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 quarterly period ended
March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main St., P.O. Box 600, New Milford, Conn. 06776
(Address of principal executive offices) (Zip Code)
(203) 354-4411
(Registrant's telephone number, including area code)
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 the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No _
The number of shares of Common Stock outstanding as of March 31,
1995 is 4,485,888.
<PAGE>
NEWMIL BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
March 31, 1995 and June 30, 1994. . . . . . . . . 2
Consolidated Statements of Operations
for the three and nine month periods
ended March 31, 1995 and 1994 . . . . . . . . . . 3
Consolidated Statements of Cash Flows for
the nine month periods ended March 31, 1995
and 1994. . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . 24
Item 4 Submission of matters to a vote of security holders. 24
Item 5 Other information. . . . . . . . . . . . . . . . . . 24
Item 6 Exhibits and Reports on Form 8-K. . . . . . . . . . .24<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS NewMil Bancorp, Inc. and Subsidiary
(dollars in thousands)
(unaudited)
<CAPTION>
March 31, June 30,
1995 1994
____ ____
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,303 $ 4,732
Federal funds sold 700 -
Securities:
Available-for-sale at market 7,588 119,141
Held-to-maturity at amortized cost
(market value: $117,925 and $32,695) 121,680 34,605
Loans (net of allowance for loan
losses: $5,518 and $5,246) 144,383 137,620
Residential loans held-for-sale - 130
Real estate acquired and in-substance
foreclosed (net of valuation
reserve: $1,029 and $367) 5,462 9,136
Bank premises and equipment, net 6,197 6,393
Accrued income 1,912 1,887
Deferred tax asset, net 800 800
Other assets 843 715
______ ______
Total Assets $294,868 $315,159
</TABLE>
<TABLE>
LIABILITIES and SHAREHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Deposits
Demand (non-interest bearing) $ 6,912 $ 7,111
NOW accounts 21,274 22,494
Money market 65,394 84,269
Savings and other 41,676 46,949
Certificates of deposit 111,542 75,359
_______ _______
Total deposits 246,798 236,182
Securities sold under agreement
to repurchase 18,078 51,850
Accrued interest and other liabilities 3,517 2,033
_______ _______
Total Liabilities 268,393 290,065
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Authorized - 20,000,000 and
6,000,000 shares
Issued - 5,965,888 shares 2,983 2,983
Paid-in capital 44,182 44,182
Accumulated deficit (508) (2,040)
Unrealized losses on securities
available-for-sale, net 126 (4,163)
Unrealized losses on securities transferred
to held-to-maturity, net (4,440) -
Treasury stock, at cost - 1,480,000 shares (15,868) (15,868)
________ ________
Total Shareholders' Equity 26,475 25,094
Total Liabilities and
Shareholders' Equity $294,868 $315,159
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
<PAGE>
CONSOLIDATED STATEMENTS
OF OPERATIONS NewMil Bancorp, Inc. and Subsidiary
(in thousands except
per share amounts)
(unaudited)
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1995 1994 1995 1994
____ ____ ____ ____
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,037 $2,581 $8,523 $8,024
Interest on securities 1,999 1,662 6,100 4,611
Dividends on marketable
equity securities 52 18 96 59
Interest on federal funds sold 15 31 52 72
_____ _____ _____ _____
Total interest and
dividend income 5,103 4,292 14,771 12,766
INTEREST EXPENSE
Deposits 2,109 1,665 5,702 5,174
Borrowed funds 315 430 1,292 1,022
Interest rate swaps, net (1) (1) (1) (4)
_____ _____ _____ _____
Total interest expense 2,423 2,094 6,993 6,192
Net interest and
dividend income 2,680 2,198 7,778 6,574
PROVISION FOR LOAN LOSSES 100 60 300 148
_____ _____ _____ _____
Net interest and dividend
income after provision
for loan losses 2,580 2,138 7,478 6,426
NON-INTEREST INCOME
Securities gains, net 30 157 226 447
Service charges on
deposit accounts 185 175 581 456
Gains on mortgage loans, net - (53) 4 99
Loan servicing fees 31 32 94 81
Other 60 61 188 197
_____ _____ _____ _____
Total non-interest income 306 372 1,093 1,280
NON-INTEREST EXPENSE
Salaries 879 700 2,483 2,126
Employee benefits 230 190 618 656
Occupancy 206 216 561 598
Equipment 142 120 424 365
Insurance 182 176 529 528
Collection and
real estate acquired 271 299 884 1,081
Marketing and
shareholder relations 60 41 219 201
Professional fees 71 100 241 269
Other 259 250 863 754
_____ _____ _____ _____
Total non-interest expense 2,300 2,092 6,822 6,578
INCOME BEFORE INCOME TAXES 586 418 1,749 1,128
Provision for income taxes 12 12 37 37
_____ _____ _____ _____
NET INCOME $ 574 $ 406 $1,712 $1,091
Earnings per share $0.13 $0.09 $0.38 $0.24
Dividends per share $0.00 $0.00 $0.04 $0.00
The accompanying notes are an integral part of the consolidated
financial statements.<PAGE>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS NewMil Bancorp, Inc. and Subsidiary
(in thousands)
(unaudited)
<CAPTION>
Nine months ended
March 31,
1995 1994
____ ____
<S> <C> <C>
Operating Activities
Net income $ 1,712 $ 1,091
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses 300 148
Provision for losses on
real estate acquired 733 205
Provision for depreciation
and amortization 384 303
Amortization of premiums on
securities, net 434 1,325
Realized gains on security sales, net (226) (447)
Realized gains on sales of real estate
acquired, net (620) (4)
Realized gains on residential loans
held-for-sale, net (4) (99)
(Increase) decrease in held-for-sale
mortgage loans, net (130) 825
(Increase) decrease in accrued
interest receivable (39) 57
(Increase) decrease in other assets, net (114) 13
Increase (decrease) in other liabilities 1,485 (527)
______ ______
Net cash provided by
operating activities 3,915 2,890
Investing Activities
Proceeds from sales of available-for-sale
securities 5,006 27,510
Proceeds from maturities and
principal repayments of securities 5,046 30,637
Purchases of available-for-sale securities (5,413) (116,829)
Purchase of short term investment - (4,993)
Proceeds from sales of available-for-sale
mortgage backed securities 15,710 23,170
Principal collected on mortgage
backed securities 3,770 13,503
Purchases of available-for-sale
mortgage backed securities - (19,639)
Loan (advances) repayments, net (6,349) 2,869
Purchases of loans (819) -
Proceeds from sales of
real estate acquired 4,891 985
Payments to improve real estate acquired (962) (817)
Net purchases of Bank premises
and equipment (187) (655)
______ ______
Net cash provided (used) by
investing activities 20,693 (44,259)
______ ______
Financing Activities
Net increase in deposits 10,615 6,570
Net (decrease) increase in
repurchase agreements (33,772) 31,534
Proceeds from exercise of stock options - 3
Dividends paid to shareholders (180) -
_______ ______
Net cash (used) provided by
financing activities (23,337) 38,107
Increase (decrease) in cash and
cash equivalents 1,271 (3,262)
Cash and federal funds sold,
beginning of year 4,732 9,272
_______ ______
Cash and federal funds sold, end of period $ 6,003 $ 6,010
Cash paid during period:
Interest to depositors $ 2,110 $ 1,873
Interest on borrowings and
interest rate swaps 1,347 1,379
Income taxes 72 71
Non-cash transfers:
From securities available-for-sale
to securities held-to-maturity 92,231 -
From loans to real estate acquired
and in-substance foreclosed 369 254
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
NEWMIL BANCORP, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements of NewMil Bancorp,
Inc. (the "Company") include those of the Company and its wholly-owned
subsidiary, New Milford Savings Bank (the "Bank"). Certain prior period
amounts in the statements of operations and balance sheets have been
reclassified to conform with the current financial presentation.
In the opinion of management, the interim unaudited consolidated
financial statements include all adjustments (consisting of normal
recurring adjustments ) necessary to present fairly the financial
position of the Company and the statements of operations and cash flows
for the interim periods presented.
The financial statements necessarily include some amounts that
are based on estimates, the most significant of which relate to the
adequacy of the allowance for loan losses and the valuation of real
estate acquired. As these estimates are highly susceptible to
changes in the state of the general economic environment, actual
results could differ significantly from such estimates.
Certain financial information which is normally included in
financial statements prepared in accordance with generally accepted
accounting principles, but which is not required for interim
reporting purposes, has been condensed or omitted. Operating
results for the nine month period ended March 31, 1995 are not
necessarily indicative of the results that may be expected for the year
ended June 30, 1995. The accompanying condensed financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year
ended June 30, 1994.
