UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934, for the quarter and nine months
ended September 30, 1996, or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934, for the transition period from
to.
COMMISSION FILE NUMBER 0-17138
NORWICH FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
06-1226755
(IRS Employer Identification Number)
4 BROADWAY, NORWICH, CONNECTICUT
(Address of principal executive offices)
06360
(Zip Code)
860-889-2621
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
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 12 months
and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's
classes of common stock was 5,384,991 shares of common stock, par
value $.01, outstanding as of October 31, 1996.
<PAGE>
NORWICH FINANCIAL CORP.
FORM 10-Q
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Listed below are the financial statements filed as a part of this
quarterly report.
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flow 5
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Exhibit A - Consolidated Financial Results 16
Exhibit B - Consolidated Nonperforming Assets
Summary 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of
Securities Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
<TABLE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands,
except share data) 1996 1995 1995
<CAPTION>
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 20,629 $ 15,029 $ 14,600
Investments
Federal funds sold 2,500 6,055 4,150
Money market instruments,
held to maturity (market
value of $29,652 and
$10,617 at September 30,
1996 and 1995 and $15,701
at December 31, 1995) 29,650 10,616 15,691
Mortgage-backed securities,
available for sale
(amortized cost of
$104,231 and $97,933 at
September 30, 1996 and 1995
and $93,456 at December
1995) 104,357 97,596 93,921
Investment securities
Held to maturity (market
value of $38,667 and
$74,895 at September 30,
1996 and 1995 and $95,287
at December 31, 1995) 38,672 74,881 95,281
Available for sale
(amortized cost of $8,699
and $24,795 at
September 30, 1996 and
1995 and $14,934 at
December 31, 1995) 9,086 25,096 15,282
Federal Home Loan Bank stock,
at cost 3,715 3,715 3,715
187,980 217,959 228,040
Loans
Mortgage 347,618 299,461 304,226
Other 123,029 106,831 111,015
Total loans 470,647 406,292 415,241
Less: allowance for
loan losses (15,544) (11,452) (13,168)
Net loans 455,103 394,840 402,073
Loans and foreclosed
properties held for sale 2,381 2,705 5,192
Premises and equipment,
at cost less accumulated
depreciation 6,230 5,314 5,910
Accrued income receivable 3,483 3,505 3,512
Foreclosed properties (net of
allowance of $0 and $229 at
September 30, 1996 and 1995
and $0 at December 31, 1995) 437 1,297 264
Deferred tax asset, net 4,374 4,102 4,718
Other assets 13,826 11,304 11,023
Total assets $694,443 $656,055 $675,332
LIABILITIES
Total deposits $594,256 $554,628 $567,783
Mortgagors' escrow accounts 1,761 1,543 3,221
FHLB advances 16,349 18,400 22,400
Other liabilities 7,252 7,323 5,908
Total liabilities 619,618 $581,894 $599,312
STOCKHOLDERS' EQUITY
Common stock 60 58 59
Additional paid in capital 58,720 57,490 58,030
Retained income 22,575 19,710 20,468
Less: Treasury stock, at cost
(568,890 and 288,729 shares
at September 30, 1996 and
1995 and 288,729 shares at
December 31,1995) (6,833) (3,074) (3,074)
Unrealized gain (loss) on
securities available for
sale net of tax effect 303 (23) 537
Total stockholders'
equity 74,825 74,161 76,020
Total liabilities and
stockholders' equity $694,443 $656,055 $675,332
BOOK VALUE PER SHARE $ 13.90 $ 13.35 $ 13.58
</TABLE>
<PAGE>
<TABLE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands,
except share data) 1996 1995 1996 1995
<CAPTION>
<S> <C> <C> <C> <C>
INTEREST INCOME
Mortgage loans $21,569 $18,209 $7,309 $6,415
Other loans 8,083 7,162 2,745 2,530
Interest and dividends
on investments
Federal funds sold 219 405 52 136
Money market instruments 916 290 363 241
U.S. Government and
agency obligations 3,758 4,649 949 1,508
Mortgage-backed
securities 4,322 3,655 1,552 1,282
Other bonds 45 45 15 15
Corporate stocks 229 189 98 65
Total interest income 39,141 34,604 13,083 12,192
INTEREST EXPENSE
Deposits 18,511 15,983 6,030 5,918
FHLB advances 800 486 266 134
Total interest expense 19,311 16,469 6,296 6,052
NET INTEREST INCOME 19,830 18,135 6,787 6,140
LOAN LOSS PROVISION 800 1,900 400 600
NET INTEREST INCOME AFTER
LOAN LOSS PROVISION 19,030 16,235 6,387 5,540
NONINTEREST INCOME
Mortgage servicing fees 482 499 154 167
Other service fee income 1,834 1,473 575 533
Net securities gains 264 49 55 49
Gains (losses) on loans
sold or held for sale (12) (26) 35 (35)
Other 300 159 238 9
Total noninterest income 2,868 2,154 1,057 723
NONINTEREST EXPENSE
Salaries and employee
benefits 7,181 5,557 2,340 1,963
Furniture and equipment 894 756 284 267
Net occupancy 1,821 1,272 595 461
