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, 1998
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, 1998 is
3,839,041.
NEWMIL BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1997. . . . . . . . . . . . . . . . . 3
Consolidated Statement of Income
for the three and nine month periods
ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
for the nine month periods ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . .28
Item 4 Submission of matters to a vote of
security holders. . . . . . . . . . . . . . . . . . . . . . . . .28
Item 5 Other information . . . . . . . . . . . . . . . . . . . . . .28
Item 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .28
[CAPTION]
NEWMIL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
<TABLE>
March 31, June 30,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,560 $ 7,168
Federal funds sold 800 17,460
Securities:
Available-for-sale at market 126,515 49,549
Held-to-maturity at amortized cost
(market value: $54,821 and $68,328) 55,012 69,819
Loans (net of allowance for
loan losses: $4,998 and $5,452) 169,206 166,141
Other real estate owned
(net of valuation reserve: $82 and $137) 296 474
Bank premises and equipment, net 6,328 6,042
Accrued income 2,552 2,024
Deferred tax asset, net 3,247 3,456
Other assets 760 928
TOTAL ASSETS $370,276 $323,061
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 13,518 $ 12,369
NOW accounts 30,720 25,830
Money market 63,228 61,075
Savings and other 41,681 40,614
Certificates of deposit 140,188 135,504
Total deposits 289,335 275,392
Securities sold under agreement to repurchase - 5,000
Federal Home Loan Bank advances 44,500 8,000
Accrued interest and other liabilities 3,452 2,950
TOTAL LIABILITIES 337,287 291,342
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Authorized - 20,000,000 shares
Issued - 6,040,839 and 5,988,138 shares 3,020 2,994
Paid-in capital 44,448 44,192
Retained earnings 8,408 7,097
Unrealized losses on securities
available-for-sale, net (139) (319)
Unrealized losses on securities transferred
to held-to-maturity, net (1,040) (1,170)
Treasury stock, at cost - 2,201,798
and 2,153,798 shares (21,708) (21,075)
TOTAL SHAREHOLDERS' EQUITY 32,989 31,719
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $370,276 $323,061
</TABLE>
[CAPTION]
NEWMIL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
Three months ended Nine months ended
March 31 March 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $3,756 $3,741 $11,338 $10,895
Interest on securities 2,439 1,897 6,183 5,571
Dividend income 31 25 82 72
Interest on federal funds sold 126 125 610 527
Total interest and dividend
income 6,352 5,788 18,213 17,065
INTEREST EXPENSE
Deposits 2,689 2,564 8,166 7,559
Borrowed funds 505 167 719 539
Total interest expense 3,194 2,731 8,885 8,098
Net interest and dividend income 3,158 3,057 9,328 8,967
PROVISION FOR LOAN LOSSES 50 100 200 300
Net interest and dividend
income after provision
for loan losses 3,108 2,957 9,128 8,667
NON-INTEREST INCOME
Service charges on deposit accounts 270 233 826 716
Securities gains (losses), net 10 - (271) (10)
Gains on mortgage loans, net 89 55 236 129
Loan servicing fees 25 27 78 83
Other 66 59 208 191
Total non-interest income 460 374 1,077 1,109
NON-INTEREST EXPENSE
Salaries 979 930 3,071 2,841
Employee benefits 325 326 925 804
Occupancy 232 207 673 637
Equipment 183 166 545 514
Insurance 26 25 78 64
Professional, collection and
OREO, net of (gains) 27 75 (378) 187
Marketing 49 49 174 146
Shareholder relations 9 10 76 62
Other 445 379 1,325 1,202
Total non-interest expense 2,275 2,167 6,489 6,457
INCOME BEFORE INCOME TAXES 1,293 1,164 3,716 3,319
Provision for income taxes 543 489 1,560 1,394
NET INCOME $ 750 $ 675 $2,156 $1,925
Earnings per share - basic $0.19 $0.17 $0.56 $0.48
Earnings per share - diluted $0.18 $0.16 $0.53 $0.46
Dividends per share $0.08 $0.06 $0.22 $0.17
</TABLE>
[CAPTION]
NEWMIL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine
months ended
March 31,
1998 1997
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES
Net income $2,156 $1,925
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 200 300
Reverse provision for losses
on real estate sold (55) -
Provision for depreciation and
amortization 464 435
Decrease in deferred income tax asset 130 116
Amortization and accretion of securities
premiums and discounts, net 66 50
Securities losses, net 271 10
Realized gains on loan sales, net (236) (129)
Realized gains on sales of OREO, net (341) (286)
Increase in accrued income (526) (516)
Increase in accrued interest expense
