UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, for the quarter and six months
ended June 30, 1997, 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 [ ]
There were 5,420,041 shares of common stock, par value $.01,
outstanding as of July 31, 1997.
NORWICH FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flow 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Exhibit A - Consolidated Financial Results 15
Exhibit B - Consolidated Nonperforming Assets
Summary 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of
Securities Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
Consolidated Balance Sheets
(In thousands, June 30, December 31,
except share data) 1997 1996 1996
<CAPTION>
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 22,236 $ 22,573 $ 19,419
Investments
Federal funds sold 8,000 5,785 3,700
Money market instruments,
held to maturity (market
value of $66,278 and
$18,650 at June 30, 1997
and 1996 and $31,765 at
December 31, 1996) 66,287 18,664 31,769
Mortgage-backed securities,
available for sale
(amortized cost of $85,931
and $100,388 at June 30,
1997 and 1996 and $100,844
at December 31, 1996) 86,349 99,724 101,025
Investment securities
Held to maturity (market
value of $77,388 at June 30,
1996 and $20,941 at
December 31, 1996) 0 77,420 20,945
Available for sale
(amortized cost of $16,590
and $25,903 at June 30,
1997 and 1996 and $9,936
at December 31, 1996) 18,440 26,128 10,556
Federal Home Loan Bank
stock, at cost 3,715 3,715 3,715
------- ------- -------
Total investments 182,791 231,436 171,710
Loans
Mortgage 354,959 338,611 350,781
Other 134,432 120,473 126,330
------- ------- -------
Total loans 489,391 459,084 477,111
Less: allowance for
loan losses (13,856) (15,223) (13,928)
------- ------- -------
Net loans 475,535 443,861 463,183
Loans and foreclosed
properties held for sale 1,044 2,728 172
Premises and equipment, net 6,061 6,337 6,216
Accrued income receivable 3,577 3,900 3,474
Foreclosed properties 1,855 322 1,167
Deferred tax asset, net 4,754 5,340 5,356
Other assets 14,846 14,696 12,602
-------- -------- --------
Total assets $712,699 $731,193 $683,299
======== ======== ========
LIABILITIES
Total deposits $606,092 $616,801 $585,080
Mortgagors' escrow accounts 3,854 3,486 3,654
FHLB advances 17,887 16,368 11,928
Other liabilities 5,287 21,269 6,139
-------- -------- --------
Total liabilities $633,120 $657,924 $606,801
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock $ 60 $ 60 $ 60
Additional paid in capital 58,709 58,755 58,708
Retained income 25,907 21,434 23,869
Less: Treasury stock, at
cost (540,840 and 561,690
shares at June 30, 1997 and
1996 and 554,240 shares at
December 31, 1996) (6,435) (6,721) (6,611)
Unrealized gain (loss) on
securities available for
sale, net of tax effect 1,338 (259) 472
------- ------- -------
Total stockholders' equity 79,579 73,269 76,498
------- ------- -------
Total liabilities and
stockholders' equity $712,699 $731,193 $683,299
======== ======== ========
BOOK VALUE PER SHARE $ 14.70 $ 13.59 $ 14.17
======== ======== ========
</TABLE>
3
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Income
Six Months Ended Three Months Ended
(In thousands, June 30, June 30,
except share data) 1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Mortgage loans $15,184 $14,260 $ 7,630 $ 7,237
Other loans 5,859 5,338 2,963 2,659
Federal funds sold 117 167 57 73
Money market instruments 1,455 553 884 270
U.S. Government and
agency obligations 59 2,809 0 1,415
Mortgage-backed securities 2,972 2,770 1,454 1,353
Other bonds 263 30 144 15
Corporate stocks 166 131 85 68
------ ------ ------ ------
Total interest income 26,075 26,058 13,217 13,090
INTEREST EXPENSE
Deposits 11,231 12,481 5,697 6,178
FHLB advances 383 534 195 278
------ ------ ----- -----
Total interest expense 11,614 13,015 5,892 6,456
------ ------ ----- -----
NET INTEREST INCOME 14,461 13,043 7,325 6,634
LOAN LOSS PROVISION 400 400 200 200
------ ------ ----- -----
NET INTEREST INCOME AFTER
LOAN LOSS PROVISION 14,061 12,643 7,125 6,434
------ ------ ----- -----
NONINTEREST INCOME
Mortgage servicing fees 333 328 169 160
Other service fee income 1,467 1,259 775 595
Net securities gains 124 209 93 206
Gains (losses) on loans
sold or held for sale 86 (47) 62 (45)
Other (28) 62 (13) 31
----- ----- ----- ---