Data processing 499 521 157 170
Advertising and promotion 373 514 70 263
FDIC/State assessments 12 565 1 (27)
Legal 85 166 22 52
Amortization of intangibles 486 193 162 97
Provision for losses on
foreclosed properties 0 0 0 0
Other nonperforming asset
expenses 23 361 37 64
Other operating expenses 2,223 1,987 653 693
Total noninterest
expense 13,597 11,892 4,321 4,003
INCOME BEFORE INCOME TAXES 8,301 6,497 3,123 2,260
INCOME TAX PROVISION 3,591 2,338 1,335 827
NET INCOME $ 4,710 $ 4,159 $ 1,788 $ 1,433
NET INCOME PER SHARE
PRIMARY $ 0.84 $ 0.75 $ 0.32 $ 0.25
FULLY DILUTED $ 0.83 $ 0.74 $ 0.32 $ 0.25
</TABLE>
<PAGE>
<TABLE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended
(Dollars in thousands) September 30,
1996 1995
<CAPTION>
<S> <C> <C>
Operating Activities
Net income $4,710 $ 4,159
Adjustments to reconcile net income
to net cash provided by operating
activities
Loan loss provision 800 1,900
Depreciation, amortization and
accretion (2,397) (3,092)
Amortization of intangible 486 193
Net gain on sales of securities (264) (49)
Loss on loans sold 12 26
Loans originated for sale (19,102) (8,228)
Proceeds from loans sold 19,482 8,713
Gain on nonperforming loans and
foreclosed properties held for (319) 0
sale
Gain on foreclosed properties (62) 0
Gain on sale of branch (201) 0
Change in assets and liabilities net
of effects from purchase of Seconn
Holding Company and The Bank
of Mystic, Inc.
Change in accrued income receivable 276 (338)
Change in deferred tax asset 575 0
Change in all other liabilities 372 3,263
Change in all other assets 127 1,652
Net cash provided by operating
activities 4,495 8,199
Investing Activities
Cash acquired net of cash paid for
purchase of Seconn Holding Company 10,387 0
Cash acquired net of cash paid for
purchase of The Bank of Mystic, Inc. 0 8,951
Mortgage-backed securities
Available for sale
Proceeds
Sales 0 10,245
Maturities and repayments 14,122 7,404
Purchases (24,979) (34,305)
Other investment securities
Available for sale
Proceeds
Sales 21,306 0
Maturities and repayments 8,500 500
Purchases (22,284) (4,992)
Held to maturity
Proceeds
Sales 0 0
Maturities and repayments 182,120 156,000
Purchases (136,280) (123,252)
Net advances on loans (24,980) (11,778)
Proceeds from sales of foreclosed
properties 870 714
Proceeds from sales of loans and
foreclosed properties held for sale 2,439 1,223
Capital expenditures, net (545) (448)
Net cash provided by investing
activities 30,676 10,262
<PAGE>
Financing Activities
Net increase (decrease) in savings,
demand and other deposit accounts 6,674 (18,869)
Net (decrease) increase in time
deposits (14,449) 28,066
Sale of deposits (9,820) 0
Net decrease in mortgagors'
escrow accounts (1,475) (1,335)
Proceeds from FHLB advances 20,902 23,649
Repayment of FHLB advances (26,953) (42,649)
Proceeds from exercise of stock
options 1,041 47
Purchase of treasury stock (4,109) (1,821)
Cash dividends paid (2,603) (2,197)
Net cash used by financing
activities (30,792) (15,109)
Net increase in cash and cash
equivalents 4,379 3,352
Cash and cash equivalents at
beginning of period 18,750 17,732
Cash and cash equivalents at
end of period $ 23,129 $21,084
Supplemental disclosures
Interest $ 19,259 $10,393
Income Taxes 3,235 25
Supplemental information on
noncash transactions
Transfer to foreclosed properties 283 797
Loans to facilitate the sale of
foreclosed properties 1,272 1,043
Treasury stock issued for the purchase
of The Bank of Mystic, Inc. 0 5,373
</TABLE>
As of January 2, 1996, the Company purchased all the stock of
Seconn Holding Company for approximately $4.7 million. In
conjunction with the acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired $49,910
Cash paid (4,654)
Liabilities assumed $45,256
</TABLE>
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
I. Basis of Presentation
The consolidated financial statements included herein have been
prepared by Norwich Financial Corp., (NFC or the Company),
without an audit except for the December 31, 1995 balance sheet,
which was derived from the Annual Report on Form 10-K, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although NFC
believes the disclosures are adequate to make the information
presented not misleading. The information furnished reflects all
adjustments which are, in the opinion of management, of a normal,
recurring nature and necessary for a fair statement of the
results for the interim periods. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and related notes included in NFC's Annual
Report on Form 10-K for the year ended December 31, 1995 and with
the supplementary schedules presented as Exhibits A and B on
pages 16 and 17. NFC's consolidated financial statements
contained herein have been prepared in accordance with the
accounting policies described in Note 2 to the December 31, 1995
financial statements included in NFC's 1995 Annual Report on Form
10-K.
