,493
Net income 2,321 1,275 3,596
<PAGE>
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NORTHWAY FINANCIAL, INC.
March 26, 1998 BY: /S/ William J. Woodward
-----------------------
William J. Woodward
President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ William J. Woodward Chairman of the Board, March 27, 1998
- ---------------------------- Presidentand Chief Executive
William J. Woodward Officer (Principal Executive
Officer)
/S/ Fletcher W. Adams Vice Chairman of the Board March 27, 1998
- ----------------------------
Fletcher W. Adams
/S/ John D. Morris Director March 27, 1998
- ----------------------------
John D. Morris
/S/ John H. Noyes Director March 27, 1998
- ----------------------------
John H. Noyes
/S/ Barry J. Kelley Director March 27, 1998
- ----------------------------
Barry J. Kelley
/S/ Randall G. Labnon Director March 27, 1998
- ----------------------------
Randall G. Labnon
/S/ Andrew L. Morse Director March 27, 1998
- ----------------------------
Andrew L. Morse
/S/ Peter H. Bornstein Director March 27, 1998
- ----------------------------
Peter H. Bornstein
/S/ Charles H. Clifford, Jr. Director March 27, 1998
- ----------------------------
Charles H. Clifford, Jr.
/S/ Arnold P. Hanson, Jr. Director March 27, 1998
- ----------------------------
Arnold P. Hanson, Jr.
/S/ Donald R. Hatt Senior Executive Vice President March 27, 1998
- ----------------------------
Donald R. Hatt
/S/ David J. O'Connor Executive Vice President, Chief March 27, 1998
- ---------------------------- Financial Officer and Treasurer
David J. O'Connor (Principal Financial and
Accounting Officer)
<PAGE>
INDEX OF EXHIBITS
Exhibit Number Description of Exhibit
- ------------- ----------------------
2.1 Agreement and Plan of Merger, dated as of March 14, 1997, by
and among Northway Financial, Inc., The Berlin City Bank,
Pemi Bancorp, Inc. and Pemigewasset National Bank (the
"Merger Agreement") (incorporated by reference to Exhibit
2.1 to Registration Statement No. 333-33033)
3.1 Amended and Restated Articles of Incorporation of Northway
Financial, Inc. (incorporated by reference to Exhibit 3.1 to
Registration Statement No. 333-33033)
3.2 By-laws of Northway Financial, Inc.(1)
4 Form of Certificate representing Northway Common Stock
(reference is also made to Exhibits 3.1 and 3.2)
(incorporated by reference to Exhibit 4 to Registration
Statement No. 333-33033)
10.1 Employment Agreement for William J. Woodward(1)(2)
10.2 Employment Agreement for Fletcher W. Adams(1)(2)
21 List of Subsidiaries(1)
23.1 Consent of Shatswell, MacLeod & Company, P.C.(1)
27 Financial Data Schedule(1)
- ------------------
(1) Filed herewith
(2) Management contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c) of this report
<PAGE>
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.
<PAGE>
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)
<PAGE>
CONFIDENTIAL AND NOT FOR DISTRIBUTION
FOR CLIENT USE ONLY
MEMORANDUM
TO: TA Associates, Inc.
FROM: John LeClaire, John Egan, Kevin Dennis and Jeff Hadden
GPH Private Equity/Emerging Companies Group
RE: Leveraged Recaps
DATE: March 24, 1998
-----------------------------------------
Many of our recent private equity transactions have involved leveraged
recap transaction structures. This memorandum summarizes the principles that
have emerged as the guidelines for structuring these transactions. It is
envisioned that we will supplement these guidelines as appropriate based on
future transaction experience.1
ANALYTICAL FRAMEWORK
Leveraged recap accounting is related to the SEC's rules for so called
"push-down" accounting (SAB Topic 5J). These rules require that an acquiror
"push-down" purchase accounting to the financial statements of its target when
the acquiror purchases "substantially all" of the target's stock in a purchase
transaction. This results in a new basis in the target's assets, the elimination
of the target's retained earnings, and in most cases the addition of goodwill to
the target's books. This goodwill reduces the target's future reported earnings
for GAAP purposes. Conversely, leveraged recap accounting will apply, and
goodwill on the target's balance sheet will be avoided, when pre-transaction
stockholders continue to maintain a significant interest following the
transaction as "substantial investors."
