NORWICH FINANCIAL CORP. AND SUBSIDIARY
Contents
1 Stockholder Information
4 President's Letter to
Stockholders
6 Five Year Selected Consolidated
Financial Data
7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations
19 Independent Auditors' Report
20 Consolidated Balance Sheets
21 Consolidated Statements of
Income
51 Form 10-K
73 Directors and Officers of the
Company and Subsidiary
74 Office Locations
Cover Painting by: Merrill Park Keeley
Stockholder Information
Corporate Headquarters
Norwich Financial Corp.
4 Broadway
P.O. Box 1048
Norwich, CT 06360
Telephone: (860) 889-2621
Stock Listing
NASDAQ Symbol: NSSB
Transfer Agent/Registrar
ChaseMellon Shareholder Services,
L.L.C.
One Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
Telephone: (800) 298-6803
Independent Public
Accountants
KPMG Peat Marwick LLP
CityPlace II
Hartford, CT 06103
Annual Meeting
The Annual Meeting of Stockholders
of Norwich Financial Corp. will be
held on May 16, 1997 at 10:00 AM
at the
Ramada Hotel
10 Laura Boulevard
Norwich, CT 06360
Stockholder Information
If you have any questions or
comments concerning Norwich
Financial Corp., or if you would
like copies of any financial
reports, please contact:
Investor Relations
Norwich Financial Corp.
P.O. Box 1048
Norwich, CT 06360
Telephone: (860) 889-2621 Ext. 2246
Common Stock Information
Market Information
Norwich Financial Corp. (NFC or
the Company) is listed as "NSSB"
on the National Market System.
There were 2,105 stockholders of
record on January 31, 1997. The
following information is pro-
vided by the National Associa-
tion of Securities Dealers, Inc.
Price Range
1996 Quarter Ended High Low
March 31 $14 3/4 $12 9/16
June 30 15 1/2 12 3/8
September 30 18 14
December 31 20 3/4 17 1/4
Price Range
1995 Quarter Ended High Low
March 31 $11 1/4 $ 9 1/2
June 30 12 10 1/2
September 30 15 1/2 11 1/4
December 31 15 12 1/4
Dividends
The NFC Board of Directors
increased the regular quarterly
dividend from $.10 to $.12 on
July 24, 1996. The Board may
authorize the payment of special
dividends in the future if
warranted by NFC's earnings and
performance. However, there can
be no assurances that NFC's
Board will authorize the payment
of special dividends in the
future or that regular quarterly
dividends will continue.
The following table illustrates dividends
that were declared:
Date Declared Date Payable Amount
September 21, 1994 October 18, 1994 $.05
October 24, 1994 November 23, 1994 .08
January 20, 1995 February 15, 1995 .08
January 20, 1995 February 15, 1995 .15*
April 19, 1995 May 17, 1995 .08
July 26, 1995 August 23, 1995 .10
October 20, 1995 November 17, 1995 .10
January 24, 1996 February 21, 1996 .10
January 24, 1996 February 21, 1996 .15*
April 24, 1996 May 22, 1996 .10
July 24, 1996 August 21, 1996 .12
October 23, 1996 November 20, 1996 .12
January 14, 1997 February 11, 1997 .12
January 14, 1997 February 11, 1997 .10*
* Denotes special dividends declared by the NFC Board of
Directors
Page 2 Graph - Primary Earnings Per Share
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Primary earnings per share $1.18 $1.00 $ .72 $ .37 $ .27
</TABLE>
Page 2 Graph - Return on Average Assets
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Return on average assets .95% .87% .65% .35% .24%
</TABLE>
Page 2 Graph - Return on Average Equity
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Return on average equity 8.91% 7.59% 5.62% 2.94% 2.20%
</TABLE>
Page 3 Graph - Total Loans (in Millions)
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total loans (in millions) $477.1 $415.2 $347.2 $335.5 $338.8
</TABLE>
Page 3 Graph - Total Deposits (in Millions)
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total deposits (in millions) $585.1 $567.8 $485.4 $482.2 $484.3
</TABLE>
Page 3 Graph - Book Value Per Share
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Book value per share $14.17 $13.58 $12.71 $12.66 $12.62
</TABLE>
Page 3 Graph - Nonperforming Assets to Total Assets
<TABLE>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonperforming assets to total assets 1.02% 1.39% 1.67% 4.34% 7.37%
</TABLE>
Page 3 Graph - Total Allowance for Losses to Total Nonperforming Assets
<TABLE>
1996 1995 1994 1992 1992
<S> <C> <C> <C> <C> <C>
Total allowance for losses to
total nonperforming assets 199.17% 140.43% 93.27% 42.37% 34.82%
</TABLE>
Dear Fellow Stockholders:
We are pleased to announce that 1996 was an excellent year for
Norwich Financial Corp. with record earnings and net income for the
year of $6,651,000, or $1.17 per share. When compared to net income
of $5,473,000 or $0.97 for the year ended December 31, 1995, these
improved earnings represent an increase of over 21% from 1995. In
recognition of these increased earnings, The Board of Directors
declared a special cash dividend of $.10 per share to stockholders
of record as of January 28, 1997 as well as a regular quarterly cash
dividend of $.12 per share. Among the factors contributing to our
robust results was an improving regional economic environment which
resulted in growth in the Company's loan portfolio and a year-over-
year increase in our earning assets related to our acquisition of
The Bank of Southeastern Connecticut. Other factors impacting our
results included management's commitment to lower funding costs
while maintaining a competitive deposit rate structure, to increase
fee income as well as to significantly reduce nonperforming assets,
and to control operating expenses.
We completed eighteen months of expansion which included enlarging
our market area in Mystic through the acquisition of The Bank of
Mystic, Inc. in 1995, extending our boundaries into Waterford and
East Lyme through the acquisition of The Bank of Southeastern
Connecticut and adding a de novo branch in New London. We spent
1996 building our customer base and establishing our presence in
those communities, further enhancing our ability to serve the
banking needs of area retail and business customers. In an era of
ever expanding regional banking giants, we have worked diligently to
foster a friendly, service oriented community bank environment,
reinforced by technological advances such as a network of
conveniently located and accessible ATMs. The Bank's management
team has determined that the right balance of service and technology
is what sets us apart from the competition and therefore strives to
develop strategies for controlled growth while maintaining a level
of service second to none in the area. We also recognize the need
to control costs and improve productivity throughout the
organization if we are to improve our profitability. In conjunction
with those broad goals, task forces comprised of seasoned bank
employees and professional consultants have and are continuing to
work in coalition with senior management to improve the efficiency
and cost effectiveness of our operation.
Over the last several years, in an effort to recover from the
industry wide loan losses incurred in the late eighties and early
nineties, a major thrust has been to accelerate the disposition of
selected nonperforming loans. I am pleased to report that great
strides have been made in this area including the sale of $2 million
of nonperforming loans in the fourth quarter, which reduced the
level of total nonperforming assets to approximately $7.0 million at
December 31, 1996.
Noninterest income, primarily derived from securities gains as
well as retail and commercial deposit service fees, increased by
more than 32% from $2.9 million in 1995 to $3.9 million at year
end 1996. The improvement in fee income is in part attributable
to the Bank's cross selling efforts at the branch level in
addition to diligence exercised in monitoring and collecting fees
for commercial and retail services rendered throughout the organ-
ization.
Located in a region undergoing a renewal in economic growth, the
Bank is strategically positioned between two thriving casinos, the
Mashantucket Pequot Foxwoods Resort Casino in Ledyard and the
recently opened Mohegan Sun Resort in Uncasville. Dependent upon
an economy that for decades was anchored almost exclusively by
defense oriented industries with Electric Boat as the most
significant player, but which is now retooling as a result of
defense downsizing, the recent emphasis on gaming and tourism has
provided the stimulus needed to transition our economy. Tourism
will continue to expand with new ventures such as a Six Flags Park
proposed location in North Stonington, in addition to the draw of
such proven attractions as Mystic Marinelife Aquarium and Mystic
Seaport. That segment of the economy attributable to the defense
industry still remains highly viable although it continues to
downsize to a lower level than a decade ago. With a concentration
of highly educated and skilled workers, unemployment levels have
remained consistently in the 5% or lower range even as the region
has responded to the shift in direction.
Our management team is encouraged by the expanding economy and
feels that the ensuing opportunities for measured growth mesh well
with our strategic plan which includes increasing our market share
through acquisitions of existing retail banking outlets which
complement our profile. In keeping with that goal, the Bank will
complete its acquisition of two First Union branches in early
March whose customer base and deposits will be merged with and
into our Groton and New London branch offices, thereby expanding
our market share in those two communities. Also a critical
component to both our short term and long range planning is our
commitment to improving efficiency in addition to ensuring that
serving our customers is always the major focus of our business,
and that we serve them with competitive pricing of both deposit
and loan products and superior service through our branch and ATM
outlets. Early in 1997 we launched our Customer Service Center
which provides customers with direct access to a team of highly
trained customer service representatives. In addition to
responding to customer questions and issues expeditiously, these
representatives also focus on expanding those customer
relationships.
We look forward to 1997 with optimism for the eastern Connecticut
region and with confidence that The Norwich Savings Society will
be a major player as we fulfill our corporate commitment to
operate in a financially sound and prudent manner while
maintaining a strong capital position and striving to maintain a
high level of profitability in addition to a favorable return to
you, our stockholders. We will continue to work diligently to not
only meet but surpass your expectations as stockholders both
responsibly and profitably. We appreciate your ongoing confidence
and support.
/s/ Danield R. Dennis, Jr.
Daniel R. Dennis, Jr.
Chairman, President and Chief Executive Officer
<TABLE>
Selected Consolidated Financial Data
(Dollars in thousands,
except share data) 1996(a) 1995(b) 1994 1993 1992
<CAPTION>
<S> <C> <C> <C> <C> <C>
OPERATING HIGHLIGHTS FOR
THE YEAR
Interest and dividend
income $52,289 $47,139 $37,784 $36,828 $43,187
Interest expense 25,342 22,797 17,477 19,045 25,731
Net interest income 26,947 24,342 20,307 17,783 17,456
Loan loss provision
(recovery) 1,400 5,500 3,370 - (426)
Net securities gains 366 86 290 1,140 1,138
Service fee and other non-
interest income 3,501 2,824 2,225 2,209 1,914
Noninterest expenses 18,136 16,379 18,631 18,159 19,299
Income before income taxes,
extraordinary item and
cumulative effect of
changes in accounting
principles 11,278 5,373 821 2,973 1,635
Income tax provision
(benefit) 4,627 (100) (2,926) 1,040 818
Income before extraordinary
item and cumulative effect
of changes in accounting
principles 6,651 5,473 3,747 1,933 817
Extraordinary item -
tax loss carryforward - - - - 614
Income before cumulative
effect of changes in
accounting principles 6,651 5,473 3,747 1,933 1,431
Cumulative effect of
changes in accounting
principles - - - 22 -
Net income $ 6,651 $5,473 $ 3,747 $ 1,955 $1,431
PER SHARE DATA
Income before extraordinary
item and cumulative effect
of accounting changes $ 1.18 $ 1.00 $ .72 $ .37 $ .15
Primary earnings 1.18 1.00 .72 .37 .27
Fully diluted earnings 1.17 .97 .71 .37 .27
Cash dividends declared .59 .51 .13 .35 -
Book value $ 14.17 $ 13.58 $ 12.71 $ 12.66 $ 12.62
BALANCE SHEET HIGHLIGHTS
AT YEAR END
Total assets $683,299 $675,322 $593,665 $580,230 $570,569
Total loans 477,111 415,241 347,241 335,509 338,803
Allowance for loan
losses (13,928) (13,168) (8,654) (9,689) (12,343)
Net loans 463,183 402,073 338,587 325,820 326,460
Total investment securities 171,710 228,040 217,978 203,762 188,488
Deposits, excluding escrow 585,080 567,783 485,372 482,209 484,344
Borrowed funds 11,928 22,400 36,400 24,400 15,365
Stockholders' equity $ 76,498 $ 76,020 $ 65,534 $ 65,578 $ 65,773
NONPERFORMING ASSETS AT
YEAR END
Nonperforming assets,
exclusive of nonperforming
assets held for sale $ 6,993 $ 9,377 $ 9,901 $ 25,158 $ 42,079
Nonperforming assets to
total assets 1.02% 1.39% 1.67% 4.34% 7.37%
SELECTED RATIOS
Return on average assets 0.95% 0.87% 0.65% 0.35% 0.24%
Return on average equity 8.91 7.59 5.62 2.94 2.20
Average equity to average
assets 10.64 11.46 11.56 11.82 11.04
Net interest rate
spread (c) 3.25 3.29 3.11 2.77 2.47
Net interest margin (c) 4.04 4.04 3.68 3.33 3.11
Dividend payout ratio 50.00 51.00 18.06 94.59 -
</TABLE>
(a) The financial information reflects the acquisition of Seconn Holding
Company on January 2, 1996.
(b) The financial information reflects the acquisition of The Bank of
Mystic, Inc. on April 1, 1995.
(c) Fully taxable equivalent basis.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis presents a review of
Norwich Financial Corp.'s consolidated financial condition and
results of operations. This review should be read in conjunction
with the selected consolidated financial statements and other
financial data presented elsewhere herein.
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.
Summary
The Company reported net income for 1996 of $6.7 million
compared to net income of $5.5 million for 1995 and $3.7 million
for 1994. Fully diluted earnings per share were $1.17 for 1996,
$.97 for 1995 and $.71 for 1994.
Return on average assets and return on average equity improved
to .95% and 8.91%, respectively, in 1996 from .87% and 7.59% in
1995. Return on average assets and return on average equity were
.65% and 5.62% in 1994.
Page 7 Graph - Net Income (in Millions)
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Net income (in millions) $6.7 $5.5 $3.7
</TABLE>
Page 7 Graph - Return on Average Assets
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Return on average assets .95% .87% .65%
</TABLE>
Page 7 Graph - Return on Average Equity
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Return on average equity 8.91% 7.59% 5.62%
</TABLE>
Core earnings for 1996 were $12.0 million compared to $10.7
million for 1995 and $7.2 million for 1994. The 1996 core
earnings represent an 11.9% increase over the 1995 results. The
$1.3 million increase in core earnings in 1996 was due primarily
to a $2.6 million increase in net interest income attributable to
an 11.0% increase in average earning assets. 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, which added approximately $44.0 million in earning assets
as of the acquisition date. The Company defines core earnings as
net interest income plus service fee income, less noninterest
expenses other than provision for losses on foreclosed
properties.
Net interest income totaled $26.9 million for 1996 compared to
$24.3 million for 1995 and $20.3 million for 1994. The net
interest margin on a fully taxable equivalent basis was 4.04% for
1996 and 1995 and 3.68% for 1994.
NFC recorded combined provisions for loan losses and losses on
foreclosed properties of $1.4 million in 1996 compared to $5.6
million in 1995 and $6.5 million in 1994. A portion of these
provisions was necessary to facilitate the Company's strategy to
accelerate the disposition of selected nonperforming loans and
foreclosed properties. See discussion under "Nonperforming
Assets and Allowances for Losses."
Noninterest income totaled $3.9 million for 1996 compared to
$2.9 million for 1995 and $2.5 million for 1994. Net pretax
securities gains included in noninterest income totaled $366,000
in 1996, $86,000 in 1995 and $290,000 in 1994. Service fees and
other noninterest income amounted to $3.5 million, $2.8 million
and $2.2 million, respectively for 1996, 1995 and 1994.
Noninterest expenses totaled $18.1 million for 1996 compared to
$16.4 million for 1995 and $18.6 million for 1994. Noninterest
expenses, excluding the provision for losses on foreclosed
properties, totaled $18.1 million for 1996 compared to $16.3
million for 1995 and $15.5 million for 1994. The increase in
total noninterest expense is primarily due to the expansion of
the Company's eastern Connecticut banking franchise which
included the acquisition of The Bank of Southeastern Connecticut
in 1996, the acquisition of The Bank of Mystic, Inc. in 1995, and
the addition of de novo branches in Waterford and New London in
1995 and 1996, respectively. These increases were offset by
reduced spending on advertising and promotions, a reduction in
the federal deposit insurance (FDIC) assessment and gains
recognized on nonperforming loans and foreclosed properties held
for sale.
NFC recorded an income tax provision of $4.6 million for 1996
reflecting federal and state income tax expense at an effective
rate of approximately 41.0%. During 1995, the Company recorded a
tax benefit of $100,000 resulting from a reduction in the
valuation allowance associated with the Company's deferred tax
asset. NFC recorded a similar tax benefit in 1994 amounting to
$3.0 million, which also represented a reduction in the valuation
allowance associated with the Company's deferred tax asset.
Future earnings are anticipated to reflect federal and state
income tax expense at an effective rate of approximately 41.0%.
See discussion under "Income Taxes."
Norwich Financial Corp. maintained its strong capital position
during 1996. NFC's equity-to-asset ratio was 11.20% at December
31, 1996 compared to 11.26% at December 31, 1995 and 11.04% at
December 31, 1994. The Company's leverage capital ratio was
10.32% and its total risk-based capital ratio was 15.12% at
December 31, 1996. At December 31, 1995 these ratios were 10.78%
and 18.07%, respectively, and at December 31, 1994 they were
11.03% and 20.07%, respectively. Both measures of capital
continue to be well above regulatory requirements. Book value
per share was $14.17 at December 31, 1996 compared to $13.58 at
December 31, 1995 and $12.71 at December 31, 1994.
Total assets at the end of 1996 were $683.3 million compared to
$675.3 million and $593.7 million at December 31, 1995 and 1994,
respectively.
On January 2, 1996, NFC completed its acquisition of Seconn
Holding Company (Seconn), the holding company for The Bank of
Southeastern Connecticut. Under the terms of the acquisition,
The Bank of Southeastern Connecticut was merged with and into the
Bank. Consideration was in the form of $6.00 in cash for each
share of stock of Seconn. The total purchase price paid to
selling shareholders was approximately $4.7 million. As of the
acquisition date, The Bank of Southeastern Connecticut had total
loans (net of allowance for loan losses) of approximately $28.9
million, total assets of $47.0 million and total deposits of
$44.4 million.
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 as
other noninterest income in 1996.
During 1996, the Bank entered into an agreement to acquire two
branch offices of First Union Bank of Connecticut (First Union).
The transaction is expected to close in the first quarter of 1997
and will include the merger of those First Union branches with
the Bank's existing offices in New London and Groton and the
transfer of approximately $25.0 million in deposits and $1.0
million in loans.
Net Interest Income
The Company's asset yields remained constant while the cost of
funds increased slightly during 1996 from year-earlier levels.
Asset yields and cost of funds increased during 1995 after
declining during 1994. Average interest-earning assets increased
more than average interest-bearing liabilities resulting in a net
interest margin of 4.04% for 1996, which is consistent with 1995
and higher than the 1994 net interest margin of 3.68%. Asset
yields increased more than deposit interest costs during 1995
resulting in an improvement in NFC's net yield on interest-
earning assets (net interest margin). The rate of return on
earning assets on a fully taxable equivalent basis was 7.82% in
1996 and in 1995 compared to 6.84% in 1994. The Company's
overall cost of interest-bearing liabilities increased to 4.57%
in 1996 from 4.53% in 1995 and 3.73% in 1994.
NFC's net interest spread decreased to 3.25% in 1996 after
increasing to 3.29% in 1995 from 3.11% in 1994. Net interest
income increased to $26.9 million in 1996 from $24.3 million in
1995 and $20.3 million in 1994. As previously mentioned, the
increase in 1996 net interest income was due to an 11.0% increase
in average earning assets primarily as a result of the
acquisition of The Bank of Southeastern Connecticut on January 2,
1996. The 1996 increase in net interest income is also
attributable to a shift in the Bank's earning assets from
investment securities to higher yielding loans. The increase in
1995 net interest income was due to NFC's higher net interest
margin and a 9.0% increase in average earning assets as The Bank
of Mystic, Inc. was acquired on April 1, 1995. Overall,
nonperforming asset volumes had little effect on the year-over-
year change in net interest income during 1996 and 1995 while
lower nonperforming asset volumes had a favorable effect on the
year-over-year change in net interest income and net interest
rate spread during 1994. Average interest-earning assets were
$669.0 million in 1996 compared with $602.9 million in 1995 and
$553.1 million in 1994.
The composition of NFC's interest-earning assets changed during
1996 as loan portfolio growth was funded with the proceeds of
maturing investment securities. At December 31, 1996, investment
securities comprised 26.5% of total earning assets compared to
35.3% at December 31, 1995 and 38.4% at December 31, 1994. Loans
represented 73.5% of total earning assets at December 31, 1996
versus 64.7% at December 31, 1995 and 61.6% at December 31, 1994
(before allowance for loan losses).
In order to remain competitive in the Bank's market area, both
fixed and variable rate residential mortgages are originated.
The majority of the fixed rate residential mortgages that the
Bank originates conform to secondary market specifications and
are originated with the intent of selling them in the secondary
market. Non-conforming fixed rate mortgages and most variable
rate mortgages remain in the Bank's portfolio. In 1996, the
Company sold $25.6 million of residential mortgage loans for cash
compared with $12.7 million in 1995 and $21.0 million in 1994.
Management expects to continue to originate mortgage loans for
sale during 1997. The Company has retained servicing on
substantially all residential mortgage loans securitized or sold
for cash. At December 31, 1996, the current principal balance of
the Company's serviced loan portfolio was $157.3 million compared
to $147.9 million at December 31, 1995 and $143.4 million at
December 31, 1994. The Company adopted the provisions of SFAS
No. 122 "Accounting for Mortgage Servicing Rights" prospectively
on January 1, 1996. The adoption of SFAS No. 122 did not have a
material impact on the Company's financial statements. During
1996, mortgage servicing rights of $243,000 were recorded. See
Note 2 of "Notes to Consolidated Financial Statements" for
further information on SFAS No. 122.
The composition of NFC's deposit liabilities has also changed.
At the end of 1996, time deposits comprised 54.0% of total
deposits, compared to 57.1% at December 31, 1995 and 53.0% at
December 31, 1994. Demand deposits were 11.8% of total deposits
at December 31, 1996 compared to 9.9% and 9.1% at December 31,
1995 and 1994, respectively. Savings, escrow and money market
deposits were 34.2% at December 31, 1996 versus 33.0% at December
31, 1995 and 37.9% at December 31, 1994. The shift in deposits
is a result of the Bank adopting a more conservative pricing
policy for time deposits in the second half of 1996 with the
objective of lowering the Bank's cost of funds and increasing the
Bank's net interest margin. See discussion under "Liquidity."
Borrowed funds at December 31, 1996 were $11.9 million compared
to $22.4 million and $36.4 million at December 31, 1995 and 1994,
respectively. Borrowings are used to supplement deposit growth
in funding earning assets.
<TABLE>
Average Balances and Interest Rates (Fully Taxable Equivalent
Basis)(a)(b)
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Interest Average Average Interest Average Average Interest Average
(Dollars in thousands) Balance(c) (d) Rate Balance(c) (d) Rate Balance(c) (d) Rate
Interest-earning assets
Federal funds sold $ 5,029 $ 268 5.33% $ 8,329 $ 484 5.81% $11,855 $ 463 3.91%
Money market instruments 24,861 1,379 5.55 7,747 456 5.89 - - -
Investment securities
Taxable 76,869 4,276 5.56 105,028 6,279 5.98 98,793 4,265 4.32
Tax advantaged(e) 3,009 121 4.02 208 12 5.77 2,600 85 3.27
Federal Home Loan
Bank stock 3,715 238 6.41 3,535 245 6.93 2,959 230 7.77
Mortgage-backed securities 94,825 5,966 6.29 84,356 5,154 6.11 86,558 4,945 5.71
Mortgage loans(e) 338,106 29,119 8.61 290,242 24,830 8.55 258,890 20,142 7.78
Other loans 122,536 10,969 8.95 103,463 9,694 9.37 91,416 7,693 8.42
668,950 52,336 7.82 602,908 47,154 7.82 553,071 37,823 6.84
Noninterest-earning assets
Cash and due from banks 14,760 11,527 9,584
Premises and equipment 10,658 9,735 9,857
Other assets, net of
allowance for loan losses 7,266 5,037 4,163
32,684 26,299 23,604
$701,634 $629,207 $576,675
Interest-bearing liabilities
Savings and mortgagors
escrow $103,804 $2,445 2.36% $101,853 $2,379 2.34% $100,634 $2,283 2.27%
Money market accounts 97,127 2,746 2.83 83,800 2,341 2.79 89,293 2,001 2.24
Time deposits 337,600 19,119 5.66 303,917 17,319 5.70 255,630 12,021 4.70
538,531 24,310 4.51 489,570 22,039 4.50 445,557 16,305 3.66
Borrowed funds 16,062 1,032 6.43 13,601 758 5.57 22,975 1,172 5.10
554,593 25,342 4.57 503,171 22,797 4.53 468,532 17,477 3.73
Noninterest-bearing
liabilities
Demand deposits 66,603 48,202 37,410
Other 5,818 5,711 4,093
Stockholders' equity 74,620 72,123 66,640
147,041 126,036 108,143
$701,634 $629,207 $576,675
Net interest income before
federal tax equivalent
adjustment 26,994 24,357 20,346
Federal tax equivalent
adjustment (47) (15) (39)
Net interest income $26,947 $24,342 $20,307
Net interest rate spread 3.25% 3.29% 3.11%
Net interest margin 4.04 4.04 3.68
</TABLE>
(a) Fully taxable equivalent income was calculated based on statutory
federal and state tax rates.
(b) Inclusive of loans and foreclosed properties held for sale.
(c) Nonaccrual loans are included in the appropriate category by type
of loan.
(d) Loan fees included in interest income were approximately $398,000,
$417,000 and $430,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
(e) Included in interest income are the following amounts for tax
advantaged investments by asset type:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Investment securities $85,000 $ 9,000 $49,000
Mortgage loans 25,000 34,000 32,000
</TABLE>
The following table sets forth changes in the Company's interest
earned and interest paid resulting from changes in volume and
changes in rates. The changes in interest due to both volume and
rate have been allocated to volume and rate changes in proportion
to the relationship to the absolute dollar amounts of the change
in each:
<TABLE>
Rate/Volume Analysis (Fully Taxable Equivalent Basis)(a)
Years Ended December 31,
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
Due to a Change in Due to a Change in
(Dollars in thousands) Volume Rate Net Volume Rate Net
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interest income
Federal funds sold $(178) $(38) $(216) $(163) $184 $21
Money market instruments 949 (26) 923 456 - 456
Investment securities
Taxable (1,587) (416) (2,003) 284 1,730 2,014
Tax advantaged 114 (5) 109 (112) 39 (73)
Federal Home Loan Bank stock 12 (19) (7) 42 (27) 15
Mortgage-backed securities 656 156 812 (128) 337 209
Mortgage loans 4,114 175 4,289 2,580 2,108 4,688
Other loans 1,725 (450) 1,275 1,078 923 2,001
5,805 (623) 5,182 4,037 5,294 9,331
Interest expense
Savings and mortgagors' escrow 46 20 66 27 69 96
Money market accounts 371 34 405 (129) 469 340
Time deposits 1,922 (122) 1,800 2,492 2,806 5,298
Borrowed funds 148 126 274 (514) 100 (414)
2,487 58 2,545 1,876 3,444 5,320
Net interest income before federal
tax equivalent adjustment 3,318 (681) 2,637 2,161 1,850 4,011
Federal tax equivalent adjustment (32) - (32) 24 - 24
Net interest income $3,286 $(681) $2,605 $2,185 $1,850 $4,035
</TABLE>
(a) Inclusive of loans held for sale.
Rate Sensitivity
The Company's goal is to manage asset and liability positions so
as to moderate the effect of interest rate fluctuations on net
interest income. An interest rate sensitivity (GAP) analysis is
completed quarterly which provides a static analysis of the
repricing characteristics of the entire balance sheet. Because
GAP analysis is only an estimate of NFC's interest rate exposure
at a particular point in time, the Company supplements its GAP
analysis with other measurements of interest rate risk. In
addition, management continually reviews the potential effect
that changes in interest rates could have on the repayment of
rate sensitive assets and funding requirements of rate sensitive
liabilities.
One of NFC's objectives is to maintain the ratio of interest
rate sensitive assets to interest rate sensitive liabilities
within a one-year time frame within a range of 90% to 110%. The
Investment Committee of the Company's Board of Directors (Board)
reviews asset/liability guidelines from time-to-time, including
the target range for the rate sensitivity ratio at one year.
Ratios outside the prescribed range of 90% to 110% are presented
to the Board for approval. As of December 31, 1996, NFC's one-
year ratio of rate sensitive assets to liabilities was 88.7%
compared to 91.5% at December 31, 1995 and 88.2% at December 31,
1994. A ratio below 100% suggests that net interest income would
tend to decrease as interest rates increase, and increase as
rates fall.
In computing interest rate sensitivity, investments are
determined to reprice at the earlier of maturity, the first date
on which a security may be put at par or the next following
contractual repricing date. Adjustable rate loans are included
in the period in which they next reprice. Monthly amortization
and prepayments of mortgage-backed securities, fixed rate
mortgage loans and other consumer installment loans are
determined on the basis of experience and estimates. At December
31, 1996 noncontractual deposits such as demand deposits,
interest-bearing checking, and savings and money market deposits
are 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's
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 $48.3 million at December 31, 1996. It is
believed that the new methodology appropriately reflects the
Company's rate sensitive position. Had the previous methodology
been applied at December 31, 1996, the one year ratio of rate
sensitive assets to liabilities would have been 78.1%. Other
deposit accounts and borrowed funds are determined to reprice at
the earlier of contractual maturity or contractual repricing
date.
NFC's rate sensitivity position as measured by the ratio of
interest rate sensitive assets to interest rate sensitive lia-
bilities within a given time frame reveals only the anticipated
difference in timing, not magnitude, of the repricing of assets
and liabilities. The GAP analysis does not evaluate potential
delays in the repricing of certain assets and liabilities when
market rates change, or changes in spreads between different market
rates. Additionally, the GAP analysis does not measure or evaluate
"pricing margin risk," or the risk that pricing margins will change
adversely over time due to competition or other factors. An ex-
ample of pricing margin risk is the potential for the spread be-
tween deposit rates and investment yields or mortgage rates to
narrow over time due to competitive factors.