II. Earnings Per Share
Earnings per common share have been computed based on the
following:
<TABLE>
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
<CAPTION>
<S> <C> <C> <C> <C>
Net income applicable
to common stock $4,710 $4,159 $1,788 $1,433
Average number of
common shares
outstanding 5,494,105 5,454,862 5,381,333 5,556,172
Average number of
common and common
equivalent shares
outstanding 5,623,848 5,551,638 5,533,592 5,691,865
Average number of
common shares
outstanding -
assuming full
dilution 5,674,430 5,628,378 5,561,658 5,737,151
</TABLE>
III. Capital Ratios
<TABLE>
September 30, 1996
Regulatory Requirements to
Actual be Considered Well Capitalized
<CAPTION>
<S> <C> <C>
Risk-based
Tier 1 13.82 6.00%
Total 15.10 10.00
Leverage 9.58 5.00
</TABLE>
<PAGE>
IV. Realized and Unrealized Gains and Losses on Investment
Securities (in thousands)
Unrealized gains and losses as of September 30, 1996 and
September 30, 1995 were as follows:
Unrealized at September 30, 1996
<TABLE>
Held to
Available for Sale Maturity
Mortgage-Backed All Other All Other
Securities Securities Securities
<CAPTION>
<S> <C> <C> <C>
Unrealized gains $ 810 $ 397 $ 8
Unrealized losses $ 684 10 11
Net unrealized gains
(losses) $ 126 $ 387 $ (3)
</TABLE>
Unrealized at September 30, 1995
<TABLE>
Held to
Available for Sale Maturity
Mortgage-Backed All Other All Other
Securities Securities Securities
<CAPTION>
<S> <C> <C> <C>
Unrealized gains $ 823 $317 $ 27
Unrealized losses 1,160 16 12
Net unrealized gains
(losses) $ (337) $301 $ 15
</TABLE>
Proceeds from sales and realized gains and losses on investments
were as follows:
<TABLE>
Nine Months Ended Three Months Ended
September 30 September 30
1996 1995 1996 1995
<CAPTION>
<S> <C> <C> <C> <C>
Other investment
securities available
for sale
Proceeds $21,306 0 $20,968 0
Realized gains 287 0 78 0
Realized losses 23 0 23 0
Mortgage-backed
securities available
for sale
Proceeds 0 $10,245 0 $10,245
Realized gains 0 49 0 49
Realized losses 0 0 0 0
</TABLE>
<PAGE>
V. Adoption of New Financial Accounting Standards
In March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of"
was issued. SFAS No. 121 requires long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Company adopted SFAS No. 121 effective January
1, 1996. The adoption of this Statement did not have a material
impact on the Company's financial statements.
In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing
Rights" was issued. SFAS No. 122 requires an enterprise which
acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those
loans with servicing retained, to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans
based on their relative fair values if it is practical to
estimate those fair values. These mortgage servicing rights are
to be amortized in proportion to and over the period of estimated
net servicing income and should be evaluated for impairment based
on their fair values. The Company adopted SFAS No. 121 effective
January 1, 1996. During the third quarter and nine months ended
September 30, 1996, the Company recorded mortgage servicing
rights of $61,000 and $183,000 respectively.
In October 1995, SFAS No. 123 "Accounting for Stock-Based
Compensation" was issued. This Statement establishes financial
accounting and reporting standards for stock-based employee
compensation plans. This includes all arrangements by which
employees receive shares of stock or other equity instruments of
the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. This
Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages
all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting prescribed
by Accounting Principles Board Opinion 25, "Accounting for Stock
Issued to Employees." Entities electing to remain with the
accounting in Opinion 25 must make proforma disclosures of net
income and earnings per share as if the fair value method of
accounting defined in this Statement had been applied. The
Company will continue to follow the method of accounting
prescribed by Opinion 25. The required proforma disclosures will
be made in the notes to the 1996 Annual Report.
The Financial Accounting Standards Board has also issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," effective for transfers of
financial assets made after December 31, 1996. This statement
provides financial reporting standards for the derecognition and
recognition of financial assets, including the distinction
between transfers of financial assets which should be recorded as
sales and those which should be recorded as secured borrowings.