<PAGE>
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
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") is made as of September 30, 1997 (the
"Effective Date"), by and between Northway Financial, Inc., a New Hampshire
chartered corporation ("Northway"), Pemigewasset National Bank, a national bank
and wholly owned subsidiary of Northway with its principal office located in New
Hampshire (Northway and Pemigewasset National Bank shall hereinafter
collectively be referred to as the "Employer"), and Fletcher W. Adams (the
"Executive"). In consideration of the mutual covenants contained in this
Agreement, the Employer and the Executive agree as follows:
1. Employment. The Employer agrees to employ the Executive and the
Executive agrees to be employed by the Employer on the terms and conditions set
forth in this Agreement.
2. Capacity. The Executive shall serve Northway as Vice Chairman and
Pemigewasset National Bank as President and Chief Executive Officer subject to
election by the Board of Directors of Northway or Pemigewasset National Bank, as
the case may be (the "Board of Directors"), and as a member of the Board of
Directors, subject to election by the shareholders of Northway and Pemigewasset
National Bank respectively. The Executive shall also serve the Employer in such
other or additional offices as the Executive may be requested to serve by the
Chief Executive Officer of Northway or the Board of Directors. In such capacity
or capacities, the Executive shall perform such services and duties from
Employer's Plymouth, New Hampshire office in connection with the business,
affairs and operations of the Employer as may be assigned or delegated to the
Executive from time to time by or under the authority of the Chief Executive
Officer of Northway or the Board of Directors.
3. Term. Subject to the provisions of Section 6, the term of employment
pursuant to this Agreement (the "Term") shall be for three (3) years from the
Effective Date and shall be renewed automatically for periods of one (1) year
commencing at the first anniversary of the Effective Date and on each subsequent
anniversary thereafter, unless either the Executive or the Employer gives
written notice to the other not less than sixty (60) days prior to the date of
any such anniversary of such party's election not to extend the Term.
4. Compensation and Benefits. The regular compensation and benefits
payable to the Executive under this Agreement shall be as follows:
(a) Salary. For all services rendered by the Executive under
this Agreement, the Employer shall pay the Executive a salary (the
"Salary") at an annual rate consistent with the letter agreement, dated
March 14, 1997, by and between Fletcher W. Adams and William J.
Woodward and attached hereto as Exhibit A, subject to increase from
time to time in the discretion of the Board of Directors. The Salary
shall be payable in periodic installments in accordance with the
Employer's usual practice for its senior executives.
(b) Bonus or Similar Incentive Programs. The Executive shall
be entitled to participate in any incentive or bonus program
established by the Board of Directors with such terms as may be
established in the sole discretion of the Board of Directors.
(c) Regular Benefits. The Executive shall also be entitled to
participate in any employee benefit plans, medical insurance plans,
life insurance plans, disability income plans, retirement plans,
vacation plans, expense reimbursement plans and other benefit plans
which the Employer may from time to time have in effect for all or most
of its senior executives. Such participation shall be subject to the
terms of the applicable plan documents, generally applicable policies
of the Employer, applicable law and the discretion of the Board of
Directors or any administrative or other committee provided for in or
contemplated by any such plan. Nothing contained in this Agreement
shall be construed to create any obligation on the part of the Employer
to establish any such plan or to maintain the effectiveness of any such
plan which may be in effect from time to time.
(d) Taxation of Payments and Benefits. The Employer shall
undertake to make deductions, withholdings and tax reports with respect
to payments and benefits under this Agreement to the extent that it
reasonably and in good faith believes that it is required to make such
deductions, withholdings and tax reports. Payments under this Agreement
shall be in amounts net of any such deductions or withholdings. Nothing
in this Agreement shall be construed to require the Employer to make
any payments to compensate the Executive for any adverse tax effect
associated with any payments or benefits or for any deduction or
withholding from any payment or benefit.