and other liabilities 508 58
Decrease in other assets, net 40 659
Net cash provided by
operating activities 2,677 2,622
INVESTING ACTIVITIES
Proceeds from sales of securities
available-for-sale 35,878 12,681
Proceeds from sale of security
held-to-maturity 7,325 -
Proceeds from maturities and principal
repayments of securities 33,417 2,701
Proceeds from sale of mortgage backed
securities available-for-sale 1,042 348
Purchases of securities available-for-sale (50,071) (15,460)
Purchases of mortgage backed securities
available-for-sale (93,403) -
Principal collected on mortgage backed
securities 3,832 2,625
Loan advances, net (3,207) (13,880)
Proceeds from sale of OREO 1,249 2,392
Payments to improve OREO (498) (141)
Net purchases of Bank premises
and equipment (750) (185)
Net cash used by
investing activities (65,186) (8,919)
FINANCING ACTIVITIES
Net increase in deposits $13,936 $ 9,595
Net repayments of repurchase agreements (5,000) (9,705)
Net proceeds from FHLB advances 36,500 8,000
Treasury stock purchases (633) (1,623)
Cash dividends paid (845) (687)
Proceeds from exercise of stock options 283 3
Net cash used by financing activities 44,241 5,583
Decrease in cash and cash
equivalents (18,268) (714)
Cash and federal funds sold, beginning
of year 24,628 17,590
Cash and federal funds sold, end of period $ 6,360 $16,876
CASH PAID DURING PERIOD
Interest to depositors $ 8,172 $ 7,613
Interest on borrowings 576 532
Income taxes 990 755
NON-CASH TRANSFERS
From loans to OREO 177 392
</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 nine month period ended March 31, 1998 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 has
adopted SFAS 128 in the quarter ended December 31, 1997.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 (SFAS 132), "Employers' Disclosure about Pensions and Other
Postretirement Benefits". SFAS 132 revises employers' disclosure about
pension and other postretirement benefits. It does not change the measurement
or recognition of those plans. SFAS 132 is effective for years beginning
after December 15, 1997. The adoption of SFAS 132 is only expected to impact
the presentation of financial information.
NOTE 2 - SECURITIES
[CAPTION]
Securities classified available-for-sale (carried at fair value) are as follows:
(dollars in thousands) Estimated Gross Amort-
fair unrealized ized
value gains losses cost
<TABLE>
<S> <C> <C> <C> <C>
MARCH 31, 1998
U.S. Treasury and Government
Agencies
Within 1 year $18,298 $ 73 $ - $18,225
After 1 within 5 years 6,051 54 - 5,997
After 5 and within 10 years 988 - 12 1,000
Mortgage backed securities 96,088 163 332 96,257
Collateralized mortgage
obligations 2,565 14 192 2,743
Total debt securities 123,990 304 536 124,222
Federal Home Loan Bank stock 2,525 - - 2,525
Total securities
available-for-sale $126,515 $304 $536 $126,747
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
MARCH 31, 1998
Mortgage backed securities $ 7,319 $ 95 $ - $ 7,414
Collateralized mortgage
obligations 47,693 292 578 47,407
Total securities
held-to-maturity $55,012 $387 $578 $54,821
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 $988,000,
respectively, were pledged as collateral against public funds at March 31, 1998.
Cash proceeds and realized gains and losses from sales of securities during
the nine
month periods ended March 31 are as follows:
<TABLE>
(dollars in thousands) Cash Realized Realized
proceeds gains losses
<S> <C> <C> <C>
NINE MONTHS ENDED MARCH 31, 1998
Available-for-sale
US Treasury Agency obligations $30,010 $ 10 $ -
Mortgage backed securities 1,042 64 -
Collateralized mortgage obligations 5,868 - 242
Held-to-maturity
Collateralized mortgage obligation 7,325 - 103
Total $44,245 $ 74 $345
NINE MONTHS ENDED MARCH 31, 1997
Available-for-sale
Mortgage backed securities $ 348 $ 17 $ -
Collateralized mortgage obligations 12,681 $ 3 $ 30
Total $13,029 $ 20 $ 30
</TABLE>
In November 1997 the Company sold a collateralized mortgage obligation ("CMO")
which was classified as held-to-maturity. In October 1997 the Company engaged a
financial securities consultant to analyze this CMO. Based on this review the
Company determined that it was highly probable that the Company would likely
receive substantially less than the contractual interest on this CMO and that
the CMO could experience a significant decline in market value. The Company
concluded that these and other changes in circumstances surrounding this CMO
were isolated, non-recurring, and highly unusual, and could not have been
reasonably anticipated. The Company realized a loss on the sale of this
security.