The Company believes that the effect of the adoption of SFAS 125
will not be material to its financial position or results of
operations.
VI. Mergers and Acquisitions
On January 2, 1996, the Company completed the acquisition of
Seconn Holding Company, (Seconn), the holding company for The
Bank of Southeastern Connecticut. In accordance with the
definitive acquisition agreement, shareholders of Seconn received
$6 in cash for each share of outstanding stock of Seconn. The
total price paid to selling shareholders was approximately $4.7
million. As of December 31, 1995, Seconn had total assets of
$47.0 million, including $28.9 million in net loans. Deposits as
of December 31, 1995, were $44.4 million. The acquisition was
accounted for as a purchase in 1996.
VII. Reclassification
Certain reclassifications have been made to the prior years'
amounts to conform with the 1996 presentation.
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of the Three and Nine Month Periods Ending
September 30, 1996 and 1995
GENERAL
Norwich Financial Corp. (NFC or the Company) is a holding company
and parent to The Norwich Savings Society (the Bank). The Bank
is a state chartered stock savings bank headquartered in Norwich,
Connecticut which originates real estate, commercial and consumer
loans in southeastern Connecticut. The Bank funds its operations
through the taking of deposits in the same market area.
Traditionally a defense oriented economy dominated by companies
such as General Dynamic's Electric Boat Division, the Bank's
market area has been diversifying to accommodate defense
downsizing which continues to impact the area's economy. The
gaming industry is currently anchored by the Mashantucket
Pequot's Foxwoods Casino which is one of the region's largest
employers and is continuing to expand. A second casino, Mohegan
Sun Resort, just south of Norwich in Montville opened in October
of 1996 and is operated by the Mohegan Tribe. Tourism continues
to grow throughout the region with the expansion, for example, of
the Mystic Marinelife Aquarium. The Nautilus Submarine and
Museum and The Mystic Seaport both represent existing major
attractions of the region. In addition to the regional tourism
and gaming concentration, eastern Connecticut's economy also
benefits by the presence of companies such as Pfizer, Inc.
expanding its pharmaceutical research facility in Groton and the
University of Connecticut's Marine Science and Technology Center
which will be located in Groton.
SUMMARY
For the third quarter of 1996, NFC had net income of $1.8 million
or $.32 per share compared to net income of $1.4 million or $.25
per share for the third quarter of 1995. For the nine months
ended September 30, 1996, net income was $4.7 million ($.84 per
share) compared to $4.2 million ($.75 per share) for the first
nine months of 1995. Core earnings for the quarter ended
September 30, 1996 were $3.2 million which is slightly higher
than $2.8 million for the quarter ended September 30, 1995. Core
earnings were affected positively by increased net interest
income which was $647,000 (10.5%) higher in the third quarter of
1996 than in the third quarter of 1995 and an increase in service
fee income of $29,000 (4.1%), offset by an increase in
noninterest expenses of $318,000 (7.9%) during the third quarter
of 1996 compared to the third quarter of 1995. For the nine
month periods ended September 30, 1996 and 1995 core earnings
were $8.5 million and $8.2 million, respectively. NFC defines
core earnings as net interest income plus service fee income,
less noninterest expenses other than provisions for losses on
foreclosed properties.
Total nonperforming assets at September 30, 1996, excluding
"loans and foreclosed properties held for sale," were $9.8
million compared to $14.3 million at the same date a year
earlier. As of September 30, 1996, total nonperforming assets,
including "loans and foreclosed properties held for sale," were
$11.5 million compared to $16.4 million at September 30, 1995.
The results of the nine months ended September 30, 1996 include
the impact of the acquisitions of The Bank of Mystic, Inc., on
April 1, 1995 and The Bank of Southeastern Connecticut (Seconn)
on January 2, 1996; both acquisitions were recorded using the
purchase method of accounting.
Effective September 20, 1996, the Bank completed the sale of a
branch. Deposits totaling $10.0 million were sold in the
transaction. Loans were excluded from the transaction. This
transaction resulted in a gain of $201,000 being recorded in the
third quarter of 1996.
<PAGE>
The Bank has entered into an agreement to acquire two branch
offices of First Union Bank of Connecticut. In addition to the
two branches, the transaction will include the transfer of
approximately $32 million in deposits and certain loans.
NET INTEREST INCOME
As previously mentioned, the year-over-year increase in core
earnings for the third quarter and for the nine months ended
September 30, 1996 was due primarily to an increase in net
interest income. For the third quarter, the increase in net
interest income was attributable to a higher net interest margin
(net yield on interest earning assets) and an 8.6% increase in
average earning assets compared to the year-earlier period. For
the nine months ended September 30, 1996, the increase was due to
a 13.9% year-over-year increase in average earning assets,
partially offset by a slightly lower net interest margin. The
year-over-year increase in earning assets was due primarily to
the Company's acquisition of The Bank of Southeastern Connecticut
on January 2, 1996.
