<PAGE>
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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.
(No Fee Required)
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(No Fee Required)
Commission File Number 000-23129
NORTHWAY FINANCIAL, INC
-----------------------
(Exact name of registrant as specified in its charter)
New Hampshire 04-3368579
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Main Street
Berlin, New Hampshire 03570
--------------------- -----
Address of principal executive offices (Zip Code)
(603) 752-1171
--------------
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by Reference in Part II of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of common stock held by nonaffiliates of the registrant
as of March 17, 2000 was 1,359,798 for an aggregate market value of $29,915,556.
At March 17, 2000, there were 1,602,569 shares of common stock outstanding,
par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part
III.
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<PAGE>
FORM 10-K TABLE OF CONTENTS
NORTHWAY FINANCIAL, INC.
PART I
------
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
-------
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 10
ITEM 13 Certain Relationships and Related Transactions................. 10
PART IV
-------
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 11
Signatures.................................................. 12
<PAGE>
PART 1
------
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 has substantially increased
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 17 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, 1999, 1998
and 1997 (dollars in thousands):
1999 1998 1997
------- ------- -------
Available-for-sale:
US Treasury and other
US government agencies $26,449 $17,391 $11,929
Mortgage-backed securities(1) 18,813 24,512 31,235
Corporate notes -- -- 5,000
Marketable equity securities 2,780 2,741 2,796
Nonmarketable equity securities 4,456 2,038 2,038
State and political subdivisions 3,500 3,885 4,143
------- ------- -------
55,998 50,567 57,141
------- ------- -------
Held-to-maturity:
Mortgage-backed securities(1) $ 3,601 $ 5,501 $ 8,400
State and political subdivisions 1,550 1,008 2,912
------- ------- -------
5,151 6,509 11,312
------- ------- -------
Total Investment Securities $61,149 $57,076 $68,453
======= ======= =======
(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, 1999 (dollars in
thousands):
Maturities
-------------------------------------------------
One to Five to Over
Available-for-sale: Within five ten ten Total
one year years years years Cost
-------- ----- ----- ----- ----
US Treasury and other
US government agencies $500 $14,496 $12,470 $ -- $27,466
Mortgage-backed
securities (1) -- 824 16,034 2,460 19,318
State and political
subdivisions 102 368 728 2,280 3,478
---- ------- ------- ------- -------
$602 $15,688 $29,232 $ 4,740 $50,262
==== ======= ======= ======= =======
Market value $604 $15,279 $28,159 $ 4,720 $48,762
==== ======= ======= ======= =======
Weighted average yield 6.88% 6.16% 6.09% 6.78% 6.19%
<PAGE>
Maturities
---------------------------------------------
One to Five to Over
Held-to-maturity: Within five ten ten Total
one year years years years Cost
-------- ----- ----- ----- ----
Mortgage-backed securities(1) $ -- $570 $1,377 $1,654 $3,601
State and political subdivisions 1,050 -- -- 500 1,550
------ ---- ------ ------ ------
$1,050 $570 $1,377 $2,154 $5,151
====== ==== ====== ====== ======
Market value $1,054 $568 $1,358 $2,115 $5,095
====== ==== ====== ====== ======
Weighted average yield 7.60% 7.18% 6.14% 6.67% 6.77%
(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,
1999, 1998, 1997, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $139,389 $146,603 $152,041 $145,847 $139,941
Commercial 93,061 77,680 61,873 43,901 37,595
Construction 4,360 4,118 5,664 2,329 363
Commercial 28,833 25,874 21,460 27,293 24,283
Installment 24,147 25,070 23,476 18,733 14,533
Indirect Installment 76,339 18 -- -- --
Other 7,369 4,795 2,769 2,999 2,277
-------- -------- -------- -------- --------
Total Loans 373,498 284,158 267,283 241,102 218,992
Less:
Unearned income 732 332 526 719 1,014
Allowance for loan losses 4,887 4,404 4,156 3,941 3,866
-------- -------- -------- -------- --------
5,619 4,736 4,682 4,660 4,880
-------- -------- -------- -------- --------
Net Loans $367,879 $279,422 $262,601 $236,442 $214,112
======== ======== ======== ======== ========
</TABLE>
The following table presents the maturity distribution of Northway's real estate
construction and commercial loans at December 31, 1999 (dollars in thousands):
Percent of
Amount Total
------ ---------
Within one year $ 3,017 9.09%
One to five years 11,562 34.83
Over five years 18,614 56.08
$33,193 100.00%
Northway's real estate construction and commercial loans due after one year at
December 31, 1999 were comprised of the following (dollars in thousands):
Amount
------
Fixed interest rate $17,933
Adjustable interest rate 12,243
-------
$30,176
=======
Asset Quality
At December 31, 1999, Northway had no classified loans. Any 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, 1999, 1998, 1997, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at the beginning of period $4,404 $4,156 $3,941 $3,866 $3,682
Charge-offs:
Real estate 159 383 452 583 456
Commercial 25 67 105 29 190
Installment loans to individuals 120 74 48 27 29
Credit card -- -- 1 11 21
Other -- -- 6 -- --
------ ------ ------ ------ ------
Total 304 524 612 650 696
------ ------ ------ ------ ------
Recoveries:
Real estate 213 115 212 160 177
Commercial 21 98 55 11 28
Installment loans to individuals 12 17 19 28 11
Credit card 1 2 4 14 12
Other -- -- 2 -- --
------ ------ ------ ------ ------
Total 247 232 292 213 228
------ ------ ------ ------ ------
Net charge-offs 57 292 320 437 468
Provision charged to expense 540 540 535 512 652
------ ------ ------ ------ ------
Balance at the end of period $4,887 $4,404 $4,156 $3,941 $3,866
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans 0.02% 0.11% 0.12% 0.20% 0.32%
</TABLE>
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,
------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------- -------------------- -------------------- --------------------
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 $ 530 7.7% $ 651 9.1% $ 613 8.0% $ 582 11.3% $ 924 11.1%
Real estate:
Commercial &
Construction 1,773 26.1 1,325 28.8 1,251 25.3 1,186 19.2 675 17.2
Residential 503 37.3 1,478 51.6 1,395 56.9 1,323 60.5 1,417 64.1
Installment 1,125 26.9 210 8.8 198 8.8 188 7.8 147 6.6
Other 60 2.0 58 1.7 55 1.0 52 1.2 53 1.0
Unallocated 896 N/A 682 N/A 644 N/A 610 N/A 650 N/A
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$4,887 100.0% $4,404 100.0% $4,156 100.0% $3,941 100.0% $3,866 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Deposits
The information set forth on page 30 of Registrants 1999 Annual Report is
incorporated herein by reference.
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."
On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") was signed by the
president and enacted into law. The Act does three fundamental things; (i) it
repeals key provisions of the Glass Steagall Act with the intent to facilitate
affiliations among banks, securities firms, insurance firms and other financial
companies; (ii) it substantially modifies the Bank Holding Company Act ("BHC
Act") to authorize bank holding companies that qualify to become "financial
holding companies" allowing them to engage in securities, insurance and other
activities that are financial in nature or incidental to a financial activity;
(iii) it allows subsidiaries of banks to engage in a broad range of financial
activities that are not permitted for banks themselves. The activities of bank
holding companies would continue to be limited to activities authorized
currently under the BHC Act. The Company has not pursued "financial holding
company" status at this time and is therefore subject to the restrictions of the
BHC Act as outlined above.
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 substantial 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. Formation of a "financial holding company" under the
Gramm-Leach-Bliley Act is also dependent of the maintenance of a "satisfactory"
CRA rating.
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, 1999, Northway and its subsidiaries had approximately 242
full-time equivalent employees. Northway considers its employee relations to be
good.
ITEM 2. PROPERTIES
Northway operates 17 branch offices and a loan origination facility in the
central and northern New Hampshire towns of Berlin, Conway (4), Gorham (2),
Groveton, Littleton, West Plymouth, Plymouth, Campton, Ashland, North Woodstock,
Tilton (2), Franklin 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 five of its branches and the loan
origination facility under five-year leases expiring between December 31, 2000
and November 20, 2004. 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 31,1999.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Northway's common stock is traded on The Nasdaq Stock Market, Inc.'s National
Market under the symbol "NWFI." The following table sets forth, for the periods
indicated, the high and low closing sale prices for the common stock, as
reported by the Nasdaq National Market, and the dividends paid on the common
stock:
Price Per Share
---------------
Low High Dividends Per Share
--- ---- -------------------
1999 4th Quarter $26.00 $28.75 $0.14
3rd Quarter $26.00 $29.75 $0.14
2nd Quarter $25.25 $30.25 $0.14
1st Quarter $29.75 $31.00 $0.14
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 --
On March 17, 2000, the closing sales price of the common stock on the Nasdaq
National Market was $22.00 per share. As of such date, there were approximately
1,480 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, 1999. 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 and 1995 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 19 to the Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
At or for the years ended December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
($000 Omitted, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $462,552 $403,972 $377,866 $372,581 $357,917
Investment securities available-for-sale 55,998 50,567 57,141 90,530 86,701
Investment securities held-to-maturity 5,151 6,509 11,312 12,199 15,377
Loans, net of unearned income 372,766 283,826 266,757 240,383 217,978
Allowance for loan losses 4,887 4,404 4,156 3,941 3,866
Other real estate owned 115 158 222 202 492
Deposit assumption premium 1,271 860 1,161 1,462 1,800
Deposits 343,029 350,921 322,063 322,315 310,388
Securities sold under agreements to repurchase 7,468 6,791 6,146 4,620 6,087
Stockholders' equity 39,286 40,956 37,526 33,663 31,102
Income Statement Data:
Net interest and dividend income $ 19,341 $ 17,535 $ 17,027 $ 15,717 $ 15,493
Provision for loan losses 540 540 535 512 652
Noninterest income 2,724 2,019 1,680 1,602 1,257
Noninterest expense 15,799 12,910 11,859 10,976 10,613
Net income 3,764 4,068 4,039 3,857 3,596
Per Common Share Data:
Net income $ 2.25 $ 2.35 $ 2.33 $ 2.23 $ 2.08
Cash dividends declared 0.56 0.42 0.55 0.52 0.44
Book value 24.32 23.67 21.67 19.44 17.96
Tangible book value (1) 23.54 23.18 21.00 18.59 16.92
Selected Ratios:
Return on average assets 0.90% 1.06% 1.07% 1.05% 1.02%
Return on average equity 9.37 10.25 11.14 12.04 12.71
Dividend payout 25.03 17.90 23.69 23.13 21.22
Average equity to average assets 9.62 10.35 9.60 8.69 8.00
(1) Stockholders equity as of December 31, 1999, 1998, 1997, 1996 and 1995 has been reduced by deposit
assumption premium.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth on pages 9 through 19 of Registrants 1999 Annual
Report is incorporated herein by reference.
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 information set forth on pages 20 through 42 of Registrants 1999 Annual
Report is incorporated herein by reference.
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 2000 Annual Meeting of Stockholders.
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 2000 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
2000 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 2000 Annual Meeting of Stockholders.
PART IV
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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 Statements of Financial Condition as of December 31,
1999 and 1998
Consolidated Statements of Income for the fiscal years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders Equity for the
fiscal years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the fiscal years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
None
(3) The Exhibits which are filed with this report or which are
incorporated herein by reference are set forth in the Exhibit Index.
The Exhibit Index is incorporated herein by reference.
(b) Northway filed no Reports on Form 8-K during the quarter ended December
31, 1999.
(c) See Item 14(a)(3) above
(d) See Item 8 to this Annual Report on Form 10-K
<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 21, 2000 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
--------- ----- ----
Chairman of the Board, President March 21, 2000
and Chief Executive Officer
/S/ William J. Woodward (Principal Executive Officer)
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William J. Woodward
/S/ Fletcher W. Adams Vice Chairman of the Board March 21, 2000
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Fletcher W. Adams
/S/ John D. Morris Director March 21, 2000
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John D. Morris
/S/ John H. Noyes Director March 21, 2000
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John H. Noyes
/S/ Barry J. Kelley Director March 21, 2000
- ---------------------------
Barry J. Kelley
/S/ Randall G. Labnon Director March 21, 2000
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Randall G. Labnon
/S/ Stephen G. Boucher Director March 26, 2000
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Stephen G. Boucher
/S/ Peter H. Bornstein Director March 21, 2000
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Peter H. Bornstein
/S/ Charles H. Clifford, Jr. Director March 21, 2000
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Charles H. Clifford, Jr.
/S/ Arnold P. Hanson, Jr. Director March 21, 2000
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Arnold P. Hanson, Jr.
/S/ Bruce W. Keough Director March 24, 2000
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Bruce W. Keough
Senior Vice President, Chief March 21, 2000
Financial Officer and
Treasurer (Principal Financial
/S/ George L. Fredette and Accounting Officer)
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George L. Fredette
<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.
(incorporated by reference to Exhibit 10.3 to Northway's
Annual Report on Form 10-K for the year ended December 31,
1998).(2)
10.4 Amendment to the Employment agreement for Fletcher W. Adams.
(incorporated by reference to Exhibit 10.4 to Northway's
Annual Report on Form 10-K for the year ended December 31,
1998). (2)
10.5 Employment agreement for Paul M. Ferguson. (incorporated by
reference to Exhibit 10.6 to Northway's Annual Report on Form
10-K for the year ended December 31, 1998). (2)
10.6 Northway Financial, Inc. 1999 Stock Option and Grant Plan
(incorporated by reference to Exhibit 4.1 to Registration
Statement No. 333-83571dated July 23,1999). (2)
10.7 Employment agreement for George L. Fredette. (1) (2)
10.8 Form of Key Employee Agreement. (1)
13 Northway Financial, Inc. 1999 Annual Report to
Stockholders (1)
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 10.7
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") is made as of February 17, 1999 (the
"Effective Date"), by and between Northway Financial, Inc., a New Hampshire
chartered corporation (the "Employer") and George L. Fredette (the "Executive").
In consideration of the mutual covenants contained in this Agreement, the
Employer and the Executive agree as follows:
1. Employment. The Employer agrees to employ the Executive and the
Executive agrees to be employed by the Employer on the terms and conditions set
forth in this Agreement. 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.
2. Capacity. The Executive shall serve the Employer as Senior Vice
President/Chief Financial 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.
3. 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.
4. Compensation and Benefits. The regular compensation and benefits
payable to the Executive under this Agreement shall be as follows:
(a) Salary. For all services rendered by the Executive under this
Agreement, the Employer shall pay the Executive a salary (the "Salary")
at an annual rate of $115,000, 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.
(b) Bonus or Similar Incentive Programs. The Executive shall be
entitled to participate in any incentive or bonus program established by
the Board of Directors to include the Executive's position, with such
terms as may be established in the sole discretion of the Board of
Directors.
(c) Regular Benefits. The Executive shall also be entitled to
participate in any employee benefit plans, medical insurance plans, life
insurance plans, disability income plans, retirement plans, vacation
plans, expense reimbursement plans and other benefit plans which the
Employer may from time to time have in effect for all or most of its
senior executives; 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.
(d) Relocation Costs. To reduce the Executive's expense associated
with relocation, the Employer shall provide the following to the
Executive:
(i) 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 Queensbury, NY and northern New Hampshire; or (B) six (6)
months. The Duplicate Residence Allowance for any month shall
equal the lesser of (Y) Eight Hundred Dollars ($800); or (Z) the
Executive's monthly rental or mortgage payment plus the cost of
electricity for a northern New Hampshire residence for such month.
(ii) Relocation Allowance. In lieu of any relocation cost
reimbursement other than the Duplicate Residence Allowance, the
Employer shall pay to the Executive (A) Ten Thousand Dollars
($10,000) promptly after the execution of this Agreement; and (B)
Ten Thousand Dollars ($10,000) upon the Executive's relocation to
a permanent residence in northern New Hampshire.
(e) 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.
(f) Exclusivity of Salary and Benefits. Unless approved by the
Board of Directors, the Executive shall not be entitled to any payments
or benefits other than those provided under this Agreement.
5. Extent of Service. During the Executive's employment under this
Agreement, the Executive shall, subject to the direction and supervision of the
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:
(a) investing the Executive's assets in any company or other
entity in a manner not prohibited by Section 7(d) and in such form or
manner as shall not require any material activities on the Executive's
part in connection with the operations or affairs of the companies or
other entities in which such investments are made; or
(b) engaging in religious, charitable or other community or
non-profit activities that do not impair the Executive's ability to
fulfill the Executive's duties and responsibilities under this Agreement.
6. Termination and Termination Benefits. Notwithstanding the provisions of
Section 3, the Executive's employment under this Agreement shall terminate under
the following circumstances set forth in this Section 6.
(a) Termination by the Employer for Cause. The Executive's
employment under this Agreement may be terminated for cause without
further liability on the part of the Employer effective immediately upon a
majority vote of the Board of Directors and written notice to the
Executive. Only the following shall constitute "cause" for such
termination:
(i) dishonest statements or acts of the Executive with
respect to the business of the Employer or any affiliate of the
Employer;
(ii) the commission by or indictment of the Executive for
(A) a felony or (B) any misdemeanor involving moral turpitude,
deceit, dishonesty or fraud ("indictment," for these purposes,
meaning an indictment, probable cause hearing or any other
procedure pursuant to which an initial determination of probable
or reasonable cause with respect to such offense is made);
(iii) material failure to perform to the reasonable
satisfaction of the Board of Directors a substantial portion of
the Executive's duties and responsibilities assigned or delegated
under this Agreement, which failure continues, in the reasonable
judgment of the Board of Directors, for sixty (60) days after
written notice given to the Executive by the Board of Directors;
(iv) gross negligence, willful misconduct or insubordination
of the Executive with respect to the Employer or any affiliate of
the Employer; or
(v) material breach by the Executive of any of the
Executive's obligations under this Agreement.
(b) Termination by the Executive. The Executive's employment under
this Agreement may be terminated by the Executive by written notice to the
Board of Directors or the CEO at least thirty (30) days prior to such
termination.
(c) Termination by the Employer Without Cause. Subject to the
payment of Termination Benefits pursuant to Section 6(d), the Executive's
employment under this Agreement may be terminated by the Employer without
cause upon written notice to the Executive by a majority vote of the Board
of Directors.
(d) Certain Termination Benefits. Unless otherwise specifically
provided in this Agreement or otherwise required by law, all compensation
and benefits payable to the Executive under this Agreement shall terminate
on the date of termination of the Executive's employment under this
Agreement. Notwithstanding the foregoing, in the event of termination of
the Executive's employment with the Employer pursuant to Section 6(c)
above, the Employer shall provide to the Executive the following
termination benefits ("Termination Benefits"):
(i) continuation of the Executive's Salary at the rate then
in effect pursuant to Section 4(a); and
(ii) continuation of group health plan benefits to the
extent authorized by and consistent with 29 U.S.C. ss. 1161 et
seq. (commonly known as "COBRA"), with the cost of the regular
premium for such benefits shared in the same relative proportion
by the Employer and the Executive as in effect on the date of
termination.
