Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended
December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main St., P.O. Box 600, New Milford, Conn. 06776
(Address of principal executive offices) (Zip Code)
(860) 355-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
The number of shares of Common Stock outstanding as of December 31,
1999 is 3,640,563.
NEWMIL BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
December 31, 1999 and June 30, 1999 3
Consolidated Statements of Income
for the three month and six month periods
ended December 31, 1999 and 1998 4
Consolidated Statements of Changes in
Shareholders' Equity for the six month
periods ended December 31, 1999 and 1998 6
Consolidated Statements of Cash Flows
for the six month periods ended
December 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures
about Market Risk 28
PART II OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 4 Submission of matters to a vote of
security holders 29
Item 5 Other information 29
Item 6 Exhibits and Reports on Form 8-K 29
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<S>
<C> <C>
December 31, June 30,
1999 1999
---- ----
(unaudited)
ASSETS
Cash and due from banks $ 7,868 $ 9,719
Federal funds sold 57 3,167
-------- --------
Total cash and cash equivalents 7,925 12,886
Securities:
Available-for-sale at market 66,171 74,135
Held-to-maturity at amortized cost
(market value: $40,555 and $42,911) 42,411 44,067
Loans (net of allowance for
loan losses: $5,029 and $4,989) 214,312 210,036
Other real estate owned 212 333
Bank premises and equipment, net 6,005 6,238
Accrued income 2,161 2,190
Deferred tax asset, net 2,046 1,788
Other assets 555 444
-------- --------
Total Assets $341,798 $352,117
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 17,554 $ 18,622
NOW accounts 38,686 34,660
Money market 70,060 71,252
Savings and other 49,402 49,443
Certificates of deposit 123,552 126,146
-------- --------
Total deposits 299,254 300,123
Federal Home Loan Bank advances 7,500 15,000
Accrued interest and other liabilities 1,907 3,859
-------- --------
Total Liabilities 308,661 318,982
-------- --------
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Authorized - 20,000,000 shares
Issued - 5,990,138 shares 2,995 2,995
Paid-in capital 43,348 43,773
Retained earnings 11,811 10,637
Accumulated other comprehensive income (1,602) (1,132)
Treasury stock, at cost - 2,349,575
and 2,325,924 shares (23,415) (23,138)
-------- --------
Total Shareholders' Equity 33,137 33,135
-------- --------
Total Liabilities and Shareholders' Equity $341,798 $352,117
======== ========
</TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
<S>
<C> <C> <C> <C>
Three months ended Six months ended
December 31 December 31
1999 1998 1999 1998
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $4,205 $3,677 $8,349 $7,335
Interest on securities 1,728 2,310 3,480 4,725
Dividend income 49 36 84 80
Interest on federal funds sold 65 125 93 505
------ ------ ------- -------
Total interest and dividend income 6,047 6,148 12,006 12,645
------ ------ ------- -------
INTEREST EXPENSE
Deposits 2,405 2,665 4,786 5,422
Borrowed funds 166 447 358 1,005
------ ------ ------ ------
Total interest expense 2,571 3,112 5,144 6,427
------ ------ ------ ------
Net interest and dividend income 3,476 3,036 6,862 6,218
------ ------ ------ ------
PROVISION FOR LOAN LOSSES 25 25 (495) 50
------ ------ ------ ------
Net interest and dividend
income after provision
for loan losses 3,451 3,011 7,357 6,168
------ ------ ------ ------
NON-INTEREST INCOME
Service charges on deposit accounts 344 294 672 601
Gain on sale of branch - - 75 -
Gains on sales of mortgage loans, net 30 152 84 290
Securities losses, net - - (109) -
Gains on sales of OREO 23 754 23 864
Loan servicing fees 17 21 34 43
Other 83 79 163 159
------ ------ ------ ------
Total non-interest income 497 1,300 942 1,957
------ ------ ------ ------
NON-INTEREST EXPENSE
Salaries 1,180 1,221 2,396 2,357
Employee benefits 289 270 600 562
Occupancy 235 315 473 512
Equipment 208 232 420 446
Insurance 28 26 56 52
Professional, collection and
OREO expense 100 181 356 241
Other 550 624 1,134 1,171
------ ------ ------ ------
Total non-interest expense 2,590 2,869 5,435 5,341
------ ------ ------ ------
Income before income taxes,
cumulative effect of accounting
change and extraordinary item 1,358 1,442 2,864 2,784
Provision for income taxes 456 870 960 1,410
------ ------ ------ ------
Income before cumulative effect of
accounting change and extraordinary
item 902 572 1,904 1,374
Cumulative effect of accounting
change, net of taxes - (162) - (162)
Extraordinary item - (87) - (87)
------ ------ ------- -------
NET INCOME $ 902 $ 323 $ 1,904 $ 1,125
====== ====== ======= =======
</TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
<S>
<C> <C> <C> <C>
Three months ended Six months ended
December 31 December 31
1999 1998 1999 1998
---- ---- ---- ----
Diluted earnings per share
Income before cumulative effect of
accounting change and
extraordinary item $0.23 $0.14 $0.50 $0.34
Cumulative effect of change in
accounting principle, net of tax (0.00) (0.04) (0.00) (0.04)
Extraordinary item, net of tax (0.00) (0.02) (0.00) (0.02)
----- ----- ----- -----
Net income $0.23 $0.08 $0.50 $0.28
===== ===== ===== =====
Basic earnings per share
Income before cumulative effect of
accounting change and
extraordinary item $0.25 $0.14 $0.52 $0.35
Cumulative effect of change in
accounting principle, net of tax (0.00) (0.04) (0.00) (0.04)
Extraordinary item, net of tax (0.00) (0.02) (0.00) (0.02)
----- ----- ----- -----
Net income $0.25 $0.08 $0.52 $0.29
===== ===== ===== =====
Dividends per share $0.10 $0.09 $0.20 $0.17
===== ===== ===== =====
</TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<S>
<C> <C> <C>
Common Paid-in Retained
Stock capital earnings
------ ------- --------
Balances at
June 30, 1998 $2,995 $43,881 $8,933
Net income - - 1,125
Change in net unrealized gains
(losses) on securities, net of
taxes - - -
Total comprehensive income
Cash dividends paid - - (652)
Proceeds from exercise
of stock options - (86) -
Acquisition of
treasury stock - - -
------ ------- ------
Balances at
December 31, 1998 $2,995 $43,795 $9,406
====== ======= ======
Balances at
June 30, 1999 $2,995 $43,773 $10,637
Net income - - 1,904
Change in net unrealized gains
(losses) on securities, net of
taxes - - -
Total comprehensive
income
Cash dividends paid - - (730)
Proceeds from
exercise of stock
options - (425) -
Acquisition of
treasury stock - - -
------ ------- -------
Balances at
December 31, 1999 $2,995 $43,348 $11,811
====== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<C> <C> <C>
Accumulated
other
comprehensive
income Total
Treasury Unrealized shareholders'
stock gains (losses) equity
-------- --------------- ------
Balances at
June 30, 1998 $(21,195) $(1,205) $33,409
Net income - - 1,125
Change in net unrealized
gains (losses) on
securities, net of taxes - 1,058 1,058
-------
Total comprehensive income 2,183
-------
Cash dividends paid - - (652)
Proceeds from exercise
of stock options 138 - 52
Acquisition of
treasury stock (136) - (136)
-------- ------- -------
Balances at
December 31, 1998 $(21,193) $ (147) $34,856
======== ======= =======
Balances at
June 30, 1999 $(23,138) $(1,132) $33,135
Net income - - 1,904
Change in net unrealized gains
(losses) on securities, net of
taxes - (470) (470)
-------
Total comprehensive
income 1,434
-------
Cash dividends paid - - (730)
Proceeds from
exercise of stock
options 761 - 336
Acquisition of