(e) Exclusivity of Salary and Benefits. Unless approved by the
Board of Directors, the Executive shall not be entitled to any payments
or benefits other than those provided under this Agreement.
5. Extent of Service. During the Executive's employment under this
Agreement, the Executive shall, subject to the direction and supervision of the
Chief Executive Officer of Northway or the Board of Directors, devote the
Executive's, best efforts and business judgment, skill and knowledge to the
advancement of the Employer's interests and to the discharge of the Executive's
duties and responsibilities under this Agreement. The Executive shall not engage
in any other business activity, except as may be approved by the Board of
Directors; provided that nothing in this Agreement shall be construed as
preventing the Executive from:
(a) investing the Executive's assets in any company or other
entity in a manner not prohibited by Section 7(d) and in such form or
manner as shall not require any material activities on the Executive's
part in connection with the operations or affairs of the companies or
other entities in which such investments are made; or
(b) engaging in religious, charitable or other community or
non-profit activities that do not impair the Executive's ability to
fulfill the Executive's duties and responsibilities under this
Agreement.
6. Termination and Termination Benefits. Notwithstanding the provisions
of Section 3, the Executive's employment under this Agreement shall terminate
under the following circumstances set forth in this Section 6.
(a) Termination by the Employer for Cause. The Executive's
employment under this Agreement may be terminated for cause without
further liability on the part of the Employer effective immediately
upon a two-thirds (2/3) vote of the Board of Directors and written
notice to the Executive. Only the following shall constitute "cause"
for such termination:
(i) dishonest statements or acts of the Executive
with respect to the business of the Employer or any affiliate
of the Employer;
(ii) the commission by or indictment of the Executive
for (A) a felony or (B) any misdemeanor involving moral
turpitude, deceit, dishonesty or fraud ("indictment," for
these purposes, meaning an indictment, probable cause hearing
or any other procedure pursuant to which an initial
determination of probable or reasonable cause with respect to
such offense is made);
(iii) material failure to perform to the reasonable
satisfaction of the Board of Directors a substantial portion
of the Executive's duties and responsibilities assigned or
delegated under this Agreement, which failure continues, in
the reasonable judgment of the Board of Directors, for sixty
(60) days after written notice given to the Executive by the
Board of Directors;
(iv) gross negligence, willful misconduct or
insubordination of the Executive with respect to the Employer
or any affiliate of the Employer; or
(v) material breach by the Executive of any of the
Executive's obligations under this Agreement.
(b) Termination by the Executive. The Executive's employment
under this Agreement may be terminated by the Executive by written
notice to the Board of Directors at least thirty (30) days prior to
such termination.
(c) Termination by the Employer Without Cause. Subject to the
payment of Termination Benefits pursuant to Section 6(d), the
Executive's employment under this Agreement may be terminated by the
Employer without cause upon written notice to the Executive by a
two-thirds (2/3) vote of the Board of Directors.
(d) Certain Termination Benefits. Unless otherwise
specifically provided in this Agreement or otherwise required by law,
all compensation and benefits payable to the Executive under this
Agreement shall terminate on the date of termination of the Executive's
employment under this Agreement. Notwithstanding the foregoing, in the
event of termination of the Executive's employment with the Employer
pursuant to Section 6(c) above, the Employer shall provide to the
Executive the following termination benefits ("Termination Benefits"):
(i) continuation of the Executive's Salary at the
rate then in effect pursuant to Section 4(a); and
(ii) continuation of group health plan benefits to
the extent authorized by and consistent with 29 U.S.C. ss.
1161 et seq. (commonly known as "COBRA"), with the cost of the
regular premium for such benefits shared in the same relative
proportion by the Employer and the Executive as in effect on
the date of termination.
