<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, 1998
[ ] 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
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(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. [ ]
The number of shares of common stock held by nonaffiliates of the
registrant as of March 11, 1999 was 1,477,751 for an aggregate market value of
$44,332,530.
At March 11, 1999, there were 1,710,469 shares of common stock
outstanding, par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its 1999 Annual Meeting of
Stockholders 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
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ITEM 1 Business...........................................................1
ITEM 2 Properties.........................................................7
ITEM 3 Legal Proceedings..................................................7
ITEM 4 Submission of Matters to a Vote of Security Holders................7
PART II
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ITEM 5 Market for the Registrant's Common Stock and Related Security
Holder Matters.....................................................7
ITEM 6 Selected Financial Data............................................8
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations. .......................................10
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk........10
ITEM 8 Financial Statements and Supplementary Material...................10
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................10
PART III
--------
ITEM 10 Directors and Executives Officers of the Registrant...............10
ITEM 11 Executive Compensation............................................10
ITEM 12 Security Ownership of Certain Beneficial Owners and Management....11
ITEM 13 Certain Relationships and Related Transactions....................11
PART IV
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ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...12
Signatures....................................................13
<PAGE>
PART 1
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ITEM 1. BUSINESS
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, (collectively the
"Banks"), became wholly owned subsidiaries of Northway. Unless the context
otherwise requires, references herein to "Northway" include Northway Financial,
Inc. and its consolidated subsidiaries.
Northway and its bank subsidiaries derive substantially all of their
revenue and income from the furnishing of bank and bank-related services,
principally to individuals and small and medium sized companies in New
Hampshire. The Banks operate as typical community banking institutions and do
not engage in any specialized finance or capital market activities. Northway
functions primarily as the holder of stock of its subsidiaries and assists the
management of its subsidiaries as appropriate.
Northway is subject to regulation by the New Hampshire Bank Commissioner,
the Federal Deposit Insurance Corporation, the Comptroller of the Currency of
the United States, and the Board of Governors of the Federal Reserve System. See
"Supervision and Regulation."
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 and construction loans, real estate mortgages, consumer loans,
including personal secured and unsecured loans, and lines of credit. During
1998, Northway, through the subsidiary banks, established an indirect lending
business unit in Concord, New Hampshire. The unit is expected to substantially
increase the volume of secured consumer installment loans originated by the
Banks. 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 14 automatic teller machines to allow
customers limited banking services on a 24 hour basis.
Northway is a legal entity separate and distinct from its subsidiaries.
The right of Northway to participate in any distribution of assets or earnings
of any subsidiary is subject to the prior claims of creditors of the subsidiary,
except to the extent that claims, if any, of Northway itself as a creditor may
be recognized. See "Supervision and Regulation".
The following information concerning Northway's investment activities,
lending activities, asset quality and allowance for loan losses should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," appearing under Item 7 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, 1998, 1997
and 1996 (dollars in thousands):
1998 1997 1996
------- -------- --------
Available-for-sale:
US Treasury and other
US government agencies $17,391 $ 11,929 $ 20,479
Mortgage-backed securities(1) 24,512 31,235 48,348
Corporate notes -- 5,000 13,068
Foreign notes -- -- 1,000
Common and preferred stocks 2,741 2,796 2,284
State and political subdivisions 3,885 4,143 3,259
Other -- -- 190
------- -------- --------
48,529 55,103 88,628
------- -------- --------
Held-to-maturity:
US Treasury and other
US government agencies $ -- $ -- $ 501
Mortgage-backed securities(1) 5,501 8,400 9,943
State and political subdivisions 1,008 2,912 1,755
------- -------- --------
6,509 11,312 12,199
------- -------- --------
Total Investment Securities $55,038 $ 66,415 $100,827
======= ======== ========
(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
yields, reported on a tax equivalent basis, as of December 31, 1998 (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
------- ------ ------- ------- -------
US Treasury and other
<S> <C> <C> <C> <C> <C>
US government agencies $ 500 $6,002 $10,820 $ -- $17,322
Mortgage-backed
securities (1) 142 1,219 10,382 12,717 24,460
State and political subdivisions -- 662 222 2,792 3,676
------- ------ ------- ------- -------
$ 642 $7,883 $21,424 $15,509 $45,458
======= ====== ======= ======= =======
Market value $ 642 $7,962 $21,451 $15,733 $45,788
======= ====== ======= ======= =======
Weighted average yield 6.46% 6.37% 6.07% 6.44% 6.25%
<CAPTION>
Maturities
------------------------------------------------------
One to Five to Over
Within five ten ten Total
Held-to-maturity: one year years years years Cost
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities(1) $ 22 $ 659 $ 2,629 $ 2,155 $ 5,501
State and political subdivisions 225 783 -- -- 1,008
------- ------ ------- ------- -------
$ 247 $1,478 $ 2,629 $ 2,155 $ 6,509
======= ====== ======= ======= =======
Market value $ 247 $1,503 $ 2,630 $ 2,135 $ 6,515
======= ====== ======= ======= =======
Weighted average yield 7.13% 7.23% 6.15% 6.26% 6.47%
</TABLE>
(1) Includes Collateralized Mortgage Obligations
Lending Activities
The following table sets forth information with respect to the composition of
Northway's loan portfolio, excluding loans held for sale, as of December 31,
1998, 1997, 1996, 1995 and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $ 146,603 $ 152,041 $145,847 $139,941 $143,193
Commercial 77,680 61,873 43,901 37,595 34,120
Construction 4,118 5,664 2,329 363 517
Commercial 25,874 21,460 27,293 24,283 25,277
Installment 25,088 23,476 18,733 14,533 12,084
Other 4,795 2,769 2,999 2,277 4,038
--------- --------- -------- -------- --------
Total Loans 284,158 267,283 241,102 218,992 219,229
Less: Unearned income (332) (526) (719) (1,014) (1,181)
Allowance for loan losses (4,404) (4,156) (3,941) (3,866) (3,682)
--------- --------- -------- -------- --------
Net Loans $279,422 $262,601 $236,442 $214,112 $214,366
======== ======== ======== ======== ========
</TABLE>
The following table presents the maturity distribution of Northway's real estate
construction and commercial loans at December 31, 1998 (dollars in thousands):
Percent of
Amount Total
Within one year $ 2,974 9.92%
One to five years 11,465 38.22
Over five years 15,553 51.86
------- -------
$29,992 100.00%
======= =======
Northway's real estate construction and commercial loans due after one year
at December 31, 1998 were comprised of the following (dollars in thousands):
Amount
Fixed interest rate $10,918
Adjustable interest rate 16,100
-------
$27,018
Asset Quality
At December 31, 1998, 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 1998 was approximately $341,000. The amount of
interest income on these loans included in net income in 1998 was approximately
$293,000.
At December 31, 1998, Northway had classified certain loans totaling
$567,000. Such loans represent a higher degree of risk and could become
non-performing loans in the future.
Analysis of the Allowance for Loan Losses
The following table reflects activity in Northway's allowance for loan losses
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at the beginning of period $4,156 $3,941 $3,866 $3,682 $3,706
Charge-offs:
Real estate 383 452 583 456 563
Commercial 67 105 29 190 307
Installment loans to individuals 74 48 27 29 30
Credit card -- 1 11 21 20
Other -- 6 -- -- --
------ ------ ------ ------ ------
Total 524 612 650 696 920
------ ------ ------ ------ ------
Recoveries:
Real estate 115 212 160 177 56
Commercial 98 55 11 28 136
Installment loans to individuals 17 19 28 11 26
Credit card 2 4 14 12 18
Other -- 2 -- -- --
------ ------ ------ ------ ------
Total 232 292 213 228 236
------ ------ ------ ------ ------
Net charge-offs 292 320 437 468 684
Provision charged to expense 540 535 512 652 660
------ ------ ------ ------ ------
Balance at the end of period $4,404 $4,156 $3,941 $3,866 $3,682
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.10% 0.13% 0.20% 0.32% 0.45%
</TABLE>
<PAGE>
Allocation of the Allowance for Loan Losses
The following table sets forth the breakdown of Northway's allowance for 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,
----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ---------------------- -------------------- -------------------- -------------------
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 $ 651 9.1% $ 613 8.0% $ 582 11.3% $ 924 11.1% $1,344 11.5%
Real estate:
Commercial &
Construction 1,325 28.8 1,251 25.3 1,186 19.2 675 17.2 375 15.6
Residential 1,478 51.6 1,395 56.9 1,323 60.5 1,417 64.1 1,131 65.6
Installment 210 8.8 198 8.8 188 7.8 147 6.6 139 5.5
Other 58 1.7 55 1.0 52 1.2 53 1.0 53 1.8
Unallocated 682 N/A 644 N/A 610 N/A 650 N/A 640 N/A
------ --- ------ --- ------ ---- ------ ---- ------ -----
$4,404 100.0% $4,156 100.0% $3,941 100.0% $3,866 100.0% $3,682 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</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 approve or disapprove
mergers, consolidations, the establishment of branches and similar corporate
actions. The comptroller also has the power to prevent a national bank from
engaging in unsafe or unsound practices or violating applicable laws in
conducting its business.
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 Federal Reserve Board. BCB's operations are subject to various
requirements and restrictions under the laws of the United States and the State
of New Hampshire, including those related to the maintenance of 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.
Both BCB and PNB are subject to the provisions of the "Community Reinvestment
Act" (CRA). Under the terms of the CRA, the appropriate federal bank regulatory
agency is required, in connection with its examination of a subsidiary
institution, to assess such institution's record in meeting the credit needs of
the community served by the institution, including those of low and moderate
income neighborhoods. The regulatory agency's assessment of the institution's
record is made available to the public.
An institution's CRA rating is taken into account by its regulators in
considering various types of applications. In addition, an institution receiving
a rating of Asubstantial noncompliance" is subject to civil money penalties or a
cease and desist order under Section 8 of the Federal Deposit Insurance Act (the
"FDIA"). CRA remains a critical component of the regulatory examination process.
CRA examination results and related concerns have been cited as a reason to
reject and or modify branching and merger applications by various federal and
state banking agencies.
The banking industry in the United States, which includes commercial banks,
savings and loan associations, mutual savings banks, capital stock savings
banks, credit unions, and bank and savings and loan holding companies, is part
of the broader financial services industry which includes insurance companies,
mutual funds, and the brokerage industry among others. In recent years, intense
market demands and economic pressures have eroded once clearly defined industry
classifications and have forced 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 permit adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wider geographic market. Consequently, it is possible for large
organizations to enter many new markets including the markets served by
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.
Government Monetary Policy
Northway's banking subsidiaries are affected by the credit policies of
monetary authorities, including the Federal Reserve Board. An important function
of the Federal Reserve Board is to regulate the national supply of bank credit.
Among the instruments of monetary policy used by the Federal Reserve Board are
open market operations in U. S. Government securities, changes in the discount
and fed funds rates, reserve requirements on member bank deposits, and funds
availability regulations. The monetary policies of the Federal Reserve Board
have in the past had a significant effect on the operations of financial
institutions, including Northway and its subsidiaries, and will continue to do
so in the future. Changing conditions in the national economy and money markets,
as well as the impact of actions by monetary and fiscal authorities, make it
difficult to predict the effect of future changes in interest rates, deposit
levels or loan demand on the business and income of Northway and its
subsidiaries.
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.
BCB and PNB compete in this environment by providing a broad range of
financial services, competitive interest rates and a personal level of service
that, combined, tend to retain the loyalty of its customers in its market areas
against competitors with far larger resources. To a lesser extent, convenience
of branch locations and hours of operations are also considered competitive
advantages of the Banks.
Employees
As of December 31, 1998, Northway and its subsidiaries had approximately 217
full-time and part-time employees. Northway considers its employee relations to
be good.
ITEM 2. PROPERTIES
Northway operates 14 branch offices and a loan origination facility in the
central and northern New Hampshire towns of Berlin, Conway (3), Gorham (2),
Groveton, Littleton, West Plymouth, Plymouth, Campton, Ashland, North Woodstock,
Tilton and Concord. Eleven of these offices, including its main offices in
Berlin, New Hampshire and Plymouth, New Hampshire, are located in properties it
owns. Northway leases three of its branches and the loan origination facility
under five-year leases expiring between December 31, 2000 and April 21, 2003.
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 31,1998.
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
------ ------ -------------------
1998 4th Quarter $24.00 $30.00 $0.14
3rd Quarter $24.75 $35.25 $0.14
2nd Quarter $32.50 $36.00 $0.14
1st Quarter $29.75 $32.75 --
1997 4th Quarter $30.00 $37.50 $0.32
On March 11, 1999, the closing sales price of the common stock on the Nasdaq
National Market was $30.00 per share. As of such date, there were approximately
1,558 holders of record of the Northway common stock.
