<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________________to _______________________
Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
Address of principal executive offices (Zip Code)
(603) 752-1171
----------------------------------------------------
(Registrant's telephone number, including area code)
No Change
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. At November 2, 1998, there were
1,731,969 shares of common stock outstanding, par value $1.00 per share.
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<PAGE>
INDEX
NORTHWAY FINANCIAL, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1998 and December
31, 1997 .......................................................... 3
Consolidated Statements of Income for the Three Months and Nine
Months Ended September 30, 1998 and 1997 .......................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 ................................. 5
Notes to Consolidated Financial Statements ........................ 6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk ........ 14
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings ................................................. 15
Item 2.
Changes in Securities ............................................. 15
Item 3.
Default Upon Senior Securities .................................... 15
Item 4.
Submission of Matters to a Vote of Security Holders ............... 15
Item 5.
Other Information ................................................. 15
Item 6.
Exhibits and Reports on Form 8-K .................................. 15
Signatures........................................................... 16
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
NORTHWAY FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEP. 30, DEC. 31,
(Dollars in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Cash and due from banks ...................................... $ 10,800 $ 12,086
Federal funds sold ........................................... 17,650 19,225
Interest bearing deposits .................................... 91 85
Investment securities available-for-sale ..................... 51,096 55,103
Investment securities held-to-maturity ....................... 13,031 11,312
Federal Reserve Bank stock, at cost .......................... 80 80
Federal Home Loan Bank stock, at cost ........................ 1,958 1,958
Loans held for sale .......................................... 622 292
Loans ........................................................ 279,833 267,283
Unearned income ............................................ (391) (526)
Allowance for possible loan losses ......................... (4,386) (4,156)
-------- --------
Loans, net ................................................. 275,056 262,601
-------- --------
Real estate acquired by foreclosure
or substantively repossessed ............................... 145 222
Accrued interest receivable .................................. 1,910 1,971
Deferred income tax asset, net ............................... 1,375 1,500
Premises and equipment, net .................................. 9,944 9,187
Deposit purchase premium, net ................................ 935 1,161
Other assets ................................................. 5,265 1,083
-------- --------
Total assets ............................................. $389,958 $377,866
======== ========
Liabilities and stockholders' equity
Liabilities:
Interest bearing deposits .................................. $288,381 $282,353
Non-interest bearing deposits .............................. 41,638 39,710
Repurchase agreements ...................................... 6,825 6,146
Federal Home Loan Bank advances ............................ 6,111 9,322
Other liabilities .......................................... 6,476 2,809
-------- --------
Total liabilities ........................................ 349,431 340,340
-------- --------
Stockholders' equity:
Preferred stock, $1 par value;
1,000,000 shares authorized: none issued ................. -- --
Common stock, $1 par value; 9,000,000 shares
authorized: 1,731,969 shares issued and outstanding ...... 1,732 1,732
Additional paid in capital ................................. 2,101 2,101
Retained earnings .......................................... 36,568 33,744
Unrealized gain (loss) on investment securities available-
for-sale, net of tax ...................................... 126 (51)
-------- --------
Total stockholders' equity ............................... 40,527 37,526
-------- --------
Total liabilities and stockholders' equity ............... $389,958 $377,866
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NORTHWAY FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans ....................................................... $ 6,208 $ 6,056 $ 18,107 $ 17,217
Investment securities available-for-sale .................... 836 928 2,547 3,387
Investment securities held-to-maturity ...................... 169 245 530 695
Federal funds sold .......................................... 163 196 547 328
Interest bearing deposits ................................... 2 2 4 6
---------- ---------- ---------- ----------
Total interest and dividend income ....................... 7,378 7,427 21,735 21,633
---------- ---------- ---------- ----------
Interest expense:
Deposits ................................................... 2,717 2,745 8,077 8,119
Borrowed funds ............................................. 213 309 646 889
---------- ---------- ---------- ----------
Total interest expense ................................... 2,930 3,054 8,723 9,008
---------- ---------- ---------- ----------
Net interest and dividend income ......................... 4,448 4,373 13,012 12,625
Provision for possible loan losses ............................ 135 140 405 395
---------- ---------- ---------- ----------
Net interest and dividend income after
provision for possible loan losses ..................... 4,313 4,233 12,607 12,230
