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
September 30, 1997
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 September 30, 1997 is
3,835,090.
NEWMIL BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
September 30, 1997 and June 30, 1997 . . . . . . . . . . . . . . .3
Consolidated Statement of Income
for the three month periods
ended September 30, 1997 and 1996. . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the three month periods ended
September 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . . . .7
Item 2 Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 22
Item 4 Submission of matters to a vote of
security holders . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 5 Other information. . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 22
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
September 30, June 30,
1997 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,572 $ 7,168
Federal funds sold 11,675 17,460
Securities:
Available-for-sale at market 53,991 49,549
Held-to-maturity at amortized cost
(market value: $66,687 and $68,328) 67,897 69,819
Loans (net of allowance for
loan losses: $5,544 and $5,452) 164,561 166,141
Other real estate owned
(net of valuation reserve: $137) 360 474
Bank premises and equipment, net 6,176 6,042
Accrued income 2,123 2,024
Deferred tax asset, net 3,380 3,456
Other assets 672 928
Total Assets $317,407 $323,061
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 12,500 $ 12,369
NOW accounts 26,532 25,830
Money market 61,686 61,075
Savings and other 39,478 40,614
Certificates of deposit 138,132 135,504
Total deposits 278,328 275,392
Securities sold under agreement to repurchase - 5,000
Federal Home Loan Bank advances 4,000 8,000
Accrued interest and other liabilities 2,784 2,950
Total Liabilities 285,112 291,342
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Authorized - 20,000,000 shares
Issued - 5,989,888 and 5,988,138 shares 2,995 2,994
Paid-in capital 44,200 44,192
Retained earnings 7,568 7,097
Unrealized losses on securities
available-for-sale, net (233) (319)
Unrealized losses on securities transferred
to held-to-maturity, net (1,147) (1,170)
Treasury stock, at cost - 2,154,798
and 2,153,798 shares (21,088) (21,075)
Total Shareholders' Equity 32,295 31,719
Total Liabilities and Shareholders' Equity $317,407 $323,061
</TABLE>
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
Three months ended
September 30
1997 1996
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,791 $3,547
Interest on securities 1,838 1,879
Dividend income 25 25
Interest on federal funds sold 238 170
Total interest and dividend
income 5,892 5,621
INTEREST EXPENSE
Deposits 2,723 2,477
Borrowed funds 103 194
Total interest expense 2,826 2,671
Net interest and dividend income 3,066 2,950
PROVISION FOR LOAN LOSSES 100 100
Net interest and dividend
income after provision
for loan losses 2,966 2,850
NON-INTEREST INCOME
Service charges on deposit accounts 269 234
Securities losses, net (23) (5)
Gains on mortgage loans, net 65 26
Loan servicing fees 26 29
Other 76 68
Total non-interest income 413 352
NON-INTEREST EXPENSE
Salaries 1,045 981
Employee benefits 316 257
Occupancy 217 212
Equipment 181 174
Insurance 26 19
Professional, collection and
OREO, net of (gains) (119) 89
Marketing 60 31
Shareholder relations 24 7
Other 422 389
Total non-interest expense 2,172 2,159
INCOME BEFORE INCOME TAXES 1,207 1,043
Provision for income taxes 506 438
NET INCOME $ 701 $ 605
Earnings per share - fully diluted $0.17 $0.14
Dividends per share $0.06 $0.05
</TABLE>
<TABLE>
<CAPTION>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three months
ended
September 30,
1997 1996
<S> <C> <C>
Operating Activities
Net income $ 701 $ 605
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 100 100
Provision for depreciation and
amortization 155 154
Decrease in deferred income tax asset 3 426
Amortization and accretion of securities
premiums and discounts, net 5 26
Securities losses, net 23 5
Realized gains on loan sales, net (65) (26)
Realized gains on sales of OREO, net (151) (76)
Increase in accrued income (98) (309)
Decrease in accrued interest expense
and other liabilities (170) (619)
Decrease (increase) in other assets, net 257 (1,091)
Net cash provided (used) by
operating activities 760 (805)
Investing Activities
Proceeds from sales of securities
available-for-sale 1,126 6,534
Proceeds from maturities and principal
repayments of securities 4,776 1,071
Purchases of securities available-for-sale (9,093) (1,991)
Principal collected on mortgage backed
securities 824 1,005
Loan repayments (advances), net 1,544 (5,494)
Proceeds from sale of OREO 531 1,606
Payments to improve OREO (266) (103)
Net purchases of Bank premises
and equipment (288) (69)
Net cash (used) provided by
investing activities (846) 2,559
Three months
ended
September 30,
1997 1996
Financing Activities
Net increase (decrease) in deposits $ 2,939 $(1,142)
Net repayments of repurchase agreements (5,000) (9,705)
Net (repayments of) proceeds from FHLB advances (4,000) 8,000
Treasury stock purchase (13) (200)
Cash dividends paid (230) (203)
Proceeds from exercise of stock options 9 -
Net cash used by financing activities (6,295) (3,250)
Decrease in cash and cash
equivalents (6,381) (1,496)
Cash and federal funds sold, beginning
of year 24,628 17,590
Cash and federal funds sold, end of period $18,247 $16,094
Cash paid during period
Interest to depositors $ 2,721 $ 2,530
Interest on borrowings 135 185
Income taxes 68 20
Non-cash transfers
From loans to OREO - 185
</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 statement of income 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 have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make extensive use of estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the statement of condition, and revenues and expenses
for the period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection
with the determination of the allowance for loan losses and valuation of
real estate, management obtains independent appraisals for significant
properties.