Net interest income for the third quarter of 1996 was $6.8
million compared with $6.1 million for the third quarter of 1995.
Net interest margin on a fully taxable equivalent basis was 4.07%
for the quarter ended September 30, 1996 compared with 3.99% for
the quarter ended September 30, 1995. Net interest income for the
nine months ended September 30, 1996 was $19.8 million compared
with $18.1 million for the year-ago period. Net interest margin
on a fully taxable equivalent basis was 3.94% for the nine months
ended September 30, 1996 versus 4.10% for the year-ago period.
NFC's asset yields decreased slightly during 1996 from year-earlier
levels for both the quarter and year-to-date periods.
The Company's cost of funds for the most recent quarter was lower
than in the year-ago quarter, but was slightly higher than the
year-earlier level for the nine months ended September 30. Asset
yields decreased less than deposit interest costs during the most
recent quarter as management followed a conservative deposit
pricing strategy during the quarter, resulting in the improvement
in NFC's net yield on interest-earning assets (net interest
margin).
For the first nine months of 1996, the yield on the Company's
loan portfolio was 8.68% compared to 8.74% for the first nine
months of 1995. All categories of loans displayed volume related
increases as net loans of $48.0 million from The Bank of Mystic,
Inc. were acquired on April 1, 1995 and $28.9 million from The
Bank of Southeastern Connecticut were acquired on January 2,
1996.
For the first nine months of 1996, the yield on the Company's
investment portfolio was 5.83% compared to 6.08% for the same
period in 1995. At September 30, 1996 and 1995, the weighted
average life of the portfolio was 2.19 years and 2.41 years,
respectively. At September 30, 1996, 84% of the portfolio was
rated Aaa compared to 96% at September 30, 1995. Securities
income was $256,000 higher in the first nine months of 1996
compared to the first nine months of 1995 due to higher volumes
which were partially offset by lower yields.
RATE SENSITIVITY
An ongoing objective of management is to manage asset and
liability positions so as to moderate the effect of interest rate
fluctuations on net interest income. NFC's position is measured
by the ratio of interest rate sensitive assets to interest rate
sensitive liabilities within a one year time frame. Management
attempts to maintain this ratio within a range of 90% to 110%.
In addition, management continually reviews the potential effect
that changes in interest rates could have on net interest income
and on the repayment of rate sensitive assets and on funding
requirements of rate sensitive liabilities.
<PAGE>
As of September 30, 1996, NFC's one year ratio of rate sensitive
assets to rate sensitive liabilities was 88.8% compared to 87.1%
at September 30, 1995. The year-over-year increase in the ratio
of rate sensitive assets to rate sensitive liabilities within a
one year time frame is partially attributable to a change,
implemented during the second quarter of 1996, in the methodology
used to determine the repricing classification of noncontractual
deposits such as demand deposits, interest-bearing checking, and
savings and money market deposits. These noncontractual deposits
are now scheduled into discrete time frames based on (1)
management's current estimate of the sensitivity of the rates and
balances of these accounts to changes in market interest rates,
(2) management's current deposit pricing philosophy in response
to changes in the interest rate environment, and (3) management
assumptions regarding seasonal patterns, cyclical factors, and
industry trends or innovations that may influence the pricing or
stability of these accounts. Previously, all interest-bearing
checking, savings and money market deposits were classified as
rate-sensitive within one year while all noninterest bearing
demand deposits were classified as long term, non-rate sensitive
liabilities. This change in methodology resulted in a net
reduction in rate sensitive liabilities within a one year time
frame of approximately $49.4 million at September 30, 1996. It
is believed that the new methodology appropriately reflects the
Company's rate sensitivity position. Had the previous
methodology been applied at September 30, 1996, the ratio would
have been 78.2%.
The Investment Committee of NFC's Board of Directors reviews
asset/liability guidelines from time to time, including the
target range for the rate sensitivity ratio at one year. The 90%
to 110% guideline is still in effect and the Investment Committee
approves ratios outside the target range.
NONPERFORMING ASSETS (NPAs) AND ALLOWANCES AND PROVISIONS FOR
CREDIT LOSSES
At the end of the third quarter of 1996, NPAs, excluding "loans
and foreclosed properties held for sale," were $9.8 million,
which was $4.5 million (31.4%) lower than at the end of the third
quarter of 1995 and was $462,000 (4.9%) higher than at the end of
1995. The increase in NPAs since December 31, 1995 reflects,
approximately, $3.0 million of nonperforming assets relating to
loans originated by the Bank of Southeastern Connecticut, prior
to the acquisition of that institution on January 2, 1996,
partially offset by the disposition of NPAs of approximately $2.5
million. Net chargeoffs for the third quarter and first nine
months of 1996 were $79,000 and $930,000 respectively, compared
to $580,000 and $1.3 million for the third quarter and first nine
months of 1995.