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts and fees ............... 206 201 623 623
Securities gains, net ...................................... 16 20 408 350
Other ...................................................... 175 128 463 405
---------- ---------- ---------- ----------
Total noninterest income ................................. 397 349 1,494 1,378
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits ............................. 1,650 1,407 4,783 4,162
Office occupancy and equipment ............................. 492 428 1,414 1,290
Amortization of deposit purchase premium ................... 75 75 226 226
Merger related expenses .................................... -- 308 -- 822
Other ...................................................... 930 753 2,686 2,348
---------- ---------- ---------- ----------
Total noninterest expense ................................ 3,147 2,971 9,109 8,848
---------- ---------- ---------- ----------
Income before income tax expense ......................... 1,563 1,611 4,992 4,760
Income tax expense ............................................ 516 578 1,683 1,589
---------- ---------- ---------- ----------
Net income ............................................... $ 1,047 $ 1,033 $ 3,309 $ 3,171
========== ========== ========== ==========
Comprehensive net income .................................. $ 1,182 $ 1,474 $ 3,486 $ 3,688
========== ========== ========== ==========
Per share data:
Earnings per common share .................................. $ 0.60 $ 0.60 $ 1.91 $ 1.83
Weighted average number of common shares ................... 1,731,969 1,731,969 1,731,969 1,731,969
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
NORTHWAY FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Nine Months Ended
September 30,
1998 1997
--------------------------
(Dollars in Thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 3,309 $ 3,171
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for:
Possible loan losses .............................................. 405 395
Depreciation and amortization ..................................... 828 743
Deferred income taxes ............................................. 5 83
Write down of real estate acquired by foreclosure ................. 5 5
Gains on sales of investment securities available-for-sale, net .... (408) (350)
Loss on sale of premises and equipment, net ........................ -- 50
Accretion of (discount) and amortization of premium on investment
and mortgage-backed securities, net ............................... 97 187
Decrease in unearned income, net .................................... (135) (150)
Gains on sales of real estate acquired by foreclosure or substantively
repossessed ........................................................ (83) (36)
Decrease in accrued income receivable ............................... 61 473
Increase in other assets ............................................ (4,182) (2,152)
Increase in other liabilities ....................................... 3,667 1,899
-------- --------
Net cash provided by operating activities ......................... 3,569 4,318
-------- --------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits .................... (6) 196
Proceeds from sales of investment securities available-for-sale ......... 3,059 19,189
Proceeds from maturities of investment securities held-to-maturity ...... 4,686 1,793
Proceeds from maturities of investment securities available-for-sale .... 18,000 15,323
Purchase of investment securities available-for-sale .................... (19,974) (9,898)
Purchase of investment securities held-to-maturity ...................... (6,827) (6,456)
Principal payments received on mortgage-backed securities ............... 3,951 2,596
Net increase in loans ................................................... (12,987) (24,548)
Net increase in loans held for resale ................................... (330) (236)
Proceeds from sales of real estate acquired by
foreclosure or substantively repossessed .............................. 418 214
Proceeds from sale of premises and equipment ............................ -- 290
Additions to premises and equipment ..................................... (1,359) (925)
-------- --------
Net cash used in financing activities ............................. (11,369) (2,462)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits ..................................... 7,956 (3,706)
Advances from Federal Home Loan Bank .................................... 3,041 31,083
Repayment of Federal Home Loan Bank advances ............................ (6,252) (27,396)
Increase in federal funds purchased ..................................... -- 50
Net increase in repurchase agreements ................................... 679 2,726
Cash dividends .......................................................... (485) (405)
-------- --------
Net cash provided by financing activities ......................... 4,939 2,352
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... (2,861) 4,208
Cash and cash equivalents at beginning of period .................. 31,311 17,282
-------- --------
Cash and cash equivalents at end of period ........................ $ 28,450 $ 21,490
======== ========
Cash paid during the year for:
Interest ................................................................ $ 9,153 $ 9,058
======== ========
Income taxes ............................................................ $ 1,628 $ 1,078
======== ========
Supplemental disclosures of non-cash activities:
Loans transferred to real estate acquired by foreclosure or substantively
repossessed ........................................................... $ 336 $ 510
======== ========
Loans charged off, net of recoveries .................................... $ 175 $ 322
======== ========
Financed sales of real estate acquired by foreclosure ................... $ 267 $ 193
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NORTHWAY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