NOTE 3 - LOANS
[CAPTION]
Major classifications of loans are as follows:
<TABLE>
March 31, June 30,
(in thousands) 1998 1997
<S> <C> <C>
Real estate mortgages:
One-four family residential $ 88,612 $ 90,885
Five or more family residential 5,960 4,812
Commercial 28,909 31,850
Land 10,937 8,334
Commercial and industrial 13,253 12,424
Home equity lines of credit 23,307 20,274
Installment and other 3,279 3,122
Total loans, gross 174,257 171,701
Deferred loan origination fees, net (53) (108)
Allowance for loan losses (4,998) (5,452)
Total loans, net $169,206 $166,141
Impaired loans
With valuation allowance $4,481 $2,136
With no valuation allowance 1,740 3,369
Total impaired loans 6,221 5,505
Valuation allowance 1,342 861
Changes in the allowance for loan losses for the nine month periods ended
March 31, are
as follows:
(in thousands) 1998 1997
Balance, beginning of period $5,452 $4,866
Provision for losses 200 300
Charge-offs (658) (85)
Recoveries 4 3
Balance, end of period $4,998 $5,084
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
[CAPTION]
The components of non-performing assets were as follows:
<TABLE>
March 31, June 30,
(in thousands) 1998 1997
<S> <C> <C>
Non-accrual loans $1,448 $2,054
Accruing loans past due
90 days or more 577 783
Accruing troubled debt
restructured loans - 274
Total non-performing loans 2,025 3,111
Other real estate owned 378 611
Allowance for estimated losses (82) (137)
Total OREO, net 296 474
Total non-performing assets $2,321 $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 nine month periods ended March
31 are as
follows:
<TABLE>
(in thousands) 1998 1997
<S> <C> <C>
Valuation reserve at beginning of period $137 $474
Charge-offs - (33)
Reverse provision for losses on
real estate sold (55) -
Valuation reserve at end of period $ 82 $441
</TABLE>
NOTE 5 - INCOME TAXES
[CAPTION]
The components of the provision for income taxes for the three and nine month
periods ended March 31 are as follows:
<TABLE>
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
(in thousands)
Current provision
Federal $ 440 $ 396 $1,263 $1,128
State 149 134 427 382
Total 589 530 1,690 1,510
Deferred provision
Federal - - - -
State (46) (41) (130) (116)
Total (46) (41) (130) (116)
Income tax provision $ 543 $ 489 $1,560 $1,394
</TABLE>
NOTE 6 - SHAREHOLDERS' EQUITY
Capital Requirements
he 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, 1998, were as follows:
<TABLE>
Company Bank
<S> <C> <C>
Leverage ratio 9.45% 9.37%
Tier I risk-based ratio 19.46% 19.86%
Total risk-based ratio 20.73% 21.13%
</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, 1998 is
$1,861,000. 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-
hartered 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 MARCH 31, 1998 AND 1997
Overview
The Company earned net income of $750,000, or $0.18 per share (diluted), for the
quarter ended March 31, 1998, the third quarter of the Company's fiscal year.
This compares with net income of $675,000, or $0.16 per share (diluted), for the
quarter ended March 31, 1997, an improvement, in net income, of 11.1%. The
increase in net income results from growth in net interest income, reflecting
growth in earning assets and an increase in non-interest income offset, in
part, by an increase in non-interest expense.
Earnings per share grew 12.5% as compared with the prior year period,
reflecting both the 11.1% increase in net income and the effect of the Company's
Treasury stock purchases.
Analysis of net interest and dividend income
Net interest and dividend income increased $101,000, or 3.3%, for the quarter
ended March 31, 1998 as compared with the prior year period. This increase
resulted from a $43.8 million, or 14.6% increase in average earning assets
offset in part by a 41 basis point decrease in the net interest margin to 3.67%
from 4.08%. The improvement in net interest income was driven by loan and
investment growth offset by lower 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 March 31, 1998 and 1997.
<TABLE>
THREE MONTHS ENDED MARCH 31, 1998 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans(a) $170,928 $3,756 8.79%
Mortgage backed securities 38,796 574 5.92
Other securities(b) 134,012 2,022 6.04
Total earning assets 343,736 6,352 7.39
Other assets 11,238
Total assets $354,974
NOW accounts $28,906 87 1.20
Money market accounts 62,725 476 3.04
Savings & other 40,453 267 2.64
Certificates of deposit 139,688 1,859 5.32
Total interest-bearing deposits 271,772 2,689 3.96
Borrowings 35,528 505 5.69
Total interest-bearing funds 307,300 3,194 4.16
Demand deposits 12,552
Other liabilities 1,721
Shareholders' equity 33,401
Total liabilities and
shareholders' equity $354,974
Net interest income $3,158
Spread on interest-bearing funds 3.23
Net interest margin(c) 3.67
THREE MONTHS ENDED MARCH 31, 1997 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans(a) $166,130 $3,741 9.01%
Mortgage backed securities 16,278 256 6.29
Other securities(b) 117,540 1,791 6.10
Total earning assets 299,948 5,788 7.72
Other assets 10,863
Total assets $310,811
NOW accounts $ 23,903 87 1.46
Money market accounts 61,335 459 2.99
Savings & other 37,103 243 2.62
Certificates of deposit 131,907 1,775 5.38
Total interest-bearing deposits 254,248 2,564 4.03
Borrowings 12,449 167 5.37
Total interest-bearing funds 266,697 2,731 4.10
Demand deposits 10,106
Other liabilities 1,310
Shareholders' equity 32,698
Total liabilities and
shareholders' equity $310,811
Net interest income $3,057
Spread on interest-bearing funds 3.62
Net interest margin(c) 4.08
</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.