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 three month
period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1998. 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, 1997.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS 128 provides
accounting and reporting standards for the calculation of earnings per
share intended to simplify the computation by replacing presentation of
primary earnings per share with the presentation of basic earnings per
share. The Company will be required to adopt SFAS 128 in the quarter
ending December 31, 1997. Had earnings per share for the three months
ended September 30, 1997 been computed in accordance with SFAS 128 basic
and diluted earnings per share would have been $0.18 and $0.17
respectively, and $0.15 and $0.14, respectively, for September 30, 1996.
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>
September 30, 1997
U.S. Treasury and Government
Agencies
Within 1 year $ 8,026 $ 38 $ - $ 7,988
After 1 within 5 years 29,947 140 - 29,807
After 5 and within 10 years 981 - 19 1,000
Mortgage backed securities 6,149 82 10 6,077
Collateralized mortgage
obligations 7,341 - 620 7,961
Total debt securities 52,444 260 649 52,833
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $53,991 $260 $649 $54,380
June 30, 1997
U.S. Treasury and Government
Agencies
Within 1 year $ 6,013 $ 24 $ - $ 5,989
After 1 within 5 years 25,784 85 4 25,703
After 5 and within 10 years 964 - 36 1,000
Mortgage backed securities 6,514 94 27 6,447
Collateralized mortgage
obligations 8,727 - 667 9,394
Total debt securities 48,002 203 734 48,533
Federal Home Loan Bank stock 1,547 - - 1,547
Total securities
available-for-sale $49,549 $203 $734 $50,080
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
September 30, 1997
Mortgage backed securities $ 8,154 $ 53 $ - $ 8,207
Collateralized mortgage
obligations 59,743 324 1,587 58,480
Total securities
held-to-maturity $67,897 $377 $1,587 $66,687
June 30, 1997
Mortgage backed securities $ 8,615 $ - $ 9 $ 8,606
Collateralized mortgage
obligations 61,204 207 1,689 59,722
Total securities
held-to-maturity $69,819 $ 207 $1,698 $68,328
</TABLE>
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
Securities with an amortized cost and market value of $1,000,000 and
$981,000, respectively, were pledged as collateral against public funds
at September 30, 1997.
