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
December 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)
(860) 355-7600
(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 December 31, 1995 is
4,494,729.
NEWMIL BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and June 30, 1995. . . . . . . . . . . . . . . .3
Consolidated Statement of Income
for the three and six month periods ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the six month periods ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . .7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 29
Item 4 Submission of matters to a vote of
security holders . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 5 Other information. . . . . . . . . . . . . . . . . . . . . . . . 29
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 29
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<CAPTION>
December 31, June 30,
1995 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,447 $ 5,791
Federal funds sold 5,000 8,500
Securities:
Available-for-sale at market 40,863 7,102
Held-to-maturity at amortized cost
(market value: $77,833 and $119,948) 78,126 120,092
Trading at market 5,900 -
Loans (net of allowance for
loan losses: $5,133 and $5,372) 147,378 150,442
Real estate acquired (net of
valuation reserve: $435 and $313) 3,415 1,676
Bank premises and equipment, net 6,071 6,125
Accrued income 1,773 1,918
Deferred tax asset, net 5,074 6,397
Other assets 527 628
Total Assets $304,574 $308,671
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 9,706 $ 8,224
NOW accounts 23,246 21,921
Money market 61,547 63,059
Savings and other 38,595 41,349
Certificates of deposit 123,458 117,867
Total deposits 256,552 252,420
Securities sold under agreement to repurchase 7,979 15,499
Federal Home Loan advances 3,000 5,000
Accrued interest and other liabilities 2,662 3,031
Total Liabilities 270,193 275,950
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Authorized - 20,000,000 shares
Issued - 5,969,138 and 5,965,888 shares 2,985 2,983
Paid-in capital 44,156 44,145
Retained earnings 4,624 3,915
Unrealized (losses) gains on securities
available-for-sale, net (286) 91
Unrealized losses on securities transferred
to held-to-maturity, net (1,294) (2,609)
Treasury stock, at cost - 1,474,409 shares (15,804) (15,804)
Total Shareholders' Equity 34,381 32,721
Total Liabilities and Shareholders' Equity $304,574 $308,671
</TABLE>
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,456 $2,822 $6,928 $5,486
Interest on securities 1,940 2,006 3,923 4,101
Dividend income 22 24 46 44
Interest on federal funds sold 46 20 68 37
Total interest and dividend
income 5,464 4,872 10,965 9,668
INTEREST EXPENSE
Deposits 2,522 1,884 5,008 3,593
Borrowed funds 125 382 299 977
Total interest expense 2,647 2,266 5,307 4,570
Net interest and dividend income 2,817 2,606 5,658 5,098
PROVISION FOR LOAN LOSSES 100 100 200 200
Net interest and dividend income
after provision for loan losses 2,717 2,506 5,458 4,898
NON-INTEREST INCOME
Service charges on
deposit accounts 218 196 413 396
Securities (losses) gains, net (55) 196 (45) 196
Gains on mortgage loans, net - - 5 4
Loan servicing fees 32 31 64 63
Other 61 64 130 128
Total non-interest income 256 487 567 787
NON-INTEREST EXPENSE
Salaries 824 828 1,678 1,604
Employee benefits 208 174 432 388
Occupancy 186 182 365 356
Equipment 166 135 337 281
Insurance 54 173 76 347
Collection and REA 92 333 308 613
Professional services 110 74 234 170
Marketing 51 54 86 86
Shareholders relationship 29 46 77 73
Other 369 307 685 604
Total non-interest expense 2,089 2,306 4,278 4,522
INCOME BEFORE INCOME TAXES 884 687 1,747 1,163
Provision for income taxes 365 13 723 25
NET INCOME $ 519 $ 674 $1,024 $1,138
Earnings per share $0.11 $0.15 $0.22 $0.25
Dividends per share $0.05 $0.02 $0.07 $0.04
</TABLE>
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(in thousands) Six months ended
December 31,
1995 1994
<S> <C> <C>
Operating Activities
Net income $ 1,024 $ 1,138
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 200 200
Provision for losses on
real estate acquired 172 622
Provision for depreciation and
amortization 273 244
Decrease in deferred income tax asset 698 -
Amortization and accretion of securities
premiums and discounts, net 198 319
Securities losses (gains), net 45 (196)
Realized gains on loan sales, net (5) (4)
Realized gains on sales of real
estate acquired, net (183) (584)
Decrease in mortgage loans held for sale - (130)
Decrease in accrued income 145 180
(Decrease) increase in accrued interest
and other liabilities (403) 681
Decrease in other assets, net 104 279
Net cash provided by
operating activities 2,268 2,749
Investing Activities
Proceeds from sales of securities
available-for-sale 3,942 3,607
Proceeds from maturities and principal
repayments of securities 2,210 3,736
Purchases of securities available-for-sale - (4,412)
Purchases of trading securities (5,900) -
Proceeds from sale of available-for-sale
mortgage backed securities 942 15,710
Principal collected on mortgage backed
securities 2,428 2,915
Loan advances, net (44) (2,187)
Purchases of loans - (819)
Proceeds from sale of real estate
acquired 1,731 3,959
Payments to improve real estate acquired (546) (699)
Net purchases of Bank premises
and equipment (219) (124)
Net cash provided by
investing activities 4,544 21,686
(in thousands) Six months ended
December 31,
1995 1994
Financing Activities
Net increase in deposits 4,166 9,280
Net repayments of repurchase agreements (7,520) (35,039)
Net (repayments of) proceeds from
FHLB advances (2,000) 5,075
Cash dividends paid (315) (180)
Proceeds from exercise of stock options 13 -
Net cash used by
financing activities (5,656) (20,864)
Increase in cash and cash equivalents 1,156 3,571
Cash and federal funds sold, beginning
of year 14,291 4,732
Cash and federal funds sold, end of year $15,447 $ 8,303
Cash paid during year
Interest to depositors $ 4,974 $ 3,590
Interest on borrowings and
interest rate swaps 127 992
Income taxes 94 47
Non-cash transfers
From securities available-for-sale
to securities held-to-maturity - 92,231
From securities held-to-maturity
to securities available-for-sale 40,530 -
From loans to real estate acquired 2,913 260
</TABLE>
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 six month
period ended December 31, 1995 are not necessarily indicative of the
results that may be expected for the year ended June 30, 1996. 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, 1995.