Northway intends to continue to pay dividends on a quarterly basis 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,
1998. This selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing under Item 7 and Northway's Consolidated
Financial Statements and Notes thereto. As a result of the Merger described
under Item 1, the selected consolidated financial data for 1997, 1996, 1995 and
1994 reflects the combined results of operations and financial position of
Northway Financial, Inc. and Pemi Bancorp, Inc. restated for such periods
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, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $403,972 $377,866 $372,581 $357,917 $349,447
Investment securities available-for-sale 48,529 55,103 88,628 84,799 23,761
Investment securities held-to-maturity 6,509 11,312 12,199 15,377 81,021
Loans, net of unearned income 283,826 266,757 240,383 217,978 218,048
Allowance for possible loan losses 4,404 4,156 3,941 3,866 3,682
Real estate acquired by foreclosure
or substantively repossessed 158 222 202 492 665
Deposit purchase premium 860 1,161 1,462 1,800 2,122
Deposits 350,921 322,063 322,315 310,388 304,983
Securities sold under agreements
to repurchase 6,791 6,146 4,620 6,087 6,882
Stockholders= equity (1) 40,956 37,526 33,663 31,102 26,113
Income Statement Data:
Net interest and dividend income $ 17,535 $ 17,027 $ 15,717 $ 15,493 $ 14,521
Provision for possible loan losses 540 535 512 652 660
Noninterest income 2,019 1,680 1,602 1,257 1,399
Noninterest expense 12,910 11,859 10,976 10,613 10,271
Net income 4,068 4,039 3,857 3,596 3,276
Per Common Share Data:
Net income $ 2.35 $ 2.33 $ 2.23 $ 2.08 $ 1.82
Cash dividends declared 0.42 0.55 0.52 0.44 0.40
Book value 23.67 21.67 19.44 17.96 14.79
Tangible Book Value (1) 23.18 21.00 18.59 16.92 13.59
Selected Ratios:
Return on average assets 1.06% 1.07% 1.05% 1.02% 0.95%
Return on average equity 10.25 11.14 12.04 12.71 11.75
Dividend payout 17.90 23.69 23.13 21.22 21.37
Average equity to average asset ratio 10.35 9.60 8.69 8.00 8.07
(1) Stockholders= equity as of December 31, 1998, 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 begins 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 on 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 "Information Concerning Directors and
Nominees" and "Executive Officers" in Northway's definitive proxy statement to
be delivered in connection with its 1999 Annual Meeting of Stockholders.
Section 16(a) of the Securities Exchange Act of 1934 requires Northway's
executive officers, directors and 10% shareholders 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 Northway
with copies of all Section 16(a) filings. During the 1997 fiscal year, Donald
Hatt, Senior Executive Vice President failed to file Form 3 upon joining
Northway. The Form 3 for Mr. Hatt was filed subsequently in 1999. Each of the
following individuals inadvertently failed to file a Form 4 with respect to
transactions in the Northway's common stock on a timely basis: Fletcher W.
Adams, Vice Chairman of the Board, three occasions representing ten
transactions; Peter H. Bornstein, Director, one occasion representing two
transactions; Arnold P. Hanson, Director, two occasions representing four
transactions; and Barry Kelley, Director, one occasion representing two
transactions. Form 4's relating to each of the foregoing transactions were
subsequently filed.
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 1999 Annual
Meeting of Stockholders, provided however, that the "Report on Executive
Compensation" and the "Stock Price Performance Graph" contained in such proxy
Statement are not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth under the caption "Security Ownership of Management" in
Northway's definitive proxy statement to be delivered in connection with its
1999 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 1999 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, 1998 and 1997
Consolidated Statements of Income for the fiscal years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for
the fiscal years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the fiscal
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1998, 1997 and 1996
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, 1998.
(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 $4,068,000, or $2.35 per share, in 1998
as compared to net income of $4,039,000, or $2.33 per share, in 1997 and
$3,857,000, or $2.23 per share, in 1996. Return on average assets was 1.06
percent in 1998, as compared to 1.07 percent and 1.05 percent for 1997 and 1996,
respectively. During 1998 the Company continued to position itself for growth.
The Company opened two new branches and created an indirect lending business
unit. In addition, the Company has retained qualified personnel to ensure that
the Company achieves its long term goals. These strategic investments resulted
in increased noninterest expense which slowed the growth rate of the Company's
earnings in 1998 and will continue to impact results of operations during at
least the first half of 1999.
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,
changes in the provision for loan losses resulting from the Company's periodic
assessment of the adequacy of its 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, 1998, 1997, and 1996.
Net interest income for 1998 increased $475,000, or 3 percent, over 1997
while increasing $1,350,000, or 8 percent, in 1997 over 1996.
Interest income was relatively unchanged in 1998 after increasing
$1,099,000, or 4 percent, in 1997. Earning assets on average increased by
$2,448,999, or 1%, during 1998, however, the mix of earning assets continued to
evolve creating a favorable volume variance. This favorable volume variance was
offset by a 5 basis point decline in average yield on earning assets as a whole.
A $17,079,000, or 7 percent, increase in the volume of average loans, offset by
a 20 basis point decrease in yield, accounted for the $1,001,000, or 4 percent,
increase in interest income on loans. Interest income on investment and
mortgage-backed securities decreased $1,226,000, or 22 percent, from 1997 to
1998. This decrease resulted from a 22 percent decrease in the average balance
of total investment and mortgage-backed securities and a 3 basis point decrease
in yield.
Total interest expense decreased by $461,000, or 4 percent, in 1998 due
primarily to a 12 basis point decrease in rates paid on interest bearing
liabilities combined with a modest decrease in average volume. The composition
of interest bearing liabilities helped drive down interest cost as all
categories of low cost funds increased while all categories of high cost funds
declined. The most expensive sources of funds, Federal Home Loan Bank advances
and other borrowed funds, declined by a combined 52 percent.
Interest income in 1997 grew $1,099,000, or 4 percent, over 1996 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 $30,459,000, or 13 percent, increase in
the volume of average loans and a 26 basis point decrease in yield accounted for
the $2,207,000, or 10 percent, increase in interest income on loans. Interest
income on investment and mortgage-backed securities decreased $1,195,000, or 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 $251,000, or 2 percent, in 1997 due
primarily to a 10 basis point decrease in rates paid on interest bearing
liabilities combined with a modest increase in average volume. In addition,
interest expense on certificates of deposit decreased 5 percent as a result of a
21 basis point decrease in rate.
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 10
basis points to 4.97 percent in 1998 after having increased 26 basis points to
4.87 percent in 1997. The increase in 1998's net interest margin was a function
of the downward pricing of interest bearing liabilities, partially offset by the
lower yields on earning assets. At the same time, the portion of interest
earning assets funded by interest bearing liabilities in 1998 was 84 percent. In
1997 and 1996 the portion of interest earning assets funded by interest bearing
liabilities was 85 percent and 87 percent, respectively.
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
1998, the net interest rate spread increased 7 basis points to 4.33 percent from
the 1997 spread of 4.26 percent as the cost of interest bearing liabilities
declined 12 basis points while the yields earned on earning assets decreased 5
basis points. The increase in 1997 was 20 basis points from 4.06 percent in
1996. See the accompanying schedules entitled "Consolidated Average Balances,
Interest Income/Expense and Average Yields/Rates" and "Consolidated Rate/Volume
Variance Analysis" for more information.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the annual cost of providing an
allowance or reserve for anticipated future losses on loans. The size of the
provision 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 $540,000 provision for loan losses in 1998
reflecting an increase of $5,000 from 1997. In 1997, the provision for loan
losses increased $23,000 to $535,000 from $512,000 in 1996. The allowance for
loan losses as a percentage of nonperforming loans decreased to 172.99 percent
at December 31, 1998 compared to 227.35 percent at December 31, 1997.
Although management utilizes its best judgement in providing for losses,
there can be no assurance that the Company will not have to change its
provisions for loan losses in subsequent periods. Management will continue to
monitor the allowance for loan losses and make additional provisions to the
allowance as appropriate.
The following table sets forth the provisions and allowance for loan losses
for the periods indicated.
Years Ended December 31,
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------
Beginning allowance $4,156 $3,941 $3,866
Provision for loan
losses 540 535 512
Loans charged-off (524) (612) (650)
Recoveries 232 292 213
------ ------ ------
Net credit losses (292) (320) (437)
------ ------ ------
Ending allowance $4,404 $4,156 $3,941
====== ====== ======
Ending allowance as
a percentage of loans 1.55% 1.56% 1.64%
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.
The following table sets forth the components of the Company's noninterest
income:
Noninterest Income
- ------------------------------------------------------
Years Ended December 31,
(In thousands) 1998 1997 1996
- ------------------------------------------------------
Service Charges on deposit
account and fees $ 843 $ 831 $ 816
Securities gains, net 496 313 306
Other 680 536 480
------ ------ ------
Total noninterest income $2,019 $1,680 $1,602
====== ====== ======
Fee income from service charges on deposit accounts increased 1 percent in
1998 and 2 percent in 1997. The improvement in both years was primarily related
to the increase in both the number of accounts and balances outstanding in
transaction deposit accounts.
Net securities gains were $496,000 in 1998, compared to $313,000 in 1997.
Investment securities gains in 1998 included net gains of $501,000 recorded on
sales of equity securities compared to $548,000 in 1997. In 1996 net securities
gains were $306,000 and included equity gains of $305,000.
Other noninterest income (sources of which include credit card merchant and
fee income, automated teller fees, and safe deposit fees) increased $144,000, or
27 percent, to $680,000 in 1998 following a 12 percent increase in 1997. The
largest component of this increase was the institution of a service charge on
noncustomer ATM users, which charges totaled approximately $72,000.
NONINTEREST EXPENSE
Total noninterest expense increased $1,051,000, or 9 percent, during 1998
and $883,000, or 8 percent, in 1997. Excluding the one time amortization of
reorganization cost and merger-related expenses, total noninterest expense
increased $1,506,000, or 13 percent, during 1998 and $276,000, or 3 percent, in
1997. The increases in these expenses were due to the Company's plans to
increase market share in existing markets and enter new markets. In 1998, these
plans resulted in the opening of two branches and the creation of an indirect
lending group.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
-----------------------1998------------------- -------------------1997-------------------
AVERAGE Average
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
-------------- --------------- ------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Federal funds sold $ 14,628 $ 769 5.26% $ 9,720 $ 528 5.43%
Interest bearing deposits 87 6 6.90 114 8 7.02
Investment and mortgage-
backed securities (1) (5) 69,854 4,272 6.12 89,366 5,498 6.15
Loans, net (1) (2) 274,826 24,351 8.86 257,747 23,350 9.06
----------- ------------ ------------ -----------
Total interest earning
assets (1) 359,395 29,398 8.18% 356,947 29,384 8.23%
------------ ======== ----------- ========
Cash and due from banks 11,967 10,804
Allowance for loan losses (4,323) (4,323)
Premises and equipment 9,844 8,732
Other assets 6,400 5,604
----------- ------------
Total assets $ 383,283 $ 377,764
=========== ============
Liabilities Interest bearing liabilities:
Regular savings $ 65,126 $ 1,519 2.33% $ 63,661 $ 1,508 2.37%
NOW and Super NOW 46,942 536 1.14 43,369 530 1.22
Money market accounts 22,467 622 2.77 22,348 613 2.74
Certificates of deposit 151,244 8,078 5.34 153,111 8,211 5.36
Repurchase agreements 8,469 431 5.09 7,796 404 5.18
Federal Home Loan Bank 5,972 360 6.03 12,139 728 6.00
Other Borrowed funds -- -- 215 13 6.05
----------- ------------ ------------ -----------
Total interest bearing
liabilities 300,220 11,546 3.85% 302,639 12,007 3.97%
------------ ======== ----------- ========
Noninterest bearing deposits 39,561 34,948
Other liabilities 3,825 3,906
----------- ------------
Total liabilities 343,606 341,493
Stockholders' equity 39,677 36,271
----------- ------------
Total liabilities and
stockholders' equity $ 383,283 $ 377,764
=========== ============
Net interest income (1) $ 17,852 $ 17,377
============ ===========
Interest spread (3) 4.33% 4.26%
======== ========
Net interest margin (4) 4.97% 4.87%
======== ========
</TABLE>
<PAGE>
-------------------------1996-------------------
Average
Average Income/ Yield/
Balance Expense Rate
--------------- ----------- -----------
Assets
Interest earning assets:
Federal funds sold $ 6,076 $ 325 5.35%
Interest bearing deposits 2,103 124 5.90
Investment and mortgage-
backed securities (1) (5) 112,443 6,693 5.95
Loans, net (1) (2) 227,288 21,143 9.30
------------ -----------
Total interest earning
assets (1) 347,910 28,285 8.13%
----------- ========
Cash and due from banks 9,346
Allowance for loan losses (3,982)
Premises and equipment 8,409
Other assets 7,036
------------
Total assets $ 368,719
============
Liabilities Interest bearing liabilities:
Regular savings $ 65,033 $ 1,551 2.38%
NOW and Super NOW 42,438 533 1.26
Money market accounts 23,428 644 2.75
Certificates of deposit 155,223 8,651 5.57
Repurchase agreements 6,568 358 5.45
Federal Home Loan Bank 8,848 521 5.89
Other Borrowed funds -- --
------------ -----------
Total interest bearing
liabilities 301,538 12,258 4.07%
----------- ========
Noninterest bearing deposits 31,889
Other liabilities 3,253
------------
Total liabilities 336,680
Stockholders' equity 32,039
------------
Total liabilities and
stockholders' equity $ 368,719
============
Net interest income (1) $ 16,027
===========
Interest spread (3) 4.06%
========
Net interest margin (4) 4.61%
========
(1) Reported on a tax equivalent basis
(2) Net of unearned income. Includes nonperforming loans
(3) Interest spread equals the yield on interest earning assets 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.