<TABLE>
Pricing Maturity or Rate Change by Period
December 31, 1996
Over 1 Over 2
Days Total year to years to Over
(Dollars in thousands) 1 to 30 31 to 180 181 to 365 1 year 2 years 3 years 3 years Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Investments
Federal funds $3,700 $- $- $3,700 $- $- $- $3,700
Money market instruments 13,961 17,808 - 31,769 - - - 31,769
Bonds 11,995 9,800 - 21,795 1,490 - 2,013 25,298
Stocks - - - - - - 6,203 6,203
Mortgage-backed securities 2,991 11,284 21,372 35,647 12,783 12,783 39,812 101,025
Federal Home Loan Bank
stock - 3,715 - 3,715 - - - 3,715
Total investments 32,647 42,607 21,372 96,626 14,273 12,783 48,028 171,710
Loans
Fixed rate
Mortgage
Residential 1,092 5,460 6,553 13,105 13,105 13,105 69,086 108,401
Commercial 903 722 734 2,359 3,280 2,037 10,120 17,796
Commercial 394 417 409 1,220 1,358 1,181 4,345 8,104
Consumer 823 2,076 2,487 5,386 4,985 4,948 26,568 41,887
Total fixed rate 3,212 8,675 10,183 22,070 22,728 21,271 110,119 176,188
Adjustable rate
Mortgage
Residential 8,197 31,610 42,651 82,458 1,553 1,743 5,761 91,515
Commercial 29,553 7,605 8,530 45,688 15,691 34,945 32,934 129,258
Commercial 38,144 - - 38,144 - - - 38,144
Consumer 26,545 3,565 2,638 32,748 1,037 - 3,104 36,889
Total adjustable rate 102,439 42,780 53,819 199,038 18,281 36,688 41,799 295,806
Total loans(a) 105,651 51,455 64,002 221,108 41,009 57,959 151,918 471,994
Total earning assets $138,298 $94,062 $85,374 $317,734 $55,282 $70,742 $199,946 $643,704
Interest-Bearing Liabilities
Demand Deposits $ - $ - $14,182 $14,182 $ - $ - $55,337 $69,519
Savings and money market 73,588 39,959 21,760 135,307 40,553 10,880 11,078 197,818
Time deposits 41,310 102,161 61,735 205,206 41,615 30,043 40,879 317,743
Mortgagors' escrow 3,654 - - 3,654 - - - 3,654
FHLB advances - - - - - - 11,928 11,928
Total interest-bearing
liabilities 118,552 142,120 97,677 358,349 82,168 40,923 119,222 600,662
Noninterest-bearing
liabilities, net - - - - - - 43,042 43,042
$118,552 $142,120 $97,677 $358,349 $82,168 $40,923 $162,264 $643,704
Maturity/rate sensitivity gap 19,746 (48,058) (12,303) (40,615) (26,886) 29,819 37,682
Cumulative gap 19,746 (28,312) (40,615) (67,501) (37,682)
Rate sensitive assets as a % of
rate sensitive liabilities-
cumulative 116.7% 89.1% 88.7% 88.7% 84.7% 92.2%
Cumulative gap as a % of total
assets 2.9 (4.1) (5.9) (5.9) (9.9) (5.5)
</TABLE>
(a) Inclusive of performing loans held for sale in the secondary market
of $172,000 and exclusive of nonaccrual loans of $5.3 million.
Nonperforming Assets and Allowances For Losses
For the year ended December 31, 1996, the Company recorded a
loan loss provision of $1.4 million compared to $5.5 million in
1995 and $3.4 million in 1994. The provision for losses on
foreclosed properties was $18,000 in 1996 compared to $98,000 in
1995 and $3.1 million in 1994. Also, for the 12 months ended
December 31, 1996, NFC charged off $3.1 million of nonperforming
assets (net of recoveries) compared with $3.5 million in 1995 and
$7.9 million in 1994. Net loan charge-offs for the years ended
December 31, 1996, 1995 and 1994 were $3.1 million, $2.8 million
and $4.4 million, respectively. Net charge-offs of foreclosed
properties for the same years were $18,000, $714,000 and $3.5
million, respectively.
Management continues to focus on the reduction of nonperforming
assets in order to reduce noninterest expenses associated with
holding nonperforming loans and foreclosed properties. As such,
during the fourth quarter of 1996 management sold $2.5 million of
loans of which $2.0 million were nonperforming. Proceeds of $1.5
million were received, transaction expenses of $36,000 were
charged to earnings and a loss on the sale of $1.0 million was
charged against the allowance for loan losses to reduce the
carrying value to the sales price.
During 1995, nonperforming loans and foreclosed properties with
a carrying value of $4.5 million were charged down by
approximately $1.7 million. After the write-downs, the remaining
balance of $2.8 million was transferred to "loans and foreclosed
properties held for sale" at December 31, 1995. The majority of
the loans identified for sale were commercial real estate and
residential real estate loans.
During 1994, nonperforming loans and foreclosed properties of
$7.8 million and performing loans of $1.0 million were charged
down by $3.3 million to facilitate their disposition. A portion
of these assets were sold in December 1994 and $1.5 million of
loans and $1.8 million of foreclosed properties were reclassified
as loans and foreclosed properties held for sale. The majority
of the loans identified were commercial real estate and
residential real estate loans. In connection with charging down
the loans and foreclosed properties for losses estimated to be
incurred as a result of the accelerated disposition strategy, an
additional provision of $2.2 million was made to the allowance
for loan losses and an additional provision of $1.1 million was
made to the allowance for losses on foreclosed properties.
During 1996, proceeds from sales of nonperforming loans and
foreclosed properties held for sale of $3.7 million were received
and gains of $615,000 were recognized as an offset to "other
nonperforming asset expenses" in the Company's Consolidated
Statements of Income. During 1995, proceeds from sales of
nonperforming loans and foreclosed properties held for sale of
$1.9 million approximated the carrying value of the respective
assets. At December 31, 1996, the remaining balance of
nonperfoming loans held for sale of $292,000 and foreclosed
properties held for sale of $423,000 were transferred to loans
and foreclosed properties, respectively, at the lower of cost or
fair value. The balance of loans and foreclosed properties held
for sale at December 31, 1996 of $172,000 represents performing
loans held for sale in the secondary market.
Page 14 graph - Nonperforming Assets to Total Assets
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Nonperforming assets to
total assets 1.0% 1.4% 1.7%
</TABLE>
At December 31, 1996, nonperforming assets, exclusive of loans
and foreclosed properties held for sale, amounted to $7.0 million
or 1.0% of total assets compared to $9.4 million or 1.4% of total
assets at December 31, 1995 and $9.9 million or 1.7% of total
assets at December 31, 1994. Nonperforming loans included in
these amounts were $5.8 million, $9.1 million and $8.3 million,
respectively, at December 31, 1996, 1995 and 1994. Nonperforming
loans comprised 83.3% of total nonperforming assets at December
31, 1996 compared to 97.2% at December 31, 1995 and 83.9% at
December 31, 1994.
Foreclosed properties, before the allowance for losses, were
$1.2 million at December 31, 1996, $264,000 at December 31, 1995
and $1.6 million at December 31, 1994. Foreclosed properties
comprised 16.7% of total nonperforming assets at December 31,
1996, 2.8% at December 31, 1995 and 16.1% at December 31, 1994.
Total nonperforming assets, exclusive of "loans and foreclosed
properties held for sale," were reduced by $2.4 million or 25.4%
during 1996 and by $524,000 or 5.3% during 1995. The decline in
nonperforming assets during 1996 resulted primarily from charge-
offs (net of recoveries) of $3.1 million.
The decline in nonperforming assets during 1995 resulted from
charge-offs (net of recoveries) of $3.5 million and transfers to
loans and foreclosed properties held for sale of $2.8 million. The
dollar amount of new credits designated as nonperforming assets
during the year exceeded resolutions of nonperforming assets by
$5.8 million, partially offsetting the above-mentioned charge-offs
and transfers. The $5.8 million net addition to nonperforming
assets before charge-offs and transfers to "loans and foreclosed
properties held for sale" includes $1.4 million in loans
originated by The Bank of Mystic, Inc. prior to the acquisition of
that institution in April, 1995.
The decline in nonperforming assets during 1994 resulted from
charge-offs (net of recoveries) of $7.9 million, transfers to
"loans and foreclosed properties held for sale" of $3.3 million
and the net resolution of $4.1 million in problem assets.
Certain of the Company's existing nonperforming assets have been
partially charged off. The current total of $7.0 million in
nonperforming assets, exclusive of "loans and foreclosed
properties held for sale," is net of approximately $3.4 million in
charge-offs.
Nonperforming asset ratios by portfolio (the ratio of total
nonperforming assets by portfolio to total loans and foreclosed
properties by portfolio, exclusive of nonperforming assets held
for sale) are summarized as follows:
<TABLE>
December 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Residential mortgages 0.88% 0.90% 0.99% 3.29%
Real estate - commercial 2.49 4.14 6.26 13.72
Commercial business 2.80 5.01 4.88 16.14
Consumer 0.18 0.93 0.99 1.65
Total - all portfolios 1.46% 2.25% 2.83% 7.02%
</TABLE>
Combined allowances for losses were $13.9 million at December 31,
1996 compared to $13.2 million at December 31, 1995 and $9.2
million at December 31, 1994. The Company's combined allowances
for losses as a percentage of nonperforming assets excluding those
held for sale were 199.2% at December 31, 1996, 140.4% at December
31, 1995 and 93.3% at December 31, 1994.
The allowance for loan losses was $13.9 million at the end of
1996, $13.2 million at the end of 1995 and $8.7 million at the end
of 1994. The allowance for loan losses was impacted during 1995
by the addition of The Bank of Mystic, Inc. allowance for loan
losses of $1.8 million and again in 1996 with the addition of The
Bank of Southeastern Connecticut allowance for loan losses of $2.5
million. The allowance for loan losses amounted to 239.1% of
nonperforming loans at the end of 1996 as compared to 144.5% and
104.2% at the end of 1995 and 1994, respectively. There was no
allowance for losses on foreclosed properties at December 31, 1996
or 1995 compared to $581,000 at December 31, 1994.
NFC attempts to control asset quality through review processes
that include careful analysis of credit applications, portfolio
diversification, and ongoing internal examination of outstanding
and delinquent loans using both internal personnel and independent
review services.
Management monitors the adequacy of the allowance for losses on
loans and foreclosed properties on a continual basis. Based on
the overall improvement in asset quality and the reduction in
nonperforming assets, 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
Mortgage servicing fees were $639,000 in 1996, net of
amortization of $42,000 relating to mortgage servicing rights,
compared to $667,000 in 1995 and $691,000 in 1994. The average
servicing spread, or servicing fee income as a percentage of
serviced portfolio balance, declined from approximately 0.47% in
1995 to 0.42% in 1996. Servicing spreads on new loans added to
the serviced portfolio in 1996 were lower than spreads on serviced
loans paid off. See discussion under "Net Interest Income."
Other service fee income totaled $2.5 million in 1996 compared to
$2.0 million in 1995 and $1.7 million in 1994. Deposit account
service charges, automated teller machine fees and commercial
servicing charges contributed to the 1996 increase in other
service fee income. These increases resulted both from higher
account activity as the Company's banking franchise expanded and a
change in the Company's deposit fee structure in the second half
of 1996.
Securities gains included in noninterest income totaled $366,000
in 1996, $86,000 in 1995 and $290,000 in 1994. Sales of
securities in 1996 resulted in proceeds of $23.4 million compared
to $20.2 million and $19.5 million in 1995 and 1994, respectively.
Sales were largely the result of the previously mentioned
asset/liability strategies employed by management.
The Company recorded net gains on loans sold or held for sale of
$18,000 in 1996, compared to net losses of $65,000 in 1995 and net
losses of $317,000 in 1994. Other noninterest income amounted to
$362,000 in 1996 compared to $268,000 and $158,000 in 1995 and
1994, respectively. Other noninterest income consists principally
of other nonrecurring income.
Noninterest Expenses
Total noninterest expenses were $18.1 million for 1996 compared
to $16.4 million for 1995 and $18.6 million for 1994. Noninterest
expenses, excluding the previously discussed provision for losses
on foreclosed properties, totaled $18.1 million for 1996 compared
to $16.3 million and $15.5 million for 1995 and 1994,
respectively. The 11.3% increase in noninterest expenses, other
than the provision for losses on foreclosed properties, was
principally the result of higher general operating expenses
partially offset by significant reductions in other nonperforming
asset expenses and the Company's federal deposit insurance (FDIC)
assessment.
Salaries and employee benefits, furniture and equipment,
occupancy expenses, and other operating expenses were higher in
1996 than in 1995 due to NFC's acquisition of The Bank of
Southeastern Connecticut on January 2, the opening of a new branch
in New London, Connecticut in January and the Company's expanded
lending activities. Salaries and employee benefits increased by
$2.0 million or 27.0% in 1996 compared to an increase of $846,000
or 12.8% in 1995 and an increase of $197,000 or 3.1% in 1994.
Furniture and equipment expense increased by $159,000 or 15.0% in
1996 compared to an increase of $31,000 or 3.0% in 1995 and a
decrease of $54,000 or 5.0% in 1994. Net occupancy expense
increased by $589,000 or 32.6% in 1996 compared to an increase of
$378,000 or 26.5% in 1995 and an increase of $41,000 or 3.0% in
1994.
Other nonperforming assets had net income of $90,000 in 1996
compared to net expenses of $474,000 in 1995 and $1.3 million in
1994. The decline in nonperforming asset expenses in 1996 is due
to the recognition of additional gains on sales of assets in 1996
versus 1995. During 1996, gains of $738,000 were recognized on
nonperforming loans and foreclosed properties, which offset
incurred expenses of $648,000. During 1995, the Bank recognized
gains of $134,000 on nonperforming loans and foreclosed properties
which partially offset incurred expenses of $608,000. The decline
in nonperforming asset expenses during 1995 was due primarily to a
reduction in foreclosed properties and other nonperforming assets
held by the Company. Nonperforming asset expenses are a function
of the level and composition of nonperforming assets in each year,
and are comprised of property taxes, legal expenses, insurance,
repair and maintenance, appraisal and consulting fees,
administrative and other costs required to obtain and market
properties acquired, as well as expenses required to pursue
borrowers and guarantors where no specific collateral exists.
The Company's federal deposit insurance (FDIC) assessment was
significantly reduced during the year, resulting in substantially
lower deposit insurance expenses in 1996. FDIC and state
assessments totaled $12,000 in 1996 versus $625,000 and $1.1
million in 1995 and 1994, respectively.
Other operating expenses were $3.3 million in 1996 compared to
$3.0 million and $2.9 million in 1995 and 1994, respectively.
Included in other operating expenses are costs such as supplies
and printing, postage and express mail as well as consulting fees.
The increase during 1995 and 1996 is due to the expansion of the
Company's banking franchise.
Total noninterest expenses, excluding the Company's provision for
losses on foreclosed properties, amounted to 2.58% of average
assets in 1996 compared to 2.59% and 2.69% of average assets in
1995 and 1994, respectively.
Income Taxes
The Company recorded an income tax provision of $4.6 million for
1996 reflecting federal and state income tax expense at an
effective rate of approximately 41%. During 1995, the Company
recorded a tax benefit of $100,000 resulting from the reduction in
the valuation allowance associated with the Company's deferred tax
asset. This reduction in the valuation allowance was the result
of the Company's trend of positive core earnings which caused
management to determine that the future benefit from a significant
amount of the Company's remaining unrecognized deferred tax asset
would more likely than not be realized. Accordingly, NFC reduced
the valuation allowance associated with the deferred tax asset by
$3.1 million in 1995, which offset income tax expense recorded at
statutory rates to produce a net tax benefit of $100,000 for 1995.
NFC recorded a similar tax benefit in 1994 amounting to $3.0
million, which also represented a reduction in the valuation
allowance associated with the Company's deferred tax asset.
At December 31, 1996, the Company's net deferred tax asset was
$5.4 million, which is net of a $175,000 valuation allowance.
Future earnings are anticipated to reflect federal and state
income tax expense at an effective rate of approximately 41%.
Liquidity
Liquidity is the ability of the Company to meet each maturing
obligation or customer demand for funds. NFC'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. At December 31, 1996, liquid assets were $75.8
million or 11.1% of total assets compared to $143.0 million or
21.2% of total assets at the end of 1995 and $132.4 million or
22.3% of total assets at the end of 1994.
Liquidity is generated by deposit inflows, loan principal 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. During 1996, total loans,
excluding those held for sale, increased $61.9 million, of which
approximately $31.4 million were a result of the acquisition of
The Bank of Southeastern Connecticut on January 2, 1996. As
previously mentioned, the remaining growth in the loan portfolio
during 1996 was funded with the proceeds of maturing investment
securities causing a reduction in liquid assets.
Total deposits, excluding escrow, increased by $17.3 million
during 1996. The increase is due primarily to the Seconn
transaction which added approximately $44.4 million in deposits
offset by the sale of a branch with $10.0 million in deposits.
Deposits also decreased slightly in the second half of 1996 as the
Bank adopted a more conservative pricing policy for time deposits.
This pricing policy contributed to lower funding costs in the
second half of 1996 which led to the 1996 quarter-to-quarter
improvement in net interest margin.
The Bank has classified individual securities into one of two
categories: held to maturity or available for sale. Securities
held to maturity will consist of U.S. Government and agency
obligations as well as money market instruments which the Bank has
the positive intent and ability to hold to maturity. All other
securities held by the Bank are classified as available for sale.
Management classifies securities into each category considering
current and projected liquidity requirements. At December 31,
1996, the Bank classified mortgage-backed securities and other
debt and equity securities with a market value of $111.6 million
(amortized cost of $110.8 million) as available for sale, with the
unrealized gain of $801,000 shown as a component of stockholders'
equity, net of related taxes of $329,000.
Capital Resources
Capital ratios for NFC and the Bank were well in excess of all
applicable regulatory requirements for all periods presented.
Capital requirements and ratios are discussed in the "Summary" to
this discussion and in Note 9 of "Notes to Consolidated Financial
Statements."
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 operations.
KPMG Peat Marwick LLP Logo
Independent Auditors' Report
The Board of Directors and Stockholders
Norwich Financial Corp.:
We have audited the accompanying consolidated balance sheets of
Norwich Financial Corp. and subsidiary (the Company) as of
December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended
December 31, 1996. 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 audits.
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 financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall 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 financial
position of Norwich Financial Corp. and subsidiary as of December
31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Notes 2 and 3 of Notes to Consolidated Financial
Statements, the Company changed its method of accounting for
investments in 1994.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut
January 17, 1997
<TABLE>
Consolidated Balance Sheets
December 31,
(Dollars in thousands, except share data) 1996 1995
<CAPTION>
<S> <C> <C>
Assets
Cash and due from banks $ 19,419 $ 14,600
Federal funds sold 3,700 4,150
Money market instruments, held to maturity
(market value of $31,765 and $15,701 in 1996
and 1995, respectively) 31,769 15,691
Mortgage-backed securities, available for sale
(amortized cost of $100,844 and $93,456
in 1996 and 1995, respectively) 101,025 93,921
Federal Home Loan Bank stock, at cost 3,715 3,715
Other investment securities
Held to maturity (market value of $20,941
and $95,287in 1996 and 1995, respectively) 20,945 95,281
Available for sale (amortized cost of $9,936
and $14,934 in 1996 and 1995, respectively) 10,556 15,282
Loans, net of allowance for loan losses of $13,928
and $13,168 in 1996 and 1995, respectively 463,183 402,073
Loans and foreclosed properties held for sale 172 5,192
Premises and equipment, at cost, less accumulated
depreciation of $8,500 and $8,394 in 1996 and
1995, respectively 6,216 5,910
Accrued income receivable 3,474 3,512
Foreclosed properties 1,167 264
Deferred tax asset, net 5,356 4,718
Other assets 12,602 11,023
Total assets $683,299 $675,332
Liabilities and Stockholders' Equity
Deposits
Demand $ 69,519 $ 56,707
Savings and mortgagors' escrow 101,508 100,736
Money market accounts 99,964 87,785
Time 317,743 325,776
Total deposits 588,734 571,004
FHLB advances 11,928 22,400
Other liabilities 6,139 5,908
Total liabilities $606,801 $599,312
Common stock, $.01 par value; authorized
25,000,000 shares;issued 5,953,881 and
5,886,278 shares in 1996 and 1995, respectively $ 60 $ 59
Additional paid-in capital 58,708 58,030
Retained income 23,869 20,468
Less: Treasury stock, at cost, 554,240 and
288,729 shares in 1996 and 1995, respectively (6,611) (3,074)
Net unrealized gain on securities available for
sale, net of tax benefit 472 537
Total stockholders' equity $ 76,498 $ 76,020
Commitments and contingencies (Note 15)
Total liabilities and stockholders' equity $683,299 $675,332
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
Consolidated Statements of Income
Years Ended December 31,
(Dollars in thousands, except share data) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Interest and dividend income
Federal funds sold $ 268 $ 484 $ 463
Money market instruments 1,379 456 -
Mortgage-backed securities 5,966 5,154 4,945
Other investment securities, including
dividends 4,599 6,533 4,551
Loans, including fees 40,077 34,512 27,825
Total interest and dividend income 52,289 47,139 37,784
Interest expense
Deposits 24,310 22,039 16,305
FHLB advances 1,032 758 1,172
Total interest expense 25,342 22,797 17,477
Net interest income 26,947 24,342 20,307
Loan loss provision 1,400 5,500 3,370
Net interest income after loan loss
provision 25,547 18,842 16,937
Noninterest income
Mortgage servicing fees 639 667 691
Other service fee income 2,482 1,954 1,693
Net securities gains 366 86 290
Gain (loss) on loans sold or held for sale 18 (65) (317)
Other 362 268 158
Total noninterest income 3,867 2,910 2,515
Noninterest expenses
Salaries and employee benefits 9,495 7,477 6,631
Net occupancy 2,394 1,805 1,427
Furniture and equipment 1,219 1,060 1,029
Data processing 682 727 650
Advertising and promotion 469 780 385
Amortization of intangibles 649 291 -
FDIC and state assessments 12 625 1,122
Provision for losses on foreclosed properties 18 98 3,130
Other nonperforming asset (income) expense (90) 474 1,332
Other operating expenses 3,288 3,042 2,925
Total noninterest expenses 18,136 16,379 18,631
Income before income taxes 11,278 5,373 821
Income tax provision (benefit) 4,627 (100) (2,926)
Net income $ 6,651 $ 5,473 $ 3,747
Net income per share
Primary $ 1.18 $ 1.00 $ .72
Fully diluted $ 1.17 $ .97 $ .71
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
Net
Additional Unrealized
(Dollars in thousands, Common Paid-in Retained Treasury (Loss) Gain On
except share data) Stock Capital Income Stock Securities Total
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 58 $56,800 $14,678 $(5,958) $ - $65,578
Net unrealized gain on
securities available for
sale upon implementation
of change in accounting
for debt and equity
securities - - - - 1,304 1,304
Net income - - 3,747 - - 3,747
Dividends on common stock
($.13 per share declared) - - (678) - - (678)
Exercise of stock options - 273 - - - 273
Purchase of treasury stock - - - (668) - (668)
Change in net unrealized
gain/loss on securities
available for sale - - - - (4,022) (4,022)
Balance, December 31, 1994 58 57,073 17,747 (6,626) (2,718) 65,534
Net income - - 5,473 - - 5,473
Dividends on common stock
($.51 per share declared) - - (2,752) - - (2,752)
Exercise of stock options 1 586 - - - 587
Purchase of treasury stock - - - (1,821) - (1,821)
Issuance of treasury stock
for the purchase of The
Bank of Mystic, Inc. - 371 - 5,373 - 5,744
Change in net unrealized
gain/loss on securities
available for sale - - - - 3,255 3,255
Balance, December 31, 1995 59 58,030 20,468 (3,074) 537 76,020
Net Income - - 6,651 - - 6,651
Dividends on common stock
($.59 per share declared) - - (3,250) - - (3,250)
Exercise of stock options 1 678 - 572 - 1,251
Purchase of treasury stock - - - (4,109) - (4,109)
Change in net unrealized
gain/loss on securities
available for sale - - - - (65) (65)
Balance, December 31, 1996 $ 60 $58,708 $23,869 $(6,611) $ 472 $76,498
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,651 $ 5,473 $ 3,747
Adjustments to reconcile net income to
net cash provided by operating activities
Loan loss provision 1,400 5,500 3,370
Provision for losses on foreclosed
properties 18 98 3,130
Depreciation, amortization and accretion (2,956) (3,926) (1,330)
Amortization of intangible 649 291 -
Deferred income tax benefit 1,458 (530) (4,883)
Net gain on sales of securities (366) (86) (290)
(Gain) loss on loans sold or held for sale (18) 65 317
Loans originated for sale (24,736) (12,641) (12,894)
Proceeds from loans sold 25,647 12,689 20,951
Gain on nonperforming loans and foreclosed
properties held for sale (615) - -
Gain on foreclosed properties (65) (26) -
Gain on sale of branch (201) - -
Change in assets and liabilities net of
effect from the purchase of Seconn Holding
Company and The Bank of Mystic, Inc.
Change in accrued income receivable 285 (345) 133
Change in other liabilities (741) 1,848 (15)
Change in other assets (794) 1,459 531
Net cash provided by operating activities 5,616 9,869 12,767
INVESTING ACTIVITIES
Cash acquired net of cash paid for purchase of
Seconn Holding Company 10,387 - -
Cash acquired net of cash paid for purchase of
The Bank of Mystic, Inc. - 8,951 -
Mortgage-backed securities
Available or held for sale
Proceeds
Sales - 10,245 11,037
Maturities and repayments 17,483 11,851 31,955
Purchases (24,979) (34,305) (30,212)
Other investment securities
Available or held for sale
Proceeds
Sales 23,369 9,927 8,420
Maturities and repayments 8,500 500 -
Purchases (25,481) (4,992) (15,779)
Held to maturity
Proceeds
Sales - - -
Maturities and repayments 228,120 210,000 180,155
Purchases (165,845) (201,581) (187,841)
Net increase in loans (33,882) (24,271) (22,280)
Proceeds from sales of foreclosed properties 1,062 532 6,297
Proceeds from sales of loans and
foreclosed properties held for sale 3,728 1,937 -
Premises and equipment, net (776) (1,353) (486)
Net cash provided (used) by investing
activities 41,686 (12,559) (18,734)
FINANCING ACTIVITIES
Net increase (decrease) in savings,
demand and other deposit accounts 4,526 (8,916) 4,068
Net (decrease) increase in
certificates of deposit (21,477) 31,267 (905)
Sale of deposits (9,820) - -
Net increase in mortgagors' escrow accounts 418 343 144
Proceeds from FHLB advances 23,120 30,649 47,161
Repayments of FHLB advances (33,592) (45,649) (35,161)
Proceeds from exercise of stock options 1,251 587 273
Purchase of treasury stock (4,109) (1,821) (668)
Cash dividends paid (3,250) (2,752) (2,492)
Net cash (used) provided by financing
activities (42,933) 3,708 12,420
Net increase in cash and cash equivalents 4,369 1,018 6,453
Cash and cash equivalents at beginning of year 18,750 17,732 11,279
Cash and cash equivalents at end of year $ 23,119 $ 18,750 $ 17,732
Supplemental Information on Cash Payments
(Receipts)
Interest $ 25,391 $ 22,745 $ 17,597
Income taxes 3,433 35 (27)
Supplemental Information on Noncash Transactions
Securitization of loans into mortgage-backed
securities - - 4,988
Transfer to foreclosed properties from loans 782 1,198 5,315
Loans to facilitate the sale of foreclosed
properties 1,927 509 4,248
Transfer from loans and foreclosed properties
to held for sale - 2,803 3,261
Treasury stock issued for the purchase of
The Bank of Mystic, Inc. $ - $ 5,744 $ -
</TABLE>
As of April 1, 1995, the Company purchased all of the stock of
The Bank of Mystic, Inc. for approximately $8.2 million. In
conjunction with the acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired $69,850
Cash and stock paid (8,200)
Liabilities assumed $61,650
</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
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements
1. Conversion to Stock Ownership and Formation of Bank Holding Company
On November 14, 1986, The Norwich Savings Society (the Bank)
completed its conversion from a state chartered mutual savings
bank to a state chartered stock savings bank through the issuance
of 5,741,151 shares of $1 par value common stock at $10.50 per
share, before conversion related expenses of $3,763,465.
On August 10, 1988, Norwich Financial Corp. (NFC or the Company)
acquired all of the outstanding common stock of the Bank in
exchange for its common stock on a one-for-one basis, in
accordance with an Agreement and Plan of Reorganization. The
accompanying consolidated financial statements give effect to the
Company's reorganization and the exchange of stock, which have
been accounted for as a pooling-of-interests transaction.
2. Summary of Significant Accounting Policies
Principles of Business and Consolidation
The Norwich Financial Corp. is a one bank holding company which
through its wholly-owned subsidiary, The Norwich Savings Society,
originates real estate, commercial and consumer loans in
southeastern Connecticut. NFC funds its operations through the
taking of deposits in the same market area. As of December 31,
1996, approximately 96% of the loans in the portfolio were to
borrowers concentrated in the Company's market area, defined as
southeastern Connecticut.
The consolidated financial statements include the Company and the
Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Acquisitions
On April 1, 1995, The Bank of Mystic, Inc. (TBM), a Connecticut
chartered state bank and trust company with assets of $66.0
million, was merged with and into the Bank. As of April 1, 1995,
TBM had net loans of $49.0 million and deposits of $60.2 million.
The acquisition was accounted for as a purchase.
Each share of TBM common stock issued and outstanding (except for
(1) shares owned by TBM as treasury shares, (2) shares owned by
any direct or indirect subsidiary of TBM, (3) shares held by the
Company or the Bank other than in a fiduciary or trust capacity
for the benefit of third parties, and (4) shares as to which
appraisal rights have been perfected) was converted into $2.40 in
cash and $5.60 payable in shares of the Company's common stock.
The total cash consideration paid by the Company was approximately
$2.5 million which was available from the Company's operations.
In addition, shareholders of TBM received approximately 554,000
shares of the Company's common stock in the merger, which shares
were paid by the Company from treasury stock and had a market
value of $5.7 million.
As part of the acquisition, goodwill of $4.6 million was recorded
as of April 1, 1995. Goodwill was later reduced during 1996 by
$500,000 and during 1995 by $375,000 in connection with the
reduction of the valuation allowance on deferred tax assets
attributable to The Bank of Mystic, Inc.
On January 2, 1996, the Company completed the acquisition of
Seconn Holding Company (Seconn), the holding company for The Bank
of Southeastern Connecticut. As of January 2, 1996, Seconn had
total assets of $47.0 million, including $28.9 million in loans.
Deposits as of January 2, 1996, were $44.4 million. The
acquisition was accounted for as a purchase.
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. Goodwill of $1.8
million was recorded for this acquisition.
Presented below is certain pro forma information as if The Bank of
Mystic, Inc. had been acquired on January 1, 1994 and Seconn had
been acquired on January 1, 1995. These results combine the
historical results of The Bank of Mystic, Inc. and Seconn into the
Company's Consolidated Statements of Income and, while certain
adjustments were made for the estimated impact of purchase
accounting adjustments and other acquisition-related activity,
they are not necessarily indicative of what would have occurred
had the acquisition taken place at that time.