Nonaccrual and restructured loans totaled $9.4 million or 95.6%
of nonperforming assets, excluding "loans and foreclosed
properties held for sale", at September 30, 1996 compared to
$12.8 million or 89.4% at September 30, 1995. Foreclosed
properties, excluding foreclosed properties held for sale and
before the allowance for losses, were $437,000 at September 30,
1996 compared to $1.5 million at September 30, 1995 and
represented 4.4% and 10.6%, respectively, of total nonperforming
assets excluding "loans and foreclosed properties held for sale".
The allowance for loan losses was $15.5 million at September 30,
1996 compared to $13.2 million at December 31, 1995 and $11.5
million one year ago. The provision for losses on loans was
$400,000 for the third quarter of 1996, and $800,000 for the
first nine months of 1996, compared to $600,000 and $1.9 million
for the third quarter and first nine months of 1995. The
allowance for loan losses also increased when Seconn's allowance
of $2.5 million was added on January 2, 1996. NFC's ratio of
allowance for loan losses to nonperforming loans, excluding
nonperforming assets held for sale, was 165.3% as of September
30, 1996 compared to 144.5% at December 31, 1995 and 89.3% at
September 30, 1995. Provisions and allowances for losses are
dependent on several factors, including the quality and estimated
value of underlying collateral held on nonperforming assets, the
results of NFC's systematic methodology to evaluate allowance
adequacy, and chargeoffs of existing nonperforming assets.
<PAGE>
Certain nonperforming loans and foreclosed properties held for
sale at December 31, 1995 were sold during the first nine months
of 1996. Proceeds from the sales exceeded the carrying value by
approximately $319,000 and resulted in a decrease in
nonperforming loans and foreclosed properties held for sale from
$4.1 million at December 31, 1995 to $1.7 million at September
30, 1996.
The bulk of NFC's problem assets and chargeoffs have been
concentrated in the commercial real estate and business loan
portfolios. As of September 30, 1996, these two portfolios
accounted for $6.9 million (69.8%) of NPAs compared with $8.7
million (60.4%) at September 30, 1995. Net chargeoffs of
commercial real estate, business loans and related foreclosed
properties represented $471,000 or 50.7% of NFC's total net
chargeoffs for the first nine months of 1996 compared to $912,000
or 68.7% for the first nine months of 1995.
NONINTEREST INCOME
Noninterest income for the current quarter amounted to $1.1
million compared to $723,000 for the year-earlier quarter. This
increase is due to additional service fee income, gain on
performing loans sold and the sale of a branch office.
For the first nine months of 1996 noninterest income was $714,000
higher than the first nine months of 1995. Securities gains of
$264,000 were recorded in the first nine months of 1996 compared
to $49,000 of securities gains for the first nine months of 1995.
Service fees, primarily deposit service fees, were $344,000
(17.4%) higher in the first nine months of 1996 compared to the
first nine months of 1995. In addition to the above, a gain of
$201,000 was recorded upon the sale of a branch office in the
third quarter of 1996.
NONINTEREST EXPENSE
Total noninterest expense was $4.3 million for the third quarter
of 1996 compared to $4.0 million for the third quarter of 1995.
The increase in total noninterest expense was principally the
result of higher general operating expenses associated with an
expansion of the Company's eastern Connecticut banking franchise
during the past twelve months.
The pattern of increases for the quarters ended September 30,
1996 and September 30, 1995 was also true for the first nine
months of 1996 compared to the first nine months of 1995. These
increases were offset by reduced spending on advertising and
promotions, a reduction in the federal deposit insurance (FDIC)
assessment as well as gains recognized on nonperforming loans and
foreclosed properties held for sale.
INCOME TAXES
The effective tax rate for the first nine months of 1996
increased to approximately 43% from 36% for the same period in
1995. The 1995 effective tax rate benefited from the recognition
of deferred tax assets. Such tax benefits were fully realized at
the end of 1995. Also, nondeductible goodwill has increased in
1996 causing an increase in the effective tax rate.
<PAGE>
CHANGES IN FINANCIAL CONDITION
The increase in total assets is due primarily to the acquisition
of Seconn on January 2, 1996 which added approximately $49.9
million in assets, including the excess cost over net assets
acquired. In addition to the impact of Seconn, the September 30,
1996 assets reflect an increase in loan activity which was funded
by maturing investments. Investments were also liquidated during
the three months ended September 30, 1996 to fund modest outflows
of deposits and the sale of a branch with approximately $10.0
million of deposits.