The Termination Benefits set forth in (i) and (ii) above shall continue
effective until the expiration of the Term; provided that in the event
that the Executive commences any employment or self-employment during the
period during which the Executive is entitled to receive Termination
Benefits (the "Termination Benefits Period"), the remaining amount of
Salary due pursuant to Section 6(d)(i) for the period from the
commencement of such employment or self-employment to the end of the
Termination Benefits Period shall be reduced by one-half of the salary 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.
(e) Disability. If the Executive shall be disabled so as to be
unable to perform the essential functions of the Executive's then existing
position or positions under this Agreement with or without reasonable
accommodation, the Board of Directors 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. ss.2601 et seq. and the Americans with Disabilities Act,
42 U.S.C. ss.12101 et seq.
(f) Termination Following a Change of Control. If there is a
Change of Control, as defined in Section 6(f)(i) below, during the Term,
the provisions of this Section 6(f) shall apply and shall continue to
apply throughout the remainder of the Term. 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.
(i) Change of Control shall mean the occurrence of one or
more of the following events:
(A) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) becomes a "beneficial
owner" (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act) (other than the Employer, any
trustee or other fiduciary holding securities under an
employee benefit plan of the Employer, or any corporation
owned, directly or indirectly, by the stockholders of the
Employer, in substantially the same proportions as their
ownership of stock of 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
(B) persons who, as of the Effective Date, constituted
the Employer'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 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
(C) 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
(D) 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.
(ii) The events referred to in Section 6(f) above shall be
as follows:
(A) a reduction of the Executive's salary other than a
reduction that (1) is based on the Employer's financial
performance or (2) is similar to the reduction made to the
salaries provided to all or most other senior executives of
the Employer; or
(B) a significant change in the Executive's
responsibilities and/or duties which constitutes, when
compared to the Executive's responsibilities and/or duties
before the Change of Control, a demotion.
(iii) The Executive shall provide the Employer with
reasonable notice and an opportunity to cure any of the events
listed in Section 6(f)(ii) and shall not be entitled to
compensation pursuant to this Section 6(f) unless the Employer
fails to cure within a reasonable period; and
(iv) It is the intention of the Executive and of the
Employer that no payments by the Employer to or for the benefit of
the Executive under this Agreement or any other agreement or plan,
if any, pursuant to which the Executive is entitled to receive
payments or benefits shall be nondeductible to the Employer by
reason of the operation of Section 280G of the Code relating to
parachute payments or any like statutory or regulatory provision.
Accordingly, and notwithstanding any other provision of this
Agreement or any such agreement or plan, if by reason of the
operation of said Section 280G or any like statutory or regulatory
provision, any such payments exceed the amount which can be
deducted by the Employer, such payments shall be reduced to the
maximum amount which can be deducted by the Employer. To the
extent that payments exceeding such maximum deductible amount have
been made to or for the benefit of the Executive, such excess
payments shall be refunded to the Employer with interest thereon
at the applicable Federal rate determined under Section 1274(d) of
the Code, compounded annually, or at such other rate as may be
required in order that no such payments shall be nondeductible to
the Employer by reason of the operation of said Section 280G or
any like statutory or regulatory provision. To the extent that
there is more than one method of reducing the payments to bring
them within the limitations of said Section 280G or any like
statutory or regulatory provision, the Executive shall determine
which method shall be followed, provided that if the Executive
fails to make such determination within forty-five (45) days after
the Employer has given notice of the need for such reduction, the
Employer may determine the method of such reduction in its sole
discretion.
7. Confidential Information, Noncompetition and Cooperation.
(a) Confidential Information. As used in this Agreement,
"Confidential Information" means information belonging to the Employer
which is of value to the Employer in the course of conducting its business
and the disclosure of which could result in a competitive or other
disadvantage to the Employer. Confidential Information includes, without
limitation, financial information, reports, and forecasts; inventions,
improvements and other intellectual property; trade secrets; know-how;
designs, processes or formulae; software; market or sales information or
plans; customer lists; and business plans, prospects and opportunities
(such as possible acquisitions or dispositions of businesses or
facilities) which have been discussed or considered by the management of
the Employer. Confidential Information includes information developed by
the Executive in the course of the Executive's employment by the Employer,
as well as other information to which the Executive may have access in
connection with the Executive's employment. Confidential Information also
includes the confidential information of others with which the Employer
has a business relationship. Notwithstanding the foregoing, Confidential
Information does not include information in the public domain, unless due
to breach of the Executive's duties under Section 7(b).
(b) Confidentiality. The Executive understands and agrees that the
Executive's employment creates a relationship of confidence and trust
between the Executive and the Employer with respect to all Confidential
Information. At all times, both during the Executive's employment with the
Employer and after its termination, the Executive will keep in confidence
and trust all such Confidential Information, and will not use or disclose
any such Confidential Information without the written consent of the
Employer, except as may be necessary in the ordinary course of performing
the Executive's duties to the Employer.
(c) Documents, Records, etc. All documents, records, data,
apparatus, equipment and other physical property, whether or not
pertaining to Confidential Information, which are furnished to the
Executive by the Employer or are produced by the Executive in connection
with the Executive's employment will be and remain the sole property of
the Employer. The Executive will return to the Employer all such materials
and property as and when requested by the Employer. In any event, the
Executive will return all such materials and property immediately upon
termination of the Executive's employment for any reason. The Executive
will not retain with the Executive any such material or property or any
copies thereof after such termination.
(d) Noncompetition and Nonsolicitation. During the Term, and for
one (1) year thereafter (or during the Termination Benefits Period, if
longer), the Executive (i) will not, directly or indirectly, whether as
owner, partner, shareholder, consultant, agent, employee, co-venturer or
otherwise, engage, participate, assist or invest in any Competing Business
(as hereinafter defined); (ii) will refrain from directly or indirectly
employing, attempting to employ, recruiting or otherwise soliciting,
inducing or influencing any person to leave employment with the Employer
(other than terminations of employment of subordinate employees undertaken
in the course of the Executive's employment with the Employer); and (iii)
will refrain from soliciting or encouraging any customer or supplier to
terminate or otherwise modify adversely its business relationship with the
Employer; provided, however, that the foregoing 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. 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.
(e) Third-Party Agreements and Rights. The Executive hereby
confirms that the Executive is not bound by the terms of any agreement
with any previous employer or other party which restricts in any way the
Executive's use or disclosure of information or the Executive's engagement
in any business. The Executive represents to the Employer that the
Executive's execution of this Agreement, the Executive's employment with
the Employer and the performance of the Executive's proposed duties for
the Employer will not violate any obligations the Executive may have to
any such previous employer or other party. In the Executive's work for the
Employer, the Executive will not disclose or make use of any information
in violation of any agreements with or rights of any such previous
employer or other party, and the Executive will not bring to the premises
of the Employer any copies or other tangible embodiments of non-public
information belonging to or obtained from any such previous employment or
other party.
(f) Litigation and Regulatory Cooperation. During and after the
Executive's employment, the Executive shall cooperate fully with the
Employer in the defense or prosecution of any claims or actions now in
existence or which may be brought in the future against or on behalf of
the Employer which relate to events or occurrences that transpired while
the Executive was employed by the Employer. The Executive's full
cooperation in connection with such claims or actions shall include, but
not be limited to, being available to meet with counsel to prepare for
discovery or trial and to act as a witness on behalf of the Employer at
mutually convenient times. During and after the Executive's employment,
the Executive also shall cooperate fully with the Employer in connection
with any investigation or review of any federal, state or local regulatory
authority as any such investigation or review relates to events or
occurrences that transpired while the Executive was employed by the
Employer. The Employer shall reimburse the Executive for any reasonable
out-of-pocket expenses incurred in connection with the Executive's
performance of obligations pursuant to this Section 7(f).
(g) Injunction. The Executive agrees that it would be difficult to
measure any damages caused to the Employer which might result from any
breach by the Executive of the promises set forth in this Section 7, and
that in any event money damages would be an inadequate remedy for any such
breach. Accordingly, subject to Section 8 of this Agreement, the Executive
agrees that if the Executive breaches, or proposes to breach, any portion
of this Agreement, the Employer shall be entitled, in addition to all
other remedies that it may have, to an injunction or other appropriate
equitable relief to restrain any such breach without showing or proving
any actual damage to the Employer.
8. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof or otherwise arising out of the
Executive's employment or the termination of that employment (including, without
limitation, any claims of unlawful employment discrimination whether based on
age or otherwise) shall, to the fullest extent permitted by law, be settled by
arbitration in any forum and form agreed upon by the parties or, in the absence
of such an agreement, under the auspices of the American Arbitration Association
("AAA") in Boston, Massachusetts in accordance with the Employment Dispute
Resolution Rules of the AAA, including, but not limited to, the rules and
procedures applicable to the selection of arbitrators. In the event that any
person or entity other than the Executive or the Employer may be a party with
regard to any such controversy or claim, such controversy or claim shall be
submitted to arbitration subject to such other person or entity's agreement.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. This Section 8 shall be specifically enforceable.
Notwithstanding the foregoing, this Section 8 shall not preclude either party
from pursuing a court action for the sole purpose of obtaining a temporary
restraining order or a preliminary injunction in circumstances in which such
relief is appropriate; provided that any other relief shall be pursued through
an arbitration proceeding pursuant to this Section 8.
9. Consent to Jurisdiction. To the extent that any court action is
permitted consistent with or to enforce Section 8 of this Agreement, the parties
hereby consent to the jurisdiction of the Superior Court of the State of New
Hampshire and the United States District Court for the District of New
Hampshire. Accordingly, with respect to any such court action, the Executive (a)
submits to the personal jurisdiction of such courts; (b) consents to service of
process; and (c) waives any other requirement (whether imposed by statute, rule
of court, or otherwise) with respect to personal jurisdiction or service of
process.
10. Integration. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
agreements between the parties with respect to any related subject matter.
11. Assignment; Successors and Assigns, etc. Neither the Employer nor the
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party; provided that the Employer may assign its rights under this Agreement
without the consent of the Executive in the event that the Employer shall effect
a reorganization, consolidate with or merge into any other corporation,
partnership, organization or other entity, or transfer all or substantially all
of its properties or assets to any other corporation, partnership, organization
or other entity. This Agreement shall inure to the benefit of and be binding
upon the Employer and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns.
12. Enforceability. If any portion or provision of this Agreement
(including, without limitation, any portion or provision of any section of this
Agreement) shall to any extent be declared illegal or unenforceable by a court
of competent jurisdiction, then the remainder of this Agreement, or the
application of such portion or provision in circumstances other than those as to
which it is so declared illegal or unenforceable, shall not be affected thereby,
and each portion and provision of this Agreement shall be valid and enforceable
to the fullest extent permitted by law.
13. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
14. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by a nationally recognized overnight courier service or by
registered or certified mail, postage prepaid, return receipt requested, to the
Executive at the last address the Executive has filed in writing with the
Employer or, in the case of the Employer, at its main offices, attention of the
Board of Directors 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.
15. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Employer.
16. Governing Law. This is a New Hampshire contract and shall be construed
under and be governed in all respects by the laws of the State of New Hampshire,
without giving effect to the conflict of laws principles of such State.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute one and the same
document.
<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/JN Rozek Name: William J. Woodward
----------------
Name: J. N. Rozek Title: Chairman, President & CEO
Title: Asst. to the Chairman
EMPLOYEE
/S/ George L. Fredette
-------------------------
George L. Fredette
<PAGE>
Exhibit 10.8
KEY EMPLOYEE AGREEMENT
THIS AGREEMENT is made as of the 19th day of August, 1999 by and among The
Berlin City Bank, a New Hampshire bank with its main office in Berlin, New
Hampshire (the "Subsidiary"), Northway Financial, Inc. a New Hampshire
corporation ("Northway") (Northway and the Subsidiary shall be hereinafter
collectively referred to as the "Company"), and _______., a resident of _______
_____________ (the "Executive").
WHEREAS in order to allow the Executive to consider the prospect of a
Change in Control (as defined in Section 1) in an objective manner and in
consideration of the services to be rendered by the Executive to the Company and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the Company, the Company is willing to provide, subject
to the terms of this Agreement, certain severance benefits to protect the
Executive from the consequences of a Terminating Event (as defined in Section 1)
occurring subsequent to a Change in Control; and
WHEREAS, in consideration of the continued employment of the Executive by
the Company, the entering into by Northway of that certain stock option
agreement between Northway and the Executive of even date herewith providing for
participation by the Executive in Northway's 1999 Stock Option and Grant Plan,
the severance benefits provided subject to the terms herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the Executive, the Executive agrees to be bound by certain
restrictions contained herein regarding competition, Confidential Information
(as defined in Section 1) and proprietary rights.
1. Certain Definitions. For the purposes of this Agreement, the following
terms shall have the following respective meanings:
(a) "Change in Control" shall be deemed to have occurred in any one of the
following events:
(i) if there has occurred a change in control of either Northway or
the Subsidiary which Northway would be required to report in
response to Item 1 (or, in the case of the Subsidiary, Item 2)
of Form 8-K promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"), or, if such regulation is no
longer in effect, any regulations promulgated by the Securities
and Exchange Commission, pursuant to the 1934 Act, which are
intended to serve similar purposes;
(ii) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such
term is defined in Rule 13d-3 promulgated under the 1934 Act),
directly or indirectly, of securities of Northway or the
Subsidiary representing 25% or more of the total number of
votes that may be cast for the election of directors of
Northway or the Subsidiary, as the case may be;
(iii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals
who are Continuing Directors (as hereinafter defined) cease for
any reason to constitute at least a majority of the Board of
Directors of Northway or the Subsidiary. For this purpose, a
"Continuing Director" shall mean (a) an individual who was a
director of Northway or the Subsidiary at the beginning of such
period or (b) any new director (other than a director
designated by a person who has entered into an agreement with
Northway or the Subsidiary to effect a transaction described in
clause (ii), (iv) or (v) of this Section 1(a)) whose election
by the Board or nomination for election by Northway's or the
Subsidiary's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors of Northway or the
Subsidiary, as appropriate, then still in office who either
were directors at the beginning of such period or whose
election or nomination for election was previously so approved;
(iv) the stockholders of Northway approve a merger or consolidation
of Northway or the Subsidiary with any other corporation or
bank, other than (a) a merger or consolidation which would
result in the voting securities of Northway outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of Northway or
such surviving entity outstanding immediately after such merger
or consolidation or (b) a merger or consolidation effected to
implement a recapitalization of Northway (or similar
transaction) in which no "person" (as defined above) acquires
more than 30% of the combined voting power of Northway's then
outstanding securities; or
(v) the stockholders of Northway or the Subsidiary approve a plan
of complete liquidation of Northway or the Subsidiary or an
agreement for the sale or disposition by Northway or the
Subsidiary of all or substantially all of Northway's or the
Subsidiary's assets;
(b) "Company-Related Inventions and Developments" means all Inventions and
Developments which either (i) relate at the time of conception or
development to the actual or demonstrably anticipated business or
research and development activities of the Company; (ii) result from
or relate to any work performed for the Company, whether or not during
normal business hours; (iii) are developed on Company work time; or
(iv) are developed through the use of Confidential Information, or the
Company's equipment, software, or other facilities or resources;
(c) "Confidential Information" means information belonging to the Company,
whether reduced to writing (or in a form from which such information
can be obtained, translated, or derived into reasonably usable form),
or maintained in the mind or memory of the Executive, which derives
independent economic value from not being readily known to or
ascertainable by proper means by others who can obtain economic value
from the disclosure or use of such information, including without
limitation, financial information, reports, and forecasts; inventions,
improvements and other intellectual property; trade secrets; know-how;
designs, processes or formulae; software or related code; market or
sales information or plans; customer lists; and business plans,
prospects and opportunities (such as possible acquisitions or
dispositions of businesses or facilities) which have been discussed or
considered by the management of the Company. Confidential Information
includes information developed by the Executive in the course of his
employment by the Company, as well as other information to which the
Executive may have access in connection with his employment.
Confidential Information also includes the confidential information of
others with which the Executive has a business relationship.
Notwithstanding the foregoing, Confidential Information does not
include information in the public domain, unless due to breach of the
duties of the Executive under Section 5 below;
(d) "Customer" means any person or entity who (i) is receiving Services,
directly or indirectly, from the Company on the date of termination of
employment of the Executive with the Company, (ii) received Services,
directly or indirectly, from the Company or the Executive at any time
during the two year period immediately preceding the date of
termination of employment of the Executive with the Company, (iii) was
solicited, directly or indirectly, in whole or in part, by the
Executive on behalf of the Company to provide Services within two
years preceding the termination of employment of the Executive with
the Company, or (iv) anyone solicited, directly or indirectly, in
whole or in part, on behalf of the Company to provide Services within
two years preceding the termination of employment of the Executive
with the Company;
(e) "Inventions and Developments" means any and all inventions,
developments, creative works and useful ideas of any description
whatsoever, whether or not patentable, including without limitation,
discoveries and improvements which consist of or relate to any form of
Confidential Information;
(f) "Restricted Term" means the aggregate period equal to the period
during which the Executive is employed by the Company, plus a period
of 1.5 years immediately following the termination of employment of
the Executive with the Company;
(g) "Services" means banking and bank-related services, and such other
services that are similar to and competitive with services the Company
may provide or develop plans to provide during the employment of the
Executive;
(h) "Terminating Event" shall mean:
(i) termination by either of Northway or the Subsidiary of the
employment of the Executive with either of Northway or the
Subsidiary for any reason other than (A) death, (B) deliberate
dishonesty of the Executive with respect to Northway or the
Subsidiary or any subsidiary or affiliate of either, or (C)
conviction of the Executive of a crime involving moral turpitude,
or
(ii) resignation of the Executive from the employ of both of Northway
and the Subsidiary, while the Executive is not receiving payments
or benefits from either of Northway or the Subsidiary by reason
of the Executive's disability, subsequent to the occurrence of
any of the following events:
(A) a significant change in the nature or scope of the
Executive's responsibilities, authorities, powers, functions
or duties from the responsibilities, authorities, powers,
functions or duties exercised by the Executive immediately
prior to the Change in Control; or
(B) a determination by the Executive that, as a result of a
Change in Control, he is unable to exercise the
responsibilities, authorities, powers, functions or duties
exercised by the Executive immediately prior to such Change
in Control; or
(C) a reduction in the Executive's annual base salary as in
effect on the date hereof or as the same may be increased
from time to time except for across-the-board salary
reductions similarly affecting all management personnel of
the Company and all management personnel of any person in
control of the Company; or
(D) the failure by the Company to pay to the Executive any
portion of his current compensation or to pay to the
Executive any portion of an installment of deferred
compensation under any deferred compensation program of the
Company within seven (7) days of the date such compensation
is due; or
(E) the failure by the Company to continue in effect any material
compensation, incentive, bonus or benefit plan in which the
Executive participates immediately prior to the Change in
Control, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with
respect to such plan, or the failure by the Company to
continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount of benefits
provided and the level of the Executive's participation
relative to other participants, as existed at the time of the
Change in Control; or
(F) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those
available to the Executive under any of the life insurance,
medical, health and accident, or disability plans or any
other material benefit plans in which the Executive was
participating at the time of the Change in Control, or the
taking of any action by the Company which would directly or
indirectly materially reduce any of such benefits, or the
failure by the Company to provide the Executive with the
number of paid vacation days to which the Executive is
entitled on the basis of years of service with the Company in
accordance with the Company's normal vacation policy in
effect at the time of the Change in Control; or
(G) the failure of the Company to obtain a satisfactory agreement
from any successor(s) to assume and agree to perform this
Agreement.
