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, 1996
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 March 31, 1996 is
4,179,498.
NEWMIL BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
March 31, 1996 and June 30, 1995 . . . . . . . . . . . . . . . . .3
Consolidated Statement of Income
for the three and nine month periods ended
March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the nine month periods ended
March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . .7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 13
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>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
March 31, June 30,
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,574 $ 5,791
Federal funds sold 12,300 8,500
Securities:
Available-for-sale at market 33,538 7,102
Held-to-maturity at amortized cost
(market value: $75,879 and $119,948) 76,917 120,092
Loans (net of allowance for
loan losses: $5,200 and $5,372) 146,739 150,442
Real estate acquired (net of
valuation reserve: $475 and $313) 3,540 1,676
Bank premises and equipment, net 6,035 6,125
Accrued income 1,689 1,918
Deferred tax asset, net 4,696 6,397
Other assets 550 628
Total Assets $291,578 $308,671
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 9,261 $ 8,224
NOW accounts 22,127 21,921
Money market 59,493 63,059
Savings and other 39,505 41,349
Certificates of deposit 126,855 117,867
Total deposits 257,241 252,420
Securities sold under agreement to repurchase - 15,499
Federal Home Loan advances - 5,000
Accrued interest and other liabilities 1,878 3,031
Total Liabilities 259,119 275,950
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Authorized - 20,000,000 shares
Issued - 5,983,138 and 5,965,888 shares 2,992 2,983
Paid-in capital 44,176 44,145
Retained earnings 5,016 3,915
Unrealized (losses) gains on securities
available-for-sale, net (311) 91
Unrealized losses on securities transferred
to held-to-maturity, net (1,276) (2,609)
Treasury stock, at cost - 1,803,640 and
1,474,409 shares (18,138) (15,804)
Total Shareholders' Equity 32,459 32,721
Total Liabilities and Shareholders' Equity $291,578 $308,671
</TABLE>
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
Three months ended Nine months ended
March 31, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,459 $3,037 $10,387 $8,523
Interest on securities 1,778 1,999 5,701 6,100
Dividend income 33 52 79 96
Interest on federal funds sold 45 15 113 52
Total interest and dividend
income 5,315 5,103 16,280 14,771
INTEREST EXPENSE
Deposits 2,523 2,109 7,531 5,702
Borrowed funds 48 314 347 1,291
Total interest expense 2,571 2,423 7,878 6,993
Net interest and dividend income 2,744 2,680 8,402 7,778
PROVISION FOR LOAN LOSSES 100 100 300 300
Net interest and dividend income
after provision for loan losses 2,644 2,580 8,102 7,478
NON-INTEREST INCOME
Service charges on
deposit accounts 200 185 613 581
Securities gains, net 72 30 27 226
Gains on mortgage loans, net - - 5 4
Loan servicing fees 30 31 94 94
Other 68 60 198 188
Total non-interest income 370 306 937 1,093
NON-INTEREST EXPENSE
Salaries 801 879 2,479 2,483
Employee benefits 245 230 677 618
Occupancy 214 206 579 561
Equipment 174 142 511 424
Insurance 20 182 96 529
Collection and REA 98 271 406 884
Professional services 82 71 316 241
Marketing 26 51 112 137
Shareholders relationship 10 9 87 82
Other 337 259 1,022 863
Total non-interest expense 2,007 2,300 6,285 6,822
INCOME BEFORE INCOME TAXES 1,007 586 2,754 1,749
Provision for income taxes 394 12 1,117 37
NET INCOME $ 613 $ 574 $1,637 $1,712
Earnings per share $0.14 $0.13 $0.36 $0.38
Dividends per share $0.05 $0.00 $0.12 $0.04
</TABLE>
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine months ended
March 31,
1996 1995
<S> <C> <C>
Operating Activities
Net income $ 1,637 $ 1,712
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 300 300
Provision for losses on
real estate acquired 212 733
Provision for depreciation and
amortization 409 384
Decrease in deferred income tax asset 1,080 -
Amortization and accretion of securities
premiums and discounts, net 246 434
Securities gains, net (27) (226)
Realized gains on loan sales, net (5) (4)
Realized gains on sales of real
estate acquired, net (302) (620)
Decrease in mortgage loans held for sale - 130
Decrease (increase) in accrued income 231 (39)
(Decrease) increase in accrued interest
and other liabilities (1,192) 1,485
Decrease (increase) in other assets, net 76 (114)
Net cash provided by
operating activities 2,665 4,175
Investing Activities
Proceeds from sales of securities
available-for-sale 10,561 5,006
Proceeds from sale of trading securities 10,064 -
Proceeds from maturities and principal
repayments of securities 3,111 5,046
Purchases of securities available-for-sale - (5,413)
Purchases of trading securities (10,000) -
Proceeds from sale of available-for-sale
mortgage backed securities 942 15,710