NOTE 2 - SECURITIES
Securities classified available-for-sale (carried at fair value)
are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1995
__________________
Estimated Gross Gross
fair unrealized unrealized Amortized
value gains losses cost
_________ __________ __________ _________
<S> <C> <C> <C> <C>
U.S. Government Agencies
Within 5 years $ 1,006 $6 $ - $1,000
After 10 years - - - -
Mortgage backed securities 4,424 151 30 4,303
Collateralized mortgage
obligations 611 - 1 612
Other bonds and notes
After 5 but within 10 years - - - -
_______ _____ _____ _____
Total debt securities 6,041 157 31 5,915
Marketable equity securities 1,547 - - 1,547
_______ _____ _____ _____
Total securities
available-for-sale $ 7,588 $157 $31 $7,462
<CAPTION>
June 30, 1994
__________________
Estimated Gross Gross
fair unrealized unrealized Amortized
value gains losses cost
_________ __________ __________ _________
<S> <C> <C> <C> <C>
U.S. Government Agencies
Within 5 years $ - $ - $ - $ -
After 10 years $ 916 $ - $ 86 $ 1,002
Mortgage backed securities 35,101 127 828 35,802
Collateralized mortgage
obligations 81,234 1 3,889 85,122
Other bonds and notes
After 5 but within 10 years 650 640 - 10
_______ _____ _____ _______
Total debt securities 117,901 768 4,803 121,936
Marketable equity securities 1,240 - 128 1,368
_______ _____ _____ _______
Total securities
available-for-sale $119,141 $ 768 $4,931 $123,304
</TABLE>
During the nine month period ended March 31, 1995 securities with
a fair value of $92,231,000 were transferred from available-for-sale to
held-to-maturity pursuant to a change in the Company's investment
strategy. These securities are part of the Company's core portfolio
which the Company has the ability and positive intent to hold to
maturity. Included in shareholders' equity at March 31, 1995 are
unrealized holding losses of $4,440,000 on such securities,
representing unrealized holding losses at the date of transfer adjusted
for subsequent amortization. Securities classified held-to-maturity
(carried at amortized cost) are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 1995
__________________
Gross Gross Estimated
Amortized unrealized unrealized fair
cost (a) gains losses value
________ _________ _________ _______
<S> <C> <C> <C> <C>
U.S. Government Agencies
After 5 but within 10 years $ 915 $ - $ 1 $ 914
Mortgage backed securities 21,052 - 601 20,451
Collateralized mortgage
obligations 99,713 - 3,153 96,560
_______ ______ ______ ______
Total securities
held-to-maturity $121,680 $ - $ 3,755 $117,925
<CAPTION>
June 30, 1994
__________________
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
________ _________ _________ _______
<S> <C> <C> <C> <C>
U.S. Government Agencies
After 5 but within 10 years $ - $ - $ - $ -
Mortgage backed securities 9,985 - 476 9,509
Collateralized mortgage
obligations 24,620 - 1,434 23,186
_______ ______ ______ ______
Total securities
held-to-maturity $ 34,605 $ - $1,910 $32,695
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
Securities aggregating $21,896,000 at amortized cost were pledged
as collateral against repurchase agreements, interest rate swaps and
public funds at March 31, 1995.
</TABLE>
<TABLE>
Cash proceeds and realized gains and losses from sales of securities
during the nine month periods ended March 31 are as follows:
<CAPTION>
(in thousands) 1995
________________________
Cash Realized
proceeds gains losses
________ _____ ______
<S> <C> <C> <C>
Available-for-sale
Mortgage backed securities $15,710 $ - $490
Collateralized mortgage obligations 2,910 - -
Other bonds & notes 696 686 -
SBA pools - - -
US Government Agency Notes - - -
Marketable equity securities 1,400 110 80
_______ _____ ____
Total $20,716 $796 $570
<CAPTION>
1994
________________________
Cash Realized
proceeds gains losses
________ _____ ______
<S> <C> <C> <C>
Available-for-sale
Mortgage backed securities $23,170 $365 $ 27
Collateralized mortgage obligations 23,379 31 40
Other bonds & notes - - -
SBA pools 2,957 23 -
US Government Agency Notes 695 1 -
Marketable equity securities 500 94 -
_______ ____ ____
Total $50,701 $514 $ 67
</TABLE>
<TABLE>
<CAPTION>
NOTE 3 - LOANS
Major classifications of loans are as follows:
(in thousands) March 31, June 30,
1995 1994
____ ____
<S> <C> <C>
Real estate mortgages:
One-four family residential $ 93,612 $ 90,260
Five or more family residential 2,471 3,199
Commercial 33,132 27,796
Land 9,669 11,833
Commercial and industrial 2,361 1,044
Home equity lines of credit 7,112 7,367
Installment and other 2,135 1,753
_______ _______
Total loans, gross 150,492 143,252
Deferred loan origination fees, net (591) (386)
Allowance for loan losses (5,518) (5,246)
_______ _______
Total loans, net $144,383 $137,620
Non-accrual loans $4,714 $4,170
Accruing loans past due 90 days or more 558 379
Accruing troubled debt restructured loans - -
</TABLE>
<TABLE>
Changes in the allowance for loan losses for the nine month periods
ended March 31, are as follows:
<S> <C> <C>
(in thousands) 1995 1994
____ ____
Balance, beginning of period $5,246 $5,331
Provision for losses 300 148
Charge-offs (48) (78)
Recoveries 20 11
Balance, end of period $5,518 $5,412
</TABLE>
<TABLE>
The following table shows the allocation of the allowance for loan
losses among the broad categories of the loan portfolio and the
percentage of loans in each category to total loans at March 31, 1995
and June 30, 1994. Although the allowance is allocated among loan
categories for the purpose of this table, it should be realized that
the allowance is applicable to the entire portfolio. Furthermore,
charge-offs in the future may not necessarily occur in these amounts or
proportions.
<CAPTION>
March 31, 1995 June 30,1994
(dollars in thousands) Allowance Loans(1) Allowance Loans(1)<F1>
Real estate mortgage:
<S> <C> <C> <C> <C>
One-four family $1,566 62.20% $1,684 66.23%
Five or more family 775 1.64 756 2.23
Commercial 1,892 22.02 1,439 16.43
Land 782 6.42 1,220 8.25
Home equity lines of credit 75 4.73 97 5.15
Commercial and industrial 39 1.57 6 0.49
Installment and other 10 1.42 5 1.22
Un-allocated allowance 379 - 39 -
_____ _____ _____ _____
Total allowance for
loan losses $5,518 100.0 $5,246 100.0
<FN>
(1) Percent of loans in each category to total loans.
</FN>
</TABLE>
<TABLE>
NOTE 4 - REAL ESTATE ACQUIRED AND IN-SUBSTANCE FORECLOSED LOANS
The components of real estate acquired and in-substance
foreclosed loans are as follows:
<CAPTION>
March 31, June 30,
(in thousands) 1995 1994
____ ____
<S> <C> <C>
Real estate acquired in
settlement of loans $ 3,486 $ 5,348
In-substance foreclosed loans 3,005 4,155
______ ______
Total real estate acquired, gross 6,491 9,503
Valuation reserve (1,029) (367)
______ ______
Total real estate acquired, net $ 5,462 $ 9,136
</TABLE>
<TABLE>
Changes in the valuation reserve for the nine month periods ended
March 31 are as follows:
<CAPTION>
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Valuation reserve at beginning
of period $ 367 $ 716
Charge-offs (71) (547)
Provision 733 205
----- ------
Valuation reserve at end of period $1,029 $ 374
</TABLE>
<TABLE>
The components of collection and real estate acquired expense for
the nine month periods ended March 31 are as follows:
<CAPTION>
(in thousands) 1995 1994
____ ____
<S> <C> <C>
Gains on sales of real estate
acquired, net $(620) $ (4)
Provision to valuation reserve 733 205
Collection costs 531 527
Holding costs 240 353
____ _____
Total collection and
real estate acquired expense $884 $1,081
</TABLE>
<TABLE>
NOTE 5 - INCOME TAXES
The components of the provision for income taxes for the three
and nine month periods ended March 31 are as follows:
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
(dollars in thousands) 1995 1994 1995 1994
____ ____ ____ ____
<S> <C> <C> <C> <C>
Current
Federal $199 $142 $595 $384
State 67 48 201 130
Benefit from net operating loss
carry-forwards
Federal (193) (142) (577) (384)
State (61) (36) (182) (93)
_____ _____ _____ _____
Income tax expense $ 12 $ 12 $ 37 $ 37
At March 31, 1995 the Company had Federal net operating loss
carryforwards of approximately $7.9 million (expiring in 2007) and
State net operating loss carryforwards of approximately $16.5 million
(expiring in 1996 and 1997) which can be applied to reduce future
Federal and State income taxes. At March 31, 1995 the Company also had
Federal and State capital loss carryforwards of approximately $15.6
million (expiring principally in 1996), which it does not expect
to utilize because of the discontinuation of investing in marketable
equity securities.