2. Severance Payments. In the event a Terminating Event occurs within one (1)
year after a Change in Control, the Company shall pay to the Executive, in
periodic installments in accordance with the Company's usual practice for its
senior executives, for a period of 1.5 years from the date of such Terminating
Event, a annualized amount equal to the annual compensation paid by the Company
to the Executive which was includible in the gross income of the Executive for
the calendar year ending before the date on which the Change in Control occurs;
provided, that if the Executive is in breach of his obligations under Section 7,
the Company may withhold amounts otherwise due to the Executive under this
Section 2 until the Executive has cured such breach or is otherwise in
compliance with Section 7.
3. Limitation on Benefits.
(a) It is the intention of the Executive and the Company that no payments
by the Company to or for the benefit of the Executive under this Agreement or
any other agreement or plan pursuant to which he is entitled to receive payments
or benefits shall be non-deductible to the Company by reason of the operation of
Section 280G of the Internal Revenue Code of 1986 , as amended (the "Code")
relating to parachute payments. Accordingly, and notwithstanding any other
provision of this Agreement or any such agreement or plan, if by reason of the
operation of said Section 280G, any such payments exceed the amount which can be
deducted by the Company, such payments shall be reduced to the maximum amount
which can be deducted by the Company. To the extent that payments exceeding such
maximum deductible amount have been made to or for the benefit of the Executive,
such excess payments shall be refunded to the Company with interest thereon at
the applicable Federal Rate determined under Section 1274(d) of the Code,
compounded annually, or at such other rate as may be required in order than no
such payments shall be non-deductible to the Company by reason of the operation
of said Section 280G. To the extent that there is more than one method of
reducing the payments to bring them within the limitations of said Section 280G,
the Executive shall determine which method shall be followed, provided that if
the Executive fails to make such determination within 45 days after the Company
has sent him written notice of the need for such reduction, the Company may
determine the method of such reduction in its sole discretion.
(b) If any dispute between the Company and the Executive as to any of the
amounts to be determined under this Section 3, or the method of calculating such
amounts, cannot be resolved by the Company and the Executive, either the Company
or the Executive after giving three days written notice to the other, may refer
the dispute to a partner in the Boston office of a firm of independent certified
public accountants selected jointly by the Company and the Executive. The
determination of such partner as to the amount to be determined under Section
3(a) and the method of calculating such amounts shall be final and binding on
both the Company and the Executive. The Company shall bear the costs of any such
determination.
4. Extent of Service. During the Executive's employment with the Company, the
Executive shall, subject to the direction and supervision of the Company, devote
his full business time, best efforts and business judgment, skill and knowledge
to the advancement of the Company's interests and to the discharge of his duties
and responsibilities under this Agreement. The Executive shall not engage in any
other business activity, except as may be approved by the Company; provided that
nothing in this Agreement shall be construed as preventing the Executive from:
(a) investing his assets in any company or other entity in a manner not
prohibited by Section 7 below and in such form or manner as shall not
require any material activities on his part in connection with the
operations or affairs of the companies or other entities in which such
investments are made; or
(b) engaging in religious, charitable or other community or non-profit
activities that do not impair the ability of the Executive to fulfill
his duties and responsibilities under this Agreement.
5. Confidentiality. The Executive acknowledges and agrees that his employment
creates a relationship of confidence and trust with the Company with respect to
all Confidential Information. At all times, both during the Executive's
employment with the Company and after the termination of such employment, the
Executive shall keep in confidence and trust all such Confidential Information,
and shall not use or disclose any such Confidential Information without the
written consent of the Company, except as may be necessary in the ordinary
course of performing his duties to the Company. In furtherance of the foregoing:
(a) Documents, Records, etc. All documents, records, data, apparatus,
equipment and physical property, whether or not pertaining to Confidential
Information or Company-Related Inventions and Developments, which are furnished
to the Executive by the Company or are produced by the Executive in connection
with his employment shall be and remain the sole property of the Company. The
Executive shall return to the Company all such materials and property, including
any material or medium from which any Confidential Information may be
ascertained or derived, as and when requested by the Company. In any event, the
Executive shall return all such materials and property immediately upon
termination of his employment for any reason. The Executive shall not retain any
such material or property or any copies, compilations, or analyses thereof after
such termination.
(b) Assignment of Inventions and Developments. The Executive agrees that
all Company-Related Inventions and Developments which he conceives or develops,
in whole or in part, either alone or jointly with others, during the term of his
employment with the Company shall be the sole property of the Company. The
Company shall be the sole owner of all patents, copyrights and other proprietary
rights in and with respect to such Company-Related Inventions and Developments.
To the fullest extent permitted by law, such Company-Related Inventions and
Developments shall be deemed works made for hire. The Executive hereby transfers
and assigns to the Company any proprietary rights which he may have or acquire
in any such Company-Related Inventions and Developments, and the Executive
hereby waives any other special rights which he may have or accrue therein. The
Executive agrees to execute any documents and take any actions that may be
required to effect and confirm such transfer, assignment and waiver. The
provisions of this Section 5(b) shall apply to all Company-Related Inventions
and Developments which are conceived or developed by the Executive during the
term of his employment with the Company, whether or not further development or
reduction to practice may take place after termination of such employment, for
which purpose it shall be presumed that any Company-Related Inventions and
Developments conceived by the Executive which are reduced to practice within one
year after termination of the employment of the Executive were conceived during
the term of the Executive's employment with the Company unless the Executive is
able to establish a later conception date by clear and convincing evidence. THE
EXECUTIVE HEREBY REPRESENTS AND WARRANTS TO THE COMPANY THAT ALL INVENTIONS AND
DEVELOPMENTS MADE BY THE EXECUTIVE PRIOR TO HIS EMPLOYMENT BY THE COMPANY ARE
DISCLOSED IN EXHIBIT A ATTACHED TO THIS AGREEMENT. The Executive agrees promptly
to disclose to the Company, or to persons designated by the Company, all
Company-Related Inventions and Developments which are or may be subject to the
provisions of this Section 5(b). The Executive further agrees to assist the
Company, at the Company's request from time to time and at its expense, to
obtain and enforce patents, copyrights or other proprietary rights with respect
to Company-Related Inventions and Developments in any and all countries and the
Executive agrees that he shall execute all documents reasonably necessary or
appropriate for this purpose. This obligation of the Executive shall survive the
termination of employment of the Executive, provided that the Company shall
compensate the Executive at a reasonable rate after such termination for time
actually spent by the Executive at the Company's request on such assistance. In
the event that the Company is unable for any reason to secure the Executive's
signature to any document reasonably necessary or appropriate for any of the
foregoing purposes (including renewals, extensions, continuations, divisions or
continuations in part), the Executive hereby irrevocably designates and appoints
the Company and its duly authorized officers and agents as the Executive's
agents and attorneys-in-fact to act for the Executive and on behalf of the
Executive, but only for the purpose of executing and filing any such document
and doing all other lawfully permitted acts to accomplish the foregoing
purposes, with the same legal force and effect as if it had been executed or
done by the Executive.
6. Nonsolicitation of Customers. During the Restricted Term, regardless of
the reason for termination of the employment of the Executive, the Executive
shall not, directly or indirectly, in any capacity:
(a) solicit the business or patronage of any Customer for any other person
or entity engaged in or for the purpose of providing Services;
(b) divert, entice, or otherwise take away from the Company the business
or patronage of any Customer, or attempt to do so;
(c) solicit or induce any Customer to terminate or reduce its relationship
with the Company;
(d) provide or assist with the provision of Services to a Customer (except
in his capacity as an employee of the Company); or
(e) refer a Customer to another provider of Services.
7. Unfair Competition. During the Restricted Term, regardless of the reason
for termination of employment of the Executive, the Executive shall not,
directly or indirectly, in any capacity, whether as owner, partner, director,
shareholder, consultant, agent, employee, co-venturer or otherwise, engage,
participate, assist or invest in any business activity anywhere in the State of
New Hampshire, or any county in another state that is contiguous to a county
where Northway or any of its subsidiaries or affiliates has an office, where the
Company directly or indirectly provides or uses Services or the Company is
preparing to provide Services, if such business activity involves the
development, production, sale, provision or marketing of Services or products or
services like or similar to, or otherwise competitive with the Services. The
foregoing shall not prevent the Executive from owning up to one percent of the
outstanding securities of a publicly-held corporation which competes with the
Company, or from being employed by or affiliated or associated with any person
or entity after termination of the employment of the executive with the Company
so long as the Executive does not have any direct or indirect involvement on
behalf of any such person or entity with respect to developing, producing,
selling, providing or marketing Services. Notwithstanding any provision of this
Agreement to the contrary, in the event a Terminating Event occurs following a
Change in Control, the Executive shall not be subject to the restrictions
outlined above in this Section 7 for a period in excess of six (6) months from
the date of such Terminating Event.
8. Nonsolicitation of Employees. During the Restricted Term, regardless of
the reason for termination of the employment of the Executive, the Executive
shall not directly or indirectly, in any capacity:
(a) hire or employ, directly or indirectly, through any enterprise with
which the Executive is associated, any current employee or agent of
the Company or any individual who had been employed by or served as an
agent to the Company within one year preceding the date of termination
of employment of the Executive; or
(b) recruit, solicit or induce (or in any way assist another person or
enterprise in recruiting, soliciting or inducing) any employee or an
agent of the Company to terminate his or her employment or other
relationship with the Company.
9. Acknowledgments. The Executive acknowledges and agrees that the
restrictions set forth in Sections 5, 6, 7 and 8 are intended to protect the
Company's interest in its Confidential Information and its commercial
relationships and goodwill (with its customers, prospective customers, vendors,
consultants and employees), or developed while the Executive was employed by the
Company, and are reasonable and appropriate for these purposes.
10. Disclosure of Agreement. The Executive agrees that he shall disclose the
existence and terms of this Agreement to any prospective company, partner,
co-venturer, investor or lender prior to entering into an employment,
partnership or other business relationship with such person or entity.
11. Third-Party Agreements and Rights. The Executive hereby confirms that he
is not bound by the terms of any agreement with any previous company or other
party which restricts in any way his use or disclosure of information or his
engagement in any business. The Executive hereby represents and warrants to the
Company that the execution by the Executive of this Agreement, the employment by
the Executive with the Company and the performance of the proposed duties of the
Executive for the Company will not violate any obligations the Executive may
have to any such previous company or other party. In the Executive's work for
the Company, the Executive agrees that he shall not disclose or make use of any
information in violation of any agreements with or rights of any such previous
company or other party, and he shall not bring to the premises of the Company
any copies or other tangible embodiments of non-public information belonging to
or obtained from any such previous employment or other party.
12. Litigation and Regulatory Cooperation. During and after the employment of
the Executive by the Company, the Executive shall cooperate fully with the
Company in the defense or prosecution of any claims or actions now in existence
or which may be brought in the future against or on behalf of the Company which
relate to events or occurrences that transpired while the Executive was employed
by the Company. The full cooperation of the Executive in connection with such
claims or actions shall include, but shall not be limited to, being available to
meet with counsel to prepare for discovery or trial and to act as a witness on
behalf of the Company at mutually convenient times. During and after the
employment of the Executive by the Company, the Executive shall cooperate fully
with the Company in connection with any investigation or review of any federal,
state or local regulatory authority as any such investigation or review relates
to events or occurrences that transpired while the Executive was employed by the
Company. The Company shall reimburse the Executive for any reasonable
out-of-pocket expenses incurred in connection with the performance by the
Executive of obligations pursuant to this Section 12.
13. Injunction. The Executive acknowledges and agrees that it would be
difficult to measure any damages caused to the Company which might result from
any breach by the Executive of the promises set forth in this Agreement, and
that in any event money damages would be an inadequate remedy for any such
breach. Accordingly, the Executive agrees that if the Executive breaches, or
threatens to breach, any portion of this Agreement, the Company shall be
entitled, in addition to, and not in substitution for, all other remedies that
it may have, at law or in equity, to an injunction or other appropriate
equitable relief to restrain any such breach without showing or proving any
actual damage to the Company.
14. Severability. The parties hereto agree that if any provisions of this
Agreement shall be adjudicated to be invalid or unenforceable, such provision
shall be deleted from the Agreement, but such deletion is to apply only with
respect to the operation of such provision in the particular jurisdiction in
which such adjudication is made, and the validity or enforceability of any other
provision hereof shall not be affected thereby. The parties hereto further agree
that to the extent any provision hereof is deemed unenforceable by virtue of its
scope in terms of area or length of time or for any other reason, but may be
made enforceable by limitations thereon, such provision shall be enforceable to
the fullest extent permissible under the laws and public policies applied in the
jurisdiction in which enforcement is sought.
15. Entire Agreement. This Agreement contains the entire and only agreement
between the parties hereto respecting the subject matter hereof and supersedes
all prior agreements and understandings between the parties as to the subject
matter hereof.
16. Survival of Obligations; Extension. The Executive acknowledges and agrees
that his obligations under this Agreement shall survive the termination of his
employment with the Company regardless of the manner of or reasons for such
termination, and regardless of whether such termination constitutes a breach of
this Agreement or of any other agreement the Executive may have with the
Company.
17. Assignment. The Executive shall not make any assignment of this Agreement
or any interest herein, by operation of law or otherwise, without the prior
written consent of Northway, and without such consent any attempted transfer
shall be null and void and of no effect. The Company shall not make any
assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the Executive, and without such
consent any attempted transfer shall be null and void and of no effect;
provided, that the Company may assign all or any portion of its rights under
this Agreement: (a) to any of its affiliates, (b) by operation of law to any
corporation or other entity with or into which the Company may be merged or
consolidated, or (c) to any corporation or other entity to which the Company
transfers all or substantially all of its assets; provided such corporation or
other entity assumes this Agreement and all obligations and undertakings of the
Company hereunder.
18. Binding Effect. This Agreement shall inure to the benefit of, and be
binding upon, and enforceable against Northway, the Subsidiary and the Executive
, their respective successors, executors, administrators, heirs and permitted
assigns. In the event of the Executive's death prior to the completion by the
Company of all payments due to him under this Agreement, the Company shall
continue such payments to the Executive's beneficiary designated in writing to
the Company prior to his death (or to his estate, if he fails to make such
designation).
19. Amendment. This Agreement may not be amended except in a writing signed by
all parties hereto.
20. No Contract of Employment. Nothing in this Agreement shall be construed as
a contract of employment between the Executive and the Company or as a
commitment on the part of the Company to retain the Executive in any capacity
for any period of time.
21. Notices. Any notices, requests, demands and other communications provided
for by this Agreement will be sufficient if in writing and delivered in person
or sent by registered or certified mail, postage prepaid, to the Executive at
the address set out below the signature of the Executive below and, in the case
of any notice to the Company, at the main office of Northway, to the attention
of its President and Chief Executive Officer.
22. Governing Law. The validity, construction, and enforceability of this
Agreement shall be governed by and construed in all respects in accordance with
the laws of the State of New Hampshire without giving effect to the conflict of
laws provisions thereof. This Agreement is executed under seal.
23. Term. This Agreement shall take effect as of the date hereof and shall
terminate upon expiry of the Restricted Term.
24. Withholding. All payments made by the Company under this Agreement shall
be net of any tax or other amounts required to be withheld by the Company under
applicable law.
25. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the State of New Hampshire by three arbitrators,
one of whom shall be appointed by the Company, one by the Executive and the
third by the first two arbitrators. If the first two arbitrators cannot agree on
the appointment of a third arbitrator, then the third arbitrator shall be
appointed by the American Arbitration Association in the City of Concord. Such
arbitration shall be conducted in the City of Concord in accordance with the
rules of the American Arbitration Association, except with respect to the
selection of arbitrators which shall be as provided in this Section 25. Judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. In the event that it shall be necessary or desirable for
the Executive to retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any or all of the Executive's rights under
this Agreement, the Company shall pay (or the Executive shall be entitled to
recover from the Company, as the case may be) the Executive's reasonable
attorneys' fees and other reasonable costs and expenses in connection with the
enforcement of said rights (including the enforcement of any arbitration award
in court) regardless of the final outcome, unless and to the extent the
arbitrators shall determine that under the circumstances of recovery by the
Executive of all or a part of any such fees and costs and expenses would be
unjust. This provision shall not apply to Section 3(b), except in the event that
the Company and the Executive cannot agree on the selection of the accounting
partner described in said Section 3(b).
26. Allocation of Obligations. Northway and the Subsidiary shall allocate
among themselves which party shall be responsible for paying the severance
payments and other benefits directed by this Agreement. The payment by either
party of such severance payments and other benefits shall satisfy the
obligations of the non-paying party under this Agreement. Both Northway and the
Subsidiary shall be jointly liable in the event of a failure by both parties to
pay such severance payments and other benefits.
27. Waiver. No waiver of any provision hereof shall be effective unless made
in writing and signed by the waiving party. The failure of any party to require
the performance of any term or obligation of this Agreement, or the waiver by
any party of any breach of this Agreement, shall not prevent any subsequent
enforcement of such term or obligation or be deemed a waiver of any subsequent
breach.
28. Election of Remedies. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not constitute a
breach by the Executive of any employment agreement between the Company and the
Executive and shall not be deemed a voluntary termination of employment by the
Executive for the purpose of interpreting the provisions of any of the Company's
benefit plans, programs or policies. Nothing in this Agreement shall be
construed to limit the rights of the Executive under any employment agreement he
may then have with the Company; provided, however, that if there is a
Terminating Event under Section 1 hereof, the Executive may elect either to
receive the severance payment provided under Section 2 or such termination
benefits as he may under any such employment agreement, but may not elect to
receive both.
29. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of Northway and the Subsidiary.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by Northway, by its duly authorized officer, by the Subsidiary, by
its duly authorized officer, and by the Executive, as of the date first above
written.
WITNESS:
_______________________________ _____________________________
ATTEST: THE BERLIN CITY BANK
________________________________ By:__________________________
Title: ______________________
Clerk
[Seal]
ATTEST: NORTHWAY FINANCIAL, INC.