Cash proceeds and realized gains and losses from sales of securities
during the three month periods ended September 30 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Cash Realized Realized
proceeds gains losses
<S> <C> <C> <C>
Three months ended September 30, 1997
Available-for-sale
Collateralized mortgage
obligation $ 1,130 - 23
Total $ 1,130 $ - $ 23
Three months ended September 30, 1996
Available-for-sale
Collateralized mortgage obligations $ 6,532 $ 3 $ 8
Total $ 6,532 $ 3 $ 8
</TABLE>
NOTE 3 - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
September 30, June 30,
(in thousands) 1997 1997
<S> <C> <C>
Real estate mortgages:
One-four family residential $ 89,881 $ 90,885
Five or more family residential 4,076 4,812
Commercial 32,032 31,850
Land 8,132 8,334
Commercial and industrial 10,476 12,424
Home equity lines of credit 22,054 20,274
Installment and other 3,547 3,122
Total loans, gross 170,198 171,701
Deferred loan origination fees, net (93) (108)
Allowance for loan losses (5,544) (5,452)
Total loans, net $164,561 $166,141
Impaired loans
With valuation allowance $2,228 $2,136
With no valuation allowance 4,022 3,369
Total impaired loans 6,250 5,505
Valuation allowance 879 861
Changes in the allowance for loan losses for the three month periods
ended September 30, are as follows:
(in thousands) 1997 1996
Balance, beginning of period $5,452 $4,866
Provision for losses 100 100
Charge-offs (9) (36)
Recoveries 1 1
Balance, end of period $5,544 $4,931
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
September 30, June 30,
(in thousands) 1997 1997
<S> <C> <C>
Non-accrual loans $2,708 $2,054
Accruing loans past due
90 days or more 986 783
Accruing troubled debt
restructured loans 271 274
Total non-performing loans 3,965 3,111
Other real estate owned 497 611
Allowance for estimated losses (137) (137)
Total OREO, net 360 474
Total non-performing assets $4,325 $3,585
</TABLE>
Other real estate owned (OREO) 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.
Changes in the OREO valuation reserve for the three month periods ended
September 30 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Valuation reserve at beginning of period $137 $474
Charge-offs - -
Provision - -
Valuation reserve at end of period $137 $474
</TABLE>
NOTE 5 - INCOME TAXES
The components of the provision for income taxes for the three month
periods ended September 30 are as follows:
<TABLE>
<CAPTION>
Three months ended
September 30,
1997 1996
(in thousands)
<S> <C> <C>
Current provision
Federal $ 410 $ 355
State 136 117
Total 546 472
Deferred provision
Federal - -
State (40) (34)
Total (40) (34)
Income tax provision $ 506 $ 438
</TABLE>
NOTE 6 - 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 September 30, 1997, were as
follows:
Company Bank
Leverage ratio 10.35% 10.14%
Tier I risk-based ratio 18.98% 19.13%
Total risk-based ratio 20.26% 20.41%
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 three month period ended September 30, 1997 is
$3,944,000. 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, 1997.
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 to both retail and
commercial markets, and conducts its business from fifteen offices in
Litchfield, New Haven and Fairfield Counties. The Company and the Bank
were formed in 1987 and 1858, respectively.
RESULTS OF OPERATIONS
For the three month periods ended September 30, 1997 and 1996
Overview
The Company earned net income of $701,000, or $0.17 per share, for the
quarter ended September 30, 1997, the first quarter of the Company's
fiscal year. This compares with net income of $605,000, or $0.14 per
share, for the quarter ended September 30, 1996, an improvement of
15.9%. The increase in net income results from continued growth in net
interest income, reflecting a stable net interest margin and growth in
earning assets and increased non-interest income offset in part by a
slight increase in operating expenses.
Earnings per share grew 21.4% as compared with the prior year period,
reflecting both the 15.9% increase in net income and the effect of the
Company's share repurchases.
Analysis of net interest and dividend income
Net interest and dividend income increased $116,000, or 3.9%, for the
quarter ended September 30, 1997 as compared with the prior year period.
This increase resulted from a $14.2 million, or 4.8% increase in average
earning assets offset in part by a 4 basis point decrease in the net
interest margin to 3.97% from 4.01%. The improvement in net interest
margin was driven by loan growth and stable yields on earning assets.
The following table sets 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 September 30,
1997 and 1996.