The following table sets forth the changes in interest due to volume and rate
for the three month periods ended March 31, 1998 and 1997.
<TABLE>
Three months ended March 31, 1998 versus 1997
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 108 $ (90) $ (3) $ 15
Mortgage backed securities 354 (15) (21) 318
Other securities 251 (18) (2) 231
Total 713 (123) (26) 564
Interest-bearing liabilities:
Deposits 176 (48) (3) 125
Borrowings 310 10 18 338
Total 486 (38) 15 463
Net change to interest income $ 227 $ (85) $ (41) $ 101
</TABLE>
Interest income
Total interest and dividend income increased $564,000, or 9.7%, for the
quarter ended March 31, 1998 as compared with the same period a year ago. This
increase is a result of an increase of $43.8 million, or 14.6%, in average
earning assets offset by a decline in average yield of 33 basis points to
7.39%.
Loan interest and fee income increased $15,000, or 0.4%, for the quarter ended
March 31, 1998 as compared with the prior year period as a result of loan
growth offset by a decrease in average yield. The average yield is down 22
basis points to 8.79% for March 31, 1998. Average loan balances increased
$4.8 million, or 2.9% in March 31, 1998 as compared to the prior year.
Interest and dividends on investments and federal funds sold increased
$549,000, or 26.8%, for the quarter ended March 31, 1998 as compared with the
prior year period as a result of a $39.0 million, or 29.1%, increase in average
balances offset by a lower average yield, which was down 11 basis point to
6.01%.
Interest expense
Interest expense for the quarter ended March 31, 1998 increased $463,000, or
17.0%, as compared to the same quarter of the prior year as a result of
increased deposit balances and borrowings, coupled with the cost of funds
increasing to 4.16%, an increase of 6 basis points. Total average balances
for deposits and borrowings increased by $40.6 million, or 15.2%, for the
period.
Deposit expense increased $125,000, or 4.9%, as a result of deposit growth of
$17.5 million, or 6.9%, offset, in part, by a decrease of 7 basis points in the
average cost of interest bearing deposits. Deposit growth has been primarily in
the certificate of deposit and NOW account categories, which increased $7.8
million, or 5.9% and $5.0 million, or 20.9%, respectively. Certificate of
Deposit rates have declined slightly to 5.32% from 5.38% a year ago. Non-
maturity deposit rates (Savings Money Market and NOW) have remained
relatively stable over the past year. Money market and Savings
deposit balances have also increased by $4.7 million, or 4.8%. The Company
has opened two additional branch locations since March 1997.
Interest expense on borrowings increased $338,000, or 202.4%, as a result of
increased average borrowings coupled with a higher average cost of funds.
Average borrowings increased $23.1 million, or 185.4%. The average cost of
borrowings increased 32 basis points to 5.69% in 1998 from 5.37% in 1997.
During the quarter ended March 31, 1998 the Company has borrowed funds to
purchase securities. The Company's borrowings are for terms of five years
and under.
Provision and Allowance for loan losses
The Company provided $50,000 for loan losses during the quarter ended March
31, 1998, compared to $100,000 for 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>
1998 1997
(dollars in thousands)
<S> <C> <C>
Balance, beginning of period $5,546 $5,022
Provision for losses 50 100
Charge-offs (600) (39)
Recoveries 2 1
Balance, end of period $4,998 $5,084
Ratio of allowance for loan losses:
to non-performing loans 246.81% 146.09%
to total gross loans 2.87 3.01
</TABLE>
The increase in the reserve coverage to non-performing loans results from both a
$1,455,000 decrease in non-performing loans and an $86,000 decrease in the
reserve since March 31, 1997. For a discussion of non-performing loans see
"Asset Quality and Portfolio Risk". The increase in reserve coverage to total
loans results from 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 $50,000 for the quarter ended March 31, 1998.
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, 1998, 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 March 31.
<TABLE>
(in thousands) 1998 1997 Change
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $270 $233 $ 37 15.9%
Securities gains, net 10 - 10 100.0
Gains on mortgage loans, net 89 55 34 61.8
Loan servicing 25 27 (2) (7.4)
Other 66 59 7 11.8
Total non-interest income $460 $374 $ 86 23.0
</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 and fifteenth branches, in Southbury
and Norwalk, Connecticut, in July 1997 and October 1997, respectively. The
Company's origination and sale of residential mortgage loans to the secondary
market has increased over the past year, increasing the Company's gains from
mortgage loan sales. For the three month period ended March 31, 1998 the Bank
sold $4.8 million in loans as compared to $3.1 million during the same period
a year ago. The decrease in loan serving fees results from portfolio run-off
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 March 31.