The Company will only recognize a deferred tax asset when, based
upon available evidence, realization is more likely than not. At June
30, 1994 the Company's net deferred tax asset valuation allowance was
reduced by $800,000 to approximately 95% of the deferred tax asset.
The reduction of future taxable income is based on estimated future
taxable income for 1995. The Company feels that its projections are
conservative and provide adequate support for the reduction in the
valuation allowance.
</TABLE>
<TABLE>
NOTE 6 - INTEREST RATE EXCHANGE AGREEMENTS
Prior to 1992 the Company used interest rate swaps to manage
interest rate risk associated with a portfolio of fixed rate
mortgage-backed securities. This program was discontinued in 1992 and
the portfolio was downsized. As the underlying assets were sold, the
Company terminated several of its swap contracts, allowed other
contracts with near term maturities to expire, and, in the case
of one contract maturing in 1995, entered into an offsetting
contract to eliminate interest rate risk. Under these contracts the
Company pays or receives a variable rate of interest (based on the
three month LIBOR index) and receives or pays a fixed rate of interest
based on the notional principal amounts listed below. The offsetting
contracts by type, maturity, market value and rate are as
follows:
<CAPTION>
(dollars in thousands) March 31, 1995
______________
Notional Rate Rate Market
Maturity amount paid earned value
________ ________ ____ ______ ______
<S> <C> <C> <C> <C> <C>
Pays fixed/
receives variable: 10/07/95 $ 6,000 8.52% 5.63% $(90)
Pays variable/
receives fixed: 10/07/95 6,000 5.63 7.41 55
_______ ____
- (35)
Valuation reserve - 35
_______ ____
Swap obligations, net $ - $ -
<CAPTION>
June 30, 1994
______________
Notional Rate Rate Market
amount paid earned value
________ ____ ______ ______
<S> <C> <C> <C> <C>
Pays fixed/
receives variable: 10/07/95 $ 6,000 8.52% 4.06% $(345)
Pays variable/
receives fixed: 10/07/95 6,000 4.06 7.41 255
_______ ____
- (90)
Valuation reserve - 85
_______ ____
Swap obligations, net $ - $ (5)
The Company fully reserved the interest differential between these
offsetting contracts in 1992 and this valuation reserve is being
amortized over the remaining lives of the swaps as an offset to the
net interest expense. As a result, these offsetting swaps have
no effect on results of operations and give rise to no interest rate
risk.
</TABLE>
[CAPTION]
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are various commitments
and contingent liabilities outstanding pertaining to the purchase and
sale of securities and the granting of loans and lines of credit which
are not reflected in the accompanying financial statements. At March
31, 1995 the Company had commitments under outstanding construction
mortgages of $887,000, unused lines of credit of $5,843,000 and
outstanding commitments to fund loans of $6,447,000. The Company
does not anticipate any material losses as a result of these
transactions.
<TABLE>
<CAPTION>
NOTE 8 - SHAREHOLDERS' EQUITY
Capital Requirements
____________________
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the Federal Deposit Insurance Corporation (the "FDIC"). The Company's
and the Bank's regulatory capital ratios at March 31, 1995, were as
follows:
Company Bank
_______ ____
<S> <C> <C>
Leverage ratio 10.12% 10.06%
Tier I risk-based ratio 19.91% 19.78%
Total risk-based ratio 21.19% 21.06%
The Company and the Bank are categorized as "well capitalized".
A well capitalized institution, as defined by the Prompt Corrective
Action rules issued by the FDIC and the FRB, is one which
maintains a total risk-based ratio of 10% or above, a Tier I
risk-based ratio of 6% or above and a leverage ratio of 5% or above.
In addition to meeting these numerical thresholds, well
capitalized institutions may not be subject to any written order,
written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level.
</TABLE>
[CAPTION]
Restrictions on Subsidiary's Dividends and Payments
___________________________________________________
The Company's ability to pay dividends is dependent on the Bank's
ability to pay dividends to the Company. There are certain
restrictions on the payment of dividends and other payments by the
Bank to the Company. Under Connecticut law the Bank is prohibited from
declaring a cash dividend on its common stock except from its net
earnings for the current year and retained net profits for the
preceding two years. Consequently, the maximum amount of dividends
payable by the Bank to the Company for the nine month period ended
March 31, 1995 is $1,784,000. At the request of the State of
Connecticut Department of Banking, the Board of Directors of the Bank
adopted a resolution which requires the Bank to obtain regulatory
approval prior to declaring any dividends. In some instances, further
restrictions on dividends may be imposed on the Company by the Federal
Reserve Bank.
[CAPTION]
MANAGEMENT'S DISCUSSION NewMil Bancorp, Inc. and Subsidiary
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations of the Company and its subsidiary should be read
in conjunction with the Company's Annual Report on Form 10-K for the
year ended June 30, 1994.
BUSINESS
NewMil Bancorp, Inc. (the "Company"), a Delaware corporation, is
a bank holding company for New Milford Savings Bank (the "Bank"), a
Connecticut-chartered and Federal Deposit Insurance Corporation (the
"FDIC") insured savings bank headquartered in New Milford, Connecticut.
The principal business of the Company consists of the business of the
Bank. The Bank is engaged in customary banking activities, including
general deposit taking and lending activities, and conducts its
business from twelve offices in Litchfield and northern Fairfield
Counties. The Company and the Bank were formed in 1987 and 1858,
respectively.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 1995 and 1994
Overview
________
The Company earned net income of $574,000, or $0.13 per share, for the
quarter ended March 31, 1995, the third fiscal quarter of the Company's
fiscal year. This compares with net income of $406,000, or $0.09 per
share, for the quarter ended March 31, 1994, an improvement of 41%.
Non-interest income included securities gains of $30,000 for the
quarter ended March 31, 1995 and $157,000 for the quarter ended March
31, 1994. The improvement in earnings was due to a 22% increase in net
interest income driven by a 79 basis point increase in the net interest
margin, while average earning assets decreased $10.7 million, or 3.6%.
The growth in net interest income more than offset the higher provision
for loan losses driven by the Company's strategy to grow the loan
portfolio. Total non-interest expense was up $208,000, or 9.9%
primarily as a result of increased compensation expense as a result of
changes in staffing. Non-performing assets declined $347,000,
or 3.13%, during the past quarter to $10,734,000, or 3.64% of
assets at March 31, 1995.
Analysis of net interest and dividend income
____________________________________________
Net interest and dividend income increased $482,000, or 21.9%, for the
quarter ended March 31, 1995 as compared with the prior year period.
This increase resulted from a 79 basis points increase in net interest
margin (to 3.78% from 2.99%) offset by a $10.7 million, or 3.63%
decrease in average earning assets. The improvement in net interest
margin was driven by the benefit, over the past year, from higher
interest rates on the Company's assets which have repriced faster than
deposit liabilities.
<TABLE>
The following table set forth the components of the Company's net
interest income and yields on average interest-earning assets and
interest-bearing funds for the three month periods ended March
31, 1995 and 1994.
<CAPTION>
Three month (dollars in thousands)
periods ended
March 31, Average balance Average rate Interest
1995 1994 1995 1994 1995 1994 Inc(dec)
____ ____ ____ ____ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $147,052 $142,516 8.26% 7.24% $3,037 $2,581 $456
Securities 136,711 151,932 6.05 4.51 2,066 1,711 355
_______ _______ ____ ____ _____ _____ ___
Total 283,763 294,448 7.19 5.83 5,103 4,292 811
Other
assets 10,632 19,031
_______ _______
TOTAL
ASSETS $294,395 $313,479
NOW
accounts 22,109 21,500 1.45 1.43 80 77 3
Money market
accounts 68,713 87,042 2.83 2.60 486 566 (80)
Savings and
other 43,410 42,956 2.58 2.59 280 278 2
Certificate
of
deposits 104,236 76,236 4.85 3.90 1,263 744 519
_______ _______ ____ ____ _____ ___ ___
Total
Deposits: 238,468 227,734 3.54 2.92 2,109 1,665 444
Borrowings 20,879 49,448 6.04 3.48 515 430 (115)
Interest-
rate swaps - - - - (1) (1) -
_______ _______ ____ ____ _____ _____ _____
Total 259,347 277,182 3.73 3.02 2,423 2,094 329
Demand
deposits 7,259 5,662
Other
liabilities 1,634 1,634
Shareholders'
equity 26,302 29,001
_______ _______
Total
liabilities
and
shareholders'
equity $294,395 $313,479
Net interest
income $2,680 $2,198 $482
Spread on
interest-
bearing
funds 3.46 2.81
Net interest
margin 3.78 2.99
Three month
periods ended
March 31, (Continued)
Variance due to
Volume Rate Rate/vol
______ ____ ________
Loans $82 $362 $12
Securities (144) 555 (56)
____ ___ ____
Total (62) 917 (44)
NOW accounts 2 1 -
Money market accounts (119) 49 (10)
Savings and other 3 (1) -
Certificate of
deposits 273 180 66
____ ____ ____
Total deposits 159 229 56
Borrowings (248) 316 (183)
Interest-rate swaps - - -
_____ ____ ____
Total (89) 545 (127)
Net interest income $ 27 $372 $ 83
</TABLE>
Interest income
_______________
Total interest and dividend income increased $811,000, or 18.9%,
for the quarter ended March 31, 1995 as compared with the prior year
period.