</TABLE>
<TABLE>
Pro forma
Years ended December 31,
(Unaudited)
(Dollars in thousands) 1995 1994
<CAPTION>
<S> <C> <C>
Interest income $52,032 $42,870
Net interest income 27,224 23,085
Net income 3,469 4,148
Net income per share $ 0.63 $ 0.72
</TABLE>
During 1996, the Bank 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 $25 million in deposits and certain loans. The
transaction is expected to close in the first quarter of 1997.
Other Events
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 1996.
Securities
The Company's securities portfolio consists of mortgage-backed
securities and other debt and equity securities. The Company
adopted Statement of Financial Accounting Standards SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," on a prospective basis in the first quarter of 1994.
In accordance with SFAS No. 115, the Company classifies individual
securities into one of three categories; held to maturity,
available for sale or trading. Securities held to maturity will
be limited to mortgage-backed securities and other debt securities
which the Company has the positive intent and ability to hold to
maturity. Trading securities, if any, will consist of securities
bought principally for the purpose of selling them in the near
term. All other securities held by the Company will be classified
as available for sale. Under SFAS No. 115, held to maturity
securities are carried at amortized cost; trading securities are
carried at market value, with unrealized gains and losses reported
in earnings; and available for sale securities are carried at
market value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders'
equity (net of taxes). Stockholders' equity will fluctuate in
future periods reflecting changes in the unrealized gains and
losses on securities classified as available for sale.
Premiums and discounts on debt securities are amortized into
interest income over the terms of the securities in a manner that
approximates the interest method. Realized gains and losses on
sales of securities are computed using the specific identification
method. Any security which management believes has experienced a
decline in value which is other than temporary is written down to
its market value through a charge to earnings.
Loans and Allowance for Losses
Interest on loans is included in income as earned, based on
contractual rates applied to principal amounts outstanding.
Unearned interest on loans made on a discounted basis is
recognized by use of a method that approximates the interest
method. Generally, loans are placed on nonaccrual status and
previously accrued interest thereon is charged against income when
principal or interest is delinquent 90 days, unless management
determines that the loan status clearly warrants other treatment.
When a loan is in nonaccrual status, interest income is recognized
only to the extent of cash received.
Loan origination and commitment fees, net of certain direct
costs, are amortized over the estimated life of the loan on a
basis which approximates the interest method, except for
origination and commitment fees on demand loans which are
amortized on a straight-line basis over the expected life of the
loan. When loans are prepaid or sold in whole or in part, the
unamortized portion of net fees is recognized in income at that
time.
Mortgage loans originated and held for sale in the secondary
market are carried at the lower of aggregate cost or estimated
market value. Net unrealized losses are recognized in a valuation
allowance through a charge to income.
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure," on
January 1, 1995, with no impact on its results of operations. As
required by SFAS No. 114, loans that are impaired (due to the
inability to collect all amounts due under the contractual terms)
are measured and valued based on (1) the present value of expected
future cash flows discounted at the loan's effective rate of
interest, (2) the loan's observable market price, or (3) the fair
value of supporting collateral if the loan is collateral
dependent. To the extent the recorded investment of an impaired
loan exceeds the present value of the loan's expected future cash
flows or other measures of value, a valuation allowance is
established for the difference. The corresponding allocation or
charge is to either the allowance for loan losses or to the
provision for loan losses, depending on the adequacy of the
overall allowance for loan losses. SFAS No. 118 allows for
existing income recognition practices to continue. The Company's
method for recognition of interest income on impaired loans is
consistent with the method for recognition of interest income on
all loans.
The allowance for loan losses is maintained at a level believed
by management to be adequate to absorb losses in the portfolio.
Management's determination of the adequacy of the allowance is
based upon an evaluation of the portfolio, the financial condition
of borrowers and guarantors, past loss experience, current real
estate and economic conditions, the composition and size of the
portfolio, credit risks, the values of underlying collateral and
other factors. The allowance is increased by charges against
income and recoveries on loans previously charged off.
Loans and Foreclosed Properties Held for Sale
Loans and foreclosed properties held for sale are valued at the
lower of cost or market. In developing estimates of market value,
the Company considers information derived from appraisals, selling
prices of similar assets and discounted cash flows using rates
commensurate with the risk involved. Loans held for sale, other
than those originated for sale in the secondary market, are on
nonaccrual status. Payments received for loans on nonaccrual are
applied against the carrying value. Changes in the carrying
value, as well as gains or losses realized upon disposition of the
properties, are reflected in "other nonperforming asset expense"
in the Company's Consolidated Statements of Income in the period
incurred.
Mortgage Servicing Rights
The Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights," on January 1, 1996. 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 amortized over the period of estimated net servicing
income and are evaluated for impairment based on their fair
values. Mortgage servicing rights of $243,000 were recorded during
1996. Amortization of $42,000 was recorded during 1996 and offset
against mortgage servicing fees in the Company's 1996 Consolidated
Statements of Income. The carrying value of the Bank's mortgage
servicing rights is $201,000 at December 31, 1996. The fair value
of these rights at December 31, 1996 is $386,000.
Transfer of Financial Assets
The Financial Accounting Standards Board has 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 except for those
transfers relating to secured borrowings, repurchase agreements
and similar transactions which are effective after December 31,
1997. 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 No. 125 will not be material to its financial position or
results of operations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful
lives of the assets (3 to 40 years).
Foreclosed Properties
Foreclosed properties consist of properties acquired through
foreclosure or accepting a deed in lieu of foreclosure and are
stated at the lower of fair value less selling costs or cost.
Thereafter, an allowance for losses on foreclosed properties is
established if the cost of a property exceeds its current fair
value less estimated costs to sell. In developing estimates of
fair value, the Company considers information derived from
appraisals, selling prices for similar assets and discounted cash
flows using rates commensurate with the risk involved. Costs of
holding foreclosed properties, as well as gains or losses in
excess of the related allowance for losses realized upon
disposition of the properties, are reflected in operations in the
period incurred.
Material Estimates
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. In
preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to change
relate to the determination of the allowance for loan losses, the
valuation of foreclosed properties acquired in connection with
foreclosures or in satisfaction of loans and the valuation of
assets held for sale. In connection with the determination of the
allowance for loan losses and the valuation of foreclosed
properties and assets held for sale, management obtains
independent appraisals for significant properties and uses
independent market information.
Management believes that the allowance for losses on loans and
valuation of foreclosed properties and assets held for sale are
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 and assets
held for sale. 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.
Long-Lived Assets
The Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
on January 1, 1996. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be 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. If an asset is deemed impaired, the
impairment loss is charged against operations. The adoption of
this accounting standard did not impact the Company's operations.
Other Assets
Other assets consist principally of prepaid expenses, investment
in a joint venture, investment in real estate, the excess cost
over net assets acquired (goodwill) from the acquisition of Seconn
Holding Company and The Bank of Mystic, Inc., and other
miscellaneous receivables. Goodwill is being amortized on a
straight-line basis over 12 years. On a periodic basis, the
Company reviews goodwill for events or changes in circumstances
that may indicate that the carrying amount of goodwill may not be
recoverable.
Through its wholly-owned subsidiaries, the Bank has an investment
in a real estate property acquired for future bank expansion. The
property, which includes land, building and building improvements,
is being carried at cost less accumulated depreciation.
The Company participates in a joint venture engaged in the
acquisition, development and sale of real estate. The joint
venture, which is 50% or less owned, is accounted for using the
equity method of accounting.
Stock Option Plans
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." The Company elected to remain with the
accounting in Opinion 25 and make pro forma disclosures of net
income and earnings per share as if the fair value method of
accounting defined in this Statement had been applied. See Note
10 for the required disclosures.
Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
carryforwards. Deferred tax assets are reduced by a valuation
allowance which takes into account the uncertainty of future
income and tax events. 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.
Disclosures of Fair Value of Financial Instruments
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. In addition, the tax ramifications relating to the
realization of the unrealized gains and losses may have a
significant effect on fair value estimates and have not been
considered in the estimates. Fair value methods and assumptions
are set forth below for the Company's financial instruments:
Cash and Federal Funds Sold
For these short-term instruments, the carrying amount is a rea-
sonable estimate of fair value.
Investment Securities and Mortgage-backed Securities
Fair value equals quoted market price or dealer quote, if
available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
Loans
For certain homogeneous categories of loans, such as some
residential mortgages, fair value is estimated by discounting
the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and
for similar remaining maturities or estimated average lives.
The fair value of residential mortgages held for sale is
estimated using quoted market prices provided by government
agencies. The fair value of commercial mortgages, commercial
business loans, nonperforming loans and loans held for sale is
derived by using management estimates of losses and expenses,
and by discounting the future cash flows over the estimated
remaining maturities or estimated average lives.
Deposits
The fair value of demand, savings, and certain money market
deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates
offered for deposits of similar remaining maturities as of year
end.
FHLB Advances
The fair value of existing debt is based on the estimated cost
to prepay the debt prior to maturity, or by discounting the
future cash flows using the rates prevailing at year end for
debt of similar remaining maturities.
Net Income Per Share
Net income per share is computed by dividing net income by the
weighted average common shares and common stock equivalents, if
dilutive, outstanding during the year. Weighted average common
shares outstanding used to calculate primary earnings per share
were 5,616,650, 5,485,553 and 5,209,017 for the years ended
December 31, 1996, 1995 and 1994, respectively. Weighted average
common shares outstanding used to calculate fully diluted earnings
per share were 5,668,893, 5,615,779 and 5,285,744 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and Federal funds sold.
Reclassification
Certain reclassifications have been made to the prior years'
amounts to conform with the 1996 presentation.
3. Investment Securities and Mortgage-Backed Securities
On January 1, 1994, the Company adopted the provisions of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and reclassified the securities labeled as held for
sale to available for sale. The net unrealized gain on the
securities available for sale on January 1, 1994 of $1,977,000,
less income taxes of $673,000, increased stockholders' equity. At
December 31, 1995, the net unrealized gain of $813,000 on
securities available for sale has been shown as an increase of
stockholders' equity, net of related income taxes of $276,000. At
December 31, 1996, the net unrealized gain of $801,000 on
securities available for sale has been shown as an increase of
stockholders' equity, net of related income taxes of $329,000.
A summary of investment and mortgage-backed securities classified
as available for sale and held to maturity at December 31, 1996
and 1995 follows:
<TABLE>
Available for sale
December 31, 1996
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
<CAPTION>
<S> <C> <C> <C> <C>
Investment securities
U.S. Government and agency
obligations $1,494 $- $(4) $1,490
Corporate securities 2,018 - (5) 2,013
Foreign governments 850 - - 850
Marketable equity securities 5,574 629 - 6,203
Total investment securities 9,936 629 (9) 10,556
Mortgage-backed securities
by issuer
Fixed rate
FHLMC 69,698 232 (545) 69,385
FNMA 8,832 - (52) 8,780
Adjustable rate
FHLMC 17,431 468 - 17,899
GNMA 4,883 78 - 4,961
Total mortgage-backed
securities 100,844 778 (597) 101,025
Total available for sale $110,780 $1,407 $(606) $111,581
</TABLE>
<TABLE>
Held to maturity
December 31, 1996
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
<CAPTION>
<S> <C> <C> <C> <C>
Investment securities
U.S. Government and agency
obligations $20,945 $- $(4) $20,941
Money market instruments 31,769 1 (5) 31,765
Total held to maturity $52,714 $1 $(9) $52,706
</TABLE>
<TABLE>
Available for sale
December 31, 1995
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
<CAPTION>
<S> <C> <C> <C> <C>
Investment securities
U.S. Government and agency
obligations $13,976 $79 $- $14,055
Foreign governments 750 - - 750
Marketable equity securities 208 269 - 477
Total investment securities 14,934 348 - 15,282
Mortgage-backed securities
by issuer
Fixed rate
FHLMC 61,808 207 (374) 61,641
FNMA 10,889 80 (24) 10,945
Adjustable rate
FHLMC 20,759 576 - 21,335
Total mortgage-backed
securities 93,456 863 (398) 93,921
Total available for sale $108,390 $1,211 $(398) $109,203
</TABLE>
<TABLE>
Held to maturity
December 31, 1995
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
<CAPTION>
<S> <C> <C> <C> <C>
Investment securities
U.S. Government and agency
obligations $95,281 $40 $(34) $95,287
Money market instruments 15,691 10 - 15,701
Total held to maturity $110,972 $50 $(34) $110,988
</TABLE>
Proceeds from sales and realized gains and losses on investment
and mortgage-backed securities available for sale were as follows:
<TABLE>
Years Ended December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Investment securities
U.S. Government and
agency obligations
Proceeds $20,968 $9,927 $5,248
Realized gains 79 37 34
Realized losses (23) - -
Marketable equity securities
Proceeds 2,401 - 3,172
Realized gains 310 - 558
Realized losses - - (222)
Mortgage-backed securities
Proceeds $- $10,245 $11,037
Realized gains - 49 149
Realized losses - - (229)
</TABLE>
There were no held to maturity investment securities sold during
1996, 1995 or 1994.
The following table sets forth the maturities of the available
for sale portfolio at December 31, 1996. U.S. Government and
agency obligations, corporate securities and foreign
governments reflect contractual maturities.
<TABLE>
Amortized Cost
After One After Five
Within Through Through After
(Dollars in thousands) One Year Five Years Ten Years Ten Years Total
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations $- $1,494 $- $- $1,494
Corporate securities - 2,018 - - 2,018
Foreign governments - 750 - 100 850
- 4,262 - 100 4,362
Mortgage-backed securities 100,844
Marketable equity securities 5,574
Total amortized cost $110,780
Weighted average interest
rate/dividend yield -% 6.32% -% 6.63% 6.24%
</TABLE>
<TABLE>
Market Value
After One After Five
Within Through Through After
(Dollars in thousands) One Year Five Years Ten Years Ten Years Total
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations $- $1,490 $- $- $1,490
Corporate securities - 2,013 - - 2,013
Foreign governments - 750 - 100 850
- 4,253 - 100 4,353
Mortgage-backed securities 101,025
Marketable equity securities 6,203
Total market value $111,581
</TABLE>
The estimated average remaining life of the mortgage-backed
securities held at December 31, 1996 is approximately 3 years and
the estimated average lives for each security range from 4 months
to 11 years. The actual average will differ from the estimates
with changes in interest rates and other market conditions.
At December 31, 1996, the Company had held to maturity U.S.
Government and agency obligations and money market instruments
maturing within one year with an amortized cost and market value
of $52.7 million and a weighted average interest rate of 5.53%.
At December 31, 1996, the Company had securities pledged as
collateral for various financial purposes which had a market
value and amortized cost of approximately $1.7 million.
4. Loans and Allowances for Losses
The following table sets forth loans, by type of collateral, and
the industry classification for commercial loans:
<TABLE>
December 31,
1996 1995
Percent of Percent of
(Dollars in thousands) Amount Total Loans Amount Total Loans
<CAPTION>
<S> <C> <C> <C> <C>
Real estate secured
1-4 family owner occupied $159,593 33.5% $145,173 34.9%
1-4 family construction 8,290 1.7 6,558 1.6
Condominiums 4,995 1.1 4,435 1.1
1-4 family non-owner occupied 30,170 6.3 25,085 6.0
5 or more family 9,653 2.0 6,777 1.6
Offices 34,967 7.3 22,559 5.4
Shopping centers/retail 59,069 12.4 48,979 11.8
Motels 8,414 1.8 14,468 3.5
Construction, land and land
development 6,823 1.4 4,808 1.2
Industrial 6,532 1.4 4,591 1.1
Recreational/school 5,498 1.2 5,690 1.4
All other 16,777 3.5 15,103 3.6
350,781 73.6 304,226 73.2
Commercial
Builder/developer 8,772 1.8 9,007 2.2
Retail 10,315 2.2 8,404 2.0
Services 15,970 3.3 10,401 2.5
Personal 4,032 0.8 3,101 0.8
Transportation and public
utilities 3,296 0.7 2,086 0.5
All other 5,037 1.1 6,301 1.5
47,422 9.9 39,300 9.5
Consumer loans
Second mortgages and home
equity mortgages 59,674 12.5 55,933 13.5
Education 3,209 0.7 2,705 0.7
Automobile 6,429 1.3 3,764 0.9
Recreational vehicle 1,459 0.3 2,113 0.5
Collateral 2,990 0.6 3,030 0.7
Marine 1,475 0.3 1,463 0.4
All other 3,672 0.8 2,707 0.6
78,908 16.5 71,715 17.3
Total loans $477,111 100.0% $415,241 100.0%
Less allowance for loan losses (13,928) (13,168)
Net loans $463,183 $402,073
</TABLE>
Included in net loans were $180,000 and $423,000 of net deferred
loan origination fees, net of costs, at December 31, 1996 and
1995, respectively.
Nonperforming assets, exclusive of nonperforming loans and
foreclosed properties held for sale, are as follows:
<TABLE>
December 31,
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Nonperforming assets
Nonaccrual loans $ 5,289 $ 8,017
Nonperforming restructured loans 537 1,096
Foreclosed properties 1,167 264
Nonperforming assets, exclusive of nonperforming loans
and foreclosed properties held for sale $ 6,993 $ 9,377
Nonperforming assets as a percent of total loans and
foreclosed properties, exclusive of nonperforming loans
and foreclosed properties held for sale 1.46% 2.25%
</TABLE>
In order to reduce nonperforming loans, management sold $2.5
million of loans at December 31, 1996 of which $2.0 million were
nonperforming. Proceeds of $1.5 million were received,
transaction expenses of $36,000 were charged to earnings and a
loss on the sale of $1.0 million was charged against the
allowance for loan losses. During the fourth quarter of 1995,
nonperforming loans and foreclosed properties with a carrying
value of $4.5 million were charged down by approximately $1.7
million. After the write-downs, the remaining balance of $2.8
million was transferred to loans and foreclosed properties held
for sale at December 31, 1995. The majority of the loans
identified for sale were commercial real estate and residential
real estate loans.
During 1994, nonperforming loans and foreclosed properties of
$7.8 million and performing loans of $1.0 million were charged
down by $3.3 million to facilitate their disposition. A portion
of these assets were sold in December 1994 and $1.5 million of
loans and $1.8 million of foreclosed properties were reclassified
as loans and foreclosed properties held for sale. The majority
of the loans identified for sale were commercial real estate and
residential real estate loans. In connection with charging down
the loans and foreclosed properties for losses estimated to be
incurred as a result of the accelerated disposition strategy, an
additional provision of $2.2 million was made to the allowance
for loan losses and an additional provision of $1.1 million was
made to the allowance for losses on foreclosed properties.
At December 31, 1996, the remaining balance of nonperforming
assets held for sale was transferred to loans and foreclosed
properties at the lower of cost or fair value as set forth below.
Activity in loans and foreclosed properties held for sale is as
follows:
<TABLE>
December 31,
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C> <C>
Nonperforming assets held for sale at January 1 $4,127 $3,261
Transfer from loans - 1,768
Transfer from foreclosed properties - 1,035
Proceeds from sales/collections (3,728) (1,937)
Gain on sales 615 -
Transfer to loans (591) -
Transfer to foreclosed properties (423) -
Nonperforming assets held for sale at December 31 - 4,127
Performing loans held for sale in the
secondary market 172 1,065
Loans and foreclosed properties held for sale $172 $5,192
</TABLE>
During 1995, proceeds from sales of nonperforming assets
approximated the carrying value of the respective assets.
Impairment of loans having recorded investments of $6.4 million
at December 31, 1996 and $10.8 million at December 31, 1995 has
been recognized in conformity with FASB Statement No. 114, as
amended by FASB Statement No. 118. The average recorded
investment in impaired loans was $10.2 and $10.1 million in 1996
and 1995, respectively. The total allowance for loan losses
related to these loans was $1.8 million on December 31, 1996 and
$1.5 million on December 31, 1995. Interest income recognized
on impaired loans during 1996 and 1995 was $257,000 and
$193,000, respectively.
If nonaccrual loans at December 31, 1996, 1995 and 1994 had
remained current in accordance with contractual payment terms,
interest income of $689,000, $1.1 million and $716,000,
respectively, would have been recognized compared to interest
income of $180,000, $594,000 and $402,000, respectively,
actually recognized.
Interest income of $22,000, $66,000 and $67,000 was recognized
in 1996, 1995 and 1994, respectively, on restructured loans
which were performing in accordance with their restructured
terms.
The Bank has one loan totaling $537,000 classified as a
troubled debt restructuring at December 31, 1996 which was
restructured at a rate lower than market at the time of
restructuring.
As of December 31, 1996 and 1995, the Company serviced loans
for others of approximately $157.3 million and $147.9 million,
respectively.
Executive officers of the Company are prohibited by Company
policy from borrowing from the Bank with the exception of
residential mortgage loans and other collateralized loans.
Directors and their associates conducted transactions with the
Company or Bank in the ordinary course of business. These
transactions were made on substantially the same terms as
comparable transactions with others. As of December 31, 1996
and 1995, loans to related parties were approximately $346,000
and $360,000, respectively.
Changes in the allowance for loan losses and allowance for
losses on foreclosed properties were as follows:
<TABLE>
Allowance for
Losses on
Foreclosed
(Dollars in thousands) Loan Losses Properties
<CAPTION>
<S> <C> <C>
Balance at December 31, 1993 $9,689 $971
Provision 3,370 3,130
Charge-offs (5,163) (4,140)
Recoveries 758 620
Balance at December 31, 1994 8,654 581
Provision 5,500 98
Allowance of The Bank of Mystic, Inc. 1,839 35
Charge-offs (3,179) (714)
Recoveries 354 -
Balance at December 31, 1995 13,168 -
Provision 1,400 18
Allowance of The Bank of Southeastern Connecticut 2,506 -
Charge-offs (4,134) (18)
Recoveries 988 -
Balance at December 31, 1996 $13,928 $-
</TABLE>
5. Premises and Equipment
<TABLE>
December 31,
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Land $313 $260
Office buildings and improvements 4,297 3,728
Furniture, fixtures and equipment 8,264 8,578
Leasehold improvements 1,842 1,738
Total 14,716 14,304
Less accumulated depreciation and amortization 8,500 8,394
Total premises and equipment, net $6,216 $5,910
</TABLE>
For the years ended December 31, 1996, 1995 and 1994,
depreciation and amortization were approximately $980,000,
$803,000 and $870,000, respectively.
The Company leases most of its branch office premises under
lease agreements which expire at various dates through 2005. The
Company has the option to renew certain leases at fair rental
values. Rental expense was approximately $903,000 in 1996,
$656,000 in 1995 and $396,000 in 1994, after reduction by rents
received from subleases of approximately $59,000, $40,000 and
$47,000, respectively. As of December 31, 1996, minimum rental
commitments under noncancelable operating leases, reduced by
rents to be received from existing noncancelable subleases, were:
<TABLE>
(Dollars in thousands) Gross Rent Sublease Rent Net Rent
<CAPTION>
<S> <C> <C> <C>
Year
1997 $870 $44 $826
1998 598 4 594
1999 530 - 530
2000 461 - 461
2001 294 - 294
2002 and thereafter 608 - 608
Total leases $3,361 $48 $3,313
</TABLE>
6. Other Assets
Included in other assets at December 31, are as follows:
<TABLE>
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Goodwill (net of accumulated amortization
of $940 in 1996 and $291 in 1995) $4,924 $3,961
Real estate property acquired for future
bank expansion (net of accumulated
depreciation of $1.7 million in 1996 and
$1.5 million in 1995) 4,170 4,354
Investment in a joint venture 504 533
Cash surrender value of life insurance 760 617
Other 2,244 1,558
Total other assets $12,602 $11,023
</TABLE>
Through its wholly-owned subsidiaries, the Bank has an
investment in a real estate property acquired for future bank
expansion. The property is currently leased to third parties.
The operating results of the investment property include rental
income of $569,000 in 1996, $555,000 in 1995 and $634,000 in
1994. The operating expenses, including depreciation of $194,000,
were approximately $484,000 during 1996. During 1995 and 1994
operating expenses, including depreciation of $280,000 and
$356,000, respectively, approximated rental income.
7. Deposits
Deposit balances are as follows:
<TABLE>
December 31,
(Dollars in thousands) 1996 1995
Average % of Average % of
Rate Amount Total Rate Amount Total
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Demand deposits -% $69,519 12% -% $56,707 10%
Savings 2.30 97,854 17 2.30 97,515 17
Money market accounts 3.02 99,964 17 3.09 87,785 16
$267,337 46% $242,007 43%
Time deposits with remaining
maturities of:
Up to one year 205,206 35% $201,580 35%
Over one to two years 41,615 7 45,329 8
Over two to three years 30,043 5 22,597 4
Over three to four years 28,283 5 24,384 4
Over four to five years 8,530 1 26,674 5
Over five years 4,066 1 5,212 1
Total time deposits 5.54 317,743 54 5.83 325,776 57
Mortgagors' escrow 3.10 3,654 2.80 3,221
Total deposits 3.87% $588,734 100% 4.21% $571,004 100%
</TABLE>
Maturities of time deposit accounts with a balance of $100,000 or
more at December 31, 1996, are summarized as follows:
<TABLE>
(Dollars in thousands)
<CAPTION>
<S> <C>
Three months or less $7,613
Over 3 through 6 months 5,583
Over 6 through 12 months 6,998
Over 12 months 16,968
Total $37,162
</TABLE>
Interest on the time deposits with balances of $100,000 or more
was $2.3 million in 1996, $1.8 million in 1995 and $1.3 million in
1994.
Interest on deposits is summarized as follows:
<TABLE>
December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Savings $ 2,350 $ 2,300 $ 2,216
Money market accounts 2,746 2,341 2,001
Time deposits 19,119 17,319 12,021
Mortgagors' escrow 95 79 67
Total interest on deposits $24,310 $22,039 $16,305
</TABLE>
8. FHLB Advances
<TABLE>
December 31,
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Advances from Federal Home Loan Bank (FHLB)
4.59% due January 2, 1996 $- $2,000
5.92% due January 4, 1996 - 4,000
9.39% due October 26, 1996 - 1,400
4.88% due December 10, 1996 - 3,000
6.34% due September 28, 2000 3,000 3,000
6.41% due September 28, 2001 3,000 3,000
6.48% due September 30, 2002 3,000 3,000
6.07% due December 21, 2005 2,928 3,000
Total FHLB advances $11,928 $22,400
</TABLE>
<TABLE>
Years Ended December 31,
(Dollars in thousands) 1995 1994
<CAPTION>
<S> <C> <C>
Information on FHLB advances with an original
maturity under one year:
Amount outstanding $4,000 $20,000
Average amount outstanding during year 2,615 7,615
Maximum outstanding at any month end 10,000 20,000
Weighted average interest rate at year end 5.92% 6.23%
Weighted average interest rate during the year 6.26% 4.59%
</TABLE>
As of December 31, 1995 the Bank had one outstanding FHLB advance
with an original maturity under one year in the amount of
$4,000,000. This advance was issued on December 28, 1995 at a
rate of 5.92% and matured on January 4, 1996. There were no
other short term FHLB advances during 1996.
The Bank has a maximum line of credit of $12,046,000 million
under the Federal Home Loan Bank of Boston's Ideal Way Line of
Credit Program. Interest is payable at a rate determined and
reset by the Federal Home Loan Bank of Boston on a daily basis.
As of December 31, 1996, the rate of interest was 7.32%. As of
December 31, 1996, there were no outstanding borrowings under
this program. During 1996, the maximum amount outstanding under
the Ideal Way Line of Credit Program was $2.0 million and the
average amount outstanding during the year was $122,000. The
weighted average interest rate for borrowings outstanding under
this program during 1996 was 5.81%.
First mortgage loans on residential property, U.S. Government
and agency obligations, funds deposited at the FHLB of Boston and
all FHLB stock were pledged as collateral to secure the FHLB
advances as of December 31, 1996.
9. Capital
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices.
The capital amounts and classification 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 Company and the Bank to maintain
minimum amounts and ratios of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined)
and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996, that the
Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1996, the most recent notification from the
Federal Deposit Insurance Corporation (FDIC) categorized the Bank
as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier I risk-based and Tier
I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management
believes have changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios
are also presented in the table.
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital
(to Risk Weighted Assets)
Consolidated $77,017 15.12% $40,746 8.00% $50,933 10.00%
The Bank 75,288 14.78 40,746 8.00 50,933 10.00
Tier I Capital
(to Risk Weighted Assets)
Consolidated 70,557 13.85 20,373 4.00 30,560 6.00
The Bank 68,828 13.51 20,373 4.00 30,560 6.00
Tier I Capital
(to Average Assets)
Consolidated 70,557 10.32 27,355 4.00 34,194 5.00
The Bank 68,828 10.06 27,355 4.00 34,194 5.00
As of December 31, 1995
Total Capital
(to Risk Weighted Assets)
Consolidated 76,942 18.07 34,068 8.00 42,585 10.00
The Bank 74,272 17.45 34,055 8.00 42,569 10.00
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 71,522 16.80 17,034 4.00 25,551 6.00
The Bank 68,854 16.17 17,027 4.00 25,541 6.00
Tier I Capital
(to Average Assets)
Consolidated 71,522 10.78 26,529 4.00 33,161 5.00
The Bank $68,854 10.38% $26,521 4.00% $33,152 5.00%
</TABLE>
The principal source of revenue for the Company is dividends
received from the Bank. The total of all dividends declared by
the Bank in a given calendar year cannot exceed the total of the
Bank's net profits for that year, plus the Bank's retained profits
from the preceding two years. Also, the Bank cannot pay any
dividends that would cause it to have insufficient capital under
regulatory guidelines. These limitations did not affect the
dividends paid by the Bank to the Company or the dividends paid by
the Company to the shareholders during 1996, 1995 or 1994.
10. Stock Option Plans
In connection with the conversion to a publicly owned company in
1986, the Bank adopted separate stock option plans for employees
and outside directors. These plans were assumed by the Company as
part of the Bank's holding company reorganization. A total of
600,000 shares of stock has been reserved for issuance under the
employee and director stock option plans. Under the employee
stock option plan, the exercise price of each option equals the
market price of the Company's stock on the date preceding the date
of grant. Under the directors plan, each outside director
receives options to purchase common stock at the market value
prevailing on the date preceding the date he becomes a director.
All options granted under the employee stock option plan expire
ten years from the date of grant and fifteen years from the date
of grant for directors. Shares are not available for future grant
under either the employee or director plan at December 31, 1996.
In 1994, the Board of Directors adopted an additional stock
option plan and incentive plan for employees and directors of the
Company's subsidiaries and an additional stock option plan for
outside directors of the Company. In conjunction with the
adoption of the 1994 outside directors plan, the 1986 outside
directors plan was terminated although previous shares granted
under this plan remain outstanding. All shares granted under the
1994 plans expire in ten years from date of grant for employees
and directors of the Company's subsidiaries and fifteen years from
date of grant for outside directors of the Company. A total of
600,000 shares has been reserved for issuance under the 1994 stock
option plans. Shares available for future grant totaled 393,450
at December 31, 1996.