treasury stock (1,038) - (1,038)
-------- ------- -------
Balances at
December 31, 1999 $(23,415) $(1,602) $33,137
======== ======= =======
</TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<S>
<C> <C>
Six months ended
December 31,
1999 1998
---- ----
Operating Activities
Net income $1,904 $1,125
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses (495) 50
Provision for depreciation and amortization 368 389
(Increase) decrease in deferred income tax asset (14) 192
Amortization and accretion of securities
premiums and discounts, net 153 400
Securities losses, net 109 -
Cumulative effect of accounting change, net - 162
Extraordinary loss on debt extinguishment, net - 87
Realized gains on loan sales, net (84) (290)
Realized gains on OREO sales, net (23) (864)
Decrease in accrued income 30 137
Decrease in accrued interest expense
and other liabilities (2,372) (88)
Increase in other assets, net (114) (350)
------- -------
Net cash (used) provided by
operating activities (538) 950
------- -------
Investing Activities
Proceeds from sales of securities
available-for-sale - 20,933
Proceeds from sales of mortgage backed securities
available-for-sale 8,411 -
Proceeds from maturities and principal
repayments of securities 1,685 15,214
Purchases of securities held-to-maturity - (10,565)
Purchases of securities available-for-sale (8,536) -
Purchases of mortgage backed securities
available-for-sale (2,034) (15,598)
Principal collected on mortgage backed securities 9,119 17,495
Loan repayments, net 450 3,495
Loans purchased for portfolio (4,164) (30,316)
Proceeds from sales of OREO 190 1,076
Payments to improve OREO (28) (107)
Purchases of Bank premises
and equipment, net (135) (884)
------- -------
Net cash provided by
investing activities 4,958 743
------- -------
Financing Activities
Net (decrease) increase in deposits (866) 11,508
Net repayments from FHLB advances (7,500) (22,647)
Cash dividends paid (730) (652)
Treasury stock purchased (1,038) (136)
Treasury stock reissued 417 -
Proceeds from exercise of stock options 336 52
------- -------
Net cash used by
financing activities (9,381) (11,875)
------- -------
Decrease in cash and cash equivalents (4,961) (10,182)
Cash and federal funds sold, beginning of year 12,886 30,476
------- -------
Cash and federal funds sold, end of period $ 7,925 $20,294
======= =======
Cash paid during period
Interest to depositors $ 4,786 $ 5,419
Interest on borrowings 394 1,110
Income taxes 817 1,510
Non-cash transfers
From loans to OREO 18 60
From securities held-to-maturity to
securities available-for-sale 21,509
</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.
("NewMil") include those of NewMil 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 NewMil 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 balance sheet, 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 six month
period ended December 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2000. The
accompanying condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in
NewMil's Annual Report for the year ended June 30, 1999.
NOTE 2 - SECURITIES
Securities classified available-for-sale (carried at fair value) were as
follows:
(dollars in thousands)
<TABLE>
<S>
<C> <C> <C> <C>
Estimated Gross
fair unrealized Amortized
value gains losses cost
----- ----- ------ ----
December 31, 1999
Mortgage backed securities $53,828 $ - $2,030 $55,858
Collateralized mortgage
obligations 1,204 - 113 1,317
Other Bonds and Notes
Within 5 years 8,374 - 160 8,534
------- ----- ------ -------
Total debt securities 63,406 - 2,303 65,709
Equity securities 2,765 - - 2,765
------- ----- ------ -------
Total securities
available-for-sale $66,171 $ - $2,303 $68,474
======= ===== ====== =======
June 30, 1999
Mortgage backed securities $70,106 $ - $1,438 $71,544
Collateralized mortgage
obligations 1,264 - 121 1,385
------- ----- ------ -------
Total debt securities 71,370 - 1,559 72,929
Equity securities 2,765 - - 2,765
------- ----- ------ -------
Total securities
available-for-sale $74,135 $ - $1,559 $75,694
======= ===== ====== =======
</TABLE>
Securities classified held-to-maturity (carried at amortized cost) were
as follows:
(dollars in thousands)
<TABLE>
<S>
<C> <C> <C> <C>
Gross Estimated
Amortized unrealized fair
cost(a) gains losses value
------- ----- ------ -----
December 31, 1999
Municipal Bonds
After 10 years $10,554 $ - $1,202 $ 9,352
Mortgage backed securities 22,830 9 280 22,559
Collateralized mortgage
obligations 9,027 18 401 8,644
------- ----- ------ -------
Total securities
held-to-maturity $42,411 $ 27 $1,883 $40,555
======= ===== ====== =======
June 30, 1999
Municipal Bonds
After 10 years $10,558 $ - $ 866 $ 9,692
Mortgage backed securities 22,890 37 - 22,927
Collateralized mortgage
obligations 10,619 51 378 10,292
------- ----- ------ -------
Total securities
held-to-maturity $44,067 $ 88 $1,244 $42,911
======= ===== ====== =======
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
</TABLE>
Securities with an amortized cost of $786,000 and a market value of
$734,000 were pledged as collateral against public funds at December 31,
1999.
Cash proceeds and realized gains and losses from sales of securities
during the six month periods ended December 31 are as follows:
(dollars in thousands)
<TABLE>
<S>
<C> <C> <C>
Cash Realized Realized
proceeds gains losses
-------- ----- ------
Six months ended December 31, 1999
Available-for-sale
Mortgage backed securities $ 8,411 $ - $ 109
======= ===== =====
Six months ended December 31, 1998
Available-for-sale
Collateralized mortgage obligations (a) $20,933 $ - $ 274
======= ===== =====
(a) This sale was transacted under the provisions of SFAS 133 with the
loss being reported as the cumulative effect of a change in accounting
principle.
</TABLE>
NOTE 3 - LOANS
Major classifications of loans are as follows:
<TABLE>
<S>
<C> <C>
December 31, June 30,
(in thousands) 1999 1999
---- ----
Real estate mortgages:
One-four family residential $128,905 $128,371
Five or more family residential 4,410 6,152
Commercial 48,946 47,894
Land 1,993 2,410
Commercial and industrial 13,553 7,773
Home equity lines of credit 18,841 19,429
Installment and other 2,622 2,850
-------- --------
Total loans, gross 219,270 214,879
Deferred loan origination fees
and purchase premium, net 71 146
Allowance for loan losses (5,029) (4,989)
-------- --------
Total loans, net $214,312 $210,036
======== ========
Impaired loans
With valuation allowance $747 $300
With no valuation allowance 452 453
------ ----
Total impaired loans $1,199 $753
====== ====
Valuation allowance $285 $173
</TABLE>
Changes in the allowance for loan losses during the six month periods
ended December 31, are as follows:
<TABLE>
<S>
<C> <C>
(in thousands) 1999 1998
---- ----
Balance, beginning of period $4,989 $5,004
Provision for losses (495) 50
Charge-offs (22) (33)
Recoveries 557 47
------ ------
Balance, end of period $5,029 $5,068
====== ======
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
<TABLE>
<S>
<C> <C>
December 31, June 30,
(in thousands) 1999 1999
---- ----
Non-accrual loans $1,434 $1,051
Accruing loans past due
90 days or more 448 185
Accruing troubled debt
restructured loans - -
------ ------
Total non-performing loans 1,882 1,236
------ ------
Other real estate owned 212 333
------ ------
Total non-performing assets $2,094 $1,569
====== ======
</TABLE>
Other real estate owned (OREO) includes collateral acquired through
foreclosure, forgiveness of debt or otherwise in lieu of debt, or loans
where NewMil has taken physical possession of the collateral.
