UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, for the quarter and three months
ended March 31, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, for the transition period from
to .
COMMISSION FILE NUMBER 0-17138
NORWICH FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
06-1226755
(IRS Employer Identification Number)
4 BROADWAY, NORWICH, CONNECTICUT
(Address of principal executive offices)
06360
(Zip Code)
860-889-2621
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's
classes of common stock was 5,401,041 shares of common stock, par
value $.01, outstanding as of April 30, 1997.
1
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Listed below are the financial statements filed as a part of this
quarterly report.
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flow 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Exhibit A - Consolidated Financial Results 15
Exhibit B - Consolidated Nonperforming Assets
Summary 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of
Securities Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
<TABLE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands, March 31, December 31,
except share data) 1997 1996 1996
<CAPTION>
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 21,067 $ 16,966 $ 19,419
Investments
Federal funds sold 4,000 10,400 3,700
Money market instruments,
held to maturity (market
value of $60,237 and
$15,863 at March 31, 1997
and 1996 and $31,765 at
December 31, 1996) 60,277 15,866 31,769
Mortgage-backed securities,
available for sale
(amortized cost of $89,203
and $88,907 at March 31,
1997 and 1996 and $100,844
at December 31, 1996) 88,984 88,387 101,025
Investment securities
Held to maturity (market
value of $86,345 at
March 31, 1996 and $20,941
at December 31, 1996) 0 86,358 20,945
Available for sale
(amortized cost of $15,473
and $20,058 at March 31,
1997 and 1996 and $9,936
at December 31, 1996) 16,009 20,354 10,556
Federal Home Loan Bank
stock, at cost 3,715 3,715 3,715
------- ------- -------
Total Investments 172,985 225,080 171,710
Loans
Mortgage 358,281 330,115 350,781
Other 130,441 118,537 126,330
------- ------- -------
Total loans 488,722 448,652 477,111
Less: allowance for
loan losses (14,039) (15,579) (13,928)
------- ------- -------
Net loans 474,683 433,073 463,183
Loans and foreclosed
properties held for sale 250 5,610 172
Premises and equipment,
at cost less accumulated
depreciation 6,078 6,493 6,216
Accrued income receivable 3,643 3,894 3,474
Foreclosed properties 1,529 715 1,167
Deferred tax asset, net 5,555 5,251 5,356
Other assets 15,444 14,546 12,602
-------- -------- --------
Total assets $701,234 $711,628 $683,299
======== ======== ========
LIABILITIES
Total deposits $603,982 $610,754 $585,080
Mortgagors' escrow accounts 2,055 1,811 3,654
FHLB advances 11,908 18,357 11,928
Other liabilities 6,240 5,453 6,139
------- -------- --------
Total liabilities $624,185 $636,375 $606,801
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock 60 60 60
Additional paid in capital 58,710 58,805 58,708
Retained income 24,698 20,467 23,869
Less: Treasury stock, at
cost (553,840 and 349,729
shares at March 31, 1997 and
1996 and 554,240 shares at
December 31, 1996) (6,606) (3,948) (6,611)
Unrealized gain (loss) on
securities available for
sale, net of tax effect 187 (131) 472
------- ------- -------
Total stockholders'equity 77,049 75,253 76,498
------- ------- -------
Total liabilities and
stockholders' equity $701,234 $711,628 $683,299
======== ======== ========
BOOK VALUE PER SHARE $ 14.27 $ 13.43 $ 14.17
======== ======== ========
</TABLE>
3
<PAGE>
<TABLE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Income
Three Months Ended
March 31,
(In thousands, except share data) 1997 1996
<CAPTION>
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Mortgage loans $ 7,554 $ 7,023
Other loans 2,896 2,679
Federal funds sold 60 94
Money market instruments 571 283
U.S. Government and agency obligations 59 1,394
Mortgage-backed securities 1,518 1,417
Other bonds 119 15
Corporate stocks 81 63
------ ------
Total interest income 12,858 12,968
INTEREST EXPENSE
Deposits 5,534 6,303
FHLB advances 188 256
----- -----
Total interest expense 5,722 6,559
----- -----
NET INTEREST INCOME 7,136 6,409
LOAN LOSS PROVISION 200 200
----- -----
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 6,936 6,209
----- -----
NONINTEREST INCOME
Mortgage servicing fees 164 168
Other service fee income 692 664
Net securities gains 31 3
Gains (losses) on loans sold or held for sale 24 (2)
Other (15) 31
--- ---
Total noninterest income 896 864
NONINTEREST EXPENSE
Salaries and employee benefits 2,268 2,368