The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized. Had compensation cost for
the Company's stock-based compensation plans been determined
consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
Dollars in thousands, 1996 1995
except share data) As Reported Pro forma As Reported Pro forma
<CAPTION>
<S> <C> <C> <C> <C>
Net income $6,651 $6,450 $5,473 $5,207
Primary earnings per share 1.18 1.15 1.00 .95
Fully diluted earnings per share $ 1.17 $ 1.14 $ .97 $ .93
</TABLE>
The effects of applying SFAS No. 123 to the above disclosure may
not be representative of net income in future years.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1996 and
1995, respectively:
<TABLE>
Dividend Expected Risk-Free Expected
Yield Volatility Interest Rate Life in Years
<CAPTION>
<S> <C> <C> <C> <C>
1996
Employee 3.5% 36.0% 6.4% 5
Directors of the Bank 3.8 45.3 6.5 6
Directors of the Company 3.7 43.8 6.7 8
1995
Employee 4.7 48.1 6.3 5
Directors of the Bank 4.2 48.2 6.4 6
Directors of the Company 4.2% 44.2% 6.7% 8
</TABLE>
A summary of the status of the Company's stock option plans
as of December 31, 1996, 1995 and 1994 and changes during the
years ended on those dates is presented below:
<TABLE>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(In thousands) Shares Price Shares Price Shares Price
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 429,803 $8.98 376,730 $8.69 368,080 $7.89
Granted 75,800 13.62 103,250 10.39 76,250 10.62
Exercised (106,903) 9.49 (47,177) 9.72 (41,600) 4.21
Canceled or expired (1,750) 10.50 (3,000) 10.19 (26,000) 10.16
Outstanding at end of
year 396,950 $9.72 429,803 $8.98 376,730 $8.69
Options exercisable at
year-end 389,950 424,803 376,730
Weighted average fair
value of options granted
during the year $4.49 $3.97
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
<CAPTION>
<S> <C> <C> <C> <C> <C>
$2.37 to 3.50 39,000 4.52 $2.53 39,000 $2.53
$3.51 to 7.00 26,500 3.14 6.12 26,500 6.12
$7.01 to 10.50 196,650 6.84 9.69 196,650 9.69
$10.51 to 14.00 134,800 10.55 12.54 127,800 12.58
$2.37 to 14.00 396,950 7.63 $9.72 389,950 $9.68
</TABLE>
11. Preferred Stock Purchase Rights
On November 21, 1989, the Company's Board of Directors declared a
dividend of one preferred stock purchase right (a Right) for each
outstanding share of the Company's common stock. Each Right
entitles a stockholder to buy 1/100 of a share of the Company's
Series A Preferred Stock at an exercise price of $45.00 per share,
subject to adjustment. The Rights are exercisable, and separately
tradeable apart from the common stock, 10 days after a person or
group has (a) become the beneficial owner of 20% or more of the
Company's common stock, or (b) become the beneficial owner of 10%
or more of the Company's common stock and is declared by the Board
of Directors to be an adverse person, or (c) commenced or
announced an intention to commence a tender or exchange offer that
would result in the ownership of 20% or more of the Company's
common stock.
Once the Rights become exercisable as a result of any of the
above events, other than the commencement of a tender or exchange
offer, each Right would entitle the holder to purchase, at the
then prevailing exercise price, shares of Company preferred stock
or common stock having a value equal to twice the exercise price
of the Right. Rights held by the acquiring person would become
void and could not be exercised. If the Company is unable to
authorize or issue the amount of preferred stock or common stock
otherwise called for upon exercise of a Right, the Board may
authorize the issuance of other securities, or cash, to holders of
Rights. Additionally, once the Rights become exercisable as a
result of any of the above events, including the commencement of a
tender or exchange offer, and the Company should consolidate or
merge with another company and the Company was not the surviving
company, or if 50% or more of the Company's consolidated assets or
earning power were sold, each Right would entitle a stockholder to
purchase, at the then current exercise price, shares of common
stock of the acquiring company having a value equal to twice the
exercise price of the Right.
The distribution of the Rights was made on December 4, 1989 to
stockholders of record on that date. The Rights will expire on
December 4, 1999, unless redeemed at the option of the Board of
Directors for one cent per Right. Redemption may occur only
until 14 days after a person or group acquires 10% or more of the
Company's common stock and is declared to be an adverse person or
14 days after a person or group acquires 20% or more of the
Company's common stock. Redemption of the Rights, and certain
other actions, require authorization by a majority of the
continuing Directors of the Company (defined essentially as
directors not nominated or elected by a potential acquirer).
12. Employee Benefits
The Company has a noncontributory defined benefit pension plan
covering substantially all employees. The benefits are based on
years of service and the employee's compensation during the last
five years of employment. The Company's funding policy is to
contribute annually an amount between the minimum amount required
by ERISA and the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not
only for benefits attributed to service to date but also for
those expected to be earned in the future.
The unrecognized net gain shown in the table arises from
differences between actual experience and projected results as
well as from the effects of changes in actuarial assumptions.
Actuarial calculations are based on the projected unit credit
method.
<TABLE>
December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Actuarial present value of benefit
obligation, substantially all vested $3,042 $2,858 $2,004
Plan assets at fair value 4,151 3,442 2,845
Projected benefit obligation 4,260 4,002 2,401
Plan assets in excess of (less than)
projected benefit obligation (109) (560) 444
Unrecognized net gain 1,081 1,535 290
Unrecognized prior service cost (17) (18) 36
Unrecognized net asset at January 1, 1987
being amortized over 15 years (222) (267) (311)
Prepaid pension cost $733 $690 $459
Net pension cost
Service cost $282 $180 $223
Interest cost 303 192 189
Return on plan assets (195) (254) (213)
Amortization of accumulated loss - - 47
Amortization of prior service cost (2) (2) 3
Amortization of transition asset (44) (44) (44)
Net pension expense $344 $72 $205
Significant actuarial assumptions
Weighted average discount rate 7.75% 7.25% 8.25%
Increase in future compensation 4.75 4.25 4.25
Rate of return on assets 8.50 8.50 8.50
</TABLE>
As of December 31, 1996, pension plan investments were $2.5
million in the Bank's certificates of deposit, $207,000 in
various money market accounts, $549,000 in real estate equity and
$868,000 in equity mutual funds independent of the Company.
In addition to providing pension benefits, the Company provides
certain health care and life insurance benefits to retired
employees. Participants become eligible for the benefits if they
retire after reaching age 55, with 10 or more years of service.
Benefits are paid for medical coverage, once deductibles and co-
insurance requirements have been met, and for life insurance
coverage based upon provisions of the plan. The Company does not
fund this plan actuarially.
The Company accrues the cost of non-pension-related retirement
benefits such as health care and life insurance in the periods
that employees perform services to earn the benefits.
The postretirement benefit expense for 1996, 1995 and 1994
included the following components:
<TABLE>
December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Service cost $23 $19 $37
Interest cost on accumulated
postretirement benefit obligation 51 54 55
Net gain (5) (8) -
Postretirement benefit expense $69 $65 $92
</TABLE>
The following table reconciles the Plan's funded status to the
accrued postretirement cost liability as reflected on the
consolidated balance sheet:
<TABLE>
December 31,
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $388 $451
Fully eligible active employees 51 31
Active employees not eligible to retire 161 289
Total $600 $771
Plan assets at fair value - -
Accumulated postretirement benefit
obligation in excess of plan asset $600 $771
Unrecognized net gain 233 31
Accrued postretirement benefit cost liability $833 $802
</TABLE>
The weighted average discount rate was 7.75%, 7.25% and 8.50% as
of December 31, 1996, 1995 and 1994, respectively. The rate of
compensation increase, for purposes of calculating life insurance
amounts, is 4.75% as of December 31, 1996, and 4.0% as of
December 31, 1995 and 1994. The health care cost trend rate used
to measure the accumulated postretirement benefit obligation is
8.5% initially, at December 31, 1996, decreasing gradually to
4.5% by the year 2005; and it was 9.5% initially, at December 31,
1995, decreasing gradually to 4.5% by the year 2005. Increasing
the health care cost trend rate by one percentage point at
December 31, 1996 would increase the accumulated postretirement
benefit obligation by approximately $129,000 and net periodic
postretirement benefit cost by approximately $26,000 (pretax).
The Company has a deferred compensation plan for its directors
which provides the participants or their beneficiaries with
annual payments each year for ten years after the retirement or
death of the participant. The liability arising from these
agreements is being accrued over the participants' remaining
period of service so that, at the expected retirement date, the
then present value of the annual payments will have been
expensed. The cost of the plan to the Company was $122,000,
$120,000 and $147,000 in 1996, 1995 and 1994, respectively.
In 1995, the Company established a new Deferred Compensation
Plan. The Plan is established and maintained for the purpose of
providing unfunded, non-qualified deferred compensation for
members of the Company's and Bank's Board of Directors, as well as
a select group of officers and highly compensated employees of the
Bank. A total of $85,400 and $44,200 in director fees was
deferred under the Plan in 1996 and 1995, respectively. During
1996 and 1995, only outside members of the Board of Directors
participated in this plan.
In 1995, the Company established The Norwich Savings Society
Pension Restoration Plan. The Plan is established and maintained
for the purpose of providing unfunded, non-qualified benefits, for
a select group of officers and highly compensated employees of the
Bank, equal to that portion of any pension or pension related
benefit which cannot be provided under the terms of the Retirement
Program by virtue of the limitations of ERISA and the Internal
Revenue Code of 1986. In 1996 and 1995, a total of $48,444 and
$28,902, respectively, was accrued under this plan and placed in a
trust.
The Norwich Savings Society maintains a savings and investment
plan for employees who have completed at least one year of service
and have worked 1,000 hours. Participation is voluntary.
Participants may contribute from 2% to 6% of their annual
compensation on a pre-tax basis or from 2% to 6% of their annual
compensation on an after tax basis. As of January 1, 1997,
participants may contribute from 2% to 10% of their annual
compensation on a pre-tax basis and/or from 2% to 6% of their
annual compensation on an after tax basis not to exceed a total of
10% of annual compensation. If the participant contributes on a
pre-tax basis, the Bank makes a matching contribution to the plan
equal to 100% on the employee's contribution up to 2% of the
employee's pre-tax earnings. Participants vest immediately in
their own contributions and are subject to a seven year vesting
schedule on the Bank's contributions. The Bank's matching
contribution was suspended in 1991 and reinstated in January 1995.
In 1996 and 1995, the Bank's matching contribution was $112,360
and $104,000 respectively.
13. Income Taxes
For the years ended December 31, 1996, 1995 and 1994, the
provision (benefit) for income taxes consisted of:
<TABLE>
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Current
Federal $3,160 $370 $-
State 9 60 26
3,169 430 26
Deferred
Federal 648 1,343 231
State 905 990 109
Effect of change in state tax rates - 275 -
1,553 2,608 340
Change in valuation allowance
for deferred tax asset (95) (3,138) (3,292)
Income tax provision (benefit) $4,627 $(100) $(2,926)
</TABLE>
As of December 31, 1996 and 1995, the components of the deferred
income tax asset were:
<TABLE>
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Deferred tax asset
Allowance for loan losses $4,989 $4,337
Allowance for losses on foreclosed properties 113 30
Net operating loss carryforwards 1,555 1,917
Capital loss carryforward - 57
Deferred compensation 271 340
Retiree health benefits 350 374
Deferred loan origination fees - 172
Alternative minimum tax credit carryforward - 174
Total gross deferred tax asset 7,278 7,401
Less valuation allowance (175) (770)
7,103 6,631
Deferred tax liabilities
Unrealized gains on securities 329 276
Bond discount accretion 1,118 642
Premises and equipment 263 406
Deferred loan origination fees 26 -
Other 11 589
Total gross deferred tax liabilities 1,747 1,913
Net deferred tax asset $5,356 $4,718
</TABLE>
In order to realize the net deferred tax asset of $5.4 million
at December 31, 1996, the Company must generate future taxable
income (in addition to income from the reversal of taxable
temporary differences) of approximately $13.2 million. Based on
the Company's recent historical and anticipated future pre-tax
earnings, management believes that it is more likely than not
that the Company's net deferred tax asset will be realized. At
December 31, 1996, the remaining valuation allowance for The Bank
of Mystic, Inc. deferred tax asset of $500,000 was eliminated and
recorded as a reduction of goodwill.
The provision or benefit for income taxes differs from the
amount computed by applying the statutory federal income tax rate
of 34% to income before income taxes and cumulative effect of
changes in accounting principles for the following reasons:
<TABLE>
December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Tax provision at statutory rate $3,835 $1,827 $279
Increase (decrease) in
tax resulting from:
State income taxes, net of federal
tax benefit 603 693 89
Effect of change in state tax rates - 275 -
Change in valuation allowance for
deferred tax asset (95) (3,138) (3,292)
Tax exempt income (8) (10) (10)
Exclusion of dividend income (2) (2) (19)
Amortization of goodwill 211 97 -
Other, net 83 158 27
Income tax provision (benefit) $4,627 $(100) $(2,926)
</TABLE>
As of December 31, 1996, the Company had federal net operating
loss carryforwards for tax return purposes of approximately $2.6
million attributable to The Bank of Mystic, Inc. Utilization of
the net operating loss carryforwards is limited to $568,000
annually and expire beginning in 2005 through 2008. State net
operating loss carryforwards as of December 31, 1996 were $10.2
million and expire beginning in 1997 through 2000.
Separate legislation was enacted in 1996 to repeal most of
Section 593 of the Internal Revenue Code pertaining to how
qualified savings institutions calculate their bad debt deduction
for federal income tax purposes. This legislation eliminated the
Bank's ability to compute its bad debt deduction utilizing the
percentage-of-taxable-income method or the reserve method based
upon experience. It also suspended the recapture of the pre-1988
tax bad debt reserves and will require the recapture of these
amounts only under very limited circumstances. It does require
the recapture of the post-1987 tax bad debt reserves over a six
year period. The Bank's pre-1988 tax bad debt reserves which have
been suspended are $7.8 million and the amount of the post-1987
reserves which will be recaptured into income beginning in 1996
are $2.2 million. Deferred taxes have been provided for the
remainder of the amount to be recaptured.
14. Disclosures About Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments
were as follows:
<TABLE>
December 31, 1996 December 31, 1995
Fair Value Fair Value
Book Fair versus Book Fair versus
(Dollars in thousands) Value Value Book Value Value Value Book Value
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash and due from banks $19,419 $19,419 $- $14,600 $14,600 $-
Federal funds sold 3,700 3,700 - 4,150 4,150 -
Mortgage-backed securities
available for sale 101,025 101,025 - 93,921 93,921 -
Federal Home Loan Bank stock 3,715 3,715 - 3,715 3,715 -
Other investment securities
Held to maturity 52,714 52,706 (8) 110,972 110,988 16
Available for sale 10,556 10,556 - 15,282 15,282 -
Loans 477,111 474,338 (2,773) 415,241 416,990 1,749
Less: allowance for loan
losses (13,928) - 13,928 (13,168) - 13,168
Net loans, excluding those
held for sale 463,183 474,338 11,155 402,073 416,990 14,917
Loans held for sale $172 $172 $- $3,273 $3,273 $-
Financial liabilities
Deposits, including
mortgagors' escrow $588,734 $591,707 $2,973 $571,004 $575,152 $4,148
FHLB advances 11,928 11,936 8 22,400 22,788 388
</TABLE>
In addition to the above, there are certain off-balance sheet
financial instruments, as described in Note 15, the fair value of
which is insignificant.
15. Commitments and Contingencies
Cash and due from banks withdrawal and usage restrictions of
$4.6 million existed as of December 31, 1996, primarily as a
result of Federal Reserve requirements to maintain certain
average balances.
There are various legal proceedings against the Company arising
out of its normal course of business. It is the opinion of
management, after consultation with legal counsel, that the
outcome of existing litigation will have no material adverse
effect on the financial position or future operating results of
the Company.
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers. Commitments to extend credit are
agreements to lend to a customer as long as 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. These financial
instruments involve, to varying degrees, elements of credit and
interest rate risk. The Company's exposure to credit loss in the
event of nonperformance by the other party to the financial
instrument is represented by the contractual amount of those
instruments. Since the making of a commitment precedes the
funding of a loan, the Company's normal underwriting and credit
policies are applied before a commitment is made. Management
believes that the Company controls the credit risk through credit
approvals and limits, portfolio monitoring procedures and the
receipt of collateral when deemed necessary.
<TABLE>
December 31,
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Financial instruments with off-balance sheet risk
Commitments to extend credit
Mortgage
Residential
Fixed $3,432 $542
Variable 739 5,955
Commercial
Fixed 1,188 -
Variable 500 1,886
Residential and commercial construction
Fixed 12,552 7,370
Variable 1,665 2,477
Commercial
Fixed 1,011 710
Variable 19,578 10,534
Consumer
Home equity line of credit
Fixed - 909
Variable 18,259 19,201
Other
Fixed 1,201 1,046
Variable 1,252 729
Letters of credit 3,220 1,054
$64,597 $52,413
</TABLE>
At December 31, 1995, the Company had a commitment to sell $25
million of 1-4 family residential loans to FHLMC. Of the $25
million commitment, $16 million was at the option of the Company.
The Bank filled $14.8 million of the commitment. The remaining
commitment of $10.2 million was forgiven by FHLMC. In December
1996, the Company entered into a new commitment with FHLMC to
sell $25 million of 1-4 family residential loans to FHLMC by
December 31, 1997. Of the $25 million commitment, $20.5 million
is at the option of the Company.
16. Condensed Financial Information of Norwich Financial Corp.
(Parent Company only)
<TABLE>
Condensed Balance Sheets December 31,
(Dollars in thousands) 1996 1995
<CAPTION>
<S> <C> <C>
Assets
Cash $1,742 $-
Dividend and other assets 306 6,877
Investment in Bank subsidiary 74,463 73,287
Total assets $76,511 $80,164
Liabilities and Stockholders' Equity
Payable to Bank subsidiary and other payables $13 $4,144
Stockholders' equity 76,498 76,020
Total liabilities and stockholders' equity $76,511 $80,164
</TABLE>
<TABLE>
Condensed Statements of Income Years Ended December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Income
Equity in undistributed income of
Bank subsidiary $1,241 $1,200 $1,351
Dividend from Bank subsidiary 5,600 4,500 3,000
Total income 6,841 5,700 4,351
Noninterest expense 190 227 604
Net income $6,651 $5,473 $3,747
</TABLE>
<TABLE>
Condensed Statements of Cash Flows Years Ended December 31,
(Dollars in thousands) 1996 1995 1994
<CAPTION>
<S> <C> <C> <C>
Operating Activities
Net income $6,651 $5,473 $3,747
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income of
Bank subsidiary (1,241) (1,200) (1,351)
Decrease (increase) in dividend
and other assets 6,571 (2,566) (1,374)
Increase (decrease) in payable to
Bank subsidiary and other payables (4,131) 2,279 1,865
Net cash provided by operating activities 7,850 3,986 2,887
Financing Activities
Proceeds from exercise of stock options 1,251 587 273
Purchase of treasury stock (4,109) (1,821) (668)
Cash dividends paid (3,250) (2,752) (2,492)
Net cash used by financing activities (6,108) (3,986) (2,887)
Net increase in cash and cash equivalents 1,742 - -
Cash and cash equivalents at beginning of year - - -
Cash and cash equivalents at end of year $1,742 $- $-
</TABLE>
<TABLE>
Selected Quarterly Consolidated Financial Data (unaudited)
1996 Quarterly Results(a)
(Dollars in thousands,
except share data) Fourth Third Second First
<CAPTION>
<S> <C> <C> <C> <C>
Interest income $13,148 $13,083 $13,090 $12,968
Interest expense 6,031 6,296 6,456 6,559
Net interest income 7,117 6,787 6,634 6,409
Loan loss provision 600 400 200 200
Mortgage service fees 157 154 160 168
Gain (loss) on loans sold or
held for sale 30 35 (45) (2)
All other noninterest income 812 868 832 698
Noninterest expenses 4,539 4,321 4,702 4,574
Income tax provision 1,036 1,335 1,165 1,091
Net income 1,941 1,788 1,514 1,408
Primary earnings per share 0.35 0.32 0.27 0.25
Fully diluted earnings per share 0.35 0.32 0.27 0.24
</TABLE>
<TABLE>
1995 Quarterly Results
(Dollars in thousands,
except share data) Fourth Third Second(d) First
<CAPTION>
<S> <C> <C> <C> <C>
Interest income $12,535 $12,192 $11,978 $10,434
Interest expense 6,328 6,052 5,723 4,694
Net interest income 6,207 6,140 6,255 5,740
Loan loss provision 3,600(b) 600 600 700
Mortgage service fees 168 167 170 162
Gain (loss) on loans sold or
held for sale (39) (35) 12 (3)
All other noninterest income 627 591 516 574
Noninterest expenses 4,487 4,003 4,274 3,615
Income tax provision (benefit) (2,438)(c) 827 747 764
Net income 1,314 1,433 1,332 1,394
Primary earnings per share 0.24 0.26 0.23 0.27
Fully diluted earnings per share 0.23 0.25 0.23 0.27
</TABLE>
(a)The financial data reflects the acquisition of Seconn Holding
Company on January 2, 1996.
(b)The increase in the fourth quarter was to facilitate the 1995
strategy to accelerate the disposition of selected
nonperforming loans and foreclosed properties and provide for
the continued impact of the weak local economy on the loan
portfolio. See Note 4 on Notes to Consolidated Financial
Statements.
(c)Benefit in the fourth quarter was attributable to a
reduction of the valuation allowance against the deferred tax
asset.
(d)The financial data reflects the acquisition of The Bank of
Mystic, Inc. on April 1, 1995.
Form 10-K
Securities and Exchange Commission
Washington, D.C. 20540
_____________________________________________________________________________
Mark One
[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 31,1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
_____________________________________________________________________________
For the transition period from to
Commission file number 34-0-17138
Exact name of registrant as specified
in its charter Norwich Financial Corp.
State or other jurisdiction of
incorporation or organization Delaware
IRS Employer Identification No. 06-1226755
Address of principal executive offices 4 Broadway, Norwich, CT
Zip Code 06360
Registrant's telephone number,
including area code 860/889-2621
Securities registered pursuant to
Section 12(b) of the Act:
Title of each class None
Name of each exchange on which registered
Securities registered pursuant to
section 12(g) of the Act:
Title of class Common Stock, $.01
Par Value
_____________________________________________________________________________
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
(or for such shorter period that registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 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 III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
5,399,641 shares of Common Stock were outstanding at January
31, 1997. The aggregate market value of the voting stock held
by non-affiliates of Norwich Financial Corp. (5,236,092
shares) totaled $99,486,000 based upon the closing price (of
$19.00 per share) as quoted on the NASDAQ National Market
System, as of January 31, 1997.
This Annual Report and Form 10-K incorporate into a single
document the requirements of the accounting profession and the
Securities and Exchange Commission. Portions of the Norwich
Financial Corp. Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of
this report.
Cross Reference Index
Page
PART 1 Item 1 - Business------------------------------------------ 53
Item 2 - Properties---------------------------------------- 67
Item 3 - Legal Proceedings--------------------------------- 68
Item 4 - Submission of Matters to a Vote of
Security Holders---------------------------------- 68
Executive Officers of the Registrant------------------------ 68
PART II Item 5 - Market for Registrant's
Common Equity and Related Shareholder
Matters------------------------------------------- 68
Item 6 - Selected Consolidated Financial Data-------------- 6
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations----- 7
Item 8 - Financial Statements and Supplementary Data------- 20
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure------------ 69
PART III Item 10 - Directors and Executive Officers of the
Registrant---------------------------------------- 69
Item 11 - Executive Compensation---------------------------- 69
Item 12 - Security Ownership of Certain Beneficial Owners
and Management------------------------------------ 69
Item 13 - Certain Relationships and Related Transactions---- 69
PART IV Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K--------------------------- 69
PART 1
Item 1 - Business
The main offices of Norwich Financial Corp. (NFC or the Company)
and The Norwich Savings Society (the Bank) are located at 4
Broadway, Norwich, Connecticut 06360. The telephone number is
(860)889-2621. The Company was organized under the laws of the
State of Delaware on December 10, 1987, to operate principally as
a bank holding company for the Bank. The Bank is the sole
subsidiary of the Company and its principal asset.
The Bank originates real estate, commercial and consumer loans in
southeastern Connecticut, funding its operations through the
taking of deposits in the same market area. In addition to the
traditional banking services, the Bank also offers a full range of
investment products including brokerage services through Liberty
Securities and insurance products through the Savings Bank Life
Insurance Company.
Principal Market Area
Headquartered in Norwich, which is located in New London County,
and about midway along the New York to Boston corridor with
convenient access via interstate highways and Amtrak service, the
Bank serves communities throughout eastern Connecticut with 16
full service branch offices in addition to the main office and a
complementary network of 21 ATM machines. The acquisition of The
Bank of Southeastern Connecticut and a de novo branch in New
London early in 1996 netted three new branches. The Bank's
customer base is essentially comprised of depositors from area
communities. The composition of these area communities includes
residential, shoreline and industrial in addition to the urban
areas of Norwich, New London, Groton and Willimantic.
Traditionally a defense oriented economy, dominated by 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
Uncasville 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
while North Stonington is the planned home for a Six Flags Theme
Park, a family oriented endeavor which will enhance the tourist
draw to the area. In addition to the regional tourism and gaming
concentration, eastern Connecticut's economy also benefits by the
presence of employers such as Pfizer, Inc. expanding its
pharmaceutical research facility in Groton and the University of
Connecticut locating its Marine Science and Technology Center in
Groton.
Lending and Investment Activities
The Bank is permitted by statute to invest its funds in a variety of
assets, of which the primary forms are loans and investment
securities. The Bank's loan portfolio includes variable and
fixed-rate real estate loans, consumer loans and commercial and
industrial loans. The Bank may also invest in a wide variety of
investment securities including mortgage-backed securities, U.S.
Government and agency obligations, corporate debt obligations,
municipal obligations and marketable common or preferred stocks listed
on a national securities exchange or shares of registered investment
companies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which includes a table setting
forth the average dollar amounts and types of loans and investment
securities held.
Management believes the Bank continues to conduct its lending
activities in accordance with appropriate underwriting criteria.
While the criteria may not allow the Bank to take advantage of every
opportunity, they are designed to ensure that the Bank will
accommodate credit-worthy borrowers. Underwriting standards are
reviewed on an on-going basis.
In originating loans, the Bank competes with other area financial
institutions which offer homogeneous products.
The composition of the Bank's loan portfolio is as follows:
<TABLE>
December 31,
1996 1995 1994 1993 1992
(Dollars in
thousands) Amount % Amount % Amount % Amount % Amount %
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
Real estate -
mortgage $335,668 70.4% $292,860 70.5% $250,809 72.3% $237,131 70.7% $230,306 68.0%
Real estate -
construction 15,113 3.2 11,366 2.7 5,304 1.5 6,619 2.0 6,287 1.9
Commercial and
financial 47,422 9.9 39,300 9.5 32,387 9.3 31,398 9.3 34,320 10.1
Consumer 78,908 16.5 71,715 17.3 58,741 16.9 60,361 18.0 67,890 20.0
$477,111 100.0% $415,241 100.0% $347,241 100.0% $335,509 100.0% $338,803 100.0%
</TABLE>
Residential Mortgage Loans
The Bank is authorized, under its charter, to engage in residential
and commercial mortgage activity within or outside the State of
Connecticut. As a matter of current policy, the Bank restricts its
mortgage activities to properties located within the State of
Connecticut. The Bank has placed its primary emphasis on
residential mortgage lending directly to individual applicants,
utilizing its branch office network and mortgage originators. The
Bank also solicits applications from builders and developers, but
these loans are generally limited to nonspeculative projects.
During 1996, the Bank originated 574 residential mortgage loans for
$63.0 million as compared to 1995 when it originated 447 loans
totaling $49.1 million. The mortgage loans originated during 1996
consisted of 155 refinances, 78 of which were previously with other
institutions and 419 purchases/new construction. The latter
amounted to 73% of the Bank's overall residential mortgage volume.
The Bank currently originates adjustable rate first mortgage loans
(ARMs) secured by residential properties which it retains for its
own portfolio as whole loans or as mortgage-backed securities.
These loans adjust annually (1-year ARM). Adjustable rate mortgages
carry a lifetime cap on aggregate adjustments of 6% and an annual
cap of 2%.
In addition to the adjustable rate mortgage product, the Bank
offers a variety of fixed-rate residential mortgage products.
The majority of these loans are underwritten for, and are
available to be sold in, the secondary market, to either Federal
National Mortgage Association (FNMA) or the Federal Home Loan
Mortgage Corporation (FHLMC). These loans have a maximum dollar
amount of $214,600.
The Bank also offers "Jumbo" mortgages, which individually are
in excess of $214,600. These mortgages are currently capped at
$350,000 if originated for retention in the Bank's own portfolio.
These mortgages are underwritten in conformity with the
requirements of a "private investor" secondary market. The Bank
is able to sell its jumbo mortgages in the "private investor"
market and may originate 15 and 30-year fixed rate mortgages up
to $650,000, if it chooses, for sale.
The Bank generally lends up to 80% of the appraised value of
owner occupied residential property, and up to 70% of non-owner
occupied residential property. Residential borrowers are
required to obtain private mortgage insurance covering the loan
balance in excess of 80% of appraised value. All conventional
first mortgages include "due-on-sale" clauses, which are
provisions giving the lender the right to declare a loan
immediately due and payable in the event that the borrower sells
or otherwise disposes of the real property which secures the
loan. "Due-on-sale" clauses contained in residential real estate
mortgages have been ruled enforceable in the State of Connecticut
by the Connecticut Supreme Court, the state's highest court. The
United States Congress, in the Garn Act, also has upheld the
enforceability of such clauses.
The Bank both purchases and sells mortgage loans without
recourse. As of December 31, 1996, the Bank's loan portfolio
included approximately $2.8 million of mortgage loans purchased
from other lenders, the majority of which are secured by property
located within the State of Connecticut. At December 31, 1995,
the Company had a commitment to sell $25 million of 1-4 family
residential loans to FHLMC. Of the $25 million commitment, $16.0
million was at the option of the Company. The Bank filled $14.8
million of the commitment. The remaining commitment of $10.2
million was forgiven by FHLMC. In December 1996, the Company
entered into a new commitment with FHLMC to sell $25 million of 1-
4 family residential loans to FHLMC by December 31, 1997. Of the
$25 million commitment, $20.5 million is at the option of the
Company. The Bank intends to fill this commitment from new fixed
rate loan originations in 1997.
The Bank offers a full range of other mortgage products
including financing for vacation and multi-family homes. Most of
the Bank's mortgage programs require that the Bank collect an
origination fee. This fee is generally calculated at 2% of the
mortgage amount.
For the foreseeable future, the Bank expects to continue to be a
major provider of residential mortgages in its primary lending
area.
Commercial Loans
The Bank also engages in commercial lending activities.