________________________________ By:__________________________
Title:_______________________
Clerk
[Seal]
<PAGE>
EXHIBIT A
INVENTIONS AND DEVELOPMENTS MADE BY EXECUTIVE
PRIOR TO EMPLOYMENT BY THE COMPANY
Nil
<PAGE>
Exhibit 13
[Graphic Omitted]
NORTHWAY
---------
FINANCIAL
=========
<PAGE>
[Graphic Omitted]
NORTHWAY
NORTHWAY FINANCIAL --------- 1999 ANNUAL REPORT
FINANCIAL
=========
Investing
In
Growth
[Graphic Omitted]
<PAGE>
Selected Financial Highlights 1
Letter to Shareholders 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Independent Auditors' Report 42
Northway Financial Board of Directors and Officers 43
Subsidiary Bank Directors 44
Information for Stockholders 44
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------
Financial Highlights
<CAPTION>
At or for the years ended December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
($000 Omitted, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $462,552 $403,972 $377,866 $372,581 $357,917
Investment securities available-for-sale 55,998 50,567 57,141 90,530 86,701
Investment securities held-to-maturity 5,151 6,509 11,312 12,199 15,377
Loans, net of unearned income 372,766 283,826 266,757 240,383 217,978
Allowance for loan losses 4,887 4,404 4,156 3,941 3,866
Other real estate owned 115 158 222 202 492
Deposit assumption premium 1,271 860 1,161 1,462 1,800
Deposits 343,029 350,921 322,063 322,315 310,388
Securities sold under agreements
to repurchase 7,468 6,791 6,146 4,620 6,087
Stockholders' equity 39,286 40,956 37,526 33,663 31,102
Income Statement Data:
Net interest and dividend income $ 19,341 $ 17,535 $ 17,027 $ 15,717 $ 15,493
Provision for loan losses 540 540 535 512 652
Noninterest income 2,724 2,019 1,680 1,602 1,257
Noninterest expense 15,799 12,910 11,859 10,976 10,613
Net income 3,764 4,068 4,039 3,857 3,596
Per Common Share Data:
Net income $ 002.25 $ 002.35 $ 002.33 $ 002.23 $ 002.08
Cash dividends declared 0.56 0.42 0.55 0.52 0.44
Book value 24.32 23.67 21.67 19.44 17.96
Tangible book value (1) 23.54 23.18 21.00 18.59 16.92
Selected Ratios:
Return on average assets 0.90% 1.06% 1.07% 1.05% 1.02%
Return on average equity 9.37 10.25 11.14 12.04 12.71
Dividend payout 25.03 17.90 23.69 23.13 21.22
Average equity to average assets 9.62 10.35 9.60 8.69 8.00
- --------------------------------------------------------------------------------------------------------------
(1) Stockholders' equity as of December 31, 1999, 1998, 1997, 1996 and 1995 has been reduced by deposit
assumption premium.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
To Our Shareholders
Overview
The theme for this year's Annual Report "Investing in Growth," conveys our
strong commitment to growing our franchise. The consolidation under Northway
Financial of The Berlin City Bank (BCB) and Pemigewasset National Bank (Pemi)
has brought together two strong New Hampshire Community Banks. By pooling
resources we have been able to achieve very strong loan growth and our franchise
has emerged as the dominant Community Commercial Bank franchise based in
Northern and Central N.H.
Our goal for 1999, as discussed in last year's Shareholders Letter, was to focus
on balancing current income objectives with long-term shareholder value. To
enhance shareholder value, we have made strategic decisions to invest in several
long-term growth initiatives, with the realization that the full positive impact
from those investments would not be reflected in short-term earnings.
"By pooling resources we have been able to achieve very strong loan growth and
our franchise has emerged as the dominant Community Commercial Bank franchise in
Northern and Central N.H."
Actual results have borne out the validity of these growth strategies and
assumptions. In 1999, our growth initiatives consisted of record increases in
our loan portfolio (up 31%); the purchase of two full-service branches; and the
opening of two supermarket branches. We implemented these growth initiatives
while achieving a solid level of earnings and after absorbing substantial
expenses for our Y2K efforts and significant one-time expenses related to the
four new branches. We continue to believe that our strategy of balancing current
income objectives with the kind of growth that develops long-term shareholder
value, is an appropriate and prudent strategy for the Shareholders, Customers,
and Employees of Northway Financial.
The strong economy in 1999, while helping us to achieve record loan growth, also
presented several unusual challenges to our organization. In response to those
challenges, our loan origination and operations staffs did an excellent job of
managing the heavy loan growth, while continuing to provide very competitive top
quality service to our customers. This was achieved at the same time that an
extensive Y2K project was undertaken, and we were continuing to work on several
consolidation efforts.
To ensure that our entire organization would be Y2K-compliant, thousands of work
hours and dollars were required to be expended, and this project did negatively
impact 1999 earnings. However, the transition of all of our systems from 1999 to
2000 was flawless and uneventful, and thus, a large success. The dedicated work
of our staff to make this happen also significantly increased their knowledge
base with respect to the systems upgrades, contingency planning and
team-building, and this in-house knowledge will benefit us for many years to
come.
Our staff of capable and dedicated people was key to our success in managing
several large projects throughout 1999. Attracting and maintaining such a staff
in a strong economy in rural northern and central N.H. is key to the
continuation of our strategy of prudent growth. To address this issue, we have
upgraded our benefits and salary and wage programs to make them fully
competitive, and we intend to review them regularly to ensure that they remain
so. As Northway Financial continues to grow and become more visible, retaining
our employees will be a major key to our success.
In addition to the loan growth and geographic growth of the franchise, we are
proud of the assistance we have given the Communities in the various markets we
serve and the assistance our commercial lenders have given to help support and
grow many of the businesses that are our customers.
USING LOANS TO INVEST IN OUR COMMUNITIES. During 1999, our loan portfolio grew
$89 million, a record 31% from the end of 1998. This unprecedented growth
benefits Northway Financial in several ways. First, this growth represents a
major diversification of our portfolio, which was one of our most important
strategic goals a year ago. The ratio of consumer loans to total loans is now
much improved. This was accomplished largely by launching a successful indirect
auto loan program. Our customers use the money we lend for a wide variety of
purposes, virtually all of which help to enhance the well-being and prosperity
of our communities.
At the same time, we continue to be the major commercial lender in northern and
central New Hampshire, which is a great measure of the success of a true
community commercial bank.
Every loan we make, every dollar we invest in businesses, has tremendous impact
on the health of our local and regional economies. Businesses are able to take
advantage of opportunities and expand; new options and additional opportunities
are created for employees; even our cities and towns benefit from a healthy
business climate.
Access to capital provides the foundation for every local economy
[Graphic Omitted]
<PAGE>
EXPANDING SERVICE TO OUR MARKETPLACE. Since the merger of the Pemi and the
Berlin City Bank, we have expanded the branch network of both banks. The Pemi
has grown from five to nine branches, while we have increased the locations of
the Berlin City Bank from seven to nine. Together, we now offer banking services
in eighteen locations across northern and central New Hampshire.
This growth will help us to build deposits in a time when many banks are
struggling to attract funds that are being lost to the equity markets. This
expansion gives us a significant advantage over many of our competitors, many of
whom are reducing the number of banking locations. Time and time again our
customers have told us that the most important thing we can do for them is to
make their banking more convenient. By increasing the number of our branches-and
by offering greatly expanded hours in our supermarket sites-we are taking
visible steps to meet the needs of our customers.
Branches
1996 10
1997 12
1998 15
1999 18
NWFI/BCB/Pemi- Number of
Branch Offices
In recent years, we have significantly expanded the branch offices available to
our customers
[Graphic Omitted]
<PAGE>
Investing in Growth
To provide you with an additional perspective on our commitment to growth, we
have dedicated three pages of this Annual Report to our growth strategy. One
page is dedicated to our loan growth, another to our geographic growth and a
third to the support we have given to our commercial customers and the
communities we serve to help them grow and prosper. We believe that northern and
central N.H. can benefit by having a strong regional community banking franchise
and we are aware of our responsibility to help support the communities we serve.
We urge you to read these sections to gain a better insight to our vision.
Financial Performance
The growth initiatives begun in 1998 have had a dramatic effect on the balance
sheet during 1999. Total assets increased $58.6 million to $462.6 million from
the end of 1998 to the end of 1999, an increase of 14.5%. Driving this growth
was an increase in net loans of $89 million. Our statewide indirect auto lending
initiative caused consumer loans to quadruple to just over $100 million during
the year while commercial real estate loans continued to grow as a result of our
focus on that sector with an increase in loans outstanding of $15.4 million, or
19.8%. We continued to position ourselves on the funding side of the balance
sheet by purchasing and opening new branches and taking advantage of Federal
Home Loan Bank borrowing opportunities.
The results of the success of these initiatives can be seen in the improvement
to net interest income which increased $1,806,000, or 10.3%, to $19,341,000 in
1999 from $17,535,000 in 1998. This increase in net interest income from the
continuing increase in loans outstanding as the year progressed caused quarterly
earnings to improve steadily as the year went on.
As predicted in last year's Annual Report, these initiatives did have a negative
impact on the early part of the year as supporting overhead had to be incurred
prior to the actual increase in loans outstanding. This start up phase of the
lending and branch expansion initiatives and our Y2K efforts negatively impacted
earnings for 1999. Net Income for 1999 was $3,764,000 down from the net income
of $4,068,000 recorded in 1998.
A quarterly dividend of $.14 was paid for each of the first three quarters of
1999. Following the fourth quarter the Board of Directors voted to increase the
dividend to $.15 (a 7.1% increase) based on the favorable performance of the
quarter. Dividend levels will continue to be reviewed on a quarterly basis.
"Enhancing the value of our Northway franchise continued to be a major priority
for our staff in 1999. We contributed to achievement of this goal by acquiring
two branches, opening one new branch, and relocating one branch."
In December 1998, the Board of Directors approved a stock repurchase plan that
authorized the purchase of 10% of the shares outstanding, or up to approximately
173,100 shares, in the open market or in private transactions. As of the end of
fiscal 1999, 116,800 shares had been purchased and were reported as treasury
stock.
While our balance sheet growth and stock repurchase program have impacted our
capital ratios, our capital ratios and tangible book value remains strong. All
capital levels continue to significantly exceed the requirements for
well-capitalized status. Tangible book value per share increased to $23.54 as of
year end 1999 versus $23.18 per share at the end of 1998.
Operational Highlights
Enhancing the value of our Northway Financial franchise continued to be a major
priority for our staff in 1999. We contributed to achievement of this goal by
acquiring two branches, opening one new branch, and relocating one branch. We
also provided our Customers with an improved menu of loan and deposit products
and services, upgraded our ATM network, initiated a new indirect auto loan
business, and achieved an unprecedented level of loan growth.
Branch Network
Several steps were taken to enhance our branch network in our three major market
areas - Pemi, Berlin-Gorham, and North Conway. The Pemi branch network expanded
its commercial and retail reach into one of the fastest growing markets in
central N.H. by the acquisition of two full-service offices in Franklin and
Tilton. In Gorham, we relocated the branch formerly at 66 Main Street to Shaw's
new supermarket on the high-traffic Berlin-Gorham Road. In North Conway, we
opened a full-service branch in the new Shaw's market. Branches located in
Shaw's supermarkets offer extended hours each week day, plus convenient hours on
the weekend. These branches have exceeded our initial expectations and enhance
the value of our retail and commercial delivery system.
"We are ever mindful of our responsibility to strive to enhance the value of
this Northway Financial franchise for our Shareholders, and we believe that this
is being achieved."
With the addition of these new branches, Northway Financial now has 18 branches.
The expansion of our branch network is consistent with our growth strategy and
supports our role as the dominant Community Commercial Bank in our markets. This
expansion is also responsive to our Customers' need for convenience and easy
access.
Providing improved and more competitive products and services, also remains a
primary objective for our organization. We introduced an automated platform
servicing system at the customer service representative desks, at Berlin City
Bank during the first quarter of 1999. This program creates a more efficient
account opening environment and allows our banking professionals additional time
to cross sell other banking product offerings to our customers.
The ATM networks at both BCB and Pemi are an important part of our continuing
effort to make banking with us as convenient and efficient as possible for our
Customers. Newest model ATM's were installed at five branches. These new
machines are designed to be adaptable to a variety of additional services in the
future.
New and improved product offerings were introduced on the loan side of both
banks. Our residential mortgage product array was enhanced with an FHA guarantee
program and several third party programs that increase our abilities to service
all credit sectors of our markets. A uniform home equity line of credit loan
product was developed and introduced in each of our markets. This product is
competitive on both rate and features and we are pleased with our early success
with this program.
The Loan portfolio represents a significant portion of the assets of most
Community Banks. Because of this, banks must develop strategies defining the
volume and composition of the kinds of loans they want in their portfolios. Both
banks traditionally have relied heavily on real estate mortgage loans and
commercial loans and have had difficulty in meeting their loan volume
objectives. Because of the direct consumer loan programs offered by automobile
manufacturers and other retailers, it has been difficult for either bank to do
significant Consumer Lending.
In the first quarter of 1999, in order to grow and diversify our loan portfolio,
we developed an Indirect Automobile Financing Division which we call Capital
Acceptance. Headquartered in Concord, this new division works through a
statewide network of carefully selected automobile dealers to generate
automobile loans. Capital Acceptance is now recognized as a major statewide
competitor in automobile financing, and has provided the diversification we
sought in our loan portfolio. This is an important achievement, especially in
light of the aggressive competition from other lenders for consumer automobile
loans.
Commercial lending activity was very strong in 1999 with over $52 million in
originations. We have grown to be the largest commercial lender in northern and
central New Hampshire through an aggressive call program, competitive products,
pricing strategies and exceptional loan servicing after the loan closes.
Commercial Lending continues to be one of our major focuses as it provides us
with the appropriate yield, opportunity for deposit growth and helps support the
economy of the markets we serve.
Looking Ahead
We believe that we have built the foundation for a strong and profitable
community banking franchise, and our goal for 2000 will be to continue to manage
our Investment in Growth in a way that will enhance long-term earnings. One of
our main priorities for 2000 is to bring to a successful conclusion the effort
to consolidate the many support functions previously managed separately by each
of the two subsidiary banks. These consolidation efforts were underway in 1999,
but their completion was delayed by the priority mandated by the Y2K compliance
project, and by the record loan growth. Our goal for 2000 is to finalize our
consolidation efforts during the third quarter. The outcome will be the improved
efficiency and productive operation of all of the consolidated support
functions.
Having established Northway Financial as a major N.H. banking franchise and a
very strong lending institution, we will look to grow our deposit base to
accommodate additional loan growth. We believe this is a real challenge as there
exist many non-traditional options for our deposit customers. We will attempt to
grow our market share and deposit base through marketing efforts, denovo
branching, branch acquisitions and aggressive business development initiatives.
We are ever mindful of our responsibility to strive to enhance the value of this
Northway Financial franchise for our Shareholders, and we believe that this is
being achieved. The consolidation under Northway Financial of The Berlin City
Bank and The Pemigewasset National Bank, coupled with significant growth since
the merger, have resulted in a strong organization with the capacity for even
further growth. As the dominant Community Commercial Bank in northern and
central New Hampshire, we believe that we are having a very positive impact on
thousands of Customers in these market areas by providing them with a broad
array of bank products and services (while larger regional banks place their
focus elsewhere). We are confident that we are playing an important role in the
lives of our Shareholders, our Customers, our Communities, and our Employees.
And we feel good about that.
/s/ William J. Woodward
William J. Woodward
Chairman of the Board
President and Chief Executive Officer
Northway Financial, Inc.
The Berlin City Bank
/s/ Fletcher W. Adams
Fletcher W. Adams
Vice Chairman of the Board
Northway Financial, Inc.
Chairman of the Board
Pemigewasset National Bank
<PAGE>
[Graphic Omitted]
Last year, subsidiary bank employees donated many thousands of hours of personal
time to local charities and community organizations
SUPPORTING THE COMMUNITIES WE SERVE. We take our role as the leading community
commercial bank in northern and central New Hampshire very seriously. We
recognize that the health of any financial institution is impacted by the health
of the cities and towns it serves. That's why we are committed to offering
useful and fairly-priced products. It's also why we contribute so much time and
financial support to organizations and institutions that are part of our
community.
Last year, The Berlin City Bank and the Pemi contributed more than $100,000 to
more than 100 organizations.
We are especially proud of the efforts of so many of our employees who support
these community groups as well. Many contributed additional funds, and even more
generously donated their time to help others who are less fortunate.
Our scholarship program is also a source of great pride and satisfaction. In
1999, we awarded more than $25,000 to outstanding high school students who will
use the funds to help meet the very high costs of college. This program has
contributed more than $300,000 in scholarships since its inception in
1979.
<PAGE>
Northway Financial, Inc. and Subsidiaries
NORTHWAY FINANCIAL, INC. AND SUBSIDIARIES 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 Northway Financial, Inc. ("the
Company") and its subsidiaries. It is intended to supplement and highlight
information contained in the accompanying consolidated financial statements and
the selected financial data presented elsewhere in this report.
OVERVIEW OF PERFORMANCE
-----------------------
The Company reported net income of $3,764,000, or $2.25 per share, in 1999 as
compared to net income of $4,068,000, or $2.35 per share, in 1998 and
$4,039,000, or $2.33 per share, in 1997. Return on average assets was 0.90
percent in 1999, as compared to 1.06 percent and 1.07 percent for 1998 and 1997,
respectively. During 1999 the Company continued the implementation of its growth
initiatives. The Company opened two new branches, purchased an additional two
branches and began operations at the indirect lending business unit created at
the end of 1998. In addition, the Company reorganized its personnel to support
the achievement of its long term goals. These strategic investments resulted in
increased noninterest expense, which caused a decline in 1999 earnings as
compared to 1998.
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, among
other factors.
SUBSEQUENT EVENTS
-----------------
On March 1, 2000 the Company's largest subsidiary, The Berlin City Bank, ("BCB")
consummated the sale of approximately $1,230,000 worth of nonperforming and
approximately $249,000 of reperforming loans. This transaction reduced
nonperforming loans from $5,348,000 on February 29, 2000, to $4,118,000 as of
March 1, 2000. Reperforming loans were reduced to $1,350,000 on March 1, 2000.
The reperforming loans retained are on an accrual method for interest income
recognition and are believed to be adequately collateralized. As a result of
previous charge-offs to the balances of the loans sold, BCB recorded a net
recovery on the sale of approximately $63,000.
On March 13, 2000 BCB, signed a purchase and sale agreement with the Bank of New
Hampshire ("BNH") which will result in acquisition of the BNH branch in West
Ossipee, New Hampshire. Deposit levels at that branch totaled approximately
$33,000,000 at December 31, 1999. In addition, BCB will purchase certain loans
associated with this branch totaling approximately $6,000,000. The West Ossipee
branch location is just south of BCB's existing location in Conway, New
Hampshire and is a natural extension of the Company's franchise. The purchase is
scheduled to close on August 25, 2000.
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 11 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, 1999, 1998, and 1997.
Net interest income for 1999 increased $1,843,000, or 10 percent, over 1998
while increasing $475,000, or 3 percent, in 1998 over 1997.
Interest income increased $1,875,000, or 6 percent, in 1999 versus 1998 after
remaining relatively unchanged in 1998 versus 1997. Earning assets on average
increased by $34,157,000, or 10 percent, during 1999, while, the mix of earning
assets continued to evolve, creating a favorable volume variance. This favorable
volume variance was offset by a 23 basis point decline in average yield on
earning assets as a whole. A $46,024,000, or 17 percent, increase in the volume
of average loans, partially offset by a 45 basis point decrease in yield,
accounted for the $2,617,000, or 11 percent, increase in interest income on
loans. Interest income on investment securities decreased $202,000, or 5
percent, from 1998 to 1999. This decrease resulted from a 3 percent decrease in
the average balance of total investment securities and an 11 basis point
decrease in yield.
Total interest expense was relatively unchanged in 1999 due primarily to a 31
basis point decrease in rates paid on interest bearing liabilities, which offset
a 9 percent increase in average volume. The composition of interest bearing
liabilities mitigated increases in interest cost as the average balances of all
categories of low cost funds increased, offsetting increases in average balances
of categories of high cost funds. The most expensive sources of funds, Federal
Home Loan Bank advances and other borrowed funds, increased by a combined
$17,445,000 and was a significant source of funding for loan growth.