Principal collected on mortgage backed
securities 3,393 3,770
Loan repayments (advances), net 131 (6,609)
Purchases of loans - (819)
Proceeds from sale of real estate
acquired 2,215 4,891
Payments to improve real estate acquired (711) (962)
Net purchases of Bank premises
and equipment (319) (187)
Net cash provided by
investing activities 19,387 20,433
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:
(in thousands) Nine months ended
March 31,
1996 1995
<S> <C> <C>
Financing Activities
Net increase in deposits 4,860 10,615
Net repayments of repurchase agreements (15,499) (33,772)
Net repayments of FHLB advances (5,000) -
Treasury stock purchased (2,381) -
Treasury stock reissued 25 -
Cash dividends paid (536) (180)
Proceeds from exercise of stock options 62 -
Net cash used by
financing activities (18 469) (23,337)
Increase in cash and cash equivalents 3,583 1,271
Cash and federal funds sold, beginning
of year 14,291 4,732
Cash and federal funds sold, end of year $17,874 $ 6,003
Cash paid during year
Interest to depositors $ 7,492 $ 5,703
Interest on borrowings and
interest rate swaps 401 1,347
Income taxes 94 72
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 3,278 369
</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 nine month
period ended March 31, 1996 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>
March 31, 1996
U.S. Government Agencies
After 5 but within 10 years $ 956 $ - $ 46 $1,002
Mortgage backed securities 8,572 164 67 8,475
Collateralized mortgage
obligations 22,463 94 663 23,032
Total debt securities 31,991 258 776 32,509
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $33,538 $258 $776 $34,056
(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
Securities classified held-to-maturity (carried at amortized cost) are
as follows:
(dollars in thousands) Gross Estimated
Amortized unrealized fair
cost(a) gains losses value
March 31, 1996
Mortgage backed securities $11,616 $ - $ 145 $11,471
Collateralized mortgage
obligations 65,301 378 1,271 64,408
Total securities
held-to-maturity $76,917 $ 378 $1,416 $75,879
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 and market value of $1,002,000 and
$956,000, respectively, were pledged as collateral against public funds
at March 31, 1996.
Cash proceeds and realized gains and losses from sales of securities
during the nine month periods ended March 31 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Cash Realized Realized
proceeds gains losses
<S> <C> <C> <C>
Nine months ended March 31, 1996
Available-for-sale
Mortgage backed securities $ 942 $ 4 $ -
Collateralized mortgage obligations 10,551 11 62
Trading assets 10,064 64 -
Marketable equity securities(a) 10 10 -
Total $21,567 $ 89 $ 62
Nine months ended March 31, 1995
Available-for-sale
Mortgage backed securities $15,710 $ - $490
Other bonds and notes 696 686 -
Collateralized mortgage
obligations 2,910 - -
Marketable equity securities 1,400 $110 $ 80
Total $20,716 $796 $570
</TABLE>
(a) Represents the settlement proceeds from a class action suit
relating to a previously held equity security.
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>
March 31, June 30,
(in thousands) 1996 1995
<S> <C> <C>
Real estate mortgages:
One-four family residential $ 89,715 $ 98,766
Five or more family residential 3,210 3,171
Commercial 29,406 29,068
Land 9,559 12,067
Commercial and industrial 4,852 3,201
Home equity lines of credit 13,066 7,785
Installment and other 2,406 2,187
Total loans, gross 152,214 156,245
Deferred loan origination fees, net (275) (431)
Allowance for loan losses (5,200) (5,372)
Total loans, net $146,739 $150,442
Impaired loans
With valuation allowance $3,805 $3,399
With no valuation allowance 4,636 5,324
Total impaired loans $8,441 $8,723
Valuation allowance $1,404 $1,373
Changes in the allowance for loan losses for the nine month periods
ended March 31, are as follows:
(in thousands) 1996 1995
Balance, beginning of period $5,372 $5,246
Provision for losses 300 300
Charge-offs (476) (48)
Recoveries 4 20
Balance, end of period $5,200 $5,518
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
March 31, June 30,
(in thousands) 1996 1995
<S> <C> <C>
Non-accrual loans $4,486 $7,175
Accruing loans past due
90 days or more 93 34
Accruing troubled debt
restructured loans 284 -
Total non-performing loans 4,863 7,209
Real estate acquired 4,015 1,989
Valuation reserve (475) (313)
Total real estate acquired, net 3,540 1,676
Total non-performing assets $8,403 $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 nine month
periods ended March 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
<S> <C> <C>
Valuation reserve at beginning of period $313 $367
Charge-offs (50) (71)
Provision 212 733
Valuation reserve at end of period $ 475 $1,029
</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:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1996 1995 1996 1995
(in thousands)
<S> <C> <C> <C> <C>