<TABLE>
December 31, 1996
(Dollars in thousands) Amount % of % of
Commercial Loans Total Loans
<CAPTION>
<S> <C> <C> <C>
Permanent commercial mortgages $142,738 72.5% 29.9%
Commercial business loans 47,422 24.0 9.9
Construction mortgages 6,823 3.5 1.4
$196,983 100.0% 41.2%
</TABLE>
As of December 31, 1996 and 1995, the total commercial loan
portfolio represented $197.0 million or 28.8% and $162.2 million
or 24.0%, of total assets, respectively. The majority of the
Bank's commercial business loan portfolio consists of loans which
adjust periodically to a margin over a contractual index and
therefore are rate sensitive.
For selected categories of loans outstanding, the following
table shows the maturities and sensitivities of loans to changes
in interest rates.
<TABLE>
December 31, 1996
Maturing
-------------------------------------------
After One
Within But Within After Five
(Dollars in thousands) One Year Five Years Years Total
<CAPTION>
<S> <C> <C> <C> <C>
Permanent commercial mortgages $7,771 $40,578 $94,389 $142,738
Commercial business loans 22,622 20,030 4,770 47,422
Construction mortgages 5,698 1,111 14 6,823
$36,091 $61,719 $99,173 $196,983
</TABLE>
<TABLE>
December 31, 1996
(Dollars in thousands) Maturing After One Year
<CAPTION>
<S> <C>
Predetermined interest rate
Permanent commercial mortgages $16,338
Commercial business loans 5,709
Construction mortgages 110
Adjustable interest rate
Permanent commercial mortgages 118,629
Commercial business loans 19,091
Construction mortgages 1,015
$160,892
</TABLE>
The Bank currently has full commercial lending powers, subject
only to applicable restrictions of Connecticut law on loans to
any one borrower. In addition, as a matter of policy, the Bank
generally limits its total extension of debt to one borrower to a
maximum of $3.5 million. In determining a borrower's debt
limitation, the Bank includes all direct debt, contingent
liabilities (guarantees and endorsements) and debt to related
entities. The Bank continually reviews its loan policies and
procedures in order to minimize its exposure to one obligor.
These reviews are based on a number of factors and from time-to-
time the internal limit to any one obligor may change. In March
1993, federal regulations restricting the loan-to-value ratios at
which banks may lend became effective. These regulations were
developed pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) and set the following limits on
loan-to-value ratios for various commercial properties: Raw Land
- - 65%; Real Estate Development - 75% and Non-residential
Construction - 80%. Commercial loans collateralized by real
estate are presently underwritten with a loan-to-value ratio of
no greater than 75%; however, under certain conditions the loan-
to-value ratio may equal 80% which is within the supervisory
limits established in FDICIA. In the case of undeveloped land,
the loan-to-value ratio is 60%.
Beginning in 1989, the commercial loan portfolio experienced
significant loan quality problems, resulting in write-offs,
transfers to nonperforming asset categories and restructured and
renegotiated loans, which have had a negative impact on the
Bank's profitability. Management constantly reviews its
underwriting procedures and philosophy with regard to desirable
business, with the focus on loan quality and broadening interest
rate spreads to enhance profitability.
Concentration of risk continues to be a major concern of
management. The Bank is located in eastern Connecticut and the
largest portion of the Bank's portfolio continues to be derived
from this market. There are both real and perceived risks
associated with the region's job market. The State of
Connecticut continues to be dependent on defense-related
businesses; principally, Pratt & Whitney, Sikorsky and, in the
Bank's principal market area, Electric Boat, where total
employment is forecasted to dip to 7,000 by 1997.
However, the economy of southeastern Connecticut continues to
focus on tourism and other leisure-time activities, including the
Mashantucket Pequot's Tribal Nation which owns Foxwoods Resort
Casino and the Mohegan Tribe of Indians of Connecticut which
operates the Mohegan Sun Resort Casino. Total employment at both
casinos is projected to exceed 14,000 in 1997.
Construction loans involve uncertainties inherent to the
estimation of construction costs, delays arising from labor
problems, material shortages and other contingencies which make
it difficult to evaluate accurately the total funds required to
complete a project and, consequently, the requisite loan-to-value
ratios. These risks are in addition to normal credit risks
related to other real estate loans.
Consumer Loans
The Bank's consumer loans include second mortgages, home equity
lines of credit, home improvement loans, automobile loans, boat
loans, recreational vehicle (RV) loans, education loans, personal
loans, cash reserve loans and land loans. The Bank originates
for its own portfolio both fixed rate second mortgage loans and
lines of credit secured by the equity in the borrower's primary
residence. Due to a decline in value of single-family
residences, the Bank periodically reinspects property to
determine current valuation. The Bank presently underwrites its
home equity credit lines at a loan-to-value no greater than 80%,
including any existing first mortgage. Additionally, the Bank is
offering a line of credit to customers who are currently closing
residential first mortgages with the Bank. Under this program,
the combined first and second mortgages may reach a loan-to-value
ratio of 80% maximum.
The Bank also is authorized to make educational loans under the
Connecticut Guaranteed Student Loan Program. The interest on
loans in this program is partially subsidized and fully
guaranteed by the federal government.
Connecticut savings banks may invest, without restriction as to
a percentage of assets, in lines of credit, overdraft loans and
credit card loans. With the acquisition of The Bank of
Southeastern Connecticut on January 2, 1996, the Bank acquired
outstanding credit card loans. The balance of credit card loans
at December 31, 1996 is $120,000.
Total consumer loans increased $7.2 million or 10.0% from the
end of 1995 to the end of 1996. The increase was primarily in
the second mortgages and home equity lines of credit, which were
$3.7 million (6.7%) higher at the end of 1996 than at the end of
1995. Automobile loans increased $2.7 million (70.8%) during
1996. Other categories of consumer loans reflected minor and
offsetting increases and decreases.
Nonperforming Assets
The Bank's policy is to cease accrual of interest on loans which
are 90 days or more past due and to reverse any interest earned
but not paid. Additionally management may designate as
nonaccrual, loans which are currently performing based on
knowledge it has obtained relative to specific circumstances that
may result in the borrower being unable to pay interest or
otherwise perform in accordance with contractual obligations. At
December 31, 1996, there were no management designated nonaccrual
loans.
The Bank has made certain concessions on restructured loans in
an attempt to maximize the ultimate collectability of these
loans. These concessions may include deferring or lowering
principal payments, reducing interest rates to below market rates
charged for loans having similar risks, adding interest due to
the principal balance and collecting interest at a reduced rate.
While all of these loans are performing in accordance with the
restructured terms, management has designated $537,000 as
nonaccrual, as of December 31, 1996.
In addition to the nonaccrual loans of $5.3 million, management
has identified $3.7 million of potential problem loans as of
December 31, 1996. These loans are currently performing in
accordance with the loan terms and, therefore, are accruing
interest.
The Company's policy is to carry foreclosed properties at the
lower of fair value minus estimated costs to sell or cost, net of
the allowance for losses. Review and evaluation of the carrying
values of foreclosed properties are performed on an ongoing
basis.
Nonperforming assets, exclusive of "loans and foreclosed
properties held for sale," showed improvement year-over-year of
$2.4 million. This positive trend occurred primarily as a result
of charge-offs taken during 1996.
<TABLE>
December 31,
(Dollars in thousands) 1996 1995 1994 1993 1992
<CAPTION>
<S> <C> <C> <C> <C> <C>
Nonperforming assets, exclusive of
loans and foreclosed properties
held for sale
Nonaccrual loans $5,289 $8,017 $7,702 $16,021 $24,658
Nonperforming restructured loans 537 1,096 602 769 3,470
Foreclosed properties, before
allowance for losses 1,167 264 1,597 8,368 13,951
Total nonperforming assets, exclusive
of nonperforming loans and
foreclosed properties held for sale $6,993 $9,377 $9,901 $25,158 $42,079
Total allowance for losses $13,928 $13,168 $9,235 $10,660 $14,651
Nonperforming assets as a percent
of total loans and foreclosed
properties, exclusive of nonperforming
loans and foreclosed properties held
for sale 1.46% 2.25% 2.83% 7.02% 11.65%
Total allowance for losses to total
nonperforming assets, exclusive of
nonperforming loans and foreclosed
properties held for sale 199.17% 140.43% 93.27% 42.37% 34.82%
</TABLE>
<TABLE>
December 31,
(Dollars in thousands) 1996 1995 1994 1993 1992
<CAPTION>
<S> <C> <C> <C> <C> <C>
Nonperforming assets, exclusive
of loans and foreclosed
properties held for sale
Real estate
Residential $1,775 $1,636 $1,587 $5,524 $7,738
Commercial 3,747 5,098 6,150 13,506 24,245
5,522 6,734 7,737 19,030 31,983
Commercial 1,331 1,978 1,583 5,131 8,895
Consumer 140 665 581 997 1,201
$6,993 $9,377 $9,901 $25,158 $42,079
Nonperforming loans and foreclosed
properties held for sale
Nonperforming loans $- $2,208 $1,450 $- $-
Foreclosed properties - 1,919 1,811 - -
Total nonperforming loans and
foreclosed properties held for sale $- $4,127 $3,261 $- $-
</TABLE>
<TABLE>
December 31,
1996 1995
(Dollars in thousands) Percent of Percent of
Amount Total Amount Total
<CAPTION>
<S> <C> <C> <C> <C>
Foreclosed property by type, exclusive of
foreclosed properties held for sale
Residential mortgage $299 25.6% $- -%
Commercial mortgage 701 60.1 95 36.0
Commercial 155 13.3 169 64.0
Consumer 12 1.0 - -
$1,167 100.0% $264 100.0%
</TABLE>
<TABLE>
Asset Quality Years Ended December 31,
(Dollars in thousands) 1996 1995 1994 1993 1992
<CAPTION>
<S> <C> <C> <C> <C> <C>
Loans outstanding at year end $477,111 $415,241 $347,241 $335,509 $338,803
Average loans outstanding $460,642 $393,705 $350,306 $346,448 $374,813
Allowance for loan losses, beginning
of the year $13,168 $8,654 $9,689 $12,343 $19,241
Provision (recovery) 1,400 5,500 3,370 - (426)
Allowance - The Bank of Mystic, Inc. - 1,839 - - -
Allowance - The Bank of Southeastern
Connecticut 2,506 - - - -
Loans charged off
Real estate - mortgage 2,646 1,540 3,718 1,585 1,761
Real estate - construction 134 465 282 3 719
Commercial business 997 838 975 1,450 4,086
Consumer 357 336 188 397 692
Total loans charged off 4,134 3,179 5,163 3,435 7,258
Recoveries on loans previously
charged off
Real estate - mortgage 522 158 171 396 315
Commercial business 333 145 533 234 62
Consumer 133 51 54 151 409
Total recoveries 988 354 758 781 786
Net loans charged off 3,146 2,825 4,405 2,654 6,472
Allowance for loan losses, end
of year $13,928 $13,168 $8,654 $9,689 $12,343
Net loans charged off as a
percentage of average loans
outstanding 0.68% 0.72% 1.26% 0.77% 1.73%
Allowance as a percentage of
loans outstanding at year end 2.92% 3.17% 2.49% 2.89% 3.64%
</TABLE>
Management's judgment as to the amount of the provisions for losses on
loans and foreclosed properties takes into account a variety of
factors, including (a) the experience of management and the Bank, (b)
management's analysis of individual loans and the overall risk
characteristics of the loan portfolio, (c) the results of the
statutorily mandated examination of the loan portfolio by regulatory
agencies, independent reviews and evaluations of loans by the Loan
Committee of the Bank's Board of Directors and the independent
auditors' annual audit and (d) current economic conditions.
In allocating the allowance for loan losses, amounts allocated to the
individual categories of loans include (1) allowances for specific
impaired loans, (2) an allocation of remaining allowance amounts based
on the experience of management and the Bank, (3) the overall risk
characteristics of the individual loan category and (4) the current
economic conditions that could affect the individual loan categories.
<TABLE>
December 31,
1996 1995 1994 1993 1992
Allowance Allowance Allowance Allowance Allowance
for Loan % of for Loan % of for Loan % of for Loan % of for Loan % of
(Dollars in thousands) Losses Total Losses Total Losses Total Losses Total Losses Total
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -
mortgage $9,314 66.9% $8,854 67.2% $5,389 62.3% $6,037 62.3% $5,474 44.3%
Real estate -
construction 747 5.4 657 5.0 575 6.6 700 7.2 1,055 8.6
Commercial business 2,207 15.8 2,089 15.9 1,625 18.8 1,868 19.3 5,294 42.9
Consumer 1,660 11.9 1,568 11.9 1,065 12.3 1,084 11.2 520 4.2
$13,928 100.0% $13,168 100.0% $8,654 100.0% $9,689 100.0% $12,343 100.0%
</TABLE>
Investment Activities
Connecticut law has provided savings banks chartered in the State
of Connecticut authority to make a wide range of investments
deemed to be prudent by their boards of directors. Subject to
various restrictions, they traditionally have been able to own
commercial paper, bonds of government agencies, including states
and municipalities, corporate bonds, mutual fund shares, debt and
equity obligations issued by creditworthy entities, whether traded
on public securities exchanges or placed privately for investment
purposes and interests in real estate located in or outside of
Connecticut without limitations as to use.
However, beginning on December 31, 1991, FDICIA has limited the
ability of state-chartered banks to invest in "equity securities."
"Equity securities" for this purpose include standard equity
interests and also most interests in real estate. FDICIA
generally permits state-chartered banks to invest in equity
securities only to the same extent as national banks. With the
limited exception of certain convertible securities, national
banks may not invest in equity securities. Nonetheless, FDICIA
permits certain insured state banks to obtain an exception to the
equity investment rules that permits banks to invest in marketable
common or preferred stocks listed on a national securities
exchange or share of registered investment companies in an amount
equal to up to 100% of the Bank's Tier 1 capital. The Bank has
been granted this exception. As of December 31, 1996, the
marketable equity securities portfolio was $6,203,000.
Because of FDICIA's equity investment restrictions, one of the
Company's subsidiaries must divest a real estate property interest
of $504,000 by December of 1998. In accordance with FDICIA, the
Bank has filed a Divestiture Plan with the FDIC stating that its
subsidiary will sell this remaining interest as quickly as
prudently possible, and in any event before December 19, 1998.
Due to a continuing shift in the Bank's mix of liabilities toward
rate sensitive deposit instruments, it has been the Bank's
practice to utilize a variety of investment vehicles to achieve a
better match with deposit maturities. In addition to providing
for liquidity requirements, the Bank maintains investment
portfolios to employ funds not currently required for its various
lending activities. Having a portion of assets in short-term
securities has proved beneficial to the Bank during periods of
rapidly rising interest rates. During such periods, as short-term
securities mature, the proceeds can be reinvested in securities at
market rates. In a declining rate environment, loans are likely
to have higher yields than debt securities. Nonetheless,
management considers it appropriate to utilize its investment
portfolio to ameliorate the effects on the Bank of future rate
volatility in the financial markets.
A summary of investment and mortgage-backed securities classified
as available for sale and held to maturity at December 31, 1996,
1995 and 1994, are as follows:
<TABLE>
1996 1995 1994
Amortized Market Amortized Market Amortized Market
(Dollars in thousands) Cost Value Cost Value Cost Value
<CAPTION>
Available for sale
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations $1,494 $1,490 $13,976 $14,055 $14,809 $14,311
Corporate securities 2,018 2,013 - - - -
Foreign governments 850 850 750 750 750 750
Marketable equity securities 5,574 6,203 208 477 208 284
Mortgage-backed securities 100,844 101,025 93,456 93,921 81,283 77,587
Total available for sale $110,780 $111,581 $108,390 $109,203 $97,050 $92,932
Held to maturity
U.S. Government and agency
obligations $20,945 $20,941 $95,281 $95,287 $114,694 $114,480
Money market instruments 31,769 31,765 15,691 15,701 - -
Total held to maturity $52,714 $52,706 $110,972 $110,988 $114,694 $114,480
Total investments $163,494 $164,287 $219,362 $220,191 $211,744 $207,412
</TABLE>
Deposits and Other Sources of Funds
The Bank seeks to attract money market and demand deposit
accounts as well as certificates of deposit from both personal and
business sources. Individual Retirement Accounts and passbook
savings are also primary sources of funds. The shortest term
certificate of deposit now offered is 91 days while the longest
maturity is 8 years.
In June 1993, FDICIA's Truth-in-Savings provisions became
effective. These provisions significantly increased the federally
mandated disclosures that all banks must provide with respect to
deposit accounts and also restricted banks' flexibility regarding
how interest may be calculated. The additional costs of
compliance with the Truth-in-Savings requirements were not
material.
Competition
The Company's market area is highly competitive with a wide range
of financial institutions including commercial banks, both mutual
and stock owned savings banks, savings and loan associations and
credit unions. In addition to traditional banking institutions,
the Bank also competes with insurance and finance companies,
investment companies and brokers for the same funds. The Bank's
market area has become more competitive in recent years as
multibranch regional institutions have resulted from recent
mergers and acquisitions, new products and rate structures have
been introduced and customers of financial institutions have
become more sophisticated.
Under Connecticut banking laws, mergers or acquisitions of
Connecticut banks and bank holding companies with banks and
holding companies of another state are permissible provided that
the other state's interstate banking law is no more restrictive
than Connecticut's. Connecticut banking laws also allow out-of-
state bank holding companies to establish a financial institution
in Connecticut subject to the same conditions. As of September
1995, federal interstate banking legislation extended this
interstate bank holding company acquisition authority nationwide.
From time-to-time, competing financial institutions set rates
higher than market rates to attract or retain deposits, a fact
which may cause upward pressure on the Bank's rate structure or a
loss of deposits.
Employees
As of December 31, 1996, the Company and the Bank had 234 full-
time equivalent employees, including 49 officers. Management
considers the Bank's relations with its employees to be good. The
Bank's employees are not represented by any collective bargaining
group.
Regulation and Supervision
As a Connecticut-chartered capital stock savings bank, the
deposits of which are insured by the Federal Deposit Insurance
Corporation (the FDIC), the Bank is subject to extensive
regulation and supervision by both the Connecticut Banking
Commissioner and the FDIC. The Company also is subject to certain
regulations of the Board of Governors of the Federal Reserve
System (the Federal Reserve Board) and the Connecticut Banking
Commissioner. This governmental regulation is intended primarily
to protect depositors and the FDIC's Bank Insurance Fund, not
stockholders.
Connecticut Regulation
The Connecticut Banking Commissioner regulates the Bank's
internal organization as well as its deposit, lending and
investment activities. The approval of the Connecticut Banking
Commissioner is required, among other things, for the
establishment of branch offices and business combination
transactions. The Connecticut Banking Commissioner conducts
periodic examinations of the Bank. Many of the areas regulated by
the Connecticut Banking Commissioner are subject to similar
regulation by the FDIC.
Connecticut banking laws grant banks broad lending authority.
Subject to certain limited exceptions, however, total secured and
unsecured loans made to any one obligor pursuant to this statutory
authority may not exceed 25% of the Bank's capital, surplus,
undivided profits and loss reserves.
The Bank is prohibited by Connecticut banking law from paying
dividends except from its net profits, which are defined as the
remainder of all earnings from current operations. The total of
all dividends declared by the Bank in any calendar year may not,
unless specifically approved by the Connecticut Banking
Commissioner, exceed the total of its net profits of that year
combined with its retained net profits of the preceding two years.
These dividend limitations can affect the amount of dividends
payable to stockholders of the Company because dividends received
by the Company from the Bank are the primary source of funds for
the Company. Under resolutions adopted by the Board of Directors
of the Bank on October 23, 1991, no dividend will be declared or
paid by the Bank which, in the judgment of the Board, would reduce
the Bank's leverage capital ratio below 8%, or any higher level
which the Board considers appropriate in light of the prevailing
economic circumstances. These resolutions will remain in effect
until amended or revoked by subsequent action of the Board.
Under Connecticut banking law, no person may acquire the
beneficial ownership of more than 10% of any class of voting
securities of a bank chartered by the State of Connecticut or
having its principal office in Connecticut or a bank holding
company thereof, or after obtaining 10%, increase said holdings to
25% or more, without the prior notification of and lack of
disapproval by the Connecticut Banking Commissioner.
Any state-chartered bank meeting statutory requirements may, with
the approval of the Connecticut Banking Commissioner, establish
and operate branches in any town or towns within the state.
The Connecticut Interstate Banking Act permits Connecticut banks
to engage in stock acquisitions of, and mergers with, depository
institutions in other states with reciprocal legislation. All of
the other New England states, and a majority of the other states,
have enacted reciprocal legislation. Federal interstate banking
legislation extended this interstate bank holding company
acquisition authority nationwide as of September 1995. Several
interstate mergers and acquisitions involving Connecticut bank
holding companies or banks with offices in the Bank's service area
and bank holding companies or banks headquartered in other states
have been completed. Under recent federal and state legislation,
interstate banking and branching authority will be expanded and
facilitated. Such legislation may lead to increased interstate
banking activity in Connecticut and elsewhere.
FDIC Regulation
The Bank's deposit accounts are insured by the Bank Insurance
Fund of the FDIC, generally, to a maximum of $100,000 for each
insured depositor. As with all state-chartered FDIC-insured
banks, the Bank is subject to extensive supervision and
examination by the FDIC and also is subject to FDIC regulations
regarding many aspects of its business, including types of deposit
instruments offered and permissible methods for acquisition of
funds.
Pursuant to FDICIA, in September 1992, the FDIC implemented a
system of risk-related deposit insurance assessments. Initially
under the new system, beginning January 1, 1993, insurance
premiums for all banks varied between .23% and .31% of total
deposits, depending upon the capital level and supervisory rating
of the institution. On May 31, 1995, when the desired Bank
Insurance Fund (BIF) reserve ratio of 1.25% was achieved by the
FDIC, a new risk-based assessment rate schedule of .04% to .31% of
total deposits was established commencing on June 1, 1995. As a
result of this new schedule, during the third quarter of 1995, the
Company benefited from a reduction in the Bank's deposit insurance
premium as well as from a refund for deposit insurance premiums
paid in previous quarters. The FDIC evaluates the adequacy of its
assessment schedule and may adjust the schedule every six months
as the FDIC deems necessary to maintain the BIF reserve ratio at
the designated level. Effective January 1, 1996, the schedule was
further revised resulting in assessment rates ranging from .000%
to .270% of total deposits, subject to the statutory requirement
that all institutions pay at least $2,000 annually for FDIC
insurance. The lower FDIC assessment rates continued throughout
1996.
As a result of the Deposit Insurance Act of 1996, a new Financing
Corporation (FICO) Payment Computation was established. Beginning
January 1, 1997, and for the three following years, BIF-assessable
deposits will be charged 20% of the rate imposed on SAIF-
assessable deposits. The FICO BIF annual rate for 1997 is .013%.
FDIC risk-based capital requirements became fully effective at
the end of 1992. Under these requirements, all FDIC-insured banks
are required to maintain minimum levels of "capital" based upon an
institution's total "risk-weighted assets." For purposes of these
requirements, "capital" is comprised of both Tier 1 capital and
Tier 2 capital. Tier 1 capital consists primarily of common stock
and limited amounts of perpetual preferred stock. Tier 2 capital
consists of the allowance for loan losses (subject to certain
limitations), certain preferred stock, subordinated debt and
convertible securities. In determining total capital, the amount
of Tier 2 capital may not exceed the amount of Tier 1 capital. A
bank's total "risk-weighted assets" are determined by assigning
the bank's assets and off-balance sheet items (e.g., letters of
credit) to one of four risk categories based upon their relative
credit risk. Under the regulations, the greater the risk
associated with an asset, the greater the amount of such assets
that will be subject to the capital requirements. All
FDIC-insured banks are required to maintain minimum ratios of Tier
1 and total capital to risk-weighted assets of 4% and 8%,
respectively. At December 31, 1996, the Bank's Tier 1 and total
risk-based capital ratios were 13.51% and 14.78%, respectively,
compared to 16.17% and 17.45% in 1995. Management believes that
the Bank will remain in full compliance with applicable capital
requirements.
A leverage ratio requirement adopted by the FDIC became effective
in 1991. Under this requirement, all FDIC-insured institutions
are required to maintain a ratio of common equity, excluding
intangible assets, to total assets of at least 3% for the most
highly rated institutions and 4% to 5% for most institutions. By
resolution adopted on October 23, 1991, the Board of Directors of
the Bank adopted a policy that the Bank will endeavor to maintain
leverage capital at or in excess of 8% of total assets. This
policy will remain in effect until amended or revoked by
subsequent action of the Board. As of December 31, 1996, the
Bank's leverage capital ratio was 10.06%, compared to 10.38% as of
December 31, 1995.
In addition, FDICIA categorizes banks based on five separate
capital levels and triggers certain mandatory and discretionary
federal banking agency responses for institutions that fall below
certain capital levels. These categories range from "well
capitalized" for the most highly capitalized institutions to
"critically undercapitalized" for the least capitalized
institutions. A bank is categorized as "well capitalized" if it
maintains a leverage ratio of at least 5%, a total capital ratio
of at least 10%, a Tier 1 risk-based capital ratio of at least 6%,
and is not subject to a capital order or directive. Based on its
regulatory capital ratios at December 31, 1996, the Company and
the Bank are well capitalized as defined in federal banking agency
regulations.
FDICIA also restricts the ability of FDIC-insured state banks,
such as the Bank, to acquire and retain equity investments.
Generally, state banks may hold equity securities only to the
extent permitted for national banks. However, FDICIA also permits
certain state banks to acquire or retain equity investments in an
amount up to 100% of Tier 1 capital in either (1) common or
preferred stock listed on a national securities exchange, or (2)
shares of a registered investment company. The Bank has been
granted this exception.
Pursuant to FDICIA, in December 1993, the FDIC issued a final
rule concerning activities of FDIC-insured state banks. Under the
final rule, an insured state bank must obtain the FDIC's prior
consent before directly, or indirectly through a majority-owned
subsidiary, engaging "as principal" in any activity that is not
permissible for a national bank unless one of the exceptions
contained in the regulation applies. The final rule sets out
application procedures for requesting FDIC's consent; provides a
phase-out period for activities which are not approved by the
FDIC; and sets out conditions that may be imposed at the FDIC's
discretion when approving applications. The final rule has not
had a material impact on the business of the Bank.
Pursuant to FDICIA, in June 1995, the federal bank regulatory
agencies issued final rules establishing standards for safety and
soundness at FDIC-insured institutions and their holding
companies. These rules became effective in August 1995. These
standards formalize in regulation the fundamental standards used
by the federal bank regulatory agencies to assess the operational
and managerial qualities of an institution. The rules establish
operational, managerial, asset quality and earnings standards for
FDIC-insured banks and their holding companies and standards that
prohibit as an unsafe and unsound practice the payment of
compensation that is excessive or could lead to material financial
loss to such institutions. These standards are designed to
identify potential safety and soundness concerns and ensure that
action is taken to address those concerns before they pose a risk
to the deposit insurance funds. The Bank is in compliance with
these standards.
FDIC insurance of deposits may be terminated by the FDIC, after
notice and hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in
an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, rule or order of, or
conditions imposed by, the FDIC. The Bank is not aware of any
practice, condition or violation that might lead to termination of
its deposit insurance.
Federal Reserve System Regulation
Under the regulations of the Federal Reserve System, depository
institutions such as the Bank are required to maintain reserves
against their transaction accounts. These regulations generally
require the maintenance of reserves of 3.0% against transaction
accounts of $52.0 million or less and 10.0% of the amount of such
accounts in excess of such amount. These amounts and percentages
are subject to adjustment by the Federal Reserve Board.
The Company is subject to regulation by the Federal Reserve Board
as a registered bank holding company. The Federal Bank Holding
Company Act of 1956, as amended (the BHCA), under which the
Company registered, limits the types of companies which the
Company may acquire or organize and the activities in which they
may engage. In general, a bank holding company and its
subsidiaries are prohibited from engaging in or acquiring control
of any company engaged in nonbanking activities unless such
activities are so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The Company
has not determined which, if any, of these or other permissible
nonbanking activities it might seek to engage in.
The Federal Reserve Board has established capital adequacy
guidelines for bank holding companies that are similar to the FDIC
capital requirements described above. As of December 31, 1996,
the Company's Tier 1 and total risk-based capital ratios were
13.85% and 15.12%, respectively, and the Company's leverage
capital ratio was 10.32%, compared to 16.80%, 18.07% and 10.78%,
respectively, as of December 31, 1995. Management believes that
the Company will remain in full compliance with applicable capital
requirements.
Under the BHCA, a bank holding company is required to obtain the
prior approval of the Federal Reserve Board to acquire, with
certain exceptions, more than 5% of the outstanding voting stock
of any bank or bank holding company, to acquire all or
substantially all of the assets of a bank or to merge or
consolidate with another bank holding company.
As described previously, the Connecticut Interstate Banking Act
and recent federal legislation specifically permits Connecticut
bank holding companies and banks to acquire or be acquired by
banks or bank holding companies in other states with reciprocal
merger and acquisition laws. As of September 1995, federal
interstate banking legislation extended this interstate bank
holding company acquisition authority nationwide. Federal
antitrust laws place limitations on the acquisition of banks and
other businesses.
Under the BHCA, the Company, the Bank, and any other subsidiaries
are prohibited from engaging in certain reciprocal arrangements in
connection with any extension of credit or provision of any
property or services. The Bank is subject to certain restrictions
imposed by the Federal Reserve Act on making any investments in
the stock or other securities of the Company or any of its
subsidiaries, and the taking of such stock or securities as
collateral for loans to any borrower.
The Bank also is subject to certain restrictions imposed by the
Federal Reserve Act on the amount of loans it can make to the
Company or its other affiliates. Such loans must be
collateralized as provided by the Federal Reserve Act. The amount
of such loans may not exceed (when aggregated with certain other
transactions between the Bank and the Company) 10% of the capital
stock and surplus of the Bank. Since the formation of the
Company, there have been no loans made by the Bank to the Company.
The Company is required under the BHCA to file annually with the
Federal Reserve Board reports of operations, and it, the Bank, and
any other subsidiaries are subject to examination by the Federal
Reserve Board. In addition, the Company, as a bank holding
company, is registered with the Connecticut Banking Commissioner
under the Connecticut Bank Holding Company and Bank Acquisition
Act.
Effect of Governmental Policy
Banking is a business that depends on interest rate
differentials. One of the most significant factors affecting the
Company's and the Bank's earnings is the difference between (1)
the interest rates paid by the Bank on its deposits and its other
borrowings and (2) the interest rates received by the Bank on
loans extended to its customers and securities held in the Bank's
investment portfolio. The value and yields of its assets and the
rates paid on its liabilities are sensitive to changes in
prevailing market rates of interest. Thus, the earnings and
growth of the Bank will be influenced by general economic
conditions, the monetary and fiscal policies of the federal
government and policies of regulatory agencies, particularly the
Federal Reserve Board, that implement national monetary policy.
The nature and impact of any future changes in monetary policies
cannot be predicted.