Total liabilities were $619.6 million at September 30, 1996, an
increase of $20.3 million from $599.3 million at December 31,
1995. The increase is due primarily to the Seconn transaction
which added approximately $44.4 million in deposits on January 2,
1996. This increase was offset by the sale of a branch, as
discussed above. Also, the Bank has recently been more
conservative in the pricing of time deposits which has caused a
modest reduction in time deposit balances.
Stockholders' equity was $74.8 million at September 30, 1996, a
decrease of $1.2 million from $76.0 million at December 31, 1995.
At September 30, 1996, NFC's equity represented 10.77% of total
assets compared to 11.30% at September 30, 1995. Book value per
share was $13.90 at September 30, 1996 compared to $13.35 at
September 30, 1995.
CAPITAL RESOURCES
Capital ratios for NFC and its subsidiary bank, The Norwich
Savings Society, continue to be well in excess of all regulatory
requirements as of September 30, 1996. The leverage capital
ratio was 9.58% and total risk based capital was 15.10% compared
to 10.89% and 18.26%, respectively, at September 30, 1995.
Capital ratios remain well above minimum regulatory requirements
of 4% to 5% for leverage capital and 8% for total risk-based
capital.
LIQUIDITY
Liquidity is the ability of the Company to meet each maturing
obligation or customer demand for funds. Norwich Financial
Corp.'s main source of liquidity is dividends from the Bank. As
a result, the liquidity of the Company is largely dependent upon
the liquidity and profitability of the Bank and the ability of
the Bank to pay dividends under applicable laws and regulations.
The Bank considers liquid assets to be cash and due from banks,
Federal funds sold, time deposits with other banks, money market
instruments and U.S. Government and agency obligations maturing
within one year. As of September 30, 1996, liquid assets were
$91.5 million or 13.2% of total assets compared to $119.6 million
and 18.2% as of September 30, 1995.
Liquidity is generated by deposit inflows, loan principle and
interest payments, maturing investments and Federal Home Loan
Bank advances. Principal uses of funds include loan
originations, investment purchases, payments of interest on
deposits and payments to meet operating expenses. Due primarily
to the acquisition of Seconn, total deposits, including mortgage
escrow, showed growth of $39.8 million during the year ended
September 30, 1996.
<PAGE>
INFLATION
The effect of inflation is reflected in the cost of NFC's
operations. Since the assets and liabilities of NFC are
primarily monetary in nature, the extent to which inflation
affects interest rates will, in turn, affect NFC's operation.
<PAGE>
<TABLE>
Exhibit A
NORWICH FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL RESULTS
Nine Months Ended Three Months Ended
September 30, September 30,
(In thousands,
except share data) 1996 1995 1996 1995
<CAPTION>
<S> <C> <C> <C> <C>
EARNINGS
Interest income $39,141 $34,604 $13,083 $ 12,192
Interest expense 19,311 16,469 6,296 6,052
Net interest income 19,830 18,135 6,787 6,140
Net income 4,710 4,159 1,788 1,433
Primary earnings per
share 0.84 0.75 0.32 0.25
Weighted average
common shares
outstanding,
including common
stock equivalents 5,623,848 5,551,638 5,533,592 5,691,865
RATIOS (annualized)
Return on average
assets 0.89% 0.90% 1.00% 0.88%
Return on average
stockholders' equity 8.30 7.81 9.64 7.72
Average stockholders'
equity to average
assets 10.71 11.53 10.41 11.41
YIELD DATA
(taxable equivalent
annualized)
Net interest margin 3.94% 4.10% 4.07% 3.99%
Net interest spread 3.17 3.37 3.29 3.20
Asset yields
Loans 8.68 8.74 8.66 8.80
Investments 5.83 6.08 5.86 6.10
Earning assets 7.76 7.82 7.79 7.87
Cost of funds
Deposits 4.54 4.43 4.45 4.66
FHLB advances 6.45 5.40 6.39 5.48
Interest bearing
liabilities 4.59 4.45 4.50 4.67
</TABLE>
<TABLE>
September 30, December 31,
1996 1995 1995
<CAPTION>
<S> <C> <C> <C>
OUTSTANDING BALANCES
Total assets $694,443 $656,055 $675,332
Net loans 455,103 394,840 402,073
Deposits 594,256 554,628 567,783
FHLB advances 16,349 18,400 22,400
Stockholders' equity 74,825 74,161 76,020
Stockholders' equity to
total assets 10.77% 11.30% 11.26%
Book value per share $13.90 $13.35 $13.58
Shares of common stock 5,384,991 5,556,172 5,597,549
</TABLE>
<PAGE>
<TABLE>
Exhibit B
NORWICH FINANCIAL CORP.AND SUBSIDIARY
NONPERFORMING ASSETS SUMMARY
September 30, December 31,
(Dollars in thousands) 1996 1995 1995
<CAPTION>
<S> <C> <C> <C>
Nonaccrual Loans
Residential real estate $ 2,667 $ 2,950 $ 1,286
Commercial real estate
Permanent 3,693 5,966 4,425
Land and construction 248 296 73
Commercial 1,704 1,831 1,809
Consumer 290 899 424
8,602 11,942 8,017
Restructured Loans
Residential and consumer 0 367 591
Commercial real estate 800 513 505
Commercial 0 0 0
800 880 1,096
Total nonperforming loans 9,402 12,822 9,113
Foreclosed properties 437 1,526 264
Total nonperforming assets
before nonperforming assets
held for sale 9,839 14,348 9,377
Nonperforming assets held for
sale
Loans on nonaccrual 851 554 2,208
Foreclosed properties 857 1,484 1,919
Total nonperforming assets
held for sale 1,708 2,038 4,127
Total nonperforming assets $11,547 $16,386 $13,504
</TABLE>
Summary of Impaired Loans
All loans classified as nonaccrual as of September 30, 1996 in
the above table, and all loans restructured since January 1, 1995
are classified as impaired as a result of the adoption of
Financial Accounting Standards Nos. 114 and 118, "Accounting by
Creditors for Impairment of a Loan" and "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures."