NOTE 2 - SECURITIES
Securities classified available-for-sale (carried at fair value) are as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) Estimated Gross Amort-
fair unrealized ized
value gains losses cost
<S> <C> <C> <C> <C>
December 31, 1995
U.S. Government Agencies
Within 5 years $1,002 $ 2 $ - $1,000
After 5 but within 10 years 991 - 11 1,002
Mortgage backed securities 8,942 154 47 8,835
Collateralized mortgage
obligations 28,381 134 709 28,956
Total debt securities 39,316 290 767 39,793
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $40,863 $290 $767 $41,340
(dollars in thousands) Estimated Gross Amort-
fair unrealized ized
value gains losses cost
June 30, 1995
U.S. Government Agencies
Within 5 years $1,018 $ 17 $ - $1,001
Mortgage backed securities 4,149 142 7 4,014
Collateralized mortgage
obligations 388 - - 388
Total debt securities 5,555 159 7 5,403
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $7,102 $159 $ 7 $6,950
</TABLE>
Securities classified held-to-maturity (carried at amortized cost) are
as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Gross Estimated
Amortized unrealized fair
cost(a) gains losses value
<S> <C> <C> <C> <C>
December 31, 1995
Mortgage backed securities $12,236 $ 82 $ - $12,318
Collateralized mortgage
obligations 65,890 634 1,009 65,515
Total securities
held-to-maturity $78,126 $ 716 $1,009 $77,833
June 30, 1995
U.S. Government Agencies
After 5 but within 10 years $ 915 $ 68 $ - $ 983
Mortgage backed securities 20,245 82 169 20,158
Collateralized mortgage
obligations 98,932 1,670 1,795 98,807
Total securities
held-to-maturity $120,092 $1,820 $1,964 $119,948
</TABLE>
(a) Securities transferred from available-for-sale to held-to-maturity
are carried at estimated fair value as of the transfer date and
adjusted for subsequent amortization.
In December 1995 the Company transferred securities with an amortized
cost basis of $40.5 million from held-to-maturity to available-for-sale.
This transfer was made in conformity with the Special Report issued by
Financial Accounting Standard Board, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities".
Securities with an amortized cost aggregating $9,919,000 were pledged as
collateral against repurchase agreements, interest rate swaps and public
funds at December 31, 1995.
Cash proceeds and realized gains and losses from sales of securities
during the six month periods ended December 31 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Cash Realized Realized
proceeds gains losses
<S> <C> <C> <C>
Six months ended December 31, 1995
Available-for-sale
Mortgage backed securities $ 942 $ 4 $ -
Collateralized mortgage obligations 3,932 - 62
Marketable equity securities(a) 10 10 -
Total $4,884 $ 14 $ 62
Six months ended December 31, 1994
Available-for-sale
Mortgage backed securities $15,710 $ - $491
Other bonds and notes 696 686 -
Collateralized mortgage
obligations 2,910 - -
Marketable equity securities 1 $ 1 $ -
Total $19,317 $687 $491
</TABLE>
(a) Represents the settlement proceeds from a class action suit
relating to a previously held equity security.
(b) The above table does not reflect unrealized gains of $3,000 from
trading assets.
NOTE 3 - LOANS
Effective July 1, 1995 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114"). Under SFAS 114, a loan is
considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled
payments of principal of interest when due according to the contractual
terms of the loan agreement. The measurement of impaired loans is
generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair
value for the collateral. The adoption of SFAS 114 resulted in no
additional provision for loan losses, determined at July 1, 1995. Prior
to the adoption of SFAS 114, loans for which foreclosure was probable
were accounted for as in-substance foreclosed and classified as real
estate acquired. Under SFAS 114 such loans are accounted for as loans.
Consistent with the Company's adoption of SFAS 114, loans previously
classified as in-substance foreclosed but for which the Company had not
taken possession of the collateral have been reclassified to loans.
This reclassification did not impact the Company's financial condition
or results of operations. All prior period data has been reclassified
to conform to current period classifications.
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
(in thousands) 1995 1995
<S> <C> <C>
Real estate mortgages:
One-four family residential $ 91,937 $ 98,766
Five or more family residential 3,396 3,171
Commercial 28,668 29,068
Land 10,118 12,067
Commercial and industrial 3,749 3,201
Home equity lines of credit 12,461 7,785
Installment and other 2,488 2,187
Total loans, gross 152,817 156,245
Deferred loan origination fees, net (306) (431)
Allowance for loan losses (5,133) (5,372)
Total loans, net $147,378 $150,442
Impaired loans
With valuation allowance $3,806 $3,399
With no valuation allowance 4,926 5,324
Total impaired loans $8,732 $8,723
Valuation allowance $1,426 $1,373
</TABLE>
Changes in the allowance for loan losses for the six month periods ended
December 31, are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
<S> <C> <C>
Balance, beginning of period $5,372 $5,246
Provision for losses 200 200
Charge-offs (441) (48)
Recoveries 2 20
Balance, end of period $5,133 $5,418
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
December 31, June 30,
(in thousands) 1995 1995
<S> <C> <C>
Non-accrual loans $4,258 $7,175
Accruing loans past due
90 days or more 420 34
Accruing troubled debt
restructured loans - -
Total non-performing loans 4,678 7,209
Real estate acquired 3,850 1,989
Valuation reserve (435) (313)
Total real estate acquired, net 3,415 1,676
Total non-performing assets $8,093 $8,885
</TABLE>
Real estate acquired includes collateral acquired through foreclosure,
forgiveness of debt or otherwise in lieu of debt, or loans where the
Company has taken physical possession of the collateral. Consistent
with the Company's adoption of SFAS 114, loans previously classified as
in-substance foreclosed but for which the Company had not taken
possession of the collateral have been reclassified to loans.