Current provision
Federal $ 342 $ 199 $ 936 $ 595
State 113 67 310 201
Benefit from net operating
loss carry forwards
Federal (336) (193) (918) (577)
State (107) (61) (291) (182)
Total 12 12 37 37
Deferred provision
Federal 290 - 805 -
State 92 - 275 -
Total 382 - 1,080 -
Income tax provision $ 394 $ 12 $1,117 $ 37
</TABLE>
At March 31, 1996 the Company had Federal net operating loss
carryforwards of approximately $5.5 million (expiring in 2007) and State
net operating loss carryforwards of approximately $14.1 million
(expiring in 1996 and 1997) which can be applied to reduce future
Federal and State income taxes. In June 1995 the Company recognize, for
book purposes, a tax benefit as a result of a reduction of the Company's
valuation allowance on its deferred tax asset. At March 31, 1996 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 March 31,
1996 the Company had commitments under outstanding construction
mortgages of $56,000, unused lines of credit of $11,316,000 and
outstanding commitments to fund loans of $3,452,000. 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 March 31, 1996, were as
follows:
<TABLE>
<CAPTION>
Company Bank
<S> <C> <C>
Leverage ratio 10.64% 10.35%
Tier I risk-based ratio 19.98% 19.44%
Total risk-based ratio 21.25% 20.71%
</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 nine month period ended March 31, 1995 is $7,518,000.
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 March 31, 1996 and 1995
Overview
The Company earned net income of $613,000, or $0.14 per share, for the
quarter ended March 31, 1996, the third fiscal quarter of the Company's
fiscal year. This compares with net income of $574,000, or $0.13 per
share, for the quarter ended March 31, 1995.
Net income before tax for the quarter grew 71.8% to $1,007,000, up from
$586,000 for the same period in 1995. The increase reflects an
improvement in net interest margin of 3.91% versus 3.78% a year ago
coupled with a 12.7% decrease in operating expenses.
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 $394,000, or 39%, as compared with a provision of $12,000,
or 2% a year ago.
Non-performing assets increased $310,000, or 3.8%, during the past three
month period, to $8,403,000, or 2.9% of assets at March 31, 1996.
Analysis of net interest and dividend income
Net interest and dividend income increased $64,000, or 2.4%, for the
quarter ended March 31, 1996 as compared with the prior year period.
This increase resulted from a 13 basis points increase in net interest
margin (to 3.91% from 3.78%) offset by a $3.4 million, or 1.2% decrease
in average earning assets. The net interest margin has been fairly
consistent during the quarter ended March 31, 1996 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 March 31, 1996
and 1995.
<TABLE>
<CAPTION>
Three months ended March 31, 1996 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans(a) $151,794 $3,459 9.12%
Mortgage backed securities 20,705 329 6.36
Other securities(b) 107,905 1,527 5.66
Total earning assets 280,404 5,315 7.58
Other assets 14,076
Total assets $294,480
NOW accounts $22,708 84 1.48
Money market accounts 60,633 458 3.02
Savings & other 38,462 251 2.61
Certificates of deposit 125,091 1,730 5.53
Total interest-bearing deposits 246,894 2,523 4.09
Borrowings 3,710 48 5.18
Total interest-bearing funds 250,604 2,571 4.10
Demand deposits 8,527
Other liabilities 1,273
Shareholders' equity 34,076
Total liabilities and
shareholders' equity $294,480
Net interest income $2,744
Spread on interest-bearing funds 3.48
Net interest margin(c) 3.91
Three months ended March 31, 1995 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans(a) $147,052 $3,037 8.26%
Mortgage backed securities 26,309 369 5.61
Other securities(b) 110,402 1,697 6.15
Total earning assets 283,763 5,103 7.19
Other assets 10,632
Total assets $294,395
NOW accounts $22,109 80 1.45
Money market accounts 68,713 486 2.83
Savings & other 43,410 280 2.58
Certificates of deposit 104,236 1,263 4.85
Total interest-bearing deposits 238,468 2,109 3.54
Borrowings 20,879 314 6.04
Total interest-bearing funds 259,347 2,423 3.73
Demand deposits 7,259
Other liabilities 1,487
Shareholders' equity 26,302
Total liabilities and
shareholders' equity $294,395
Net interest income $2,680
Spread on interest-bearing funds 3.46
Net interest margin(c) 3.78
</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 March 31, 1996 versus 1995
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 98 $ 314 $ 10 $ 422
Mortgage backed securities (79) 49 (10) (40)
Other securities (38) (135) 3 (170)
Total (19) 228 3 212
Interest-bearing liabilities:
Deposits 166 217 31 414
Borrowings (259) (45) 38 (266)
Total (93) 172 69 148
Net change to interest income $ 74 $ 56 $ (66) $ 64
</TABLE>
Interest income
Total interest and dividend income increased $212,000, or 4.2%, for the
quarter ended March 31, 1996 as compared with the same period a year
ago.