Total noninterest income 1,982 1,811 1,086 947
NONINTEREST EXPENSE
Salaries and employee
benefits 4,756 4,841 2,488 2,473
Furniture and equipment 619 610 327 313
Net occupancy 1,159 1,226 579 600
Data processing 374 342 180 168
Advertising and promotion 273 303 159 145
FDIC/State assessments 38 11 20 6
Amortization of intangibles 340 324 195 162
Provision for losses on
foreclosed properties 77 0 73 0
Other nonperforming asset
expenses (income) 168 (14) 103 (6)
Other operating expenses 1,494 1,633 776 841
----- ----- ----- -----
Total noninterest
expense 9,298 9,276 4,900 4,702
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 6,745 5,178 3,311 2,679
INCOME TAX PROVISION 2,763 2,256 1,346 1,165
------ ------ ------ ------
NET INCOME $3,982 $2,922 $1,965 $1,514
====== ====== ====== ======
NET INCOME PER SHARE
PRIMARY $ 0.71 $ 0.52 $ 0.35 $ 0.27
FULLY DILUTED $ 0.71 $ 0.51 $ 0.35 $ 0.27
</TABLE>
4
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
Consolidated Statements of Cash Flow
Six Months Ended
June 30,
(Dollars in thousands) 1997 1996
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,982 $ 2,922
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loan loss provision 400 400
Provision for foreclosed real estate 77 0
Depreciation, amortization and
accretion (981) (1,647)
Amortization of intangible 340 324
Net gain on sales of securities (124) (209)
(Gain) loss on loans sold (86) 47
Loans originated for sale (14,548) (12,669)
Proceeds from loans sold 13,762 13,372
Gain on nonperforming loans
and foreclosed properties
held for sale 0 (284)
Gain on foreclosed properties (30) (51)
Change in assets and liabilities net
of effects from the acquisition
of branch offices and the purchase
of Seconn Holding Company:
Change in accrued income receivable (97) (141)
Change in all other liabilities (910) (1,571)
Change in all other assets 545 (581)
----- -----
Net cash provided (used) by
operating activities 2,330 (88)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired net of cash paid
for purchase of Seconn Holding Company 0 10,387
Mortgage-backed securities
available for sale:
Purchases 0 0
Proceeds from sales 8,362 0
Maturities and repayments 6,518 8,972
Other investment securities
available for sale:
Purchases (11,330) (18,578)
Proceeds from sales 4,790 338
Maturities and repayments 0 8,500
Other investment securities
held to maturity:
Purchases (95,063) (100,065)
Maturities and repayments 83,000 117,120
Net advances on loans (13,139) (13,139)
Acquisition of loans and other assets (4,227) 0
Proceeds from sales of foreclosed
properties 740 775
Proceeds from sales of loans and
foreclosed properties held for sale 0 1,699
Capital expenditures, net (326) (403)
------- ------
Net cash (used) provided by
investing activities (20,675) 15,606
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in savings, demand and
other deposit accounts 3,537 9,823
Net decrease in time deposits (7,954) (5,074)
Assumption of deposits and liabilities
of acquired branches 25,487 0
Net decrease in mortgagors'
escrow accounts 200 250
Proceeds from FHLB advances 10,376 10,703
Repayment of FHLB advances (4,417) (16,735)
Proceeds from exercise of stock options 177 920
Purchase of treasury stock 0 (3,839)
Cash dividends paid (1,944) (1,958)
------ ------
Net cash provided (used) by
financing activities 25,462 (5,910)
------ ------
Net increase in cash and cash
equivalents 7,117 9,608
Cash and cash equivalents at
beginning of period 23,119 18,750
------ ------
Cash and cash equivalents at
end of period $30,236 $28,358
======= =======
Supplemental disclosures
Interest $ 11,541 $12,991
Income Taxes 2,438 1,435
Supplemental information on noncash
transactions
Transfer to foreclosed properties 1,475 83
Loans to facilitate the sale of
foreclosed properties $ 146 $ 994
</TABLE>
5
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 1997
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, 1996 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, 1996 and with
the supplementary schedules presented as Exhibits A and B on
pages 15 and 16. NFC's consolidated financial statements
contained herein have been prepared in accordance with the
accounting policies described in Note 2 to the December 31, 1996
financial statements included in NFC's 1996 Annual Report on Form
10-K.