<PAGE>
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 Compared to 1997
Increase (Decrease)
---------------------------------------------------------------------
Due to Change in
Volume Rate Mix Total
<S> <C> <C> <C> <C>
Interest and dividend income:
Federal funds sold $ 267 $ (17) $ (9) $ 241
Interest bearing deposits (2) -- -- (2)
Investments and mortgage-
backed securities (1,200) (33) 7 (1,226)
Loans 1,547 (512) (34) 1,001
------------- ------------ ------------ ------------
Total interest and dividend income 612 (562) (36) 14
------------- ------------ ------------ ------------
Interest expense:
Regular savings accounts 35 (23) (1) 11
NOW and Super NOW accounts 44 (35) (3) 6
Money market accounts 3 6 -- 9
Certificates of deposit (100) (33) -- (133)
Repurchase agreements 35 (7) (1) 27
FHLB advances (370) 4 (2) (368)
Other Borrowed funds (13) -- -- (13)
------------- ------------ ------------ ------------
Total interest expense (366) (88) (7) (461)
------------- ------------ ------------ ------------
Net interest and dividend income $ 978 $ (474) $ (29) $ 475
============= ============ ============ ============
1997 Compared to 1996
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------------
Due to Change In
Volume Rate Mix Total
<S> <C> <C> <C> <C>
Interest and dividend income:
Federal funds sold $ 193 $ 6 $ 4 $ 203
Interest bearing deposits (117) 23 (22) (116)
Investments and mortgage-
backed securities (1,374) 225 (46) (1,195)
Loans 2,833 (552) (74) 2,207
------------- ------------ ------------ ------------
Total interest and dividend income 1,535 (298) (138) 1,099
------------- ------------ ------------ ------------
Interest expense:
Regular savings accounts (33) (10) -- (43)
NOW and Super NOW accounts 11 (14) -- (3)
Money market accounts (30) (1) -- (31)
Certificates of deposit (117) (327) 4 (440)
Repurchase agreements 67 (18) (3) 46
FHLB advances 194 10 3 207
Other Borrowed funds 13 -- -- 13
------------- ------------ ------------ ------------
Total interest expense 105 (360) 4 (251)
------------- ------------ ------------ ------------
Net interest and dividend income $ 1,430 $ 62 $ (142) $ 1,350
============ ============ ============ ============
</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) 1998 1997 1996
- --------------------------------------------------------
Salaries and employee
benefits $ 6,762 $ 5,883 $ 5,423
Occupancy and equipment 2,080 1,714 1,759
Amortization of deposit
purchase premium 301 301 513
Amortization of reorgan-
ization cost 188 10 --
Directors' fees 138 266 303
Stationery and supplies 470 374 360
Merger related expenses -- 643 36
Other 2,971 2,668 2,582
------- -------- --------
$12,910 $ 11,859 $ 10,976
======= ======== ========
Salaries and employee benefits increased $879,000 or 15 percent, from 1997
to 1998 and by $460,000, or 8 percent, from 1996 to 1997. 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.
The Company expects the increases in salary and employee benefits expenses
resulting from the Company's expansion initiatives in 1998 to continue in 1999
while the anticipated increases in revenue resulting from such initiatives will
not begin to be realized until the second half of 1999. Consequently, results of
operations could be adversely affected in the short-term.
Amortization of deposit purchase premium in 1998 of $301,000 is consistent
with the amount incurred in 1997. The decrease of $212,000 to $301,000 in 1997
versus $513,000 expensed in 1996 resulted from the Company's decision in 1996 to
accelerate the amortization of the premium associated with the purchase of Home
Bank's deposits.
Amortization of reorganization cost of $188,000 in 1998 and merger related
expense of $643,000 in 1997 are primarily related to the creation of the holding
company, the related stock split, and the merger.
INCOME TAX EXPENSE
The Company recognized $2,036,000, $2,274,000 and $1,974,000 in income tax
expense for the years ended December 31, 1998, 1997, and 1996, respectively. The
effective tax rate was 33.3% for 1998, 36.0% for 1997, and 33.9% for 1996. 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 increased $26,106,000, or 7%, to $403,972,000 at December 31,
1998 versus $377,866,000 at December 31, 1997. The composition of earning assets
has continued to change in order to meet corporate goals.
BALANCE SHEET HIGHLIGHTS
December 31,
(In thousands) 1998 1997 Change
- -------------------------------------------------------------------
Total assets $403,972 $377,866 $26,106
Earning assets 378,004 354,812 23,192
Securities 55,038 66,415 (11,377)
Loans, net of
unearned income 283,826 266,757 17,069
Deposits 350,921 322,063 28,858
Equity 40,956 37,526 3,430
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, 1998 and 1997, showing amortized cost and market value for each
category:
December 31, 1998 1997
Amortized Market Amortized Market
(In thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------
Securities available-for-sale:
US Treasury and Government
Agencies $17,322 $17,391 $ 11,873 $ 11,929
Mortgage-backed securities 13,342 13,442 17,366 17,340
Collateralized mortgage
obligations 11,118 11,070 14,171 13,895
Corporate and foreign notes -- -- 5,008 5,000
Common and preferred stocks 2,919 2,741 2,752 2,796
State and political subdivisions 3,676 3,885 4,016 4,143
------- ------- -------- --------
Total securities
available-for-sale $48,377 $48,529 $ 55,186 $ 55,103
======= ======= ======== ========
Securities held-to-maturity:
Mortgage-backed securities $ 5,501 5,485 8,400 8,354
State and political subdivisions 1,008 1,030 2,912 2,943
------- ------- -------- --------
Total securities held-to-
maturity $ 6,509 $ 6,515 $ 11,312 $ 11,297
------- ------- -------- --------
Total securities $54,886 $ 55,044 $ 66,498 $ 66,400
======= ======== ======== ========
Securities available-for-sale decreased $6,574,000 during 1998 to
$48,529,000. 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 gain on securities available-for-sale was $152,000 at
December 31, 1998 as compared to a net unrealized loss of $83,000 in 1997. This
was the result of a lower interest rate environment, and corresponding higher
bond prices in 1998.
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.
Securities held to maturity comprise approximately 10 percent and 17
percent of the aggregate securities portfolio at December 31, 1998 and 1997,
respectively. This is consistent with management's objective to maintain
portfolio flexibility and liquidity by classifying most securities as available
for sale.
A portion of the securities portfolio is pledged to secure public deposits
and short-term repurchase agreements. Refer to Note 3 for a further discussion
of pledging.
LOANS
Loans increased 6 percent in 1998 with most of the increase concentrated in
commercial 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) 1998 of Total 1997 of Total
- --------------------------------------------------------------------
Real estate
Residential $146,603 51.6% $152,041 56.9%
Commercial 77,680 27.4 61,873 23.1
Construction 4,118 1.4 5,664 2.1
Commercial 25,874 9.1 21,460 8.0
Installment 25,088 8.8 23,476 8.9
Other 4,795 1.7 2,769 1.0
-------- ----- -------- -----
$284,158 100.0% $267,283 100.0%
======== ===== ======== =====
The loan portfolio mix changed significantly during the year. As of
December 31, 1998, total commercial real estate and commercial loans represented
36.5 percent of the Company's loan portfolio, while residential real estate
loans represented 51.6 percent. This compares with a commercial real estate and
commercial loan percentage of 31.1 percent and residential real estate loan
percentage of 56.9 percent in 1997. The 1998 increase in commercial real estate
and commercial 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 commercial loans consist of loans that are either
unsecured or are secured by inventories, receivables or other corporate assets,
and many are additionally secured by the guarantee of the Small Business
Administration. Commercial real estate and commercial loans increased by
$20,221,000 in 1998 as compared to 1997. The Company continues to emphasize
commercial real estate and commercial loans in order to reduce the relative
concentration of its loan portfolio in other types of loans.
Residential real estate loans decreased $5,438,000 in 1998, a 4 percent
decrease from 1997. 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 $1,612,000, or 7 percent, in 1998 is 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 $2,704,000, or 0.67% of total assets, at December
31, 1998 as compared to $2,050,000, or 0.53% of total assets, at December 31,
1997.
Nonperforming assets are comprised primarily of nonperforming loans, real
estate acquired by foreclosure and loans 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, 1998, nonperforming loans totaled $2,546,000, or 0.90% of
total loans, compared to $1,828,000, or 0.70% of total loans, in 1997.
Real estate acquired by foreclosure or substantively repossessed at
December 31, 1998 was $158,000 compared to $222,000 in 1997.
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for 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 allowance. Recoveries of
amounts previously charged-off are added to the reserve when collected. The
adequacy of the allowance for loan losses is evaluated on a regular basis by
management. Factors considered in evaluating the adequacy of the allowance
include previous loss experience, current economic conditions and their effect
on borrowers and the market area in general, and the performance of individual
credits in relation to the contract terms. The provision for 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 loan
losses.
The Company's allowance for loan losses increased $248,000 from December
31, 1997 to $4,404,000, or 1.55% of total loans, at December 31, 1998. The 1998
provision for loan losses was $540,000, $5,000 higher than the prior year level
of $535,000. The increase was due primarily to the increased level of loans.
DEPOSITS AND BORROWINGS
Total deposits at December 31, 1998 were $350,921,000, an increase of
$28,858,000, or 9%, as compared to the $322,063,000 reported at December 31,
1997. The increase in deposits was due to the opening of two branches during the
year as well as the retention of a significant short term deposit at December
31, 1998. For additional information see Note 9 to the Consolidated Financial
Statements.
Components of Deposits
- ------------------------------------------------------------------
December 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------
Demand $ 45,808 $ 39,710
Regular savings, NOW & Money Market 152,094 130,664
Time 153,019 151,689
-------- ---------
Total deposits $350,921 $322,063
======== ========
Certificates of deposit of $100,000 or more are scheduled to mature as
follows at December 31, 1998:
(In thousands)
- --------------------------------------
3 months or less $ 3,164
Over 3 to 6 months 5,179
Over 6 to 12 months 10,163
Over 12 months 5,442
-------
$23,948
=======
The following table sets forth certain information concerning the Company
borrowings at the dates indicated.
December 31,
(In thousands) 1998 1997
- ---------------------------------------------------
FHLB advances $ 3,111 $ 9,322
Repurchase agreements 6,791 6,146
------- -------
$ 9,902 $15,544
======= =======
FHLB advances declined as a non-deposit related interest-bearing funding
source for the Company in 1998. During 1998, FHLB borrowings totaled $3,111,000,
a decrease of $6,211,000 from the $9,322,000 reported at December 31, 1997. For
additional information regarding FHLB advances, see Note 10 to the Consolidated
Financial Statements.
The increase in securities sold under agreements to repurchase of $645,000
was attributable to an increase in the Company's relationship with its municipal
customers. For additional discussion of securities sold under agreements to
repurchase, see Note 11 to the Consolidated Financial Statements.