Loan interest and fee income increased $422,000, or 13.9%, for the
quarter ended March 31, 1996 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 $4.7 million, or
3.2%. The yield on the loan portfolio increased to 9.12%, an increase
of 86 basis points as compared to the prior year.
Investment and fed funds income decreased $210,000, or 10.2%, for the
quarter ended March 31, 1996 as compared with the prior year period as
a result of a $8.1 million, or 5.9%, decrease in average investments
coupled with lower yields on 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 decreased to 5.77% for
1996 from 6.05% in 1995 as a result of a lower fed rate pricing and an
investment in a trading asset which generated capital gains rather than
interest income, offset by the upward repricing of floating rate
securities.
Interest expense
Interest expense for the quarter ended March 31, 1996 increased
$148,000, or 6.1%, 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 $8.7 million, or 3.4%, for the period.
Deposit expense increased $414,000, or 19.6%, 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 $8.4 million, or 3.5%. 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 $266,000, or 84.7%, as a
result of lower average balances coupled with lower borrowing rates.
Average borrowings decreased $17.2 million, or 82.2%. The average cost
of borrowings decreased 86 basis points to 5.18% in 1996 from 6.04% in
1995, as a result of the lower interest rate environment in 1996. 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
March 31, 1996, unchanged from the prior year period provision. The
following table details changes in the allowance for loan losses during
the three month periods ended March 31:
<TABLE>
<CAPTION>
1996 1995
(dollars in thousands)
<S> <C> <C>
Balance, beginning of period $5,133 $5,418
Provision for losses 100 100
Charge-offs (35) -
Recoveries 2 -
Balance, end of period $5,200 $5,518
Ratio of allowance for loan losses:
to non-performing loans 106.93% 66.67%
to total gross loans 3.42 3.61
</TABLE>
The increase in the ratio of the allowance for loan losses to non-
performing loans results from the $3,414,000 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 March 31, 1996, 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 FDIC, in March 1996. 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 March 31.
<TABLE>
<CAPTION>
(in thousands) 1996 1995 Change
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $200 $185 $ 15 8.1%
Securities gains, net 72 30 42 140.0
Loan servicing 30 31 (1) (3.2)
Other 68 60 8 13.3
Total non-interest income $370 $306 $ 64 20.9
</TABLE>
Service charges on deposit accounts increased $15,000, or 8.1%,
reflecting the increased level of usage at the Bank's ATMs. During the
quarter the Company realized net gains of $72,000 from the sales of debt
securities and trading activities. Loan servicing fees and other non-
interest income increased slightly from a year ago.
Operating expenses
The following table details the principal categories of operating
expenses for the three month periods ended March 31.
<TABLE>
<CAPTION>
(in thousands) 1996 1995 Change
<S> <C> <C> <C> <C>
Salaries $ 801 $ 879 $ (78) (8.9)%
Employee benefits 245 230 15 6.5
Occupancy 214 206 8 3.9
Equipment 174 142 32 22.5
Insurance 20 182 (162) (89.0)
Collections and REA 98 271 (173) (63.8)
Professional services 82 71 11 15.5
Postage and telecommunications 71 84 (13) (15.5)
Marketing 26 51 (25) (49.0)
Other operating 276 184 92 50.0
Total operating expenses $2,007 $2,300 $(293) (12.7)
</TABLE>
Salaries expense decreased for the quarter ended March 31, 1996 as
compared with the prior year period due primarily to bonuses that were
accrued in the quarter ended March 31, 1995 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 $162,000, or 89.0%, as a result of lower
FDIC deposit insurance premiums. Collection and real estate acquired
expense decreased $173,000, or 63.8%, due primarily to reductions in
non-performing loans over the past year coupled with recoveries received
for some of the prior collection cost. 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 $394,000, representing a 39% effective rate, as compared
with a provision of only $12,000 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 $394,000 for the quarter ended March
31, 1996 represents deferred federal and state taxes totaling $382,000
and minimum federal and state taxes net of federal and state tax
benefits of $336,000 and $107,000, respectively, from the utilization of
net operating loss carryforwards.