Changes in the real estate acquired valuation reserve for the six month
periods ended December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
<S> <C> <C>
Valuation reserve at beginning of period $313 $367
Charge-offs (50) (71)
Provision 172 622
Valuation reserve at end of period $435 $918
</TABLE>
NOTE 5 - INCOME TAXES
The components of the provision for income taxes for the three and six
month periods ended December 31 are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1995 1994 1995 1994
(in thousands)
<S> <C> <C> <C> <C>
Current provision
Federal $ 301 $ 234 $ 594 $ 395
State 102 79 201 134
Benefit from net operating
loss carry forwards
Federal (294) (227) (581) (382)
State (96) (73) (189) (122)
Total 13 13 25 25
Deferred provision
Federal 239 - 515 -
State 113 - 183 -
Total 352 - 698 -
Income tax provision $ 365 $ 13 $ 723 $ 25
</TABLE>
At December 31, 1995 the Company had Federal net operating loss
carryforwards of approximately $3.7 million (expiring in 2007) and State
net operating loss carryforwards of approximately $12.3 million
(expiring in 1996 and 1997) which can be applied to reduce future
Federal and State income taxes. At December 31, 1995 the Company also
had Federal and State capital loss carryforwards of approximately $16.0
million and $20.4 million (expiring principally in 1996), respectively,
which it does not expect to materially utilize because of the
discontinuation of investing in marketable equity securities.
NOTE 6 - 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 December 31,
1995 the Company had commitments under outstanding construction
mortgages of $206,000, unused lines of credit of $11,115,000 and
outstanding commitments to fund loans of $2,228,000. The Company does
not anticipate any material losses as a result of these transactions.
NOTE 7 - 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 December 31, 1995, were as
follows:
<TABLE>
<CAPTION>
Company Bank
<S> <C> <C>
Leverage ratio 10.98% 10.58%
Tier I risk-based ratio 20.86% 20.11%
Total risk-based ratio 22.14% 21.39%
</TABLE>
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.
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 six month period ended December 31, 1995 is $1,024,000.
In some instances, further restrictions on dividends may be imposed on
the Company by the Federal Reserve Bank.
NewMil Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION 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, 1995.
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 December 31, 1995 and 1994
Overview
The Company earned net income of $519,000, or $0.11 per share, for the
quarter ended December 31, 1995, the second fiscal quarter of the
Company's fiscal year. This compares with net income of $674,000, or
$0.15 per share, for the quarter ended December 31, 1994.
Net income before tax for the quarter grew 28.7% to $884,000, up from
$687,000 for the same period in 1994. The increase reflects an
improvement in net interest margin of 3.97% versus 3.64% a year ago.
The Company returned to a fully-taxable reporting basis on July 1, 1995
following the recognition of substantially all of its deferred tax asset
at June 30, 1995. Net income for the quarter included an income tax
provision of $365,000, or 41%, as compared with a provision of $13,000
a year ago.
Non-performing assets declined $229,000, or 2.8%, during the past three
month period, to $8,093,000, or 2.7% of assets at December 31, 1995.
Analysis of net interest and dividend income
Net interest and dividend income increased $211,000, or 8.1%, for the
quarter ended December 31, 1995 as compared with the prior year period.
This increase resulted from a 33 basis points increase in net interest
margin (to 3.97% from 3.64%) offset by a $2.9 million, or 1.0% decrease
in average earning assets. The net interest margin has been fairly
consistent during the quarter ended December 31, 1995 and is not
expected to materially change in the next quarter. The improvement in
net interest margin was driven by both changes in asset mix and the
benefit, over the past year, from higher interest rates on the Company's
assets whose rates have increased more than deposit liabilities.
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 December 31,
1995 and 1994.
<TABLE>
<CAPTION>
Three months ended December 31, 1995 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans(a) $153,205 $3,456 9.02%
Mortgage backed securities 22,613 337 5.96
Other securities(b) 107,658 1,671 6.21
Total earning assets 283,476 5,464 7.71
Other assets 13,590
Total assets $297,066
NOW accounts $22,847 85 1.49
Money market accounts 60,785 464 3.05
Savings & other 39,178 258 2.63
Certificates of deposit 122,029 1,715 5.62
Total interest-bearing deposits 244,839 2,522 4.12
Borrowings 8,278 125 6.04
Total interest-bearing funds 253,117 2,647 4.18
Demand deposits 8,705
Other liabilities 1,479
Shareholders' equity 33,765
Total liabilities and
shareholders' equity $297,066
Net interest income $2,817
Spread on interest-bearing funds 3.53
Net interest margin(c) 3.97
Three months ended December 31, 1994 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans(a) $143,061 $2,822 7.89%
Mortgage backed securities 37,795 509 5.39
Other securities(b) 105,562 1,541 5.84
Total earning assets 286,418 4,872 6.80
Other assets 11,646
Total assets $298,064
NOW accounts $22,505 83 1.48
Money market accounts 77,017 511 2.65
Savings & other 45,708 300 2.63
Certificates of deposit 90,026 990 4.40
Total interest-bearing deposits 235,256 1,884 3.20
Borrowings 28,257 382 5.41
Total interest-bearing funds 263,513 2,266 3.44
Demand deposits 7,301
Other liabilities 1,479
Shareholders' equity 25,771
Total liabilities and
shareholders' equity $298,064
Net interest income $2,606
Spread on interest-bearing funds 3.36
Net interest margin(c) 3.64
</TABLE>
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal funds
sold.
(c) Net interest income divided by average interest-earning assets.