II. Net Income Per Share
Earnings per common share have been computed based on the
following:
<TABLE>
Six Months Ended Three Months Ended
June 30, June 30,
1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Net income applicable to
common stock
(in thousands) $3,982 $2,922 $1,965 $1,514
Average number of common
and common equivalent
shares outstanding 5,602,446 5,672,419 5,606,633 5,597,150
Average number of common
shares outstanding -
assuming full dilution 5,623,098 5,703,486 5,626,991 5,633,577
</TABLE>
III. Capital Ratios
<TABLE>
June 30, 1997
Regulatory Requirements
to be Considered Well
Actual Capitalized
<CAPTION>
<S> <C> <C>
Risk-based
Tier 1 13.09% 6.00%
Total 14.35 10.00
Leverage 10.15% 5.00%
</TABLE>
6
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 1997
IV. Realized and Unrealized Gains and Losses on Investment
Securities
Unrealized gains and losses as of June 30, 1997 and June 30, 1996
were as follows:
<TABLE>
June 30, 1997
Unrealized Unrealized Net Unrealized
(In thousands) Gains Losses Gains (losses)
<CAPTION>
<S> <C> <C> <C>
Available for sale
Mortgage-backed
securities $ 895 $477 $ 418
All other securities 1,868 18 1,850
Held to maturity
All other securities $ 2 $ 11 $ (9)
</TABLE>
<TABLE>
June 30, 1996
Unrealized Unrealized Net Unrealized
Gains Losses Gains (losses)
<CAPTION>
<S> <C> <C> <C>
Available for sale
Mortgage-backed
securities $564 $1,228 $(664)
All other securities 262 37 225
Held to maturity
All other securities $ 3 $ 49 $ (46)
</TABLE>
Proceeds from sales and realized gains and losses on investments
were as follows:
<TABLE>
Six Months Ended Three Months Ended
June 30, June 30,
(In thousands) 1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Other investment
securities available
for sale
Proceeds $4,790 $338 $1,302 $338
Realized gains 93 206 93 206
Realized losses (8) 0 0 0
Mortgage-backed securities
available for sale
Proceeds 8,362 0 0 0
Realized gains 79 0 0 0
Realized losses $ (67) $ 0 $ 0 $ 0
</TABLE>
The Company received a capital gain distribution of $27,000 and
$3,000 on its investment of mutual funds during the first six
months of 1997 and 1996, respectively.
At June 30, 1996, securities purchased but not yet settled were
$16.0 million. There were no securities in transit at June 30,
1997.
7
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 1997
V. Adoption of New Financial Accounting Standards
The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities," on January 1, 1997, with no impact on its results
of operations. SFAS No. 125 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. Transfers relating to secured
borrowings, repurchase agreements and similar transactions made
prior to December 31, 1997 are not covered under this Statement.
This Statement also amends the accounting for mortgage servicing
rights and supersedes SFAS No. 122, "Accounting for Mortgage
Servicing Rights."
The Financial Accounting Standards Board has recently issued SFAS
No. 128, "Earnings per Share." This statement simplifies the
computation of earnings per share (EPS) by replacing the
presentation of primary EPS with basic EPS. Under the new
statement, dual presentation of basic and diluted EPS is required
on the face of the income statement for entities with complex
capital structures. A reconciliation of the numerator and
denominator used in the basic EPS computation to the diluted EPS
computation's numerator and denominator is also required. SFAS
No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The
Company believes that the effect of the adoption of SFAS No. 128
will not be material to its disclosure of earnings per share.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was
issued. The objective of SFAS No. 130 is to report comprehensive
income which is defined as all changes in equity of an enterprise
that result from transactions and other economic events of the
period other than transactions with owners. SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods, provided for
comparative purposes, is required.