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.
For the nine month periods ended March 31, 1996 and 1995
Overview
The Company earned net income of $1,637,000, or $0.36 per share, for the
nine month period ended March 31, 1996. This compares with net income
of $1,712,000, or $0.38 per share, for the same period ended March 31,
1995.
Net income before tax for the nine month period grew 57.5% to
$2,754,000, up from $1,749,000 for the same period in 1995. The
increase reflects an improvement in net interest margin of 3.95% versus
3.58% a year ago. In addition, there was a reduction of $537,000, or
7.9%, in operating expenses.
Net income for the period included an income tax provision of
$1,117,000, or 41%, as compared with a provision of $37,000 a year ago.
The nine months ended March 31, 1995 also include securities gains of
$226,000 as compared to $27,000 for 1996.
Analysis of net interest and dividend income
Net interest and dividend income increased $624,000, or 8.0%, for the
nine months ended March 31, 1996 as compared with the prior year period.
This increase resulted from a 37 basis points increase in net interest
margin (to 3.95% from 3.58%) offset by a $6.4 million, or 2.2% 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 nine month periods ended March 31, 1996
and 1995.
<TABLE>
<CAPTION>
Nine months ended March 31, 1996 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans(a) $153,319 $10,387 9.03%
Mortgage backed securities 22,470 1,018 6.04
Other securities(b) 107,783 4,875 6.03
Total earning assets 283,572 16,280 7.66
Other assets 13,473
Total assets $297,045
NOW accounts $ 22,599 252 1.49
Money market accounts 61,271 1,398 3.04
Savings & other 39,492 778 2.63
Certificates of deposit 122,033 5,103 5.58
Total interest-bearing deposits 245,395 7,531 4.09
Borrowings 7,859 347 5.90
Total interest-bearing funds 253,254 7,878 4.15
Demand deposits 8,539
Other liabilities 1,559
Shareholders' equity 33,693
Total liabilities and
shareholders' equity $297,045
Net interest income $8,402
Spread on interest-bearing funds 3.51
Net interest margin(c) 3.95
Nine months ended March 31, 1995 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans(a) $143,958 $8,523 7.89%
Mortgage backed securities 34,540 1,374 5.30
Other securities(b) 111,439 4,874 5.83
Total earning assets 289,937 14,771 6.79
Other assets 11,724
Total assets $301,661
NOW accounts $ 22,502 248 1.47
Money market accounts 76,633 1,549 2.70
Savings & other 45,463 896 2.63
Certificates of deposit 89,779 3,009 4.47
Total interest-bearing deposits 234,377 5,702 3.24
Borrowings 32,945 1,291 5.23
Total interest-bearing funds 267,322 6,993 3.49
Demand deposits 7,140
Other liabilities 1,349
Shareholders' equity 25,850
Total liabilities and
shareholders' equity $301,661
Net interest income $7,778
Spread on interest-bearing funds 3.30
Net interest margin(c) 3.58
</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>
Nine months ended March 31, 1996 versus 1995
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 554 $1,230 $ 80 $1,864
Mortgage backed securities (480) 191 (67) (356)
Other securities (160) 166 (5) 1
Total (86) 1,587 8 1,509
Interest-bearing liabilities:
Deposits 654 947 228 1,829
Borrowings (984) 167 (127) (944)
Total (330) 1,114 101 885
Net change to interest income $ 244 $ 473 $ (93) $ 624
</TABLE>
Interest income
Total interest and dividend income increased $1,509,000, or 10.2%, for
the nine months ended March 31, 1996 as compared with the same period a
year ago.
Loan interest and fee income increased $1,864,000, or 21.9%, for the
nine months ended March 31, 1996 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 $9.4 million, or
6.5%. The yield on the loan portfolio increased to 9.03%, an increase
of 114 basis points as compared to the prior year.
Investment and fed funds income decreased $355,000, or 5.7%, for the
nine months ended March 31, 1996 as compared with the prior year period
as a result of a $15.7 million, or 10.8%, decrease in average
investments offset by higher yields on floating rate securities.
Average investment yield increased to 6.03% for 1996 from 5.71% in 1995
as a result of the upward repricing of floating rate securities.
Interest expense
Interest expense for the nine months ended March 31, 1996 increased
$885,000, or 12.7%, as compared to the same period in the prior year.
Total average balances for deposits and borrowings decreased by $14.1
million, or 5.3%, for the period. The average cost of funds increased
66 basis points to 4.15% for 1996 from 3.49% for 1995.