The Termination Benefits set forth in (i) and (ii) above shall continue
effective until the expiration of the Term; provided that in the event
that the Executive commences any employment or self-employment during
the period during which the Executive is entitled to receive
Termination Benefits (the "Termination Benefits Period"), the remaining
amount of Salary due pursuant to Section 6(d)(i) for the period from
the commencement of such employment or self-employment to the end of
the Termination Benefits Period shall be reduced by one-half of the
salary the Executive receives from such employment or self- employment
and, if the Executive receives benefits from such employment or self-
employment comparable to those benefits provided by the Employer, the
payments provided under Section 6(d)(ii) shall cease effective as of
the date of commencement of such employment or self-employment. The
Employer's liability for Salary continuation pursuant to Section
6(d)(i) shall be reduced by the amount of any severance pay due or
otherwise paid to the Executive pursuant to any severance pay plan or
stay bonus plan of the Employer. Notwithstanding the foregoing, nothing
in this Section 6(d) shall be construed to affect the Executive's right
to receive COBRA continuation entirely at the Executive's own cost to
the extent that the Executive may continue to be entitled to COBRA
continuation after the Executive's right to cost sharing under Section
6(d)(ii) ceases. The Executive shall be obligated to give prompt notice
of the date of commencement of any employment or self-employment during
the Termination Benefits Period and shall respond promptly to any
reasonable inquiries concerning any employment or self-employment in
which the Executive engages during the Termination Benefits Period.
(e) Disability. If the Executive shall be disabled so as to be
unable to perform the essential functions of the Executive's then
existing position or positions under this Agreement with or without
reasonable accommodation, the Board of Directors of Northway by a
two-thirds (2/3) vote may remove the Executive from any
responsibilities and/or reassign the Executive to another position with
the Employer for the remainder of the Term or during the period of such
disability. Notwithstanding any such removal or reassignment, the
Executive shall continue to receive the Executive's full Salary (less
any disability pay or sick pay benefits to which the Executive may be
entitled under the Employer's policies) and benefits under Section 4 of
this Agreement (except to the extent that the Executive may be
ineligible for one or more such benefits under applicable plan terms)
for a period of time equal to the lesser of (i) one (1) year; or (ii)
the remainder of the Term. If any question shall arise as to whether
during any period the Executive is disabled so as to be unable to
perform the essential functions of the Executive's then existing
position or positions with or without reasonable accommodation, the
Executive may, and at the request of the Employer shall, submit to the
Employer a certification in reasonable detail by a physician selected
by the Employer to whom the Executive or the Executive's guardian has
no reasonable objection as to whether the Executive is so disabled or
how long such disability is expected to continue, and such
certification shall for the purposes of this Agreement be conclusive of
the issue. The Executive shall cooperate with any reasonable request of
the physician in connection with such certification. If such question
shall arise and the Executive shall fail to submit such certification,
the Employer's determination of such issue shall be binding on the
Executive. Nothing in this Section 6(e) shall be construed to waive the
Executive's rights, if any, under existing law including, without
limitation, the Family and Medical Leave Act of 1993, 29 U.S.C. ss.2601
et seq. and the Americans with Disabilities Act, 42 U.S.C. ss.12101 et
seq.
(f) Termination Following a Change of Control. If there is a
Change of Control, as defined in Section 6(f)(i) below, during the
Term, the provisions of this Section 6(f) shall apply and shall
continue to apply throughout the remainder of the term of this
Agreement. If, within eighteen (18) months following a Change of
Control, the Executive's employment is terminated by the Employer or
the Executive following the occurrence of any of the events listed in
Section 6(f)(ii) below or if the Executive's employment is terminated
without cause (in accordance with Section 6(c) above), in lieu of any
payments under Section 6(d) above, the Employer shall pay to the
Executive (or the Executive's estate, if applicable) a lump sum amount
equal to 2.99 times the Executive's "base amount" within the meaning of
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended
(the "Code").