VI. Mergers and Acquisitions
On March 7, 1997 the Company completed its acquisition of two
branches of First Union Bank of Connecticut. Under terms of the
acquisition, the newly acquired branches were merged with The
Norwich Savings Society's existing offices in New London and
Groton. The acquisition includes the transfer of approximately
$25.5 million in deposits and $1.1 million in loans.
VII. Reclassification
Certain reclassifications have been made to the prior years'
amounts to conform with the 1997 presentation.
8
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of the Three and Six Month Periods Ending June 30,
1997 and 1996
The following discussion and analysis presents a review of Norwich
Financial Corp's (NFC or the Company) financial condition and
results of operations. This review should be read in conjunction
with the consolidated financial statements and other data presented
herein.
GENERAL
Norwich Financial Corp. 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.
Located in a region undergoing an economic revival, the Bank is
strategically positioned between two thriving casinos allowing it to
take advantage of the area's recent growth in gaming and tourism.
While southeastern Connecticut was dependent for decades almost
solely on the defense industry, the area's economy is currently
anchored by the Mashantucket Pequot Foxwoods Resort casino in
Ledyard and the Mohegan Sun Resort in Uncasville. Tourism continues
to grow as evidenced by projects such as the expansion of the Mystic
Marinelife Aquarium which is expected to attract additional visitors
to the region. In addition to the regional tourism and gaming
concentration, eastern Connecticut's economy also benefits by the
presence of employers such as Pfizer and General Dynamic's Electric
Boat Division.
SUMMARY
Net income for the three months ended June 30, 1997 was $2.0
million, 29.8% higher than net income for the three months ended
June 30, 1996 of $1.5 million. Fully diluted earnings per share
were $0.35 for the quarter ended June 30, 1997 compared with
$0.27 per share for the quarter ended June 30, 1996. Core
earnings for the second quarter of 1997 increased to $3.4 million
from $2.7 million for the second quarter of 1996. The 28.1%
increase in core earnings was due to an increase in both net
interest income and service fee income. NFC defines core
earnings as net interest income plus service fee income, less
noninterest expenses other than provision for losses on
foreclosed properties.
Net income was $4.0 million for the six months ended June 30,
1997, an increase of $1.1 million from the $2.9 million reported
for the six months ended June 30, 1996. Consistent with the
quarterly trend, the increase is primarily due to an increase in
both net interest income and service fee income. Fully diluted
earnings per share were $0.71 for the six months ended June 30,
1997 compared with $0.51 per share for the six months ended June
30, 1996.
Total nonperforming assets at June 30, 1997, excluding "loans and
foreclosed properties held for sale," were $9.2 million
consistent with the same date a year earlier. As of June 30,
1997, total nonperforming assets, including "loans and foreclosed
properties held for sale," were $9.2 million compared to $11.7
million at June 30, 1996.
Return on average assets and return on average equity were 1.12%
and 10.09%, respectively, for the second quarter of 1997 compared
with 0.85% and 8.26% for the second quarter of 1996. Comparable
returns for the six months ended June 30, 1997 were 1.16% and
10.37%, respectively, compared to 0.83% and 7.75% for the six
months ended June 30, 1996.
9
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three and Six Month Periods Ending June 30,
1997 and 1996
NET INTEREST INCOME
Net interest income increased to $7.3 million for the quarter
ended June 30, 1997 representing a $691,000 or 10.4% increase
from the $6.6 million of net interest income reported during the
second quarter of 1996. The increase can be attributed to an
improvement in net interest margin (net yield on interest earning
assets) on a fully taxable equivalent basis to 4.41% for the
three months ended June 30, 1997 from 3.92% for the prior year's
quarter. Two factors contributed to this improvement; first, a
shift in the composition of NFC's interest-earning assets to
higher yielding loans and, second, a shift in deposits as a
result of the Bank adopting a more conservative pricing policy
for time deposits over the past 12 months.