1. Basis of Presentation.
The unaudited consolidated financial statements of Northway Financial,
Inc. and its two wholly owned bank subsidiaries (collectively "the Corporation")
included herein have been prepared by the Corporation in accordance with the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with such rules and regulations. The
Corporation, however, believes that the disclosures are adequate to make the
information presented not misleading. All prior period amounts in the Form 10Q
have been restated to reflect the reorganization of the Corporation on September
30, 1997 into a multi-bank holding company. Refer to Note 4 for further
discussion of the holding company reorganization and merger transactions. The
amounts shown reflect, in the opinion of management, all adjustments necessary
for a fair presentation of the financial statements for the periods reported.
The results of operations for the three and nine month periods ended
September 30, 1998 and 1997 are not necessarily indicative of the results of
operations to be expected for the full year or any other interim periods.
2. Allowance for Possible Loan Losses
Analysis of the allowance for possible loan losses for the three month and
nine month periods ended September 30, 1998 and 1997 is as follows:
Nine Months Three Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
(Dollars in thousands)
Balance beginning of period $4,156 $3,941 $4,344 $3,920
------ ------ ------ ------
Chargeoffs 381 505 131 149
Recoveries 206 183 38 103
------ ------ ------ ------
Net chargeoffs 175 322 93 46
------ ------ ------ ------
Provision for possible loan losses 405 395 135 140
------ ------ ------ ------
Balance at end of period $4,386 $4,014 $4,386 $4,014
====== ====== ====== ======
<PAGE>
NORTHWAY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
3. Commitments and Contingencies
At September 30, 1998, the Corporation had the following off-balance sheet
financial instruments with contract amounts which represent credit risk:
Contract or Notional Amount
(Dollars in thousands)
Commitments to extend credit $35,010
Standby letters of credit and
financial guarantees written $ 709
Commercial letters of credit $ -0-
Foreign exchange contracts $ -0-
4. Formation of Northway Financial, Inc.
Northway Financial, Inc. ("Northway") is a New Hampshire corporation
organized on March 7, 1997 for the purpose of becoming the holding company for
The Berlin City Bank ("BCB") pursuant to a reorganization transaction (the "BCB
Reorganization") by and among Northway, BCB and a subsidiary of BCB, and
thereafter, effecting the merger (the "Merger") between Northway and Pemi
Bancorp, Inc. ("PEMI"), pursuant to which Northway also became the holding
company for PEMI's wholly owned subsidiary, Pemigewasset National Bank ("PNB").
The BCB Reorganization and the Merger were consummated on September 30, 1997.
The Merger was treated as a "pooling of interests" for accounting purposes.
BCB is a trust company chartered under the laws of the State of New
Hampshire. BCB has eight banking offices in New Hampshire through which it
provides a range of bank-related services.
PNB is a national banking association organized under the laws of the
United States. PNB has six banking offices in New Hampshire through which it
provides a range of bank-related services.
<PAGE>
NORTHWAY FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
5. Supplemental Disclosure of Separate Results
The Corporation's consolidated financial statements for periods prior to
the Merger reflect the combined results of The Berlin City Bank and Pemi
Bancorp, Inc. Supplemental disclosure of the separate results of BCB and PEMI
for periods prior to the Merger are as follows:
Berlin City Pemi Northway
Bank Bancorp Financial
----------- ------- ---------
(In thousands except per share data)
July 1, 1997 to September 30, 1997
Net interest income $ 2,770 $ 1,603 $ 4,373
Net income 756 277 1,033
Net income per share $ 0.44 $ 0.16 $ 0.60
January 1, 1997 to September 30, 1997
Net interest income $ 8,010 $ 4,615 $12,625
Net income 2,388 783 3,171
Net income per share $ 1.38 $ 0.45 $ 1.83
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Introduction
The following discussion and analysis and related consolidated financial
statements include Northway Financial, Inc. and its wholly-owned subsidiaries,
The Berlin City Bank and Pemigewasset National Bank (collectively the
"Corporation").