(i) Change of Control shall mean the occurrence of
one or more of the following events:
(A) any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange
Act")) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the Exchange
Act) (other than the Employer, any trustee or other
fiduciary holding securities under an employee
benefit plan of the Employer, or any corporation
owned, directly or indirectly, by the stockholders of
the Employer, in substantially the same proportions
as their ownership of stock of Northway), directly or
indirectly, of securities of Northway, representing
fifty percent (50%) or more of the combined voting
power of Northway's then outstanding securities; or
(B) persons who, as of the Effective Date,
constituted Northway's Board of Directors (the
"Incumbent Board") cease for any reason including,
without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to
constitute at least a majority of Northway's Board of
Directors, provided that any person becoming a
director of Northway subsequent to the Effective Date
whose election was approved by at least a majority of
the directors then comprising the Incumbent Board
shall, for purposes of this Section 6(f), be
considered a member of the Incumbent Board; or
(C) the stockholders of Northway approve a
merger or consolidation of Northway with any other
corporation or other entity, other than (1) a merger
or consolidation which would result in the voting
securities of Northway outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity) more than fifty
percent (50%) of the combined voting power of the
voting securities of Northway or such surviving
entity outstanding immediately after such merger or
consolidation or (2) a merger or consolidation
effected to implement a recapitalization of Northway
(or similar transaction) in which no "person" (as
hereinabove defined) acquires more than fifty percent
(50%) of the combined voting power of Northway's then
outstanding securities; or
(D) the stockholders of Northway approve a
plan of complete liquidation of Northway or an
agreement for the sale or disposition by Northway of
all or substantially all of Northway's assets.
(ii) The events referred to in Section 6(f) above
shall be as follows:
(A) a reduction of the Executive's salary
other than a reduction that (1) is based on the
Employer's financial performance or (2) is similar to
the reduction made to the salaries provided to all or
most other senior executives of the Employer; or
(B) a significant change in the Executive's
responsibilities and/or duties which constitutes,
when compared to the Executive's responsibilities
and/or duties before the Change of Control, a
demotion; or
(C) a material loss of title or office; or
(D) the relocation of the offices at which
the Executive is principally employed as of the
Change of Control to a location more than fifty (50)
miles from such offices, which relocation is not
approved by the Executive.
(iii) The Executive shall provide the Employer with
reasonable notice and an opportunity to cure any of the events
listed in Section 6(f)(ii) and shall not be entitled to
compensation pursuant to this Section 6(f) unless the Employer
fails to cure within a reasonable period; and
(iv) It is the intention of the Executive and of the
Employer that no payments by the Employer to or for the
benefit of the Executive under this Agreement or any other
agreement or plan, if any, pursuant to which the Executive is
entitled to receive payments or benefits shall be
nondeductible to the Employer by reason of the operation of
Section 280G of the Code relating to parachute payments or any
like statutory or regulatory provision. Accordingly, and
notwithstanding any other provision of this Agreement or any
such agreement or plan, if by reason of the operation of said
Section 280G or any like statutory or regulatory provision,
any such payments exceed the amount which can be deducted by
the Employer, such payments shall be reduced to the maximum
amount which can be deducted by the Employer. To the extent
that payments exceeding such maximum deductible amount have
been made to or for the benefit of the Executive, such excess
payments shall be refunded to the Employer with interest
thereon at the applicable Federal rate determined under
Section 1274(d) of the Code, compounded annually, or at such
other rate as may be required in order that no such payments
shall be nondeductible to the Employer by reason of the
operation of said Section 280G or any like statutory or
regulatory provision. To the extent that there is more than
one method of reducing the payments to bring them within the
limitations of said Section 280G or any like statutory or
regulatory provision, the Executive shall determine which
method shall be followed, provided that if the Executive fails
to make such determination within forty-five (45) days after
the Employer has given notice of the need for such reduction,
the Employer may determine the method of such reduction in its
sole discretion.