<TABLE>
<CAPTION>
Three months ended September 30, 1997 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans(a) $170,376 $3,791 8.90%
Mortgage backed securities 14,745 231 6.27
Other securities(b) 123,733 1,870 6.05
Total earning assets 308,854 5,892 7.63
Other assets 9,737
Total assets $318,591
NOW accounts $26,834 101 1.51
Money market accounts 62,443 477 3.06
Savings & other 39,705 272 2.74
Certificates of deposit 136,272 1,873 5.50
Total interest-bearing deposits 265,254 2,723 4.11
Borrowings 7,217 103 5.71
Total interest-bearing funds 272,471 2,826 4.15
Demand deposits 11,754
Other liabilities 2,014
Shareholders' equity 32,352
Total liabilities and
shareholders' equity $318,591
Net interest income $3,066
Spread on interest-bearing funds 3.48
Net interest margin(c) 3.97
Three months ended September 30, 1996 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans(a) $158,086 $3,547 8.98%
Mortgage backed securities 18,343 294 6.41
Other securities(b) 118,197 1,780 6.02
Total earning assets 294,626 5,621 7.63
Other assets 13,032
Total assets $307,658
NOW accounts $ 24,173 91 1.51
Money market accounts 61,599 472 3.07
Savings & other 39,580 262 2.65
Certificates of deposit 123,485 1,652 5.35
Total interest-bearing deposits 248,837 2,477 3.98
Borrowings 14,140 194 5.49
Total interest-bearing funds 262,977 2,671 4.06
Demand deposits 10,747
Other liabilities 1,612
Shareholders' equity 32,322
Total liabilities and
shareholders' equity $307,658
Net interest income $2,950
Spread on interest-bearing funds 3.57
Net interest margin(c) 4.01
</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 September 30, 1997 versus 1996
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 276 $ (29) $ (3) $ 244
Mortgage backed securities (57) (7) 1 (63)
Other securities 83 6 1 90
Total 302 (30) (1) 271
Interest-bearing liabilities:
Deposits 163 77 6 246
Borrowings (95) 8 (4) (91)
Total 68 85 2 155
Net change to interest income $ 234 $(115) $ (3) $ 116
</TABLE>
Interest income
Total interest and dividend income increased $271,000, or 4.8%, for the
quarter ended September 30, 1997 as compared with the same period a year
ago. This increase is a result of an increase of $14.2 million, or
4.8%, in average earning assets with a flat yield of 7.63%.
Loan interest and fee income increased $244,000, or 6.9%, for the
quarter ended September 30, 1997 as compared with the prior year period
as a result of loan growth, offset by a slight decrease in average
yield, down 8 basis points. Average loan balances increased $12.3
million, or 7.8%.
Investment and fed funds income increased $27,000, or 1.3%, for the
quarter ended September 30, 1997 as compared with the prior year period
as a result of a $1.9 million, or 1.4%, increase in average investments
offset in part by a slightly lower yield on investments and fed funds
which was down 1 basis point to 6.07%.
Interest expense
Interest expense for the quarter ended September 30, 1997 increased
$155,000, or 5.8%, as compared to the same quarter of the prior year as
a result of increased deposit volumes offset by reduced borrowing volume
while the cost of funds increased to 4.15%, an increase of 9 basis
points. Total average balances for deposits and borrowings increased by
$9.5 million, or 3.6%, for the period.
Deposit expense increased $246,000, or 9.9%, as a result of deposit
growth of $16.4 million, or 6.6%, coupled with an increase of 13 basis
points in the average cost of interest bearing deposits. Deposit growth
has been primarily in the certificate of deposit category, which
increased $12.8 million, or 10.4%. Certificate of deposits have also
seen the most significate movement in rates since 1996, with the average
cost increasing to 5.50% from 5.35% a year ago. Non-maturity deposit
rates (Savings Money Market and NOW) have remained relatively stable
over the past year. Non-maturity deposit balances have also increased.
Interest expense on borrowings decreased by $91,000, or 46.9%, as a
result of lower borrowings offset in part by higher borrowing rates.
Average borrowings decreased $6.9 million, or 49.0%. The average cost
of borrowings increased 22 basis points to 5.71% in 1997 from 5.49% in
1996. During the past year the Company has utilized deposit growth to
repay higher cost borrowings. The Company's borrowings are generally
for terms of one month and under.
Provision and Allowance for loan losses
The Company provided $100,000 for loan losses during the quarter ended
September 30, 1997, unchanged from the prior year period provision. The
following table details changes in the allowance for loan losses during
the three month periods ended September 30:
<TABLE>
<CAPTION>
1997 1996
(dollars in thousands)
<S> <C> <C>
Balance, beginning of period $5,452 $4,866
Provision for losses 100 100
Charge-offs (9) (36)
Recoveries 1 1
Balance, end of period $5,544 $4,931
Ratio of allowance for loan losses:
to non-performing loans 139.81% 104.89%
to total gross loans 3.26 3.07
</TABLE>
The increase in the reserve coverage to non-performing loans results
from both a $1,358,000 decrease in non-performing loans and a $613,000
increase in the reserve since September 30, 1996. For a discussion of
non-performing loans see "Asset Quality and Portfolio Risk". The
increase 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 and the provision of $100,000 for the quarter ended
September 30, 1997.
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 September 30, 1997, 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, in
March 1997. 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 September 30.