<TABLE>
<CAPTION>
Three months ended December 31, 1995 versus 1994
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 200 $ 405 $ 29 $ 634
Mortgage backed securities (204) 54 (22) (172)
Other securities 31 97 2 130
Total 27 556 9 592
Interest-bearing liabilities:
Deposits 203 354 81 638
Borrowings (270) 45 (32) (257)
Total (67) 399 49 381
Net change to interest income $ 94 $ 157 $ (40) $ 211
</TABLE>
Interest income
Total interest and dividend income increased $592,000, or 12.2%, for the
quarter ended December 31, 1995 as compared with the same period a year
ago.
Loan interest and fee income increased $634,000, or 22.5%, for the
quarter ended December 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 loan growth, primarily in higher yielding
Prime based loans. Average loan balances increased $10.1 million, or
7.1%. The yield on the loan portfolio increased to 9.02%, an increase
of 113 basis points as compared to the prior year.
Investment and fed funds income decreased $42,000, or 2.0%, for the
quarter ended December 31, 1995 as compared with the prior year period
as a result of a $13.1 million, or 9.1%, decrease in average investments
offset by higher yields on floating rate securities. Over the past year
the Company has sought to downsize the investment portfolio to fund
growth in the loan portfolio. The average investment yield increased to
6.17% for 1995 from 5.72% in 1994 as a result of the upward repricing of
floating rate securities.
Interest expense
Interest expense for the quarter ended December 31, 1995 increased
$381,000, or 16.8%, as compared to the same quarter of the prior year as
a result of increases in deposit and borrowings rates and the changes in
funding mix. Total average balances for deposits and borrowings
decreased by $10.4 million, or 3.9%, for the period.
Deposit expense increased $638,000, or 33.9%, as a result of higher
deposit rates, a change in deposit mix resulting from transfers from
money market and savings accounts into certificates of deposit accounts,
and deposit growth of $9.6 million, or 4.1%. 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.
Treasury yields have been declining, therefore the spread is expected to
tighten if savings and money market rates are not reduced.
Interest expense on borrowings decreased by $257,000, or 67.3%, as a
result of lower average balances, offset in part by higher borrowing
rates. Average borrowings decreased $20.0 million, or 70.7%. The
average cost of borrowings increased 63 basis points to 6.04% in 1995
from 5.41% in 1994, as a result of the higher interest rate environment
in 1995. The Company's borrowing rates generally follow the one-month
LIBOR index.
Provision and Allowance for loan losses
The Company provided $100,000 for loan losses during the quarter ended
December 31, 1995, unchanged from the prior year period provision. The
following table details changes in the allowance for loan losses during
the three month periods ended December 31:
<TABLE>
<CAPTION>
1995 1994
(dollars in thousands)
<S> <C> <C>
Balance, beginning of period $5,242 $5,298
Provision for losses 100 100
Charge-offs (209) -
Recoveries - 20
Balance, end of period $5,133 $5,418
Ratio of allowance for loan losses:
to non-performing loans 109.73% 66.85%
to total gross loans 3.37 3.64
</TABLE>
The increase in the ratio of the allowance for loan losses to non-
performing loans results from the $3,427,000 decrease in non-performing
loans. For a discussion of non-performing loans see "Asset Quality and
Portfolio Risk". The decrease in reserve coverage to total loans
results from new loan originations, changes in loan mix and ongoing
credit administration efforts, all of which contribute to improvements
in the risk profile of the portfolio.
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 December 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 could
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 State of Connecticut,
Department of Banking, in April 1995. No additions to the allowance
were requested as a result of this examination.
Non-interest income
The following table details the principal categories of non-interest
income for the three month periods ended December 31.
<TABLE>
<CAPTION>
(in thousands) 1995 1994 Change
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $218 $196 $ 22 11.2%
Securities (losses) gains, net (55) 196 (251) (128.1)
Loan servicing 32 31 1 3.2
Other 61 64 (3) (4.7)
Total non-interest income $256 $487 $(231) (47.4)
</TABLE>
Service charges on deposit accounts increased $22,000, or 11.2%,
reflecting the increased level of usage at the Bank's ATMs. During the
quarter the Company realized net losses of $55,000 from the sales of
debt securities and trading assets activity. Loan servicing fees and
other non-interest income declined marginally from a year ago.
Operating expenses
The following table details the principal categories of operating
expenses for the three month periods ended December 31.
<TABLE>
<CAPTION>
(in thousands) 1995 1994 Change
<S> <C> <C> <C> <C>
Salaries $ 824 $ 828 $ (4) (0.5)%
Employee benefits 208 174 34 19.5
Occupancy 186 182 4 2.2
Equipment 166 135 31 23.0
Insurance 54 173 (119) (68.8)
Collections and REA 92 333 (241) (72.4)
Professional services 110 74 36 48.7
Postage and telecommunications 70 53 17 32.1
Marketing 51 54 (3) (5.6)
Other operating 328 300 28 9.3
Total operating expenses $2,089 $2,306 $(217) (9.4)
</TABLE>
Salaries expense decreased for the quarter ended December 31, 1995 as
compared with the prior year period due primarily a reduction in
deferred salary expense due to lower mortgage loan origination activity
offset by annual salary increases of approximately 4%. Employee
benefits expense increased primarily as a result of the increase in
employee medical expense. Insurance expense decreased $119,000, or
68.8%, as a result of lower FDIC deposit insurance premiums. Collection
and real estate acquired expense decreased $241,000, or 72.4%, due
primarily to reductions in non-performing assets over the past year.
Changes in other operating expenses, including legal and professional,
postage and phone, office, shareholders relationship and other, result
from normal changes in operating activities.
Income taxes
The Company returned to a fully-taxable reporting basis on July 1, 1995
following the recognition of substantially all of its deferred tax asset
at June 30, 1995. Net income for the quarter included an income tax
provision of $365,000, representing a 41% effective rate, as compared
with a provision of only $13,000 a year ago.