Net interest income for the first six months of 1997 was $14.5
million compared to $13.0 million for the first six months of
1996. Net interest margin on a fully taxable basis improved to
4.42% for the six months ended June 30, 1997 from 3.87% for the
comparable six months of 1996. A shift in NFC's interest-earning
assets from investments to higher yielding loans increased the
Bank's yield on interest earnings assets to 8.00% for the six
month period ended June 30, 1997 from 7.74% for the six months
ended June 30, 1996. In addition, as mentioned above, the Bank
adopted a more conservative pricing policy on time deposits over
the past 12 months which caused a shift in the deposit structure
and led to a decrease in the cost of interest-bearing liabilities
to 4.39% for the first six months of 1997 from 4.64% during the
first six months of 1996.
At June 30, 1997, loans represented 72.8% of total earning assets
compared to 66.6% at June 30, 1996. Investments represented
27.2% of total earning assets at June 30, 1997 versus 33.4% at
June 30, 1996.
At June 30, 1997 and 1996, NFC's deposit liabilities were as
follows:
<TABLE>
June 30, 1997 June 30, 1996
<CAPTION>
<S> <C> <C>
Savings and money market 34.3% 33.2%
Demand deposits 13.6 11.4
Time deposits 52.1 55.4
----- -----
100.0% 100.0%
</TABLE>
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. As of June 30, 1997,
NFC's one year ratio of rate sensitive assets to rate sensitive
liabilities was 89.7% compared to 95.8% at June 30, 1996.
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.
10
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three and Six Month Periods Ending June 30,
1997 and 1996
NONPERFORMING ASSETS (NPAs) AND ALLOWANCES AND PROVISIONS FOR
CREDIT LOSSES
At the end of the second quarter of 1997, NPAs, excluding "loans
and foreclosed properties held for sale," were $9.2 million,
which was slightly lower than at the end of the second quarter of
1996 yet was $2.2 million (31.1%) higher than at the end of 1996.
Included in nonperforming assets were nonperforming loans of $7.3
million or 79.8% of nonperforming assets, excluding "loans and
foreclosed properties held for sale," at June 30, 1997 compared
to $8.9 million or 96.5% at June 30, 1996. Foreclosed properties
were $1.9 million at June 30, 1997 compared to $322,000 at June
30, 1996 and represented 20.2% and 3.5%, respectively, of total
nonperforming assets excluding "loans and foreclosed properties
held for sale."
The allowance for loan losses was $13.9 million at both June 30,
1997 and December 31, 1996 and $15.2 million one year ago. The
provision for losses on loans was $200,000 for the second quarter
of 1997 and $400,000 for the first six months of 1997 which is
the same as for the second quarter and first six months of 1996.
NFC's ratio of allowance for loan losses to nonperforming loans,
excluding "loans and foreclosed properties held for sale," was
189.44% as of June 30, 1997 compared to 239.07% at December 31,
1996 and 170.74% at June 30, 1996.
Net charge-offs for the second quarter and first six months of
1997 were $456,000 and $549,000, respectively, compared to
$556,000 and $851,000 for the second quarter and first six months
of 1996. Net charge-offs on loans and foreclosed properties were
as follows:
<TABLE>
Six Months Ended Three Months Ended
June 30, June 30,
(In thousands) 1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
Loans $472 $851 $383 $556
Foreclosed properties 77 0 73 0
---- ---- ---- ----
Total chargeoffs $549 $851 $456 $556
</TABLE>
The bulk of NFC's problem assets and charge-offs have been
concentrated in the commercial real estate and business loan
portfolios. As of June 30, 1997, these two portfolios accounted
for $7.6 million (82.4%) of NPAs compared with $6.6 million
(71.7%) at June 30, 1996. Net charge-offs of commercial real
estate, business loans and related foreclosed properties
represented $226,000 or 41.2% of NFC's total net charge-offs for
the first six months of 1997 compared to $457,000 or 53.7% for
the first six months of 1996.
11
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three and Six moth Periods Ending June 30,
1997 and 1996
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 charge-
offs of existing nonperforming assets. Management monitors the
adequacy of the allowance for losses on loans and foreclosed
properties on a continual basis. Management believes the allowance
for losses on loans and foreclosed properties is adequate. While
management uses available information to recognize losses on loans
and foreclosed properties, future additions to the allowance and
additional write-downs may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Bank's allowance for losses on loans and valuation of
foreclosed properties. Such agencies may require the Bank to
recognize additions to the allowance or additional write-downs
based on their judgment of information available to them at the
time of their examination.