<TABLE>
<CAPTION>
(in thousands) 1997 1996 Change
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $269 $234 $ 35 15.0%
Securities losses, net (23) (5) (18) (360.0)
Gains on loans, net 65 26 39 150.0
Loan servicing 26 29 (3) (10.3)
Other 76 68 8 11.8
Total non-interest income $413 $352 $ 61 17.3
</TABLE>
The increase in service charges on deposit accounts reflects increased
transactions volume resulting from deposit growth and increased
ATM/debit card activity. The Bank opened its fourteenth branch, in
Southbury, Connecticut, in July 1997. Gain on loan sales result from
increased activity in the secondary market. During the last year the
Company has become more active in originating residential loans for the
secondary market. For the three months ended September 1997 the Bank
sold $3.5 million in loans as compared to $1.4 million during the same
period a year ago. The decrease in Loan serving fees is a result of a
decrease in the servicing portfolio as the loans currently being sold
are sold with the servicing released.
Operating expenses
The following table details the principal categories of operating
expenses for the three month periods ended September 30.
<TABLE>
<CAPTION>
(in thousands) 1997 1996 Change
<S> <C> <C> <C> <C>
Salaries $1,045 $ 981 $ 64 6.5%
Employee benefits 316 257 59 23.0
Occupancy 217 212 5 2.4
Equipment 181 174 7 4.0
Insurance 26 19 7 36.8
Professional, collections
and OREO, net of (gains) (119) 89 (208) (233.7)
Postage and telecommunications 84 83 1 1.2
Marketing 60 31 29 93.6
Other operating 362 313 49 15.7
Total operating expenses $2,172 $2,159 $ 13 0.6
</TABLE>
The increase in salaries expense for the quarter ended September 30,
1997 as compared with the prior year period was due primarily to
increases in staffing, primarily in retail banking, as a result of
additional locations and annual salary increases of approximately 4%.
The increase in employee benefits expense is due to additional health,
taxes and other benefits related to the increased staffing levels, and
additional retirement benefit expense. The Bank opened branches in
Southbury and Norwalk in July 1997 and October 1997. The Southbury
branch is the Bank's second supermarket branch. Collection and OREO
expense decreased $219,000, due primarily to reductions in non-
performing assets over the past year coupled with gains on OREO sales in
1997. Professional services have increased as a result of increased
legal expense for general corporate matters. The increase in marketing
expense results from the promotion of new loan and deposit products and
services, the opening of new branch offices and increased emphasis on
new business development. Other operating expenses, which include
shareholder relations, office supplies and other expenses, increased as
a result of normal changes in operating activities.
Income taxes
Net income for the quarter included an income tax provision of $506,000,
representing a 42% effective rate, as compared with a provision of
$438,000 a year ago, representing a 42% effective rate.
ASSET QUALITY AND PORTFOLIO RISK
Loans
During the three month period ended September 30, 1997, net loans
decreased by $1.6 million, or 1.0%.
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
September 30, June 30,
(in thousands) 1997 1997
<S> <C> <C>
Real estate mortgages:
One-four family residential $ 89,881 $ 90,885
Five or more family residential 4,076 4,812
Commercial 32,032 31,850
Land 8,132 8,334
Commercial and industrial 10,476 12,424
Home equity lines of credit 22,054 20,274
Installment and other 3,547 3,122
Total loans, gross 170,198 171,701
Deferred loan origination fees, net (93) (108)
Allowance for loan losses (5,544) (5,452)
Total loans, net $164,561 $166,141
</TABLE>
During the year the Company has continued to develop relationships with
new commercial customers. However, as a result of higher prepayments on
commercial loans, including both mortgages and C & I loans, commercial
loans decreased $1.7 million, or 2.7%, since June 30, 1997. The Company
has also expanded its retail lending business development effort. Over
the past year the Company has increased originations of both residential
mortgage loans and home equity credit line. However, residential
mortgage loans decreased $1.0 million, or 1.1%, since June 30, 1997, due
in part to loan sales. Home equity lines of credit increased $1.8
million, or 8.8%, as a result of successful product promotion.
Non-performing assets
The following table details changes in non-performing assets during the
three month periods ended September 30.