The present bank regulatory climate is undergoing significant
change, both as it affects the banking industry itself and as it
affects competition between banks and nonbanking financial
institutions. There has been significant regulatory change in the
regulation and operations of savings associations, in the bank
merger and acquisition area, in the products and services banks
can offer, and in the nonbanking activities in which bank holding
companies can engage. In part as a result of these changes, banks
are competing actively with other types of depository institutions
and with nonbank financial institutions, such as money market
funds, brokerage firms, insurance companies and other financial
services enterprises. It is not possible at this time to assess
what impact these changes in the regulatory climate ultimately
will have on the Bank.
Moreover, certain legislative and regulatory proposals that could
affect the Bank and the banking business in general are pending,
or may be introduced, before the United States Congress, the
Connecticut General Assembly and various governmental agencies.
These proposals include measures that may alter further the
structure, regulation and competitive relationship of financial
institutions, and that may subject the Bank to increased
regulation, disclosure and reporting requirements. In addition,
the various banking regulatory agencies frequently propose rules
and regulations to implement and enforce existing legislation. It
cannot be predicted whether or in what form any legislation or
regulations will be enacted or the extent to which the business of
the Company and/or the Bank will be affected thereby.
Separate legislation was enacted in 1996 to repeal most of
Section 593 of the Internal Revenue Code pertaining to how
qualified savings institutions calculate their bad debt deduction
for federal income tax purposes. The impact of this legislation
is immaterial to the financial position of the Bank.
Item 2 - Properties
In addition to the main office of the Company and the Bank,
located at 4 Broadway, Norwich, Connecticut, the Bank operated 16
banking branches located throughout New London, Tolland and
Windham counties in 1996. The following table sets forth certain
information regarding the banking offices of the Bank.
Lease
Date Owned or Expiration
Office Location Opened Leased Date
Main Office 4 Broadway 1824 Owned Not Applicable
Norwich, CT
Norwichtown 45 Town Street 1956 Leased 9/30/2001
Norwich, CT
Ledyard Rt. 12 & King's Highway 1964 Leased 10/1/2004
Gales Ferry, CT
West Main 624 W. Main St. 1972 Leased 1/31/2002
Norwich, CT
Taftville 30 Norwich Avenue 1975 Leased 7/31/2000
Norwich, CT
Montville Route 32 1976 Leased 7/31/2001
Uncasville, CT
Mansfield Route 195 1979 Leased 6/30/1999
Mansfield Center, CT
Plainfield 67 Lathrop Road 1980 Leased 5/10/2001
Plainfield, CT
Mystic Rt. 27 & Whitehall Ave. 1980 Leased 9/30/2005
Mystic, CT
Mystic 12 Roosevelt Avenue 1995 Leased 2/14/1998
Mystic, CT
Colchester 139 South Main St. 1981 Leased 4/30/1998
Colchester, CT
Griswold Route 138 1989 Leased 10/31/2004
Griswold, CT
Groton 218 Route 12 1989 Leased 9/30/2002
Groton, CT (land)
Waterford 119 Boston Post Rd. 1995 Leased 3/31/2005
Waterford, CT
New London 15 Masonic St. 1996 Leased 11/01/2000
New London, CT
Waterford 716 Broad St. Ext. 1996 Owned Not Applicable
Waterford, CT
Flanders 125 Boston Post Rd. 1996 Leased 11/30/2003
East Lyme, CT
Item 3 - Legal Proceedings
There are no pending legal proceedings to which the Company or
the Bank is a party, other than ordinary routine litigation in the
normal course of business. After consultation with legal counsel,
it is the opinion of management that the outcome of existing
litigation will have no material adverse effect on the financial
position or future operating results of the Company or the Bank.
Item 4 - Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1996, no matter was submitted to a
vote of stockholders of the Company.
Executive Officers of the Registrant
The following persons are the executive officers of the Company:
Daniel R. Dennis, Jr., age 52, has been the Chairman of the
Board of Directors, President and Chief Executive Officer of
the Company since its incorporation in August 1988. Mr.
Dennis was elected President and Chief Executive Officer of
the Bank in 1985.
Michael J. Hartl, age 55, has been the Executive Vice
President, Treasurer and Chief Financial Officer and a
director of the Company since its incorporation in August
1988. Mr. Hartl has been Executive Vice President, Treasurer
and Chief Financial Officer of the Bank since 1985 and a
director since 1986.
Daphne P. Cannata, age 42, has served as Vice President and
Corporate Secretary of the Company since its incorporation in
August 1988. Ms. Cannata has been Senior Vice President -
General Administration and Corporate Secretary of the Bank
since March 1989, and has held various positions with the Bank
since 1978.
James R. Brown, age 61, has been Senior Vice President -
Lending of the Bank since 1985.
Richard W. Dennison, age 51, has been Senior Vice President -
Systems and Operations of the Bank since 1989.
James F. Dewey, age 55, has been Senior Vice President -
Marketing and Branch Administration of the Bank since 1985.
Lori J. Ferro, CPA, age 32, has been Vice President and
Controller of the Company and the Bank since 1995. Prior to
joining the Company, Ms. Ferro was a Senior Manager in the
Hartford office of KPMG Peat Marwick LLP.
Each of the above officers is elected by the Board of Directors
of the Company and/or the Bank to hold office until the next
annual election of officers or until his or her successor shall
have been elected. There is no relationship by blood, marriage or
adoption between any executive officer or director of the Company
and any other executive officer or director of the Company.
PART II
Item 5 - Market for Registrant's Common Equity and Related
Shareholder Matters
Reference is made to "Common Stock Information" contained
elsewhere in this report.
Dividends are paid by the Company from its assets which are
provided mainly by dividends from the Bank. However, certain
restrictions exist regarding the ability of the Bank to transfer
funds to the Company in the form of cash dividends, loans or
advances.
Connecticut capital stock savings banks, such as the Bank, may
not declare cash dividends in excess of "net profits." "Net
profits" are defined statutorily as "the remainder of all earnings
from current operations." In addition, the total of all cash
dividends declared in any calendar year may not, without the
specific approval of the Connecticut Banking Commissioner, exceed
the total of its net profits of that year combined with its
retained net profits of the preceding two years. For additional
information on dividend restrictions, see Item 1 under headings
"Connecticut Regulation" and "FDIC Regulation."
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information concerning the directors and executive officers of
the Company and Section 16 reporting persons is included in the
Proxy Statement under the caption "Election of Directors (Proposal
1)," and in Part I of this Report under the caption "Executive
Officers of the Registrant," and is incorporated by reference
herein.
Item 11 - Executive Compensation
Information concerning the compensation paid and benefits
provided to directors and executive officers of the Company is
included in the Proxy Statement under the caption "Election of
Directors (Proposal 1) - Compensation and Related Matters," and
"Election of Directors (Proposal 1) - Employee Benefit Plan," and
is incorporated by reference herein.
Item 12 - Security Ownership of Certain Beneficial Owners and
Management
Information concerning the ownership of the Company's securities
by certain beneficial owners and management is included in the
Proxy Statement under the caption "Voting Securities and Principal
Holders Thereof" and "Election of Directors (Proposal 1)" and is
incorporated by reference herein.
Item 13 - Certain Relationships and Related Transactions
Information concerning transactions between the Company and
management, directors and certain beneficial owners of the
Company's securities is contained in the Proxy Statement under the
caption "Election of Directors (Proposal 1) - Transactions with
Management and Others" and is incorporated by reference herein.
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as part of this report.
(1) Financial Statements:
Norwich Financial Corp. and Subsidiary
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders'Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Selected Quarterly Consolidated Financial Data
(2) Financial Statement Schedules:
All Schedules to the Consolidated Financial Statements
required by Article 9 of Regulation S-X are not
required under the related instructions or are
disclosed in the financial statements and related notes
or are inapplicable and therefore have been omitted.
(3) Exhibits:
Exhibit No. Description
3.1 Certificate of Incorporation of the Company,
as amended (Incorporated by reference to
Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1989)
3.2 Bylaws of the Company, as amended (Incorporated
by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989)
4 Instruments Defining Rights of Security Holders
(Included in Exhibits 3.1 and 3.2)
10.1* Amended and Restated The Norwich Savings Society
1986 Stock Option and Incentive Plan, as restated
September 11, 1996
10.2* Amended and Restated Norwich Financial Corp.
1986 Stock Option Plan for Outside Directors, as
restated September 11, 1996
10.3* Form of The Norwich Savings Society 1986 Stock
Option and Incentive Plan Incentive Stock Option
Agreement (Incorporated by reference to Exhibit
4.5 of the Company's Registration Statement on
Form S-8 (No. 33-24866) filed on October 7, 1988)
10.4* Form of The Norwich Savings Society 1986 Stock
Option and Incentive Plan Non-Qualified Stock
Option Agreement (Incorporated by reference to
Exhibit 4.6 of the Company's Registration
Statement on Form S-8 (No. 33-24866) filed on
October 7, 1988)
10.5a* Employment Agreement between the Company, the
Bank and the President and Chief Executive
Officer of the Bank and the Company, (Incorporated
by reference to Exhibit 10.4 to the Company's
quarterly report on Form 10-Q for the quarter
ended September 30, 1995 filed on November 2, 1995)
10.5b* Employment Agreement between the Company, the Bank
and the Executive Vice President, Treasurer and
Chief Financial Officer of the Bank and the Company,
(Incorporated by reference to Exhibit 10.4 to the
Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1995 filed on November 2,
1995)
10.5c* Employment Agreement between the Company, the Bank
and the Vice President and Secretary of the Company
and Senior Vice President of the Bank (Incorporated
by reference to Exhibit 10.5c to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995)
10.5d* Employment Agreement between the Bank and a Senior
Vice President of the Bank (Incorporated by reference
to Exhibit 10.5d to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
10.5e* Employment Agreement between the Bank and a Senior
Vice President of the Bank (Incorporated by reference
to Exhibit 10.5e to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
10.6 The Norwich Savings Society Thrift Plan (Incorporated
by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995)
10.6a First Amendment to The Norwich Savings Society Thrift
Plan
10.7* Amended and Restated Norwich Financial Corp. 1994
Stock Option and Incentive Plan, as restated September
11, 1996
10.8* Amended and Restated Norwich Financial Corp. 1994
Stock Option Plan for Outside Directors, as restated
September 11, 1996
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant (Incorporated by
reference to Exhibit 2 to the Company's registration
Statement on Form S-4 (No. 33-19887) filed on January
29, 1988)
23.1 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney
27 Financial Data Schedule
*Management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report.
A copy of any exhibit listed above will be provided by the Company to any
stockholder upon the written request of such stockholder and upon the payment
of a reasonable fee limited to the Company's expenses in furnishing such
exhibit. Requests should be addressed to: Daphne P. Cannata, Corporate
Secretary, Norwich Financial Corp., 4 Broadway, Norwich, Connecticut 06360.
(b) No reports on Form 8-K have been filed during the fourth quarter of
1996.
(c) The exhibits required by Item 601 of Regulation S-K are filed as a
separate part of this report.
Signatures
Pursuant to the requirements of Section 13 and 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.
Norwich Financial Corp.
Date: March 18, 1997 By /s/ Daniel R. Dennis, Jr.
Daniel R. Dennis, Jr.
Chairman, President and Chief
Executive Officer
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.
Signatures Title Date
/s/ Daniel R. Dennis, Jr.
Daniel R. Dennis, Jr. Chairman, President and Chief March 18, 1997
Executive Officer, and Director
(Principal Executive Officer)
/s/ Michael J. Hartl
Michael J. Hartl Executive Vice President, March 18, 1997
Treasurer and Chief Financial
Officer, and Director
(Principal Financial Officer
and Principal Accounting
Officer)
Paul R. Duevel*
Paul R. Duevel Director March 18, 1997
Anthony P. Halsey*
Anthony P. Halsey Director March 18, 1997
Jeremiah J. Lowney, Jr.*
Jeremiah J. Lowney, Jr Director March 18, 1997
Robert T. Ramsdell*
Robert T. Ramsdell Director March 18, 1997
Richard P. Reed*
Richard P. Reed Director March 18, 1997
Martin C. Shapiro*
Martin C. Shapiro Director March 18, 1997
*By /s/ Daniel R. Dennis, Jr.
Daniel R. Dennis, Jr.
Attorney-in-fact
Directors Officers of Subsidiary
*Norwich Financial Corp. The Norwich Savings Society
Daniel R. Dennis, Jr. Daniel R. Dennis, Jr.
Chairman, President and Chairman, President and
Chief Executive Officer, Chief Executive Officer
The Norwich Savings Society
Michael J. Hartl
Paul R. Duevel Executive Vice President,
Retired Senior Vice President Treasurer and
for Corporate Affairs Chief Financial Officer
Backus Corporation
James R. Brown
Anthony P. Halsey Senior Vice President,
Past Chairman Lending
The Bank of Mystic, Inc.
Daphne P. Cannata
Michael J. Hartl Senior Vice President,
Executive Vice President, General Administration
Treasurer and Chief Financial and Corporate Secretary
Officer, The Norwich Savings
Society Richard W. Dennison
Senior Vice President,
Jeremiah J. Lowney, Jr. Systems and Operations
Orthodontist
James F. Dewey
Robert T. Ramsdell Senior Vice President,
Chairman, President and Marketing and Branch
Chief Executive Officer, Administration
New London County Mutual
Insurance Company Richard R. Cascio
Vice President,
Richard P. Reed Credit Administration
President, Radio Station
WICH, Inc. and Executive Lori J. Ferro, CPA
Vice President, Hall Vice President and
Communications, Inc. Controller
Martin C. Shapiro Carolyn L. Fisher
Retired President, M.S. Chambers Vice President,
& Son, Inc. Commercial Loan Officer
Anthony A. Joyce, III
Vice President,
Commercial Loan Officer
Catherine L. Sarni
Vice President
Human Resources
William J. Terwilliger
Vice President
Commercial Lending
Mark A. Turner
Vice President,
Commercial Loan Officer
Janet M. West, CPA
Vice President
Auditor
Mary Jo Wlodecki
Vice President,
Mortgage and Consumer
Lending and Loan
Operations
Richard A. Woerle
Vice President,
Investments
* In addition to the above, the following individuals served as directors of
The Norwich Savings Society until their retirement on December 31, 1996:
Joseph H. Brustolon
President, Brustolon
Buick-Pontiac, Inc.
Walter L. McGill
Retired President and
Treasurer,
Anderson Supply Company, Inc.
Office Locations
The Norwich Savings Society
Main Office Plainfield Office
4 Broadway 67 Lathrop Road
Norwich, CT 06360 Plainfield, CT 06374
(860) 889-2621 (860) 564-2753
Norwichtown Office Mystic Office
45 Town Street Route 27 & Whitehall Avenue
Norwich, CT 06360 Mystic, CT 06355
(860) 886-2888 (860) 572-0547
Ledyard Office Colchester Office
Rt. 12 & Kings Highway 139 South Main Street
Gales Ferry, CT 06335 Colchester, CT 06415
(860) 464-2247 (860) 537-3476
West Main Street Griswold Office
624 W. Main Street Route 138
Norwich, CT 06360 Griswold, CT 06351
(860) 889-4711 (860) 376-2541
Taftville Office Groton Office
30 Norwich Avenue 218 Route 12
Norwich, CT 06360 Groton, CT 06340
(860) 889-1788 (860) 445-4353
Montville Office New London Office
Route 32 15 Masonic Street
Uncasville, CT 06382 New London, CT 06320
(860) 848-1132 (860) 447-7944
Mansfield Office Mystic Packer Office
Route 195 12 Roosevelt Avenue
Mansfield Center, CT 06250 Mystic, CT 06355
(860) 456-2207 (860) 572-8981
Waterford Office Waterford Broad Street Office
119 Boston Post Road 716 Broad Street Ext.
Waterford, CT 06385 Waterford, CT 06385
(860) 444-2011 (860) 447-1401
Flanders Office
125 Boston Post Road
East Lyme, CT 06333
(860) 739-3035
THE NORWICH SAVINGS SOCIETY
1986 STOCK OPTION AND INCENTIVE PLAN
I. GENERAL
1. Purpose.
This 1986 Stock Option and Incentive Plan (the "Plan") of The Norwich
Savings Society (the "Bank") is intended to advance the interests of
the Bank by providing certain of its employees with an additional
incentive, encouraging stock ownership by such employees, increasing their
proprietary interest in the success of the Bank and encouraging them to
remain employees of the Bank.
2. Definitions.
Whenever used herein, the following terms shall have the meanings set
forth below:
(a) "Bank Group" means the Bank, a parent corporation or subsidiary
corporation of the Bank, or a corporation, or a parent corporation or
subsidiary corporation of such corporation, issuing or assuming an Option
in a transaction of the type described in Section 425(a) of the Code. The
terms "parent corporation" and "subsidiary corporation" shall have the
meanings assigned to such terms by Section 425 of the Code.
(b) "Board" means the Board of Directors of the Bank.
(c) "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
(d) "Committee" means the Stock Option Committee appointed by the
Board to administer this Plan pursuant to Section 3 hereof.
(e) "Disability" means a permanent and total disability as defined
in Section 422A(c)(7) of the Code.
(f) "Fair Market Value" means the average of closing bid and asked
prices for the Shares on the date as of which the determination is made
(or if no such quotation occurred on that date, on the next preceding date
on which there was such a quotation), as made available for publication by
the National Association of Securities Dealers Automated Quotation System,
or if no such prices are available, the fair market value as determined by
rules to be adopted by the Committee.
(g) "Incentive Stock Option" means an Option granted pursuant to the
Incentive Stock Option provisions as set forth in Part II of this Plan.
(h) "Nonqualified Stock Option" means an Option granted pursuant to
the Nonqualified Stock Option provisions as set forth in Part III of this
Plan.
(i) "Option" means an option to purchase shares under this Plan.
(j) "Participant" means an individual to whom an Option is granted
under this Plan.
(k) "Shares" means shares of the Bank's common stock.
(1) "Stock Appreciation Right" means a stock appreciation right
granted to a Participant pursuant to Section 3 of Part II or Section 3
of Part III of this Plan.
3. Administration.
This Plan shall be administered by a Stock Option Committee appointed
by the Board. The Committee shall consist of at least two members of
the Board, who are non-employee directors for purposes of Rule 16b-3.
The Board, at its pleasure, may remove members from or add members to
the Committee. A majority of Committee members shall constitute a quorum
of members, and the actions of the majority shall be final and binding on
the whole Committee.
In addition to the other powers granted to the Committee under this Plan,
the Committee shall have the power, subject to the terms of this Plan:
(i) to determine which of the eligible employees shall be granted Options
and Stock Appreciation Rights; (ii) to determine the time or times when
Options and Stock Appreciation Rights shall be granted and to determine
the number of Shares subject to each Option and Stock Appreciation Right;
(iii) to grant Options with or without related Stock Appreciation Rights;
(iv) to determine whether Stock Appreciation Rights shall be settled in
cash, in Shares, or in a combination of cash and Shares; (v) with the
approval of the Connecticut Banking Commissioner, to accelerate or extend
(except for Incentive Stock Options) the date on which a previously
granted Option or Stock Appreciation Right may be exercised; (vi) to
prescribe the form of agreement evidencing Options and Stock Appreciation
Rights granted pursuant to this Plan; and (vii) to construe and interpret
this Plan and the agreements evidencing Options and Stock Appreciation
Rights granted pursuant to this Plan, and to make all other determinations
and take all other actions necessary or advisable for the administration
of this Plan.
4. Eligibility.
The individuals who shall be eligible to receive Options and Stock
Appreciation Rights shall be such full-time employees employed by a member
of the Bank Group as shall be selected by the Committee. Participants
chosen to participate under this Plan may be granted an Incentive Stock
Option (with or without related Stock Appreciation Rights), a Nonqualified
Stock Option (with or without related Stock Appreciation Rights), or any
combination thereof.
5. Shares Subject to This Plan.
The Shares subject to Options and Stock Appreciation Rights shall be
either authorized and unissued Shares or treasury Shares. The aggregate
number of Shares which may be issued pursuant to this Plan shall be
400,000. Except as provided below, if an Option shall expire and
terminate for any reason, in whole or in part, without being exercised,
the number of Shares as to which such expired or terminated Option shall
not have been exercised may again become available for the grant of
Options or Stock Appreciation Rights. If a Stock Appreciation Right is
exercised in whole or in part, and, as a result, the related Nonqualified
Stock Option or Incentive Stock Option is cancelled to the extent of the
number of Shares with respect to which the Stock Appreciation Right was
exercised, such number of Shares shall not again be available for the
grant of Options or Stock Appreciation Rights.
6. No Tandem Options.
There shall be no terms and conditions under an Option which provide
that the exercise of an Incentive Stock Option reduces the number of
Shares for which a Nonqualified Stock Option may be exercised; and
there shall be no terms and conditions under an Option which provide
that the exercise of a Nonqualified Stock Option reduces the number
of Shares for which an Incentive Stock Option may be exercised.
II. INCENTIVE STOCK OPTION PROVISIONS
1. Grant of Incentive Stock Options.
Subject to the provisions of this Part II; the Committee shall from
time to time determine those individuals eligible pursuant to Section 4
of Part I to whom Incentive Stock Options shall be granted and the number
of Shares subject to, and terms and conditions of, such Options. The
aggregate option price of incentive stock options (as defined in
Section 422A of the Code) for which an individual may be granted such
options in a calendar year ending prior to January 1, 1987 (under all
plans of the Bank Group) shall not exceed $100,000 plus any unused limit
carryover (as defined in Section 422A(b)(8) of the Code as in effect prior
to January 1, 1987) to such year. For Incentive Stock Options granted
after December 31, 1986, the aggregate option price of incentive stock
options granted to an individual (under all plans of the Bank Group) which
are exercisable for the first time in a calendar year shall not exceed
$100,000. Anything herein to the contrary notwithstanding, no Incentive
Stock Option shall be granted to an employee if, at the time the Incentive
Stock Option is granted, such employee owns stock possessing more than 10%
of the total combined voting power of all classes of stock of any member of
the Bank Group unless the option price is at least 110% of the Fair Market
Value of the Shares subject to the Incentive Stock Option at the time the
Incentive Stock Option is granted and the Incentive Stock Option is not
exercisable after the expiration of five (5) years from the date the
Incentive Stock Option is granted.
2. Terms and Conditions of Incentive Stock Options.
Each Incentive Stock Option shall be evidenced by an option agreement
which shall be in such form as the Committee shall from time to time
approve, and which shall comply with and be subject to the following
terms and conditions:
(a) Number of Shares. Each Incentive Stock Option agreement shall
state the number of shares covered by the agreement.
(b) Option Price and Method of Payment. The Option price of each
Incentive Stock Option shall be no less than the Fair Market Value of
the Shares on the date the Incentive Stock Option is granted. The
option price shall be payable on exercise of the Option (i) in cash or
by certified check, bank draft or postal or express money order, (ii) by
the surrender of Shares then owned by the Participant, or (iii) partially
in accordance with clause (i) and partially in accordance with clause (ii)
of this Section 2(b). Shares so surrendered in accordance with clause
(ii) or (iii) shall be valued at the Fair Market Value thereof on the date
of exercise, surrender of such Shares to be evidenced by delivery of the
certificate(s) representing such Shares in such manner, and endorsed in
such form, or accompanied by stock powers endorsed in such form, as the
Committee may determine.
(c) Option Period.
(i) General. The period during which an Incentive Stock Option
shall be exercisable shall not exceed ten (10) years from the
date such Incentive Stock Option is granted; provided, however,
that such Option may be sooner terminated in accordance with
the provisions of this Section 2(c). Subject to the foregoing,
the Committee may establish a period or periods with respect to
all or any part of the Incentive Stock Option during which such
Option may not be exercised and at the time of a subsequent
grant of an Incentive Stock Option or at such longer time as
the Committee may determine accelerate the right of the
Participant to exercise all or any part of the Incentive Stock
Option not then exercisable. The number of Shares which may be
purchased at any one time shall be 100 Shares, a multiple
thereof or the total number at the time purchasable under the
Incentive Stock Option.
(ii) Termination of Employment. If the Participant ceases to be an
employee of any member of the Bank Group for any reason other
than Disability or death, any then outstanding Incentive Stock
Option held by the Participant shall terminate on the earlier
of the date on which such Option would otherwise expire or
three (3) months after such termination of employment, and such
Option shall be exercisable, prior to its termination, to the
extent it was exercisable as of the date of termination of
employment.
(iii) Disability. If a Participant's employment is terminated by
reason of Disability, any then outstanding Incentive Stock
Option held by the Participant shall terminate on the earlier
of the date on which such Option would otherwise expire or one
(1) year after such termination of employment, and such Option
shall be exercisable, prior to its termination, to the extent
it was exercisable as of the date of termination of employment.
(iv) Death. If a Participant's employment is terminated by death,
the representative of the Participant's estate or beneficiaries
thereof to whom the Option has been transferred shall have the
right during the one (1) year period following the date of the
Participant's death to exercise any then outstanding Incentive
Stock Options in whole or in part. The number of Shares in
respect of which an Incentive Stock Option may be exercised
after a Participant's death shall be the number of Shares in
respect of which such Option could be exercised as of the date
of the Participant's death. In no event may the period for
exercising an Incentive Stock Option extend beyond the date on
which such Option would otherwise expire.
(d) Sequential Exercise. Notwithstanding anything herein to the contrary
(including the right of the Committee to accelerate the right of a
Participant to exercise all or any part of an Incentive Stock Option), an
Incentive Stock Option by its terms shall not be exercisable while there
is outstanding any other incentive stock option (as defined in Section
422A of the Code) which was granted before the granting of such Incentive
Stock Option, to such Participant to purchase stock in the Bank or in a
corporation which, at the time of grant, was a member of the Bank Group,
or is a predecessor of the Bank or of any of such corporations. This
Section 2(d) shall not apply to Incentive Stock Options granted after
December 31, 1986.
(e) Non-transferability. Unless otherwise determined by the Committee,
an Incentive Stock Option shall not be transferable or assignable by the
Participant other than by will or the laws of descent and distribution and
shall be exercisable during the Participant's lifetime only by the
Participant.
(f) Separate Agreements. Nonqualified Options may not be granted in the
same agreement as an Incentive Stock Option.
3. Stock Appreciation Rights.
(a) Grant. Stock Appreciation Rights related to all or any portion of
an Incentive Stock Option may be granted by the Committee to any
Participant in connection with the grant of an Incentive Stock Option to
such Participant. Each Stock Appreciation Right shall be subject to such
terms and conditions (which may include limitations as to the time when
such Stock Appreciation Right becomes exercisable and when it ceases to be
exercisable that are more restrictive than the limitations on the exercise
of the Incentive Stock Option to which it relates) not inconsistent with
the provisions of this Part II as shall be determined by the Committee and
included in the agreement relating to such Incentive Stock Option and Stock
Appreciation Right, subject in any event, however, to the following terms
and conditions of this Section 3.
(b) Exercise. No Stock Appreciation Right shall be exercisable after
the date the related Incentive Stock Option shall cease to be exercisable,
and no Stock Appreciation Right shall be exercisable with respect to such
related Incentive Stock Option or portion thereof unless such Incentive
Stock Option or portion thereof shall itself be exercisable at that time.
A Stock Appreciation Right shall be exercised only upon surrender of the
related Incentive Stock Option or portion thereof in respect of which the
Stock Appreciation Right is then being exercised. A Stock Appreciation
Right related to an Incentive Stock Option shall be exercisable only at a
date when the then Fair Market Value of a Share exceeds the option price
per share specified in the related Incentive Stock Option.
(c) Amount of Payment. On exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive an amount equal to the product of
(i) the amount by which the Fair Market Value of a Share on the date of
exercise of the Stock Appreciation Right exceeds the option price per
share specified in the related Incentive Stock Option and (ii) the number
of shares in respect of which the Stock Appreciation Right shall have been
exercised.
(d) Form of Payment. The Committee shall have the sole discretion
either (i) to determine the form in which payment in settlement of a Stock
Appreciation Right will be made (i.e., cash, Shares or any combination
thereof), or (ii) to consent to or disapprove the election by the
Participant to receive cash in full or partial settlement of a Stock
Appreciation Right, such consent or disapproval to be given at any time
after the election to which it relates. If settlement of a Stock
Appreciation Right, or portion thereof, is to be made in the form of
Shares, the number of Shares to be distributed shall be the largest whole
number obtained by dividing the cash sum otherwise distributable in
respect of such settlement by the Fair Market Value of a Share on the
date of exercise of the Stock Appreciation Right. The value of any
fractional Share shall be paid in cash.
(e) Effect of Exercise of Related Option. If the related Incentive
Stock Option is exercised in whole or in part, then the Stock Appreciation
Right with respect to the Shares purchased pursuant to such exercise (but
not with respect to any unpurchased Shares) shall be terminated as of the
date of exercise. For purposes of the sequential exercise rule of
Section 2(d) of this Part II, the related Incentive Stock Option shall be
considered exercised in full when the related Stock Appreciation Right
shall have been exercised in full.
(f) Non-transferability. Unless otherwise determined by the
Committee, a Stock Appreciation Right shall not be transferable or
assignable by the Participant other than by will or by the laws of descent
and distribution, shall not be transferred other than together with the
Incentive Stock Option to which it relates, and shall be exercisable during
the Participant's lifetime only by the Participant.
(g) Termination of Employment. If the Participant ceases to be an
employee of any member of the Bank Group for any reason, each outstanding
Stock Appreciation Right shall only be exercisable for such period and to
such extent as the related Incentive Stock Opinion or portion thereof.
III. NONQUALIFIED STOCK OPTION PROVISIONS
1. Grant of Nonqualified Stock Options.
Subject to the provisions of this Part III, the Committee shall from time
to time determine those individuals eligible pursuant to Section 4 of
Part I to whom Nonqualified Stock Options shall be granted and the number
of Shares subject to, and terms and conditions of, such Options.
2. Terms and Conditions of Nonqualified Stock Options.
Each Nonqualified Stock Option shall be evidenced by an option agreement
which shall be in such form as the Board shall from time to time approve,
and which shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares. Each Nonqualified Stock Option agreement shall
state the number of Shares covered by the agreement.
(b) Option Price and Method of Payment. The option price of each
Nonqualified Stock Option shall be such price as the Committee, in its
discretion, shall establish, and the Committee may, in its discretion,
reduce the option price of such Option at any time prior to the exercise
of the Option; provided however, that the option price may not be less
than the greater of 85% of the Fair Market Value of the Shares on the
date the Nonqualified Stock Option is granted or the par value, if any,
of the Shares. The option price shall be payable on exercise of the
Option (i) in cash or by certified check, bank draft or postal or express
money order, (ii) by the surrender of Shares then owned by the
Participant, or (iii) partially in accordance with clause (i) and
partially in accordance with clause (ii) of this Section 2(b). Shares
so surrendered in accordance with clause (ii) or (iii) shall be valued at
the Fair Market Value thereof on the date of exercise, surrender of such
Shares to be evidenced by delivery of the certificate(s) representing such
Shares in such manner, and endorsed in such form, or accompanied by stock
powers endorsed in such form, as the Committee may determine.