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average common
shares outstanding during the year. The computation of diluted earnings
per share is similar to the computation of basic earnings per share
except the denominator is increased to include the number of additional
common shares that would have been outstanding if dilutive potential
common shares had been issued. Shares used in the computations for the
three and six month periods ended December 31, are as follows:
<TABLE>
<S>
<C> <C> <C> <C>
Three months ended Six months ended
December 31, December 31,
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Basic 3,658 3,838 3,656 3,836
Effect of dilutive stock options 182 192 184 197
----- ----- ----- -----
Diluted 3,840 4,030 3,840 4,033
===== ===== ===== =====
</TABLE>
NOTE 6 - COMPREHENSIVE INCOME
The components of comprehensive income for the three and six month
periods ended December 31, are as follows:
<TABLE>
<S>
<C> <C> <C> <C>
Three months ended Six months ended
December 31, December 31,
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Comprehensive income
Net income $ 902 $ 323 $1,904 $1,125
Net unrealized (losses) gains on
securities during period (493) 357 (470) 1,058
----- ----- ------ ------
Comprehensive income $ 409 $ 680 $1,434 $2,183
===== ===== ====== ======
</TABLE>
The components of other comprehensive income, and related tax effects
were as follows:
<TABLE>
<S>
<C> <C> <C>
(in thousands) Before Tax Net of
tax (expense) tax
amount benefit amount
------ ------- ------
Three months ended December 31, 1999
Net unrealized losses on securities
available-for-sale arising
during the period $(758) $ 258 $(500)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 11 (4) 7
----- ----- -----
Net unrealized losses on
securities during period $(747) $ 254 $(493)
===== ===== =====
Six months ended December 31, 1999
Net unrealized losses on securities
available-for-sale arising
during the period $(852) $ 290 $(562)
Reclassification adjustment for realized
losses included in net income 109 (37) 72
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 30 (10) 20
----- ----- -----
Net unrealized losses on
securities during period $(713) $ 243 $(470)
===== ===== =====
Three months ended December 31, 1998
Net unrealized loss on securities
available-for-sale arising
during the period $(538) $ 233 $(305)
Reclassification adjustment for
realized loss included in net income 274 (112) 162
Accretion of unrealized loss on
securities transferred from
held-to-maturity to available-for
sale 817 (369) 448
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 87 (35) 52
----- ----- -----
Net unrealized gains on
securities during period $ 640 $(283) $ 357
===== ===== =====
Six months ended December 31, 1998
Net unrealized gains on securities
available-for-sale arising
during the period $ 501 $(182) $ 319
Reclassification adjustment for
realized loss included in net income 274 (112) 162
Accretion of unrealized loss on
securities transferred from
held-to-maturity to available-for
sale 817 (369) 448
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 217 (88) 129
------ ----- ------
Net unrealized gains on
securities during period $1,809 $(751) $1,058
====== ===== ======
</TABLE>
NOTE 7 - INCOME TAXES
The components of the provision for income taxes for the three and six
month periods ended December 31 are as follows:
<TABLE>
<S>
<C> <C> <C> <C>
Three months ended Six month ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Current provision
Federal $ 462 $ 457 $ 974 $ 913
State - 178 - 305
Total 462 635 974 1,218
----- ----- ----- ------
Deferred provision
Federal (6) (237) (14) (237)
State - 472 - 429
Total (6) 235 (14) 192
----- ----- ----- ------
Income tax provision $ 456 $ 870 $ 960 $1,410
===== ===== ===== ======
</TABLE>
On May 19, 1998 Connecticut legislation was passed which made sweeping
changes to the corporation business tax treatment of banks and financial
service companies. The new law permits banks to shelter certain
mortgage income from the Connecticut corporation business tax through
the use of a new special purpose entity called a "passive investment
company" (PIC). In general, the PIC can earn mortgage interest income,
and pay dividends to its parent company, free from the Connecticut
corporation business tax. The legislation was effective for income
years commencing on or after January 1, 1999.
NewMil formed a PIC, NMSB Mortgage Company, and changed its tax year to
a calendar year basis to take advantage of the Connecticut statute.
Effective January 1, 1999 NewMil transferred mortgages into the PIC and
income of the PIC and its dividends to NewMil became exempt from the
Connecticut Corporation Business Tax. Effective January 1, 1999,
NewMil's combined Federal and State effective tax rate became 34%,
compared with an effective rate, during the first two quarters of the
prior fiscal year, of 40.27%.
The formation of the PIC, in the quarter ended December 31, 1998, has
required NewMil to establish a valuation allowance against its existing
deferred State tax assets that are no longer expected to be realized in
future years. Accordingly, NewMil's income tax provision for the second
quarter ended December 31, 1998 includes a charge of $266,000.
NOTE 8 - SHAREHOLDERS' EQUITY
Capital Requirements
NewMil 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"). NewMil's and
the Bank's regulatory capital ratios at December 31, 1999, were as
follows:
<TABLE>
<S>
<C> <C>
NewMil Bank
------ ----
Leverage ratio 9.84% 9.78%
Tier I risk-based ratio 17.26% 17.74%
Total risk-based ratio 18.53% 19.00%
</TABLE>
NewMil 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
NewMil's ability to pay dividends is dependent on the Bank's ability to
pay dividends to NewMil. There are certain restrictions on the payment
of dividends and other payments by the Bank to NewMil. 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 NewMil for the six
month period ended December 31, 1999 is $1,120,000. In some instances,
further restrictions on dividends may be imposed on NewMil 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 NewMil and its subsidiary should be read in conjunction
with NewMil's Annual Report on Form 10-K for the year ended June 30,
1999.
BUSINESS
NewMil Bancorp, Inc. ("NewMil"), 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 NewMil 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 fourteen offices in Litchfield,
New Haven and Fairfield Counties. NewMil and the Bank were formed in
1987 and 1858, respectively.
RESULTS OF OPERATIONS
For the three month periods ended December 31, 1999 and 1998
Overview
NewMil earned net income of $902,000, or 23 cents per share (diluted),
for the quarter ended December 31, 1999 as compared with $323,000, or 8
cents per share (diluted), for the quarter ended December 31, 1998.
Net income for the quarter ended December 31, 1998 included a number of
special adjustments resulting from the formation of a Connecticut
Passive Investment Company, the adoption of SFAS 133 and related
securities sales and prepayment of above market rate Federal Home Loan
Bank advances.
Excluding these adjustments, income from core operations for the quarter
ended December 31, 1999 increased 7.6% to $902,000 as compared with
$838,000 for the quarter ended December 31, 1998. The improvement
results from increased net interest income and decreased non-interest
expense, offset by decreases in gains on OREO sales and gains on
mortgage loan sales.
In December 1998 NewMil formed a Connecticut Passive Investment Company
("PIC") and changed its Federal tax year to a calendar year basis to
take advantage of changes in Connecticut tax statutes effective for the
1999 calendar year. NewMil's income tax provision for the quarter ended
December 31, 1998 included a deferred tax charge of $266,000 arising
from the formation of the PIC. NewMil was required to establish a
valuation allowance against deferred State tax assets that were no
longer expected to be realized in future years. During the quarter
ended December 31, 1998 NewMil adopted the provisions of SFAS 133
(Accounting for Derivative Instruments and Hedging Activities) and
simultaneously reclassified securities totaling $21 million from held-
to-maturity to available-for-sale, and then sold those securities.
NewMil realized a loss, net of tax, of $162,000 on the transfer and sale
of these securities. This loss has been reported separately in net
income as the cumulative effect of adopting SFAS 133. NewMil used the
proceeds from the sale of the securities to prepay $22.5 million of
Federal Home Loan Bank fixed rate advances. NewMil incurred a
prepayment fee, net of taxes, of $87,000 that has been reported in net
income as an extraordinary item for this early extinguishment of debt.
Analysis of net interest and dividend income
Net interest and dividend income increased $440,000, or 14.5%, for the
quarter ended December 31, 1999 as compared with the prior year period.
This increase resulted from a 69 basis point increase in the net
interest margin to 4.14% from 3.45%, offset in part by a $16.4 million,
or 4.6% decrease in average earning assets.
The following table sets forth the components of NewMil's net interest
income and yields on average interest-earning assets and interest-
bearing funds for the three month periods ended December 31, 1999 and
1998.