NONINTEREST INCOME
Noninterest income for the current quarter amounted to $1.1
million compared to $947,000 for the year-earlier quarter.
Service fees, primarily deposit service fees, contributed to the
increase in noninterest income. Service fees were $944,000 for
the second quarter of 1997 compared to $755,000 during the second
quarter of 1996, an increase of $189,000 (25.0%). This increase
resulted both from increased account activity and a change in the
Company's deposit fee structure in the second half of 1996.
Gains on the sale of loans were $62,000 for the second quarter of
1997 compared to a loss of $45,000 for the second quarter of 1996
(a $107,000 increase in noninterest income) which was completely
offset by a decrease in securities gains to $93,000 for the
current quarter from $206,000 during the year-earlier quarter.
For the six months ended June 30, 1997 noninterest income was
$2.0 million compared to $1.8 million during the same period of
1996. Consistent with the quarterly trend, the increase is
primarily attributable to additional service fee income. Service
fees were $1.8 million for the first six months of 1997 compared
to $1.6 million for the first six months of 1996, an increase of
$213,000. Gains on the sale of loans were $86,000 for the first
six months of 1997 compared to a loss of $47,000 for the
comparable period of 1996 (a $133,000 increase in noninterest
income). This increase was substantially offset by a decrease in
securities gains to $124,000 for the first six months of 1997
from $209,000 during the year-earlier period.
NONINTEREST EXPENSE
Noninterest expense was $4.9 million for the second quarter of
1997 compared to $4.7 million for the second quarter of 1996.
The increase of $198,000 is primarily attributable to an increase
in the provision for losses on foreclosed properties ($73,000)
and an increase in the other nonperforming asset expenses
($109,000). The increase in other nonperforming asset expenses
in the second quarter of 1997 is due to lower gains on sales of
assets in 1997 versus the second quarter of 1996. During the
second quarter of 1997, gains of $2,000 were recognized on sales
of nonperforming loans and foreclosed properties compared with
$141,000 in the second quarter of 1996.
12
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three and Six Month Periods Ending June 30,
1997 and 1996
Noninterest expense was $9.3 million for the six months ended
June 30, 1997 as well as for the six months ended June 30, 1996.
During these comparable periods, increases were noted in the
provision for losses on foreclosed properties ($77,000) as well
as other nonperforming asset expenses ($182,000). The increase in
other nonperforming asset expenses in the first six months of
1997 is due to lower gains on sales of assets in 1997 versus the
comparable period of 1996. During the first six months of 1997,
gains of $30,000 were recognized on sales of nonperforming loans
and foreclosed properties compared with $326,000 in the first six
months of 1996. Offsetting these increases were decreases in
salaries and employee benefits, net occupancy costs and other
operating expenses for the six months ended June 30, 1997
compared to the six months ended June 30, 1996. Included in
other operating expenses are costs such as supplies and printing,
postage and express mail, and consulting fees. The decrease in
salaries and employee benefits, net occupancy costs and other
operating expenses, is due to the successful completion and
integration of The Bank of Southeastern Connecticut branches into
The Norwich Savings Society franchise during 1996 and the sale of
a branch office in the third quarter of 1996.
INCOME TAXES
The effective tax rate for the second quarter and first six
months of 1997 was 41%, down slightly from 44% for the same
periods in 1996. The $507,000 increase in income taxes to $2.8
million for the six months ended June 30, 1997 is substantially
attributable to a higher level of taxable income.
CHANGES IN FINANCIAL CONDITION
The increase in total assets from December 31, 1996 is due
primarily to the acquisition of two First Union branch offices
during the first quarter of 1997. This acquisition added
approximately $25.5 million in assets, including the excess cost
over net assets acquired.
Total liabilities were $633.1 million at June 30, 1997, an
increase of $26.3 million from $606.8 million at December 31,
1996. The increase is due primarily to the First Union
transaction which added approximately $25.5 million in deposits
on March 7, 1997.
Stockholders' equity was $79.6 million at June 30, 1997, an
increase of $3.1 million from $76.5 million at December 31, 1996.