Loan interest and fee income increased $456,000, or 17.7%, for
the quarter ended March 31, 1995 as compared with the prior year period
as a result of the upward repricing of adjustable rate loans
caused by higher interest rates and the growth in Prime based
lending. Average loan balances increased $4.5 million, or 3.2%. The
increase in average loan balances is a result of the Company's pursuit
of the credit needs of small business. In the past year the Company
embarked on a new commercial lending strategy designed to serve the
credit needs of the small business and professional community.
Interest and dividends from securities increased $355,000, or
20.7%, for the quarter ended March 31, 1995 as compared with the prior
year period as a result of increased yields on floating rate
securities. Average portfolio yield grew to 6.05% for 1995 from
4.51% in 1994 as a result of both portfolio turnover and the upward
repricing of floating rate securities. Average securities decreased
$15.2 million, or 10.0%.
Interest expense
________________
Interest expense for the quarter ended March 31, 1995 increased
$329,000, or 15.7%, as compared to the same quarter of the prior year
as a result of increases in deposit yields and the cost of
borrowings. Total average balances for deposits and borrowings
decreased by $17.8 million, or 6.4%, for the period. Deposit expense
increased $444,000, or 26.7%, as a result of higher yields
on deposit accounts (savings accounts declined slightly), a
change in deposit mix resulting from transfers from money market
accounts into certificates of deposit accounts, and deposit growth of
$10.7 million, or 4.7%. Bank deposit rates, particularly savings
and money market rates, have lagged increases in Treasury yields over
the past year. This lag has been a principal contributor to the
increase in the Company's net interest margin. Interest expense on
borrowings decreased by $115,000, or 26.7%, as a result of lower
average balances (down $28.6 million, or 57.8%) which was offset by
higher borrowing rates (up 256 basis points to 6.04% in 1995 from 3.48%
in 1994). The Company's borrowing rates generally follow the one-month
LIBOR index and are invested primarily in floating rate securities tied
to the one-month LIBOR index.
<TABLE>
Provision and Allowance for loan losses
_______________________________________
The Company provided $100,000 for loan losses during the quarter
ended March 31, 1995, as compared with a provision of $60,000 in the
prior year period. The higher provision level is driven
by the Company's strategy to grow the portfolio. During the
fourth quarter of fiscal year 1994 the Company expanded its commercial
lending staff and began actively pursuing the credit needs of
small or mid-size companies, professional practices and start-up
companies. In 1993 and 1994 the Company was predominately engaged in
residential mortgage lending. The following table details
changes in the allowance for loan losses during the three month
periods ended March 31:
<CAPTION>
1995 1994
____ ____
<S> <C> <C>
(dollars in thousands)
Balance, beginning of period $5,418 $5,370
Provision for losses 100 60
Charge-offs - (19)
Recoveries - 1
______ _____
Balance, end of period $5,518 $5,412
Ratio of allowance for loan losses:
to non-performing loans 104.67% 110.95%
to total gross loans 3.68 3.84
</TABLE>
During the twelve month period from March 31, 1994 to 1995, total
non-performing loans increased $394,000 and the reserve coverage to
non-performing loans decreased, from 110.95% to 104.67%. For a
discussion of non-performing loans see "Asset Quality and Portfolio
Risk". Originations of residential mortgage loans (which are assigned
lower formula reserves than other categories of loans), ongoing credit
risk administration of seasoned commercial real estate and land loans,
and their replacement with new commercial mortgage loans, continue to
improve the risk profile of the portfolio. During this period the
reserve coverage to total loans decreased slightly, to 3.68% at
March 31, 1995 from 3.84% at March 31, 1994, as a result of loan
growth.
The Bank determines its allowance and provisions for loan losses
based upon a detailed evaluation of the loan portfolio through a
process which considers numerous factors, including estimated credit
losses based upon internal and external portfolio reviews, delinquency
levels and trends, estimates of the current value of underlying
collateral, concentrations, portfolio volume and mix, changes in
lending policy, historical loan loss experience, current economic
conditions and examinations performed by regulatory authorities.
Determining the level of the allowance at any given period
is difficult, particularly during deteriorating or uncertain
economic periods. Management must make estimates using assumptions and
information which is often subjective and changing rapidly. The review
of the loan portfolio is a continuing event in the light of a changing
economy and the dynamics of the banking and regulatory environment. In
management's judgement the allowance for loan losses at March 31, 1995,
is adequate. Should the economic climate begin to deteriorate,
borrowers may experience difficulty and the level of non-performing
loans, charge-offs and delinquencies could rise and require increased
provisions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically
review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based
on their judgements of information available to them at the time
of their examination. The Bank was examined by the FDIC in 1994. No
additions to the allowance were requested from this examination.
<TABLE>
Non-interest income
___________________
The following table details the principal categories of non-interest
income for the three month periods ended March 31.
<CAPTION>
(dollars in thousands) 1995 1994 Inc(dec) %
____ ____ _______ __
<S> <C> <C> <C> <C>
Service charges on deposit accounts $185 $175 $ 10 5.7%
Securities gains, net 30 157 (127) (80.9)
Gains (losses) on loans, net - (53) 53 100.0
Loan servicing fees 31 32 (1) (3.1)
Other 60 61 (1) (1.6)
Total non-interest income $306 $372 $ (66) (17.7)
Service charges on deposit accounts increased $10,000, or 5.7%,
reflecting pricing increases, new ATM related service fees and
increased customer activity. During the quarter the Company
realized a net gain of $30,000 from the sale $1,399,000 of
marketable equity securities. These securities were designated as
available-for-sale. The proceeds were used to repay short term
borrowings. The Company curtailed its secondary market fixed
rate mortgage loan origination activity in the first quarter of the
current fiscal year in response to diminished profitability caused
by declining volume and increasing lending rates. In the prior
year period the Company had net losses of $53,000 which included
realized gains of $13,000 on sales of $5.0 million and unrealized
losses of $66,000 on loans held-for-sale. The slight decrease in
loan servicing fees was a result of the decrease of the loan servicing
portfolio during the 1995 fiscal year. At March 31, 1995 the loan
servicing portfolio totaled $34.1 million compared to $36.9 million at
March 31, 1994.
</TABLE>
<TABLE>
Operating expenses
__________________
The principal categories of operating expenses for the three
month periods ended March 31 are as follows.
<CAPTION>
(dollars in thousands) 1995 1994 Inc(dec) %
____ ____ _______ __
<S> <C> <C> <C> <C>
Salaries $ 879 $ 700 $ 179 25.6%
Employee benefits 230 190 40 21.1
Occupancy 206 216 (10) (4.6)
Equipment 142 108 34 31.5
Insurance 182 176 6 3.4
Collection and real estate acquired 271 299 (28) (9.4)
Marketing and shareholder relations 60 41 19 46.3
Legal and professional fees 71 99 (28) (28.3)
Other operating 259 263 (4) (1.5)
____ ___ ___ ____
Total operating expenses $2,300 $2,092 $ 208 9.9
Salaries expense increased for the quarter ended March 31, 1995
as compared with the prior year period due primarily to increases in
staffing, primarily in lending and management, decreased
expense deferral relating to lower mortgage loan origination
activity and annual salary increases of approximately 3%. Employee
benefits expense increased primarily as a result of increased
medical benefits and taxes related to the increased salary and
wages. Collection and real estate acquired expense decreased $28,000,
or 9.4%, due primarily to reductions in non-performing assets.
Marketing and shareholders relations increased $19,000 or 46.3%
as a result increases in both shareholders relations and marketing
expenses. Changes in other operating expenses, including
legal and professional, postage and phone, office and other,
result from normal changes in operating activities and the out-sourcing
of certain deposit operations activities.
</TABLE>
Income taxes
____________
Due to the utilization of net operating loss carryforwards only
minimum taxes are currently payable for federal and state purposes.
The Company's income tax expense of $12,000 for the quarter
ended March 31, 1995 represents minimum federal and state taxes
net of federal and state tax benefits of $193,000 and $61,000,
respectively, from the utilization of net operating loss
carryforwards. Similarly, the Company's income tax expense of
$12,000 for the quarter ended March 31, 1994 represents minimum federal
and state taxes net of federal and state tax benefits of $142,000 and
$36,000, respectively, from the utilization of net operating loss
carryforwards.