7. Confidential Information, Noncompetition and Cooperation.
(a) Confidential Information. As used in this Agreement,
"Confidential Information" means information belonging to the Employer
which is of value to the Employer in the course of conducting its
business and the disclosure of which could result in a competitive or
other disadvantage to the Employer. Confidential Information includes,
without limitation, financial information, reports, and forecasts;
inventions, improvements and other intellectual property; trade
secrets; know-how; designs, processes or formulae; software; market or
sales information or plans; customer lists; and business plans,
prospects and opportunities (such as possible acquisitions or
dispositions of businesses or facilities) which have been discussed or
considered by the management of the Employer. Confidential Information
includes information developed by the Executive in the course of the
Executive's employment by the Employer, as well as other information to
which the Executive may have access in connection with the Executive's
employment. Confidential Information also includes the confidential
information of others with which the Employer has a business
relationship. Notwithstanding the foregoing, Confidential Information
does not include information in the public domain, unless due to breach
of the Executive's duties under Section 7(b).
(b) Confidentiality. The Executive understands and agrees that
the Executive's employment creates a relationship of confidence and
trust between the Executive and the Employer with respect to all
Confidential Information. At all times, both during the Executive's
employment with the Employer and after its termination, the Executive
will keep in confidence and trust all such Confidential Information,
and will not use or disclose any such Confidential Information without
the written consent of the Employer, except as may be necessary in the
ordinary course of performing the Executive's duties to the Employer.
(c) Documents, Records, etc. All documents, records, data,
apparatus, equipment and other physical property, whether or not
pertaining to Confidential Information, which are furnished to the
Executive by the Employer or are produced by the Executive in
connection with the Executive's employment will be and remain the sole
property of the Employer. The Executive will return to the Employer all
such materials and property as and when requested by the Employer. In
any event, the Executive will return all such materials and property
immediately upon termination of the Executive's employment for any
reason. The Executive will not retain with the Executive any such
material or property or any copies thereof after such termination.
(d) Noncompetition and Nonsolicitation. During the Term and
for one (1) year thereafter (or during the Termination Benefits Period,
if longer), the Executive (i) will not, directly or indirectly, whether
as owner, partner, shareholder, consultant, agent, employee,
co-venturer or otherwise, engage, participate, assist or invest in any
Competing Business (as hereinafter defined); (ii) will refrain from
directly or indirectly employing, attempting to employ, recruiting or
otherwise soliciting, inducing or influencing any person to leave
employment with the Employer (other than terminations of employment of
subordinate employees undertaken in the course of the Executive's
employment with the Employer); and (iii) will refrain from soliciting
or encouraging any customer or supplier to terminate or otherwise
modify adversely its business relationship with the Employer; provided,
however, that the foregoing one-year restriction shall not apply in the
event the Executive's employment under this Agreement is terminated
pursuant to Section 6(c) hereof. The Executive understands that the
restrictions set forth in this Section 7(d) are intended to protect the
Employer's interest in its Confidential Information and established
employee, customer and supplier relationships and goodwill, and agrees
that such restrictions are reasonable and appropriate for this purpose.
For purposes of this Agreement, the term "Competing Business" shall
mean a business conducted anywhere in the State of New Hampshire which
is competitive with any business which the Employer or any of its
affiliates conducts or proposes to conduct at any time during the
employment of the Executive. Notwithstanding the foregoing, the
Executive may own up to one percent (1%) of the outstanding stock of a
publicly held corporation which constitutes or is affiliated with a
Competing Business.
(e) Third-Party Agreements and Rights. The Executive hereby
confirms that the Executive is not bound by the terms of any agreement
with any previous employer or other party which restricts in any way
the Executive's use or disclosure of information or the Executive's
engagement in any business. The Executive represents to the Employer
that the Executive's execution of this Agreement, the Executive's
employment with the Employer and the performance of the Executive's
proposed duties for the Employer will not violate any obligations the
Executive may have to any such previous employer or other party. In the
Executive's work for the Employer, the Executive will not disclose or
make use of any information in violation of any agreements with or
rights of any such previous employer or other party, and the Executive
will not bring to the premises of the Employer any copies or other
tangible embodiments of non-public information belonging to or obtained
from any such previous employment or other party.