Furniture and equipment 292 297
Net occupancy 580 626
Data processing 194 174
Advertising and promotion 114 158
FDIC/State assessments 18 5
Amortization of intangibles 145 162
Provision for losses on foreclosed properties 4 0
Other nonperforming asset expenses (income) 65 (8)
Other operating expenses 718 792
----- -----
Total noninterest expense 4,398 4,574
----- -----
INCOME BEFORE INCOME TAXES 3,434 2,499
INCOME TAX PROVISION 1,417 1,091
------ ------
NET INCOME $2,017 $1,408
====== ======
NET INCOME PER SHARE
PRIMARY $ 0.36 $ 0.25
FULLY DILUTED $ 0.36 $ 0.24
</TABLE>
4
<PAGE>
<TABLE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flow
Three Months Ended
March 31,
(Dollars in thousands) 1997 1996
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,017 $ 1,408
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loan loss provision 200 200
Provision for losses on foreclosed
properties 4 0
Depreciation, amortization and
accretion (363) (824)
Amortization of intangible 145 162
Net gain on sales of securities (31) (3)
(Gain) loss on loans sold (24) 2
Loans originated for sale (5,410) (8,658)
Proceeds from loans sold 5,356 7,580
Gain on nonperforming loans
and foreclosed properties
held for sale 0 (161)
Gain on foreclosed properties (25) (14)
Change in assets and liabilities net
of effects from the acquisition
of branch offices and the purchase
of Seconn Holding Company
Change in accrued income receivable (163) (135)
Change in all other liabilities 43 (1,427)
Change in all other assets 140 (269)
----- -----
Net cash provided (used) by
operating activities 1,889 (2,139)
----- -----
Cash flows from investing activities:
Cash acquired net of cash paid
for purchase of Seconn Holding Company 0 10,387
Mortgage-backed securities
available for sale
Purchases 0 0
Proceeds from sales 8,362 0
Maturities and repayments 3,268 4,520
Other investment securities
available for sale
Purchases (9,006) (5,613)
Proceeds from sales 3,488 0
Maturities and repayments 0 1,500
Other investment securities
held to maturity
Purchases (58,938) (42,286)
Maturities and repayments 52,000 52,120
Net advances on loans (11,670) (2,281)
Acquisition of loans and other assets (4,227) 0
Proceeds from sales of foreclosed
properties 717 330
Proceeds from sales of loans and
foreclosed properties held for sale 0 665
Capital expenditures, net (95) (314)
--- ---
Net cash (used) provided by
investing activities (16,101) 19,028
------ ------
Cash flows from financing activities:
Net decrease in savings,
demand and other deposit accounts (4,039) (3,827)
Net (decrease) increase in time
deposits (2,488) 2,529
Assumption of deposits and liabilities
of acquired branches 25,487 0
Net decrease in mortgagors'
escrow accounts (1,599) (1,425)
Proceeds from FHLB advances 1,684 3,644
Repayment of FHLB advances (1,704) (7,687)
Proceeds from exercise of stock options 7 778
Purchase of treasury stock 0 (874)
Cash dividends paid (1,188) (1,411)
----- -----
Net cash provided (used) by
financing activities 16,160 (8,273)
------ -----
Net increase in cash and cash
equivalents 1,948 8,616
Cash and cash equivalents at
beginning of period 23,119 18,750
------ ------
Cash and cash equivalents at
end of period $25,067 $27,366
======= =======
Supplemental disclosures
Interest $ 5,674 $ 6,576
Income Taxes 13 1,218
Supplemental information on noncash
transactions
Transfer to foreclosed properties 1,058 68
Loans to facilitate the sale of
foreclosed properties $ 146 $ 401
</TABLE>
5
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
March 31, 1997
I. Basis of Presentation
The consolidated financial statements included herein have been
prepared by Norwich Financial Corp., (NFC or the Company),
without an audit except for the December 31, 1996 balance sheet,
which was derived from the Annual Report on Form 10-K, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although NFC
believes the disclosures are adequate to make the information
presented not misleading. The information furnished reflects all
adjustments which are, in the opinion of management, of a normal,
recurring nature and necessary for a fair statement of the
results for the interim periods. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and related notes included in NFC's Annual
Report on Form 10-K for the year ended December 31, 1996 and with
the supplementary schedules presented as Exhibits A and B on
pages 15 and 16. NFC's consolidated financial statements
contained herein have been prepared in accordance with the
accounting policies described in Note 2 to the December 31, 1996
financial statements included in NFC's 1996 Annual Report on Form
10-K.