As of June 30, 1995, the Company had recognized 100% of its remaining
available Federal income tax benefits (expiring 2007), excluding any
capital loss carry forwards, together with that portion of its remaining
available State income tax benefits (expiring 1997) which the Company
expects to utilize, and other book/tax temporary differences.
The Company's income tax expense of $365,000 for the quarter ended
December 31, 1995 represents deferred federal and state taxes totaling
$352,000 and minimum federal and state taxes net of federal and state
tax benefits of $294,000 and $96,000, respectively, from the utilization
of net operating loss carryforwards.
The Company's income tax expense of $13,000 for the quarter ended
December 31, 1994 represents minimum federal and state taxes net of
federal and state tax benefits of $227,000 and $73,000, respectively,
from the utilization of net operating loss carryforwards.
For the six month periods ended December 31, 1995 and 1994
Overview
The Company earned net income of $1,024,000, or $0.22 per share, for the
six month period ended December 31, 1995, this compares with net income
of $1,138,000, or $0.25 per share, for the same period ended December
31, 1994.
Net income before tax for the six month period grew 50.2% to $1,747,000,
up from $1,163,000 for the same period in 1994. The increase reflects
an improvement in net interest margin of 3.97% versus 3.48% a year ago.
Net income for the period included an income tax provision of $723,000,
or 41%, as compared with a provision of $25,000 a year ago. The six
months ended December 31, 1994 also include securities gains of $196,000
as compared to losses of $55,000 for 1995.
Analysis of net interest and dividend income
Net interest and dividend income increased $560,000, or 11.0%, for the
six months ended December 31, 1995 as compared with the prior year
period. This increase resulted from a 49 basis points increase in net
interest margin (to 3.97% from 3.48%) offset by a $7.7 million, or 2.6%
decrease in average earning assets. The improvement in net interest
margin was driven by both changes in asset mix and the benefit, over the
past year, from higher interest rates on the Company's assets whose
rates have increased more than deposit liabilities.
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 six month periods ended December 31, 1995
and 1994.
<TABLE>
<CAPTION>
Six months ended December 31, 1995 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans(a) $154,070 $6,928 8.99%
Mortgage backed securities 23,343 689 5.90
Other securities(b) 107,711 3,348 6.22
Total earning assets 285,124 10,965 7.69
Other assets 13,173
Total assets $298,297
NOW accounts $22,544 168 1.49
Money market accounts 61,582 940 3.05
Savings & other 39,998 527 2.64
Certificates of deposit 120,521 3,373 5.60
Total interest-bearing deposits 244,645 5,008 4.09
Borrowings 9,912 299 6.05
Total interest-bearing funds 254,557 5,307 4.17
Demand deposits 8,537
Other liabilities 1,700
Shareholders' equity 33,503
Total liabilities and
shareholders' equity $298,297
Net interest income $5,658
Spread on interest-bearing funds 3.52
Net interest margin(c) 3.97
Six months ended December 31, 1994 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans(a) $142,445 $5,486 7.70%
Mortgage backed securities 44,475 1,143 5.14
Other securities(b) 105,938 3,039 5.74
Total earning assets 292,858 9,668 6.60
Other assets 12,356
Total assets $305,214
NOW accounts $22,696 168 1.48
Money market accounts 80,506 1,062 2.64
Savings & other 46,467 617 2.66
Certificates of deposit 82,707 1,746 4.22
Total interest-bearing deposits 232,376 3,593 3.09
Borrowings 38,847 977 5.03
Total interest-bearing funds 271,223 4,570 3.37
Demand deposits 7,082
Other liabilities 1,282
Shareholders' equity 25,627
Total liabilities and
shareholders' equity $305,214
Net interest income $5,098
Spread on interest-bearing funds 3.23
Net interest margin(c) 3.48
</TABLE>
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal funds
sold.
(c) Net interest income divided by average interest-earning assets.
<TABLE>
<CAPTION>
Six months ended December 31, 1995 versus 1994
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 448 $ 919 $ 75 $1,442
Mortgage backed securities (543) 170 (81) (454)
Other securities 51 254 4 309
Total (44) 1,343 (2) 1,297
Interest-bearing liabilities:
Deposits 462 732 221 1,415
Borrowings (728) 199 (149) (678)
Total (266) 931 72 737
Net change to interest income $ 222 $ 412 $ (74) $ 560
</TABLE>
Interest income
Total interest and dividend income increased $1,297,000, or 13.4%, for
the six months ended December 31, 1995 as compared with the same period
a year ago.
Loan interest and fee income increased $1,442,000, or 26.3%, for the six
months ended December 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 loan growth, primarily in higher yielding
Prime based loans. Average loan balances increased $11.6 million, or
8.2%. The yield on the loan portfolio increased to 8.99%, an increase
of 129 basis points as compared to the prior year.
Investment and fed funds income decreased $145,000, or 3.5%, for the six
months ended December 31, 1995 as compared with the prior year period as
a result of a $19.4 million, or 12.9%, decrease in average investments
offset by higher yields on floating rate securities. Average investment
yield increased to 6.16% for 1995 from 5.56% in 1994 as a result of the
upward repricing of floating rate securities.
Interest expense
Interest expense for the six months ended December 31, 1995 increased
$737,000, or 16.1%, as compared to the same period in the prior year.
Total average balances for deposits and borrowings decreased by $16.7
million, or 6.1%, for the period. The average cost of funds increased
80 basis points to 4.17% for 1995 from 3.37% for 1994.
Deposit expense increased $1,415,000, or 39.4%, as a result of higher
deposit rates, a change in deposit mix resulting from transfers from
money market and savings accounts into certificates of deposit accounts,
and deposit growth of $12.3 million, or 5.3%. 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. The
rates on certificates however have increased to 5.60% in 1995 from 4.22%
in 1994, a 138 basis point increase.
