<PAGE>
As filed with the Securities and Exchange Commission on July 3, 2000
Registration No. 333__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________________
NewMil Bancorp, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 6712 06-1186389
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
19 Main Street
New Milford, Connecticut 06776
(860) 355-7600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
B. Ian McMahon
Chief Financial Officer
19 Main Street
New Milford, Connecticut 06776
(860) 355-7630
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
________________________
Copies to:
William W. Bouton, III, Esq. Robert M. Taylor, III, Esq.
Lewis Segal, Esq. Day, Berry & Howard LLP
Tyler Cooper & Alcorn, LLP CityPlace
CityPlace - 35/th/ Floor Hartford, Connecticut 06103
Hartford, Connecticut 06103-3488 (860) 275-0100
(860) 725-6200
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
________________________
Calculation of Registration Fee
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed maximum Proposed maximum
securities to be registered registered offering price per unit* aggregate offering price* Amount of registration fee*
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.50 per share 1,350,520 $8.25 $11,141,790 $2,941
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Estimated pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities Act
of 1933, as amended, based upon the average of the bid and asked prices for
shares of common and Series B preferred stock of Nutmeg as reported on the
Nasdaq Small Cap Market and calculated as of June 29, 2000 and the exchange
ratio prescribed by the agreement and plan of merger. The calculation assumes
that the maximum amount of NewMil common stock payable pursuant to the
agreement and plan of merger, 60% of total consideration, is issued in the
transaction.
<PAGE>
AVAILABLE INFORMATION
NewMil is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by NewMil with the Commission can be
inspected and copied at public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661. The Commission also maintains a Web site that contains reports, proxy
statements and other information. The address of the site is http://www.sec.gov.
------------------
Copies of such material also can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, material filed by NewMil can be inspected at the
offices of the National Association of Securities Dealers, 1735 K Street, N.W.,
Washington, D.C. 20006.
Nutmeg is also subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements, and other
information with the Office of Thrift Supervision (the "OTS"). The reports,
proxy statements and other information filed by Nutmeg with the OTS can be
inspected and copied at public reference facilities maintained by the OTS at its
Public Files in the Registration and Disclosure Section at Room F-643, 1776 F
Street, N.W., Washington, D.C. 20006. Copies of such material may be ordered
from such Section by telephone request at prescribed rates by calling (202) 898-
8920.
NewMil has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereof, the "Registration Statement") under the
Securities Act of 1933, pursuant to the Merger Agreement. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and exhibits thereto. Such additional information may be
inspected and copied as set forth above. Statements contained in this Joint
Proxy Statement/Prospectus or in any document incorporated by reference in this
Joint Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or such document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Joint Proxy
Statement/Prospectus in connection with the Merger and offering covered by this
Joint Proxy Statement/Prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by NewMil or
Nutmeg. This Joint Proxy Statement/Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the NewMil Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this Joint Proxy Statement/Prospectus
nor any issuance of securities made hereunder shall, under any circumstances,
create an implication that there has not been any change in the facts set forth
in this Joint Proxy Statement/Prospectus or in the affairs of NewMil or Nutmeg
since the date hereof.
<PAGE>
NEWMIL BANCORP, INC. NUTMEG FEDERAL SAVINGS
19 Main Street & LOAN ASSOCIATION
New Milford, Connecticut 06776 301 Main Street
(860) 355-7600 Danbury, Connecticut 06810
(203) 792-3332
___________ __________
PROSPECTUS/PROXY STATEMENT PROXY STATEMENT
The Boards of Directors of NewMil Bancorp, Inc. ("NewMil") and Nutmeg
Federal Savings & Loan Association ("Nutmeg") have each approved an agreement
and plan of merger. This agreement provides that Nutmeg will merge into New
Milford Savings Bank ("NMSB"), NewMil's subsidiary bank, subject to customary
conditions such as shareholder and regulatory approvals.