<TABLE>
<S>
<C> <C> <C>
Three months ended December 31, 1999 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $217,990 $4,205 7.72%
Mortgage backed securities 80,578 1,312 6.51
Other securities(b) 37,188 530 5.70
-------- ------
Total earning assets 335,756 6,047 7.20
------
Other assets 10,804
--------
Total assets $346,560
========
NOW accounts $ 36,293 104 1.15
Money market accounts 72,617 534 2.94
Savings & other 48,892 306 2.50
Certificates of deposit 123,304 1,461 4.74
-------- ------
Total interest-bearing deposits 281,106 2,405 3.42
Borrowings 11,351 166 5.85
-------- ------
Total interest-bearing funds 292,457 2,571 3.52
Demand deposits 18,866 ------
Other liabilities 1,765
Shareholders' equity 33,472
--------
Total liabilities and
shareholders' equity $346,560
========
Net interest income $3,476
======
Spread on interest-bearing funds 3.68
Net interest margin(c) 4.14
</TABLE>
<TABLE>
<S>
<C> <C> <C>
Three months ended December 31, 1998 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $180,538 $3,677 8.15%
Mortgage backed securities 98,501 1,445 5.87
Other securities(b) 73,076 1,026 5.62
-------- ------
Total earning assets 352,115 6,148 6.98
Other assets 14,800 ------
--------
Total assets $366,915
========
NOW accounts $ 32,772 97 1.18
Money market accounts 67,579 501 2.97
Savings & other 47,942 323 2.70
Certificates of deposit 134,532 1,744 5.19
-------- ------
Total interest-bearing deposits 282,825 2,665 3.77
Borrowings 29,918 447 5.98
-------- ------
Total interest-bearing funds 312,743 3,112 3.98
Demand deposits 17,307 ------
Other liabilities 2,154
Shareholders' equity 34,711
--------
Total liabilities and
shareholders' equity $366,915
========
Net interest income $3,036
======
Spread on interest-bearing funds 3.00
Net interest margin(c) 3.45
(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>
The following table sets forth the changes in interest due to volume and
rate for the three month periods ended December 31, 1999 and 1998.
<TABLE>
<S>
<C> <C> <C> <C>
Three months ended December 31, 1999 versus 1998
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $ 763 $(194) $ (41) $ 528
Mortgage backed securities (263) 159 (29) (133)
Other securities (504) 15 (7) (496)
----- ----- ----- -----
Total (4) (20) (77) (101)
----- ----- ----- -----
Interest-bearing liabilities:
Deposits (16) (245) 1 (260)
Borrowings (277) (9) 5 (281)
----- ----- ----- -----
Total (293) (254) 6 (541)
----- ----- ----- -----
Net change to interest income $ 289 $ 234 $ (83) $ 440
===== ===== ===== =====
</TABLE>
Interest income
Total interest and dividend income decreased $101,000, or 1.6%, for the
quarter ended December 31, 1999 as compared with the same period a year
ago. This decrease resulted from a $16.4 million, or 4.6%, decrease in
average earning assets offset in part by a increase in average yield of
22 basis points to 7.20%.
Loan interest and fee income increased $528,000, or 14.4%, for the
quarter ended December 31, 1999 as compared with the prior year period
as a result of an increase in average loan balances offset in part by a
decrease in average yield. Average yield declined 43 basis points to
7.72%. Average loan balances increased $37.5 million, or 20.7%. The
increased volume was primarily in the lower yielding residential
mortgage loan portfolio.
Interest and dividends on investments and federal funds sold decreased
$629,000, or 25.5%, as a result of a $53.8 million, or 31.4%, decrease
in average balances, offset in part by a higher average yield, which
increased 50 basis point to 6.26%. The decrease in volume resulted from
maturities, sales and monthly repayments on MBS and CMOs.
Interest expense
Interest expense for the quarter ended December 31, 1999 decreased
$541,000, or 17.4%, as compared with the same period a year ago as a
result of a $20.3 million, or 6.5%, decrease in average borrowings and
deposit balances for the period coupled with a 46 basis point decrease
in the cost of funds to 3.52%.
Deposit expense decreased $260,000, or 9.8%, as a result of a 35 basis
points decrease in the average cost of deposits coupled with a decrease
of $1,719,000, or 0.6%, in average interest bearing deposit balances for
the period. Deposit expense has also benefitted from a more favorable
deposit mix as higher cost deposits have decreased while lower cost
deposits have increased. The average savings account balance has
increased over the period by $950,000, or 2.0%, NOW account balances
have increased $3.5 million, or 10.7%, and Money Market accounts have
increased $5.0 million, or 7.5%. Certificates of deposit decreased by
$11.2 million, or 8.3%. The average rate paid on Certificate of deposit
has declined to 4.74% from 5.19% a year ago, while NOW deposit rates
have declined to 1.15% from 1.18% a year ago. Savings rates have
declined to 2.50% from 2.70% and Money Market rates have declined to
2.94% from 2.97%.
Interest expense on borrowings decreased $281,000, or 62.9%, as a result
of decreased average borrowings coupled with a lower average borrowing
rate. Average borrowings for the current quarter were $18.6 million, or
62.1%, lower than the prior year period and the average borrowings cost
was 13 basis points lower than the prior year period. In March 1998
NewMil used Federal Home Loan Bank fixed rate term advances to fund
purchases of fixed rate mortgage backed securities. In December 1998
NewMil prepaid $22.5 million of these fixed rate borrowings. NewMil's
current borrowings are for terms of less than two years.
Provision and Allowance for loan losses
NewMil provided $25,000 for loan losses during the quarter ended
December 31, 1999, compared with provision of $25,000 for the prior year
period. The following table details key ratios for the periods ended
December 31, 1999, June 30, 1999 and December 31, 1998:
<TABLE>
<S>
<C> <C> <C>
Dec 31, 1999 June 30, 1999 Dec 31, 1998
------------ ------------- ------------
Ratio of allowance for loan losses:
to non-performing loans 267.2% 403.6% 358.2%
to total gross loans 2.3 2.3 2.6
</TABLE>
Since June 30, 1999, non-performing loans have increased $646,000, or
52.3%, as a result of two loans for $484,000 becoming non-accrual and
one loan, for $270,000, becoming 90 days past due and accruing. NewMil
remains adequately reserved both against total loans and non-performing
loans. For a discussion on loan quality see "Non-Performing Assets".
The Bank determines its allowance and provisions for loan losses based
upon a detailed evaluation of the loan portfolio through a process which
considers numerous factors, including estimated credit losses based upon
internal and external portfolio reviews, delinquency levels and trends,
estimates of the current value of underlying collateral, concentrations,
portfolio volume and mix, changes in lending policy, historical loan
loss experience, current economic conditions and examinations performed
by regulatory authorities. Determining the level of the allowance at
any given period is difficult, particularly during deteriorating or
uncertain economic periods. Management must make estimates using
assumptions and information which is often subjective and changing
rapidly. The review of the loan portfolio is a continuing event in the
light of a changing economy and the dynamics of the banking and
regulatory environment. In management's judgement the allowance for
loan losses at December 31, 1999, is adequate. Should the economic
climate deteriorate, borrowers could 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 Bank's allowance for loan losses. Such agencies could require the
Bank to recognize additions to the allowance based on their judgements
of information available to them at the time of their examination. The
Bank was last examined by its banking regulators in August 1999 and no
additions to the allowance were requested as a result of this
examination.
The allowance for loan losses is reviewed and approved by the Bank's
Board of Directors on a quarterly basis. The allowance for loan losses
is computed by taking the portfolio and segregating it into various risk
rating categories. Some loans have been further segregated and carry
specific reserve amounts. All other loans that do not have specific
reserves assigned are reserved based on a percentage of the outstanding
balance. The percentage applied to the outstanding balance varies
depending on the risk rating. In addition the Bank maintains an
unallocated reserve, the level of unallocated reserves from June 30,
1999 to December 31, 1999 remained substantially the same.