<TABLE>
(in thousands) 1998 1997 Change
<S> <C> <C> <C> <C>
Salaries $ 979 $ 930 $ 49 5.3%
Employee benefits 325 326 (1) (0.3)
Occupancy 232 207 25 12.1
Equipment 183 166 17 10.2
Insurance 26 25 1 4.0
Professional, collections
and OREO, net of (gains) 27 75 (48) (64.0)
Postage and telecommunications 98 87 11 12.6
Marketing 49 49 - 0.0
Other operating 356 302 54 17.9
Total operating expenses $2,275 $2,167 $108 5.0
</TABLE>
The increase in salaries expense for the quarter ended March 31, 1998 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 4.5%. The increase in Occupancy and
Equipment expense is primarily a result of increased banking locations. The
Bank opened branches in Southbury and Norwalk in July 1997 and October 1997.
The Southbury branch is the Bank's second supermarket branch. The Norwalk
branch expands the Bank's branch network into lower Fairfield County.
Professional, collection and OREO expense decreased $48,000, due
primarily to gains on OREO sales and the reversal of prior OREO provision in
1998. Changes in other operating expenses, which include shareholder relations,
office supplies and other expenses, result from normal operating activities,
growth in retail locations and deposit growth.
Income taxes
Net income for the quarter included an income tax provision of $543,000,
representing a 42% effective rate, as compared with a provision of $489,000 a
year ago, representing a 42% effective rate.
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Overview
The Company earned net income of $2,156,000, or $0.53 per share (diluted), for
the nine month period ended March 31, 1998. This compares with net income of
$1,925,000, or $0.46 per share (diluted), for the nine month period ended
March 31, 1997, an improvement of 12.0%. The increase in net income results
from continued growth in net interest income, reflecting a growth in earning
assets offset in part by a slight increase in operating expenses and by a
slight decrease in non-interest income as a result of security losses.
Earnings per share grew 15.2% as compared with the prior year period,
reflecting both the 12.0% increase in net income and the effect of the
Company's Treasury stock purchases.
Analysis of net interest and dividend income
Net interest and dividend income increased $361,000, or 4.0%, for the nine
month period ended March 31, 1998 as compared with the prior year period. This
increase resulted from a $24.5 million, or 8.3% increase in average earning
assets offset in part by a 16 basis point decrease in the net interest margin
to 3.87% from 4.03%. The improvement in net interest income was driven by
loan and investment growth offset in part by slightly lower 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 nine month periods ended March 31, 1998 and 1997.
<TABLE>
NINE MONTHS ENDED MARCH 31, 1998 Average Income/ Average
(dollars in thousands) balance expense yield/rate
<S> <C> <C> <C>
Loans(a) $170,634 $11,338 8.86%
Mortgage backed securities 22,865 1,042 6.08
Other securities(b) 128,041 5,833 6.07
Total earning assets 321,540 18,213 7.55
Other assets 10,917
Total assets $332,457
NOW accounts $28,026 290 1.38
Money market accounts 62,324 1,430 3.06
Savings & other 40,128 817 2.72
Certificates of deposit 138,042 5,629 5.44
Total interest-bearing deposits 268,520 8,166 4.06
Borrowings 16,641 719 5.76
Total interest-bearing funds 285,161 8,885 4.15
Demand deposits 12,455
Other liabilities 1,940
Shareholders' equity 32,901
Total liabilities and
shareholders' equity $332,457
Net interest income $9,328
Spread on interest-bearing funds 3.40
Net interest margin(c) 3.87
NINE MONTHS ENDED MARCH 31, 1997 Average Income/ Average
(dollars in thousands) balance expense yield/rate
Loans(a) $161,926 $10,895 8.97%
Mortgage backed securities 17,289 822 6.34
Other securities(b) 117,817 5,348 6.05
Total earning assets 297,032 17,065 7.66
Other assets 11,740
Total assets $308,772
NOW accounts $ 24,056 268 1.49
Money market accounts 61,367 1,397 3.04
Savings & other 38,111 756 2.65
Certificates of deposit 127,352 5,138 5.38
Total interest-bearing deposits 250,886 7,559 4.02
Borrowings 13,138 539 5.47
Total interest-bearing funds 264,024 8,098 4.09
Demand deposits 10,666
Other liabilities 1,439
Shareholders' equity 32,643
Total liabilities and
shareholders' equity $308,772
Net interest income $8,967
Spread on interest-bearing funds 3.57
Net interest margin(c) 4.03
</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.
The following table sets forth the changes in interest due to volume and rate
for the
nine month periods ended March 31, 1998 and 1997.
[CAPTION]
<TABLE>
Nine months ended March 31, 1998 versus 1997
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 586 $ (136) $ (7) $ 443
Mortgage backed securities 265 (34) (11) 220
Other securities 464 20 1 485
Total 1,315 (150) (17) 1,148
Interest-bearing liabilities:
Deposits 531 71 5 607
Borrowings 144 29 7 180
Total 675 100 12 787
Net change to interest income $ 640 $(250) $ (29) $ 361
</TABLE>
Interest income
Total interest and dividend income increased $1,148,000, or 6.7%, for the nine
monthn period ended March 31, 1998 as compared with the same period a year ago.
This increase is a result of an increase of $24.5 million, or 8.3%, in average
earning assets offset in part by an 11 basis point decline in average yield to
7.55%.