Interest income in 1998 was relatively unchanged versus 1997 as a result of a 1
percent increase in the volume of earning assets, and as a result of the
decrease in average yield of earning assets. A $17,079,000, or 7 percent,
increase in the volume of average loans and 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 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 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. In addition, 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 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 3 basis
points to 5.00 percent in 1999 after having increased 10 basis points to 4.97
percent in 1998. The increases in net interest margin in both 1999 and 1998 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 1999 was 83
percent. In 1998 and 1997, the portion of interest earning assets funded by
interest bearing liabilities was 84 percent and 85 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 of interest rate movements. During
1999, the net interest rate spread increased 8 basis points to 4.41 percent from
the 1998 spread of 4.33 percent as the cost of interest bearing liabilities
declined 31 basis points while the yields earned on earning assets decreased 23
basis points. The increase in 1998 was 7 basis points from 4.26 percent in 1997.
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 1999 equaling
the provision incurred in 1998. In 1998, the provision for loan losses increased
$5,000 to $540,000 from $535,000 in 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.
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:
($000 Omitted)
Years Ended December 31, 1999 1998 1997
---- ---- ----
Service charges and fees on deposit accounts $ 935 $ 843 $ 831
Securities gains, net 709 496 313
Other 1,080 680 536
------ ------ ------
Total noninterest income $2,724 $2,019 $1,680
====== ====== ======
<PAGE>
<TABLE>
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND AVERAGE YIELDS/RATES
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
($000 Omitted)
1999 1998 1997
---------------------------- ---------------------------- ---------------------------
Average Average Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Federal funds sold $ 4,865 $ 228 4.69% $ 14,628 $ 769 5.26% $ 9,720 $ 528 5.43%
Interest bearing deposits 93 7 7.53 87 6 6.90 114 8 7.02
Investments(1)(2) 67,744 4,070 6.01 69,854 4,272 6.12 89,366 5,498 6.15
Loans, net(1)(3) 320,850 26,968 8.41 274,826 24,351 8.86 257,747 23,350 9.06
-------- ------- ------- ------- -------- -------
Total interest
earning assets(1) 393,552 31,273 7.95 359,395 29,398 8.18 356,947 29,384 8.23
------- ---- ------ ---- ------ ----
Cash and due from banks 12,868 11,967 10,804
Allowance for loan losses (4,653) (4,323) (4,323)
Premises and equipment 10,125 9,844 8,732
Other assets 5,637 6,400 5,604
-------- ------- --------
Total assets $417,529 $383,283 $377,764
======== ======== ========
Liabilities
Interest bearing liabilities:
Regular savings $ 68,333 1,319 1.93 $ 65,126 1,518 2.33 $ 63,661 1,507 2.37
NOW and super NOW 49,832 433 0.87 46,942 536 1.14 43,369 530 1.22
Money market accounts 23,765 592 2.49 22,467 622 2.77 22,348 613 2.74
Certificates of deposit 152,353 7,514 4.93 151,244 8,079 5.34 153,111 8,211 5.36
Securities sold under
agreements to repurchase 9,267 432 4.66 8,469 431 5.09 7,796 404 5.18
Federal Home Loan
Bank advances 23,266 1,279 5.50 5,972 360 6.03 12,139 729 6.01
Other borrowed funds 151 9 5.96 -- -- 215 13 6.05
------- ------- ------- ------- -------- -------
Total interest bearing
liabilities 326,967 11,578 3.54 300,220 11,546 3.85 302,639 12,007 3.97
------- ---- ------- ------- ---- ------- ----
Noninterest bearing deposits 46,459 39,561 34,948
Other liabilities 3,931 3,825 3,906
-------- -------- --------
Total liabilities 377,357 343,606 341,493
Stockholders' equity 40,172 39,677 36,271
-------- -------- --------
Total liabilities and
stockholders' equity $417,529 $383,283 $377,764
======== ======== ========
Net interest income(1) $19,695 $17,852 $17,377
======= ======= =======
Interest spread (4) 4.41% 4.33% 4.26%
==== ==== ====
Net interest margin (5) 5.00% 4.97% 4.87%
==== ==== ====
(1) Reported on a tax equivalent basis.
(2) Average balances are calculated using the adjusted cost basis.
(3) Net of unearned income and includes nonperforming loans.
(4) Interest spread equals the yield on interest earning assets minus the rate paid on interest bearing liabilities.
(5) The net interest margin equals net interest income divided by total average interest earning assets.
</TABLE>
<PAGE>
<TABLE>
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED RATE/VOLUME VARIANCE ANALYSIS
------------------------------------------
<CAPTION>
($000 Omitted)
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Mix Total Volume Rate Mix Total
------ ------ ----- ------ ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Federal funds sold $ (513) $ (84) $ 56 $ (541) $ 267 $ (17) $ (9) $ 241
Interest bearing deposits -- 1 -- 1 (2) -- -- (2)
Investments (129) (75) 2 (202) (1,200) (33) 7 (1,226)
Loans 4,078 (1,251) (210) 2,617 1,54 (512) (34) 1,001
------ ------ ----- ------ ----- ----- ----- -------
Total interest and dividend income 3,436 (1,409) (152) 1,875 612 (562) (36) 14
----- ----- ----- -------
Interest expense:
Regular savings accounts 75 (261) (13) (199) 35 (23) (1) 11
NOW and super NOW accounts 33 (128) (8) (103) 44 (35) (3) 6
Money market accounts 36 (62) (4) (30) 3 6 -- 9
Certificates of deposit 59 (620) (4) (565) (100) (32) -- (132)
Securities sold under agreements
to repurchase 40 (36) (3) 1 35 (7) (1) 27
FHLB advances 1,042 (32) (91) 919 (370) 3 (2) (369)
Other borrowed funds -- -- 9 9 (13) -- -- (13)
------ ------ ----- ------ ----- ----- ----- -------
Total interest expense 1,285 (1,139) (114) 32 (366) (88) (7) (461)
------ ------ ----- ------ ----- ----- ----- -------
Net interest and dividend income $2,151 $ (270) $ (38) $1,843 $ 978 $(474) $ (29) $ 475
====== ====== ===== ====== ===== ===== ===== =======
</TABLE>
<PAGE>
Northway Financial, Inc. and Subsidiaries
NONINTEREST INCOME (CONTINUED)
------------------------------
Fee income from service charges on deposit accounts increased 11 percent in 1999
and 1 percent in 1998. The improvement in 1999 was a result of the decision to
increase fees for the first time in years. The increase in 1998 was primarily
related to an increase in the number of transaction deposit accounts.
Net securities gains were $709,000 in 1999, compared to $496,000 in 1998.
Investment securities gains in 1999 included net gains of $679,000 recorded on
sales of equity securities compared to $501,000 in 1998. In 1997 net securities
gains were $313,000 and included equity gains of $548,000.
Other noninterest income (sources of which include the creation of mortgage
servicing assets, credit card merchant and fee income, automated teller fees,
and safe deposit fees) increased $400,000, or 59 percent, to $1,080,000 in 1999
following a 27 percent increase in 1998, and a 12 percent increase in 1997.
NONINTEREST EXPENSE
-------------------
Total noninterest expense increased $2,889,000, or 22 percent, during 1999 and
$1,051,000, or 9 percent, in 1998. The increases in these expenses were due to
the Company's decision to increase market share in existing markets and enter
new markets. In both 1999 and 1998 two branches were opened and over the two
year period an indirect lending group was created and began operations. In
addition, during 1999, two branches were purchased.
The following table sets forth information relating to the Company's noninterest
expense during the periods indicated.
($000 Omitted)
Years Ended December 31, 1999 1998 1997
------- ------- -------
Salaries and employee benefits $ 8,464 $ 6,762 $ 5,883
Occupancy and equipment 2,541 2,080 1,714
Amortization of deposit assumption premium 357 301 301
Professional fees 1,091 702 569
Stationery and supplies 565 470 374
Merger related expenses -- -- 643
Other 2,781 2,595 2,375
------- ------- -------
$15,799 $12,910 $11,859
======= ======= =======
Salaries and employee benefits increased $1,702,000, or 25 percent, from 1998 to
1999 and by $879,000, or 15 percent, from 1997 to 1998. These increases reflect
staff additions in connection with the expansion of the retail franchise,
increased lending activities and normal salary and wage increases. The expansion
initiatives also caused occupancy and equipment expense to increase $461,000 to
$2,541,000 in 1999 from $2,080,000 in 1998, which was $366,000 higher than the
$1,714,000 recorded in 1997.
Amortization of deposit assumption premium in 1999 increased to $357,000 versus
$301,000 in both 1998 and 1997. The increase is a result of the acquisition of
two branches on July 9, 1999.
Merger related expense of $643,000 in 1997 is primarily related to the creation
of the holding company, the related stock split, and the merger.
INCOME TAX EXPENSE
------------------
The Company recognized $1,962,000, $2,036,000 and $2,274,000 in income tax
expense for the years ended December 31, 1999, 1998, and 1997, respectively. The
effective tax rate was 34.3% for 1999, 33.3% for 1998, and 36.0% for 1997. The
increase in the effective tax rate for 1999 over 1998 is due to the fact that
during 1999 New Hampshire adopted a new tax law that increased the rate of the
Business Profits Tax from seven to eight percent of income. During 1997, the
Company recorded merger-related expenses of $643,000. 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 14 to the Consolidated Financial Statements.
<PAGE>
Northway Financial, Inc. and Subsidiaries
ASSETS
------
Total assets increased $58,580,000, or 15 percent, to $462,552,000 at December
31, 1999 versus $403,972,000 at December 31, 1998. The composition of earning
assets has continued to change in order to meet corporate goals.
Balance Sheet Highlights
($000 Omitted)
Years Ended December 31, 1999 1998 Change
-------- -------- --------
Total assets $462,552 $403,972 $ 58,580
Earning assets 434,066 378,004 56,130
Securities 61,149 57,076 4,073
Loans, net of unearned income 372,766 283,826 88,940
Deposits 343,029 350,921 (7,892)
Equity 39,286 40,956 (1,670)
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, 1999 and 1998, showing amortized cost and market value for each category:
<TABLE>
<CAPTION>
($000 Omitted)
1999 1998
------------------- --------------------
Amortized Market Amortized Market
December 31, Cost Value Cost Value
- ----------------- --------- ------ --------- ------
<S> <C> <C> <C> <C>
Securities available-for-sale:
US Treasury and government agencies $27,466 $26,449 $17,322 $17,391
Mortgage-backed securities 9,179 8,855 13,342 13,442
Collateralized mortgage obligations 10,139 9,958 11,118 11,070
Marketable equity securities 2,999 2,780 2,919 2,741
Non-marketable equity securities 4,456 4,456 2,038 2,038
State and political subdivisions 3,478 3,500 3,676 3,885
------- ------- ------- -------
Total securities available-for-sale $57,717 $55,998 $50,415 $50,567
------- ------- ------- -------
Securities held-to-maturity:
Mortgage-backed securities $ 2,285 $ 2,247 $ 5,501 $ 5,485
Collateralized mortgage obligations 1,316 1,297 -- --
State and political subdivisions 1,550 1,551 1,008 1,030
------- ------- ------- -------
Total securities held-to-maturity $ 5,151 $ 5,095 $ 6,509 $ 6,515
------- ------- ------- -------
Total securities $62,868 $61,093 $56,924 $57,082
======= ======= ======= =======
</TABLE>
Securities available-for-sale increased $5,431,000 during 1999 to $55,998,000.
The increase in the portfolio reflects the Company's strategy to maximize
profits by increasing the amount of higher yielding assets.
The net unrealized loss on securities available-for-sale was $1,719,000 at
December 31, 1999 as compared to a net unrealized gain of $152,000 in 1998. This
was the result of a higher interest rate environment, and corresponding lower
bond prices in 1999.
The Company has a policy of purchasing debt 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 vice versa. Additionally, mortgage-backed
securities carry prepayment risk whereby expected yields may not be achieved due
to the inability to reinvest proceeds from prepayment at comparable yields.
Moreover, such mortgage-backed securities may not benefit from price
appreciation in periods of declining rates to the same extent as the remainder
of the portfolio.
Securities held-to-maturity comprise approximately 8 percent and 11 percent of
the aggregate securities portfolio at December 31, 1999 and 1998, 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,
short-term securities sold under agreements to repurchase and treasury, tax and
loan accounts. Refer to Note 3 for a further discussion of pledging.
<PAGE>
Northway Financial, Inc. and Subsidiaries
LOANS
-----
Loans increased 31 percent in 1999 primarily due to increases in indirect auto
and 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 as
of December 31:
($000 Omitted)
Percent Percent
1999 of Total 1998 of Total
-------- -------- -------- --------
Real estate
Residential $139,389 37.3% $146,603 51.6%
Commercial 93,061 24.9 77,680 27.4
Construction 4,360 1.2 4,118 1.4
Commercial 28,833 7.7 25,874 9.1
Installment 24,147 6.5 25,070 8.8
Indirect installment 76,339 20.4 18 --
Other 7,369 2.0 4,795 1.7
-------- ----- -------- -----
$373,498 100.0% $284,158 100.0%
======== ===== ======== =====
The loan portfolio mix changed significantly during the year. As of December 31,
1999, total commercial real estate and commercial loans represented 32.6 percent
of the Company's loan portfolio, residential real estate loans represented 37.3
percent, and installment loans represented 26.9 percent. This compares with a
commercial real estate and commercial loan percentage of 36.5 percent,
residential real estate loan percentage of 51.6 percent and installment loan
percentage of 8.8 percent in 1998. The 1999 increase in the installment loan
percentage and decrease in the real estate loan percentage reflects management's
commitment to diversify the loan portfolio.
Commercial real estate loans consist of loans secured by income producing
commercial real estate and 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
$18,340,000 in 1999 as compared to 1998. 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 $7,214,000 in 1999, a 5 percent decrease
from 1998. 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 $75,398,000, or 301 percent, in 1999 is a result of growth in
indirect automobile loans, recreational vehicle loans and home equity 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 and automobiles located
in New Hampshire. In addition, other real estate owned is located in this
market. Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of other real estate owned are
susceptible to changing conditions in this market.
NONPERFORMING ASSETS
--------------------
Nonperforming assets were $4,727,000, or 1.02 percent of total assets, at
December 31, 1999 as compared to $2,704,000, or 0.67 percent of total assets, at
December 31, 1998. This increase was primarily caused by the addition in 1999 of
a large borrowing relationship to the nonperforming asset category. The Company
may make additional provisions to the allowance for loan losses related to this
credit in the future.
Nonperforming assets are comprised primarily of nonperforming loans, other
chattels owned and real estate acquired by foreclosure or a similar conveyance
of title. The accrual of interest on a loan is discontinued when there is
reasonable doubt as to its collectibility or whenever the payment of principal
or interest is more than 90 days past due. However, there are loans within this
nonperforming classification that receive periodic payments, but which have a
weakness with respect to the collateral securing the loan.
At December 31, 1999, nonperforming loans totaled $4,578,000, or 1.2 percent of
total loans, compared to $2,546,000, or 0.90 percent of total loans, in 1998.
Other real estate owned at December 31, 1999 was $115,000 compared to $158,000
in 1998.
<PAGE>
Northway Financial, Inc. and Subsidiaries
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 allowance when collected. The
adequacy of the allowance for loan losses is evaluated on a regular basis by
management. Factors considered in evaluating the adequacy of the allowance
include previous loss experience, current economic conditions and their effect
on borrowers and the market area in general, and the performance of individual
credits in relation to the contract terms. The provision for loan losses charged
to earnings is based on management's judgment 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 $483,000 from December 31,
1998 to $4,887,000, or 1.31 percent of total loans, at December 31, 1999. The
1999 and 1998 provision for loan losses were each $540,000.
The following table sets forth the composition of the allowance for loan losses
for the periods indicated.
<TABLE>
<CAPTION>
($000 Omitted)
Years Ended December 31, 1999 1998 1997
- ------------------------ ------- ------- -------
<S> <C> <C> <C>
Beginning allowance $ 4,404 $ 4,156 $ 3,941
Provision for loan losses 540 540 535
Loans charged-off (304) (524) (612)
Recoveries 247 232 292
------- ------- -------
Net charge-offs (57) (292) (320)
------- ------- -------
Ending allowance $ 4,887 $ 4,404 $ 4,156
======= ======= =======
Ending allowance as a percentage of loans outstanding at 12/31 1.31% 1.55% 1.56%
Ending allowance as a percentage of nonperforming loans at 12/31 106.75 172.98 227.35
Net charge-offs as a percentage of average loans 0.02 0.11 0.12
</TABLE>
DEPOSITS AND BORROWINGS
-----------------------
Total deposits at December 31, 1999 were $343,029,000, a decrease of $7,892,000,
or 2 percent, compared to $350,921,000 at December 31, 1998. The decrease in
deposits was due to the withdrawal of a $14,500,000 temporary money market
deposit on January 6, 1999, which was deposited on December 31, 1998 and an
outflow of certificates of deposit. These declines were partially offset by the
acquisition of two branch offices from Vermont National Bank holding deposits of
approximately $18,000,000.
Components of Deposits ($000 Omitted)
December 31, 1999 1998
- ------------ -------- --------
Demand $ 49,925 $ 45,808
Regular savings, NOW
& money market 142,659 152,094
Time 150,445 153,019
-------- --------
Total deposits $343,029 $350,921
======== ========
Certificates of deposit of $100,000 or more are scheduled to mature as follows
at December 31, 1999:
($000 Omitted)
3 months or less $ 6,293
Over 3 to 6 months 3,410
Over 6 to 12 months 7,902
Over 12 months 4,469
-------
$22,074
=======
The following table sets forth certain information concerning the Company's
borrowings at the dates indicated.
($000 Omitted)
December 31, 1999 1998
- ------------ ---- ----
Short-term borrowings $17,418 $7,624
Long-term debt 58,528 2,278
------- ------
$75,946 $9,902
======= ======
At December 31, 1999 short-term borrowings consisted of Federal Home Loan Bank
("FHLB") advances of $9,950,000 and securities sold under agreements to
repurchase of $7,468,000 compared to $833,000 and $6,791,000 respectively, for
1998. The increase in FHLB advances was a direct result of the need to fund loan
growth. At December 31, 1999 long-term debt consisted solely of FHLB term
advances of $58,528,000 as compared to $2,278,000 in 1998. The increase in
borrowings was a direct result of the need to fund loan growth. Long-term debt
maturities range from July 2001 through December 2009. Many of the advances,
however, are callable with call dates ranging from February 2000 through
November 2001. See Note 10 to the Consolidated Financial Statements for
additional information.
<PAGE>
Northway Financial, Inc. and Subsidiaries
CAPITAL
-------
The following table sets forth the Company's risk-based capital and leverage
ratios:
($000 Omitted)
December 31, 1999 1998
- ------------ -------- --------
Risk-adjusted assets $329,369 $241,943
Tier 1 capital (to average assets) 8.47% 10.25%
Tier 1 capital (to risk weighted assets) 11.80 6.53
Total capital (to risk weighted assets) 13.05 17.78
The Company's capital serves to support growth and provide depositors and other
creditors protection against loss. Equity capital represents the stockholders'
investment in the Company. Management strives to maintain an optimal level of
capital on which an attractive return to the stockholders will be realized over
both the short-term and long-term, while serving depositors' and creditors'
needs.