CAPITAL
The following table sets forth the Company's risk-based capital and
leverage ratios:
December 31,
(Dollars in thousands) 1998 1997
- ---------------------------------------------------
Risk-adjusted assets $241,943 $223,332
Tier 1 risk-based
capital (4% minimum) 16.53% 16.31%
Total risk-based
capital (8% minimum) 17.78 17.56
Leverage ratio 10.25 9.67
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 that banks and
bank holding companies must meet: Tier 1 capital, total capital (combination of
Tier 1 capital and Tier 2 capital), and leverage ratio. Tier 1 capital consists
of stockholders' equity, net of intangible assets. Tier 2 capital consists of a
limited amount of loss reserves. Tier 1 capital, 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, 1998, 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 the 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 caused by 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, 1998 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 $102,402 $ 81,460 $ 34,452 $ 49,163 $ 17,216 $284,693
Federal funds sold 36,475 -- -- -- -- 36,475
Interest bearing
deposits -- -- 92 -- -- 92
Securities 7,198 13,675 6,522 9,816 19,865 57,076
Other assets -- -- -- -- 25,636 25,636
-------- --------- ------- -------- -------- --------
Total assets $146,075 $ 95,135 $ 41,066 $ 58,979 $ 62,717 $403,972
-------- --------- ------- -------- -------- --------
Deposits $ 79,804 $ 109,487 $ 79,817 $ 36,005 $ 45,808 $350,921
Repurchase agreements 1,330 2,677 2,784 -- -- 6,791
Borrowed funds -- 833 750 1,528 -- 3,111
Other liabilities and
stockholders' equity -- -- -- -- 43,149 43,149
-------- --------- ------- -------- -------- --------
Total liabilities
and equity $ 81,134 $ 112,997 $ 83,351 $ 37,533 $ 88,957 $403,972
-------- --------- ------- -------- -------- --------
Gap for period $ 64,941 $ (17,862) $(42,285) $ 21,446 $ (26,240)
-------- --------- -------- -------- ---------
Cumulative gap $ 47,079 $ 4,794 $ 26,240 --
========= ======== ======== =========
As a percent of
total assets 16.1% 11.7% 1.2% 6.5%
</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, 1998,
the estimated exposure was 11.7% asset-sensitive (see table above). The one-year
gap currently exceeds 10% due to the fact that the Company has been accumulating
cash in anticipation of increased loan volume due to its indirect lending
initiative.
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 11.32%. The projection exceeds the Company's 10% policy limit due
to the increased level of federal funds sold being maintained in anticipation of
increased loan volume due to its indirect lending initiative.
Additionally, duration and market value sensitivity are selectively utilized
where they provide added value to the overall interest rate risk management
process.
LIQUIDITY RISK
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
contractual maturity, the repayment of debt as it matures, the ability to fund
new and existing loan commitments and the ability to take advantage of new
business opportunities. Liquidity may be provided through amortization, maturity
or sale of assets such as loans and securities available-for-sale, liability
sources such as increased deposits, utilization of the FHLB credit facility,
purchased or other borrowed funds, and access to the capital markets. Liquidity
targets are subject to change based on economic and market conditions and are
controlled and monitored by 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. These include brokered deposits,
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, the purchase of treasury
stock, 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 $20,020,000 during 1998. The principal cause for the
increase was the deposit driven cash provided from financing activities of
$22,509,000. Net cash used by investing activities of $6,732,000 was a result of
continued loan growth offset by a net decline in investment securities. The net
cash provided by operating activities provided the remainder of funding sources
for 1998. The $4,243,000 of net cash provided by operating activities was
attributable to net income of $4,068,000.
CAPITAL EXPENDITURES AND COMMITMENTS
During 1998, the Company incurred approximately $1,600,000 in capital
expenditures. These expenditures included $216,000 for leasehold improvements
and furniture and equipment for the Company's branch in Tilton, New Hampshire.
The Company completed its branch located in Conway Village, New Hampshire
spending $451,000 on buildings and $158,000 for the purchase of furniture and
equipment. Approximately $730,000 was spent for the completion of the Company's
upgrade of its existing computer system. The remaining expenditures were for
normal upgrades to existing property and equipment.
Capital expenditures in 1997 totaled approximately $1,500,000 and consisted
of $310,000 for the purchase of land and partial construction of the Company's
branch location in Conway Village, New Hampshire. In addition, approximately
$1,093,000 was spent for the Company's upgrade of its existing computer system.
The remaining expenditures were related to normal upgrades to existing property
and equipment.
During 1999, the Company's estimated capital expenditure projections,
excluding Year 2000 related expenditures, total $775,000. Approximately $250,000
will be spent to provide generators to three locations, Berlin, Plymouth and
Conway Village, New Hampshire. These generators are being purchased as part of
the Company's Disaster Recovery Plan. The Company has also allocated $150,000
for furniture, fixtures, equipment and leasehold improvements related to the
Company's planned supermarket branch location in Gorham, New Hampshire. The
remaining monies will be spent for normal upgrades to existing property, plant
and equipment.
IMPACT OF THE YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosures" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
There is considerable concern over the ability of many computer software
programs to function when the year 2000 arrives. This concern arises because
many existing programs use only the last two digits to refer to the year. As
such, programs do not recognize the difference between a year that begins with
"20" instead of the current "19."
The Company has developed a Year 2000 strategic plan and a Year 2000 test
plan. The Company appointed a dedicated Year 2000 project manager. Each of the
Company'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 called for the identification of 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 to ensure Year 2000 compliance based upon conclusions reached
in the risk analysis assessment phase. Renovation of the subsidiary banks' core
operating hardware was completed on September 19, 1998. Renovation of the
subsidiary banks' core operating software was completed on October 10, 1998.
Renovations to the remaining operating systems are expected to be completed by
March 31, 1999.
The fourth phase is to validate the renovations to the system. The testing
of the core operating systems was substantially completed by December 31, 1998.
The Company has hired an outside independent third party to review the Company's
validation and testing procedures. Testing and verification of the remaining
systems are expected to be completed by March 31, 1999.
The fifth phase is to implement the Year 2000 compliant systems. All
systems are expected to be operating on a compliant basis by June 30, 1999.
The Company has identified both customers and vendors with whom it has a
material relationship and has determined that the risk that these third party
relationships pose to the Company is considered low. For those customers where a
borrowing relationship exists, the subsidiary banks have completed a customer
risk assessment to determine the status of their Year 2000 efforts.
The Company has developed a Year 2000 budget which includes administration,
cost of new technology and the cost of testing. Total expenses from Year 2000
compliance are estimated to be $135,000. Actual expenses incurred in 1998 in
association with Year 2000 compliance were $42,000 and 1999's projected expenses
are $93,000.
The development of a Business Resumption Contingency Plan, to deal with the
Company's worst-case scenario, the loss of electric power, is well underway.
Contingency Planning Teams have been appointed and are led by the Year 2000
project manager. An independent third party has been hired to assist the Company
in preparing the contingency plan. There are four phases to the plan:
organization planning guidelines, business impact analysis, business resumption
contingency plan and validation of the plan. It is anticipated that the Business
Resumption Contingency Plan will be completed by the regulatory milestone date
of June 30, 1999.
Should the Company's worst case scenario, the loss of electric power,
occur, the Company will have in place an electric generator at its operation
center. This should allow the Company to continue to run its core operating
system. Transactions that would be per-formed at a number of the Company'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 Company's
Executive Committee on a weekly basis. Additionally progress reports are
presented to the Company's and the subsidiary banks' Boards of Directors on a
monthly basis.
The Company's subsidiary banks are subject to regulation by the Federal
Deposit Insurance Corporation and the Office of the Comptroller of the Currency,
respectively. In the event the Company's efforts as described above fail to
adequately resolve any such Year 2000 issues affecting the Company's subsidiary
banks, the Company could be subject to formal supervisory or enforcement actions
by their respective regulators.
FORWARD LOOKING INFORMATION
Certain statements in this report are "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements may include, but are not limited to, projections of
revenue, income or loss, plans for future operations and acquisitions, plans
related to products or services of the Company and its subsidiaries, and the
statements made in the preceding Year 2000 discussion. Such forward looking
statements are subject to known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company. To the
extent any such risks, uncertainties and contingencies are realized, the
Company's actual results, performance or achievements could differ materially
from anticipated results, performance or achievements. Factors that might affect
such forward looking statements include, among other 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, the timing, impact and other uncertainties of future
acquisitions, and the Company's handling of the Year 2000 issues.
<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, 1998 and 1997...............C-3
Consolidated Statements of Income for the fiscal years
ended December 31, 1998, 1997 and 1996......................................C-4
Consolidated Statements of Changes in Stockholders' Equity
for the fiscal years ended December 31, 1998, 1997 and 1996.................C-5
Consolidated Statements of Comprehensive Income for the
fiscal years ended December 31, 1998, 1997 and 1996.........................C-6
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 1998, 1997 and 1996......................................C-7
Notes to Consolidated Financial Statements..................................C-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
NORTHWAY FINANCIAL, INC.
We have audited the accompanying consolidated balance sheets of Northway
Financial, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1998. 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, 1998 and 1997 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 20, 1999
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Years Ended December 31, 1998 and 1997 (In thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Assets
Cash and due from banks (note 2) $ 14,856 $ 12,086
Federal funds sold 36,475 19,225
Interest bearing deposits 92 85
Investment securities available-for-sale, amortized cost of
$48,377 in 1998 and $55,186 in 1997 (notes 3 and 11) 48,529 55,103
Investment securities held-to-maturity, market value of
$6,515 in 1998 and $11,297 in 1997 (note 3) 6,509 11,312
Federal Home Loan Bank stock, at cost 1,958 1,958
Federal Reserve Bank stock, at cost 80 80
Loans held for sale 535 292
Loans (notes 4, 5 and 6) 284,158 267,283
Unearned income (332) (526)
Allowance for loan losses (note 5) (4,404) (4,156)
- ------------- -------------
Loans, net 279,422 262,601
Real estate acquired by foreclosure or substantively
repossessed (note 7) 158 222
Accrued interest receivable 1,846 1,971
Deferred income tax asset, net (note 16) 1,222 1,500
Premises and equipment, net (note 8) 9,963 9,187
Deposit purchase premium, net (note 12) 860 1,161
Other assets 1,467 1,083
- ------------- -------------
Total assets $ 403,972 $ 377,866
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) $ 350,921 $ 322,063
Securities sold under agreements to repurchase (note 11) 6,791 6,146
Federal Home Loan Bank advances (note 10) 3,111 9,322
Other liabilities 2,193 2,809
- ------------- -------------
Total liabilities 363,016 340,340
- ------------- -------------
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 1,729,969 outstanding in 1998 and
1,731,969 issued and outstanding in 1997 1,732 1,732
Surplus 2,101 2,101
Retained earnings 37,084 33,744
Treasury stock, at cost (2,000 shares) (55) --
Accumulated other comprehensive income (loss), net of tax (note 3) 94 (51)
- ------------- -------------
Total stockholders' equity 40,956 37,526
- ------------- -------------
Total liabilities and stockholders' equity $ 403,972 $ 377,866
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 24,313 $ 23,210 $ 21,079
Investment securities available-for-sale 3,311 4,301 5,398
Investment securities held-to-maturity 682 987 1,049
Federal funds sold 769 528 325
Interest bearing deposits 6 8 124
--------- --------- ---------
Total interest and dividend income 29,081 29,034 27,975
--------- --------- ---------
Interest expense:
Deposits (note 9) 10,755 10,861 11,378
Borrowed funds 791 1,146 880
--------- --------- ---------
Total interest expense 11,546 12,007 12,258
--------- --------- ---------
Net interest and dividend income 17,535 17,027 15,717
Provision for loan losses (note 5) 540 535 512
--------- --------- ---------
Net interest and dividend income after
provision for loan losses 16,995 16,492 15,205
--------- --------- ---------
Noninterest income:
Service charges on deposit accounts and fees 843 831 816
Securities gains (losses), net (note 3) 496 313 306
Other 680 536 480
--------- --------- ---------
Total noninterest income 2,019 1,680 1,602
--------- --------- ---------