Certain statements in this Form 10-Q (including, without limitation, the
discussion concerning Year 2000 compliance), in the Corporation's press
releases, and in oral statements made by or with the approval of an authorized
executive officer of the Corporation, constitute "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995
(the "Act") and within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
promulgated thereunder. The words "believe," "expect," "anticipate," "intend,"
"estimate," "project" and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Corporation to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. The
Corporation undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise.
The following important factors, among others, may have affected the
Corporation and its subsidiaries in the past and could in the future affect the
actual results of operations of the Corporation, and could cause the actual
results of operations for subsequent periods to differ materially from those set
forth in, contemplated by, or underlying any forward-looking statement made
herein: (i) the effect of changes in laws and regulations, including federal and
state banking laws and regulations, with which the Corporation must comply,
including the effect of the cost of such compliance; (ii) the timely resolution
of the Year 2000 issue by the Corporation and its customers and suppliers, (iii)
the effect of changes in accounting policies and practices, as may be adopted by
the regulatory agencies as well as by the Financial Accounting Standards Board,
or of changes in the Corporation's organization, compensation and benefit plans;
(iv) the effect on the competitive position of the Corporation's subsidiaries
within their respective market areas resulting from increased consolidation
within the banking industry and increased competition from larger regional and
out-of-state banking organizations, as well as from nonbank providers of various
financial services; (v) the effect of unforeseen changes in interest, loan
default and charge-off rates; (vi) changes in deposit levels necessitating
increased borrowing to fund loans and investments; (vii) the effect of changes
in the business cycle and downturns in the New Hampshire, New England, and
national economies; (viii) the factors detailed in the section titled "Risk
Factors" in the Corporation's Proxy Statement/Prospectus, dated Aug. 12, 1997;
and (ix) changes in the assumptions used in making such forward-looking
statements. Though the Corporation has attempted to list comprehensively these
important factors, the Corporation wishes to caution investors that other
factors may in the future prove to be important in affecting the Corporation's
results of operations. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
forward looking statements.
Financial Condition
The Corporation's total assets at September 30, 1998 were $390 million
compared to $378 million at December 31, 1997, a $12 million increase. Net
loans, including loans held for sale, increased $12.8 million and investment
securities decreased $2.3 million. Cash and cash equivalents decreased $2.9
million to $28.5 million. Total deposits increased $8.0 million. Federal Home
Loan Bank advances decreased $3.2 million, and repurchase agreements increased
$0.7 million. Other assets and other liabilities increased $4.2 million and $3.7
million respectively, primarily due to pending securities purchases at quarter
end.
The Corporation maintains an allowance for possible loan losses to absorb
future chargeoffs of loans in the existing portfolio. The allowance is increased
when a loan loss provision is recorded in the income statement. When a loan, or
portion thereof, is considered uncollectible, it is charged against this
allowance. Recoveries of amounts previously charged off are added to the
allowance when collected. At September 30, 1998 the allowance for possible loan
losses was $4.4 million, or 1.57% of total loans, as compared to $4.2 million,
or 1.55% of total loans at December 31, 1997. The adequacy of the allowance for
possible loan losses was based on an evaluation by each bank's management and
Board of Directors of current and anticipated economic conditions, changes in
the diversification, size and risk within the loan portfolio, and other factors.
Nonperforming loans totaled $2.7 million as of September 30, 1998,
compared to $1.8 million at December 31, 1997. The ratio of nonperforming loans
to total loans was 0.96% as of September 30, 1998 compared to 0.70% at December
31, 1997 and the ratio of nonperforming assets to total assets was 0.69% as of
September 30, 1998 compared to 0.53% at December 31, 1997.