At March 31, 1995 the Company had Federal net operating loss
carryforwards of approximately $7.9 million (expiring in 2007) and
State net operating loss carryforwards of approximately $16.5
million (expiring in 1996 and 1997) which can be applied to
reduce future Federal and State income taxes. At March 31, 1995 the
Company also had capital loss carryforwards of approximately $15.6
million (expiring principally in 1996), which it does not expect to
utilize because of the discontinuation of investing in marketable
equity securities.
The Company will only recognize a deferred tax asset when, based
upon available evidence, realization is more likely than not. At June
30, 1994 the Company's net deferred tax asset valuation allowance was
reduced by $800,000 to approximately 95% of the deferred tax asset.
The reduction of future taxable income is based on estimated future
taxable income for 1995. The Company feels that its projections are
conservative and provide adequate support for the reduction in the
valuation allowance.
For the nine month periods ended March 31, 1995 and 1994
Overview
________
The Company earned net income of $1,712,000, or $0.38 per share,
for the nine months ended March 31, 1995. This compares with net
income of $1,091,000, or $0.24 per share, for the same period ended
March 31, 1994, an improvement of 57%. Non-interest income included
securities gains of $226,000 for the period ended March 31, 1995 and
$447,000 for the period ended March 31, 1994. The improvement in
earnings was due to a 18% increase in net interest income driven
by a 49 basis point increase in the net interest margin and a
$6.0 million, or 2.1%, increase in average earning assets.
The growth in net interest income more than offset the decrease in
gains on securities and loans and the increase in the provision for
loan losses driven by the Company's strategy to grow the loan
portfolio. Total non-interest expense increased $244,000, or
3.7% for the period ended 1995.
Analysis of net interest and dividend income
____________________________________________
Net interest and dividend income increased $1,204,000, or 18.3%,
for the nine months ended March 31, 1995 as compared with the prior
year period. This increase resulted from a 49 basis points increase in
net interest margin (to 3.58% from 3.09%) and a $6.0 million, or 2.1%,
increase in average earning assets. The improvement in net interest
margin was driven the benefit, over the past year, from higher interest
rates on the Company's assets which have repriced faster than
deposit liabilities offset in part by the increase in the Bank's
cost of funds. The growth in earning assets was achieved through
leveraging the securities portfolio during fiscal year 1994 with
floating rate assets.
<TABLE>
The following table set forth the components of the Company's net
interest income and yields on average interest-earning assets and
interest-bearing funds for the nine month periods ended March
31, 1995 and 1994.
<CAPTION>
Nine month (dollars in thousands)
periods ended
March 31, Average balance Average rate Interest
1995 1994 1995 1994 1995 1994 Inc(dec)
____ ____ ____ ____ ____ ____ ________
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $143,958 $143,184 7.89% 7.47% $8,523 $8,024 $499
Securities 145,979 140,712 5.71 4.49 6,248 4,742 1,506
_______ _______ ____ ____ ______ _____ _____
Total 289,937 283,896 6.79 6.00 14,771 12,766 2,005
Other
assets 11,724 18,659
_______ _______
TOTAL
ASSETS $301,661 $302,555
NOW
accounts 22,502 20,918 1.47 1.60 248 251 (3)
Money market
accounts 76,633 87,775 2.70 2.73 1,549 1,802 (253)
Savings and
other 45,463 43,082 2.63 2.70 896 852 44
Certificate
of
deposits 89,779 75,435 4.47 4.01 3,009 2,269 740
_______ _______ ____ ____ _____ ___ ___
Total
Deposits: 234,377 226,209 3.24 3.05 5,702 5,174 528
Borrowings 32,945 39,730 5.23 3.43 1,292 1,022 270
Interest-
rate swaps - - - - (1) (4) 3
_______ _______ ____ ____ _____ _____ _____
Total 267,322 265,939 3.49 3.10 6,993 6,192 801
Demand
deposits 7,140 5,586
Other
liabilities 1,349 1,770
Shareholders'
equity 25,850 29,260
_______ _______
Total
liabilities
and
shareholders'
equity $301,661 $302,555
Net interest
income $7,778 $6,574 $1,204
Spread on
interest-
bearing
funds 3.30 2.89
Net interest
margin 3.58 3.09
Nine month (dollars in thousands)
periods ended
March 31, (Continued)
Variance due to
Volume Rate Rate/vol
______ ____ ________
Loans $ 43 $454 $ 2
Securities 547 1,175 (216)
____ ___ ____
Total 590 1,629 (214)
NOW accounts 19 (20) (2)
Money market accounts (229) (28) 4
Savings and other 69 (23) (2)
Certificate of
deposits 431 259 50
____ ____ ____
Total deposits 290 188 50
Borrowings (174) 536 (92)
Interest-rate swaps - - 3
_____ ____ ____
Total 116 724 (39)
Net interest income $474 $905 $(175)
</TABLE>
Interest income
_______________
Total interest and dividend income increased $2,005,000, or 15.7%, in
the nine month period ended March 31, 1995 as compared with the prior
year period.
Loan interest and fee income increased $499,000, or 6.2%, for the
nine month period ended March 31, 1995 as compared with the prior year
period, as a result of higher yields (to 7.89% from 7.47%)
and a slight increase in average loans. The increase in average
loan yield resulted primarily from upward portfolio repricing following
the rise in interest rates over the past twelve months, and, to
a lesser extent, changes in loan mix.
Interest and dividends from securities increased $1,506,000, or
31.8%, for the nine month period ended March 31, 1995 as compared with
the prior year period as a result of a $5.3 million, or 3.7%,
growth in average securities and increased yields of 122 basis
points (to 5.71% from 4.49%). Asset growth was achieved during fiscal
year 1994 through leveraging the portfolio with floating rate
securities. Average yield increased as a result of both
portfolio reinvestment at higher yields and the upward repricing of
floating rate securities.
Interest expense
________________
Interest expense for the nine month period ended March 31, 1995
increased $801,000, or 12.9%, as compared to the prior year period as a
result of both higher volume and increases in deposit yields and the
cost of borrowings. Total average balances for deposits and borrowings
increased by $1.4 million, or 0.5%, for the period. Deposit expense
increased $528,000, or 10.2%, reflecting an increase of $8.2 million,
or 3.6%, in average deposits coupled with a 19 basis point increase in
the average cost of interest-bearing deposits (to 3.24% from
3.05%). The increase in average deposit yield resulted from an
increase in certificate of deposit cost and the change in deposit mix
resulting from transfers from money market accounts into certificates
of deposit accounts offset in part by a decline in savings and money
market account yields during the prior year. Bank deposit
rates, particularly savings and money market rates, have lagged
increases in Treasury yields over the past year and this lag has been a
principal contributor to the increase in the Company's net
interest margin.
Interest expense on borrowings increased $270,000, or 26.4%, as a
result of higher borrowing rates (up 180 basis points to 5.23% from
3.43%) offset in part by a decrease in average borrowings, down
$6.8 million, or 17.1%. The Company's borrowing rates generally
follow the one-month LIBOR index which fluctuates according to changes
in the bond market.
<TABLE>
Provision and Allowance for loan losses
_______________________________________
The Company provided $300,000 for loan losses during the nine
months ended March 31, 1995, as compared with a provision of $148,000
in the prior year period. The higher provision level is
driven by the Company's strategy to grow the portfolio and to
concentrate on commercial lending. During the fourth quarter of fiscal
year 1994 the Company expanded its commercial lending staff
and began actively pursuing the credit needs of small or mid-size
companies, professional practices and start-up companies. In the past
the Company was predominately engaged in residential mortgage lending.
The following table details changes in the allowance for loan losses
for the nine month periods ended March 31:
<CAPTION>
1995 1994
____ ____
<S> <C> <C>
(dollars in thousands)
Balance, beginning of period $5,246 $5,331
Provision for losses 300 148
Charge-offs (48) (78)
Recoveries 20 11
Balance, end of period $5,518 $5,412
Ratio of allowance for loan losses:
to non-performing loans 104.67% 110.95%
to total gross loans 3.68 3.84
For a discussion of the allowance for loan losses see "Three
month periods ended March 31, 1995 and 1994 - Provision and Allowance
for Loan Losses" above.
</TABLE>
<TABLE>
Non-interest income
___________________
The following table details the principal categories of non-interest
income for the nine month periods ended March 31.
<CAPTION>
(dollars in thousands) 1995 1994 Inc(dec) %
____ ____ _______ __
<S> <C> <C> <C> <C>
Service charges on deposit accounts $581 $456 $125 27.4%
Securities gains, net 226 447 (221) (49.4)
Gains on loans, net 4 99 (95) (96.0)
Loan servicing fees 94 81 13 16.0
Other 188 197 (9) (4.6)
____ ___ ____ _____
Total non-interest income $1,093 $1,280 $(187) (14.6)
Service charges on deposit accounts increased $125,000, or 27.4%,
reflecting pricing increases, new ATM service fees and increased
customer activity. The net securities gains of $226,000 for the nine
month period ended March 31, 1995 were realized on sales of $20.7
million of available-for-sale securities during the period. The net
securities gains of $447,000 for the prior year period were
realized on sales of $50.7 million of available-for-sale securities.