Noninterest expense:
Salaries and employee benefits (note 17) 6,762 5,883 5,423
Office occupancy and equipment 2,080 1,714 1,759
Amortization of deposit purchase premium 301 301 513
Amortization of reorganization cost 188 10 --
Merger related expenses -- 643 36
Other (note 15) 3,579 3,308 3,245
--------- --------- ---------
Total noninterest expense 12,910 11,859 10,976
--------- --------- ---------
Income before income taxes 6,104 6,313 5,831
Income tax expense (note 16) 2,036 2,274 1,974
--------- --------- ---------
Net income $ 4,068 $ 4,039 $ 3,857
========= ========= =========
Earnings per common share $ 2.35 $ 2.33 $ 2.23
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Total
Common Retained Treasury Income Stockholders'
Stock Surplus Earnings Stock (Loss) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,732 $ 2,101 $27,697 $-- $ (433) $31,097
Net income -- -- 3,857 -- -- 3,857
Net change in unrealized loss on
securities available-for-sale, net of tax -- -- -- -- (399) (399)
Cash dividends declared ($0.52 per share) -- -- (892) -- -- (892)
------- ------- ------- ------- ------- -------
Balance at December 31, 1996 1,732 2,101 30,662 -- (832) 33,663
Net income -- -- 4,039 -- -- 4,039
Net change in unrealized loss on
securities available-for-sale, net of tax -- -- -- -- 781 781
Cash dividends declared ($0.55 per share) -- -- (957) -- -- (957)
------- ------- ------- ------- ------- -------
Balance at December 31, 1997 1,732 2,101 33,744 -- (51) 37,526
Net income -- -- 4,068 -- -- 4,068
Net change in unrealized loss on
securities available-for-sale, net of tax -- -- -- -- 145 145
Treasury stock purchased -- -- -- (55) -- (55)
Cash dividends declared ($0.42 per share) -- -- (728) -- -- (728)
------- ------- ------- ------- ------- -------
Balance at December 31, 1998 $ 1,732 $ 2,101 $37,084 $ (55) $ 94 $40,956
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
- --------------------------------------------------------------------------------
For the years ended December 31,
1996
Net income $ 3,857
Other comprehensive income:
Net unrealized holding loss on securities
available-for-sale, net of tax benefit of $259 (399)
--------
Comprehensive income $ 3,458
========
1997
Net income $ 4,039
Other comprehensive income:
Net unrealized holding gain on securities
available-for-sale, net of tax expense of $492 781
--------
Comprehensive income $ 4,820
========
1998
Net income $ 4,068
Other comprehensive income:
Net unrealized holding gain on securities
available-for-sale, net of tax expense 145
--------
Comprehensive income $ 4,213
========
Reclassification disclosure for the year ended December 31, 1998:
Net unrealized gains on available-for-sale securities $ 731
Less reclassification adjustment for realized gains in net income 496
--------
Other comprehensive income before income tax effect 235
Income tax expense 90
--------
Other comprehensive income, net of tax $ 145
========
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,068 $ 4,039 $ 3,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for:
Loan losses 540 535 512
Depreciation and amortization 1,122 992 1,173
Deferred income taxes 188 56 (11)
Write down of real estate acquired by foreclosure 5 58 54
Gains on sales of investment securities available-for-sale, net (496) (313) (306)
Loss on sale of premises and equipment -- 45 --
Amortization of premium and accretion of (discount)
on investment and mortgage-backed securities, net 116 230 449
Decrease in unearned income, net (194) (193) (294)
Gains on sales of real estate acquired by foreclosure
or substantively repossessed (45) (56) (88)
Net (increase) decrease in loans held for sale (243) (234) 86
Decrease (increase) in accrued interest receivable 125 640 (5)
Increase in other assets (327) (380) (130)
(Decrease) increase in other liabilities (616) 97 186
---------- --------- --------
Net cash provided by operating activities 4,243 5,516 5,483
---------- --------- --------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits (7) 194 2,195
Proceeds from sales of investment securities available-for-sale 4,344 28,446 3,223
Proceeds from maturities of investment securities held-to-maturity 7,487 8,855 9,956
Proceeds from maturities of investment securities available-for-sale 20,107 17,817 11,137
Purchase of investment securities available-for-sale (24,558) (15,050) (23,305)
Purchase of Federal Home Loan Bank stock -- (136) --
Purchase of investment securities held-to-maturity (7,017) (8,036) (6,910)
Principal payments received on investment securities held-to-maturity 4,269 -- 35
Principal payments received on investment securities available-for-sale 7,360 3,735 4,413
Net increase in loans (17,473) (26,901) (22,706)
Proceeds from sales of real estate acquired by
foreclosure or substantively repossessed
and principal payments received on OREO 353 378 486
Proceeds from sale of premises and equipment -- 296 --
Additions to premises and equipment (1,597) (1,454) (1,099)
---------- --------- --------
Net cash (used)/provided by investing activities (6,732) 8,144 (22,575)
---------- --------- --------
Cash flows from financing activities:
Net increase in demand deposits
NOW, savings and money market accounts 27,528 1,957 7,676
Net increase (decrease) in time deposits 1,330 (2,208) (2,507)
Cash received from acquisition of branch -- -- 6,355
Advances from Federal Home Loan Bank 3,327 42,467 39,814
Repayment of Federal Home Loan Bank advances (9,538) (41,848) (38,603)
Net increase (decrease) in repurchase agreements 645 1,526 (1,467)
Net (decrease) increase in other borrowed funds -- (221) 221
Purchases of treasury stock (55) -- --
Cash dividends paid (728) (1,304) (802)
---------- --------- --------
Net cash provided by financing activities 22,509 369 10,687
---------- --------- --------
Net increase (decrease) in cash and cash equivalents 20,020 14,029 (6,405)
Cash and cash equivalents at beginning of period 31,311 17,282 23,687
---------- --------- --------
Cash and cash equivalents at end of period $ 51,331 $ 31,311 $ 17,282
========== ========= ========
Cash paid during the year for:
Interest $ 12,068 $ 11,802 $ 11,957
========== ========= ========
Income taxes $ 2,097 $ 2,383 $ 2,104
========== ========= ========
Supplemental disclosures of non-cash activities:
Loans transferred to real estate acquired by
foreclosure or substantively repossessed $ 524 $ 603 $ 305
========== ========= ========
Loans transferred to other personal property owned $ 57 $ 19 $ --
========== ========= ========
Loans charged off, net of recoveries $ 292 $ 320 $ 437
========== ========= ========
Financed sales of real estate acquired by foreclosure $ 231 $ 203 $ 141
========== ========= ========
Real estate acquired by foreclosure or substantively repossessed
transferred to loans $ 44 $ -- $ --
========== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
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
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 consolidation.
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 relate to
the determination of the allowance for 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 years' financial statements have been
reclassified to conform with the current year's presentation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash and due from banks 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
than the carrying value of the loans. Gains and losses are determined using the
specific identification method. All loans sold are without recourse to the
Company.
LOANS
Loans are carried at the principal amounts outstanding, net of any unearned
income. 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 notes using a method the result of which approximates that of the
interest method. Loans are placed on nonaccrual when payment of principal or
interest is considered to be in doubt or is past due 90 days or more. The
Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired, if (i) it is probable that the Company will collect all amounts due in
accordance with the contractual terms of the loan or (ii) the loan is not a
commercial, commercial real estate or an individually significant mortgage or
consumer loan. Previously accrued income on nonaccrual loans that has not been
collected is reversed from current income, and subsequent cash receipts are
recorded as income. 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 LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate by
management on the basis of many factors including the risk characteristics of
the portfolio, trends in loan delinquencies and an assessment of existing
economic conditions. Management believes that the allowance for 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
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 loan
losses. Such agencies may require the Banks to recognize additions to the
allowance based on judgements different from those of management.
Commercial, commercial real estate and individually significant mortgage and
consumer loans are considered impaired, and are placed on nonaccrual, when it is
probable that the Company will not be able to collect all amounts due according
to the contractual terms of the loan agreement. Mortgage and consumer loans
which are not individually significant are measured for impairment collectively.
Loans that experience insignificant payment delays and insignificant shortfalls
in payment amounts generally are not classified as impaired. The amount of
impairment for all impaired loans is determined by the difference between the
present value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loan. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
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. 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 1998 and 1997 financial statements and EPS for 1996
financial statements did not need to be restated.
NOTE 2 CASH AND DUE FROM BANKS
Cash and due from banks at December 31, 1998 and 1997 includes $2,308,000 and
$2,284,000, 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
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investment and mortgage-backed securities at December 31, 1998
follows: (In thousands)
Gross Gross
Amortized Unrealized unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
Available-for-sale:
US Treasury and other
US government agencies $17,322 $ 93 $ 24 $17,391
Common and preferred stocks 2,919 118 296 2,741
Mortgage-backed securities 13,342 120 20 13,442
Collateralized mortgage obligations 11,118 14 62 11,070
State and political subdivisions 3,676 209 -- 3,885
------- ----- ------ -------
$48,377 $ 554 $ 402 $48,529
======= ===== ====== =======
Held-to-maturity:
Mortgage-backed securities $ 5,501 $ 16 $ 32 $ 5,485
State and political subdivisions 1,008 22 -- 1,030
------- ----- ------ -------
$ 6,509 $ 38 $ 32 $ 6,515
======= ===== ====== =======
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 contractual maturity distribution of investments in debt obligations at
December 31, 1998 follows: (In thousands)
<TABLE>
<CAPTION>
One to Five to Over
Within five ten ten Total
one year years years years cost
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Available-for-sale:
US Treasury and other US government agencies $ 500 $6,002 $10,820 $ -- $17,322
Mortgage-backed securities 142 1,219 929 11,052 13,342
Collateralized mortgage obligations -- -- 9,453 1,665 11,118
State and political subdivisions -- 662 222 2,792 3,676
------- ------ ------- ------- -------
$ 642 $7,883 $21,424 $15,509 $45,458
======= ====== ======= ======= =======
Market value $ 642 $7,962 $21,451 $15,733 $45,788
======= ====== ======= ======= =======
<CAPTION>
One to Five to Over
Within five ten ten Total
one year years years years cost
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Held-to-maturity:
Mortgage-backed securities $ 22 $ 695 $ 2,629 $ 2,155 $ 5,501
State and political subdivisions 225 783 -- -- 1,008
------- ------ ------- ------- -------
$ 247 $1,478 $ 2,629 $ 2,155 $ 6,509
======= ====== ======= ======= ========
Market value $ 247 $1,503 $ 2,630 $ 2,135 $ 6,515
======= ====== ======= ======= ========
</TABLE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ -------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
------- ------ ----- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Investments:
Debt $ -- $ -- $ 31 $178 $ 1 $ --
Equity 523 22 548 -- 325 20
Mortgage-backed securities available-for-sale -- 5 88 176 -- --
------- ------ ----- ---- ------ -------
$ 523 $ 27 $ 667 $354 $ 326 $ 20
======= ====== ===== ==== ====== =======
</TABLE>
Investment securities totaling $22,414,000 and $24,588,000 were pledged to
secure public deposits, repurchase agreements and treasury, tax and loan
accounts at December 31, 1998 and 1997, respectively.
NOTE 4 LOANS
Loans at December 31 were comprised of the following: (In thousands)
1998 1997
-------- --------
Real Estate:
Residential $146,603 $152,041
Commercial 77,680 61,873
Construction 4,118 5,664
Commercial 25,874 21,460
Installment 25,088 23,476
Other 4,795 2,769
-------- --------
Total loans 284,158 267,283
Less: Unearned income (332) (526)
Allowance for
loan losses (note 5) (4,404) (4,156)
-------- --------
$279,422 $262,601
======== ========
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, 1998
and 1997 follows: (In thousands)
1998 1997
-------- --------
Balance at beginning of year $ 1,692 $ 1,361
New loans 867 1,138
Repayments (947) (782)
Change in status of
officers and directors (63) (25)
-------- --------
Balance at end of year $ 1,549 $ 1,692
======== ========
The Company's lending activities are conducted principally in New Hampshire.
Although the loan portfolio is diversified, a portion of its debtors ability to
repay is dependent upon the economic conditions prevailing in New Hampshire.
Mortgage loans serviced for others are not included in the accompanying
balance sheets. The unpaid principal balances of the loans totaled $12,007,000
and $4,715,000 at December 31, 1998 and 1997, respectively.
In 1998 and 1997 the Company sold mortgage loans totaling $7,787,000 and
$2,209,000 and retained the servicing rights. The fair value of those rights is
not material and has not been recognized in the 1998 and 1997 financial
statements.
NOTE 5 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses at December 31 follows: (In
thousands)
1998 1997 1996
-------- -------- --------
Balance at beginning of year $ 4,156 $ 3,941 $ 3,866
Provision charged to expense 540 535 512
Recoveries on loans
previously charged-off 232 292 213
Loans charged-off (524) (612) (650)
-------- -------- --------
Balance at end of year $ 4,404 $ 4,156 $ 3,941
======== ======== ========
NOTE 6 IMPAIRED LOANS
Restructured, accruing loans entered into prior to the adoption of SFAS No.