II. Net Income Per Share
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 5,605,010 and 5,621,019 for the three months ended March 31,
1997 and 1996, respectively. Weighted average common shares
outstanding used to calculate fully diluted earnings per share
were 5,605,010 and 5,753,581 for the three months ended March 31,
1997 and 1996, respectively.
III. Capital Ratios
<TABLE>
Regulatory Requirements
to be Considered Well
March 31, 1997 Actual Capitalized
<CAPTION>
<S> <C> <C>
Risk-based
Tier 1 12.79% 6.00%
Total 14.06 10.00
Leverage 10.18% 5.00%
</TABLE>
6
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
March 31, 1997
IV. Realized and Unrealized Gains and Losses on Investment
Securities
Unrealized gains and losses as of March 31, 1997 and March 31,
1996 were as follows:
<TABLE>
March 31, 1997
Unrealized Unrealized Net Unrealized
(in thousands) Gains Losses Gains (losses)
<S> <C> <C> <C>
Available for sale
Mortgage backed securities $643 $862 $(219)
All other securities 698 162 536
Held to maturity
All other securities $ 0 $ 40 $ (40)
</TABLE>
<TABLE>
March 31, 1996
Unrealized Unrealized Net Unrealized
Gains Losses Gains (losses)
<CAPTION>
<S> <C> <C> <C>
Available for sale
Mortgage backed securities $626 $1,146 $(520)
All other securities 306 10 296
Held to maturity
All other securities $ 25 $ 41 $ (16)
</TABLE>
Proceeds from sales and realized gains and losses on investments
were as follows:
<TABLE>
Three Months Ended
March 31,
(in thousands) 1997 1996
<S> <C> <C>
Other investment securities
available for sale
Proceeds $3,488 $0
Realized gains 0 0
Realized losses (8) 0
Mortgage-backed securities
available for sale
Proceeds 8,362 0
Realized gains 79 0
Realized losses $ (67) $0
</TABLE>
The Company received a capital gain distribution of $27,000 and
$3,000 on its investment of mutual funds during the first quarter
of 1997 and 1996, respectively.
7
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
March 31, 1997
V. Adoption of New Financial Accounting Standards
The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities," on January 1, 1997, with no impact on its results
of operations. SFAS No. 125 provides financial reporting
standards for the derecognition and recognition of financial
assets, including the distinction between transfers of financial
assets which should be recorded as sales and those which should
be recorded as secured borrowings. Transfers relating to secured
borrowings, repurchase agreements and similar transactions made
prior to December 31, 1997 are not covered under this Statement.
This Statemennt also amends the accounting for mortgage servicing
rights and supercedes SFAS No. 122, "Accounting for Mortgage
Servicing Rights."
The Financial Accounting Standards Board has recently issued SFAS
No. 128, "Earnings per Share." This statement simplifies the
computation of earnings per share (EPS) by replacing the
presentation of primary EPS with basic EPS. Under the new
statement, dual presentation of basic and diluted EPS is required
on the face of the income statement for entities with complex
capital structures. A reconciliation of the numerator and
denominator used in the basic EPS computation to the diluted EPS
computation's numerator and denominator is also required. SFAS
No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including subsequent interim
periods. The Company believes that the effect of the adoption of
SFAS No. 128 will not be material to its disclosure of earnings
per share.
VI. Mergers and Acquisitions
On March 7, 1997 the Company completed its acquisition of two
branches of First Union Bank of Connecticut. Under terms of the
acquisition, the newly acquired branches were merged with the
Bank's existing offices in New London and Groton. The
acquisition includes the transfer of approximately $25.5 million
in deposits and $1.1 million in loans.