If the merger takes place, Nutmeg's shareholders will receive the
equivalent of $8.25 in cash or common stock of NewMil for each share of Nutmeg's
common stock they own and $14.4375 in cash or common stock of NewMil for each
share of Nutmeg's Series B preferred stock they own. These figures may be
adjusted upward based on the sale by Nutmeg of certain loan servicing rights
prior to closing. Shareholders may elect to receive cash or NewMil stock,
subject to certain limitations described in this document. The exchange of
shares of Nutmeg common and Series B preferred stock into NewMil common stock
generally will not be taxable, except for the receipt of cash instead of
fractional shares. The exchange of Nutmeg common and Series B preferred stock
into cash will be taxable. NewMil's common stock is traded on the Nasdaq Stock
Market's National Market Tier under the symbol "NMSB".
This document contains important information about NewMil, Nutmeg, the
merger and the conditions that must be satisfied before the merger can occur.
Please give all the information your careful attention.
Your vote is very important. The merger agreement and the merger must be
approved by (i) a majority of the shares of NewMil cast at the meeting, in
person or by proxy; and (ii) a majority of the outstanding shares of the common
shares and Series B preferred shares of Nutmeg, voting as separate classes, and
two-thirds of all outstanding shares of Nutmeg. To vote your shares, you may
use the enclosed proxy card or attend the special shareholders meetings we will
hold to allow you to consider and vote on the merger. To approve the merger and
merger agreement, you MUST vote FOR the proposal by following the instructions
on the enclosed proxy card. If a Nutmeg shareholder does not vote at all, that
will, in effect, count as a vote against the proposal. We urge you to vote FOR
this proposal.
[Signature] [Signature]
Francis J. Wiatr Paul A. Jaber
Chairman, President and Chief Executive Officer Chairman
NewMil Bancorp, Inc. Nutmeg Federal Savings & Loan
Association
____________________________
NewMil's common stock has not been approved or disapproved by the Securities
and Exchange Commission, any state securities commission, or the Federal Deposit
Insurance Corporation, nor have any of these institutions passed upon the
accuracy or adequacy of this Proxy Statement/Prospectus. Any representation to
the contrary is a criminal offense.
The date of this Proxy Statement/Prospectus is _____________, 2000
and first mailed to shareholders on ___________, 2000
<PAGE>
NEWMIL BANCORP, INC.
19 Main Street
New Milford, Connecticut 06776
___________________
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
_________________, 2000
___________________
A special meeting of shareholders of NewMil Bancorp, Inc. ("NewMil") will
be held on _____________, 2000, at _____ a.m. at the __________________________,
Connecticut _______________ for the following purposes:
1. To consider and vote on a proposal to approve and adopt the agreement
and plan of merger, dated as of May 30, 2000, by and among NewMil, New
Milford Savings Bank, a wholly-owned bank subsidiary of NewMil, and
Nutmeg Federal Savings & Loan Association ("Nutmeg"), the merger of
Nutmeg into New Milford Savings Bank, and the other transactions
contemplated by the merger agreement, as described in the attached
Proxy Statement/Prospectus.
2. To transact any other business that properly comes before the special
meeting, or any adjournments or postponements of the meeting,
including, without limitation, a motion to adjourn the special meeting
to another time and/or place for the purpose of soliciting additional
proxies in order to approve the merger agreement and the merger or
otherwise.
You are entitled to notice and to vote at the special meeting or any
adjournments or postponements of the meeting only if you were a holder of record
of NewMil's common stock at the close of business on ____________, 2000.
NewMil's Board of Directors has unanimously determined that the merger is
advisable and is fair to and in the best interest of NewMil's shareholders, has
approved the merger agreement and the merger, and recommends that you vote to
approve the merger agreement and the merger.
The affirmative vote of a majority of the shares of NewMil's common stock
cast at the special meeting, in person or by proxy, is required to approve the
merger agreement and the merger.
It is very important that your shares be represented at the special
meeting. Whether or not you plan to attend the special meeting, please
complete, date and sign the enclosed proxy card and return it as soon as
possible in the enclosed postage-paid envelope. A shareholder who executes a
proxy may revoke it at any time before it is exercised by giving written notice
to the Secretary of NewMil's Board of Directors, by subsequently filing another
proxy or by attending the special meeting and voting in person.