The Company curtailed its secondary market fixed rate mortgage loan
origination activity in the first quarter of the current fiscal year in
response to diminished profitability caused by declining volume and
increasing lending rates. In the nine month period ended March 31,
1995 the Company realized a net gain of $4,000 on loan sales of
$370,000, down from net gains of $99,000 in the prior year period,
resulting from net realized gains of $165,000 on sales of $19.6 million
offset in part by unrealized losses of $66,000 on loans held-for-sale.
The increase in loan servicing fees was driven by the growth of the
loan servicing portfolio during the prior fiscal year.
</TABLE>
<TABLE>
Operating expenses
__________________
The principal categories of operating expenses for the nine month
periods ended March 31 are as follows.
<CAPTION>
(dollars in thousands) 1995 1994 Inc(dec) %
---- ---- ------- --
<S> <C> <C> <C> <C>
Salaries $2,483 $2,126 $357 16.8%
Employee benefits 618 656 (38) (5.8)
Occupancy 561 598 (37) (6.2)
Equipment 424 325 99 30.5
Insurance 529 528 1 (0.2)
Collection and real estate acquired 884 1,081 (197) (18.2)
Marketing and shareholder relations 219 201 18 9.0
Legal and professional fees 241 267 (26) (9.7)
Other operating 863 796 67 8.4
_____ _____ ____ _____
Total operating expenses $6,822 $6,578 $ 244 3.7
Salaries expense increased for the nine months ended March 31,
1995 as compared with the prior year period due primarily to increases
in staffing, primarily in lending and management, decreased
expense deferral relating to lower mortgage loan origination
activity and annual salary increases of approximately 3%. Employee
benefits expense declined primarily as a result of a change from
a defined benefit pension plan to a defined contribution 401k
retirement savings plan. The Company curtailed its pension plan in
September 1993 and adopted a 401k plan in April 1994. Equipment
expense increased reflecting higher depreciation and maintenance
expense associated with the ATM machines installed in late 1993 and
early 1994, in seven branch facilities. Collection and real estate
acquired expense decreased $197,000, or 18.2% as a result of the
reductions in non-performing assets. Marketing and shareholder
relations expense increased for the nine month period as a result
increased annual meeting costs and additional administrative costs
associated with the resumption of quarterly dividend payments, and
increased advertising for new deposit products. Changes in other
operating expenses, including legal and professional, postage and
phone, office and other, result from normal changes in operating
activities and the out-sourcing of certain deposit operations
activities.
</TABLE>
Income taxes
____________
Due to the utilization of net operating loss carryforwards only
minimum taxes are currently payable for federal and state purposes.
The Company's income tax expense of $37,000 for the nine month
period ended March 31, 1995 represents minimum federal and state
taxes net of federal and state tax benefits of $577,000 and $182,000,
respectively, from the utilization of net operating loss
carryforwards. Similarly, the Company's income tax expense of
$37,000 for the same period ended March 31, 1994 represents minimum
federal and state taxes net of federal and state tax benefits
of $384,000 and $93,000, respectively, from the utilization of
net operating loss carryforwards.
ASSET QUALITY AND PORTFOLIO RISK
Loans
_____
During the nine month period ended March 31, 1995 loans secured
by residential real estate increased by $2.4 million to $103.2 million
at March 31, 1995 and represent 68.6% of the Company's portfolio. They
include one-to-four family residential mortgage loans of $93.6 million,
five-or-more family residential mortgage loans of $2.5 million
and home equity lines of credit of $7.1 million. Predominately all
residential mortgage loans are adjustable rate. Non-residential real
estate and land loans totaled $42.8 million at March 31, 1995, up
$3.2 million for the nine month period, and represent 28.4% of the
Company's loan portfolio at March 31, 1995. They include
land and land development loans of $9.7 million and commercial
real estate mortgage loans of $33.1 million. Commercial and industrial
loans totaled $2.4 million, or 1.6% of the loan portfolio, at March 31,
1995, up $1.3 million for the period. The remainder of the loan
portfolio is represented by installment and collateral loans totaling
$2.1 million, or 1.4% of the Company's portfolio.
<TABLE>
Non-performing assets
_____________________
The following table summarizes changes in non-performing assets
during the quarter ended March 31, 1995.
<CAPTION>
Three months ended Non- Accruing loans Accruing
March 31, 1995 accrual past due 90 restructured
(dollars in thousands) loans or more days loans
_______ ______________ ___________
<S> <C> <C> <C>
Balance, beginning of quarter $4,983 $ - $ -
Increase (decrease) in non-accrual
loans and accruing loans past
due 90 or more days, net 318 565 -
Transfers to REA (108) - -
Net charge-offs and write-downs - - -
Payments to improve REA - - -
Collections and proceeds
from sales of REA (479) (7) -
Gains on sales of REA, net - - -
______ ______ ______
Balance, end of period $4,714 $ 558 $ -
Three months ended March 31, 1995 Real Total
(Continued) Estate Nonperforming
acquired assets
___________ ___________________
Balance, beginning of quarter $6,098 $11,081
Increase (decrease) in non-accrual
loans and accruing loans past
due 90 or more days, net - 883
Transfers to REA 108 -
Net charge-offs and write-downs (111) (111)
Payments to improve REA 263 263
Collections and proceeds
from sales of REA (932) (1,418)
Gains on sales of REA, net 36 36
______ _______
Balance, end of period $5,462 $10,734
During the quarter ended March 31, 1995 non-performing assets
decreased $347,000, or 3.13%, due principally to sales of real estate
of $932,000 offset by net additions to non-performing loans and
capital improvements to certain real estate acquired. Additions
to non-accrual loans generally represent loans which had previously
been classified on the Company's internally monitored list
and had been adequately reserved.
</TABLE>
<TABLE>
The following table summarizes changes in non-performing assets
during the nine month period ended March 31, 1995.
<CAPTION>
Nine months ended Non- Accruing loans Accruing
March 31, 1995 accrual past due 90 restructured
(dollars in thousands) loans or more days loans
_______ ______________ ___________
<S> <C> <C> <C>
Balance, beginning of year $4,170 $ 379 $ -
Increase (decrease) in non-accrual
loans and accruing loans past
due 90 or more days, net 1,584 357 -
Transfers to REA (369) - -
Net charge-offs and write-downs (48) - -
Payments to improve REA - - -
Collections and proceeds
from sales of REA (623) (178) -
Gains on sales of REA, net - - -
______ ______ ______
Balance, end of period $4,714 $ 558 $ -
Nine months ended March 31, 1995 Real Total
(Continued) Estate Nonperforming
acquired assets
___________ ___________________
Balance, beginning of quarter $9,136 $13,685
Increase (decrease) in non-accrual
loans and accruing loans past
due 90 or more days, net - 1,941
Transfers to REA 369 -
Net charge-offs and write-downs (733) (781)
Payments to improve REA 961 961
Collections and proceeds
from sales of REA (4,891) (5,692)
Gains on sales of REA, net 620 620
______ _______
Balance, end of period $5,462 $10,734
During the nine month period ended March 31, 1995, non-performing
assets decreased $3.0 million, or 21.56%, due principally to sales of
real estate offset by net additions to non-performing loans and capital
improvements to real estate acquired.
</TABLE>
<TABLE>
The following table details the composition of non-performing
assets at March 31, 1995.
<CAPTION>
Non-Performing Assets Non- Accruing loans Restruc-
(dollars in thousands) accrual past due 90 tured
loans or more days loans(a)
_______ _____________ ________
<S> <C> <C> <C>
Real estate:
Residential $2,868 $ 558 $ -
Commercial 1,103 - -
Land and land development 737 - -
Collateral and
installment loans 6 - -
Valuation reserve - - -
______ _____ _____
Totals $4,714 $558 $ -
Percent of total assets
Non-Performing Assets (cont'd)
Real estate acquired
____________________ Total non-
In-substance Valuation performing
foreclosed Owned reserve assets
____________ _____ _________ _________
Real estate:
Residential $ - $ 934 $ - $ 4,360
Commercial - 706 - 1,809
Land and land development 3,005 1,846 - 5,588
Collateral and
installment loans - - - 6
Valuation reserve - - (1,029) (1,029)
______ _____ ______ ______
Totals $3,005 $3,486 $(1,029) $10,734
Percent of total assets 3.64%
(a) Includes accruing troubled debt restructurings.
The Company pursues the resolution of all non-performing assets
through restructurings, credit enhancements or collections. When
collection procedures do not bring a loan into performing or
restructured status, the Company generally initiates action to
foreclose the property or to acquire it by deed in lieu of foreclosure.