(f) Litigation and Regulatory Cooperation. During and after
the Executive's employment, the Executive shall cooperate fully with
the Employer in the defense or prosecution of any claims or actions now
in existence or which may be brought in the future against or on behalf
of the Employer which relate to events or occurrences that transpired
while the Executive was employed by the Employer. The Executive's full
cooperation in connection with such claims or actions shall include,
but not be limited to, being available to meet with counsel to prepare
for discovery or trial and to act as a witness on behalf of the
Employer at mutually convenient times. During and after the Executive's
employment, the Executive also shall cooperate fully with the Employer
in connection with any investigation or review of any federal, state or
local regulatory authority as any such investigation or review relates
to events or occurrences that transpired while the Executive was
employed by the Employer. The Employer shall reimburse the Executive
for any reasonable out-of-pocket expenses incurred in connection with
the Executive's performance of obligations pursuant to this Section
7(f).
(g) Injunction. The Executive agrees that it would be
difficult to measure any damages caused to the Employer which might
result from any breach by the Executive of the promises set forth in
this Section 7, and that in any event money damages would be an
inadequate remedy for any such breach. Accordingly, subject to Section
8 of this Agreement, the Executive agrees that if the Executive
breaches, or proposes to breach, any portion of this Agreement, the
Employer shall be entitled, in addition to all other remedies that it
may have, to an injunction or other appropriate equitable relief to
restrain any such breach without showing or proving any actual damage
to the Employer.
8. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof or otherwise arising out of the
Executive's employment or the termination of that employment (including, without
limitation, any claims of unlawful employment discrimination whether based on
age or otherwise) shall, to the fullest extent permitted by law, be settled by
arbitration in any forum and form agreed upon by the parties or, in the absence
of such an agreement, under the auspices of the American Arbitration Association
("AAA") in Boston, Massachusetts in accordance with the Employment Dispute
Resolution Rules of the AAA, including, but not limited to, the rules and
procedures applicable to the selection of arbitrators, except that the
arbitrator shall apply the law as established by decisions of the U.S. Supreme
Court, the Court of Appeals for the First Circuit and the U.S. District Court
for the District of New Hampshire in deciding the merits of claims and defenses
under federal law or any state or federal anti-discrimination law, and any
awards to the Executive for violation of any anti-discrimination law shall not
exceed the maximum award to which the Executive could be entitled under the
applicable (or most analogous) federal anti-discrimination or civil rights laws.
In the event that any person or entity other than the Executive or the Employer
may be a party with regard to any such controversy or claim, such controversy or
claim shall be submitted to arbitration subject to such other person or entity's
agreement. Judgment upon the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. This Section 8 shall be specifically
enforceable. Notwithstanding the foregoing, this Section 8 shall not preclude
either party from pursuing a court action for the sole purpose of obtaining a
temporary restraining order or a preliminary injunction in circumstances in
which such relief is appropriate; provided that any other relief shall be
pursued through an arbitration proceeding pursuant to this Section 8.
9. Consent to Jurisdiction. To the extent that any court action is
permitted consistent with or to enforce Section 8 of this Agreement, the parties
hereby consent to the jurisdiction of the Superior Court of the State of New
Hampshire and the United States District Court for the District of New
Hampshire. Accordingly, with respect to any such court action, the Executive (a)
submits to the personal jurisdiction of such courts; (b) consents to service of
process; and (c) waives any other requirement (whether imposed by statute, rule
of court, or otherwise) with respect to personal jurisdiction or service of
process.
10. Integration. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements between the parties with respect to any related subject matter.
11. Assignment; Successors and Assigns, etc. Neither the Employer nor
the Executive may make any assignment of this Agreement or any interest herein,
by operation of law or otherwise, without the prior written consent of the other
party; provided that the Employer may assign its rights under this Agreement
without the consent of the Executive in the event that the Employer shall effect
a reorganization, consolidate with or merge into any other corporation,
partnership, organization or other entity, or transfer all or substantially all
of its properties or assets to any other corporation, partnership, organization
or other entity. This Agreement shall inure to the benefit of and be binding
upon the Employer and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns.