Deposit interest expense increased $1,829,000, or 32.1%, 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 $11.0 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. The rates on certificates however have increased to 5.58% in
1996 from 4.47% in 1995.
Interest expense on borrowings decreased by $944,000, or 73.1%, as a
result of lower average balances, offset in part by higher borrowing
rates. Average borrowings decreased $25.1 million, or 76.1%. The
average cost of borrowings increased 67 basis points to 5.90% in 1996
from 5.23% in 1995, as a result of the higher interest rate environment
in 1996.
Provision and Allowance for loan losses
The Company provided $300,000 for loan losses during the nine months
ended March 31, 1996 and 1995. The following table details changes in
the allowance for loan losses during the nine month periods ended March
31:
<TABLE>
<CAPTION>
1996 1995
(dollars in thousands)
<S> <C> <C>
Balance, beginning of period $5,372 $5,246
Provision for losses 300 300
Charge-offs (476) (48)
Recoveries 4 20
Balance, end of period $5,200 $5,518
Ratio of allowance for loan losses:
to non-performing loans 106.93% 66.67%
to total gross loans 3.42 3.61
</TABLE>
For a detailed discussion of the Bank's allowance for loan losses see
"For the three month periods ended March 31, 1996 and 1995", above.
Non-interest income
The following table details the principal categories of non-interest
income for the nine month periods ended March 31.
<TABLE>
<CAPTION>
(in thousands) 1996 1995 Change
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $613 $581 $ 32 5.5%
Gains on loan sales, net 5 4 1 25.0
Securities gains, net 27 226 (199) (88.1)
Loan servicing 94 94 - 0.0
Other 198 188 10 5.3
Total non-interest income $937 $1,093 $(156) (14.3)
</TABLE>
Service charges on deposit accounts increased $32,000, or 5.5%
reflecting the increased level of usage at the Bank's ATMs. During the
nine months the Company realized a net security gains of $27,000 from
the sales of debt securities, trading activities and 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 nine month periods ended March 31.
<TABLE>
<CAPTION>
(in thousands) 1996 1995 Change
<S> <C> <C> <C> <C>
Salaries $2,479 $2,483 $ (4) (0.2)%
Employee benefits 677 618 59 9.5
Occupancy 579 561 18 3.2
Equipment 511 424 87 20.5
Insurance 96 529 (433) (81.9)
Collections and REA 406 884 (478) (54.1)
Professional services 316 241 75 31.1
Postage and telecommunications 211 215 (4) (1.9)
Marketing 112 137 (25) (18.2)
Other operating 898 730 168 23.0
Total operating expenses $6,285 $6,822 $(537) (7.9)
</TABLE>
Salaries expense decreased for the nine month period ended March 31,
1996 as compared with the prior year period primarily as a result of
bonus accruals in the prior period offset by annual salary increases of
approximately 4%, and 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. Insurance expense decreased $433,000, or 81.9%, as a
result of lower FDIC deposit insurance premiums and a refund on
previously paid FDIC premiums. Collection and real estate acquired
expense decreased $478,000, or 54.1%, due primarily to reductions in
non-performing loans over the past year coupled with a recovery received
on a prior non-performing assets. Professional expense increased
$75,000, or 31.1%, as a result of higher legal expenses. The increase
in other operating expenses, including postage and phone, office,
shareholders relationship and other, result from advertising and
expenses associated with a loan promotion that was created during the
year and additional expenses relating to the Company's ATM promotion, in
addition to normal changes in operating activities.
Income taxes
Net income for the nine month period ended March 31, 1996 included an
income tax provision of $1,117,000, representing a 41% effective rate,
as compared with a provision of only $37,000 a year ago.
The Company's income tax expense of $1,117,000 for the nine months ended
March 31, 1996 represents deferred federal and state taxes totaling
$1,080,000 and minimum federal and state taxes net of federal and state
tax benefits of $918,000 and $291,000, respectively, from the
utilization of net operating loss carryforwards. The Company's income
tax expense of $37,000 for the 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.
ASSET QUALITY AND PORTFOLIO RISK
Loans
During the nine month period ended March 31, 1996, net loans decreased
$3.7 million, or 2.5%. The following table details the composition of
the loan portfolio as of the periods presented.
<TABLE>
<CAPTION>
(in thousands) March 31, June 30,
1996 1995
<S> <C> <C>
Real estate mortgages
One-four family residential $ 89,715 $ 98,766
Five or more family residential 3,210 3,171
Commercial 29,406 29,068
Land and land development 9,559 12,067
Commercial and industrial 4,852 3,201
Home equity lines of credit 13,066 7,785
Installment and other 2,406 2,187
Total loans, gross $152,214 $156,245
</TABLE>
The decrease, of $4.0 million, in gross loans resulted, in part, from
the reclassification of $3.3 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 March 31.