Results of Operations
The Corporation reported net income of $1.0 million, or $0.60 per common
share, for the three months ended September 30, 1998, the same as the three
months ended September 30, 1997. Net interest income increased $75,000 to $4.4
million which was the result of a reduction in interest expense associated
primarily with a decrease in borrowed funds.
Noninterest income increased $48,000 primarily as a result of an increase
in gains on loan sales. Noninterest expense was $3.1 million for the third
quarter 1998, an increase of $176,000 over the same period last year. The
increase was principally attributable to increases in salaries and benefits
expense, professional fees, and equipment expense. These increases were
partially offset by the fact that there were no merger related expenses in 1998
compared to expenses of $308,000 in the third quarter of 1997. The provision for
possible loan losses decreased to $135,000 for the three months ended September
30, 1998 as compared to $140,000 in 1997.
The Corporation generated net income of $3.3 million, or $1.91 per common
share, for the nine month period ended September 30, 1998 compared to net income
of $3.2 million, or $1.83 per common share, for the same period in 1997. Net
interest income for the nine months ended September 30, 1998 was $13.0 million,
an increase of $387,000 over the same period in 1997. This improvement is
primarily due to the shift of assets from investment securities into loans as
well as a decrease in the Corporation's cost of funds and a lower level of FHLB
advances.
Noninterest income for the nine months ended September 30, 1998 increased
$116,000 to $1.5 million primarily as a result of increased securities gains and
improved gains on sales of loans. Total noninterest expense was $9.1 million for
the nine months ended September 30, 1998 compared to $8.8 million for the same
period last year. Increases in salaries and benefits expense, professional fees,
and equipment expense were partially offset by a decrease in merger related
expenses of $822,000. These increased expenses are a direct result of new branch
openings, increases in lending staff, and the costs associated with converting
to a new computer system. The provision for possible loan losses increased to
$405,000 for the nine months ended September 30, 1998 from the $395,000 reported
for the comparable period in 1997.
Liquidity
Liquidity risk management refers to the Corporation's and its
subsidiaries' ability to raise funds in order to meet their existing and
anticipated financial obligations. These obligations are the withdrawal of
deposits on demand or at their contractual maturity, the repayment of borrowings
as they mature, the ability to fund new and existing loan commitments and the
ability to take advantage of new business opportunities. Liquidity may be
provided through amortization, maturity or sale of assets such as loans and
securities available-for-sale, liability sources such as increased deposits,
utilization of the FHLB credit facility, purchased or other borrowed funds, and
access to the capital markets. Liquidity targets are subject to change based on
economic and market conditions and are controlled and monitored by the
Corporation's Asset/Liability Committee.
At the subsidiary bank level, liquidity is managed by measuring the net
amount of marketable assets after deducting pledged assets, plus lines of
credit, primarily with the FHLB, which are available to fund liquidity
requirements. Management then measures the adequacy of that aggregate amount
relative to the aggregate amount of liabilities deemed to be sensitive or
volatile liabilities. These include core deposits in excess of $100,000, term
deposits with short maturities, and credit commitments outstanding.
Additionally, the parent holding company requires cash for various
operating needs including dividends to shareholders, capital injections to the
subsidiary banks, and the payment of general corporate expenses. The primary
source of liquidity for the parent holding company is dividends from the
subsidiary banks.
Capital
The Corporation's Tier 1 and Total Risk Based Capital ratios were 16.62%
and 17.87%, respectively, at September 30, 1998. The Corporation's leverage
ratio at September 30, 1998 was 10.06%.
As of September 30, 1998, the capital ratios of the Corporation and all
its subsidiary banks exceeded the minimum capital ratio requirements of the
"well capitalized" category under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA).
Impact of the Year 2000
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
The Corporation has developed a Year 2000 strategic plan and a Year 2000
test plan. The Corporation has also appointed a dedicated Year 2000 project
manager. Each of the Corporation's subsidiary banks have Year 2000 action teams.
These teams and the Year 2000 project manager work together closely.
The first phase of this project was to identify all information and non
information technology systems, both in house and those provided by third party
vendors. All systems have been identified.