VII Reclassification
Certain reclassifications have been made to the prior years'
amounts to conform with the 1997 presentation.
8
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of the Three Month Periods Ending March 31, 1997 and 1996
The following discussion and analysis presents a review of
Norwich Financial Corp's (NFC or the Company) financial condition
and results of operations. This review should be read in
conjunction with the consolidated financial statements and other
data presented herein.
GENERAL
Norwich Financial Corp. (NFC or the Company) is a holding company
and parent to The Norwich Savings Society (the Bank). The Bank
is a state chartered, stock savings bank headquartered in Norwich,
Connecticut which originates real estate, commercial and consumer
loans in southeastern Connecticut. The Bank funds its operations
through the taking of deposits in the same market area.
Traditionally a defense oriented economy dominated by companies
such as General Dynamic's Electric Boat Division, the Bank's
market area has been diversifying to accommodate defense
downsizing which continues to impact the area's economy. The
gaming industry is currently anchored by the Mashantucket
Pequot's Foxwoods Casino which is one of the region's largest
employers and is continuing to expand. A second casino, Mohegan
Sun Resort, just south of Norwich in 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. 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.
SUMMARY
For the first quarter of 1997, NFC had net income of $2.0 million
or $.36 per share compared to net income of $1.4 million or $.25
per share for the first quarter of 1996. Core earnings for the
quarter ended March 31, 1997 were $3.6 million compared to $2.7
million for the quarter ended March 31, 1996. The 34.9% increase
in core earnings was due primarily to an increase in net interest
income which was $727,000 (11.3%) higher in the first quarter of
1997 than in the first quarter of 1996 and a decrease in
noninterest expenses of $176,000 (3.8%) for the same periods,
respectively. NFC defines core earnings as net interest income
plus service fee income, less noninterest expenses other than
provisions for losses on foreclosed properties.
Total nonperforming assets at March 31, 1997, excluding "loans
and foreclosed properties held for sale," were $7.0 million
compared to $10.2 million at the same date a year earlier. As of
March 31, 1997, total nonperforming assets, including "loans and
foreclosed properties held for sale," were $7.0 million compared
to $13.7 million at March 31, 1996.
9
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NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three Month Periods Ending March 31, 1997 and 1996
NET INTEREST INCOME
As previously mentioned, the year-over-year increase in core
earnings for the first quarter ended March 31, 1997 was due
primarily to an increase in net interest income. Net interest
income for the first quarter of 1997 was $7.1 million compared
with $6.4 million for the first quarter of 1996. Net interest
margin (net yield on interest earning assets) hit an all time
high during the quarter ended March 31, 1997. Net interest margin
on a fully taxable equivalent basis was 4.43% for the quarter
ended March 31, 1997 compared with 3.83% for the quarter ended
March 31, 1996.
Although average interest-earning assets decreased slightly,
(3.7%) from March 31, 1996 to March 31, 1997, NFC's rate of
return on earning assets increased due to a shift in the
composition of NFC's interest-earning assets. The higher
yielding loan portfolio growth was funded with the proceeds of
maturing investment securities. At March 31, 1997, loans
represented 73.9% of total earning assets compared to 66.8% at
March 31, 1996. Investments represented 26.1% of total earning
assets at March 31, 1997 versus 33.2% at March 31, 1996.
For the first three months of 1997, the yield on the Company's
loan portfolio was 8.72% compared to 8.70% for the first three
months of 1996. For the first three months of 1997, the yield on
the Company's investment portfolio was 5.97% compared to 5.87%
for the same period in 1996. At March 31, 1997 and 1996, the
weighted average life of the investment portfolio was 2.0 years
and 2.1 years, respectively.
The Company's overall cost of funds decreased to 4.41% at March
31, 1997 from 4.69% at March 31, 1996. This decrease is the
result of a shift in the composition of NFC's deposit
liabilities. At March 31, 1997 and 1996, NFC's deposit
liabilities were as follows:
<TABLE>
March 31, 1997 March 31, 1996
<CAPTION>
<S> <C> <C>
Savings and money market 34.5% 32.3%
Demand deposits 12.3 10.5
Time deposits 53.2 57.2
----- ----
100.0% 100.0%
</TABLE>
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 and the first quarter of 1997 with the objective of
lowering the Bank's cost of funds and increasing the Bank's net
interest margin.