There were no impaired loans on accrual status as of September
30, 1996. Impaired loans were $9.7 million as of September 30,
1996 with an associated allowance for losses of $2.1 million.
<TABLE>
September 30, December 31,
(Dollars in thousands) 1996 1995 1995
<CAPTION>
<S> <C> <C> <C>
Net chargeoffs (recoveries)
year to date $ 930 $ 1,328 $ 3,539
Net chargeoffs to average loans
and foreclosed properties
For the period 0.20% 0.34% 0.89%
Annualized 0.27% 0.46% (a)
Allowances for losses
On loans $15,544 $11,452 $13,168
On foreclosed properties 0 229 0
Combined $15,544 $11,681 $13,168
Ratios (exclusive of
nonperforming assets
held for sale)
Allowance for loan
losses to
Nonaccrual loans 180.70% 95.90% 164.25%
Nonperforming loans 165.33 89.32 144.50
Allowance for foreclosed
properties to foreclosed
properties (a) 15.01 (a)
Combined allowances for
losses to
Total nonperforming assets 157.98 81.41 140.43
Total loans and foreclosed
properties 3.29 2.86 3.16
Total nonperforming assets to
Total loans and foreclosed
properties 2.09 3.51 2.25
Total assets 1.42 2.19 1.39
(a) Not Applicable
</TABLE>
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the
Company or its subsidiary is a party, or of which any of their property
is the subject, other than ordinary routine litigation in the normal
course of business.
Item 2. Changes in Securities
During the third quarter of 1996, there were no changes which
would materially modify the rights of the holders of the Company's
registered securities.
Item 3. Defaults upon Senior Securities
The Company and its subsidiary are not in default with respect to the
payment of principal or interest related to any outstanding borrowing.
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are filed herewith:
Exhibit 27 - Financial Data Schedule
(b) Reports on form 8-K:
No report on form 8-K was filed during the period covered
by this report.
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
10-Q SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 14, 1996 By: /s/ Daniel R. Dennis, Jr.
Daniel R. Dennis, Jr.
Chairman, President, Chief Executive
Officer and Director
Date: November 14, 1996 By: /s/ Michael J. Hartl
Michael J. Hartl
Executive Vice President, Treasurer,
Chief Financial Officer and Director
Date: November 14, 1996 By: /s/ Lori J. Ferro
Lori J. Ferro
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,629
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113,443
<INVESTMENTS-CARRYING> 68,322
<INVESTMENTS-MARKET> 68,319
<LOANS> 470,647
<ALLOWANCE> 15,544
<TOTAL-ASSETS> 694,443
<DEPOSITS> 594,256
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,252
<LONG-TERM> 16,349
0
0
<COMMON> 60
<OTHER-SE> 74,765
<TOTAL-LIABILITIES-AND-EQUITY> 694,443
<INTEREST-LOAN> 29,652
<INTEREST-INVEST> 9,489
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 39,141
<INTEREST-DEPOSIT> 18,511
<INTEREST-EXPENSE> 19,311
<INTEREST-INCOME-NET> 19,830
<LOAN-LOSSES> 800
<SECURITIES-GAINS> 264
<EXPENSE-OTHER> 13,597
<INCOME-PRETAX> 8,301
<INCOME-PRE-EXTRAORDINARY> 8,301
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,710
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 3.94
<LOANS-NON> 9,453
<LOANS-PAST> 0
<LOANS-TROUBLED> 800
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,168
<CHARGE-OFFS> 1,729
<RECOVERIES> 799
<ALLOWANCE-CLOSE> 15,544
<ALLOWANCE-DOMESTIC> 15,544
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