The Company must also observe the minimum requirements enforced by the federal
banking regulators. There are three capital requirements that banks and bank
holding companies must meet: Tier 1 capital, total capital (combination of Tier
1 capital and Tier 2 capital), and leverage (Tier 1 capital to average assets)
ratios. Tier 1 capital consists of stockholders' equity, net of intangible
assets. Tier 2 capital consists of a limited amount of loss reserves. Tier 1
capital, total capital and leverage ratios do not include any adjustments for
unrealized gains and losses relating to securities available-for-sale except net
unrealized losses relating to marketable equity securities. The minimum
requirements for the leverage ratio, risk-based Tier 1 capital and risk-based
total capital are 4 percent, 4 percent and 8 percent, respectively. As of
December 31, 1999, the subsidiary banks of the Company were "well capitalized"
as defined under FDIC regulations.
INTEREST RATE RISK
------------------
Volatility in interest rates requires the Company to manage interest rate risk,
which arises from differences in the timing 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 changes in net interest income under
alternative balance sheet and interest rate scenarios.
<TABLE>
INTEREST RATE GAP ANALYSIS
<CAPTION>
($000 Omitted)
Balance Maturing or Subject to Repricing
3 months 4 to 12 12 to 24 2 to 5 After 5
December 31, 1999 or less months months years years Total
- ----------------- -------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $108,048 $ 93,603 $ 54,725 $101,570 $ 14,874 $372,820
Interest bearing deposits -- 97 -- -- -- 97
Securities 6,127 3,910 4,920 24,170 22,022 61,149
Other assets -- -- -- -- 28,486 28,486
-------- --------- --------- -------- -------- --------
Total assets $114,175 $ 97,610 $ 59,645 $125,740 $ 65,382 $462,552
-------- --------- --------- -------- -------- --------
Deposits $ 79,395 $ 94,250 $ 82,811 $ 36,647 $ 49,926 $343,029
Repurchase agreements 4,895 1,948 625 -- -- 7,468
Borrowed funds 17,200 32,750 18,500 28 -- 68,478
Other liabilities and
stockholders' equity -- -- -- -- 43,577 43,577
-------- --------- --------- -------- -------- --------
Total liabilities and equity $101,490 $ 128,948 $ 101,936 $ 36,675 $ 93,503 $462,552
-------- --------- --------- -------- -------- --------
GAP for period $ 12,685 $ (31,338) $ (42,291) $ 89,065 $(28,121)
-------- --------- --------- -------- --------
Cumulative GAP $ 12,685 $ (18,653) $ (60,944) $ 28,121 --
======== ========= ========= ======== ========
As a percent of total assets 2.7% (4.0)% (13.2)% 6.1%
</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, all 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
noncontractual 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 percent of total assets. As of December 31, 1999, the
estimated exposure was 4.0 percent liability sensitive (see table above).
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 200
basis points, the December 31, 1999 earnings simulation model projects that net
interest income for the next twelve months would decrease by an amount equal to
approximately 0.14 percent. In addition, utilizing an immediate rate shock
stimulation where interest rates decrease 200 basis points, the December 31,
1999 earnings simulation model projects that net interest income for the next
twelve months would decrease by an amount equal to approximately 4.96 percent.
Both the up and down rate shock simulations are within the Company's 10 percent
policy limit.
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 sources of liquidity for the parent holding company are
dividends from the subsidiary banks and reimbursement for services performed on
behalf of the banks.
As shown in the consolidated statements of cash flows, cash and cash equivalents
decreased by $35,336,000 during 1999. The principal cause for the decrease was
cash used for investing activities, primarily in lending, which totaled
$95,194,000 with lending activities utilizing $89,801,000. Cash provided by
financing activities of $53,078,000 was provided by a branch acquisition and
FHLB advances, which was partially offset by a decline in total deposits. The
net cash provided by operating activities provided the remainder of funding
sources for 1999. The $6,780,000 of net cash provided by operating activities
was primarily attributable to net income of $3,764,000 and an increase in net
other liabilities/other assets of $1,239,000.
<PAGE>
Northway Financial, Inc. and Subsidiaries
CAPITAL EXPENDITURES AND COMMITMENTS
------------------------------------
During 1999, the Company incurred approximately $1,400,000 in capital
expenditures. These expenditures included $189,000 and $193,000, respectively,
for leasehold improvements and furniture and equipment for the Company's
supermarket branches in Gorham and North Conway, New Hampshire. The Company also
purchased its Tilton and Franklin, New Hampshire branch offices from Vermont
National Bank for $185,000 and $75,000, respectively. Approximately $93,000 was
spent on expenditures for furniture and equipment for Tilton and $86,000 for
Franklin. The remaining expenditures were for normal upgrades to existing
property and equipment.
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
incurring capital expenditures of $451,000 for buildings and $158,000 for
furniture and equipment. Expenditures totaling approximately $730,000 were
incurred 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.
During 2000, the Company's estimated capital expenditure projections total
$1,910,000. Approximately $1,200,000 is expected to be incurred for the
construction of a new branch, and related furniture and equipment. The Company
has also allocated $200,000 of expenditures to upgrade on-line teller systems at
nine retail locations, as well as $175,000 to improve imaging systems. The
remaining expenditures will be incurred for normal upgrades to existing property
and equipment.
IMPACT OF YEAR 2000 EVENT
-------------------------
As previously reported, over the past several years the Company developed and
implemented a plan to address the anticipated impacts of the so-called Year 2000
(Y2K) problem on our information technology (IT) systems and on our non-IT
systems involving embedded chip technologies. We also surveyed selected third
parties and loan customers to determine the status of their Y2K compliance
programs. In addition we developed contingency plans specifying what the Company
would do if we or important third parties experienced disruptions to critical
business activities as a result of the Y2K issue.
Our Company's Y2K plan was completed prior to the anticipated Y2K failure dates.
As of March 15, 2000, the Company has not experienced any business disruptions
or system failures as a result of the Y2K issues, nor is it aware of any Y2K
issues materially impacting the Company's customers, vendors or other
significant third parties. However, there can be no assurance that unforeseen
circumstances may not arise, or that the Company will not in the future identify
equipment or systems which are not Y2K compliant.
As of December 31, 1999 the Company incurred costs of approximately $214,000
verses a budgeted $263,000, and approximately 11,400 man-hours to address and
prepare for Y2K issues. These costs were included in operating expenses as
incurred. No further material expenses relating to the Y2K issue are expected to
be incurred in 2000.
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. 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, and the timing, impact and other uncertainties of future
acquisitions.
In addition to the factors described above, the following are some additional
factors that could cause our financial performance to differ from any forward
looking statement contained herein; a) the rise in interest rates during the
past year and expected increases in interest rates in 2000; b) a change in
product mix attributable to changing interest rates, customer preferences or
competition; c) a significant portion of the Company's loan customers are in the
hospitality business and therefore could be affected by adverse weather
conditions and/or rising gasoline prices; and d) the effectiveness of
advertising, marketing and promotional programs.
<PAGE>
<TABLE>
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
($000 Omitted, Except Per Share Data)
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997
================================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $26,865 $24,313 $23,210
Interest on Debt Securities :
Taxable 3,109 3,322 4,592
Tax-Exempt 472 479 514
Dividends 238 192 182
Interest on Federal Funds Sold 228 769 528
Interest on Interest Bearing Deposits 7 6 8
- ----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 30,919 29,081 29,034
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits:
Regular Savings, Interest Checking and Money Market Deposit Accounts 2,344 2,676 2,650
Certificates of Deposit (in Denominations of $100,000 or More) 1,169 1,176 1,062
Other Time 6,345 6,903 7,149
Interest on Short-Term Borrowings 954 751 875
Interest on Long-Term Debt 766 40 271
- ----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 11,578 11,546 12,007
- ----------------------------------------------------------------------------------------------------------------
Net Interest and Dividend Income 19,341 17,535 17,027
Provision for Loan Losses 540 540 535
- ----------------------------------------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 18,801 16,995 16,492
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service Charges and Fees on Deposit Accounts 935 843 831
Securities Gains and Losses, Net 709 496 313
Other 1,080 680 536
- ----------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 2,724 2,019 1,680
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and Employee Benefits 8,464 6,762 5,883
Office Occupancy and Equipment 2,541 2,080 1,714
Amortization of Deposit Assumption Premium 357 301 301
Merger Related Expenses -- -- 643
Other 4,437 3,767 3,318
- ----------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 15,799 12,910 11,859
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,726 6,104 6,313
Income Tax Expense 1,962 2,036 2,274
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,764 $ 4,068 $ 4,039
================================================================================================================
Earnings Per Common Share and Earnings Per Common Share Assuming Dilution $ 2.25 $ 2.35 $ 2.33
================================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
------------------------------------
($000 Omitted)
AS OF DECEMBER 31, 1999 1998
================================================================================================================
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks and Interest Bearing Deposits $ 16,087 $ 14,948
Federal Funds Sold -- 36,475
- ----------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 16,087 51,423
- ----------------------------------------------------------------------------------------------------------------
Securities Available-for-Sale 55,998 50,567
Securities Held-to-Maturity (Fair Value of $5,095 in 1999 and $6,515 in 1998) 5,151 6,509
Loans Held for Sale 54 535
Loans, Net Before Allowance for Loan Losses 372,766 283,826
Less: Allowance for Loan Losses (4,887) (4,404)
- ----------------------------------------------------------------------------------------------------------------
Net Loans 367,879 279,422
- ----------------------------------------------------------------------------------------------------------------
Bank Premises and Equipment, Net 10,387 9,963
Other Real Estate Owned 115 158
Other Assets 6,881 5,395
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 462,552 $ 403,972
================================================================================================================
LIABILITIES
Deposits:
Demand $ 49,925 $ 45,808
Regular Savings, Interest Checking Accounts and Money Market Deposit Accounts 142,659 152,094
Certificates of Deposit (In Denominations of $100,000 or More) 22,074 23,948
Other Time 128,371 129,071
- ----------------------------------------------------------------------------------------------------------------
Total Deposits 343,029 350,921
- ----------------------------------------------------------------------------------------------------------------
Short-Term Borrowings 17,418 7,624
Accrued Taxes and Other Liabilities 4,291 2,193
Long-Term Debt 58,528 2,278
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 423,266 363,016
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 Par Value; 1,000,000 Shares Authorized; None Issued -- --
Common Stock, $1.00 Par Value; 9,000,000 Shares Authorized; 1,731,969 issued and
1,615,169 Outstanding in 1999 and 1,729,969 Outstanding in 1998 1,732 1,732
Surplus 2,101 2,101
Retained Earnings 39,906 37,084
Treasury Stock (116,800 Shares in 1999 and 2,000 Shares in 1998) (3,398) (55)
Accumulated Other Comprehensive (Loss) Income, Net of Tax (1,055) 94
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 39,286 40,956
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 462,552 $ 403,972
================================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
<CAPTION>
=============================================================================================================================
($000 Omitted)
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, 1996 $1,732 $2,101 $ 30,662 $ -- $ (832) $ 33,663
Net Income - 1997 -- -- 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 - 1998 -- -- 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
Net Income - 1999 -- -- 3,764 -- -- 3,764
Net Change in Unrealized Gain on
Securities Available-for-Sale, Net of Tax -- -- -- -- (1,149) (1,149)
Treasury Stock Purchased -- -- -- (3,343) -- (3,343)
Cash Dividends Declared ($0.56 Per Share) -- -- (942) -- -- (942)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $1,732 $2,101 $ 39,906 $(3,398) $(1,055) $ 39,286
=============================================================================================================================
Accumulated other comprehensive income (loss) as of December 31, 1999, 1998 and 1997 consists of net unrealized holding
gains (losses) on available-for-sale securities, net of taxes.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
<CAPTION>
===========================================================================================================================
($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 3,764 $4,068 $4,039
Other Comprehensive Income (Loss):
Net Unrealized (Losses) Gains on Available-for-Sale Securities (1,162) 731 1,586
Reclassification Adjustment for Realized Gains in Net Income 709 496 313
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive (Loss) Income Before Income Tax Effect (1,871) 235 1,273
Income Tax (Benefit) Expense (722) 90 492
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive (Loss) Income, Net of Tax (1,149) 145 781
- ---------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 2,615 $4,213 $4,820
===========================================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
Northway Financial, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<CAPTION>
($000 Omitted)
FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997
=============================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,764 $ 4,068 $ 4,039
- -----------------------------------------------------------------------------------------------------------------------------
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Loan Losses 540 540 535
Depreciation and Amortization 1,290 1,122 992
Deferred Income Taxes (342) 188 56
Write-Down of Other Real Estate Owned 47 5 58
Gains on Sales of Investment Securities Available-for-Sale, Net (709) (496) (313)
Loss on Sale of Premises and Equipment -- -- 45
Amortization of Premiums and Accretion of Discounts on Securities, Net 76 116 230
Increase (Decrease) in Unearned Income, Net 400 (194) (193)
(Gains) Losses on Sales of Other Real Estate Owned (7) (45) (56)
Net Decrease (Increase) in Loans Held for Sale 481 (243) (234)
Other Liabilities Assumed Net of Other Assets Acquired in Branch Transaction 1 -- --
Net Change in Other Assets and Other Liabilities 1,239 (818) 357
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,780 4,243 5,516
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities Available-for-Sale 6,157 4,344 28,446
Proceeds from Maturities of Investment Securities Held-to-Maturity 13,074 11,756 8,855
Proceeds from Maturities of Investment Securities Available-For-Sale 9,979 27,467 21,552
Purchase of Investment Securities Available-for-Sale (21,813) (24,558) (15,186)
Purchase of Investment Securities Held-to-Maturity (11,716) (7,017) (8,036)
Net Increase in Loans (89,801) (17,473) (26,901)
Proceeds from Sales of and Payments Received on Other Real Estate Owned 282 353 378
Proceeds from Sale of Premises and Equipment -- -- 296
Premises and Equipment Acquired in Branch Transaction (292) -- --
Additions to Premises and Equipment (1,064) (1,597) (1,454)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (95,194) (6,725) 7,950
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits (25,903) 28,858 (251)
Deposits Assumed in Branch Transaction, Net of Premium 17,222 -- --
Advances from Federal Home Loan Bank 57,000 2,250 28
Repayment of Federal Home Loan Bank Advances (750) (82) (5,409)
Net Increase (Decrease) in Short-term Federal Home Loan Bank Advances 9,117 (8,379) 6,000
Net Increase in Securities Sold Under Agreements to Repurchase 677 645 1,526
Net (Decrease) in Other Borrowed Funds -- -- (221)
Purchases of Treasury Stock (3,343) (55) --
Cash Dividends Paid (942) (728) (1,304)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 53,078 22,509 369
- -----------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (35,336) 20,027 13,835
Cash and Cash Equivalents at Beginning of Year 51,423 31,396 17,561
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,087 $ 51,423 $ 31,396
=============================================================================================================================
Supplemental Disclosure of Cash Flows:
Interest Paid $ 11,242 $ 12,068 $ 11,802
Taxes Paid 2,043 2,097 2,383
Loans Transferred to Other Real Estate Owned 410 524 603
Loans Transferred to Other Personal Property 125 57 19
Loans Charged-Off, Net of Recoveries 57 292 320
Financed Sales of Other Real Estate Owned 131 231 203
Other Real Estate Owned Transferred to Loans -- 44 --
Increase in Amount Due to Broker 992 -- --
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
Northway Financial, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 becoming a holding company on September 30,
1997, as described in Note 19, the Company had no operations other than those of
an organizational nature. Subsequent thereto, the Company's only business
activity has been to own all of the shares of, and provide management and
operational support to, The Berlin City Bank ("BCB") and The Pemigewasset
National Bank ("PNB"). The Company's headquarters are in Berlin, New Hampshire.
The Berlin City Bank is a trust company chartered under the laws of the State of
New Hampshire and is headquartered in Berlin, New Hampshire. The Berlin City
Bank is engaged principally in the business of attracting deposits from the
general public and investing those deposits in investment securities, commercial
loans, real estate loans, and consumer loans.
The Pemigewasset National Bank is a federally chartered bank headquartered in
Plymouth, New Hampshire. Pemigewasset National Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits in investment securities, commercial loans, real estate loans, and
consumer loans.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, 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 statements of financial condition, 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 other real
estate owned.
The Company's loans are primarily secured by real estate in New Hampshire. In
addition, other real estate owned is located in this market. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan portfolio
and the recovery of other real estate owned are susceptible to changing
conditions in this market. 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, federal funds sold and interest bearing deposits.
Securities
Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost; if
debt and equity securities are bought and held principally for the purpose of
selling in the near term they would be classified as trading and reported at
fair value, with unrealized gains and losses included in earnings; and debt and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of estimated income taxes. At this time, the Company
has not established a trading account.
Premiums and discounts are amortized and accreted primarily on the level yield
method over the contractual life of the securities adjusted for expected
prepayments.
If a decline in the fair value below the adjusted cost basis of an investment is
judged to be other than temporary, the cost basis of the investment is written
down to fair value as the new cost basis and the amount of the write down 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.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
was effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 (except for
certain provisions which were deferred for one year by SFAS No. 127). This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of the financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS No. 125 did not have
a material impact on the Company's consolidated financial position, results of
operations, or liquidity.
Other Real Estate Owned
Other real estate owned is comprised of properties acquired either through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure, and for
which the Company has taken physical possession. The Company classifies loans as
repossessed or foreclosed if the Company receives physical possession of the
debtor's assets, regardless of whether or not foreclosure proceedings take
place.
Assets acquired through foreclosure or a similar conveyance of title are
initially recorded at the lower of the carrying value of the loan or the fair
value, less estimated costs to sell, of the property constructively or actually
received. Gains and losses upon disposition are reflected in 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 carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock-Based Compensation
The Company recognizes stock-based compensation using the "intrinsic value"
approach as set forth in Accounting Principles Board ("APB") Opinion No. 25
rather than the "fair value" method introduced in SFAS No. 123. Entities
electing to continue following APB Opinion No. 25 must make pro forma disclosure
of net income and, if presented, earnings per share, as if the fair value based
method of accounting in SFAS No. 123 had been applied. The Company has made the
pro forma disclosures required by SFAS No. 123.
Earnings Per Share
In the year ended December 31, 1997, the Company adopted SFAS No. 128 "Earnings
per Share" ("EPS"). 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
stock options granted in 1999 had no dilutive effect.
NOTE 2 CASH AND DUE FROM BANKS
------------------------------
Cash and due from banks at December 31, 1999 and 1998 includes $3,338,000 and
$2,308,000, respectively, which is subject to withdrawals and usage restrictions
to satisfy the reserve requirements of the Federal Reserve Bank.