<TABLE>
<CAPTION>
(in thousands) 1996 1995
<S> <C> <C>
Balance, beginning of period $8,093 $11,081
Loans placed on non-accrual status 732 318
Increase (decrease) in accruing loans past
due 90 or more days, net (327) 565
Loans restructured 284 -
Payments to improve REA 165 263
Loan payments (22) (486)
Loans returned to accrual status (83) -
Loan charge-offs (35) -
Gross proceeds from REA sales (484) (932)
Gains on REA sales, net 120 36
Provision to REA valuation reserve (40) (111)
Balance, end of period $8,403 $10,734
</TABLE>
During the quarter ended March 31, 1996 non-performing assets increased
$310,000, or 3.8%, due principally to a net increase in non-accrual
loans, restructured loans and capitalized expenditures on REA offset by
REA sales, payments and loans returned to a performing status.
Additions 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
nine month periods ended March 31.
<TABLE>
<CAPTION>
(in thousands) 1996 1995
<S> <C> <C>
Balance, beginning of year $8,885 $13,685
Loans placed on non-accrual status 1,668 1,583
Increase (decrease) in accruing loans past
due 90 or more days, net 59 186
Loans restructured 284 -
Payments to improve REA 711 961
Loan payments (461) (629)
Loans returned to accrual status (143) -
Loan charge-offs (475) (48)
Gross proceeds from REA sales (2,215) (4,891)
Gains on REA sales, net 302 620
Provision to REA valuation reserve (212) (733)
Balance, end of period $8,403 $10,734
Percent of total assets 2.88% 3.64%
</TABLE>
During the nine months ended March 31, 1995 non-performing assets
decreased $482,000, or 5.4%, due principally to sales of real estate of
$2,215,000, loan payments and charge-offs, offset by a net increase in
non-accrual loans, restructured loans, loans past due 90 days or more,
and capitalized expenditures on REA.
The following table details the composition of non-performing assets as
of March 31, 1996.
<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
March 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential $2,461 $ 93 $ - $1,065 $ - $3,438
Commercial 525 - 284 201 - 759
Land and land
development 1,500 - - 2,749 - 4,326
Valuation reserve - - - - (475) (475)
Totals $4,486 $ 93 $284 $4,015 $(475) $8,403
</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 $912,000 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 March 31, 1996 totaled
$475,000, or 11.8% 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 $17.1 million, or 5.5%, to $291.6 million in the
nine month period from June 30, 1995 through March 31, 1996. The
decrease resulted from a $16.7 million decrease in the securities
portfolio, through principal repayments and security sales offset by
security purchases. Loans, net of the allowance for losses, decreased
$3.7 million, or 2.5%. Loan advances for the period were offset by loan
repayments and the reclassification of $3.3 million of non-performing
assets from loans to real estate acquired.
Loans
Loans, net of the allowance for loans losses, decreased $3.7 million, or
2.5%, during the nine month period ended March 31, 1996. The primary
reason for this decrease was the transfer of $3.3 million from loans to
real estate acquired. Loan repayments for the nine month period totaled
$30.9 million, while originations and advances were $30.4 million.
Securities
The securities portfolio consists primarily of collateralized mortgage
obligations ("CMOs") and mortgage-backed securities ("MBSs"), and to a
lesser extent, agency obligations and Federal Home Loan Bank stock.
There are no structured notes, inverse floaters, or interest-only or
principal-only strips in the portfolio. At March 31, 1996 48.0% 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 3.1 years, respectively. Fixed rate
CMOs and MBSs are generally securities with relatively stable cash
flows. The Company actively monitors the prepayment of its CMOs and
MBSs. At March 31, 1996 50.6% 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 14.6 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 1.4% of the portfolio at March 31,
1996, was represented by Federal Home Loan Bank stock.
At March 31, 1996, securities totaling $76.9 million, or 69.6%, were
classified as held-to-maturity and securities totaling $33.5 million, or
30.4%, were classified as available-for-sale.
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 March 31, 1996 is an
adjustment of $1,276,000, net of taxes, 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
March 31, 1996 net unrealized losses on both securities available-for-
sale and held-to-maturity totaled $3.8 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 nine month period ended March 31, 1996
provided net cash of $2.7 million. Investing activities provided net
cash of $19.4 million principally from securities principal repayments,
securities sales and sales of real estate acquired, offset in part by
security purchases, net loan advances and capitalized improvements to
real estate acquired. Funds provided by investing and operating
activities, together with a increase in deposits of $4.9 million, were
used to reduce short term borrowings by $20.5 million, purchase treasury
stock of $2.4 million, pay dividends of $536,000 and increase cash and
federal funds sold by $3.6 million.