The second phase was to complete a risk analysis assessment of each
information and non information technology system. This second phase is
complete.
The third phase is to renovate the information and non information
technology systems based upon conclusions reached in the risk analysis
assessment phase. Renovation of the Corporations' core operating hardware was
completed on September 19, 1998. Renovation of the Corporations' core operating
software was completed on October 10, 1998. Renovations to the remaining
operating systems will be completed by March 31, 1999.
The fourth phase is to validate the renovations to the systems. The
testing and validating of the core operating systems are ongoing and expected to
be completed by December 31, 1998. The Corporation has hired an outside
independent third party to review the Corporation's validation and testing
procedures. Testing and validation of the remaining systems is currently 20%
complete, and the estimated completion date is March 31, 1999.
The fifth phase is to implement the Year 2000 compliant systems. It is
estimated that all systems will be operating on a compliant basis by June 30,
1999, although there can be no assurances in this regard.
The Corporation has identified both customers and vendors with whom it,
BCB or PEMI have a material relationship. Two vendors are considered to have
material third party relationships with the Corporation. These two vendors
provide the hardware and software, respectfully, used to run the Corporations'
core operating systems. The risk that these third party relationships pose to
the Corporation is considered low, primarily due to the fact that renovation,
testing and validation of the core operating system is expected to be
substantially complete by December 31, 1998.
For those customers where a borrowing relationship exists, BCB and PEMI
have each completed a customer risk assessment to determine the status of their
Year 2000 efforts. BCB and PEMI have each allocated a portion of their reserve
for loan and lease losses for those relationships where a determination has been
made that the risk of the customer not being compliant with Year 2000 is high or
medium and where the ability of such customers to service their debt is unknown
at this time.
The Corporation has developed a Year 2000 budget which includes
administration, cost of new technology and the cost of testing. This budget
indicates that the costs associated with Year 2000 compliance have not been and
do not appear likely to be material to the Corporation's consolidated financial
position, results of operations or cash flows.
The Corporation does not currently have a contingency plan in place should
the Corporation's worst case scenario, loss of electric power, occur. However,
the Corporation has commenced developing a contingency plan. A contingency
planning team has been appointed and is led by the Year 2000 project manager.
The Corporation has hired an outside independent third party to assist the
Corporation in preparing the contingency plan. There are four phases to the
plan, the first two, organization planning guidelines and business impact
analysis, are currently being developed. Completion of these two phases is
expected to be completed by November 16, 1998. After these are complete, the
third and fourth phases, the business resumption contingency plan and validation
of the plan, will commence. The contingency plan will be substantially complete
by December 31, 1998.
Should the Corporation's worst case scenario, the loss of electric power,
occur the Corporation will have in place an electric generator at its operations
center. This will allow the Corporation to continue to run its core operating
system. Transactions that would be performed at a number of the Corporation's
locations would then have to be transported to the operations center for input.
This would continue until such time as normal electric power is restored.
The Year 2000 project manager provides progress reports to the
Corporation's Executive Committee on a weekly basis. Additional progress reports
are presented to the Boards of Directors of the Corporation, BCB and PEMI on a
monthly basis.
BCB and PEMI are subject to regulation by the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency, respectively. In
the event the Corporation's efforts as described above fail to adequately
resolve any such Year 2000 issues affecting BCB or PEMI, BCB or PEMI could be
subject to formal supervisory or enforcement actions by their respective
regulators.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding quantitative and qualitative disclosures about
market risk, see the Corporation's discussion under Item 7A of its Annual Report
on Form 10-K for the fiscal year ended December 31, 1997. Between December 31,
1997 and September 30, 1998, there were no material changes in the Corporation's
market risk.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number
(27) Financial Data Schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto
duly authorized.
NORTHWAY FINANCIAL, INC.
November 13, 1998 BY: \S\ William J. Woodward
--------------------------------
William J. Woodward
President & CEO
November 13, 1998 BY: \S\ Donald R. Hatt
-------------------------------------
Donald R. Hatt
Senior Executive Vice President & COO
(Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
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<SHORT-TERM> 6,825
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