114 and 118 are not required to be reported as impaired loans unless such loans
are not performing in accordance with the restructured terms at adoption of 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, 1998 and 1997, loans restructured in a troubled debt
restructuring before January 1, 1995, the effective date of SFAS No. 114, that
are not impairedbased on the terms specified by the restructuring agreement
totaled $1,151,000 and $1,184,000, respectively. The gross interest income that
would have been recorded in the years ended December 31, 1998 and 1997 if such
restructured loans had been current in accordance with their original terms was
$105,000 and $111,000, respectively. The amount of interest income on such
restructured loans that was included in net income for the years ended December
31, 1998 and 1997 was $90,000 and $96,000, respectively.
The recorded investment in loans that are considered to be impaired under FASB
No. 114 was $415,000 and $211,000 for the years ended December 31, 1998 and
1997, respectively, for which the related allowance for loan losses is $19,000
and $0, 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, 1998 and 1997 was approximately $316,000 and $555,000, respectively. For the
twelve months ended December 31, 1998 and 1997 the Company recognized interest
income on those impaired loans of $10,000 and $16,000 which included $0 and
$4,000 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)
1998 1997
-------- --------
Commercial real estate $ 100 $ --
Residential homes 28 112
Mobile home on land 30 --
Condominiums -- 96
Land -- 14
-------- --------
$ 158 $ 222
======== ========
The aforementioned balances include $58,000 and $59,000 of collateral
substantively repossessed at December 31, 1998 and 1997, respectively.
Sales by the Company resulted in gains of $45,000, $56,000, and $88,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.
Write downs on real estate acquired by foreclosure totaled $5,000, $58,000,
and $54,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
NOTE 8 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows: (In thousands)
1998 1997
-------- --------
Land $ 1,615 $ 1,615
Buildings 7,788 7,029
Construction in progress 111 516
Equipment 5,675 4,586
-------- --------
15,189 13,746
Less accumulated depreciation
and amortization (5,226) (4,559)
-------- --------
$ 9,963 $ 9,187
======== ========
The Company leases four of its locations under non-cancellable operating
leases. Minimum lease payments in future periods under non-cancellable operating
leases at December 31, 1998 are as follows:
1999 139,137
2000 139,733
2001 94,409
2002 50,000
2003 24,722
--------
$448,001
========
The terms of two 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. All 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, 1998, 1997 and 1996 amounted to
$91,000, $57,000, and $52,000, respectively.
NOTE 9 DEPOSITS
Deposits at December 31 were as follows: (Dollars in thousands)
1998 1997
------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
Non-certificate
deposits:
Regular savings $ 63,536 2.04% $ 62,825 2.37%
NOW and
Super NOW 50,730 0.99 46,419 1.28
Money market 37,828 2.54 21,420 2.77
Demand deposits 45,808 -- 39,710 --
-------- --------
197,902 1.40 170,374 1.57
-------- --------
Certificates of deposit:
Less than $100,000 129,071 5.13 131,308 5.43
$100,000 and over 23,948 5.14 20,381 5.39
-------- --------
153,019 5.14 151,689 5.43
-------- --------
Total deposits $350,921 3.03% $322,063 3.39%
======== ========
On December 31, 1998, BCB accepted a temporary money market deposit in the
amount of $14,500,000. This account was closed on January 6, 1999.
For time deposits as of December 31, 1998, the aggregate amount of maturities
for each of the following five years ended December 31, are: (In thousands)
1999 117,964
2000 30,841
2001 3,691
2002 433
2003 90
--------
$153,019
========
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,
1998: (Dollars in thousands)
Weighted
Average
Rate to
Maturity Date Balance Maturity
------------- ------- --------
1999 833 5.87%
2000 750 5.83
2001 1,500 5.95
2002 28 6.78
------
TOTAL $3,111
======
Advances are secured by the Company's stock in that institution, its
residential real estate mortgage portfolio and the remaining US government and
agency securities not otherwise pledged.
Information about short-term advances included above
is as follows: (Dollars in thousands)
December 31,
----------------------------
1998 1997
-------- --------
Outstanding at end of period $ 833 $ 9,212
Approximate maximum out-
standing at any month end 8,054 12,221
Average amounts outstanding
during the period 4,951 9,019
Weighted average interest
rate during the period 6.47% 5.98%
Weighted average interest
rate at end of period 5.91 5.92
NOTE 11 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase at December 31 are summarized
as follows: (Dollars in thousands)
1998 1997 1996
------- ------ ------
Outstanding at December 31 $ 6,791 $6,146 $4,620
Maturity date 1/99-4/00 2/98-12/98 2/97-5/98
Weighted average interest
rate at end of year 4.97% 5.57% 5.50%
Maximum amount out-
standing at any month end $10,396 $9,161 $7,784
Daily average outstanding $ 8,469 $7,796 $6,565
Weighted average interest
rate for the year 5.09% 5.18% 5.45%
Investment securities with a total book value and accrued interest of
$16,964,000, $20,633,000 and $14,393,000 were pledged as collateral and held by
a Correspondent Bank under the Company's control to secure the agreements at
December 31, 1998, 1997, and 1996, respectively. The market value of the
collateral at December 31, 1998, 1997 and 1996 was $16,821,000, $20,107,000, and
$13,998,000, 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, 1998 the Banks' available line of
credit totaled $10.2 million.
In addition, the Banks have a credit line totaling $2.0 million with another
commercial bank.
At December 31, 1998 and 1997 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, 1998, 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, 1998, that the
Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, 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)
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes: Provisions:
---------------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Risk-based Total Capital:
Consolidated $ 43,016 17.78% $ 18,870 >=8% N/A
the Berlin City Bank 26,204 16.64 12,598 >=8 $ 15,747 >=10%
the Pemigewasset National Bank 14,344 17.33 6,621 >=8 8,277 >=10
Risk-based Tier 1 Capital:
Consolidated 40,002 16.53 9,435 >=4 N/A
the Berlin City Bank 24,221 15.38 6,299 >=4 9,448 >=6
the Pemigewasset
National Bank 13,307 16.08 3,311 >=4 4,966 >=6
Leverage:
Consolidated 40,002 10.25 15,550 >=4 N/A
the Berlin City Bank 24,221 9.26 10,468 >=4 13,085 >=5
the Pemigewasset
National Bank 13,307 10.05 5,297 >=4 6,622 >=5
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
</TABLE>
Under the National Bank Act, the approval of the Office of the Comptroller of
the Currency ("OCC") is required if dividends declared by Pemigewasset National
Bank ("PNB") in any year exceed the net profits of that year, as defined,
combined with the retained net profit for the two preceding years. At December
31, 1998, PNB could, without approval of the OCC, declare dividends aggregating
$2,077,000.
NOTE 15 OTHER NONINTEREST EXPENSE
The major components of other noninterest expense for the years ended
December 31 follows: (In thousands)
1998 1997 1996
-------- -------- --------
Directors' fees $ 138 $ 266 $ 303
Stationery and supplies 470 374 360
Other 2,971 2,668 2,582
-------- -------- --------
$ 3,579 $ 3,308 $ 3,245
======== ======== ========
NOTE 16 FEDERAL AND STATE TAXES
The components of federal and state tax expense at December 31 are as
follows: (In thousands)
1998 1997 1996
-------- -------- --------
Current:
Federal $ 1,628 $ 2,025 $ 1,732
State 220 193 253
-------- -------- --------
1,848 2,218 1,985
-------- -------- --------
Deferred:
Federal 154 45 (8)
State 34 11 (3)
-------- -------- --------
188 56 (11)
-------- -------- --------
Total $ 2,036 $ 2,274 $ 1,974
======== ======== ========
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)
1998 1997
-------- --------
Deferred income tax assets:
Allowance for
loan losses $ 1,297 $ 1,149
Loan origination fees 91 155
Interest on nonaccrual
loans 18 193
Foreclosed property valuation -- 19
Unrealized holding loss on
investment securities
available-for-sale -- 32
Deposit purchase premium 338 280
Supplemental insurance 53 57
Other 57 47
-------- --------
1,854 1,932
-------- --------
Deferred income liabilities:
Depreciation (454) (380)
Pension (120) (52)
Unrealized holding gain on
investment securities
available-for-sale (58) --
-------- --------
(632) (432)
-------- --------
Deferred income tax asset, net $ 1,222 $ 1,500
======== ========
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, 1998, 1997 and 1996
differs from the "expected" federal income tax expense at the 34% statutory rate
for the following reasons:
1998 1997 1996
-------- -------- --------
Expected federal income taxes 34.0% 34.0% 34.0%
Municipal income (3.6) (3.6) (3.5)
State tax expense net
of federal benefit 2.8 3.2 2.6
Other 0.1 2.4 0.8
-------- -------- --------
33.3% 36.0% 33.9%
======== ======== ========
NOTE 17 PENSION PLANS
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 information about the plans as of December 31
and for the years then ended: (Dollars in thousands)
1998 1997
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $ 3,587 $ 3,191
Service cost 218 202
Interest cost 268 233
Actuarial gain 204 162
Benefits paid (289) (201)
-------- --------
Benefit obligation at end of year 3,988 3,587
-------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 3,419 2,946
Actual return on plan assets 333 394
Employer contribution 303 280
Benefits paid (289) (201)
-------- --------
Fair value of plan assets
at end of year 3,766 3,419
-------- --------
Funded status (222) (168)
Unrecognized net actuarial loss 560 409
Unrecognized prior service cost (8) (11)
-------- --------
Prepaid benefit cost $ 330 $ 230
======== ========
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31, 1998 1997
------------------------
BCB PNB BCB PNB
Discount rate 7% 8% 7% 8%
Expected return on plan assets 9% 8% 9% 8%
Rate of compensation increase 5% 4% 5% 4%
COMPONENTS OF NET
PERIODIC BENEFIT COST 1998 1997 1996
-------- -------- --------
Service cost $ 218 $ 202 $ 199
Interest cost 268 232 204
Expected return on plan assets (296) (246) (234)
Amortization of prior
service cost 1 1 1
Recognized net actuarial loss 16 13 5
Recognized transition amount (4) (4) (4)
-------- -------- --------
Net periodic benefit cost $ 203 $ 198 $ 171
======== ======== ========
Plan assets as of December 31, 1998 and 1997 include a savings account at BCB
totaling $798,000 and $162,000, respectively.
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, $15,000, and $14,000 for the years ended December 31, 1998, 1997,
and 1996, 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)
1998 1997
-------- --------
Financial instrument whose contract
amounts represent credit risk:
Unadvanced portions of home
equity loans $ 2,381 $ 1,863
Unadvanced portions of lines
of credit 10,691 16,930
Unadvanced portions of
commercial real estate loans 1,757 1,585
Commitments to originate loans 13,460 8,713
Standby letters of credit 520 491
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: 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.
The estimated fair values of the Company's financial instruments are as
follows: (In thousands)
Loans held for sale: The carrying amount reported in the balance sheet
approximates fair value.
1998 1997
-----------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and due from banks $ 14,856 $ 14,856 $ 12,086 $ 12,086
Federal funds sold 36,475 36,475 19,225 19,225
Interest bearing deposits 92 92 85 85
Investment securities
available-for-sale 48,529 48,529 55,103 55,103
Investment securities
held-to-maturity 6,509 6,515 11,312 11,297
FHLB stock 1,958 1,958 1,958 1,958
FRB stock 80 80 80 80
Loans held for sale 535 535 292 292
Loans, net 279,422 280,754 262,601 262,164
Accrued interest receivable 1,846 1,846 1,971 1,971
Financial liabilities:
Deposits 350,921 351,775 322,063 322,379
Repurchase agreements 6,791 6,827 6,146 6,150
FHLB advances 3,111 3,135 9,322 9,325
The carrying amounts of financial instruments shown in the above table are
included in the balance sheets under the indicated captions.
At December 31, 1998, all the Company's financial instruments were held for
purposes other than trading.