At June 30, 1997, NFC's equity represented 11.17% of total assets
compared to 11.20% at December 31, 1996 and 10.02% at June 30,
1996. Book value per share was $14.70 at June 30, 1997 compared
to $14.17 at December 31, 1996 and $13.59 at June 30, 1996.
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 June 30, 1997. The leverage capital ratio was
10.15% and total risk based capital was 14.35% compared to 9.19%
and 15.02%, respectively, at June 30, 1996. Capital ratios
remain well above minimum regulatory requirements of 4% for
leverage capital and 8% for total risk-based capital.
13
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three and Six Month Periods Ending June 30,
1997 and 1996
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 June 30, 1997, liquid assets were $99.4
million or 13.9% of total assets compared to $129.4 million and
17.7% as of June 30, 1996.
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 First Union acquisition, total deposits, including
mortgage escrow, showed growth of $21.2 million during the first
six months of 1997.
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.
14
<PAGE>
<TABLE>
Exhibit A
NORWICH FINANCIAL CORP. AND SUBSIDIARY
Consolidated Financial Results
Six Months Ended Three Months Ended
(In thousands, June 30, June 30,
(except share data) 1997 1996 1997 1996
<CAPTION>
<S> <C> <C> <C> <C>
EARNINGS
Interest income $26,075 $26,058 $13,217 $13,090
Interest expense 11,614 13,015 5,892 6,456
Net interest income 14,461 13,043 7,325 6,634
Net income 3,982 2,922 1,965 1,514
Fully diluted earnings
per share 0.71 0.51 0.35 0.27
Weighted average common
shares outstanding,
including common
stock equivalents 5,623,098 5,703,486 5,626,991 5,633,577
RATIOS (annualized)
Return on average
assets 1.16% 0.83% 1.12% 0.85%
Return on average
stockholders' equity 10.37 7.75 10.09 8.26
Average stockholders'
equity to average
assets 11.22 10.71 11.12 10.32
YIELD DATA
(taxable equivalent -
annualized)
Net interest margin 4.42% 3.87% 4.41% 3.92%
Net interest spread 3.61 3.10 3.59 3.16
Asset yields
Loans 8.69 8.70 8.66 8.72
Investments 5.99 5.81 6.02 5.75
Earning assets 8.00 7.74 7.97 7.75
Cost of funds
Deposits 4.34 4.58 4.33 4.52
FHLB advances 6.40 6.47 6.40 6.79
Interest bearing
liabilities 4.39 4.64 4.38 4.59
June 30, December 31,
1997 1996 1996
OUTSTANDING BALANCES
Total assets $712,699 $731,193 $683,299
Net loans 475,535 443,861 463,183
Deposits 606,092 616,801 585,080
FHLB advances 17,887 16,368 11,928
Stockholders' equity 79,579 73,269 76,498
Stockholders' equity to
total assets 11.17% 10.02% 11.20%
Book value per share $14.70 $13.59 $14.17
Shares of common stock 5,413,041 5,392,191 5,399,641
</TABLE>
15
<PAGE>
<TABLE>
Exhibit B
NORWICH FINANCIAL CORP. AND SUBSIDIARY
Nonperforming Assets Summary
June 30, December 31,
(Dollars in thousands) 1997 1996 1996
<CAPTION>
<S> <C> <C> <C>
Nonperforming loans
Residential real estate $1,328 $ 2,084 $ 1,476
Commercial real estate
Permanent 3,584 3,996 2,932
Land and construction 1,492 224 114
Commercial 789 2,163 1,176
Consumer 121 449 128
----- ----- -----
Total nonperforming loans 7,314 8,916 5,826
----- ----- -----
Foreclosed properties 1,855 322 1,167
------ ----- -----
Total nonperforming assets
before nonperforming assets
held for sale 9,169 9,238 6,993
Nonperforming assets
held for sale
Loans on nonaccrual 0 1,073 0
Foreclosed properties 0 1,340 0
------ ----- ------
Total nonperforming assets
held for sale 0 2,413 0
------ ------- ------
Total nonperforming assets $9,169 $11,651 $6,993
====== ======= ======
Performing restructured loans $2,356 $ 888 $ 532
====== ======= ======
</TABLE>
Summary of Impaired Loans
At June 30, 1997, all loans classified as nonperforming in the
above table, as well as performing restructured loans of $2.4
million, are classified as impaired. Impaired loans of $9.7
million as of June 30, 1997 had an associated allowance for
losses of $1.5 million.