10
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three Month Periods Ending March 21, 1997 and 1996
RATE SENSITIVITY
An ongoing objective of management is to manage asset and
liability positions so as to moderate the effect of interest rate
fluctuations on net interest income. NFC's position is measured
by the ratio of interest rate sensitive assets to interest rate
sensitive liabilities within a one year time frame. Management
attempts to maintain this ratio within a range of 90% to 110%.
In addition, management continually reviews the potential effect
that changes in interest rates could have on net interest income
and on the repayment of rate sensitive assets and on funding
requirements of rate sensitive liabilities.
The Investment Committee of NFC's Board of Directors reviews
asset/liability guidelines from time to time, including the
target range for the rate sensitivity ratio at one year. The 90%
to 110% guideline is still in effect and the Investment Committee
approves ratios outside the target range.
As of March 31, 1997, NFC's one year ratio of rate sensitive
assets to rate sensitive liabilities was 89.8% compared to 89.0%
at March 31, 1996. The year-over-year increase in the ratio of
rate sensitive assets to rate sensitive liabilities within a one
year time frame is partially attributable to a change,
implemented during the second quarter of 1996, in the methodology
used to determine the repricing classification of noncontractual
deposits such as demand deposits, interest-bearing checking, and
savings and money market deposits. These noncontractual deposits
are now scheduled into discrete time frames based on (1)
management's current estimate of the sensitivity of the rates and
balances of these accounts to changes in market interest rates,
(2) management's current deposit pricing philosophy in response
to changes in the interest rate environment, and (3) management
assumptions regarding seasonal patterns, cyclical factors, and
industry trends or innovations that may influence the pricing or
stability of these accounts. Previously, all interest-bearing
checking, savings and money market deposits were classified as
rate-sensitive within one year while all noninterest bearing
demand deposits were classified as long term, non-rate sensitive
liabilities. This change in methodology resulted in a net
reduction in rate sensitive liabilities within a one year time
frame of approximately $49.4 million at March 31, 1997. It is
believed that the new methodology appropriately reflects the
Company's rate sensitivity position. Had the previous
methodology been applied at March 31, 1997, the ratio would have
been 79.3%.
NONPERFORMING ASSETS (NPAs) AND ALLOWANCES AND PROVISIONS FOR
CREDIT LOSSES
At the end of the first quarter of 1997, NPAs, excluding "loans
and foreclosed properties held for sale," were $7.0 million,
which was $3.2 million (31.4%) lower than at the end of the first
quarter of 1996 and was $22,000(.3%) higher than at the end of
1996. Net charge-offs for the first quarter 1997 were $93,000
compared to $295,000 for the first quarter of 1996. Net loan
charge-offs for the first quarter of 1997 were $89,000 compared
to $295,000 for the first quarter of 1996. Net charge-offs on
foreclosed properties for the first quarter of 1997 were $4,000
while there were no charge-offs on foreclosed properties during
the first quarter of 1996.
11
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three Month Periods Ending March 31, 1997 and 1996
Nonaccrual and nonperforming restructured loans totaled $5.5
million or 78.2% of nonperforming assets, excluding "loans and
foreclosed properties held for sale," at March 31, 1997 compared
to $9.5 million or 93.0% at March 31, 1996. Foreclosed
properties, excluding foreclosed properties held for sale and
before the allowance for losses, were $1.5 million at March 31,
1997 compared to $715,000 at March 31, 1996 and represented 21.8%
and 7.0%, respectively, of total nonperforming assets excluding
"loans and foreclosed properties held for sale."
The allowance for loan losses was $14.0 million at March 31, 1997
compared to $13.9 million at December 31, 1996 and $15.6 million
one year ago. The provision for losses on loans was $200,000 for
the first quarter of 1997 and 1996. NFC's ratio of allowance for
loan losses to nonperforming loans, excluding "loans and
foreclosed properties held for sale," was 255.91% as of March 31,
1997 compared to 239.07% at December 31, 1996 and 163.89% at
March 31, 1996. Provisions and allowances for losses are
dependent on several factors, including the quality and estimated
value of underlying collateral held on nonperforming assets, the
results of NFC's systematic methodology to evaluate allowance
adequacy, and charge-offs of existing nonperforming assets.