At December 31, 1998, 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 1998 and 1997 follows:
1998 Quarters Ended
-----------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- --------
Interest and dividend income $ 7,168 $ 7,189 $ 7,379 $ 7,345
Interest expense 2,910 2,884 2,930 2,822
-------- -------- -------- --------
Net interest income 4,258 4,305 4,449 4,523
Provision for loan losses 135 135 135 135
Noninterest income 636 461 397 525
Noninterest expense 2,899 3,062 3,148 3,801
-------- -------- -------- --------
Income before taxes 1,860 1,569 1,563 1,112
Income tax expense 652 515 516 353
-------- -------- -------- --------
Net income $ 1,208 $ 1,054 $ 1,047 $ 759
======== ======== ======== ========
Earnings per share $ 0.70 $ 0.61 $ 0.60 $ 0.44
======== ======== ======== ========
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 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
======== ======== ======== ========
NOTE 22 CONDENSED PARENT ONLY FINANCIAL STATEMENTS
Condensed financial statements of Northway
Financial, Inc. as of December 31, 1998 and 1997 and
for the three years ended December 31, 1998 follow: (In
thousands)
Balance Sheets
1998 1997
---- ----
Assets
Cash and cash equivalents $ 2,322 $ 1,412
Investment in subsidiary,
The Berlin City Bank 25,024 23,232
Investment in subsidiary,
The Pemigewasset National Bank 13,636 12,884
Other assets 1 --
-------- --------
$ 40,983 $ 37,528
======== ========
Liabilities and Stockholders' Equity
Accrued expenses $ 27 $ 2
-------- --------
Total liabilities 27 2
-------- --------
Stockholders' equity:
Common Stock 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 37,084 33,744
Treasury stock (55) --
Accumulated other
comprehensive income 94 (51)
-------- --------
Total Stockholders' Equity 40,956 37,526
-------- --------
$ 40,983 $ 37,528
======== ========
Statements of Income
1998 1997 1996
-------- -------- --------
Dividends from subsidiaries $ 1,686 $ 1,973 $ 892
Interest income 43 -- --
Management fee income
from subsidiary -- 25 36
-------- -------- --------
1,729 1,998 928
General and administrative
expense 70 217 36
-------- -------- --------
Income before income
tax expense (benefit) and
equity in undistributed net
income of subsidiaries 1,659 1,781 892
Income tax expense (benefit) (9) 3 --
-------- -------- --------
Income before equity in
undistributed net income
of subsidiaries 1,668 1,778 892
Equity in undistributed net
income of subsidiaries 2,400 2,261 2,965
-------- -------- --------
Net income $ 4,068 $ 4,039 $ 3,857
======== ======== ========
Statements of Cash Flows
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income $ 4,068 $ 4,039 $ 3,857
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Increase in other assets -- -- 2
Increase (decrease) in
accrued expenses 25 (1) --
Undistributed net income
of subsidiaries (2,400) (2,261) (2,965)
-------- -------- --------
Net cash provided by
operating activities 1,693 1,777 894
-------- -------- --------
Cash flows from financing
activities:
Cash received from BCB -- 245 --
Purchase of treasury stock (55) -- --
Dividends paid (728) (1,004) (802)
-------- -------- --------
Net cash used in
financing activities (783) (759) (802)
-------- -------- --------
Net increase in cash and
equivalents 910 1,018 92
Cash and cash equivalents
at beginning of year 1,412 394 302
-------- -------- --------
Cash and cash equivalents
at end of year $ 2,322 $ 1,412 $ 394
======== ======== ========
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: (In thousands)
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 year ended December 31,
1996: (In thousands)
Pemi
The Berlin Bancorp,
City Bank Inc. Combined
--------- -------- --------
Net interest and dividend income $9,671 $6,046 $15,717
Net income 2,580 1,277 3,857
<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 29, 1999 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, President March 29, 1999
----------------------- and Chief Executive Officer
William J. Woodward (Principal Executive Officer)
/S/ Fletcher W. Adams Vice Chairman of the March 29, 1999
----------------------- Board
Fletcher W. Adams
/S/ John D. Morris Director March 29, 1999
-----------------------
John D. Morris
/S/ John H. Noyes Director March 29, 1999
-----------------------
John H. Noyes
/S/ Barry J. Kelley Director March 29, 1999
-----------------------
Barry J. Kelley
/S/ Randall G. Labnon Director March 29, 1999
-----------------------
Randall G. Labnon
/S/ Andrew L. Morse Director March 29, 1999
-----------------------
Andrew L. Morse
/S/ Peter H. Bornstein Director March 29, 1999
-----------------------
Peter H. Bornstein
/S/ Charles H. Clifford, Jr. Director March 29, 1999
-----------------------
Charles H. Clifford, Jr.
/S/ Arnold P. Hanson, Jr. Director March 29, 1999
-----------------------
Arnold P. Hanson, Jr.
/S/ Donald R. Hatt Senior Executive Vice March 29, 1999
----------------------- President
Donald R. Hatt Director
/S/ George L. Fredette Senior Vice President, Chief March 29, 1999
----------------------- Financial Officer and Treasurer
George L. Fredette (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 (incorporated by
reference to Exhibit 3.2 to Northway's Annual Report on Form
10-K for the year ended December 31, 1997).
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 (incorporated
by reference to Exhibit 10.1 to Northway's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.2 Employment Agreement for Fletcher W. Adams (incorporated by
reference to Exhibit 10.2 to Northway's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.3 Amendment to the Employment agreement for William J.
Woodward. (1)(2)
10.4 Amendment to the Employment agreement for Fletcher W. Adams.
(1)(2)
10.5 Employment agreement for Donald R. Hatt. (1)(2)
10.6 Employment agreement for Paul M. Ferguson. (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 10.3
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment") is entered into by and
among Northway Financial, Inc., a New Hampshire chartered corporation
("Northway"), The Berlin City Bank, a New Hampshire chartered bank and wholly
owned subsidiary of Northway with its principal office located in New Hampshire
(Northway and The Berlin City Bank are hereinafter collectively referred to as
the "Employer"), and William J. Woodward (the "Executive").
WHEREAS, the Employer and the Executive are parties to an Employment
Agreement dated September 30, 1997 (the "Employment Agreement"); and
WHEREAS, the Employer and the Executive have determined that it is in their
mutual best interest to amend the Employment Agreement as set forth below;
NOW, THEREFORE, the Employer and the Executive agree as follows:
The Employment Agreement is amended by adding the following to the
end of Section 7(d) ("Noncompetition and Nonsolicitation"):
Notwithstanding the foregoing, in the event that the Executive
becomes entitled to Termination Benefits pursuant to Section 6(f)
("Termination Following a Change of Control"), this Section 7(d)
shall not apply to the Executive with respect to the Executive's
activities during any period following the termination of the
Executive's employment.
This Amendment shall be effective as of January 1, 1999 (the
"Effective Date").
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed as a sealed instrument
by the Employer, by its duly authorized officer, and by the Executive, as of the
Effective Date.
NORTHWAY FINANCIAL, INC.
Attest:
By: Fletcher W. Adams
-------------------
By: /S/ Donald R. Hatt Name: Fletcher W. Adams
-------------------- Title: Vice Chairman
Name: Donald R. Hatt
Title: Senior Executive Vice President
and Chief Financial Officer
THE BERLIN CITY BANK
By: /S/ William J. Woodward
-------------------
Name: William J. Woodward
Title: President and Chief
Executive Officer
EXECUTIVE
/S/ William J. Woodward
----------------------
William J. Woodward
<PAGE>
Exhibit 10.4
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment") is entered into by
and among Northway Financial, Inc., a New Hampshire chartered corporation
("Northway"), 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 are hereinafter collectively referred
to as the "Employer"), and Fletcher Adams (the "Executive").
WHEREAS, the Employer and the Executive are parties to an Employment
Agreement dated September 30, 1997 (the "Employment Agreement"); and
WHEREAS, the Employer and the Executive have determined that it is in
their mutual best interest to amend the Employment Agreement as set forth below;
NOW, THEREFORE, the Employer and the Executive agree as follows:
The Employment Agreement is amended by adding the following to the end
of Section 7(d) ("Noncompetition and Nonsolicitation"):
Notwithstanding the foregoing, in the event that the Executive becomes
entitled to Termination Benefits pursuant to Section 6(f) ("Termination
Following a Change of Control"), this Section 7(d) shall not apply to
the Executive with respect to the Executive's activities during any
period following the termination of the Executive's employment.
This Amendment shall be effective as of January 1, 1999 (the "Effective
Date").
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed as a sealed
instrument by the Employer, by its duly authorized officer, and by the
Executive, as of the Effective Date.
NORTHWAY FINANCIAL, INC.
Attest:
By: /S/ William J. Woodward
-------------------
By: /S/ Donald R. Hatt Name: William J. Woodward
---------------- Title: President and Chief
Name: Donald R. Hatt Executive Officer
Title: Senior Executive Vice President
PEMIGEWASSET NATIONAL BANK
By: /S/ Fletcher W. Adams
------------------
Name: Fletcher W. Adams
Title: President and Chief
Executive Officer
EXECUTIVE
/S/ Fletcher W. Adams
-------------------
Fletcher W. Adams
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") is made as of November 12, 1997 (the
"Effective Date"), by and between Northway Financial, Inc., a New Hampshire
chartered corporation (the "Employer") and Donald R. Hatt (the "Executive"). In
consideration of the mutual covenants contained in this Agreement, the Employer
and the Executive agree as follows:
A. 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. For the purposes of complying
with and administering its compensation obligations under this
Agreement, the Employer may, at its option, engage its subsidiary, The
Berlin City Bank (the "Bank"), to serve, for such period as the
Employer determines to be necessary, as a joint employer of the
Executive under this Agreement and the Executive accepts any such
employment by the Bank.
B. Capacity. The Executive shall serve the Employer as Senior
Executive Vice President/Chief Operating Officer, subject to election
by the Board of Directors of the Employer (the "Board of Directors").
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 (the "CEO") or 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 CEO or the Board of Directors.
C. Term. Subject to the provisions of Section 6, the term of
employment pursuant to this Agreement (the "Term") shall be for two (2)
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.
D. Compensation and Benefits. The regular compensation and
benefits payable to the Executive under this Agreement shall be as
follows:
1. 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 of $150,000, 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.
2. Bonus or Similar Incentive Programs. The Executive
shall be entitled to participate in any incentive or bonus
program established by the Board of Directors to include the
Executive's position, with such terms as may be established in
the sole discretion of the Board of Directors.
3. 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; provided that until a package of benefit plans is
established by the Employer, the Executive shall be entitled
to participate in benefit plans in effect for all or most of
the senior executives of the Bank. 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.
4. Relocation Costs. To reduce the Executive's
expense associated with relocation, the Employer shall provide
the following to the Executive:
a) Duplicate Residence Allowance. The
Employer shall pay to the Executive a Duplicate
Residence Allowance effective for the lesser of (A)
such period as the Executive maintains residences in
both North Carolina and northern New Hampshire; or
(B) nine (9) months. The Duplicate Residence
Allowance for any month shall equal the lesser of (Y)
One Thousand Dollars ($1,000); or (Z) the Executive's
monthly rental or mortgage payment plus the cost of
electricity for a northern New Hampshire residence
for such month.
b) Relocation Allowance. In lieu of any
relocation cost reimbursement other than the
Duplicate Residence Allowance, the Employer shall pay
to the Executive (A) Fifteen Thousand Dollars
($15,000) promptly after the execution of this
Agreement; and (B) Fifteen Thousand Dollars ($15,000)
upon the Executive's relocation to a permanent
residence in northern New Hampshire.
5. 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.
6. 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.
E. Extent of Service. During the Executive's employment under
this Agreement, the Executive shall, subject to the direction and
supervision of the CEO 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 CEO or the Board of Directors; provided that
nothing in this Agreement shall be construed as preventing the
Executive from:
1. 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
2. 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.
F. 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.
1. 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 majority vote of the
Board of Directors and written notice to the Executive. Only
the following shall constitute "cause" for such termination:
a) dishonest statements or acts of the
Executive with respect to the business of the
Employer or any affiliate of the Employer;
b) 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);
c) 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;
d) gross negligence, willful misconduct or
insubordination of the Executive with respect to the
Employer or any affiliate of the Employer; or
e) material breach by the Executive of any
of the Executive's obligations under this Agreement.
2. 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 or the
CEO at least thirty (30) days prior to such termination.
3. 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 majority vote of the Board of Directors.
4. 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"):
a) continuation of the Executive's Salary at
the rate then in effect pursuant to Section 4(a); and
b) continuation of group health plan
benefits to the extent authorized by and consistent
with 29 U.S.C. Section 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 or other cash compensation the Executive receives from
such employment or self-employment attributable to services performed during the
Termination Benefits Period 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.
1. 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 by a majority 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. Section 2601 et seq. and the Americans with Disabilities Act, 42 U.S.C.
Section 12101 et seq.