NOTE 3 SECURITIES
-----------------
The amortized cost, gross unrealized gains, gross unrealized losses and market
value of investment securities at December 31, 1999 and 1998 follows:
<TABLE>
Securities Available-for-Sale: ($000 Omitted)
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1999 Cost Gains Losses Value
- -------------------------------------------- ------- ---- ------ -------
<S> <C> <C> <C> <C>
US Treasury and other US government agencies $27,466 $ 2 $1,019 $26,449
Marketable equity securities 2,999 141 360 2,780
Non-marketable equity securities 4,456 -- -- 4,456
Mortgage-backed securities 9,179 7 331 8,855
Collateralized mortgage obligations 10,139 -- 181 9,958
State and political subdivisions 3,478 37 15 3,500
------- ---- ------ -------
$57,717 $187 $1,906 $55,998
======= ==== ====== =======
December 31, 1998
- --------------------------------------------
US Treasury and other US government agencies $17,322 $ 93 $ 24 $17,391
Marketable equity securities 2,919 118 296 2,741
Non-marketable equity securities 2,038 -- -- 2,038
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
------- ---- ------ -------
$50,415 $554 $ 402 $50,567
======= ==== ====== =======
</TABLE>
<PAGE>
<TABLE>
Securities Held-to-Maturity: ($000 Omitted)
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1999 Cost Gains Losses Value
- ----------------------------------- ------ --- --- ------
<S> <C> <C> <C> <C>
Mortgage-backed securities $2,285 $ 3 $41 $2,247
Collateralized mortgage obligations 1,316 -- 19 1,297
State and political subdivisions 1,550 3 2 1,551
------ --- --- ------
$5,151 $ 6 $62 $5,095
====== === === ======
December 31, 1998
- --------------------------------
Mortgage-backed securities $5,501 $16 $32 $5,485
State and political subdivisions 1,008 22 -- 1,030
--- --- ------
$6,509 $38 $32 $6,515
====== === === ======
</TABLE>
<TABLE>
The contractual maturity distribution of investments in debt obligations at December 31, 1999 follows:
<CAPTION>
($000 Omitted)
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 $14,496 $12,470 $ -- $27,466
Mortgage-backed securities -- 824 6,834 1,521 9,179
Collateralized mortgage obligations -- -- 9,200 939 10,139
State and political subdivisions 102 368 728 2,280 3,478
------ ------- ------- ------ -------
$ 602 $15,688 $29,232 $4,740 $50,262
====== ======= ======= ====== =======
Market value $ 604 $15,279 $28,159 $4,720 $48,762
====== ======= ======= ====== =======
Held-to-Maturity:
Mortgage-backed securities $ -- $ 570 $ 145 $1,570 $ 2,285
Collateralized mortgage obligations -- -- 1,232 84 1,316
State and political subdivisions 1,050 -- -- 500 1,550
------ ------- ------- ------ -------
$1,050 $ 570 $ 1,377 $2,154 $ 5,151
====== ======= ======= ====== =======
Market value $1,054 $ 568 $ 1,358 $2,115 $ 5,095
====== ======= ======= ====== =======
</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 securities available-for-sale sold during the years ended December
31, follows:
<TABLE>
<CAPTION>
($000 Omitted)
1999 1998 1997
--------------------- -------------------- --------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Debt $-- $-- $-- $-- $ 31 $178
Equity 720 41 523 22 548 --
Mortgage-backed securities 30 -- -- 5 88 176
---- ---- ---- ---- ---- ----
$750 $ 41 $523 $ 27 $667 $354
==== ==== ==== ==== ==== ====
</TABLE>
The tax provision applicable to these net realized gains and losses amounted to
$278,000, $192,000 and $121,000 for 1999, 1998, and 1997, respectively.
Investment securities with a carrying amount totaling $22,805,000 and
$22,414,000 were pledged to secure public deposits, securities sold under
agreements to repurchase and treasury, tax and loan accounts at December 31,
1999 and 1998, respectively.
NOTER 4 LOANS
-------------
Loan balances were comprised of the following:
($000 Omitted)
December 31, 1999 1998
- ---------------------------- -------- --------
Real estate:
Residential $139,389 $146,603
Commercial 93,061 77,680
Construction 4,360 4,118
Commercial 28,833 25,874
Installment 24,147 25,070
Indirect installment 76,339 18
Other 7,369 4,795
-------- --------
Total loans 373,498 284,158
Less:
Unearned income 732 332
Allowance for loan losses 4,887 4,404
-------- --------
5,619 4,736
-------- --------
$367,879 $279,422
======== ========
Loans are made in the ordinary course of business to directors, executive
officers, and their immediate families and to organizations in which such
persons have more than a 10 percent ownership interest. These loans are made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the same time for comparable transactions with unrelated persons
and did not involve more than the normal risk of collectibility or present other
unfavorable features.
An analysis of activity in such loans for the years ended December 31, 1999 and
1998 follows:
($000 Omitted)
1999 1998
------ ------
Balance at beginning of year $1,121 $1,389
New loans 530 552
Repayments (431) (815)
Change in status of executive
officers and directors (420) (5)
------ ------
Balance at end of year $ 800 $1,121
====== ======
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
statements of financial condition. The unpaid principal balances of these loans
totaled $18,755,000 and $12,007,000 at December 31, 1999 and 1998, respectively.
In 1999 and 1998 the Company sold mortgage loans totaling $8,306,000 and
$7,787,000, respectively, and retained the servicing rights. In 1999 the Company
capitalized $83,000 of mortgage servicing rights and amortized $7,000 of those
rights. There is no valuation allowance for mortgage servicing rights, because
their fair value approximates their carrying amount of $76,000.
Restructured, accruing loans entered into prior to the adoption of SFAS No. 114
and 118 are not required to be reported as impaired loans unless such loans are
not performing in accordance with the restructured terms at adoption of SFAS No.
114. Restructured, accruing loans entered into subsequent to the adoption of
these statements are reported as impaired loans. In the year subsequent to
restructure these loans may be removed from the impaired loan disclosure
provided that the loan bears a market rate of interest at the time of
restructure and is performing under the restructured terms.
At December 31, 1999 and 1998, loans restructured in a troubled debt
restructuring before January 1, 1995, the effective date of SFAS No. 114, that
are not impaired based on the terms specified by the restructuring agreement
totaled $1,035,000 and $1,057,000, respectively. The gross interest income that
would have been recorded in the years ended December 31, 1999 and 1998 if such
restructured loans had been current in accordance with their original terms was
$100,000 and $105,000, respectively. The amount of interest income recognized on
such restructured loans for the years ended December 31, 1999 and 1998 was
$88,000 and $90,000, respectively.
The recorded investment in loans that are considered to be impaired under SFAS
No. 114 was $3,139,000 and $325,000 at December 31, 1999 and 1998, respectively,
for which the related allowance for loan losses is $1,000,000 and $19,000,
respectively. All of the Company's impaired loans are collateralized and
therefore all impaired loans are measured by the difference between the fair
value of the collateral and the recorded amount of the loan. The average
recorded investment in impaired loans during the twelve months ended December
31, 1999 and 1998 was approximately $120,000 and $226,000, respectively. For the
twelve months ended December 31, 1999 and 1998 the Company recognized interest
income on impaired loans of $11,000 and $10,000, respectively, which included no
interest income on a cash-basis method of accounting.
NOTE 5 ALLOWANCE FOR LOAN LOSSES
--------------------------------
Changes in the allowance for loan losses at December 31, follows:
($000 Omitted)
1999 1998 1997
------ ------ ------
Balance at beginning of year $4,404 $4,156 $3,941
Provision charged to expense 540 540 535
Recoveries on loans previously charged-off 247 232 292
Loans charged-off (304) (524) (612)
------ ------ ------
Balance at end of year $4,887 $4,404 $4,156
====== ====== ======
NOTE 6 OTHER REAL ESTATE OWNED
------------------------------
Other real estate owned consists of real estate acquired by foreclosure or a
similar conveyance of title. Other real estate owned at December 31, follows:
($000 Omitted)
1999 1998
---- ----
Commercial real estate $ 40 $100
Residential homes 75 28
Mobil home on land -- 30
---- ----
$115 $158
==== ====
Sales of other real estate owned by the Company resulted in gains of $7,000,
$45,000, and $56,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.
Write downs on other real estate owned totaled $47,000, $5,000, and $58,000 for
the years ended December 31, 1999, 1998, and 1997, respectively.
NOTE 7 PREMISES AND EQUIPMENT
-----------------------------
A summary of premises and equipment at December 31, follows:
($000 Omitted)
1999 1998
------- -------
Land $ 1,650 $ 1,615
Buildings 8,309 7,788
Construction in progress 4 111
Equipment 4,935 5,675
14,898 15,189
------- -------
Less accumulated depreciation and amortization 4,511 5,226
------- -------
$10,387 $ 9,963
======= =======
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
amounted to $933,000, $821,000, and $691,000, respectively.
The Company leases six of its locations under non-cancellable operating leases.
Minimum lease payments in future periods under non-cancellable operating leases
at December 31, 1999 are as follows:
($000 Omitted)
2000 $248
2001 204
2002 145
2003 123
2004 63
----
$783
====
The terms of four 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 all real estate taxes.
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to
$190,000, $91,000 and $57,000, respectively.
NOTE 8 DEPOSITS
---------------
The aggregate amount of maturities for time deposits as of December 31, 1999,
for each of the following five years ended December 31, are as follows:
($000 Omitted)
2000 $115,220
2001 31,999
2002 2,232
2003 829
2004 165
--------
$150,445
========
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.
NOTE 9 SHORT-TERM BORROWINGS
----------------------------
Short-term borrowings, which include securities sold under agreements to
repurchase and FHLB advances with maturities of less than one year and their
related average interest rates for the years ended December 31, 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
($000 Omitted)
Amount outstanding at December 31, 1999 1998 1997
------------------ ----------------- ------------------
Avg. Avg. Avg.
Int. Int. Int.
Amount Rate Amount Rate Amount Rate
------- ---- ------ ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $ 9,950 4.60% $ 833 5.91% $ 9,212 5.92%
Securities sold under agreements to repurchase 7,468 4.88 6,791 4.97 6,146 5.57
------- -------
$17,418 4.72% $7,624 5.07% $15,358 5.78%
======= =======
Maximum amount outstanding at any month end $33,729 $17,608 $19,582
Average amount outstanding during the year 20,442 4.67% 13,420 5.60% 16,815 5.20%
</TABLE>
The underlying securities associated with securities sold under agreements to
repurchase are under the control of the Company.
NOTE 10 LONG-TERM DEBT
----------------------
Long-term debt at December 31, 1999 and 1998 consisted of FHLB advances of
$58,528,000 and $2,278,000 respectively.
As of December 31, 1999, contractual principal payments due under long-term debt
were as follows:
The FHLB debt consisted of 11 separate advances with the following terms:
<TABLE>
<CAPTION>
($000 Omitted)
Amount Rate Maturity Date Call Date
($000 Omitted) ------- ---- ------------- ---------
<S> <C> <C> <C> <C> <C>
2000 $ -- $ 1,500 5.95% 07/31/01 N/A
2001 1,500 28 6.78 04/04/02 N/A
2002 28 5,000 5.79 08/30/04 08/30/01
2003 -- 3,000 5.29 09/28/04 03/28/00
2004 8,000 5,000 5.27 08/16/06 02/16/00
2005 and years thereafter 49,000 10,000 5.29 09/21/09 09/21/00
-------
$58,528 5,000 5.35 10/08/09 10/10/00
======= 7,000 5.54 11/02/09 11/01/00
7,000 5.57 11/09/09 11/09/01
10,000 5.39 11/24/09 05/24/00
5,000 5.91 12/17/09 06/18/01
-------
$58,528
=======
</TABLE>
<PAGE>
NOTE 11 ACQUISITIONS
--------------------
On July 9, 1999, the Company acquired certain assets and assumed deposits from
branch offices of Vermont National Bank located in Tilton and Franklin, New
Hampshire. As a result of the purchase, the Company made the following entries
to record this transaction:
($000 Omitted)
Prepaid expenses $ 5
Premises and equipment 292
Deposit assumption premium 789
Cash 16,931
Interest expense 3
Other income 3
Other liabilities 6
Deposits 18,011
This transaction was accounted for using the purchase method of accounting. The
results of operations of the acquired branches are included in the 1999 income
statement of the Company from the date of the transaction.
The deposit assumption premium of $789,000 is being amortized to noninterest
expense over seven years using the straight line method.
Management reviews the carrying amount of intangible assets on an ongoing basis,
taking into consideration any events and circumstances that might have
diminished such amount.
NOTE 12 STOCKHOLDERS' EQUITY
----------------------------
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the 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). As of December 31, 1999, the most recent notification 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. There are no
conditions or events since that notification that management believes have
changed the Company's and Banks' categories. Management believes, as of December
31, 1999 and 1998, that the Company and the Banks met all capital adequacy
requirements to which they are subject.
These minimum capital amounts and ratios, as well as the Company's and Banks'
actual capital amounts and ratios are presented in the following table:
<TABLE>
<CAPTION>
($000 Omitted)
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, 1999:
Tier 1 capital (to average assets):
Consolidated $38,852 8.47% $18,356 >=4.00% N/A
The Berlin City Bank 25,664 8.20 12,513 >=4.00 $15,641 >= 5.00%
The Pemigewasset National Bank 12,986 8.69 5,980 >=4.00 7,475 >= 5.00
Total capital (to risk weighted assets):
Consolidated 42,969 13.05 26,350 >=8.00 N/A
The Berlin City Bank 28,420 12.93 17,581 >=8.00 21,976 >=10.00
The Pemigewasset National Bank 14,283 13.78 8,293 >=8.00 10,366 >=10.00
Tier 1 capital (to risk weighted assets):
Consolidated 38,852 11.80 13,175 >=4.00 N/A
The Berlin City Bank 25,664 11.68 8,790 >=4.00 13,186 >= 6.00
The Pemigewasset National Bank 12,986 12.53 4,146 >=4.00 6,220 >= 6.00
As of December 31, 1998: Tier 1 capital (to average assets):
Consolidated $40,002 10.25% $15,550 >=4.00% N/A
The Berlin City Bank 24,221 9.26 10,468 >=4.00 $13,085 >= 5.00%
The Pemigewasset National Bank 13,307 10.05 5,297 >=4.00 6,622 >= 5.00
Total capital (to risk weighted assets):
Consolidated 43,016 17.78 18,870 >=8.00 N/A
The Berlin City Bank 26,204 16.64 12,598 >=8.00 15,747 >=10.00
The Pemigewasset National Bank 14,344 17.33 6,621 >=8.00 8,277 >=10.00
Tier 1 capital (to risk weighted assets):
Consolidated 40,002 16.53 9,435 >=4.00 N/A
The Berlin City Bank 24,221 15.38 6,299 >=4.00 9,448 >= 6.00
The Pemigewasset National Bank 13,307 16.08 3,311 >=4.00 4,966 >= 6.00
</TABLE>
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.
Under the National Bank Act, the approval of the Office of the Comptroller of
the Currency ("OCC") is required if dividends declared by 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, 1999, PNB could, without approval
of the OCC, declare dividends aggregating $1,622,000.
As of December 31, 1999, BCB is restricted from declaring dividends to the
Company in an amount greater than approximtately $10,389,000, as such
declaration would decrease capital below BCB's required minimum level of
regulatory capital.
NOTE 13 OTHER NONINTEREST EXPENSE
---------------------------------
The major components of other noninterest expense for the years ended December
31, are as follows:
($000 Omitted)
1999 1998 1997
------ ------ ------
Professional fees $1,091 $ 702 $ 569
Stationery and supplies 565 470 374
Other 2,781 2,595 2,375
------ ------ ------
$4,437 $3,767 $3,318
====== ====== ======
NOTE 14 FEDERAL AND STATE TAXES
-------------------------------
The components of federal and state tax expense for the years ended December 31,
are as follows:
($000 Omitted)
1999 1998 1997
------ ------ ------
Current
Federal $1,932 $1,628 $2,025
State 372 220 193
------ ------ ------
2,304 1,848 2,218
------ ------ ------
Deferred
Federal (248) 154 45
State (94) 34 11
------ ------ ------
(342) 188 56
------ ------ ------
Total $1,962 $2,036 $2,274
====== ====== ======
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:
<TABLE>
<CAPTION>
($000 Omitted)
1999 1998
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses $ 1,653 $ 1,434
Loan origination fees -- 57
Interest on nonaccrual loans 165 38
Deferred origination costs 38 57
Unrealized holding loss on investment securities available-for-sale 664 --
Deposit assumption premium 390 332
Prepaid pension 24 --
Supplemental insurance 51 53
------- -------
2,985 1,971
------- -------
Deferred income liabilities:
Loan origination costs, net (3) --
Depreciation (542) (447)
Pension -- (120)
Mortgage servicing rights (30) --
Unrealized holding gain on investment securities available-for-sale -- (58)
------- -------
(575) (625)
------- -------
Deferred income tax asset, net $ 2,410 $ 1,346
======= =======
</TABLE>
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, 1999, 1998 and 1997
differs from the "expected" federal income tax expense at the 34% statutory rate
for the following reasons:
1999 1998 1997
---- ---- ----
Expected federal income taxes 34.0% 34.0% 34.0%
Municipal income (3.9) (3.6) (3.6)
State tax expense, net of federal benefit 3.5 2.8 3.2
Other 0.7 0.1 2.4
---- ---- ----
34.3% 33.3% 36.0%
==== ==== ====
NOTE 15 EMPLOYEE BENEFITS
-------------------------
Pension Plan
In 1998, the Company had a non-contributory defined benefit plan for each of its
bank subsidiaries. On November 28, 1998, the Boards of Directors of the Company
and the two Banks voted to adopt a resolution to approve changes to the
Company's Retirement Plan ("Plan"). Effective December 31, 1998, The
Pemigewasset National Bank Employee Pension Trust ("Pemi Plan") was merged into
The Retirement Plan for Employees of The Berlin City Bank ("BCB Plan"). Also on
December 31, 1998, it was approved to freeze the accruals under the Pemi Plan
and the BCB Plan. Also effective on December 31, 1998, the assets of the Pemi
Plan were merged into the assets of the BCB Plan. Effective January 1, 1999, the
BCB Plan, as merged, was amended to be a Plan sponsored by the Company.
The following table sets forth information about the Plan as of December 31, and
for the years then ended:
($000 Omitted)
1999 1998
------ ------
Change in benefit obligation
- ----------------------------
Benefit obligation at
beginning of year $3,988 $3,587
Service cost 238 218
Interest cost 244 268
Actuarial gain (672) 204
Benefits paid (831) (289)
------ ------
Benefit obligation at
end of year 2,967 3,988
------ ------
Change in plan assets
- ---------------------
Fair value of plan assets at
beginning of year 3,766 3,419
Actual return on plan assets 187 333
Employer contribution -- 303
Benefits paid (832) (289)
------ ------
Fair value of plan assets at
end of year 3,121 3,766
------ ------
($000 Omitted)
1999 1998
------ ------
Funded status
- -------------
Funded status 154 (222)
Unrecognized net actuarial loss 1,338 560
Unrecognized prior service cost (1,309) (8)
------ ------
Prepaid benefit cost $ 183 $ 330
====== ======
Weighted-average assumptions
as of December 31, 1999 1998
- ------------------ ---- -------------------
BCB PNB
---- ----
Discount rate 7.75% 7.00% 8.00%
Expected return on plan assets 8.50 9.00 8.00
Rate of compensation increase 4.50 5.00 4.00
Plan assets as of December 31, 1999 and 1998 include a savings account at BCB
totaling $2,000 and $798,000, respectively.