The bulk of NFC's problem assets and charge-offs have been
concentrated in the commercial real estate and business loan
portfolios. As of March 31, 1997, these two portfolios accounted
for $5.9 million (83.5%) of NPAs compared with $7.4 million
(72.8%) at March 31, 1996. Net charge-offs of commercial real
estate, business loans and related foreclosed properties
represented $9,000 or 9.7% of NFC's total net charge-offs for the
first three months of 1997 compared to $226,000 or 76.6% for the
first three months of 1996.
NONINTEREST INCOME
Noninterest income for the current quarter amounted to $896,000
compared to $864,000 for the year-earlier quarter. Securities
gains of $31,000 were recorded in the first three months of 1997
compared to $3,000 of securities gains for the first three months
of 1996. Service fees, primarily deposit service fees, were
$24,000 (2.9%) higher in the first three months of 1997 compared
to the first three months of 1996. This increase resulted both
from higher account activity and a change in the Company's
deposit fee structure in the second half of 1996.
NONINTEREST EXPENSE
Total noninterest expense was $4.4 million for the first quarter
of 1997 compared to $4.6 million for the first quarter of 1996.
The decrease in noninterest expenses is primarily attributable to
a decrease in salaries and employee benefits of $100,000 as well
as a decrease of $74,000 in other operating expenses. Included
in other operating expenses are costs such as supplies and
printing, postage and express mail, and consulting fees. The
decrease in salaries and employee benefits, as well as other
operating expenses, is due to the successful completion and
integration of The Bank of Southeastern Connecticut branches into
The Norwich Savings Society franchise during 1996 and the
reduction in staffing costs due to the sale of a branch office in
the third quarter of 1996.
12
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three Month Periods Ending March 31, 1997 and 1996
Other nonperforming assets had net expenses of $65,000 for the
first quarter of 1997 compared to net income of $8,000 during the
first quarter of 1996. The increase in nonperforming asset
expenses in the first quarter of 1997 is due to lower gains on
sales of assets in 1997 versus the first quarter of 1996. During
the first quarter of 1997, gains of $28,000 offset net incurred
expenses of $93,000. During the first quarter of 1996, gains of
$185,000 offset net incurred expenses of $177,000. The decline
in expenses incurred on nonperforming assets is due 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 costs and other costs to obtain and market
properties acquired, as well as expenses incurred to pursue
borrowers and guarantors where no specific collateral exists.
These expenses are offset by rents received from tenants.
INCOME TAXES
The effective tax rate for the quarter ended March 31, 1997 was
41%, down slightly from the 44% for the same period in 1996. The
$326,000 increase in income taxes to $1.4 million for the quarter
ended March 31, 1997 is substantially attributable to a higher
level of taxable income.
CHANGES IN FINANCIAL CONDITION
The increase in total assets is due primarily to the acquisition
of two First Union branch offices during the first quarter of
1997. This acquisition added approximately $25.5 million in
assets, including the excess cost over net assets acquired. This
increase in assets was offset as investments were liquidated
during the three months ended March 31, 1997 to fund modest
outflows of deposits.
Total liabilities were $624.2 million at March 31, 1997, an
increase of $17.4 million from $606.8 million at December 31,
1996. The increase is due primarily to the First Union
transaction which added approximately $25.5 million in deposits
on March 7, 1997. This increase was offset by a modest outflow
of deposits as the Bank continued a conservative pricing
structure for time deposits.
Stockholders' equity was $77.0 million at March 31, 1997, an
increase of $551,000 from $76.5 million at December 31, 1996. At
March 31, 1997, NFC's equity represented 10.99% of total assets
compared to 11.20% at December 31, 1996 and 10.57% at March 31,
1996. Book value per share was $14.27 at March 31, 1997 compared
to $14.17 at December 31, 1996 and $13.43 at March 31, 1996.