<TABLE>
June 30, December 31,
(Dollars in thousands) 1997 1996 1996
<CAPTION>
<S> <C> <C> <C>
Net charge-offs year to date $ 549 $ 851 $ 3,164
Net charge-offs to average
loans and foreclosed
properties
For the period 0.11% 0.19% 0.69%
Annualized 0.23% 0.38% (a)
Allowances for losses
On loans $13,856 $15,223 $13,928
On foreclosed properties 0 0 0
------- ------- -------
Combined $13,856 $15,223 $13,928
======= ======= =======
Ratios (exclusive of
nonperforming assets
held for sale)
Allowance for loan losses to
nonperforming loans 189.44% 170.74% 239.07%
Combined allowances for
losses to:
Total nonperforming
assets 151.12 164.79 199.17
Total loans and foreclosed
properties 2.81 3.31 2.91
Total nonperforming assets to:
Total loans and
foreclosed properties 1.86 2.01 1.46
Total assets 1.29% 1.26% 1.02%
(a) Not Applicable
</TABLE>
16
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
For the Quarter and Six Months Ended June 30, 1997
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - not applicable
Item 2. Changes in Securities - not applicable
Item 3. Defaults upon Senior Securities - not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
At the Annual Meeting of Stockholders, held May 16, 1997, two
matters were submitted to a vote: the election of three
directors and the ratification of the appointment of KPMG Peat
Marwick LLP as independent public accountants for the fiscal
year ending December 31, 1997. Following are the results of
the tabulation of the voting on these matters.
Withheld/
For Against Abstentions
Election of Directors
Daniel R. Dennis, Jr. 4,753,344 0 112,762
Anthony P. Halsey 4,753,344 0 112,762
Jeremiah J. Lowney, Jr. 4,752,114 0 113,992
Ratification of
Public Accountant 4,704,742 135,304 26,060
Item 5. Other Information - not applicable
Item 6. Exhibits and Reports on Form 8-K
(a)The following Exhibit is filed herewith:
Exhibit 27 - Financial Data Schedule
(b)Reports on Form 8-K - not applicable
17
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
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: August 14, 1997 /s/ Daniel R. Dennis, Jr.
Daniel R. Dennis, Jr.
Chairman, President,
Chief Executive Officer
and Director
Date: August 14, 1997 /s/ Michael J. Hartl
Michael J. Hartl
Executive Vice President,
Treasurer, Chief Financial
Officer and Director
Date: August 14, 1997 /s/ Lori J. Ferro
Lori J. Ferro
Vice President and Controller
18
<PAGE>
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 22,236
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 104,789
<INVESTMENTS-CARRYING> 66,287
<INVESTMENTS-MARKET> 66,278
<LOANS> 489,391
<ALLOWANCE> 13,856
<TOTAL-ASSETS> 712,699
<DEPOSITS> 606,092
<SHORT-TERM> 6,000
<LIABILITIES-OTHER> 5,287
<LONG-TERM> 11,887
0
0
<COMMON> 60
<OTHER-SE> 79,519
<TOTAL-LIABILITIES-AND-EQUITY> 712,699
<INTEREST-LOAN> 21,043
<INTEREST-INVEST> 5,032
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,075
<INTEREST-DEPOSIT> 11,231
<INTEREST-EXPENSE> 11,614
<INTEREST-INCOME-NET> 14,461
<LOAN-LOSSES> 400
<SECURITIES-GAINS> 124
<EXPENSE-OTHER> 9,298
<INCOME-PRETAX> 6,745
<INCOME-PRE-EXTRAORDINARY> 6,745
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,982
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 4.42
<LOANS-NON> 7,314
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,356
<LOANS-PROBLEM> 1,278
<ALLOWANCE-OPEN> 13,928
<CHARGE-OFFS> 727
<RECOVERIES> 255
<ALLOWANCE-CLOSE> 13,856
<ALLOWANCE-DOMESTIC> 13,856
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