Non-interest income
The following table details the principal categories of non-interest
income for the three month periods ended December 31:
<TABLE>
<S>
<C> <C> <C> <C>
(in thousands) 1999 1998 Change
---- ---- ------
Service charges on
deposit accounts $ 344 $ 294 $ 50 17.0%
Gains on sales of OREO 23 754 (731) (97.0)
Gains on sales of mortgage
loans, net 30 152 (122) (80.3)
Loan servicing 17 21 (4) (19.1)
Other 83 79 4 5.1
----- ------ -----
Total non-interest income $ 497 $1,300 $(803) (61.8)
===== ====== =====
</TABLE>
The decrease in non-interest income results from lower gains on sales of
OREO and residential mortgage loans in 1999. Gains on sales of OREO in
1998 included the sale of a property taken into OREO several years
before, at which time it was written down to its market value. As a
result of a stronger real estate market in 1998 it was sold at a
significant gain. The decrease in gains on sales of residential
mortgage loans resulted from lower loan sales volume, $1.4 million in
1999 compared with $7.7 million in 1998. Secondary market loan sales
are generally pre-arranged on a loan by loan basis prior to origination
and loans are sold with servicing rights released. The decrease in loan
servicing fees results from portfolio run-off. The Bank has not sold
loans with servicing rights retained since June 1995.
Operating expenses
The following table details the principal categories of operating
expenses for the three month periods ended December 31:
<TABLE>
<S>
<C> <C> <C> <C>
(in thousands) 1999 1998 Change
---- ---- ------
Salaries $1,180 $1,221 $ (41) (3.4)%
Employee benefits 289 270 19 7.0
Occupancy 235 315 (80) (25.4)
Equipment 208 232 (24) (10.3)
Insurance 28 26 2 7.7
Professional fees, Collection
and OREO expense 100 181 (81) (44.8)
Postage and telecommunications 92 108 (16) (14.8)
Marketing 70 58 12 20.7
Other operating 388 458 (70) (15.3)
------ ------ -----
Total operating expenses $2,590 $2,869 $(279) (9.7)
====== ====== =====
</TABLE>
The decrease in salaries for the quarter ended December 31, 1999 as
compared with the prior year period was due primarily to lower staffing
levels in 1999 and higher bonuses in 1998, offset in part by annual
salary increases of approximately 4.5% in 1999. The increase in
employee benefits results from higher health benefits expenses in 1999.
The decrease in occupancy expense results from higher building
maintenance at certain branch offices in the prior year coupled with
lower costs in the current year resulting from the closure of the
Winsted Office in May 1999. The decrease in professional, collection
and OREO expense results from higher legal fees relating to collections
in 1998.
Income taxes
Net income for the quarter included an income tax provision of $456,000,
representing a 33.6% effective rate, as compared with a provision of
$870,000 a year ago, representing a 60.3% effective rate. The tax
provision for 1998 included a charge for $266,000 as a result of the
formation of a Connecticut PIC discussed below.
On May 19, 1998 Connecticut legislation was passed which made sweeping
changes to the corporation business tax treatment of banks and financial
service companies. The new law permits banks to shelter certain
mortgage income from the Connecticut corporation business tax through
the use of a new special purpose entity called a "passive investment
company" (PIC). In general, the Connecticut PIC can earn mortgage
interest income, and pay dividends to its parent company, free from the
Connecticut corporation business tax.
In December 1998, NewMil formed a Connecticut PIC and changed its
Federal tax year to a calendar year basis to take advantage of the
Connecticut statute. Effective January 1, 1999 NewMil transferred
mortgages into the PIC and income of the PIC and its dividends to NewMil
became exempt from the Connecticut Corporation Business Tax. Effective
January 1, 1999, NewMil's combined Federal and State effective tax rate
became 34%, compared with an effective rate, during the first two
quarters of its 1999 fiscal year, of 40.27%.
Effect of Change in Accounting Principle and Extraordinary Item
Effective October 1, 1998 NewMil adopted the provisions of SFAS 133, and
during the quarter ended December 31, 1998 reclassified securities
totaling $21 million from held-to-maturity to available-for-sale, and
then sold those securities. NewMil realized a loss, net of tax, of
$162,000 on the transfer and sale of these securities. This loss has
been reported separately in net income as the cumulative effect of
adopting SFAS 133.
During the quarter ended December 31, 1998, NewMil used the proceeds
from the sale of the securities to prepay $22.5 million of Federal Home
Loan Bank fixed rate advances. NewMil incurred a prepayment fee, net of
taxes, of $87,000 that has been reported in net income as an
extraordinary item.
RESULTS OF OPERATIONS
For the six month periods ended December 31, 1999 and 1998
Overview
NewMil earned net income of $1,904,000, or 50 cents per share (diluted),
for the six month period ended December 31, 1999 as compared with
$1,125,000, or 28 cents per share (diluted), for the period ended
December 31, 1998.
Net income for the six month period ended December 31, 1998 included a
number of special adjustments resulting from the formation of a
Connecticut PIC, the adoption of SFAS 133 and related securities sales
and prepayment of above market rate Federal Home Loan Bank advances.
Refer to the "Results of Operations - For the three month periods ended
December 31, 1999 and 1998" for a detailed discussion of these
adjustments.
Excluding these adjustments, income from core operations for the six
month period ended December 31, 1999 increased 16.1% to $1,904,000 as
compared with $1,640,000 for the period ended December 31, 1998. The
improvement resulted from increased net interest income and a negative
provision for loan losses, offset by a decrease in non-interest income
and an increase in non-interest expense.
Analysis of net interest and dividend income
Net interest and dividend income increased $644,000, or 10.4%, for the
six months ended December 31, 1999 as compared with the prior year
period. This increase resulted from a 58 basis point increase in the
net interest margin to 4.08% from 3.50%, offset in part by a $19.4
million, or 5.4% decrease in average earning assets.
The following table sets forth the components of NewMil's net interest
income and yields on average interest-earning assets and interest-
bearing funds for the six month periods ended December 31, 1999 and
1998.
<TABLE>
<S>
<C> <C> <C>
Six months ended December 31, 1999 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $217,313 $8,349 7.68%
Mortgage backed securities 86,839 2,782 6.41
Other securities(b) 32,251 875 5.43
-------- -------
Total earning assets 336,403 12,006 7.14
Other assets 10,733 -------
--------
Total assets $347,136
========
NOW accounts $ 36,464 209 1.15
Money market accounts 72,311 1,062 2.94
Savings & other 48,827 595 2.44
Certificates of deposit 124,198 2,920 4.70
-------- ------
Total interest-bearing deposits 281,800 4,786 3.40
Borrowings 11,750 358 6.09
-------- ------
Total interest-bearing funds 293,550 5,144 3.51
Demand deposits 18,720 ------
Other liabilities 1,689
Shareholders' equity 33,177
--------
Total liabilities and
shareholders' equity $347,136
========
Net interest income $6,862
======
Spread on interest-bearing funds 3.63
Net interest margin(c) 4.08
</TABLE>
<TABLE>
<S>
<C> <C> <C>
Six months ended December 31, 1998 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $175,909 $7,335 8.34%
Mortgage backed securities 95,992 2,879 6.00
Other securities(b) 83,867 2,431 5.80
-------- ------
Total earning assets 355,768 12,645 7.11
Other assets 12,987 ------
--------
Total assets $368,755
========
NOW accounts $ 31,886 194 1.22
Money market accounts 67,392 1,020 3.03
Savings & other 46,867 639 2.73
Certificates of deposit 136,123 3,569 5.24
-------- ------
Total interest-bearing deposits 282,268 5,422 3.84
Borrowings 33,709 1,005 5.96
-------- ------
Total interest-bearing funds 315,977 6,427 4.07
Demand deposits 16,348 ------
Other liabilities 2,069
Shareholders' equity 34,361
--------
Total liabilities and
shareholders' equity $368,755
========
Net interest income $6,218
======
Spread on interest-bearing funds 3.04
Net interest margin(c) 3.50
(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>
The following table sets forth the changes in interest due to volume and
rate for the six month periods ended December 31, 1999 and 1998.