CAPITAL RESOURCES
Capital ratios for NFC and its subsidiary bank, The Norwich
Savings Society, continue to be well in excess of all regulatory
requirements as of March 31, 1997. The leverage capital ratio
was 10.18% and total risk based capital was 14.06% compared to
9.82% and 16.01%, respectively, at March 31, 1996. Capital
ratios remain well above minimum regulatory requirements of 4%
for leverage capital and 8% for total risk-based capital.
13
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Comparison of the Three Month Periods Ending March 31, 1997 and 1996
LIQUIDITY
Liquidity is the ability of the Company to meet each maturing
obligation or customer demand for funds. Norwich Financial
Corp.'s main source of liquidity is dividends from the Bank. As
a result, the liquidity of the Company is largely dependent upon
the liquidity and profitability of the Bank and the ability of
the Bank to pay dividends under applicable laws and regulations.
The Bank considers liquid assets to be cash and due from banks,
Federal funds sold, time deposits with other banks, money market
instruments and U.S. Government and agency obligations maturing
within one year. As of March 31, 1997, liquid assets were $85.4
million or 12.2% of total assets compared to $141.6 million and
19.9% as of March 31, 1996.
Liquidity is generated by deposit inflows, loan principal and
interest payments, maturing investments and Federal Home Loan
Bank advances. Principle uses of funds include loan
originations, investment purchases, payments of interest on
deposits and payments to meet operating expenses. Due primarily
to the First Union acquisition, total deposits, including
mortgage escrow, showed growth of $17.3 million during the quarter
ended March 31, 1997.
INFLATION
The effect of inflation is reflected in the cost of NFC's
operations. Since the assets and liabilities of NFC are
primarily monetary in nature, the extent to which inflation
affects interest rates will, in turn, affect NFC's operation.
14
<PAGE>
<TABLE>
Exhibit A
NORWICH FINANCIAL CORP. AND SUBSIDIARY
Consolidated Financial Results
Three Months Ended
March 31,
(In thousands, except share data) 1997 1996
<CAPTION>
<S> <C> <C>
EARNINGS
Interest income $12,858 $12,968
Interest expense 5,722 6,559
Net interest income 7,136 6,409
Net income 2,017 1,408
Fully diluted earnings per share 0.36 0.24
Weighted average common
shares outstanding,
including common stock equivalents 5,605,010 5,753,581
RATIOS (annualized)
Return on average assets 1.21% 0.81%
Return on average stockholders' equity 10.67 7.47
Average stockholders' equity
to average assets 11.31 10.81
YIELD DATA (taxable equivalent - annualized)
Net interest margin 4.43% 3.83%
Net interest spread 3.62 3.07
Asset yields
Loans 8.72 8.70
Investments 5.97 5.87
Earning assets 8.03 7.76
Cost of funds
Deposits 4.36 4.64
FHLB advances 6.39 6.16
Interest bearing liabilities 4.41 4.69
</TABLE>
<TABLE>
March 31, December 31,
1997 1996 1996
<CAPTION>
<S> <C> <C> <C>
OUTSTANDING BALANCES
Total assets $701,234 $711,628 $683,299
Net loans 474,683 433,073 463,183
Deposits 603,982 610,754 585,080
FHLB advances 11,908 18,357 11,928
Stockholders' equity 77,049 75,253 76,498
Stockholders' equity to
total assets 10.99% 10.57% 11.20%
Book value per share $14.27 $13.43 $14.17
Shares of common stock 5,400,041 5,604,152 5,399,641
</TABLE>
15
<PAGE>
<TABLE>
Exhibit B
NORWICH FINANCIAL CORP. AND SUBSIDIARY
Nonperforming Assets Summary
March 31, December 31,
(Dollars in thousands) 1997 1996 1996
<CAPTION>
<S> <C> <C> <C>
Nonaccrual Loans
Residential real estate $ 989 $ 1,943 $ 1,476
Commercial real estate
Permanent 3,178 3,556 2,395
Land and construction 73 224 114
Commercial 599 2,367 1,176
Consumer 116 470 128
----- ----- -----
4,955 8,560 5,289
----- ----- -----
Nonperforming Restructured Loans
Residential and consumer 0 288 0
Commercial real estate 531 658 537
Commercial 0 0 0
----- ----- -----
531 946 537
----- ----- ----
Total nonperforming loans 5,486 9,506 5,826
----- ----- -----
Foreclosed properties 1,529 715 1,167
----- ----- -----
Total nonperforming assets
before nonperforming assets
held for sale 7,015 10,221 6,993
----- ------ -----
Nonperforming assets held for sale
Loans on nonaccrual 0 1,605 0
Foreclosed properties 0 1,864 0
----- ----- -----
Total nonperforming assets held
for sale 0 3,469 0
------ ------- ------
Total nonperforming assets $7,015 $13,690 $6,993
====== ======= ======
</TABLE>
Summary of Impaired Loans
At March 31, 1997, all loans classified as nonperforming in the
above table, as well as performing restructured loans of $2.0
million, are classified as impaired. Impaired loans of $7.5
million as of March 31, 1997 had an associated allowance for
losses of $1.4 million.