($000 Omitted)
Components of net periodic
benefit cost 1999 1998 1997
- -------------------------- ---- ---- ----
Service cost $ 238 $ 218 $ 202
Interest cost 244 268 232
Expected return on plan assets (316) (296) (246)
Amortization of prior service cost (85) 1 1
Recognized net actuarial loss 70 16 13
Recognized transition amount (4) (4) (4)
----- ----- -----
Net periodic benefit cost $ 147 $ 203 $ 198
===== ===== =====
401(k) Plan
On July 1, 1999, the PNB 401(k) plan was amended and restated as the Northway
Financial, Inc. 401(k) and Profit Sharing Plan (the "401(k) Plan"). Under the
401(k) Plan employees must have attained age 21, completed six months of service
and be credited with 1,000 hours of service. Employees of the Company, PNB and
BCB are eligible to participate. Under the 401(k) Plan, employers match 50% of
the first 4% of employee contributions. Total 401(k) matching expense in 1999
amounted to $73,000 and the Profit Sharing contribution expense was $54,000.
Prior to July 1, 1999, PNB had a 401(k) plan. To be eligible, employees must
have attained age 21, completed six months of service and be credited with 1,000
hours of service. PNB matched 25% of employee contributions on the first 4% of
compensation deposited as elective contributions. The 401(k) matching expense
was $0, $15,000 and $15,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Stock-Based Compensation
As indicated in Note 1, The Company applies APB Opinion 25 and related
interpretations in accounting for stock options. Accordingly, no compensation
cost has been recognized for its fixed stock options granted. Had compensation
cost been determined based on the fair value of the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1999
----
Net income ($000 Omitted) As reported $3,764
Pro forma $3,528
Earnings per common share As reported $2.25
Pro forma $2.11
The Board of Directors (the "Committee") administers the 1999 Stock Option and
Grant Plan (the "1999 Plan"), which is described below. The 1999 Plan was
approved by shareholders on May 18, 1999.
Under the 1999 Plan, the Committee may select the individuals to whom awards may
from time to time be granted; determine the time or times of grant, and the
extent, if any, of incentive stock options, non-qualified stock options,
restricted stock awards, unrestricted stock awards, performance share awards, or
any combination of the foregoing.
The 1999 Plan expires in February 2009. The aggregate number of shares of the
Company's Common Stock which may be issued upon the exercise of options granted
under the 1999 Plan is 175,000. The option price is fixed by the Committee at
the time of the grant and may not be less than 100% of the fair market value of
the stock, as determined by the Committee, in good faith as of the grant date.
Each option may be exercised at such times as shall be determined by the
Committee at or after the grant date; provided, however, that no option may be
exercised ten years after the date of grant.
The fair value of each option granted is estimated on grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the grants in 1999: dividend yield of 2.0%; expected
volatility of 23%; risk-free interest rate of 6.03% and expected lives of 8
years.
A summary of the status of the Company's 1999 Plan as of December 31, 1999 and
changes during the year then ended is presented below:
1999
--------------------------
Weighted-Average
Shares Exercise Price
------ ----------------
Outstanding, beginning of year -- $ --
Granted 26,000 28.00
------
Outstanding, end of year 26,000 $28.00
======
Options exercisable at year-end 24,000
Per share weighted-average fair
value of options granted during
the year $ 9.07
There are 26,000 stock options outstanding as of December 31, 1999 with an
exercise price of $28.00 and a weighted-average remaining contractual life of
9.5 years. Of the total, 24,000 are exercisable.
Change in Control
The Company and its subsidiaries have entered into employment agreements with
certain officers. These agreements provide for the payment, under certain
circumstances, to the officer upon the officer's termination after a change of
control. The amount of such payments is set forth in their individual employment
agreements.
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
---------------------------------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the 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:
($000 Omitted)
1999 1998
------- -------
Financial instrument whose contract
amounts represent credit risk:
Unadvanced portions of
home equity loans $ 3,165 $ 2,381
Unadvanced portions of
lines of credit 10,287 10,691
Unadvanced portions of
commercial real estate loans 2,034 1,757
Commitments to originate loans 17,249 13,460
Standby letters of credit 531 520
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 17 FAIR VALUE OF FINANCIAL INSTRUMENTS
-------------------------------------------
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and cash equivalents approximates the fair value of those assets.
Investment 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 Federal Reserve Bank ("FRB") Stock: The carrying amount reported in the
balance sheets for FHLB and FRB Stock approximates their fair value. If
redeemed, the Company will receive an amount equal to the par value of the
stocks.
Loans held for sale: The carrying amount reported in the balance sheet
approximates fair value.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair value
for other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The fair value of nonaccrual loans was estimated
using the estimated fair value of the underlying collateral. The fair value of
commitments to originate loans and outstanding letters of credit were considered
in estimating the fair value of loans. As the undisbursed lines of credit are at
floating rates, there is no fair value adjustment.
Accrued interest receivable: The carrying value of accrued interest receivable
approximates its fair value because of the short term nature of this financial
instrument.
Deposits and mortgagors' escrow accounts: The fair value of demand deposits
(e.g. NOW and super NOW checking, noninterest bearing checking, regular savings,
money market accounts and mortgagors' escrow accounts) are, by definition, equal
to the amount payable on demand at the reporting date (i.e. their carrying
amounts). Fair values for certificates of deposit are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
of time deposits.
Securities sold under agreements to repurchase: The fair value of the Company's
securities sold under agreements to repurchase is estimated using discounted
cash flow analysis, based on the Company's current rate for similar securities
sold under agreements to repurchase.
FHLB advances: The fair values 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:
<TABLE>
<CAPTION>
($000 Omitted)
1999 1998
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 16,087 $ 16,087 $ 51,423 $ 51,423
Investment securities available-for-sale 51,692 51,692 48,529 48,529
Investment securities held-to-maturity 5,151 5,095 6,509 6,515
FHLB stock 4,226 4,226 1,958 1,958
FRB stock 80 80 80 80
Loans held for sale 54 54 535 535
Loans, net 367,879 366,596 279,422 280,754
Accrued interest receivable 2,439 2,439 1,846 1,846
Financial liabilities:
Deposits 343,029 343,782 350,921 351,775
Securities sold under agreements to repurchase 7,468 7,468 6,791 6,827
FHLB advances 68,478 68,181 3,111 3,135
</TABLE>
The carrying amounts of financial instruments shown in the above table are
included in the consolidated statements of financial condition under the
indicated captions except that (1) FHLB stock and FRB stock are included with
investment securities available-for-sale in the statements; (2) accrued interest
receivable is included with other assets in the statement; (3) securities sold
under agreements to repurchase are included with short-term borrowings in the
statements; and (4) FHLB advances are comprised of part of the short-term debt
and all of the long-term debt in the statements.
At December 31, 1999, all the Company's financial instruments were held for
purposes other than trading.
At December 31, 1999, 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 judgments regarding future
expected loss experience, cash flows, current economic conditions, risk
characteristics, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered. The fair value amounts presented do not
represent the underlying value of the Company because fair values of certain
other financial instruments, assets and liabilities have not been determined.
NOTE 18 CONDENSED PARENT ONLY FINANCIAL STATEMENT
-------------------------------------------------
Condensed financial statements of Northway Financial, Inc. (Parent Company only)
as of December 31, 1999 and 1998 and for the three years ended December 31, 1999
follow:
Statements of Financial Condition ($000 Omitted)
------- -------
1999 1998
Assets
Cash and cash equivalents $ 372 $ 2,322
Investment in subsidiary, The Berlin City Bank 25,394 25,024
Investment in subsidiary, The Pemigewasset National Bank 13,691 13,636
Other assets 59 1
------- -------
Total assets $39,516 $40,983
======= =======
Liabilities and stockholders' equity
Accrued expenses $ 116 $ 27
Other liabilities 114 --
------- -------
Total liabilities 230 27
------- -------
Stockholders' equity:
Common stock 1,732 1,732
Additional paid-in-capital 2,101 2,101
Retained earnings 39,906 37,084
Treasury stock (3,398) (55)
Accumulated other comprehensive (loss) income (1,055) 94
------- -------
Total stockholders' equity 39,286 40,956
------- -------
Total liabilities and stockholders' equity $39,516 $40,983
======= =======
Statements of Income ($000 Omitted)
1999 1998 1997
------ ------ ------
Dividends from subsidiaries $2,922 $1,686 $1,973
Interest income 50 43 --
Management fee income from subsidiary -- -- 25
Other 70 -- --
------ ------ ------
3,042 1,729 1,998
General and administrative expense 856 70 217
------ ------ ------
Income before income tax (benefit) expense and
equity in undistributed net income of subsidiaries 2,186 1,659 1,781
Income tax (benefit) expense (250) (9) 3
------ ------ ------
Income before equity in undistributed net
income of subsidiaries 2,436 1,668 1,778
Equity in undistributed net income of subsidiaries 1,328 2,400 2,261
------ ------ ------
Net income $3,764 $4,068 $4,039
====== ====== ======
<TABLE>
Statements of Cash Flows ($000 Omitted)
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,764 $4,068 $4,039
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in other assets (58) -- --
Increase (decrease) in accrued expenses and other liabilities 202 25 (1)
Undistributed net income of subsidiaries (1,328) (2,400) (2,261)
------- ------ ------
Net cash provided by operating activities 2,580 1,693 1,777
------- ------ ------
Cash flows from financing activities:
Cash received from BCB -- -- 245
Cash paid to BCB (245) -- --
Purchases of treasury stock (3,343) (55) --
Dividends paid (942) (728) (1,004)
------- ------ ------
Net cash used in financing activities (4,530) (783) (759)
------- ------ ------
Net (decrease) increase in cash and cash equivalents (1,950) 910 1,018
Cash and cash equivalents at beginning of year 2,322 1,412 394
------- ------ ------
Cash and cash equivalents at end of year $ 372 $2,322 $1,412
======= ====== ======
</TABLE>
NOTE 19 FORMATION OF HOLDING COMPANY
------------------------------------
On September 30, 1997, The Berlin City Bank and Pemi Bancorp, Inc. (Parent
company of The Pemigewasset National Bank), completed a series of transactions
in accordance with an Agreement and Plan of Merger dated as of March 14, 1997.
As a result Northway Financial, Inc. became the bank holding company for The
Berlin City Bank and The Pemigewasset National Bank. In connection with 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
interests. 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:
($000 Omitted)
The Berlin City Bank Pemi Bancorp, Inc.
Net interest and
dividend income $8,010 $4,615
Net income 2,388 783
<PAGE>
Northway Financial, Inc. and Subsidiaries
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-------------------------------------------
Summarized quarterly financial data for 1999 and 1998 follows:
($000 Omitted, except earnings per share)
1999 Quarters Ended
------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
Interest and dividend income $7,023 $7,320 $7,938 $8,638
Interest expense 2,658 2,705 2,879 3,336
------ ------ ------ ------
Net interest income 4,365 4,615 5,059 5,302
Provision for loan losses 135 135 135 135
Noninterest income 718 614 655 737
Noninterest expense 3,731 3,785 4,140 4,143
------ ------ ------ ------
Income before taxes 1,217 1,309 1,439 1,761
Income tax expense 399 470 483 610
------ ------ ------ ------
Net income $ 818 $ 839 $ 956 $1,151
====== ====== ====== ======
Earnings per share $ 0.48 $ 0.50 $ 0.57 $ 0.70
====== ====== ====== ======
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
====== ====== ====== ======
<PAGE>
Northway Financial, Inc. and Subsidiaries
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
----------------------------------------
Responsibility for the financial information presented in the Annual Report
rests with Northway Financial, Inc.'s management. The Company believes that the
consolidated financial statements reflect fairly the substance of transactions
and present fairly the Company's financial position and results of operations in
conformity with generally accepted accounting principles appropriate in the
circumstances, applying certain estimates and judgments as required.
In meeting its responsibilities for the reliability of the consolidated
financial statements, the Company depends on its system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are executed in accordance with the appropriate
corporate authorizations and recorded properly to permit the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. Although accounting control procedures are designed to
achieve these objectives, it must be recognized that errors or irregularities
may nevertheless occur. Also, estimates and judgments are required to assess and
balance the relative cost and expected benefits of the controls. The Company
believes that its accounting controls provide reasonable assurance that errors
and irregularities that could be material to the consolidated financial
statements are prevented or would be detected within a timely period by
employees in the normal course of performing their assigned functions. An
important element of the system is a continuing and extensive internal audit
program.
The Board of Directors of the Company has an Audit Committee composed entirely
of directors who are not officers or employees of the Company. The Committee
meets periodically and privately with management, the internal auditors, and the
independent public accountants to consider audit results and to discuss internal
accounting controls, auditing, and financial reporting matters.
Shatswell, MacLeod & Company, P.C., independent certified public accountants,
have been engaged to render an independent professional opinion of the Company's
consolidated financial statements. Their audit is conducted in accordance with
generally accepted auditing standards and forms the basis for their report as to
the fair presentation, in the consolidated financial statements, of the
Company's financial position, operating results and cash flows.
/s/ William J. Woodward /s/ George L. Fredette
William J. Woodward George L. Fredette
President and Chief Executive Officer Senior Vice President and Chief
Financial Officer
January 21, 2000
<PAGE>
Northway Financial, Inc. and Subsidiaries
INDEPENDENT AUDITORS' REPORT
----------------------------
Shatswell, MacLeod & Company, P.C.
Certified Public Accountants
83 Pine Street
West Peabody, Massachusetts 01960
The Board of Directors and Stockholders
Northway Financial, Inc.
Berlin, New Hampshire
We have audited the accompanying consolidated statements of financial condition
of Northway Financial, Inc. and Subsidiaries as of December 31, 1999 and 1998
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, 1999. 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, 1999 and 1998 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Shatswell, MacLeod & Company, P.C.
Shatswell, MacLeod & Company, P.C.
January 21, 2000
<PAGE>
NORTHWAY FINANCIAL, INC. BOARD OF DIRECTORS
-------------------------------------------
BOARD OF DIRECTORS OFFICERS
Fletcher W. Adams William J. Woodward
Vice Chairman Chairman of the Board,
Northway Financial, Inc. President and CEO
Chairman of the Board
Pemigewasset National Bank Fletcher W. Adams
Vice Chairman
Peter H. Bornstein
Attorney and Partner George L. Fredette
Bergeron, Hanson, Bornstein & Carlson Senior Vice President and CFO
Stephen G. Boucher Richard P. Orsillo
President Vice President
Airmar Technology Corp. Corporate Controller
Charles H. Clifford, Jr. Joseph N. Rozek
President Assistant Secretary
Clifford-Nicols Printing
Arnold P. Hanson, Jr.
President
Isaacson Structural Steel, Inc.
Barry J. Kelley
President
White Mountain Lumber Co.
Bruce W. Keough
Private Investor
Randall G. Labnon
General Manager
Town and Country Motor Inn
John D. Morris
Retired Businessman
John H. Noyes
President
Noyes Insurance Agency, Inc.
President
Central Square Insurance, Inc.
William J. Woodward
Chairman of the Board,
President and CEO
Northway Financial, Inc.
The Berlin City Bank
<PAGE>
SUBSIDIARY BANK DIRECTORS
-------------------------
THE BERLIN CITY BANK PEMIGEWASSET NATIONAL BANK
Frederick C. Anderson Fletcher W. Adams
General Manager and CEO Vice Chairman
NH Electric Cooperative, Inc. Northway Financial, Inc.
Chairman of the Board
Peter H. Bornstein Pemigewasset National Bank
Attorney and Partner
Bergeron, Hanson, Bornstein & Carlson Frederick C. Anderson
General Manager and CEO
Stephen G. Boucher NH Electric Cooperative, Inc.
President
Airmar Technology Corp. Charles H. Clifford, Jr.
President
Arnold P. Hanson, Jr. Clifford-Nicols Printing
President
Isaacson Structural Steel, Inc. Paul M. Ferguson
President and CEO
Barry J. Kelley Pemigewasset National Bank
President
White Mountain Lumber Co. John H. Noyes
President
Bruce W. Keough Noyes Insurance Agency, Inc.
Private Investor President
Central Square Insurance, Inc.
Randall G. Labnon
General Manager Brien L. Ward
Town and Country Motor Inn Attorney
John D. Morris William J. Woodward
Retired Businessman Chairman of the Board,
President and CEO
Brien L. Ward Northway Financial, Inc.
Attorney The Berlin City Bank
William J. Woodward
Chairman of the Board,
President and CEO
Northway Financial, Inc.
The Berlin City Bank
INFORMATION FOR STOCKHOLDERS
----------------------------
TRANSFER AGENT INDEPENDENT AUDITORS
Boston EquiServe, LP Shatswell, MacLeod & Company, P.C.
Investor Relations 83 Pine Street
P.O. Box 8040 West Peabody, Massachusetts 01960-3635
Mail Stop 45-02-64
Boston, Massachusetts 02266-8040 FINANCIAL INFORMATION
MARKET MAKERS For financial documents, including
The following companies have generally the annual report, quarterly
been market makers for Northway reports and reports to the
Financial, Inc. Common Stock as of Securities and Exchange Commission
March 31, 2000. on Form 10-K or Form 10-Q,
contact:
First Albany Corporation
Ryan Beck & Co., Inc. George L. Fredette
Senior Vice President and CFO
Northway Financial, Inc.
9 Main Street
Berlin, New Hampshire 03570
<PAGE>
Exhibit 21
Northway Financial, Inc.
1999 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 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 21, 2000, relating
to the consolidated statements of financial condition of Northway Financial,
Inc. and Subsidiaries as of December 31, 1999 and 1998, 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, 1999.
/S/ Shatswell, Macleod & Company, P.C.
---------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 15,990
<INT-BEARING-DEPOSITS> 97
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,998
<INVESTMENTS-CARRYING> 5,151
<INVESTMENTS-MARKET> 5,095
<LOANS> 372,766
<ALLOWANCE> 4,887
<TOTAL-ASSETS> 462,552
<DEPOSITS> 343,029
<SHORT-TERM> 17,418
<LIABILITIES-OTHER> 4,291
<LONG-TERM> 58,528
0
0
<COMMON> 1,732
<OTHER-SE> 37,554
<TOTAL-LIABILITIES-AND-EQUITY> 462,552
<INTEREST-LOAN> 26,865
<INTEREST-INVEST> 3,819
<INTEREST-OTHER> 235
<INTEREST-TOTAL> 30,919
<INTEREST-DEPOSIT> 9,858
<INTEREST-EXPENSE> 11,578
<INTEREST-INCOME-NET> 19,341
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 709
<EXPENSE-OTHER> 15,799
<INCOME-PRETAX> 5,726
<INCOME-PRE-EXTRAORDINARY> 3,764
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,764
<EPS-BASIC> 2.25
<EPS-DILUTED> 2.25
<YIELD-ACTUAL> 5.00
<LOANS-NON> 4,578
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,035
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,404
<CHARGE-OFFS> 304
<RECOVERIES> 247
<ALLOWANCE-CLOSE> 4,887
<ALLOWANCE-DOMESTIC> 3,991
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 896
</TABLE>