Interest expense on borrowings decreased by $678,000, or 69.4%, as a
result of lower average balances, offset in part by higher borrowing
rates. Average borrowings decreased $28.9 million, or 74.5%. The
average cost of borrowings increased 102 basis points to 6.05% in 1995
from 5.03% in 1994, as a result of the higher interest rate environment
in 1995.
Provision and Allowance for loan losses
The Company provided $200,000 for loan losses during the six months
ended December 31, 1995 and 1994. The following table details changes
in the allowance for loan losses during the six month periods ended
December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
(dollars in thousands)
Balance, beginning of period $5,372 $5,246
Provision for losses 200 200
Charge-offs (441) (48)
Recoveries 2 20
Balance, end of period $5,133 $5,418
Ratio of allowance for loan losses:
to non-performing loans 109.73% 66.85%
to total gross loans 3.37 3.64
</TABLE>
For a detailed discussion of the Bank's allowance for loan losses see
"For the three month periods ended December 31, 1995 and 1994", above.
Non-interest income
The following table details the principal categories of non-interest
income for the six month periods ended December 31.
<TABLE>
<CAPTION>
(in thousands) 1995 1994 Change
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $413 $396 $ 17 4.3%
Gains on loan sales, net 5 4 1 25.0
Securities (losses) gains, net (45) 196 (241) (123.0)
Loan servicing 64 63 1 1.6
Other 130 128 2 1.6
Total non-interest income $567 $787 $(220) (28.0)
</TABLE>
Service charges on deposit accounts increased $17,000, or 4.3%
reflecting the increased level of usage at the Bank's ATMs. During the
six months the Company realized a net losses of $45,000 from the sales
of debt securities and a settlement of $10,000 for a class action suit
on equities that had been held several years ago.
Operating expenses
The following table details the principal categories of operating
expenses for the six month periods ended December 31.
<TABLE>
<CAPTION>
(in thousands) 1995 1994 Change
<S> <C> <C> <C> <C>
Salaries $1,678 $1,604 $ 74 4.6%
Employee benefits 432 388 44 11.3
Occupancy 365 356 9 2.5
Equipment 337 281 56 19.9
Insurance 76 347 (271) (78.1)
Collections and REA 308 613 (305) (49.8)
Professional services 234 170 64 37.6
Postage and telecommunications 140 132 8 6.1
Marketing 86 86 - 0.0
Other operating 622 545 77 14.1
Total operating expenses $4,278 $4,522 $(244) (5.4)
</TABLE>
Salaries expense increased for the six month period ended December 31,
1995 as compared with the prior year period primarily as a result of
annual salary increases of approximately 4%, offset in part by reduced
deferred salary expense due to lower mortgage loan origination activity.
Employee benefits expense increased primarily as a result of the
increase in employee medical expense and increased taxes related to the
increased salary and wages. Insurance expense decreased $271,000, or
78.1%, as a result of lower FDIC deposit insurance premiums and a refund
on previously paid FDIC premiums. Collection and real estate acquired
expense decreased $305,000, or 49.8%, due primarily to reductions in
non-performing assets over the past year. Professional expense
increased $64,000, or 37.6%, as a result of higher legal expenses.
Changes in other operating expenses, including postage and phone,
office, shareholders relationship and other, result from normal changes
in operating activities.
Income taxes
Net income for the six month period ended December 31, 1995 included an
income tax provision of $723,000, representing a 41% effective rate, as
compared with a provision of only $25,000 a year ago.
The Company's income tax expense of $723,000 for the six months ended
December 31, 1995 represents deferred federal and state taxes totaling
$698,000 and minimum federal and state taxes net of federal and state
tax benefits of $581,000 and $189,000, respectively, from the
utilization of net operating loss carryforwards. The Company's income
tax expense of $25,000 for the period ended December 31, 1994 represents
minimum federal and state taxes net of federal and state tax benefits of
$382,000 and $122,000, respectively, from the utilization of net
operating loss carryforwards.
ASSET QUALITY AND PORTFOLIO RISK
Loans
During the six month period ended December 31, 1995, net loans decreased
$3.1 million, or 2.0%. The following table details the composition of
the loan portfolio as of the periods presented.
<TABLE>
<CAPTION>
(in thousands) December 31, June 30,
1995 1995
<S> <C> <C>
Real estate mortgages
One-four family residential $ 91,937 $ 98,766
Five or more family residential 3,396 3,171
Commercial 28,668 29,068
Land and land development 10,118 12,067
Commercial and industrial 3,749 3,201
Home equity lines of credit 12,461 7,785
Installment and other 2,488 2,187
Total loans, gross $152,817 $156,245
</TABLE>
The decrease, of $3.4 million, in gross loans resulted from the
reclassification of $2.9 million of non-performing loans to real estate
acquired, coupled with net loan repayments for the period.
Predominately all of the Company's loans are adjustable rate.
Non-performing assets
The following table details changes in non-performing assets during the
three month periods ended December 31.
<TABLE>
<CAPTION>
(in thousands) 1995 1994
<S> <C> <C>
Balance, beginning of year $8,322 $11,438
Loans placed on non-accrual status 513 640
Increase (decrease) in accruing loans past
due 90 or more days, net 420 -
Payments to improve REA 172 247
Loan payments (333) 3
Loans returned to accrual status (60) -
Loan charge-offs (209) -
Gross proceeds from REA sales (743) (1,184)
Gains on REA sales, net 11 104
Provision to REA valuation reserve - (167)
Balance, end of period $8,093 $11,081
</TABLE>
During the quarter ended December 31, 1995 non-performing assets
decreased $229,000, or 2.8%, due principally to the sales of real
estate, loan payments and charge-offs, offset by a net increase in non-
accrual loans and loans past due 90 days or more, and capitalized
expenditures on REA. Addition to non-accrual loans are generally loans
which had previously been classified on the Company's internally
monitored list and had been adequately reserved.