<TABLE>
March 31, December 31,
(Dollars in thousands) 1997 1996 1996
<CAPTION>
<S> <C> <C> <C>
Net charge-offs year to date $ 93 $ 295 $ 3,164
Net charge-offs to average loans
and foreclosed properties
For the period 0.02% 0.07% 0.69%
Annualized 0.08% 0.26% (a)
Allowances for losses
On loans $14,039 $15,579 $13,928
On foreclosed properties 0 0 0
------- ------- -------
Combined $14,039 $15,579 $13,928
======= ======= =======
Ratios (exclusive of
nonperforming assets
held for sale)
Allowance for loan losses to:
Nonaccrual loans 283.33% 182.00% 263.34%
Nonperforming loans 255.91 163.89 239.07
Combined allowances for
losses to:
Total nonperforming assets 200.13 152.42 199.17
Total loans and foreclosed
properties 2.86 3.45 2.91
Total nonperforming assets to:
Total loans and foreclosed
properties 1.43 2.26 1.46
Total assets 1.00% 1.44% 1.02%
(a) Not Applicable
</TABLE>
16
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
For the Three Months Ended March 31, 1997
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the
Company or its subsidiary is a party, or of which any of
their property is the subject, other than ordinary routine
litigation in the normal course of business.
Item 2. Changes in Securities
During the first quarter of 1997, there were no changes which
would materially modify the rights of the holders of the
Company's registered securities.
Item 3. Defaults upon Senior Securities
The Company and its subsidiary are not in default with
respect to the payment of principal or interest related to
any outstanding borrowing.
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are filed herewith:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the period covered
by this report.
17
<PAGE>
NORWICH FINANCIAL CORP. AND SUBSIDIARY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
10-Q SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 14, 1997 By: /s/ Daniel R. Dennis, Jr.
Daniel R. Dennis, Jr.
Chairman, President,
Chief Executive Officer
And Director
Date: May 14, 1997 By: /s/ Michael J. Hartl
Michael J. Hartl
Executive Vice President,
Treasurer, Chief Financial
Officer and Director
Date: May 14, 1997 By: /s/ Lori J. Ferro
Lori J. Ferro
Vice President and Controller
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 21,067
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 104,993
<INVESTMENTS-CARRYING> 60,277
<INVESTMENTS-MARKET> 60,237
<LOANS> 488,722
<ALLOWANCE> 14,039
<TOTAL-ASSETS> 701,234
<DEPOSITS> 603,982
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,240
<LONG-TERM> 11,908
0
0
<COMMON> 60
<OTHER-SE> 76,989
<TOTAL-LIABILITIES-AND-EQUITY> 701,234
<INTEREST-LOAN> 10,450
<INTEREST-INVEST> 2,408
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,858
<INTEREST-DEPOSIT> 5,534
<INTEREST-EXPENSE> 5,722
<INTEREST-INCOME-NET> 7,136
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 4,398
<INCOME-PRETAX> 3,434
<INCOME-PRE-EXTRAORDINARY> 3,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,017
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 4.43
<LOANS-NON> 4,955
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,519
<LOANS-PROBLEM> 2,127
<ALLOWANCE-OPEN> 13,928
<CHARGE-OFFS> 240
<RECOVERIES> 151
<ALLOWANCE-CLOSE> 14,039
<ALLOWANCE-DOMESTIC> 14,039
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