Loan interest and fee income increased $443,000, or 4.1%, for the nine month
period ended March 31, 1998 as compared with the prior year period as a result
of loan growth, offset by a slight decrease in average yield, down 11 basis
points. Average loan balances increased $8.7 million, or 5.4%.
Investment and fed funds income increased $705,000, or 11.4%, for the nine
month period ended March 31, 1998 as compared with the prior year period as a
result of a $15.8 million, or 11.7%, increase in average investments offset in
part by a slightly lower average yield on investments and fed funds, down 2
basis point to 6.07%.
Interest expense
Interest expense for the nine month period ended March 31, 1998 increased
$787,000, or 9.7%, as compared to the same period of the prior year as a result
of increased deposit and borrowings balances together with an increased in the
cost of funds to 4.15%, up 6 basis points. Total average balances for
deposits and borrowings increased by $21.1 million, or 8.0%, since March 31,
1997.
Deposit expense increased $607,000, or 8.0%, as a result of deposit growth of
$17.6 million, or 7.0%, coupled with an increase of 4 basis points in the
average cost of interest bearing deposits. Deposit growth has been primarily
in the certificate of deposit category, which increased $10.7 million, or 8.4%.
Certificate of deposits average cost increasing to 5.44% from 5.38% a year ago.
Non-maturity deposit rates (Savings Money Market and NOW) have increased by $6.9
million, or 5.6%, while rates on these deposits have been relatively stable over
the past year.
Interest expense on borrowings increased by $180,000, or 33.4%, as a result of
higher average borrowings coupled with higher borrowing rates. Average
borrowings increased $3.5 million, or 26.7%. The average cost of borrowings
increased 29 basis points to 5.76% in 1998 from 5.47% in 1997. The Company's
borrowings are generally for terms of five years and under.
Provision and Allowance for loan losses
The Company provided $200,000 for loan losses during the nine month period
ended March 31, 1998, compared to $300,000 from the prior year period provision.
The following table details changes in the allowance for loan losses during the
nine month periods ended March 31:
<TABLE>
1998 1997
(dollars in thousands)
<S> <C> <C>
Balance, beginning of period $5,452 $4,866
Provision for losses 200 300
Charge-offs (658) (85)
Recoveries 4 3
Balance, end of period $4,998 $5,084
Ratio of allowance for loan losses:
to non-performing loans 246.81% 146.09%
to total gross loans 2.87 3.01
</TABLE>
For a detailed discussion of the Bank's allowance for loan losses see "For the
three month periods ended March 31, 1998 and 1997", above.
Non-interest income
The following table details the principal categories of non-interest income
for the nine month periods ended March 31.
<TABLE>
(in thousands) 1998 1997 Change
<S> <C> <C> <C> <C>
Service charges on
deposit accounts $826 $716 $110 15.4%
Securities losses, net (271) (10) (261)(2610.0)
Gains on mortgage loans, net 236 129 107 82.9
Loan servicing 78 83 (5) (6.0)
Other 208 191 17 8.9
Total non-interest income $1,077 $1,109 $ (32) (2.9)
</TABLE>
The increase in service charges on deposit accounts reflects increased
transactions volume resulting from deposit growth and increased ATM/debit card
activity. The increase in gain from mortgage loan sales results from increased
activity in the secondary market. For the nine month period ended March 1998
the Bank sold $12.6 million of loans as compared to $7.3 million during the same
period a year ago. The securities losses resulted primarily from the sale of
$13.2 million of CMOs whose market risks were determined to be unsuitable. The
decrease in loan serving fees results from portfolio run-off 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 nine month periods ended March 31.
<TABLE>
(in thousands) 1998 1997 Change
<S> <C> <C> <C> <C>
Salaries $3,071 $2,841 $230 8.1%
Employee benefits 925 804 121 15.1
Occupancy 673 637 36 5.7
Equipment 545 514 31 6.0
Insurance 78 64 14 21.9
Professional, collections
and OREO, net of (gains) (378) 187 (565) (302.1)
Postage and telecommunications 280 260 20 7.7
Marketing 174 146 28 19.2
Other operating 1,121 1,004 117 11.7
Total operating expenses $6,489 $6,457 $ 32 0.5
</TABLE>
The increase in salaries expense for the nine month period ended March 31,
1998 as compared with the prior year period was due primarily to increases in
staffing, primarily in retail banking, as a result of additional branch
locations, and annual salary increases of approximately 4.5%. 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 increase in Occupancy and Equipment cost are related
primarily to new retail locations, opened since March 1997.
Insurance expense increased primarily as a result of increase FDIC premium
cost. Professional, collection and OREO expense decreased $565,000, due
primarily to gains on OREO sales in 1998 and reduced legal fees on non-
performing assets. 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. Changes
in other operating expenses, which include shareholder relations, office
supplies and other expenses, result from normal operating activities,
growth in retail locations and deposit growth.
Income taxes
Net income for the nine month period included an income tax provision of
$1,560,000, representing a 42% effective rate, as compared with a provision of
$1,394,000 a year ago, representing a 42% effective rate.