2. 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. If (1) 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 the Executive's employment is terminated without
cause (in accordance with Section 6(c) above); and (2) such termination occurs
both within twelve (12) months following a Change of Control and during the
Term, then the Employer shall provide the Executive (or the Executive's estate,
if applicable) with Termination Benefits for two (2) years from the date of
termination of the Executive's employment. To the extent that Termination
Benefits would otherwise be due to the Executive, this Section 6(f) shall not be
construed to require the provision of any additional pay or benefits to the
Executive.
a) Change of Control shall mean the occurrence of one or more
of the following events:
(1) 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 the Employer), directly or indirectly, of securities of the
Employer, representing fifty percent (50%) or more of the
combined voting power of the Employer's then outstanding
securities; or
(2) persons who, as of the Effective Date,
constituted the Employer's Board of Directors (the AIncumbent
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 the
Employer's Board of Directors, provided that any person
becoming a director of the Employer 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
(3) the stockholders of the Employer approve a merger
or consolidation of the Employer with any other corporation or
other entity, other than (1) a merger or consolidation which
would result in the voting securities of the Employer
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 the Employer or such surviving entity
outstanding immediately after such merger or consolidation or
(2) a merger or consolidation effected to implement a
recapitalization of the Employer (or similar transaction) in
which no "person" (as hereinabove defined) acquires more than
fifty percent (50%) of the combined voting power of the
Employer's then outstanding securities; or
(4) the stockholders of the Employer approve a plan
of complete liquidation of the Employer or an agreement for
the sale or disposition by of all or substantially all of the
Employer's assets.
a) The events referred to in Section 6(f)
above shall be as follows:
(5) 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
(6) 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.
a) 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
b) 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.
G. Confidential Information, Noncompetition and Cooperation.
1. 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).
2. 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.
3. 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.
4. 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 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. Nowithstanding the foregoing, in
the event that the Executive becomes entitled to Termination
Benefits pursuant to Section 6(f) ("Termination Following a
Change of Control"), this Section 7(d) shall not apply to the
Executive with respect to the Executive's activities during
any period following the termination of the Executive's
employment.
5. 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.
6. 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).
7. 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.
H. 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. 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.
I. 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.
J. 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.
K. 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.
L. 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.
M. 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.
N. 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
or the CEO, and shall be effective on the date of delivery in person or
by courier or three (3) days after the date mailed.
O. 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.
P. 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.
Q. 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.
<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/ William J. Woodward
-----------------------
By: /S/ Joe N. Rozek Name: William J. Woodward
------------------- Title: President and CEO
Name: Joe N. Rozek
Title: Assistant to the Office of the
Chairman of the Board
EMPLOYEE
/S/ Donald R. Hatt
-------------------
Donald R. Hatt
<PAGE>
Exhibit 10.6
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") is made as of August 31, 1998 (the
"Effective Date"), by and between Northway Financial, Inc. ("Northway"), a New
Hampshire chartered corporation and its subsidiary, Pemigewasset National Bank
("PNB") (collectively referred to as the "Employer") and Paul M. Ferguson (the
"Executive"). The Employer may, in its discretion, administer and discharge any
of its obligations through Northway, PNB, or both entities. 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 as Executive Vice
President and Chief Operating Officer of PNB ("EVP/COO"), subject to
election by the Boards of Directors of both Northway and PNB (the
"Boards of Directors"). 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 PNB (the "CEO") or the Chairman
of Northway (the "Chairman"). 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 CEO or the Chairman. Notwithstanding the foregoing, after the
Executive becomes Chief Executive Officer of PNB pursuant to Section 4
below, all references to "CEO" in this Agreement shall thereafter mean
the Chairman of PNB.
3. Term. Subject to the provisions of Section 7, the term of
employment pursuant to this Agreement (the "Term") shall be for two (2)
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. Promotions. Subject to the Executive's satisfactory
performance on a continuing basis, as determined in the discretion of
the Employer, and further subject to the approval of the Boards of
Directors, the Executive shall be promoted to the following positions
in the following time frames: (a) the Executive shall be promoted to
the position of President and Chief Operating Officer of PNB in May,
1999; and (b) when PNB's current President and Chief Executive Officer,
Fletcher Adams, retires, the Executive shall be promoted to the
position of President and Chief Executive Officer of PNB. The Employer
states that as of the date of execution of this Agreement, Mr. Adams
has stated an intention to retire in the year 2000.
5. Compensation and Benefits. The regular compensation and
benefits payable to the Executive under this Agreement shall be as
follows:
1. Salary. For all services rendered by the Executive
under this Agreement, the Employer shall pay the Executive an
initial salary (the "Salary") at an annual rate of $117,500,
subject to such increases in conjunction with the promotions
described above in Section 4 that the Employer, in its
judgment, determines to be appropriate based upon the
accompanying changes in the Executive's responsibilities, and
further subject to any other increases that the Employer may,
in its discretion, determine to be appropriate from time to
time. The Salary shall be payable in periodic installments in
accordance with the Employer's usual practice for its senior
executives.
2. Bonus or Similar Incentive Programs. The Executive
shall be entitled to participate in any incentive or bonus
program established by the Northway Board of Directors to
include the Executive's position, with such terms as may be
established in the sole discretion of the Boards of Directors.
3. 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 in effect and generally
applicable to the senior executives of PNB. 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 Boards 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.
4. Relocation Costs. To reduce the Executive's
expense associated with relocation, the Employer shall provide
the following to the Executive:
a) Temporary Housing Allowance. The Employer
shall pay to the Executive a monthly Temporary
Housing Allowance effective for the lesser of (A)
such period following the Effective Date until the
Executive obtains, by purchase or lease, a permanent
residence in the Plymouth, New Hampshire area; or (B)
six (6) months following the Effective Date. The
Temporary Housing Allowance for any month shall equal
the lesser of (Y) Seven Hundred Dollars ($700); or
(Z) the Executive's monthly rental or mortgage
payment plus the cost of electricity for a Plymouth,
New Hampshire area residence for such month.
b) Relocation Allowance. In lieu of any
relocation cost reimbursement other than the
Temporary Housing Allowance, the Employer shall pay
to the Executive a relocation allowance to cover all
of the costs that the Executive may incur in
connection with the transition from his current
residence in Mount Vernon, New Hampshire to a
permanent residence in the Plymouth, New Hampshire
area. The Relocation Allowance shall be in the amount
of up to Twenty Thousand Dollars ($20,000) to be paid
as follows: (A) Ten Thousand Dollars ($10,000)
promptly after the Effective Date; and (B) Ten
Thousand Dollars ($10,000) promptly after the
Executive obtains, by purchase or lease, a permanent
residence in the Plymouth, New Hampshire area,
provided that such relocation occurs not later than
six (6) months after the Effective Date. Such amounts
may be used for purposes related to the relocation as
determined in the Executive's discretion.
5. 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.
6. Exclusivity of Salary and Benefits. Unless
approved by the Boards of Directors, the Executive shall not
be entitled to any payments or benefits other than those
provided under this Agreement.
6. Extent of Service. During the Executive's employment under
this Agreement, the Executive shall, subject to the direction and
supervision of the CEO or the Chairman, 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 CEO or the Chairman; 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 8(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.
7. 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 7.
(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 majority vote of either
Board of Directors and written notice to the Executive. Only
the following shall constitute "cause" for such termination:
a) dishonest statements or acts of the
Executive with respect to the business of Northway,
PNB, or any affiliate of either of them;
b) 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);
c) material failure to perform to the
reasonable satisfaction of either 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 that is taking
such action, for sixty (60) days after written notice
given to the Executive by such Board of Directors;
d) gross negligence, willful misconduct or
insubordination of the Executive with respect to the
Employer or any affiliate of the Employer; or
e) 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 CEO or the Chairman 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 7(d), the Executive's employment under this Agreement
may be terminated by the Employer without cause upon written
notice to the Executive by a majority vote of either 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 7(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 5(a);
and
(ii) continuation of group health plan
benefits to the extent authorized by and consistent
with 29 U.S.C. Section 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 7(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 or other cash compensation the Executive
receives from such employment or self-employment
attributable to services performed during the
Termination Benefits Period 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
7(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 7(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 7(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
7(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, either
Board of Directors by a majority 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 5 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 7(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. Section 2601 et seq. and the Americans with
Disabilities Act, 42 U.S.C. Section 12101 et seq.
(f) Termination Following a Change of Control. If
there is a Change of Control, as defined in Section 7(f)(i)
below, during the Term, the provisions of this Section 7(f)
shall apply and shall continue to apply throughout the
remainder of the Term. If (1) the Executive's employment is
terminated by the Employer or the Executive following the
occurrence of any of the events listed in Section 7(f)(ii)
below or the Executive's employment is terminated without
cause (in accordance with Section 7(c) above); and (2) such
termination occurs both within twelve (12) months following a
Change of Control and during the Term, then the Employer shall
provide the Executive (or the Executive's estate, if
applicable) with Termination Benefits for two (2) years from
the date of termination of the Executive's employment. To the
extent that Termination Benefits would otherwise be due to the
Executive, this Section 7(f) shall not be construed to require
the provision of any additional pay or benefits to the
Executive.
(i) Change of Control shall mean the
occurrence of one or more of the following events:
(1) 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 Northway, any trustee or other
fiduciary holding securities under an
employee benefit plan of Northway, or any
corporation owned, directly or indirectly,
by the stockholders of Northway, 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
(2) 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 7(f), be considered
a member of the Incumbent Board; or
(3) 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
(4) the stockholders of Northway
approve a plan of complete liquidation of
Northway or an agreement for the sale or
disposition by of all or substantially all
of Northway's assets.
(ii) The events referred to in Section 7(f)
above shall be as follows:
(A) a reduction of the Executive's
salary other than a reduction that (1) is
based on Northway's or PNB's financial
performance or (2) is similar to the
reduction made to the salaries provided to
all or most other senior executives of
Northway or PNB; 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.
(iii) The Executive shall provide Northway
with reasonable notice and an opportunity to cure any
of the events listed in Section 7(f)(ii) and shall
not be entitled to compensation pursuant to this
Section 7(f) unless Northway fails to cure within a
reasonable period; and
(iv) It is the intention of the Executive
and of Northway that no payments by Northway 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 Northway 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 Northway, such
payments shall be reduced to the maximum amount which
can be deducted by Northway. 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
Northway 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 Northway 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 Northway has given notice of the need for such
reduction, Northway may determine the method of such
reduction in its sole discretion.
8. 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 8(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 Northway or PNB (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 Northway or
PNB; provided, however, that the restrictions set forth in the
foregoing sentence shall not apply in the event that the
Executive's employment under this Agreement is terminated
pursuant to Section 7(c) ("Termination by the Employer Without
Cause"). The Executive understands that the restrictions set
forth in this Section 8(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 Northway, PNB, or any of the
affiliates of either of them 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. Notwithstanding the foregoing, in the
event that the Executive becomes entitled to Termination
Benefits pursuant to Section 7(f) ("Termination Following a
Change of Control"), this Section 8(d) shall not apply to the
Executive with respect to the Executive's activities during
any period following the termination of the Executive's
employment.
(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 8(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 8, and that in any event money
damages would be an inadequate remedy for any such breach.
Accordingly, subject to Section 9 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.
9. 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. 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 9 shall be specifically enforceable.
Notwithstanding the foregoing, this Section 9 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 9.
10. Consent to Jurisdiction. To the extent that any court
action is permitted consistent with or to enforce Section 9 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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 Boards of Directors
or the CEO, and shall be effective on the date of delivery in person or
by courier or three (3) days after the date mailed.
16. 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.
17. 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.
18. 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.
19. Legal and Regulatory Limitations. All Termination Benefits
and all other obligations of the Employer to the Executive referred to
above in this Agreement are subject to any applicable legal or
regulatory limitations or approvals applicable to Northway and/or any
subsidiary of Northway, including, without implication of limitation,
PNB.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by Northway and PNB, each by an authorized officer, and by the
Executive, as of the Effective Date.
NORTHWAY FINANCIAL, INC.
Attest:
By: /S/ William J. Woodward
-----------------------
Name: William J. Woodward
Title: President and CEO
By: /S/ Joe N. Rozek
------------------
Name: Joe N. Rozek
Title: Assistant to the Office of the
Chairman of the Board
PEMIGEWASSET NATIONAL BANK
By: /S/ Fletcher W. Adams
---------------------
Name: Fletcher W. Adams
Title: President and CEO
EXECUTIVE
/S/ Paul M. Ferguson
---------------------------
Paul M. Ferguson
<PAGE>
Exhibit 21 List of Subsidiaries
Northway Financial, Inc.
1998 Annual report on Form 10-K
Subsidiaries of the Registrant
Jurisdiction of
Name of Significant Subsidiary % Owned Incorporation
- ------------------------------ ------- -------------
Berlin City Bank 100 United States
Pemigewasset National Bank 100 United States
<PAGE>
Exhibit 23.1 Consent
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 20, 1999,
relating to the consolidated balance sheets of Northway Financial, Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, comprehensive income and
cash flows for each of the years in the three-year period ended December 31,
1998.
/S/ Shatswell, Macleod & Company, P.C.
--------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 25, 1999
<TABLE> <S> <C>
<PAGE>
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