At March 31, 1996, 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 $120.2 million, to net deposits and short term unsecured
liabilities, was 63.9%, well in excess of the Company's minimum
guideline of 15%. At March 31, 1996, the Company had outstanding
commitments to fund new loan originations of $3.5 million, construction
mortgage commitments of $56,000 and unused lines of credit of $11.3
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, 1996, the Company had a negative cumulative one year gap of
$17.5 million, or 6.0% 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 nine month period ended March 31, 1996 the Company's net
interest margin increased 37 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
NOW, 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
NOW, 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 decreased $262,000, to $32,459,000, while book
value per share increased $0.48 to $7.77, during the nine month period
ended March 31, 1996. The decrease, in equity, resulted from net
treasury stock purchases of $2,356,000 and dividends paid of $536,000,
offset by earnings of $1,637,000, or $0.36 per share, together with a
$931,000 decrease in the adjustment to shareholders' equity for net
unrealized holding losses on securities net of taxes and proceeds of
$62,000 from the exercise of stock options.
In December 1995 the Company announced its intention to repurchase up to
10% of its outstanding common stock over the next 18 months in the open
market and unsolicited negotiated transactions, including block
purchases. As of March 31, 1996 the Company had repurchased 7.4% or
333,400 shares of its outstanding common stock for total consideration
of $2,381,000.
The adjustment of $931,000 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 March 31,
1996 included net unrealized holding losses, net of taxes, of $311,000
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 March 31, 1996 the Company's leverage capital ratio was
10.64% and its tier I and total risk-based capital ratios were 19.98%
and 21.25%, respectively. At March 31, 1996 the Bank's leverage capital
ratio was 10.35% and its tier I and total risk-based capital ratios were
19.44% and 20.71%, 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 March 31, 1996 was $7,518,000. 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.
May 13, 1996 By /s/ Francis J. Wiatr
Francis J. Wiatr,
President
May 13, 1996 By /s/ B. Ian McMahon
B. Ian McMahon,
Chief Financial Officer
Exhibit 11.1
<TABLE>
<CAPTION>
NEWMIL BANCORP, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
(in thousands except per share amounts)
Three months Nine months
ended ended
March 31, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income
Net income - primary and
fully diluted $613 $574 $1,637 $1,712
Weighted Average Common and Common
Equivalent Stock
Weighted average common stock
outstanding 4,380 4,486 4,456 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 305 229 312 226
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (197) (177) (207) (174)
Weighted average common and common
equivalent stock outstanding
- primary 4,488 4,538 4,561 4,538
Weighted average common stock
outstanding 4,380 4,486 4,456 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 324 255 331 252
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (222) (213) (223) (210)
Weighted average common and common
equivalent stock outstanding
- fully diluted 4,482 4,528 4,564 4,528
Earnings Per Common and Common
Equivalent Share
Primary $0.14 $0.13 $0.36 $0.38
Fully diluted $0.14 $0.13 $0.36 $0.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's March 31, 1996 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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,574,000
<INT-BEARING-DEPOSITS> 99,000
<FED-FUNDS-SOLD> 12,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,538,000
<INVESTMENTS-CARRYING> 76,917,000
<INVESTMENTS-MARKET> 75,879,000
<LOANS> 151,939,000
<ALLOWANCE> 5,200,000
<TOTAL-ASSETS> 291,578,000
<DEPOSITS> 257,241,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,878,000
<LONG-TERM> 0
0
0
<COMMON> 2,992,000
<OTHER-SE> 29,467,000
<TOTAL-LIABILITIES-AND-EQUITY> 291,578,000
<INTEREST-LOAN> 10,387,000
<INTEREST-INVEST> 5,780,000
<INTEREST-OTHER> 113,000
<INTEREST-TOTAL> 16,280,000
<INTEREST-DEPOSIT> 7,531,000
<INTEREST-EXPENSE> 7,878,000
<INTEREST-INCOME-NET> 8,402,000
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> 27,000
<EXPENSE-OTHER> 6,285,000
<INCOME-PRETAX> 2,754,000
<INCOME-PRE-EXTRAORDINARY> 2,754,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,637,000
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.91
<LOANS-NON> 4,486,000
<LOANS-PAST> 93,000
<LOANS-TROUBLED> 284,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,372,000
<CHARGE-OFFS> 476,000
<RECOVERIES> 4,000
<ALLOWANCE-CLOSE> 5,200,000
<ALLOWANCE-DOMESTIC> 4,976,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 224,000
</TABLE>