Many of the real estate loans classified as in-substance foreclosed
involve bankruptcy and legal proceedings, which, in general, have
significantly delayed recovery periods. Included in in-substance
foreclosed real estate are two loans with a carrying value of $3.0
million to two principal shareholders of the Company, both of
whom are in bankruptcy. The Company has instituted foreclosure and
legal actions and has charged off approximately $5.3 million against
such loans. Included in land and land development real estate owned is
a 34 lot residential sub-division with a carrying value of $1.2 million
which the Company is developing under a joint venture with a
residential construction firm. The Company expects to recover its
carrying value and future site development costs through sales of
lots over the next two-to-three years. The Company actively markets
all real estate owned and during the nine month period ended March 31,
1995 sold $4.9 million of real estate from which net gains of $620,000
were realized. During the nine month period ended March 31, 1995 the
Company added $733,000 to the REA valuation reserve and charged-off
$71,000 against the reserve. The REA valuation reserve, which at March
31, 1995 totaled $1,029,000, or 15.9% of real estate acquired, cushions
the Company against further declines in real estate values. There
continues to be an oversupply of commercial and residential real estate
in New England and any further decline in the real estate
market could adversely affect the market values of the Company's
real estate acquired which could require additional provisions to the
valuation reserve and reductions in the carrying values of
properties.
</TABLE>
FINANCIAL CONDITION
Total assets declined $20.3 million, or 6.44%, to $294.9 million
over the nine month period ended March 31, 1995. This decline resulted
from down sizing the securities portfolio, through securities
sales and principal repayments, and from sales of real estate
acquired, offset in part by net loan growth. During the nine month
period ended March 31, 1995 net securities declined $24.5 million,
or 15.92%, and real estate acquired decreased by $3.7 million, or
40.2%, while net loans increased $6.8 million, or 4.91%.
The securities portfolio consists primarily of collateralized
mortgage obligations ("CMOs") and mortgage-backed securities ("MBSs"),
and to a lesser extent, agency obligations and marketable
equity securities. There are no structured notes, inverse
floaters, or interest-only or principal-only strips in the portfolio.
At March 31, 1995 49.3% of the portfolio was invested in fixed rate
securities, principally CMOs and MBSs. The fixed rate portfolio
had a consensus weighted average duration and life of 3.8% and 4.8
years, respectively. Fixed rate CMOs and MBSs are generally
in securities with relatively stable cash flows. The Company
actively monitors the prepayment of its CMOs and MBSs. At March 31,
1995 49.5% of the portfolio was invested in floating rate CMOs
and MBSs which generally reprice monthly based on pre-determined
spreads to underlying index, subject to life-time caps and floors. The
floating rate portfolio had a consensus weighted average
duration and life of -0.3% and 14.8 years, respectively. The
floating rate securities are tied to several indices including the
eleventh district cost of funds index ("EDCOFI"), one-month LIBOR
and Treasury indices. Securities tied to EDCOFI are match funded
with core deposits while securities tied to the one-month LIBOR index
and Treasury indices are matched against borrowings whose rates
generally follow the one-month LIBOR index. The remaining 1.2% of the
portfolio at March 31, 1995, was represented by Federal Home Loan Bank
stock.
At March 31, 1995, securities totaling $121.7 million, or 94.1%,
were classified held-to-maturity and securities totaling $7.6 million,
or 5.9%, were classified available-for-sale.
During the first and second quarters of the current fiscal year
the Company restructured the securities portfolio. Adjustable rate
MBSs totaling $15.7 million and a corporate bond, both classified
available-for-sale, were sold and the proceeds used to repay short term
borrowings whose rates had repriced higher than the MBSs. The Company
realized a loss of $491,000 on the sale of the MBSs which was offset by
a gain of $686,000 on the sale of the corporate bond. In addition,
the Company transferred securities with a fair value of $92.2
million from available-for-sale to held-to-maturity pursuant to a
change in investment strategy. All held-to-maturity securities are
part of the Company's core portfolio which the Company has the ability
and positive intent to hold to maturity. Transfers from
available-for-sale to held-to-maturity were made at fair value at the
time of transfer. Included in shareholders' equity at March 31, 1995
is an adjustment of $4,440,000, representing net unrealized holding
losses at the time of transfer adjusted for subsequent principal
amortization. No provision for deferred taxes has been applied
against the adjustment for net unrealized holding losses in
shareholders' equity because of the availability of the Company's net
operating loss carryforwards. During the quarter ended March 31,
1995 the Company also sold $1.4 million of marketable equity securities
and realized a net gain of $30,000. At March 31, 1995, the
Company's remaining equity portfolio consisted of stock issued by
the Federal Home Loan Bank of Boston and the Federal National Mortgage
Association, both held pursuant to membership requirements.
The rise in Treasury yields from early 1994 to date has resulted
in a decline in fair market value of the Company's securities
portfolio. At March 31, 1995 net unrealized losses on both securities
available-for-sale and held-to-maturity totaled $4.4 million.
Changes in the fair market value of the portfolio results from changes
in both portfolio duration and yield from the time the securities
were purchased. There are no credit losses in the portfolio and
all unrealized gains and losses are expected to reverse as securities
approach maturity. Accordingly, the Company does not expect
to realize these losses. Refer to "Capital Resources" for a
discussion of the impact of unrealized holding losses on securities on
shareholders' equity.
Net loans increased $6.8 million, or 4.91%, during the nine month
period ended March 31, 1995, as loan originations exceeded principal
repayments. During this period the Company originated $26.8 million
and purchased $819,000 in loans.
In conjunction with the securities portfolio restructuring
discussed above, during the second quarter the Company raised $14
million in certificates of deposit and used the funds to repay short
term borrowings and lengthen deposit maturities. During the nine
month period total deposits increased $10.6 million, or 4.50%, and
borrowings decreased $33.8 million, or 65.13%. In addition to the
second quarter certificate of deposit promotion, the rise in
certificate of deposit rates over the past year has resulted in a
change in deposit mix through transfers from lower yielding money
market and savings accounts into higher yielding certificates of
deposit. Certificate of deposits have increased $36.2 million, or
48.01%, with savings and money market declining $5.3 million and $18.9
million, respectively.
LIQUIDITY
The Company manages its liquidity position to ensure that there
is sufficient funding availability at all times to meet both
anticipated and unanticipated deposit withdrawals, new loan
originations, securities purchases and other operating cash outflows.
The primary sources of liquidity for the Company are principal payments
and maturities of securities and loans, short term borrowings
through repurchase agreements, Federal Home Loan Bank advances,
net deposit growth, funds provided by operations. Liquidity can also
be provided through sales of loans and available-for-sale
securities. In August 1994 the Company became a member of the
Federal Home Loan Bank of Boston, greatly enhancing the Company's funds
management and liquidity management alternatives.
Operating activities for the nine month period ended March 31,
1995 provided net cash flows of $3.9 million, an increase of $1.0
million as compared with the prior year period, reflecting the
improved core earnings of the Company, gains in real estate
acquired sales and the reduction in the loans held-for-sale. Investing
activities provided net cash flows of $20.7 million principally from
securities principal repayments, sales of available-for-sale
securities and sales of real estate acquired, offset in part by net
loan advances. Funds provided by investing and operating activities,
together with a net increase in deposits, were used to reduce
short term borrowings by $33.8 million, pay dividends to shareholders
and increase cash and cash equivalents by $1.3 million.
At March 31, 1995, the Company's liquidity ratio, as represented
by cash, short term available-for-sale securities, marketable assets
and unused borrowing capacity, to net deposits and short term
unsecured liabilities, was 64.8%, well in excess of the Company's
minimum guideline of 15%. At March 31, 1995, the Company had
outstanding commitments to fund new loan originations of $6.4
million, construction mortgage commitments of $0.9 million and
unused lines of credit of $5.8 million. These commitments will be met
in the normal course of business. The Company believes that its
liquidity sources will continue to provide funding sufficient to
support operating activities, loan originations and commitments, and
deposit withdrawals.
INTEREST RATE SENSITIVITY
At March 31, 1995, the Company had a negative cumulative one year
gap of $20.4 million, or 6.9% of assets, and, as a result, the net
interest margin could be adversely affected by a sudden increase
in interest rates. For the purposes of this analysis, money
market, savings and NOW deposit accounts have been included in the
within one year category, however, the elasticity of these
accounts cannot be tied to any one time category.
However, for the nine month period ended March 31, 1995 the
Company's net interest margin increased 49 basis points as compared
with prior year period, driven by the benefit, over the past
year, from higher interest rates on the Company's adjustable rate
assets which have repriced faster than deposit liabilities. The
Company's deposit rates, in particular savings and money market
rates, have lagged increases in Treasury yields over the past
year and this lag has been a principal contributor to the increase in
the Company's net interest margin.
The low interest rate environment prior to 1994 contributed to a
shortening of deposit liabilities, as maturing certificates of deposits
were rolled over into more liquid savings and money market
accounts. The Company has benefited from this favorable deposit
mix over the past year as certificate of deposit rates began to rise
while money market and savings rates remained substantially unchanged.