<TABLE>
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Balance, beginning of year $3,585 $6,480
Loans placed on non-accrual status 661 954
Change in accruing loans past
due 90 or more days, net 203 128
Change in loans restructured, net (3) (4)
Payments to improve OREO 266 103
Loan payments (6) (143)
Loans returned to accrual status - (269)
Loan charge-offs (1) (36)
Gross proceeds from OREO sales (531) (1,606)
Gains on OREO sales, net 151 76
Provision to OREO valuation reserve - -
Balance, end of period $4,325 $5,683
Percent of total assets 1.36% 1.86%
</TABLE>
During the three months ended September 30, 1997 non-performing assets
increased $740,000, or 20.6%, due principally to addition to non-accrual
loans and capital improvements to OREO offset in part by OREO sales of
$531,000. Additions to non-accrual loans generally represent loans
which had previously been classified on the Company's internally
monitored list and had been adequately reserved.
The following table details the composition of non-performing assets as
of September 30, 1997.
<TABLE>
<CAPTION>
Non-Performing Assets Accruing Total
(dollars in thousands) loans non-
Non- past due Restruc- perform-
accrual 90 or tured OREO ing
loans more days loans (a) OREO reserve assets
September 30, 1997
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential $ 514 $973 - $ 211 $ - $1,698
Commercial 780 13 271 36 - 1,100
Land and land
development 1,409 - - 250 - 1,659
Collateral and
installment loans 5 - - - - 5
Valuation reserve - - - - (137) (137)
Totals $2,708 $986 $271 $ 497 $(137) $4,325
</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. The Company actively markets
all OREO. The OREO valuation reserve at September 30, 1997 totaled
$137,000, or 27.6% of OREO. 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 OREO which could require additional provisions to the
valuation reserve and reductions in the carrying values of properties.
FINANCIAL CONDITION
Total assets decreased by $5.7 million, or 1.8%, to $317.4 million in
the three month period from June 30, 1997 through September 30, 1997.
The decrease resulted from a decrease of $5.8 million in federal funds,
of which $4.0 million was used to repay short term borrowings, and a
$1.6 million decrease in net loans, offset in part by an increase of $2.5
million in securities.
Loans
Loans, net of the allowance for loan loss, decreased $1.6 million, or
1.0%, during the three month period ended September 30, 1997. The
primary reason for this decrease was a lower level of loan advances
coupled with higher prepayments. Loan originations and advances for the
three month period totaled $15.7 million, while repayments were $13.6
million. Of the loans originated the Company sold $3.5 million in the
secondary market during the three months ended September 30, 1997.
Securities
The securities portfolio consists primarily of U.S. Treasury and Agency
obligations, collateralized mortgage obligations ("CMOs") and mortgage-
backed securities ("MBSs"), and to a lesser extent, Federal Home Loan
Bank stock. At September 30, 1997, 65.5% of the portfolio was invested
in fixed rate securities, principally CMOs, US Treasury and Agency
obligations and to a lesser extent MBSs. The fixed rate portfolio had
a consensus weighted average duration and life of 1.6 years and 1.8
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 September 30, 1997 33.2% 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 12.5
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 1.3% of the
portfolio at September 30, 1997, was represented by Federal Home Loan
Bank stock.
At September 30, 1997, securities totaling $67.9 million, or 55.7%, were
classified as held-to-maturity and securities totaling $54.0 million, or
44.3%, were classified as available-for-sale.
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 September 30, 1997 is an
adjustment of $1,147,000, 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 CMOs and MBSs investments 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 September 30, 1997 net unrealized losses on both
securities available-for-sale and held-to-maturity totaled $3.5 million.
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 three month period ended September 30, 1997
provided net cash of $760,000. Investing activities used net cash of
$846,000, principally securities purchases offset by securities sales,
principal repayments, net loan repayments and sales of real estate
acquired. Financing activities used net cash of $6.3 million,
principally as a result of the net decrease in borrowings, dividends
paid and treasury stock purchases offset by a net increase in deposits.
Funds provided by operating and financing activities were utilized to
fund investing activities. Cash and cash equivalents decreased slightly
to $16.9 million.
At September 30, 1997, 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 $180.2 million, to net deposits and short term unsecured
liabilities, was 63.9%, well in excess of the Company's minimum
guideline of 15%. At September 30, 1997, the Company had outstanding
commitments to fund new loan originations of $4.9 million, construction
mortgage commitments of $954,000 and unused lines of credit of $19.2
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.