<TABLE>
<S>
<C> <C> <C> <C>
Six months ended December 31 1999 versus 1998
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $1,726 $(577) $(135) $1,014
Mortgage backed securities (275) 196 (18) (97)
Other securities (1,496) (156) 96 (1,556)
------ ----- ----- ------
Total (45) (537) (57) (639)
------ ----- ----- ------
Interest-bearing liabilities:
Deposits (9) (628) 1 (636)
Borrowings (655) 22 (14) (647)
------ ----- ----- ------
Total (664) (606) (13) (1,283)
------ ----- ----- ------
Net change to interest income $ 619 $ 69 $ (44) $ 644
====== ===== ===== ======
</TABLE>
Interest income
Total interest and dividend income decreased $639,000, or 5.1%, for the
six month period ended December 31, 1999 as compared with the same
period a year ago. This decrease resulted from a $19.4 million, or
5.4%, decrease in average earning assets offset in part by an increase
in average yield of 3 basis points to 7.14%.
Loan interest and fee income increased $1,014,000, or 13.8%, for the six
month period ended December 31, 1999 as compared with the prior year
period as a result of an increase in average loan balances offset in
part by a decrease in average yield. Average yield declined 66 basis
points to 7.68%. Average loan balances increased $41.4 million, or
23.5%. The increased volume was primarily in lower yielding residential
mortgage loans.
Interest and dividends on investments and federal funds sold decreased
$1,653,000, or 31.1%, as a result of a $60.8 million, or 33.8%, decrease
in average balances offset in part by a higher average yield, which
increased 23 basis point to 6.14%. The decrease in volume results from
maturities, sales and monthly repayments on MBS and CMOs.
Interest expense
Interest expense for the six month period ended December 31, 1999
decreased $1,283,000, or 20.0%, as compared with the same period a year
ago as a result of a $22.4 million, or 7.1%, decrease in average
borrowings and deposit balances for the period coupled with a 56 basis
point decrease in the cost of funds to 3.51%.
Deposit expense decreased $636,000, or 11.7%, as a result of a 44 basis
points decrease in the average cost of funds coupled with a decrease of
$468,000, or 0.2%, in average interest bearing deposit balances for the
period. Deposit expense has also benefitted from a more favorable
deposit mix. Average savings account balances increased over the period
by $2.0 million, or 4.2%, NOW account balances increased $4.6 million,
or 14.4%, and Money Market accounts increased $4.9 million, or 7.3%.
Certificates of deposit decreased by $11.9 million, or 8.8%. The
average rate paid on Certificate of deposit declined to 4.70% from 5.24%
a year ago, while NOW deposit rates declined to 1.15% from 1.22% a year
ago, Savings rates declined to 2.44% from 2.73% and Money Market rates
declined to 2.94% from 3.03%.
Interest expense on borrowings decreased $647,000, or 64.4%, as a result
of lower average borrowings offset by a higher average borrowing cost.
Average borrowings for the current six month period were $22.0 million,
or 65.1%, lower than the prior year period and the average borrowings
cost was 13 basis points higher than the prior year period.
Provision and Allowance for loan losses
NewMil had a negative provision of $495,000 for loan losses during the
six month period ended December 31, 1999, compared with a provision of
$50,000 for the prior year period. The negative provision resulted from
a loan loss recovery of $545,000, in the September 30, 1999 quarter,
related to a loan that had been charged off in prior years. The
recovery represents cash received from the borrower's bankruptcy court
proceedings.
If it had not been for the loan loss recovery of $545,000 received
during the September 30, 1999 quarter the provision would have been
similar to the prior year period expense. NewMil remains adequately
reserved both against total loans and non-performing loans. For a
detailed discussion of the Bank's allowance for loan losses refer to the
"Results of Operations - For the three month periods ended December 31,
1999 and 1998" above.
Non-interest income
The following table details the principal categories of non-interest
income for the six month periods ended December 31:
<TABLE>
<S>
<C> <C> <C> <C>
(in thousands) 1999 1998 Change
---- ---- ------
Service charges on
deposit accounts $ 672 $ 601 $ 71 11.8%
Gain on sale of branch 75 - 75 100.0
Gains on sale of OREO 23 864 (841) (97.3)
Gains on sales of mortgage
loans, net 84 290 (206) (71.0)
Loan servicing 34 43 (9) (20.9)
Securities losses, net (109) - (109) (100.0)
Other 163 159 4 2.5
----- ------ -------
Total non-interest income $ 942 $1,957 $(1,015) (51.9)
===== ====== =======
</TABLE>
The decrease in non-interest income results from security losses and
lower gains on sales of OREO and mortgage loans in 1999, offset in part
by an additional premium received in 1999 from the sale of the Winsted
Office in May 1999. The additional premium resulted from certain
competitive events not occurring within a time frame stipulated in the
sale agreement. Gains on sales of OREO in 1998 included the sale of a
property taken into OREO several years before, at which time it was
written down to its market value. As a result of a stronger real estate
market in 1998 it was sold at a significant gain. The decrease in gains
on sales of residential mortgage loans resulted from lower loan sales
volume, $4.6 million in 1999 compared with $14.3 million in 1998.
Secondary market loan sales are generally pre-arranged on a loan by loan
basis prior to origination and loans are sold with servicing rights
released. The decrease in loan servicing fees results from portfolio
run-off. The Bank has not sold loans with servicing rights retained
since June 1995.
Operating expenses
The following table details the principal categories of operating
expenses for the three month periods ended December 31:
<TABLE>
<S>
<C> <C> <C> <C>
(in thousands) 1999 1998 Change
---- ---- ------
Salaries $2,396 $2,357 $ 39 1.7%
Employee benefits 600 562 38 6.8
Occupancy 473 512 (39) (7.6)
Equipment 420 446 (26) (5.8)
Insurance 56 52 4 7.7
Professional fees, Collection
and OREO expense 356 241 115 47.7
Postage and telecommunications 177 208 (31) (14.9)
Marketing 140 127 13 10.2
Other operating 817 836 (19) (2.3)
------ ------ ----
Total operating expenses $5,435 $5,341 $ 94 1.8
====== ====== ====
</TABLE>
The increase in salaries expense for the six months ended December 31,
1999 as compared with the prior year period was due primarily to annual
salary increases of approximately 4.5%, offset, in part, by lower
staffing levels. The decrease in occupancy expense results from the
closure of the Winsted Office in May 1999. Professional, Collection and
OREO expense increased as a result of legal fees for litigation over the
sale of OREO and expenses related to several strategic initiatives that
had been undertaken during the six month period ended December 1999.
Changes in other operating expenses, which include shareholder
relations, office supplies and other expenses, decreased $37,000 as a
result of changes in operating activities.
Income taxes
Net income for the six month period included an income tax provision of
$960,000, representing a 33.5% effective rate, as compared with a
provision of $1,410,000 a year ago, representing a 50.6% effective rate.
The provision for December 31, 1998 included a charge of $266,000
as a result of the formation of the Connecticut PIC. For a detailed
discussion of the formation of the PIC see "Results of Operation - For
the three month periods ended December 31, 1999 and 1998" above.
FINANCIAL CONDITION
Total assets decreased $10.3 million, or 2.9%, to $341.8 million during
the six month period from June 30, 1999 through December 31, 1999.
During the six month period securities decreased $9.6 million, or 8.1%,
net loans increased $4.3 million, or 2.0%, deposits decreased $869,000,
or 0.3%, and borrowings decreased $7.5 million.
Securities
Securities decreased $9.6 million, or 8.1%, during the six month period
ended December 31, 1999, as maturities and sales exceeded purchases.
During the period ended NewMil purchased $2.0 million of fixed rate
mortgage backed securities and $8.5 million of corporate bonds and sold
$8.4 million of other fixed rate mortgage backed securities.