(c) Option Period.
(i) General. The period during which a Nonqualified Stock
Option shall be exercisable shall not exceed ten (10) years from
the date such Nonqualified Stock Option is granted; provided,
however, that such Option may be sooner terminated in accordance
with the provisions of this Section 2(c). Subject to the
foregoing, the Committee may establish a period or periods with
respect to all or any part of the Nonqualified Stock Option during
which such Option may not be exercised and at the time of a
subsequent grant of a Nonqualified Stock Option or at such longer
time as the Committee may determine accelerate the right of the
Participant to exercise all or any part of the Nonqualified Stock
Option not then exercisable. The number of Shares which may be
purchased at any one time shall be 100 Shares, a multiple thereof
or the total number at the time purchasable under the Nonqualified
Stock Option.
(ii) Termination of Employment. If the Participant ceases to be
an employee of any member of the Bank Group for any reason other
than Disability, retirement or death, any outstanding Nonqualified
Stock Option held by the Participant shall terminate on the earlier
of the date on which such Option would otherwise expire or one (1)
year after such termination of employment, and such Option shall be
exercisable, prior to its termination, to the extent it was
exercisable as of the date of termination of employment.
(iii) Disability or Retirement. If a Participant's employment is
terminated by Disability or retirement (as permitted by any
retirement plan maintained by a member of the Bank Group in which
the Participant participates), any then outstanding Nonqualified
Stock Option held by the Participant shall terminate on the earlier
of the date on which such Option would otherwise expire or
three (3) years after such termination of employment, and such
Option shall be exercisable, prior to its termination, to the
extent it was exercisable as of the date of termination of
employment.
(iv) Death. If a Participant's employment is terminated by
death, the representative of the Participant's estate or
beneficiaries thereof to whom the Option has been transferred shall
have the right during the three (3) year period following the date
of the Participant's death to exercise any then outstanding
Nonqualified Stock Options in whole or in part. The number of
Shares in respect to which a Nonqualified Stock Option may be
exercised after a Participant's death shall be the number of Shares
in respect of which such Option could be exercised as of the date
of the Participant's death. In no event may the period for
exercising a Nonqualified Stock Option extend beyond the date on
which such Option would otherwise expire.
(d) Non-transferability. Unless otherwise determined by the Committee,
a Nonqualified Stock Option shall not be transferable or assignable by the
Participant other than by will or the laws of descent and distribution, and
shall be exercisable during the Participant's lifetime only by the
Participant.
3. Stock Appreciation Rights.
(a) Grant. Stock Appreciation Rights related to all or any portion of
a Nonqualified Stock Option may be granted by the Committee to any
Participant in connection with the grant of a Nonqualified Stock Option or
unexercised portion thereof held by the Participant at any time and from
time to time during the term thereof. Each Stock Appreciation Right shall
be subject to such terms and conditions (which may include limitations as
to the time when such Stock Appreciation Right becomes exercisable and
when it ceases to be exercisable that are more restrictive than the
limitations on the exercise of the Nonqualified Stock Option to which it
relates) not inconsistent with the provisions of this Part III as shall be
determined by the Committee and included in the agreement relating to such
Nonqualified Stock Option and Stock Appreciation Right, subject in any
event, however, to the following terms and conditions of this Section 3.
(b) Exercise. No Stock Appreciation Right shall be exercisable with
respect to such related Nonqualified Stock Option or portion thereof unless
such Nonqualified Stock Option or portion shall itself be exercisable at
that time. A Stock Appreciation Right shall be exercised only upon
surrender of the related Nonqualified Stock Option or portion thereof in
respect of which the Stock Appreciation Right is then being exercised.
(c) Amount of Payment. On exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive an amount equal to the product of
(i) the amount by which the Fair Market Value of a Share on the date of
exercise of the Stock Appreciation Right exceeds the option price per share
specified in the related Nonqualified Stock Option and (ii) the number of
shares in respect of which the Stock Appreciation Right shall have been
exercised.
(d) Form of Payment. The Committee shall have the sole discretion
either (i) to determine the form in which payment in settlement of a Stock
Appreciation Right will be made (i.e., cash, Shares or any combination
thereof), or (ii) to consent to or disapprove the election by the
Participant to receive cash in full or partial settlement of the Stock
Appreciation Right, such consent or disapproval to be given at any time
after the election to which it relates. If settlement of a Stock
Appreciation Right, or portion thereof, is to be made in the form of
Shares, the number of Shares to be distributed shall be the largest whole
number obtained by dividing the cash sum otherwise distributable in respect
of such settlement by the Fair Market Value of a Share on the date of
exercise of the Stock Appreciation Right. The value of any fractional
Share shall be paid in cash.
(e) Effect of Exercise of Related Option. If the related Nonqualified
Stock Option is exercised in whole or in part, then the Stock Appreciation
Right with respect to the Shares purchased pursuant to such exercise (but
not with respect to any unpurchased Shares) shall be terminated as of the
date of exercise.
(f) Non-transferability. Unless otherwise determined by the Committee,
a Stock Appreciation Right shall not be transferable or assignable by the
Participant other than by will or the laws of descent and distribution,
shall not be transferred other than together with the Nonqualified Stock
Option to which it relates, and shall be exercisable during the
Participant's lifetime only by the Participant.
(g) Termination of Employment. If the Participant ceases to be an
employee of any member of the Bank Group for any reason, each outstanding
Stock Appreciation Right shall be exercisable for such period and to such
extent as the related Nonqualified Stock Option or portion thereof.
IV. MISCELLANEOUS
1. Effective Date. This Plan shall become effective on November 21, 1986,
provided, however, that if the Plan is not approved by the holders of a
majority of the outstanding Shares of the Bank prior to November 21, 1987 this
Plan and all Options and Stock Appreciation Rights granted hereunder shall be
null and void and shall be of no effect.
2. Duration of Program. Unless sooner terminated, the Plan shall remain in
effect for a period of ten years after November 21, 1986 and shall thereafter
terminate. No Incentive Stock Options or Nonqualified Stock Options may be
granted after the termination of this Plan; provided however, that except as
otherwise provided in Section 1 of this Part IV, termination of the Plan shall
not affect any Options or Stock Appreciation Rights previously granted, which
such Options and Stock Appreciation Rights shall remain in effect until
exercised, surrendered or cancelled, or until they have expired, all in
accordance with their terms.
3. Changes in Capital Structure, etc. In the event of changes in the
outstanding common shares of the Bank by reasons of stock dividends, stock
splits, recapitalizations, mergers, consolidations, combinations or exchange
of shares, separations, reorganizations, or liquidations, the number of Shares
available under the Plan in the aggregate and the maximum number of Shares as
to which Options and Stock Appreciation Rights may be granted to any Participant
shall be correspondingly adjusted by the Committee. In addition, the Committee
shall make appropriate adjustments in the number of Shares as to which
outstanding Options, Stock Appreciation Rights, or portions thereof then
unexercised, shall relate, to the end that the Participant's proportionate
interest shall be maintained as before the occurrence of such events; such
adjustment shall be made without change in the total price applicable to the
unexercised portion of Options and with a corresponding adjustment in the
option price per Share.
4. Rights as Shareholder. A Participant entitled to Shares as a result of the
exercise of an Option or Stock Appreciation Right shall not be deemed for any
purpose to be, or have rights as, a shareholder of the Bank by virtue of such
exercise, except to the extent a stock certificate is issued therefor and then
only from the date such certificate is issued. No adjustments shall be made for
dividends or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
5. Expenses. The expenses of this Plan shall be paid by the Bank.
6. Withholding. Any person exercising an Option or Stock Appreciation Right
shall be required to pay to the appropriate member of the Bank Group the
amount of any taxes such member is required by law to withhold with respect to
the exercise of such option or Stock Appreciation Right. Such payment shall be
due on the date such member is required by law to withhold such taxes. Such
payment may also be made at the election of the optionee by the surrender of
Shares then owned by the optionee, or the withholding of Shares otherwise to be
issued to the optionee on exercise, in an amount that would satisfy the
withholding amount due. Any election so made by optionees subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, shall be in
accordance with the requirements of Rule 16b-3 and any interpretations thereof
of the Securities and Exchange Commission. The value of such Shares withheld or
delivered shall be equal to the Fair Market Value of such Shares on the date of
exercise. In the event that such payment is not made when due, the Bank shall
have the right to deduct, to the extent permitted by law from any payment of
any kind otherwise due to such person from any member of the Bank Group, all
or part of the amount required to be withheld (including cash payable in
settlement of a Stock Appreciation Right).
7. Compliance with Applicable Law. Notwithstanding anything herein to the
contrary, the Bank shall not be obligated to cause to be issued or delivered
any certificates evidencing Shares to be delivered pursuant to the exercise of
an Option or Stock Appreciation Right, unless and until the Bank is advised by
its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws and regulations of governmental authority.
The Bank shall in no event be obligated to register any securities pursuant
to the Securities Act of 1933 (as now in effect or as hereafter amended) or to
take any other action in order to cause the issuance and delivery of such
certificates to comply with any such law or regulation. The Committee may
require, as a condition of the issuance and delivery of such certificates and
in order to ensure compliance with such laws and regulations, that the
Participant make such covenants, agreements and representations as the
Committee, in its sole discretion, deems necessary or desirable.
8. Application of Funds. Any cash proceeds received by the Bank from the
sale of Shares pursuant to Options will be used for general corporate purposes.
9. Amendment of the Plan. The Board may from time to time suspend or
discontinue this Plan or revise or amend it in any respect whatsoever. No such
suspension, discontinuance, revision or amendment shall in any manner affect
any grant theretofore made without the consent of the Participant or the
transferee of the Participant, unless necessary to comply with applicable law.
NORWICH FINANCIAL CORP.
1986 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
1. Purpose.
The purpose of this 1986 Stock Option Plan For Outside Directors (the "Plan")
is to attract and retain the continued services of non-employee directors of
Norwich Financial Corp. (the "Company") and its subsidiaries with the
requisite qualifications and to encourage such directors to secure or increase
on reasonable terms their stock ownership in the Company. The Board of
Directors of the Company (the "Board") believes that the granting of options
(the "Options") under the Plan will promote continuity of management and
increased personal interest in the welfare of the Company and its subsidiaries
by those who are responsible for shaping and carrying out the long-range plans
of the Company and its subsidiaries and securing their continued growth and
financial success.
2. Effective Date of the Plan.
The Plan became effective on November 21, 1986, and was assumed by the Company
upon its acquisition of the Norwich Savings Society. This amended and restated
Plan shall become effective upon its approval by the shareholders of the
Company.
3. Stock Subject to Plan.
200,000 of the authorized but unissued shares of the Company's common stock
(the "Shares") have been reserved for issuance upon the exercise of Options;
provided, however, that the number of Shares so reserved may from time to time
be reduced to the extent that a corresponding number of treasury Shares are
set aside for issuance upon the exercise of Options. If any Options expire or
terminate for any reason without having been exercised in full, the unpurchased
Shares subject thereto shall again be available for the grant of Options.
4. Administration.
The Plan shall be administered by the Committee referred to in Section 5
hereof. Subject to the provisions of the Plan, the Committee shall have
complete authority in its discretion to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it and to make all other
determinations necessary or advisable for the administration of the Plan;
provided, however, that the Committee shall have no discretion to determine
the non-employee directors who will receive Options, the number of Shares
subject to Options, the terms upon which, the times at which or the periods
within which Shares may be acquired or the Options may be acquired and
exercised.
5. Committee.
The Committee shall consist of at least two members of the Board. Each member
of the Committee shall be a non-employee director for purpose of Rule 16b-3
under the Securities Exchange Act of 1934, as amended. The Committee shall be
appointed by the Board, which may at any time and from time to time remove any
member of the Committee, with or without cause, appoint additional members to
the Committee and fill vacancies, however caused, in the Committee. A majority
of the members of the Committee shall constitute a quorum. All determinations
of the Committee shall be made by a majority of its members. Any decision or
determination of the Committee reduced to writing and signed by all of the
members of the Committee shall be fully effective as if it had been made at a
meeting duly called and held.
6. Eligibility.
An Option may be granted only to members of the Board and members of the Boards
of Directors of subsidiaries of the Company who are not otherwise employees of
the Company or any of its subsidiaries on the date of grant and have not been
employees of the Company or any of its subsidiaries at any time since the
beginning of the preceding fiscal year (the "Participants").
7. Grant of Options and Option Price.
(a) Participants on November 21, 1986. Each individual who is a
participant on November 21, 1986 shall automatically be granted on
November 21, 1986 an Option to purchase 10,000 Shares.
(b) Future Participants. Directors who are elected to the Board or
a Board of Directors of a subsidiary at an annual meeting of the
shareholders or directors who become such due to a merger or
consolidation with or acquisition of another bank shall receive an
automatic grant of an Option to purchase 5,000 Shares on the date
they become a director; provided, that such automatic grant shall
only be made in either case if the director is a Participant on
such date, and the number of Shares subject to future grant under
the Plan is sufficient to make the automatic grants required to be
made pursuant to the Plan on such date. Notwithstanding the
foregoing, no Participant will receive more than one grant of an
Option pursuant to this Plan, even if the Participant is elected
to serve on multiple Boards of Directors of the Company and/or its
subsidiaries.
(c) Price. The initial per Share price to be paid by a Participant
upon the exercise of an Option shall be equal to the fair market
value of a Share on the day preceding the date of grant. For the
purposes hereof, the fair market value of a Share on any date
shall be equal to the average of the closing bid and asked prices
for the Shares on such date (or if no such quotation occurred on
that date, on the next preceding date on which there was such a
quotation), as made available for publication by the National
Association of Securities Dealers Automated Quotation System, or
if no such prices are available, the fair market value as
determined by rules to be adopted by the Committee.
8. Option Period.
Participants shall be granted Options which are exercisable for a period
of fifteen (15) years from the date of the granting thereof.
Notwithstanding the foregoing, no Option granted under this Plan shall be
exercisable until one year after the grant thereof.
9. Exercise of Option.
Subject to Section 8, an Option may be exercised in whole or in part at
any time after the date it is granted and only by a written notice of
intent to exercise the Option with respect to a specified number of Shares
and payment to the Bank of the amount of the Option exercise price for the
number of Shares with respect to which the Option is then exercised;
provided, however, that all or any portion of such payment may be made in
kind by the delivery of Shares having a fair market value (as determined
in the manner set forth in Section 7 hereof), on the date of delivery,
equal to the portion of the Option exercise price so paid. The number of
Shares which may be purchased at any one time shall be 100 Shares, a
multiple thereof, or the total number at the time purchasable under the
Option.
10. Transferability.
Unless otherwise determined by the Committee, no Option shall be assignable or
transferable except by will and/or by the laws of descent and distribution and,
during the life of any Participant, each Option granted to the Participant may
be exercised only by the Participant.
11. Ceasing to be a Director.
(a) Termination. If a Participant terminates service as a director
for any reason other than death or retirement, any outstanding
Option held by the Participant shall terminate on the earlier of
the date on which such Option would otherwise expire or (1) year
after such termination.
(b) Retirement or Death. If a Participant's service as a director is
terminated by retirement or death, the Participant or the
representative of the Participant's estate or beneficiaries
thereof to who the Option has been transferred shall have the
right during the period commencing on the date of the
Participant's retirement or death and ending three (3) years after
such termination to exercise any then outstanding Options in whole
or in part.
12. Duration of Plan.
Unless sooner terminated, the Plan shall remain in effect for a period of ten
years after November 21, 1986 and shall thereafter terminate. No Options may
be granted after the termination of this Plan; provided, however, that
termination of the Plan shall not affect any Options previously granted, which
such Options shall remain in effect until exercised, surrendered or canceled,
or until they have expired, all in accordance with their terms.
13. Changes in Capital Structure, etc.
In the event of changes in the outstanding common stock of the Company by
reasons of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combination or exchange of shares, separations,
reorganizations, or liquidations, the number of shares available under the
Plan in the aggregate and the number of Shares as to which Options may be
granted to any Participant shall be correspondingly adjusted by the Committee.
In addition, the Committee shall make appropriate adjustments in the number of
Shares as to which outstanding Options, or portions thereof then unexercised,
shall relate, to the end that the Participant's appropriate interest shall be
maintained as before the occurrence of such event; such adjustment shall be
made without change in the total price applicable to the unexercised portion
of Options and with a corresponding adjustment in the option price per Share.
14. Rights as Shareholder.
A Participant entitled to Shares as a result of the exercise of an Option shall
not be deemed for any purpose to be, or have rights as, a shareholder of the
Company by virtue of such exercise, except to the extent a stock certificate
is issued therefor and then only from the date such certificate is issued.
No adjustments shall be made for dividends or distributions or other rights for
which the record date is prior to the date such stock certificate is issued.
15. Expenses.
The expenses of this Plan shall be paid by the Company and/or its subsidiaries.
16. Compliance with Applicable Law.
Notwithstanding anything herein to the contrary, the Company shall not be
obligated to cause to be issued or delivered any certificates evidencing Shares
to be delivered pursuant to the exercise of an Option, unless and until the
Company is advised by its counsel that the issuance and delivery of such
certificates is in compliance with all applicable laws and regulations of
governmental authority. The Company shall in no event be obligated to register
any securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) or to take any other action in order to cause the issuance
and delivery of such certificates to comply with any such law or regulation.
The Committee may require, as a condition of the issuance and delivery of such
certificates and in order to ensure compliance with such laws and regulations,
that the Participant make such covenants, agreements and representations as the
Committee, in its sole discretion, deems necessary or desirable.
17. Application of Funds.
Any cash proceeds received by the Company from the sale of Shares pursuant to
options will be used for general corporate purpose.
18. Amendment of the Plan.
The Board may from time to time suspend or discontinue this Plan or revise or
amend it in any respect whatsoever. No such suspension, discontinuance,
revision or amendment shall in any manner affect any grant theretofore made
without the consent of the Participant or the transferee of the Participant,
unless necessary to comply with applicable law.
FIRST AMENDMENT TO
THE NORWICH SAVINGS SOCIETY THRIFT PLAN
THIS AMENDMENT is executed this 29th day of October 1996, by THE NORWICH
SAVINGS SOCIETY, for the purpose of amending certain terms and conditions of
The Norwich Savings Society Thrift Plan (the "Plan"),
W I T N E S S E T H:
WHEREAS, by action of its Board of Directors on January 12, 1981, The
Norwich Savings Society (the "Bank") adopted the Plan effective as of
January 1, 1981 for the benefit of its eligible Employees; and
WHEREAS, the Plan was most recently amended and restated effective as
of January 1, 1995; and
WHEREAS, the Bank wishes to further amend the Plan in the particulars
set forth below;
NOW, THEREFORE, the Bank does hereby amend the Plan as follows:
1. Section 3.06 is amended to read as follows:
"3.06 (a) Each Participant may enter into a salary or wage reduction
agreement with the Bank pursuant to which his compensation will be
reduced by any whole percentage not less than two (2) nor more than
ten (10), which amount the Bank will contribute to the Plan on behalf of
the Participant. These contributions will be credited to the
Participant Before Tax Contribution Account of the Participant.
(b) A Participant may authorize contributions to be made to his
Account by payroll deduction in any whole percentage of his Compensation
between two (2) and six (6), provided that the sum of the Participant's
contributions pursuant to subsections (a) and (b) may not exceed ten
percent (10%) of his Compensation. These contributions will be credited
to the Participant After Tax Contributions Account of the Participant.
An Employee is not required to enter into a salary or wage reduction
agreement with the Bank in order to make payroll deduction contributions
in accordance with this paragraph (b)."
2. Section 6.05 is amended to read as follows:
"6.05 (a) Participants (including terminated Participants with Account
balances under the Plan) may direct the Trustee as to the investment of
their Account from among the investment options provided under the Plan.
The investment options under the Plan are stock in Norwich Financial
Corp. ("Stock"), up to ten (10) mutual funds selected by the Bank, and a
money market fund. The Bank may add or delete investment fund options
hereunder without the necessity for further amendment. Separate
investment elections may be chosen for existing Account balances and
future contributions, although a single investment election shall apply
with respect to all existing Accounts of a Participant and a single
investment election shall apply with respect to all future contributions
of a Participant. Investment transfer elections and future contributions
elections shall be made in increments of ten percent (10%). Changes in
the investment elections for existing Account balances and for future
contributions are permitted on a daily basis and may be made in
accordance with such procedures as the Administrator shall prescribe.
The Administrator shall provide Participants with information regarding
various investment options. If a Participant does not direct the Trustee
as to the investment of his Account, his Account shall be invested in the
money market fund.
(b) Any dividends on shares of Stock shall not be reinvested in
Stock, but shall be credited to the Account of the Participant to whose
Stock Account such dividends are allocated and shall be invested in the
money market fund.
(c) The Stock Fund shall be a record of allocations of Company
Stock to the Participant's Account under the Plan and shall show the
Participant's allocated portion of the shares and fractional shares of
Company Stock contributed to or purchased and paid for by the Plan.
Earnings or losses on any mutual funds offered as a directed investment
alternative and upon the money market fund shall be allocated based upon
the number of the units purchased on behalf of Plan Participants pursuant
to their investment directions. Any dividends or capital gains upon
mutual fund units shall be utilized to purchase additional units of that
mutual fund.
(d) Any reallocation of investments shall be subject to any
restrictions upon transfer imposed by the applicable investment fund."
3. The following new paragraph (c) is added to Section 11.08:
"(c) Notwithstanding any Plan provision to the contrary, for
purposes of valuing a distribution hereunder, the value of a
Participant's Account shall be its value on the date of distribution,
rather than as of the end of the preceding calendar quarter.
Furthermore, notwithstanding any Plan provision to the contrary,
distributions may be made as soon as practicable following the occurrence
of the event on account of which benefits become payable, and need not
wait until the end of the applicable calendar quarter. Distributions
shall continue to be subject, nevertheless, to such consent to
distribution, waiting period, and other requirements imposed under the
Plan and by law."
4. As amended by the foregoing, the Plan remains in full force and
effect.
5. This Amendment is effective as of January 1, 1997.
IN WITNESS WHEREOF, the Bank has signed this Amendment.
ATTEST: THE NORWICH SAVINGS SOCIETY
/s/ Daphne P. Cannata By:/s/ Michael J. Hartl
Corporate Secretary Its Executive Vice President and
Chief Financial Officer
1994 STOCK OPTION AND INCENTIVE PLAN
OF NORWICH FINANCIAL CORP.
I. GENERAL
1. Purpose.
This 1994 Stock Option and Incentive Plan (the "Plan") of Norwich
Financial Corp. (the "Company") is intended to advance the interests of
the Company by providing certain employees and directors of the Company
Group with an additional incentive, encouraging stock ownership by such
individuals, increasing their proprietary interest in the success of the
Company and encouraging them to remain employees or directors of the
Company Group.
2. Definitions.
Whenever used herein, the following terms shall have the meanings set
forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
(c) "Committee" means the Stock Option Committee appointed by the
Board to administer this Plan pursuant to Section 3 hereof.
(d) "Company Group" means the Company, a parent corporation or
subsidiary corporation of the Company, or a corporation, or a parent
corporation or subsidiary corporation of such corporation, issuing or
assuming an Option in a transaction of the type described in Section
424(a) of the Code. The terms "parent corporation" and "subsidiary
corporation" shall have the meanings assigned to such terms by Section 424
of the Code.
(e) "Disability" means a permanent and total disability as defined in
Section 422(c)(6) of the Code.
(f) "Fair Market Value" means the average of closing bid and asked
prices for the shares on the date as of which the determination is made
(or if no such quotation occurred on that date, on the next preceding
date on which there was such a quotation), as made available for
publication by the National Association of Securities Dealers Automated
Quotation System, or if no such prices are available, the fair market
value as determined by reasonable rules to be adopted by the Committee.
(g) "Incentive Stock Option" means an Option granted pursuant to the
Incentive Stock Option provisions as set forth in Part II of this Plan.
(h) "Nonqualified Stock Option" means an Option granted pursuant to
the Nonqualified Stock Option provisions as set forth in Part III of this
Plan.
(i) "Option" means an option to purchase shares under this Plan.
(j) "Participant" means an individual to whom an Option is granted
under this Plan.
(k) "Rule 16b-3" means Rule 16b-3 under the Securities Exchange Act of
1934, as it may be amended from time to time.
(l) "Shares" means shares of the Company's common stock.
(m) "Stock Appreciation Right" means a stock appreciation right
granted to a Participant pursuant to Section 3 of Part II or Section 3 of
Part III of this Plan.
3. Administration
This Plan shall be administered by a Stock Option Committee appointed by
the Board. The Committee shall consist of at least two individuals all of
whom are non-employee directors for purposes of Rule 16b-3. The Board, at
its pleasure, may remove members from or add members to the Committee. A
majority of Committee members shall constitute a quorum of members, and
the actions of the majority shall be final and binding on the whole
Committee.
In addition to the other powers granted to the Committee under this Plan,
the Committee shall have the power, subject to the terms of this Plan:
(i) to determine which of the eligible individuals shall be granted
Options and Stock Appreciation Rights; (ii) to determine the time or times
when Options and Stock Appreciation Rights shall be granted and to
determine the number of Shares subject to each Option and Stock
Appreciation Right; (iii) to grant Options with or without related Stock
Appreciation Rights; (iv) to determine whether Stock Appreciation Rights
shall be settled in cash, in Shares, or in a combination of cash and
Shares; (v) to accelerate or extend (except for Incentive Stock Options)
the date on which a previously granted Option or Stock Appreciation Right
may be exercised; (vi) to prescribe the form of agreement evidencing
Options and Stock Appreciation Rights granted pursuant to this Plan; and
(vii) to construe and interpret this Plan and the agreements evidencing
Options and Stock Appreciation Rights granted pursuant to this Plan, and
to make all other determinations and take all other actions necessary or
advisable for the administration of this Plan.
4. Eligibility.
The individuals who shall be eligible to receive Options and Stock
Appreciation Rights shall be such employees employed by a member of the
Company Group as shall be selected by the Committee. Participants chosen
to participate under this Plan may be granted an Incentive Stock Option,
a Nonqualified Stock Option, or any combination thereof (with or without
related Stock Appreciation Rights). In addition, directors of any
subsidiary of the Company who are not members of the Board and who are not
employed by a member of the Company Group as shall be selected by the
Committee shall be eligible to receive Nonqualified Stock Options (with
or without related Stock Appreciation Rights) pursuant to this Plan.
5. Shares Subject to This Plan.
The Shares subject to Options and Stock Appreciation Rights shall be
either authorized and unissued Shares or treasury Shares. The aggregate
number of Shares which may be issued pursuant to this Plan shall be
400,000. Except as provided below, if an Option shall expire and terminate
for any reason, in whole or in part, without being exercised, the number
of Shares as to which such expired or terminated Option shall not have
been exercised may again become available for the grant of Options or
Stock Appreciation Rights. If a Stock Appreciation Right is exercised in
whole or in part, and, as a result, the related Nonqualified Stock Option
or Incentive Stock Option is cancelled, to the extent of the number of
Shares with respect to which the Stock Appreciation Right was exercised,
such number of Shares shall not again be available for the grant of
Options or Stock Appreciation Rights.
6. No Tandem Options.
There shall be no terms and conditions under an Option which provide that
the exercise of an Incentive Stock Option reduces the number of Shares for
which a Nonqualified Stock Option may be exercised; and there shall be no
terms and conditions under an Option which provide that the exercise of a
Nonqualified Stock Option reduces the number of Shares for which an
Incentive Stock Option may be exercised.
II. INCENTIVE STOCK OPTION PROVISIONS
1. Grant of Incentive Stock Options.
Subject to the provisions of this Part II, the Committee shall from time
to time determine those individuals eligible pursuant to Section 4 of
Part I to whom Incentive Stock Options shall be granted and the number of
Shares subject to, and terms and conditions of, such Options. The
aggregate Fair Market Value (determined as of the date of grant) of shares
with respect to which incentive stock options (as defined in Section 422
of the Code) are exercisable for the first time by an individual in a
calendar year (under all plans of the Company Group) shall not exceed
$100,000. Anything herein to the contrary notwithstanding, no Incentive
Stock Option shall be granted to an employee if, at the time the Incentive
Stock Option is granted, such employee owns stock possessing more than 10%
of the total combined voting power of all classes of stock of any member
of the Company Group unless the option price is at least 110% of the Fair
Market Value of the Shares subject to the Incentive Stock Option at the
time the Incentive Stock Option is granted and the Incentive Stock Option
is not exercisable after the expiration of five (5) years from the date
the Incentive Stock Option is granted.
2. Terms and Conditions of Incentive Stock Options.
Each Incentive Stock Option shall be evidenced by an option agreement
which shall be in such form as the Committee shall from time to time
approve, and which shall comply with and be subject to the following terms
and conditions:
(a) Number of Shares. Each Incentive Stock Option agreement shall
state the number of shares covered by the agreement.
(b) Option Price and Method of Payment. The Option price of each
Incentive Stock Option shall be no less than the Fair Market Value
of the Shares on the date the Incentive Stock Option is granted.
The option price shall be payable on exercise of the Option
(i) in cash or by certified check, bank draft or postal or express
money order, (ii) by the surrender of Shares then owned by the
Participant, or (iii) partially in accordance with clause (i) and
partially in accordance with clause (ii) of this Section 2(b).
Shares so surrendered in accordance with clause (ii) or (iii) shall
be valued at the Fair Market Value thereof on the date of exercise,
surrender of such Shares to be evidenced by delivery of the
certificate(s) representing such Shares in such manner, and
endorsed in such form, or accompanied by stock powers endorsed in
such form, as the Committee may determine.
(c) Option Period.
(i) General. The period during which an Incentive Stock Option
shall be exercisable shall not exceed ten (10) years from the date
such Incentive Stock Option is granted; provided, however, that
such Option may be sooner terminated in accordance with the
provisions of this Section 2(c). An Incentive Stock Option shall
not be exercisable until six (6) months from the date it is
granted. Subject to the foregoing, the Committee may establish
a period or periods with respect to all or any part of the
Incentive Stock Option during which such Option may not be
exercised and at the time of a subsequent grant of an Incentive
Stock Option or at such other time as the Committee may determine
accelerate the right of the Participant to exercise all or any part
of the Incentive Stock Option not then exercisable. The number of
Shares which may be purchased at any one time shall be 100 Shares,
a multiple thereof or the total number at the time purchasable
under the Incentive Stock Option.
(ii) Termination of Employment. If the Participant ceases to be
an employee of any member of the Company Group for any reason other
than retirement, Disability or death, any then outstanding
Incentive Stock Option held by the Participant shall terminate on
the earlier of the date on which such Option would otherwise expire
or one (1) year after such termination of employment, and such
Option shall be exercisable, prior to its termination, to the
extent it was exercisable as of the date of termination of
employment, subject to the ability of the Committee to accelerate
exercisability set forth in (i) above.