CAPITAL RESOURCES
Shareholders' equity increased $576,000, to $32,295,000, while book
value per share increased $0.15 to $8.42, during the three month period
ended September 30, 1997. The increase, in equity, resulted from
earnings of $701,000, or $0.17 per share, a decrease of $109,000 in the
adjustment for net unrealized holding losses on securities, net of
taxes, and option proceeds which were offset by treasury stock purchases
of $13,000 and dividends paid of $230,000
In July 1996 the Company announced its intention to repurchase up to 10%
of its outstanding common stock in the open market and unsolicited
negotiated transactions, including block purchases. During the three
month period ended September 30, 1997 the Company repurchased 1,000
shares of its outstanding common stock for total consideration of
$13,000.
Shareholders' equity at September 30, 1997 included net unrealized
holding losses, net of taxes, of $233,000 on securities available-for-
sale, and an adjustment for unrealized holding losses, net of taxes, of
$1.1 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 September 30, 1997 the Company's leverage capital ratio
was 10.35% and its tier I and total risk-based capital ratios were
18.98% and 20.26%, respectively. At September 30, 1997 the Bank's
leverage capital ratio was 10.14% and its tier I and total risk-based
capital ratios were 19.13% and 20.41%, 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 September 30, 1997 was $3,944,000. 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
The annual shareholders' meeting was held on October 24, 1997. The
following matters were considered and voted on, as certified by the
election officer at the annual meeting:
(1) Willis H. Barton, Jr., Herbert E. Bullock and Francis J. Wiatr were
each elected to the office of Director for a three year term.
Betty F. Pacocha was elected to the office of Director for a two
year term. All nominees received at least 2,620,313 votes, or 88%.
(2) To amend the 1986 Stock Option and Incentive Plan for key officers
and employees. The shares were voted as follows: 2,088,357 or 70%
FOR.
(3) Coopers and Lybrand L.L.P., Certified Public Accountants, were
approved as independent auditors for the fiscal year ending June
30, 1998. The shares were voted as follows: 2,713,355 or 92% FOR.
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.
November 10, 1997 By /s/ Francis J. Wiatr
Francis J. Wiatr,
Chairman, President and CEO
November 10, 1997 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
ended
September 30,
1997 1996
<S> <C> <C>
Net income
Net income - primary and
fully diluted $701 $605
Weighted Average Common and Common
Equivalent Stock
Weighted average common stock
outstanding 3,835 4,058
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 464 444
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (181) (294)
Weighted average common and common
equivalent stock outstanding
- primary 4,118 4,208
Weighted average common stock
outstanding 3,835 4,058
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 465 455
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (166) (305)
Weighted average common and common
equivalent stock outstanding
- fully diluted 4,134 4,208
Earnings Per Common and Common
Equivalent Share
Primary $0.17 $0.14
Fully diluted $0.17 $0.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's September 30, 1997 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-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,572,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,675,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,991,000
<INVESTMENTS-CARRYING> 67,897,000
<INVESTMENTS-MARKET> 66,687,000
<LOANS> 170,105,000
<ALLOWANCE> 5,544,000
<TOTAL-ASSETS> 317,407,000
<DEPOSITS> 278,328,000
<SHORT-TERM> 4,000,000
<LIABILITIES-OTHER> 2,784,000
<LONG-TERM> 0
0
0
<COMMON> 2,995,000
<OTHER-SE> 29,300,000
<TOTAL-LIABILITIES-AND-EQUITY> 317,407,000
<INTEREST-LOAN> 3,791,000
<INTEREST-INVEST> 1,863,000
<INTEREST-OTHER> 238,000
<INTEREST-TOTAL> 5,892,000
<INTEREST-DEPOSIT> 2,723,000
<INTEREST-EXPENSE> 2,826,000
<INTEREST-INCOME-NET> 3,066,000
<LOAN-LOSSES> 100,000
<SECURITIES-GAINS> 23,000
<EXPENSE-OTHER> 2,172,000
<INCOME-PRETAX> 1,207,000
<INCOME-PRE-EXTRAORDINARY> 1,207,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 701,000
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
<YIELD-ACTUAL> 3.97
<LOANS-NON> 2,708,000
<LOANS-PAST> 986,000
<LOANS-TROUBLED> 271,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,452,000
<CHARGE-OFFS> 9,000
<RECOVERIES> 1,000
<ALLOWANCE-CLOSE> 5,544,000
<ALLOWANCE-DOMESTIC> 4,693,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 851,000
</TABLE>