ASSET QUALITY AND PORTFOLIO RISK
Loans
During the nine month period ended March 31, 1998, net loans increased by
$3,065,000.
Major classifications of loans are as follows:
<TABLE>
March 31, June 30,
(in thousands) 1998 1997
<S> <C> <C>
Real estate mortgages:
One-four family residential $ 88,612 $ 90,885
Five or more family residential 5,960 4,812
Commercial 28,909 31,850
Land 10,937 8,334
Commercial and industrial 13,253 12,424
Home equity lines of credit 23,307 20,274
Installment and other 3,279 3,122
Total loans, gross 174,257 171,701
Deferred loan origination fees, net (53) (108)
Allowance for loan losses (4,998) (5,452)
Total loans, net $169,206 $166,141
</TABLE>
During the year the Company has continued to develop relationships with new
commercial customers. Commercial loans, including mortgages on land and multi-
family property have increased $810,000, or 1.8% since June 30, 1997. C & I
loans, have increased $829,000, or 6.7%, 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 lines. Many of residential mortgage loans are
originated for sale to the secondary market. Since June 30, 1997 the
residential mortgage loan portfolio has decreased $2.3 million, or 2.5%,
as repayments have exceeded portfolio originations. Home equity lines of credit
balances have increased $3.0 million, or 15.0%, as a result of successful
product promotions.
Non-performing assets
The following table details changes in non-performing assets during the nine
month periods ended March 31.
<TABLE>
(in thousands) 1998 1997
<S> <C> <C>
Balance, beginning of year $3,585 $6,480
Loans placed on non-accrual status 1,167 1,489
Change in accruing loans past
due 90 or more days, net (206) (73)
Change in loans restructured, net (274) (4)
Payments to improve OREO 498 141
Loan payments (675) (548)
Loans returned to accrual status (341) (1,167)
Loan charge-offs (580) (81)
Gross proceeds from OREO sales (1,249) (2,392)
Gains on OREO sales, net 341 286
Reverse provision for real estate acquired
valuation reserve 55 -
Balance, end of period $2,321 $4,131
Percent of total assets 0.63% 1.30%
</TABLE>
During the twelve months ended March 31, 1998 non-performing assets decreased
$1,810,000, or 43.8%, due principally to OREO sales of $1,249,000, offset in
part by addition to non-accrual loans and capital improvements to OREO.
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
March 31,
1998.
[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
MARCH 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential $ 175 $542 - $ 82 $ - $ 799
Commercial 107 35 - 36 - 178
Land and land
development 1,161 - - 260 - 1,421
Collateral and
installment loans 5 - - - - 5
Valuation reserve - - - - (82) (82)
Totals $1,448 $577 $ - $ 378 $(82) $2,321
</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 March 31, 1998 totaled $82,000, or 21.7% of OREO.
A 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 increased by $47.2 million, or 14.6%, to $370.3 million in the
nine month period from June 30, 1997 through March 31, 1998. The increase
resulted from an increase of $62.2 million in securities and $3.1 million in
net loans offset in part by a decrease of $16.7 million in federal funds.
Loans
Loans, net of the allowance for loan loss, increased $3.1 million, or 1.8%,
during the nine month period ended March 31, 1998. Loan originations and
advances for the nine month period totaled $56.5 million, while repayments were
$40.4 million. Of the loans originated the Company sold $12.9 million in the
secondary market during the nine months ended March 31, 1998.
Securities
Securities increased $62.2 million, or 52.1%, to $181.5 million during the
nine month period ended March 31, 1998. This resulted from the reinvestment of
federal funds sold balances into securities and an increase in borrowings for
the purpose of purchasing additional securities, both of which occurred in the
Company's third fiscal quarter. Securities purchased included Government agency
mortgage backed 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
March 31, 1998, 80.2% of the portfolio was invested in fixed rate securities,
principally MBS, CMOs, US Treasury and Agency obligations. The fixed rate
portfolio had a consensus weighted average duration and life of 2.6 years and
2.7 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, 1998 18.4% 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 0.2 years and 11.6 years, respectively. The floating rate securities are
tied to several indices, including the eleventh district cost of funds index
("EDCOFI"), and several Treasury indices. The remaining 1.4% of the portfolio
at March 31, 1998, was represented by Federal Home Loan Bank stock.
At March 31, 1998, securities totaling $55.0 million, or 30.3%, were
classified as held-to-maturity and securities totaling $126.5 million, or 69.7%,
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 March 31, 1998 is an adjustment of $1,040,000, 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 were purchased in 1993 and early 1994,
and subsequent movements in interest rates and market conditions have resulted
in a net decline in fair market value of certain classes of CMOs. At March 31,
1998 net unrealized losses on total securities, including available-for-sale and
held-to-maturity, totaled $2.2 million. Fluctuations in fair market value
caused by movements in interest rates and market conditions will not necessarily
adversely impact future earnings.