Over the past nine months deposit liabilities have once again began to
lengthen as the rate differential between money market rates and
certificate of deposit rates has widened. Rates on certificates of
deposit have increased significantly and resulted in transfers from
money market accounts into certificates of deposit. This trend
is expected to continue and will adversely impact the Company's net
interest margin. Furthermore, a sudden increase in yields on
money market and savings accounts would adversely impact the
Company's net interest margin. However, the Company believes that this
effect will be offset over time as the Company's 1-year adjustable rate
mortgage loans continue to reprice upwards and as cash flows from
securities and non-performing assets are reinvested into higher
yielding loans.
As evidenced by the past year, a significant factor in determining the
Company's ability to maintain its spread in a changing interest rate
environment is its ability to manage its core deposit rates.
Essentially all of the Company's deposit base is composed of local
retail deposit accounts which tend to be somewhat less sensitive to
moderate interest fluctuations than other funding sources and,
therefore, provide a reasonably stable and cost-effective source of
funds. The Company also structures its loan and securities portfolios
to provide for portfolio repricing consistent with its interest rate
risk objectives.
CAPITAL RESOURCES
Stockholders' equity and book value per share were $26,475,000
and $5.90, respectively, at March 31, 1995, up $1,381,000 and $0.31,
respectively, from June 30, 1994. Although the Company earned
net income of $1,712,000, or $0.38 per share, for the period,
this was offset by a $151,000 increase in the adjustment to
shareholders' equity for net unrealized holding losses on securities
and dividends of $180,000. The Company commenced paying a $.02
quarterly dividend in the first quarter and during the nine month
period ended March 31, 1995 total dividends of $0.04 per share
have been declared and paid. On April 20, 1995 the Company
declared a $.02 third quarter dividend. Stockholders' equity at March
31, 1995 included an adjustment for unrealized holding losses of $4.4
million on securities transferred from available-for-sale to
held-to-maturity and net unrealized holding gains of $126,000 on
securities available-for-sale.
The change in unrealized holding gains and losses on securities
transferred to held-to-maturity and securities available-for-sale
resulted from the significant rise in interest rates which began in
early 1994. Refer to "Financial Condition" for a discussion of the
Company's securities portfolio and investment strategy. Although fair
market values of the Company's securities declined during 1994, the
Company's net interest margin has increased as discussed earlier.
Thus, although the mark-to-market accounting treatment prescribed by
SFAS 115 for securities has caused shareholders equity to fluctuate in
response to movements in interest rates, the Company does not
believe that this accounting treatment will necessarily adversely
impact future earnings.
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the FDIC. At March 31, 1995 the Company's leverage capital ratio was
10.12% and its tier I and total risk-based capital ratios were 19.91%
and 21.19%, respectively. At March 31, 1995 the Bank's leverage
capital ratio was 10.06% and its tier I and total risk-based capital
ratios were 19.78% and 21.06%, respectively. The Company and the
Bank are categorized as "well capitalized". A well capitalized
institution, which is the highest capital category for an institution
as defined by the Prompt Corrective regulations issued by the
FDIC and the FRB, is one which maintains a total risk-based ratio
of 10% or above, a Tier I risk-based ratio of 6% or above and a
leverage ratio of 5% or above, and is not subject to any written
order, written agreement, capital directive, or prompt corrective
action directive to meet and maintain a specific capital level.
Dividends
_________
The Company's ability to pay dividends is dependent on the Bank's
ability to pay dividends to the Company. There are certain
restrictions on the payment of dividends and other payments by the
Bank to the Company. Under Connecticut law the Bank is prohibited from
declaring a cash dividend on its common stock except from its net
earnings for the current year and retained net profits for the
preceding two years. Consequently, the maximum amount of dividends
payable by the Bank to the Company for the nine month period ended
March 31, 1995 is $1,784,000. At the request of the State of
Connecticut Department of Banking, the Board of Directors of the Bank
adopted a resolution which requires the Bank to obtain regulatory
approval prior to declaring any dividends. In some instances, further
restrictions on dividends may be imposed on the Company by the Federal
Reserve Bank.
On September 27, 1994 the Company resumed the payment of quarterly
dividends and dividends of $0.02 were payable to shareholders of record
on October 7, 1994 and December 31, 1995, for a total dividend of $0.04
for the nine months ended March 31, 1995. On April 20, 1995 the
Company declared a $.02 third quarter dividend payable to shareholders
of record on May 1, 1995. Prior to October 1994 the Company had not
paid cash dividends since August 1990, at which time the Company paid a
dividend of $0.15 per Common Share. The Company believes that the
payment of cash dividends to its shareholders is appropriate,
provided that such payment considers the Company's capital needs, asset
quality, and overall financial condition and does not adversely
affect the financial stability of the Company or the Bank. The
continued payment of cash dividends by the Company will be dependent on
the Company's future core earnings, financial condition and
capital needs, regulatory restrictions, and other factors deemed
relevant by the Board of Directors of the Company.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As of March 31, 1995, Mr. Ronald Strol, a principal shareholder
(a beneficial owner of more than five percent of the Company's Common
Stock), had principal indebtedness to the Bank totaling approximately
$8.1 million. In 1989 and 1990, the Bank instituted foreclosure
actions against Mr. Strol, among others, seeking the foreclosure of
certain mortgages which had been given as collateral for some of the
indebtedness owed by Mr. Strol to the Bank. On March 28, 1991, Mr.
Strol filed a petition for relief under Chapter 11 of the United
States Bankruptcy Code. On March 4, 1993 the case was converted to one
under Chapter 7, and an interim Chapter 7 trustee has subsequently been
appointed. The Bank has moved in the bankruptcy court to compel Mr.
Strol to turn over estate properties to the interim trustee, and that
motion was granted by the bankruptcy court in June 1993. The Bank
continues to act to protect its interest in these bankruptcy
proceedings, however, there is no assurance that the Bank will
recover from Mr. Strol the full amount of the indebtedness owed by Mr.
Strol to the Bank. While the Bank does not comment on specific
reserves on individual loans the Bank believes that it has adequately
reserved against the indebtedness owed by Mr. Strol to the Bank.
As of March 31, 1995, Mr. Dominic Peburn, a principal shareholder, had
principal indebtedness to the Bank totaling approximately $2.7 million.
The Bank has instituted foreclosure actions against Mr. Peburn seeking
the foreclosure of mortgages given as collateral for indebtedness owed
by Mr. Peburn to the Bank. Judgements of strict foreclosure have
been entered by the court concerning these mortgages and the Bank has
taken title to certain of these properties. The Bank has filed motions
seeking deficiency judgements and otherwise acted to protect the Bank's
interests in these foreclosure proceedings. There is no assurance,
however, that the Bank will recover from Mr. Peburn the full amount of
the indebtedness owed by Mr. Peburn to the Bank. While the Bank
does not comment on specific reserves on individual loans the
Bank believes that it has adequately reserved against the indebtedness
owed by Mr. Peburn to the Bank.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of earnings per share.
(b) Report on Form 8-K.
None
<PAGE>
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.
NEWMIL BANCORP, INC.
May 11, 1995 By /s/ Anthony J. Nania
____________________________
Anthony J. Nania,
Chairman of the Board and
Chief Executive Officer
May 11, 1995 By /s/ B. Ian McMahon
____________________________
B. Ian McMahon,
Chief Financial Officer
<TABLE>
Exhibit 11
NEWMIL BANCORP, INC.
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
(in thousands except per Three months Nine months
share amounts) ended ended
March 31, March 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net Income
__________
Net income -
primary and fully diluted $574 $406 $1,712 $1,091
Weighted Average Common and
Common Equivalent Stock
___________________________
Weighted average common
stock outstanding 4,486 4,485 4,486 4,485
Assumed conversion as of the
beginning of each period or
upon issuance during a period
of stock options outstanding
at the end of each period 229 131 204 98
Assumed purchase of treasury
stock options outstanding
at the end of each period (177) (103) (154) (73)
Weighted average common and ______ _____ _____ _____
common equivalent stock
outstanding - primary 4,538 4,513 4,536 4,510
Weighted average common stock
outstanding 4,486 4,485 4,486 4,485
Assumed conversion as of the
beginning of each period or
upon issuance during a period
of stock options outstanding
at the end of each period 255 158 252 125
Assumed purchase of treasury
stock during each period
with proceeds from conversion
of stock options outstanding
at the end of each period (213) (156) (210) (126)
Weighted average common and _____ _____ _____ _____
common equivalent stock
outstanding - fully diluted 4,528 4,487 4,528 4,484
Earnings Per Common and
Common Equivalent Share
_____________________________
Primary $0.13 $0.09 $0.39 $0.24
Fully diluted $0.13 $0.09 $0.38 $0.24
</TABLE>