(iii) Retirement or Disability. If a Participant's employment is
terminated by reason of retirement (as defined in any pension plan
maintained by a member of the Company Group in which the
Participant participates) or Disability, any then outstanding
Incentive Stock Option held by the Participant shall terminate on
the earlier of the date on which such Option would otherwise expire
or three (3) years after such termination of employment, and such
Option shall be exercisable, prior to its termination, to the
extent it was exercisable as of the date of termination of
employment, subject to the ability of the Committee to accelerate
exercisability set forth in (i) above.
(iv) Death. If a Participant's employment is terminated by
death, the representative of the Participant's estate or
beneficiaries thereof to whom the Option has been transferred shall
have the right during the three (3) year period following the date
of the Participant's death to exercise any then outstanding
Incentive Stock Options in whole or in part. The number of Shares
in respect of which an Incentive Stock Option may be exercised
after a Participant's death shall be the number of Shares in
respect of which such Option could be exercised as of the date of
The Participant's death, subject to the ability of the Committee to
accelerate exercisability set forth in (i) above. In no event may
the period for exercising an Incentive Stock Option extend beyond
the date on which such Option would otherwise expire.
(d) Non-transferability. Unless otherwise determined by the Committee,
an Incentive Stock Option shall not be transferable or assignable
by the Participant other than by will or the laws of descent and
distribution and shall be exercisable during the Participant's
lifetime only by the Participant.
(e) Separate Agreements. Nonqualified Options may not be granted in
the same agreement as an Incentive Stock Option.
3. Stock Appreciation Rights.
(a) Grant. Stock Appreciation Rights related to all or any portion of
an Incentive Stock Option may be granted by the Committee to any
Participant in connection with the grant of an Incentive Stock
Option to such Participant. Each Stock Appreciation Right shall be
subject to such terms and conditions (which may include limitations
as to the time when such Stock Appreciation Right becomes
exercisable and when it ceases to be exercisable that are more
restrictive than the limitations on the exercise of the Incentive
Stock Option to which it relates) not inconsistent with the
provisions of this Part II as shall be determined by the Committee
and included in the agreement relating to such Incentive Stock
Option and Stock Appreciation Right, subject in any event, however,
to the following terms and conditions of this Section 3.
(b) Exercise. No Stock Appreciation Right shall be exercisable after
the date the related Incentive Stock Option shall cease to be
exercisable, and no Stock Appreciation Right shall be exercisable
with respect to such related Incentive Stock Option or portion
thereof unless such Incentive Stock Option or portion thereof shall
itself be exercisable at that time. A Stock Appreciation Right
shall be exercised only upon surrender of the related Incentive
Stock Option or portion thereof in respect of which the Stock
Appreciation Right is then being exercised. A Stock Appreciation
Right related to an Incentive Stock Option shall be exercisable
only at a date when the then Fair Market Value of a Share exceeds
the option price per share specified in the related Incentive Stock
Option.
(c) Amount of Payment. On exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive an amount equal to the
product of (i) the amount by which the Fair Market Value of a Share
on the date of exercise of the Stock Appreciation Right exceeds the
option price per share specified in the related Incentive Stock
Option and (ii) the number of shares in respect of which the Stock
Appreciation Right shall have been exercised.
(d) Form of Payment. The Committee shall have the sole discretion
either (i) to determine the form in which payment in settlement of
a Stock Appreciation Right will be made (i.e., cash, Shares or any
combination thereof), or (ii) to consent to or disapprove the
election by the Participant to receive cash in full or partial
settlement of a Stock Appreciation Right, such consent or
disapproval to be given at any time after the election to which it
relates. If settlement of a Stock Appreciation Right, or portion
thereof, is to be made in the form of Shares, the number of Shares
to be distributed shall be the largest whole number obtained by
dividing the cash sum otherwise distributable in respect of such
settlement by the Fair Market Value of a Share on the date of
exercise of the Stock Appreciation Right. The value of any
fractional Share shall be paid in cash.
(e) Effect of Exercise of Related Option. If the related Incentive
Stock Option is exercised in whole or in part, then the Stock
Appreciation Right with respect to the Shares purchased pursuant to
such exercise (but not with respect to any unpurchased Shares)
shall be terminated as of the date of exercise.
(f) Non-transferability. Unless otherwise determined by the
Committee a Stock Appreciation Right shall not be transferable or
assignable by the Participant other than by will or by the laws of
descent and distribution, shall not be transferred other than
together with the Incentive Stock Option to which it relates, and
shall be exercisable during the Participant's lifetime only by the
Participant.
(g) Termination of Employment. If the Participant ceases to be an
employee of any member of the Company Group for any reason, each
outstanding Stock Appreciation Right shall only be exercisable
for such period and to such extent as the related Incentive Stock
Option or portion thereof.
III. NONQUALIFIED STOCK OPTION PROVISIONS
1. Grant of Nonqualified Stock Options.
Subject to the provisions of this Part III, the Committee shall from time
to time determine those individuals eligible pursuant to Section 4 of
Part I to whom Nonqualified Stock Options shall be granted and the
number of Shares subject to, and terms and conditions of, such Options.
2. Terms and Conditions of Nonqualified Stock Options.
Each Nonqualified Stock Option shall be evidenced by an option agreement
which shall be in such form as the Committee shall from time to time
approve, and which shall comply with and be subject to the following
terms and conditions:
(a) Number of Shares. Each Nonqualified Stock Option agreement shall
state the number of Shares covered by the agreement.
(b) Option Price and Method of Payment. The option price of each
Nonqualified Stock Option shall be such price as the Committee,
in its discretion, shall establish, and the Committee may, in its
discretion, reduce the option price of such Option at any time
prior to the exercise of the Option; provided however, that the
option price may not be less than the greater of 85 % of the Fair
Market Value of the Shares on the date the Nonqualified Stock
Option is granted or the par value, if any, of the Shares. The
option price shall be payable on exercise of the Option (i) in
cash or by certified check, bank draft or postal or express money
order, (ii) by the surrender of Shares then owned by the
Participant, or (iii) partially in accordance with clause (i) and
partially in accordance with clause (ii) of this Section 2(b).
Shares so surrendered in accordance with clause (ii) or
(iii) shall be valued at the Fair Market Value thereof on the
date of exercise, surrender of such Shares to be evidenced by
delivery of the certificate(s) representing such Shares in such
manner, and endorsed in such form, or accompanied by stock powers
endorsed in such form, as the Committee may determine.
(c) Option Period.
(i) General. The period during which a Nonqualified Stock
Option shall be exercisable shall not exceed ten (10) years from
the date such Nonqualified Stock Option is granted; provided,
however, that such Option may be sooner terminated in accordance
with the provisions of this Section 2(c). A Nonqualified Stock
Option shall not be exercisable until six (6) months from the date
it is granted. Subject to the foregoing, the Committee may
establish a period or periods with respect to all or any part of the
Nonqualified Stock Option during which such Option may not be
exercised and at the time of a subsequent grant of a Nonqualified
Stock Option or at such other time as the Committee may determine
accelerate the right of the Participant to exercise all or any part
of the Nonqualified Stock Option not then exercisable. The number
of Shares which may be purchased at any one time shall be 100
Shares, a multiple thereof or the total number at the time
purchasable under the Nonqualified Stock Option.
(ii) Termination of Employment. If the Participant ceases to be
an employee or director of any member of the Company Group for any
reason other than retirement, Disability or death, any outstanding
Nonqualified Stock Option held by the Participant shall terminate
on the earlier of the date on which such Option would otherwise
expire or one (1) year after such termination, and such Option
shall be exercisable, prior to its termination, to the extent it
was exercisable as of the date of such termination, subject to the
ability of the Committee to accelerate exercisability set forth in
(i) above.
(iii) Retirement or Disability. If a Participant's employment or
status as a director is terminated by reason of retirement (as
defined in any pension plan maintained by a member of the Company
Group in which the Participant participates for employees, and when
the sum of a Participant's whole years of service as a director and
age equal or exceed seventy (70) for directors) or Disability, any
then outstanding Nonqualified Stock Option held by the Participant
shall terminate on the earlier of the date on which such Option
would otherwise expire or three (3) years after such termination,
and such Option shall be exercisable, prior to its termination, to
the extent it was exercisable as of the date of termination,
subject to the ability of the Committee to accelerate
exercisability set forth in (i) above.
(iv) Death. If a Participant's employment or status as a
director is terminated by death, the representative of the
Participant's estate or beneficiaries thereof to whom the Option
has been transferred shall have the right during the three (3) year
period following the date of the Participant's death to exercise
any then outstanding Nonqualified Stock Options in whole or in
part. The number of Shares in respect to which a Nonqualified Stock
Option may be exercised after a Participant's death shall be the
number of Shares in respect of which such Option could be exercised
as of the date of the Participant's death, subject to the ability
of the Committee to accelerate exercisability set forth in (i)
above. In no event may the period for exercising a Nonqualified
Stock Option extend beyond the date on which such Option would
otherwise expire.
(d) Non-transferability. Unless otherwise determined by the
Committee, a Nonqualified Stock Option shall not be transferable or
assignable by the Participant other than by will or the laws of descent
and distribution, and shall be exercisable during the Participant's
lifetime only by the Participant.
3. Stock Appreciation Rights.
(a) Grant. Stock Appreciation Rights related to all or any portion of
a Nonqualified Stock Option may be granted by the Committee to any
Participant in connection with the grant of a Nonqualified Stock
Option or unexercised portion thereof held by the Participant at
any time and from time to time during the term thereof. Each Stock
Appreciation Right shall be subject to such terms and conditions
(which may include limitations as to the time when such Stock
Appreciation Right becomes exercisable and when it ceases to be
exercisable that are more restrictive than the limitations on the
exercise of the Nonqualified Stock Option to which it relates) not
inconsistent with the provisions of this Part Ill as shall be
determined by the Committee and included in the agreement relating
to such Nonqualified Stock Option and Stock Appreciation Right,
subject in any event, however to the following terms and conditions
of this Section 3.
(b) Exercise. No Stock Appreciation Right shall be exercisable with
respect to such related Nonqualified Stock Option or portion
thereof unless such Nonqualified Stock Option or portion shall
itself be exercisable at that time. A Stock Appreciation Right
shall be exercised only upon surrender of the related Nonqualified
Stock Option or portion thereof in respect of which the Stock
Appreciation Right is then being exercised.
(c) Amount of Payment. On exercise of a Stock Appreciation Right, a
Participant shall be entitled to receive an amount equal to the
product of (i) the amount by which the Fair Market Value of a
Share on the date of exercise of the Stock Appreciation Right
exceeds the option price per share specified in the related
Nonqualified Stock Option and (ii) the number of shares in respect
of which the Stock Appreciation Right shall have been exercised.
(d) Form of Payment. The Committee shall have the sole discretion
either (i) to determine the form in which payment in settlement of
a Stock Appreciation Right will be made (i.e., cash, Shares or any
combination thereof), or (ii) to consent to or disapprove the
election by the Participant to receive cash in full or partial
settlement of the Stock Appreciation Right, such consent or
disapproval to be given at any time after the election to which it
relates. If settlement of a Stock Appreciation Right, or portion
thereof, is to be made in the form of Shares, the number of Shares
to be distributed shall be the largest whole number obtained by
dividing the cash sum otherwise distributable in respect of such
settlement by the Fair Market Value of a Share on the date of
exercise of the Stock Appreciation Right. The value of any
fractional Share shall be paid in cash.
(e) Effect of Exercise of Related Option. If the related Nonqualified
Stock Option is exercised in whole or in part, then the Stock
Appreciation Right with respect to the Shares purchased pursuant
to such exercise (but not with respect to any unpurchased Shares)
shall be terminated as of the date of exercise.
(f) Non-transferability. Unless otherwise determined by the
Committee, a stock Appreciation Right shall not be transferable or
assignable by the Participant other than by will or the laws of
descent and distribution, shall not be transferred other than
together with the Nonqualified Stock Option to which it relates,
and shall be exercisable during the Participant's lifetime only by
the Participant.
(g) Termination. If the Participant ceases to be an employee or
director of any member of the Company Group for any reason, each
outstanding Stock Appreciation Right shall be exercisable for such
period and to such extent as the related Nonqualified Stock Option
or portion thereof.
IV. MISCELLANEOUS
1. Effective Date.
This Plan shall become effective on May 20, 1994 (the "Effective Date"),
provided, however, that if the Plan is not approved by the shareholders
of the Company prior to the expiration of the one year period commencing
on the Effective Date, this Plan and all Options and Stock Appreciation
Rights granted hereunder shall be null and void and shall be of no effect.
2. Duration of Program.
Unless sooner terminated, the Plan shall remain in effect for a period of
ten years after the Effective Date and shall thereafter terminate. No
Incentive Stock Options or Nonqualified Stock Options may be granted after
the termination of this Plan; provided however, that except as otherwise
provided in Section 1 of this Part IV, termination of the Plan shall not
affect any Options or Stock Appreciation Rights previously granted, which
such Options and Stock Appreciation Rights shall remain in effect until
exercised, surrendered or cancelled, or until they have expired, all in
accordance with their terms.
3. Changes in Capital Structure, etc.
In the event of changes in the outstanding common shares of the Company by
reasons of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combinations or exchange of shares, separations,
reorganizations, or liquidations, the number of Shares available under the
Plan in the aggregate and the maximum number of Shares as to which Options
and Stock Appreciation Rights may be granted to any Participant shall be
correspondingly adjusted by the Committee. In addition, the Committee
shall make appropriate adjustments in the number of Shares as to which
outstanding Options, Stock Appreciation Rights, or portions thereof then
unexercised, shall relate, to the end that the Participant's proportionate
interest shall be maintained as before the occurrence of such events; such
adjustment shall be made without change in the total price applicable to
the unexercised portion of Options and with a corresponding adjustment in
the option price per Share.
In addition, if the Company is to be consolidated with or acquired by
another entity in a merger, sale of all or substantially all of the
Company's assets or otherwise (an "Acquisition"), the Committee or the
Board of Directors of any entity assuming the obligations of the Company
hereunder, shall, as to outstanding Options and Stock Appreciation Rights,
either (i) make appropriate provision for the continuation of such Options
and Stock Appreciation Rights by substituting on an equitable basis for
the shares then subject to such Options and Stock Appreciation Rights the
consideration payable with respect to the outstanding Shares in connection
with the Acquisition, or (ii) upon written notice to the optionees,
provide that all Options and Stock Appreciation Rights must be exercised,
to the extent then exercisable, within a specified number of days (no less
than thirty (30)) of the date of such notice, at the end of which period
the Options and Stock Appreciation Rights shall terminate; or (iii)
terminate all Options and Stock Appreciation Rights in exchange for a cash
payment equal to the excess of the Fair Market Value of the Shares subject
to such Options (to the extent then exercisable) over the exercise price
thereof.
4. Rights as Shareholder.
A Participant entitled to Shares as a result of the exercise of an Option
or Stock Appreciation Right shall not be deemed for any purpose to be, or
have rights as, a shareholder of the Company by virtue of such exercise,
except to the extent a stock certificate is issued therefor and then only
from the date such certificate is issued. No adjustments shall be made for
dividends or distributions or other rights for which the record date is
prior to the date such stock certificate is issued.
5. Expenses.
The expenses of this Plan shall be paid by the Company and/or any
member(s) of the Company Group.
6. Withholding.
Any person exercising an Option or Stock Appreciation Right shall be
required to pay to the appropriate member of the Company Group the amount
of any taxes such member is required by law to withhold with respect to
the exercise of such Option or Stock Appreciation Right. Such payment
shall be due on the date such member is required by law to withhold such
taxes. Such payment may also be made at the election of the optionee by
the surrender of Shares then owned by the optionee, or the withholding of
Shares otherwise to be issued to the optionee on exercise, in an amount
that would satisfy the withholding amount due. Any election so made by
optionees subject to Section 16(b) of the Securities Exchange Act of 1934,
as amended, shall be in accordance with the requirements of Rule 16b-3 and
any interpretations thereof of the Securities and Exchange Commission. The
value of such Shares withheld or delivered shall be equal to the Fair
Market Value of such Shares on the date of exercise. In the event that
such payment is not made when due, the Company shall have the right to
deduct, to the extent permitted by law, from any payment of any kind
otherwise due to such person from any member of the Company Group, all or
part of the amount required to be withheld (including cash payable in
settlement of a Stock Appreciation Right).
7. Compliance with Applicable law.
Notwithstanding anything herein to the contrary, the Company shall not be
obligated to cause to be issued or delivered any certificates evidencing
Shares to be delivered pursuant to the exercise of an Option or Stock
Appreciation Right, unless and until the Company is advised by its counsel
that the issuance and delivery of such certificates is in compliance with
all applicable laws and regulations of governmental authority. The Company
shall in no event be obligated to register any securities pursuant to the
Securities Act of 1933 (as now in effect or as hereafter amended) or to
take any other action in order to cause the issuance and delivery of such
certificates to comply with any such law or regulation. The Committee may
require, as a condition of the issuance and delivery of such certificates
and in order to ensure compliance with such laws and regulations, that the
Participant make such covenants, agreements and representations as the
Committee, in its sole discretion, deems necessary or desirable.
8. Application of Funds.
Any cash proceeds received by the Company from the sale of Shares pursuant
to Options will be used for general corporate purposes.
9. Amendment of the Plan.
The Board may from time to time suspend or discontinue this Plan or revise
or amend it in any respect whatsoever; provided, however, that any
amendment requiring stockholder approval under Section 422 of the Code
shall not be made without the further approval of the shareholders of the
Company. No such suspension, discontinuance, revision or amendment shall
in any manner affect any grant theretofore made without the consent of the
Participant or the transferee of the Participant, unless necessary to
comply with applicable law.
1994 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
OF NORWICH FINANCIAL CORP.
1. Purpose.
The purpose of this 1994 Stock Option Plan For Outside Directors (the
"Plan") is to attract and retain the continued services of non-employee
directors of Norwich Financial Corp. (the "Company") with the requisite
qualifications and to encourage such directors to secure or increase on
reasonable terms their stock ownership in the Company. The Board of
Directors of the Company (the "Board") believes that the granting of
options (the "Options") under the Plan will promote continuity of
management and increased personal interest in the welfare of the Company
by those who are responsible for shaping and carrying out the long-range
plans of the Company and securing its continued growth and financial
success.
2. Effective Date of the Plan.
The Plan shall become effective upon its approval by the shareholders of
the Company (the "Effective Date").
3. Stock Subject to Plan.
Two hundred thousand (200,000) of the authorized but unissued shares of
The Company's common stock (the "Shares") have been reserved for issuance
upon the exercise of Options; provided, however, that the number of Shares
so reserved may from time to time be reduced to the extent that a
corresponding number of treasury Shares are set aside for issuance upon
the exercise of Options. If any Options expire or terminate for any reason
without having been exercised in full, the unpurchased Shares subject
thereto shall again be available for the grant of Options.
4. Administration.
The Plan shall be administered by the Committee referred to in Section 5
hereof. Subject to the provisions of the Plan, the Committee shall have
complete authority in its discretion to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it and to make all
other determinations necessary or advisable for the administration of the
Plan; provided, however, that the Committee shall have no discretion to
determine the non-employee directors who will receive Options, the number
of Shares subject to Options, the terms upon which, the times at which or
the periods within which Shares may be acquired or the Options may be
acquired and exercised.
5. Committee.
The Committee shall consist of at least two members of the Board, each of
whom shall be a non-employee director as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, and as such Rule may be hereafter
amended. The Committee shall be appointed by the Board, which may at any
time and from time to time remove any member of the Committee, with or
without cause, appoint additional members to the Committee and fill
vacancies, however caused, in the Committee. A majority of the members of
the Committee shall constitute a quorum. All determinations of the
Committee shall be made by a majority of its members. Any decision or
determination of the Committee reduced to writing and signed by all of the
members of the Committee shall be fully effective as if it had been made
at a meeting duly called and held.
6. Eligibility.
An Option may be granted only to members of the Board who are not
otherwise employees of the Company or any of its subsidiaries on the date
of grant (the "Participants").
7. Grant of Options and Option Price.
(a) Participants on the Effective Date. Each individual who is a
Participant on the Effective Date shall automatically be granted on the
Effective Date an Option to purchase 5,000 Shares.
(b) Future Participants. Directors who are not Participants on the
Effective Date and who are newly elected to the Board or directors who
become such due to a merger or consolidation with or acquisition of
another bank shall receive an automatic grant of an Option to purchase
5,000 Shares on the date they become a director (or, if elected by the
Board, on the date of the annual meeting of the shareholders coincident
with or next following such date); provided, that such automatic grant
shall only be made in either case if the director is a Participant on such
date, and the number of Shares subject to future grant under the Plan is
sufficient to make the automatic grants required to be made pursuant to
the Plan on such date.
(c) Additional Grants. Each director who has previously received a
grant of an Option pursuant to subsections (a) or (b) shall be granted on
each anniversary of the Effective Date subsequent to such grant an
additional Option to purchase 2,000 Shares, provided, that such automatic
grant shall only be made if the director is a Participant on such date,
and the number of Shares subject to future grant under the Plan is
sufficient to make the automatic grants required to be made pursuant to
the Plan on such date.
(d) Price. The initial per Share price to be paid by a Participant
upon the exercise of an Option shall be equal to the fair market value of
a Share on the day preceding the date of grant. For the purposes hereof,
the fair market value of a Share on any date shall be equal to the average
of the closing bid and asked prices for the Shares on such date (or if no
such quotation occurred on that date, on the next preceding date on which
there was such a quotation), as made available for publication by the
National Association of Securities Dealers Automated Quotation System, or
if no such prices are available, the fair market value as determined by
rules to be adopted by the Committee.
8. Option Period.
Participants shall be granted Options which are exercisable for a period
of fifteen (15) years from the date of the granting thereof.
Notwithstanding the foregoing, no Option granted under this Plan shall be
exercisable until six (6) months after the grant thereof, and no Option
granted under Sections 7(b) or (c) to a director who has been elected by
the Board shall be exercisable until such director is elected as a
director by the shareholders.
9. Exercise of Option.
Subject to Section 8, an Option may be exercised in whole or in part at
any time after the date it is granted and only by a written notice of
intent to exercise the Option with respect to a specified number of Shares
and payment to the Company of the amount of the Option exercise price for
the number of Shares with respect to which the Option is then exercised;
provided, however, that all or any portion of such payment may be made in
kind by the delivery of Shares having a fair market value (as determined
in the manner set forth in Section 7 hereof), on the date of delivery,
equal to the portion of the Option exercise price so paid. The number of
Shares which may be purchased at any one time shall be 100 Shares, a
multiple thereof, or the total number at the time purchasable under the
Option.
10. Transferability.
Unless otherwise determined by the Committee, no Option shall be
assignable or transferable except by will and/or by the laws of descent
and distribution and, during the life of any Participant, each Option
granted to the Participant may be exercised only by the Participant.
11. Ceasing to be a Director.
(a) Termination. If a Participant terminates service as a director for
any reason other than death, disability or retirement, any outstanding
Option held by the Participant shall terminate on the earlier of the date
on which such Option would otherwise expire or (1) year after such
termination.
(b) Death, Disability or Retirement. If a Participant's service as a
director is terminated by death, disability (which condition constitutes
total disability under the federal Social Security Acts), or retirement
when the sum of a Participant's whole years of service as a director and
age equal or exceed seventy (70), the Participant or the representative
of the Participant's estate or beneficiaries thereof to who the Option
has been transferred shall have the right during the period commencing on
the date of the Participant's death, disability or retirement and ending
three (3) years after such termination to exercise any then outstanding
Options in whole or in part; provided, however, that in no event may the
period for exercising an Option extend beyond the date on which such
Option would otherwise expire.
12. Duration of Plan.
Unless sooner terminated, the Plan shall remain in effect for a period of
ten years after the Effective Date and shall thereafter terminate. No
Options may be granted after the termination of this Plan; provided,
however, that termination of the Plan shall not affect any Options
previously granted, which such Options shall remain in effect until
exercised, surrendered or cancelled, or until they have expired, all in
accordance with their terms.
13. Changes in Capital Structure, etc.
In the event of changes in the outstanding common stock of the Company
by reasons of stock dividends, stock splits, recapitalizations, mergers,
consolidations, combination or exchange of shares, separations,
reorganizations, or liquidations, the number of shares available under
the Plan in the aggregate and the number of Shares as to which Options
may be granted to any Participant shall be correspondingly adjusted by
the Committee. In addition, the Committee shall make appropriate
adjustments in the number of Shares as to which outstanding Options, or
portions thereof then unexercised, shall relate, to the end that the
Participant's appropriate interest shall be maintained as before the
occurrence of such event; such adjustment shall be made without change
in the total price applicable to the unexercised portion of Options and
with a corresponding adjustment in the option price per Share.
14. Rights as Shareholder.
A Participant entitled to Shares as a result of the exercise of an Option
shall not be deemed for any purpose to be, or have rights as, a
shareholder of the Company by virtue of such exercise, except to the
extent a stock certificate is issued therefor and then only from the date
such certificate is issued. No adjustments shall be made for dividends or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued.
15. Expenses.
The expenses of this Plan shall be paid by the Company and/or its
subsidiaries.
16. Compliance with Applicable law.
Notwithstanding anything herein to the contrary, the Company shall not be
obligated to cause to be issued or delivered any certificates evidencing
Shares to be delivered pursuant to the exercise of an Option, unless and
until the Company is advised by its counsel that the issuance and delivery
of such certificates is in compliance with all applicable laws and
regulations of governmental authority. The Company shall in no event be
obligated to register any securities pursuant to the Securities Act of
1933 (as now in effect or as hereafter amended) or to take any other
action in order to cause the issuance and delivery of such certificates to
comply with any such law or regulation. The Committee may require, as a
condition of the issuance and delivery of such certificates and in order
to ensure compliance with such laws and regulations, that the Participant
make such covenants, agreements and representations as the Committee, in
its sole discretion, deems necessary or desirable.
17 Application of Funds.
Any cash proceeds received by the Company from the sale of Shares pursuant
to options will be used for general corporate purposes.
18. Amendment of the Plan
The Board may from time to time suspend or discontinue this Plan or revise
or amend it in any respect whatsoever. No such suspension,
discontinuance, revision or amendment shall in any manner affect any grant
theretofore made without the consent of the Participant or the transferee
of the Participant, unless necessary to comply with applicable law.
Exhibit No. 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Norwich Financial Corp.:
We consent to incorporation by reference in the Registration
Statements (Nos. 33-79530, 33-39324 and 33-24866) on Forms S-8
of Norwich Financial Corp. of our report dated January 17,
1997, relating to the consolidated balance sheets of Norwich
Financial Corp. and subsidiary as of December 31, 1996 and
1995 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996,
which report appears in the December 31, 1996 annual report
on Form 10-K of Norwich Financial Corp.
Our report refers to a change in the method of accounting
for investment securities in 1994.
/s/KPMG PEAT MARWICK LLP
Hartford, Connecticut
March 18, 1997
Exhibit No. 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned hereby
constitutes and appoints each of Daniel R. Dennis, Jr. and
Michael J. Hartl the true and lawful attorney of the
undersigned to execute and to file with the Securities and
Exchange Commission the Annual Report of Norwich Financial
Corp. on Form 10-K for the year ended December 31, 1996, and
all amendments thereto, and the undersigned hereby ratifies
and confirms all the said attorney or agent shall do or
cause to be done by virtue hereof.
/s/ Richard P. Reed March 18, 1997
Richard P. Reed Date
Exhibit No. 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned
hereby constitutes and appoints each of Daniel R. Dennis,
Jr. and Michael J. Hartl the true and lawful
attorney of the undersigned to execute and to file with
the Securities and Exchange Commission the Annual Report
of Norwich Financial Corp. on Form 10-K for the year
ended December 31, 1996, and all amendments thereto, and
the undersigned hereby ratifies and confirms all the
said attorney or agent shall do or cause to be done by
virtue hereof.
/s/ Paul R. Duevel March 18, 1997
Paul R. Duevel Date
Exhibit No. 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned
hereby constitutes and appoints each of Daniel R. Dennis,
Jr. and Michael J. Hartl the true and lawful
attorney of the undersigned to execute and to file with
the Securities and Exchange Commission the Annual Report
of Norwich Financial Corp. on Form 10-K for the year
ended December 31, 1996, and all amendments thereto, and
the undersigned hereby ratifies and confirms all the
said attorney or agent shall do or cause to be done by
virtue hereof.
/s/ Anthony P. Halsey March 18, 1997
Anthony P. Halsey Date
Exhibit No. 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned
hereby constitutes and appoints each of Daniel R. Dennis,
Jr. and Michael J. Hartl the true and lawful
attorney of the undersigned to execute and to file with
the Securities and Exchange Commission the Annual Report
of Norwich Financial Corp. on Form 10-K for the year
ended December 31, 1996, and all amendments thereto, and
the undersigned hereby ratifies and confirms all the
said attorney or agent shall do or cause to be done by
virtue hereof.
/s/ Jeremiah J. Lowney, Jr. March 18, 1997
Jeremiah J. Lowney, Jr. Date
Exhibit No. 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned
hereby constitutes and appoints each of Daniel R. Dennis,
Jr. and Michael J. Hartl the true and lawful
attorney of the undersigned to execute and to file with
the Securities and Exchange Commission the Annual Report
of Norwich Financial Corp. on Form 10-K for the year
ended December 31, 1996, and all amendments thereto, and
the undersigned hereby ratifies and confirms all the
said attorney or agent shall do or cause to be done by
virtue hereof.
/s/ Robert T. Ramsdell March 18, 1997
Robert T. Ramsdell Date
Exhibit No. 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned
hereby constitutes and appoints each of Daniel R. Dennis,
Jr. and Michael J. Hartl the true and lawful
attorney of the undersigned to execute and to file with
the Securities and Exchange Commission the Annual Report
of Norwich Financial Corp. on Form 10-K for the year
ended December 31, 1996, and all amendments thereto, and
the undersigned hereby ratifies and confirms all the
said attorney or agent shall do or cause to be done by
virtue hereof.
/s/ Martin C. Shapiro March 18, 1997
Martin C. Shapiro Date
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 19,419
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<FED-FUNDS-SOLD> 3,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111,581
<INVESTMENTS-CARRYING> 52,714
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<LOANS> 477,111
<ALLOWANCE> 13,928
<TOTAL-ASSETS> 683,299
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0
0
<COMMON> 60
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<EXPENSE-OTHER> 18,136
<INCOME-PRETAX> 11,278
<INCOME-PRE-EXTRAORDINARY> 11,278
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,651
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 4.04
<LOANS-NON> 5,289
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,069
<LOANS-PROBLEM> 3,738
<ALLOWANCE-OPEN> 13,168
<CHARGE-OFFS> 4,134
<RECOVERIES> 988
<ALLOWANCE-CLOSE> 13,928
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</TABLE>