NewMil's securities portfolio consists of MBS, bank qualified municipal
bonds, corporate bonds, CMOs and equity securities. At December 31,
1999, 89.7% of the portfolio consisted of fixed rate securities and
included MBS, municipal bonds, corporate bonds and CMOs. At December
31, 1999 total fixed rate securities had a projected weighted average
duration and life of 4.8 years and 6.7 years, respectively, based on
median projected prepayment speeds at current interest rates. At
December 31, 1999, 7.8% of the portfolio consisted of floating rate CMOs
and MBSs that generally reprice monthly based on pre-determined spreads
to underlying index, subject to life-time caps and floors. The floating
rate securities had a projected weighted average duration and life of
0.1 years and 7.8 years, respectively, based on median projected
prepayment speeds at current interest rates. Floating rate MBSs are
tied to the Eleventh District Cost of Funds index, while the floating
rate CMOs are tied to Treasury indices. The remaining 2.5% of the
portfolio at December 31, 1999, was represented by Federal Home Loan
Bank stock and Bankers Bank Northeast stock.
At December 31, 1999, securities totaling $66.2 million, or 60.9%, were
classified as available-for-sale and securities totaling $42.4 million,
or 39.1%, were classified as held-to-maturity.
Loans
Net loans grew $4.3 million, or 2.0%, during the six month period ended
December 31, 1999. Loans originated and loan advances totaled $37.2
million, while loan repayments and loans sold in the secondary market
were $28.3 million and $4.6 million, respectively. Loans originated
include $4.2 million of residential mortgage loans purchased for
portfolio.
Major classifications of loans are as follows:
<TABLE>
<S>
<C> <C>
December 31, June 30,
(in thousands) 1999 1999
---- ----
Real estate mortgages:
One-four family residential $128,905 $128,371
Five or more family residential 4,410 6,152
Commercial 48,946 47,894
Land 1,993 2,410
Commercial and industrial 13,553 7,773
Home equity lines of credit 18,841 19,429
Installment and other 2,622 2,850
-------- --------
Total loans, gross 219,270 214,879
Deferred loan origination fees
and purchase premium, net 71 146
Allowance for loan losses (5,029) (4,989)
-------- --------
Total loans, net $214,312 $210,036
======== ========
</TABLE>
The Commercial Lending department specializes in lending to small and
mid-size companies and professional practices and provides short-term
and long-term financing, construction loans, commercial mortgages and
property improvement loans. The department also works with several
government-assisted lending programs. Commercial mortgage loans,
including mortgages on land and multi-family property decreased
$1,107,000, or 2.0% since June 30, 1999, and C & I loans increased
$5,780,000, or 74.4%, for the period.
The Residential Mortgage Department, in addition to traditional
portfolio lending, sells a variety of mortgage products on a service-
released basis. During the six month period ended December 31, 1999 the
department originated and sold $4.5 million of loans to the secondary
market. From time to time the department supplements its own portfolio
originations by purchasing Connecticut residential mortgage loans from
several correspondent lenders. During the six month period ended
December 31, 1999 the department purchased $4.2 million of loans for
portfolio. Since June 30, 1999 the residential mortgage loan portfolio
has increased by $535,000, or 0.4%, while home equity lines decreased
$588,000, or 3.0%, for the period.
Non-performing assets
The following table details changes in non-performing assets during the
six month periods ended December 31.
<TABLE>
<S>
<C> <C>
(in thousands) 1999 1998
---- ----
Balance, beginning of year $1,569 $1,683
Loans placed on non-accrual status 603 632
Change in accruing loans past
due 90 or more days, net 263 (400)
Payments to improve OREO 28 108
Loan payments (3) (125)
Loans returned to accrual status (179) (3)
Loan charge-offs (20) (30)
Gross proceeds from OREO sales (190) (1,076)
Gains on OREO sales, net 23 864
Reverse provision for OREO
valuation reserve - 19
------ ------
Balance, end of period $2,094 $1,672
====== ======
Percent of total assets 0.61% 0.47%
</TABLE>
During the six month period ended December 31, 1999 non-performing
assets increased $525,000, or 33.5%, due principally to new non-accrual
loans and loans 90 days past due and accruing offset in part by a
decrease in OREO. The increase in non-accrual loans is primarily the
result of two loans for $484,000 becoming non-accrual. The increases in
loans 90 days past due and accruing is primarily the result of one loan
for $270,000 that has become 90 days past due and still accruing.
Additions to non-accrual loans generally represent loans which had
previously been classified on NewMil's internally monitored list and had
been adequately reserved. Additions to loans 90 days past due and still
accruing represent loans which are classified on NewMil's internally
monitored list, have adequate collateral value, and are in the process
of collection.
In addition to non-performing assets, at December 31, 1999 NewMil had
$4,752,000 of performing classified loans that are considered potential
problem loans. Although not impaired, performing classified loans, in
the opinion of management, exhibit a higher than normal degree of risk
and warrant monitoring due to various considerations, including (i) the
degree of documentation supporting the borrower's current financial
position, (ii) potential weaknesses in the borrowers' ability to service
the loan, (iii) possible collateral value deficiency, and (iv) other
risk factors such as geographic location, industry focus and negatively
trending financial results. These deficiencies create some uncertainty,
but not serious doubt, as to the borrowers' ability to comply with the
loan repayment terms in the future. Management believes that reserves
for these loans are adequate.
The following table details the composition of non-performing assets as
of December 31, 1999.
<TABLE>
<S>
<C> <C> <C> <C>
Non-Performing Assets Accruing
(dollars in thousands) loans Total
Non- past due non-
accrual 90 or performing
loans more days OREO assets
----- --------- ---- ------
December 31, 1999
Real estate:
Residential $ 235 $ 444 $ 212 $ 891
Commercial 796 4 - 800
Land and land
development 403 - - 403
Collateral and
installment loans - - - -
------ ------ ----- ------
Totals $1,434 $ 448 $ 212 $2,094
====== ====== ===== ======
</TABLE>
NewMil 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,
NewMil generally initiates action to foreclose the property or to
acquire it by deed in lieu of foreclosure. NewMil actively markets all
OREO property.
LIQUIDITY
NewMil manages its liquidity position to ensure that there is sufficient
funds available 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
NewMil are principal payments and maturities of securities and loans,
short term borrowings through repurchase agreements and Federal Home
Loan Bank advances, net deposit growth and funds provided by operations.
Liquidity can also be provided through sales of loans and available-for-
sale securities.
Operating activities for the six month period ended December 31, 1999
used net cash of $538,000. Investing activities provided net cash of
$4,958,000, principally as a result of securities repayments, sales and
maturities offset, in part, by securities and loans purchased.
Financing activities used net cash of $9,381,000, principally due to
repayment of borrowings, a net deposit decline, dividends paid and
treasury stock purchases. Funds provided by investing activities,
together with a $5.0 million decrease in cash and overnight federal
funds sold, were utilized to fund financing activities.
At December 31, 1999, NewMil'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
$171.0 million, to net deposits and short term unsecured liabilities,
was 59.7%, well in excess of NewMil's minimum guideline of 15%. At
December 31, 1999, NewMil had outstanding commitments to fund new loan
originations of $3.4 million, construction mortgage commitments of $5.1
million and unused lines of credit of $25.8 million. These commitments
will be met in the normal course of business. NewMil 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 $2,000, to $33,137,000, while book value
per share increased $0.06 to $9.10, during the six month period ended
December 31, 1999. The increase in equity resulted from net income of
$902,000, or $0.23 per share (diluted), option proceeds of $336,000
offset, in part, by net unrealized losses on securities during the
period, net of taxes, of $470,000, treasury stock purchases of
$1,038,000 and dividends paid of $730,000.