The following table details changes in non-performing assets during the
six month periods ended December 31.
<TABLE>
<CAPTION>
(in thousands) 1995 1994
<S> <C> <C>
Balance, beginning of year $8,885 $13,685
Loans placed on non-accrual status 936 1,264
Increase (decrease) in accruing
loans past due 90 or more
days, net 386 (379)
Payments to improve REA 546 699
Loan payments (439) (143)
Loans returned to accrual status (60) -
Loan charge-offs (441) (48)
Gross proceeds from REA sales (1,731) (3,959)
Gains on REA sales, net 183 584
Provision to REA valuation reserve (172) (622)
Balance, end of period $8,093 $11,081
Percent of total assets 2.66% 3.75%
</TABLE>
During the six months ended December 31, 1995 non-performing assets
decreased $792,000, or 8.9%, due principally to sales of real estate of
$1,731,000, loan payments and charge-offs, offset by a net increase in
non-accrual loans and loans past due 90 days or more, and capitalized
expenditures on REA.
The following table details the composition of non-performing assets as
of December 31, 1995.
<TABLE>
<CAPTION>
Non-Performing Assets Accruing Total
(dollars in thousands) loans non-
Non- past due Restruc- Real Valuat-perform-
accrual 90 or tured estate ion ing
loans more days loans (a)acquired reserve assets
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995
Real estate:
Residential $2,069 $420 - $ 949 $ - $3,438
Commercial 684 - - 75 - 759
Land and land
development 1,500 - - 2,826 - 4,326
Collateral and
installment loans 5 - - - - 5
Valuation reserve - - - - (435) (435)
Totals $4,258 $420 $ - $3,850 $(435) $8,093
</TABLE>
(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. Included in land and land
development real estate owned is a 34 lot residential sub-division with
a carrying value of $971,000 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 years. The Company actively markets all
real estate owned. The REA valuation reserve at December 31, 1995
totaled $435,000, or 11.3% of real estate acquired. There continues to
be an oversupply of commercial and residential real estate in New
England and any 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.
FINANCIAL CONDITION
Total assets declined $4.1 million, or 1.3%, to $304.6 million in the
six month period from June 30, 1995 through December 31, 1995. The
decrease resulted from a $2.3 million decrease in the securities
portfolio, through principal repayments and sales offset by security
purchases. Loans decreased $3.1 million, or 2.0%. Loan advances for
the period were offset by loan repayments and the reclassification of
$2.9 million of non-performing assets from loans to real estate
acquired.
Loans
Loans, net of the allowance for loans losses, decreased $3.1 million, or
2.0%, during the six month period ended December 31, 1995. The primary
reason for this decrease was the transfer of $2.9 million from loans to
real estate acquired. Loan repayments for the six month period totaled
$23.5 million, while originations and advances were $23.4 million.
Securities
The securities portfolio consists primarily of collateralized mortgage
obligations ("CMOs") and mortgage-backed securities ("MBSs"), and to a
lesser extent, agency obligations, a mutual funds and Federal Home Loan
Bank stock. There are no structured notes, inverse floaters, or
interest-only or principal-only strips in the portfolio. At December
31, 1995 47.4% 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 2.7 years and 3.4 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 December 31, 1995 46.7% 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 -0.01 years and 12.4
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. The remaining 5.9% of the
portfolio at December 31, 1995, was represented by Federal Home Loan
Bank stock and a money-market bond mutual fund.
At December 31, 1995, securities totaling $78.1 million, or 62.6%, were
classified as held-to-maturity, securities totaling $40.7 million, or
32.7%, were classified as available-for-sale and $5.9 million, or 4.7%,
were classified as trading.
Pursuant to the Special Report issued by Financial Accounting Standard
Board in November 1995, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities", in
December 1995 the Company reclassified securities with an amortized cost
basis of $40.5 million from held-to-maturity to available-for-sale.
This one-time transfer, which included $29.2 million in floating rate
securities and $11.3 million in fixed rate securities, will enable the
Company to more prudently react to market and rate fluctuations, and
future liquidity needs.
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. Included in shareholders' equity at December 31, 1995 is an
adjustment of $1,294,000 relating to securities transferred from
available-for-sale to held-to-maturity, representing net unrealized
holding losses at the time of transfer adjusted for subsequent principal
amortization and net of taxes.
Substantially all of the Company's securities were purchased in 1993 and
early 1994. Subsequent movements in interest rates and market
conditions have resulted in a net decline in fair market value. At
December 31, 1995 net unrealized losses on both securities available-
for-sale and held-to-maturity totaled $2.9 million. No credit losses
are expected and all gains and losses are expected to reverse as
securities approach maturity. Fluctuations in fair market value caused
by movements in interest rates and market conditions will not
necessarily adversely impact future earnings.
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 principal sources of
liquidity for the Company are principal payments and maturities of
securities and loans, short term borrowings through repurchase
agreements and Federal Home Loan Bank advances, net deposit growth and
funds provided by operations. Liquidity can also be provided through
sales of loans and available-for-sale securities.
Operating activities for the six month period ended December 31, 1995
provided net cash of $2.3 million. Investing activities provided net
cash of $4.5 million principally from securities principal repayments,
securities sales and sales of real estate acquired, offset in part by
net loan advances and capitalized improvements to real estate acquired.
Funds provided by investing and operating activities, together with a
increase in deposits of $4.2 million, were used to reduce short term
borrowings by $9.5 million, increase cash and federal funds sold by $1.2
million and pay shareholder dividends.
At December 31, 1995, the Company's liquidity ratio, as represented by
cash, short term available-for-sale securities, marketable assets and
the ability to borrow against held-to-maturity securities and loans
through unused FHLB and other short term borrowing capacity, of
approximately $118.3 million, to net deposits and short term unsecured
liabilities, was 63.4%, well in excess of the Company's minimum
guideline of 15%. At December 31, 1995, the Company had outstanding
commitments to fund new loan originations of $2.1 million, construction
mortgage commitments of $206,000 and unused lines of credit of $11.1
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 December 31, 1995, the Company had a negative cumulative one year gap
of $13.6 million, or 4.5% 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.