LIQUIDITY AND INTEREST RATE RISK
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, 1998 provided
net cash of $2.7 million. Investing activities used net cash of $65.2 millon,
principally securities purchases, net loan advances and payments to improve real
estate acquired, offset in part, by securities sales, principal repayments and
sales of OREO. Financing activities provided net cash of $44.2 million,
principally from net increases in borrowings and deposits, and from stock
options exercised, offset, in part, by dividends paid and treasury stock
purchases. Funds provided by operating and financing activities were utilized
to fund investing activities. Cash and cash equivalents decreased to $18.3
million.
At March 31, 1998, 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 $174.7 million, to net
deposits and short term unsecured liabilities, was 57.3%, well in excess of the
Company's minimum guideline of 15%. At March 31, 1998, the Company had
outstanding commitments to fund new loan originations of $11.6 million,
construction mortgage commitments of $1.2 million and unused lines of credit
of $19.4 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.
The Company manages interest rate risk through an ALCO Committee comprised of
senior management. The committee monitors exposure to interest rate risk on a
quarterly basis using both a traditional gap analysis and simulation analysis.
Traditional gap analysis identifies short and long term interest rate positions
or exposure. Simulation analysis measures the amount of short term earnings at
risk under both rising and falling rate scenarios. The Company's interest rate
risk has not significantly changed from the prior year.
CAPITAL RESOURCES
Shareholders' equity increased $1,270,000, to $32,989,000, while book value
per share increased $0.32 to $8.59, during the nine month period ended March 31,
1998. The increase in equity resulted from earnings of $2,156,000, or $0.53 per
share (diluted), a decrease of $310,000 in the adjustment for net unrealized
holding losses on securities, net of taxes, and stock option proceeds of
$283,000, offset by treasury stock purchases of $633,000 and dividends paid of
$845,000.
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 nine month period ended
March 31, 1998 the Company repurchased 48,000 shares of its outstanding common
stock for total consideration of $633,000.
Shareholders' equity at March 31, 1998 included net unrealized holding losses,
net of taxes, of $139,000 on securities available-for-sale, and an adjustment
for unrealized holding losses, net of taxes, of $1.0 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, 1998 the Company's leverage capital ratio was 9.45% and its
tier I and total risk-based capital ratios were 19.46% and 20.73%, respectively.
At March 31, 1998 the Bank's leverage capital ratio was 9.37% and its tier I and
total risk-based capital ratios were 19.86% and 21.13%, 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, 1998 was $1,861,000. 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 11, 1998 By /s/ Francis J. Wiatr
Francis J. Wiatr,
Chairman, President and CEO
May 11, 1998 By /s/ B. Ian McMahon
B. Ian McMahon,
Chief Financial Officer
Exhibit 11.1
NEWMIL BANCORP, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
(in thousands except per share amounts)
<TABLE>
Three months Nine months
ended ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income
Net income - basic and diluted $750 $675 $2,156 $1,925
Weighted Average Common and Common
Equivalent Stock
Weighted average common stock
outstanding 3,855 3,973 3,846 4,025
Weighted average common stock
outstanding 3,855 3,973 3,846 4,025
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 415 454 414 453
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (205) (273) (205) (293)
Weighted average common and common
equivalent stock outstanding -
diluted 4,065 4,154 4,055 4,185
Earnings Per Common and Common
Equivalent Share
Basic $0.19 $0.17 $0.56 $0.48
Diluted $0.18 $0.16 $0.53 $0.46
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
the registrant's March 31, 1998 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-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,560,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126,515,000
<INVESTMENTS-CARRYING> 55,012,000
<INVESTMENTS-MARKET> 54,821,000
<LOANS> 174,204,000
<ALLOWANCE> 4,998,000
<TOTAL-ASSETS> 370,276,000
<DEPOSITS> 289,335,000
<SHORT-TERM> 44,500,000
<LIABILITIES-OTHER> 3,452,000
<LONG-TERM> 0
0
0
<COMMON> 3,020,000
<OTHER-SE> 29,969,000
<TOTAL-LIABILITIES-AND-EQUITY> 370,276,000
<INTEREST-LOAN> 11,338,000
<INTEREST-INVEST> 6,265,000
<INTEREST-OTHER> 610,000
<INTEREST-TOTAL> 18,213,000
<INTEREST-DEPOSIT> 8,166,000
<INTEREST-EXPENSE> 8,885,000
<INTEREST-INCOME-NET> 9,328,000
<LOAN-LOSSES> 200,000
<SECURITIES-GAINS> 271,000
<EXPENSE-OTHER> 6,489,000
<INCOME-PRETAX> 3,716,000
<INCOME-PRE-EXTRAORDINARY> 3,716,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,560,000
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.53
<YIELD-ACTUAL> 3.87
<LOANS-NON> 1,448,000
<LOANS-PAST> 577,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,452,000
<CHARGE-OFFS> 658,000
<RECOVERIES> 4,000
<ALLOWANCE-CLOSE> 4,998,000
<ALLOWANCE-DOMESTIC> 4,188,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 810,000
</TABLE>