NewMil and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the FDIC. At December 31, 1999 NewMil's leverage capital ratio was
9.84% and its tier I and total risk-based capital ratios were 17.26% and
18.53%, respectively. At December 31, 1999 the Bank's leverage capital
ratio was 9.78% and its tier I and total risk-based capital ratios were
17.74% and 19.00%, respectively. NewMil 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
NewMil's ability to pay dividends is dependent on the Bank's ability to
pay dividends to NewMil. There are certain restrictions on the payment
of dividends and other payments by the Bank to NewMil. 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
NewMil as of December 31, 1999 was $1,120,000. In some instances,
further restrictions on dividends may be imposed on NewMil by the
Federal Reserve Bank.
NewMil believes that the payment of cash dividends to its shareholders
is appropriate, provided that such payment considers NewMil's capital
needs, asset quality, and overall financial condition and does not
adversely affect the financial stability of NewMil or the Bank. The
continued payment of cash dividends by NewMil will be dependent on
NewMil's future core earnings, financial condition and capital needs,
regulatory restrictions, and other factors deemed relevant by the Board
of Directors of NewMil.
YEAR 2000
Year 2000 Action Plan
In early 1997 NewMil developed its Year 2000 Action Plan (Plan) to
ensure that its operating systems, and those of its outside vendors and
suppliers, will function correctly in the year 2000 and beyond. During
1999 NewMil became compliant with its Year 2000 Plan. The Plan was
managed by the Year 2000 Committee, comprised of representatives from
each operational area of the Bank. The Plan had five phases: (1)
awareness; (2) assessment; (3) renovation; (4) validation; and, (5)
implementation.
The awareness phase included development of the Plan, conducting
awareness meetings and communicating with all NewMil employees,
attending Year 2000 seminars and attending a user group meeting for the
Bank's legacy system vendor. The awareness phase was completed during
1997.
The assessment phase included the development of an inventory of all
date sensitive systems, including in-house systems and those of the
Bank's outside vendors and suppliers, a risk assessment of each element,
and specific methodology to correct non-compliant systems. The
assessment phase was completed for all items during the first six months
of 1999.
High criticality ratings were assigned to several systems, including the
Bank's legacy computer systems, that had the potential to substantially
impact the Bank's operation should they prove to be non-compliant.
The renovation phase addressed the bringing of systems into compliance,
systems replacements and retirements. The renovation phase was
completed for all items during the first six months of 1999.
The validation phase addressed systems testing by the Bank and its
outside vendors and suppliers alike. The Bank converted its in-house
computer system in November 1998 from a legacy computer system to a
client server relational database system. The Bank's new client server
system was certified Year 2000 compliant by the supplying vendor and the
Bank verified compliance in early 1999. Several third party interfaces
were scheduled for testing in early 1999 as well. All systems testing
were completed during the first six months of 1999.
The implementation phase addressed the roll out of Year 2000 compliant
systems during 1998 and 1999. The implementation phase was completed
for all items during the first six months of 1999.
In addition, contingency plans had been developed for all systems with
high criticality ratings. All testing of contingency plans was
completed as of September 30, 1999.
NewMil has completed an evaluation of its loan portfolio to identify
credit risk arising from the potential failure of a borrower's operating
or other systems as a consequence of the Year 2000. NewMil conducted
mailings of a Year 2000 Questionnaire to all of its commercial borrowers
and completed Year 2000 Risk to Bank assessment ratings for all
commercial borrowers in early 1999. Based on our evaluation of
commercial borrowers there has not been a significant increase in credit
risk as a result of our Year 2000 assessment.
Federal banking agencies conducted supervisory reviews of all financial
institutions Year 2000 readiness. In February 1998 the FDIC completed
an assessment of the Bank's Year 2000 planning efforts. In September
1998 the FDIC conducted a supervisory review of the Bank's Year 2000
conversion effort. In March 1999 the FDIC and State of Connecticut
completed their Year 2000 Readiness Phase II Assessment of the Bank.
Costs
The cost of Year 2000 compliance was minimal because the Bank converted
its in-house data processing system to a new system which has been
certified to be Year 2000 compliant. This cost has been capitalized and
is being depreciated over the fixed assets useful lives. Based on
current information, management believes that any additional costs
related to NewMil's Year 2000 systems issues will not have a material
impact on the operations, cash flows or financial condition of NewMil.
Risks
NewMil has not experienced any disruption of service or problems
relating to the century change. There is still general uncertainty
inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party vendors and
borrowers and NewMil is unable to determine conclusively at this time
whether the consequences of Year 2000 failures in the future, if any,
will have a material impact on NewMil's results of operations, liquidity
or financial condition. However, based on NewMil's high level of
readiness and the readiness reported by all significant third party
vendors, NewMil does not expect any significant disruption of service.
The Year 2000 Action Plan significantly reduced NewMil's level of
uncertainty about the Year 2000 problem and, in particular, about the
Year 2000 readiness of its material vendors, suppliers and commercial
borrowers. NewMil believes that, with the implementation of the new
client server system and the completion of the Plan as scheduled, the
possibility of significant interruptions of normal operations will be
minimized.
Item 3. QUANTITATIVE and QUALITATIVE DISCLOSURE of MARKET RISK
NewMil 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. NewMil's interest rate risk has not significantly
changed from the prior year.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against NewMil or the
Bank or any of their properties, other than ordinary routine litigation
incidental to NewMil's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of earnings per share.
(b) Report on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWMIL BANCORP, INC.
February 9, 2000 By /s/ Francis J. Wiatr
Francis J. Wiatr,
Chairman, President and CEO
February 9, 2000 By /s/ B. Ian McMahon
B. Ian McMahon,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S DECEMBER 31, 1999 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,769,000
<INT-BEARING-DEPOSITS> 99,000
<FED-FUNDS-SOLD> 57,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,171,000
<INVESTMENTS-CARRYING> 42,411,000
<INVESTMENTS-MARKET> 40,555,000
<LOANS> 214,312,000
<ALLOWANCE> 5,029,000
<TOTAL-ASSETS> 341,798,000
<DEPOSITS> 299,254,000
<SHORT-TERM> 7,500,000
<LIABILITIES-OTHER> 1,907,000
<LONG-TERM> 0
0
0
<COMMON> 2,995,000
<OTHER-SE> 30,142,000
<TOTAL-LIABILITIES-AND-EQUITY> 341,798,000
<INTEREST-LOAN> 8,349,000
<INTEREST-INVEST> 3,564,000
<INTEREST-OTHER> 93,000
<INTEREST-TOTAL> 12,006,000
<INTEREST-DEPOSIT> 4,786,000
<INTEREST-EXPENSE> 5,144,000
<INTEREST-INCOME-NET> 6,862,000
<LOAN-LOSSES> (495,000)
<SECURITIES-GAINS> (109,000)
<EXPENSE-OTHER> 5,435,000
<INCOME-PRETAX> 2,864,000
<INCOME-PRE-EXTRAORDINARY> 2,864,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,904,000
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 4.08
<LOANS-NON> 1,434,000
<LOANS-PAST> 448,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,752,000
<ALLOWANCE-OPEN> 4,989,000
<CHARGE-OFFS> 22,000
<RECOVERIES> 557,000
<ALLOWANCE-CLOSE> 5,029,000
<ALLOWANCE-DOMESTIC> 4,128,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 901,000
</TABLE>
Exhibit 11.1
NEWMIL BANCORP, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
(in thousands except per share amounts)
<TABLE>
<S> <C> <C> <C> <C>
Three month Six month
period ended period ended
December 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
Net income
Net income - basic and diluted $ 902 $ 323 $1,904 $1,125
====== ====== ====== ======
Weighted Average Common and Common
Equivalent Stock
Weighted average common stock
outstanding 3,658 3,838 3,656 3,836
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 410 402 414 411
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (228) (210) (230) (214)
----- ----- ----- -----
Weighted average common and common
equivalent stock outstanding
- diluted 3,840 4,030 3,840 4,033
===== ===== ===== =====
Earnings Per Common and Common
Equivalent Share
Basic $0.25 $0.08 $0.52 $0.29
===== ===== ===== =====
Diluted $0.23 $0.08 $0.50 $0.28
===== ===== ===== =====
</TABLE>