For the six month period ended December 31, 1995 the Company's net
interest margin increased 49 basis points as compared with the prior
year period. This improvement in net interest margin was driven by both
changes in asset mix and the benefit, over the past year, from higher
interest rates on the Company's assets whose rates have increased more
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 contributed to the increase in the
Company's net interest margin. A sudden increase in rates on money
market and savings accounts would adversely impact the Company's net
interest margin. Similarly, a decrease in yields and rates on earning
assets and interest-bearing liabilities, without a corresponding decline
in money market and savings rates, would result in a tightening of
spread. However, the Company believes that this effect would be offset
over time as the Company's adjustable rate loans and securities reprice
and as principal repayments from securities, loans and non-performing
assets are reinvested into higher yielding loans.
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
Shareholders' equity and book value per share increased $1,660,000, or
$0.36 per share, to $34,381,000 and $7.65, during the six month period
ended December 31, 1995. This increase resulted from the Company's
earnings of $1,024,000, or $0.22 per share, together with a $938,000
decrease in the adjustment to shareholders' equity for net unrealized
holding losses on securities net of taxes and proceeds of $13,000 from
the exercise of stock options, offset in part by shareholder dividend
payments of $315,000.
The adjustment of $938,000 for net unrealized holding losses on
securities results primarily from the mark-to-market adjustment for the
$40.5 million of securities transferred from held-to-maturity to
available-for-sale in December 1995. Shareholders' equity at December
31, 1995 included net unrealized holding losses, net of taxes, of
$286,000 on securities available-for-sale, and an adjustment for
unrealized holding losses, net of taxes, of $1.3 million on held-to-
maturity securities which had previously been transferred from
available-for-sale. Securities transferred from available-for-sale to
held-to-maturity are carried at estimated fair value as of the transfer
date and adjusted for subsequent amortization.
The Company and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the FDIC. At December 31, 1995 the Company's leverage capital ratio was
10.98% and its tier I and total risk-based capital ratios were 20.86%
and 22.14%, respectively. At December 31, 1995 the Bank's leverage
capital ratio was 10.58% and its tier I and total risk-based capital
ratios were 20.11% and 21.39%, 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 calendar year and retained net profits for the preceding two
years. Consequently, the maximum amount of dividends payable by the
Bank to the Company as of December 31, 1995 was $9,801,000. In some
instances, further restrictions on dividends may be imposed on the
Company by the Federal Reserve Bank.
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
There are no material legal proceedings pending against the
Company or the Bank or any of their properties, other than
ordinary routine litigation incidental to the Company's
business.
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
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.
February 9, 1996 By /s/ Anthony J. Nania
Anthony J. Nania,
Chairman of the Board and
Chief Executive Officer
February 9, 1996 By /s/ B. Ian McMahon
B. Ian McMahon,
Chief Financial Officer
Exhibit 11.1
NEWMIL BANCORP, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months Six months
ended ended
December 31, December 31,
<S> <C> <C> <C> <C>
1995 1994 1995 1994
Net income
Net income - primary and
fully diluted $519 $674 $1,024 $1,138
Weighted Average Common and Common
Equivalent Stock
Weighted average common stock
outstanding 4,494 4,486 4,494 4,486
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 319 206 307 225
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (212) (174) (207) (173)
Weighted average common and common
equivalent stock outstanding
- primary 4,601 4,518 4,594 4,538
Weighted average common stock
outstanding 4,494 4,486 4,494 4,486
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 341 252 329 250
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (232) (242) (222) (220)
Weighted average common and common
equivalent stock outstanding
- fully diluted 4,603 4,496 4,601 4,516
Earnings Per Common and Common
Equivalent Share
Primary $0.11 $0.15 $0.22 $0.25
Fully diluted $0.11 $0.15 $0.22 $0.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's December 31, 1995 unaudited balance sheet, income statement and
cash flow statement, and notes thereto, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> DEC-31-1995
<CASH> 10,348,000
<INT-BEARING-DEPOSITS> 99,000
<FED-FUNDS-SOLD> 5,000,000
<TRADING-ASSETS> 5,900,000
<INVESTMENTS-HELD-FOR-SALE> 40,863,000
<INVESTMENTS-CARRYING> 78,126,000
<INVESTMENTS-MARKET> 77,833,000
<LOANS> 152,511,000
<ALLOWANCE> 5,133,000
<TOTAL-ASSETS> 304,574,000
<DEPOSITS> 256,552,000
<SHORT-TERM> 10,979,000
<LIABILITIES-OTHER> 2,662,000
<LONG-TERM> 0
0
0
<COMMON> 2,985,000
<OTHER-SE> 31,396,000
<TOTAL-LIABILITIES-AND-EQUITY> 304,574,000
<INTEREST-LOAN> 6,928,000
<INTEREST-INVEST> 3,969,000
<INTEREST-OTHER> 68,000
<INTEREST-TOTAL> 10,965,000
<INTEREST-DEPOSIT> 5,008,000
<INTEREST-EXPENSE> 5,307,000
<INTEREST-INCOME-NET> 5,658,000
<LOAN-LOSSES> 200,000
<SECURITIES-GAINS> 45,000
<EXPENSE-OTHER> 4,278,000
<INCOME-PRETAX> 1,747,000
<INCOME-PRE-EXTRAORDINARY> 1,747,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,024,000
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 3.97
<LOANS-NON> 4,258,000
<LOANS-PAST> 420,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,372,000
<CHARGE-OFFS> 441,000
<RECOVERIES> 2,000
<ALLOWANCE-CLOSE> 5,133,000
<ALLOWANCE-DOMESTIC> 4,925,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 208,000
</TABLE>