12. Enforceability. If any portion or provision of this Agreement
(including, without limitation, any portion or provision of any section of this
Agreement) shall to any extent be declared illegal or unenforceable by a court
of competent jurisdiction, then the remainder of this Agreement, or the
application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby,
and each portion and provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
13. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
14. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by a nationally recognized overnight courier service or by
registered or certified mail, postage prepaid, return receipt requested, to the
Executive at the last address the Executive has filed in writing with the
Employer or, in the case of the Employer, at Northway's main offices, attention
of the Chief Executive Officer of Northway, and shall be effective on the date
of delivery in person or by courier or three (3) days after the date mailed.
15. Amendment. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by a duly authorized
representative of the Employer.
16. Governing Law. This is a New Hampshire contract and shall be
construed under and be governed in all respects by the laws of the State of New
Hampshire, without giving effect to the conflict of laws principles of such
State.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute one and the same
document.
(The rest of this page is left intentionally blank)
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Employer, by its duly authorized officer, and by the
Executive, as of the Effective Date.
NORTHWAY FINANCIAL, INC.
Attest:
By: /s/ David J. O'Connor By: /s/ William J. Woodward
------------------------------- -----------------------------
Name: David J. O'Connor Name: William J. Woodward
Title: Executive Vice President Title: President and Chief
and Chief Financial Officer Executive Officer
PEMIGEWASSET NATIONAL BANK
Attest:
By: /s/ Keith L. Philbrick By: /s/ Fletcher W. Adams
------------------------------- -----------------------------
Name: Keith L. Philbrick Name: Fletcher W. Adams
Title: Chief Financial Officer Title: President and Chief
Executive Officer
EMPLOYEE
/s/ Fletcher W. Adams
---------------------------
Fletcher W. Adams
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
Name Jurisdiction of Organization
- ---- ----------------------------
The Berlin City Bank New Hampshire
Pemigewasset National Bank United States
<PAGE>
EXHIBIT 23.1
SHATSWELL, MacLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 PINE STREET
WEST PEABODY, MASSACHUSETTS 01960-3635
TELEPHONE (978) 535-0206
FACSIMILE (978) 535-9908
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report on Form
10-K of Northway Financial, Inc. of our report dated January 16, 1998.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacCLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND FROM THE MANAGEMENT DISCUSSION AND ANALYSIS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
MANAGEMENT DISCUSSION.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,086
<INT-BEARING-DEPOSITS> 85
<FED-FUNDS-SOLD> 19,225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,103
<INVESTMENTS-CARRYING> 11,312
<INVESTMENTS-MARKET> 11,297
<LOANS> 267,283
<ALLOWANCE> 4,156
<TOTAL-ASSETS> 377,866
<DEPOSITS> 322,063
<SHORT-TERM> 6,146
<LIABILITIES-OTHER> 2,809
<LONG-TERM> 9,322
0
0
<COMMON> 1,732
<OTHER-SE> 25,794
<TOTAL-LIABILITIES-AND-EQUITY> 377,866
<INTEREST-LOAN> 23,210
<INTEREST-INVEST> 5,288
<INTEREST-OTHER> 536
<INTEREST-TOTAL> 29,034
<INTEREST-DEPOSIT> 10,861
<INTEREST-EXPENSE> 12,007
<INTEREST-INCOME-NET> 17,027
<LOAN-LOSSES> 535
<SECURITIES-GAINS> 313
<EXPENSE-OTHER> 11,859
<INCOME-PRETAX> 6,313
<INCOME-PRE-EXTRAORDINARY> 6,313
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,039
<EPS-PRIMARY> 2.33
<EPS-DILUTED> 2.33
<YIELD-ACTUAL> 8.33
<LOANS-NON> 1,828
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,184
<LOANS-PROBLEM> 813
<ALLOWANCE-OPEN> 3,941
<CHARGE-OFFS> 612
<RECOVERIES> 292
<ALLOWANCE-CLOSE> 4,156
<ALLOWANCE-DOMESTIC> 3,512
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 644
</TABLE>
