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