By order of the Board of Directors
Francis J. Wiatr
Chairman, President and Chief Executive Officer
New Milford, Connecticut
_____________, 2000
Your vote is important. Please complete, sign, date and return your proxy card.
<PAGE>
NUTMEG FEDERAL SAVINGS & LOAN ASSOCIATION
301 Main Street
Danbury, Connecticut 06810
___________________
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
________________, 2000
___________________
A special meeting of shareholders of Nutmeg Federal Savings & Loan
Association ("Nutmeg") will be held on _____________, 2000, at _____ a.m. at the
___________________________, Connecticut _______________ for the following
purposes:
1. To consider and vote on a proposal to approve and adopt the agreement
and plan of merger, dated as of May 30, 2000, by and among Nutmeg,
NewMil Bancorp, Inc. ("NewMil") and New Milford Savings Bank, a
wholly-owned bank subsidiary of NewMil, the merger of Nutmeg into New
Milford Savings Bank, and the other transactions contemplated by the
merger agreement, as described in the attached Proxy
Statement/Prospectus.
2. To transact any other business that properly comes before the special
meeting, or any adjournments or postponements of the meeting,
including, without limitation, a motion to adjourn the special meeting
to another time and/or place for the purpose of soliciting additional
proxies in order to approve the merger agreement and the merger or
otherwise.
You are entitled to notice and to vote at the special meeting or any
adjournments or postponements of the meeting only if you were a holder of record
of Nutmeg's common or Series B preferred stock at the close of business on
____________, 2000.
Nutmeg's Board of Directors has unanimously determined that the merger is
advisable and is fair to and in the best interest of Nutmeg's shareholders, has
approved the merger agreement and the merger, and recommends that you vote to
approve the merger agreement and the merger.
The affirmative vote of a majority of the shares of Nutmeg's common stock
and Series B preferred stock outstanding on ______________, 2000, voting as
separate classes, and the affirmative vote of at least two-thirds of all
outstanding common and Series B preferred stock combined is required to approve
the merger agreement and the merger. The required vote of Nutmeg's shareholders
is based on the total number of shares of Nutmeg's common stock and Series B
preferred stock outstanding and not on the number of shares which are actually
voted. Not returning a proxy card, or not voting in person at the special
meeting or abstaining from voting will have the same effect as voting AGAINST
the merger agreement and the merger.
It is very important that your shares be represented at the special
meeting. Whether or not you plan to attend the special meeting, please
complete, date and sign the enclosed proxy card and return it as soon as
possible in the enclosed postage-paid envelope. A shareholder who executes a
proxy may revoke it at any time before it is exercised by giving written notice
to the Secretary of Nutmeg's Board of Directors, by subsequently filing another
proxy or by attending the special meeting and voting in person.
By order of the Board of Directors
Paul A. Jaber
Chairman
Danbury, Connecticut
____________, 2000
Your vote is important.
Please complete, sign, date and return your proxy card.
<PAGE>
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT NEWMIL AND NUTMEG THAT IS NOT INCLUDED IN OR DELIVERED WITH
THE DOCUMENT. THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO YOU IF YOU CALL OR
WRITE TO B. IAN MCMAHON, CHIEF FINANCIAL OFFICER, NEWMIL BANCORP, INC., 19 MAIN
STREET, NEW MILFORD, CONNECTICUT 06776, TELEPHONE (860) 355-7630 OR DAVID F.
LUCAS, SENIOR VICE PRESIDENT, NUTMEG FEDERAL SAVINGS & LOAN ASSOCIATION, 301
MAIN STREET, DANBURY, CONNECTICUT 06810, TELEPHONE (203) 792-3332. IN ORDER TO
OBTAIN TIMELY DELIVERY OF DOCUMENTS, YOU SHOULD REQUEST INFORMATION AS SOON AS
POSSIBLE, BUT NO LATER THAN [5 business days prior to special meeting date].
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE
MERGER..................................................................
SUMMARY.................................................................
SHARE INFORMATION AND MARKET PRICES.....................................
COMPARATIVE PER SHARE DATA..............................................
SELECTED FINANCIAL DATA.................................................
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS....................................................
Pro Forma Condensed Consolidated Statements of
Condition - March 31, 2000..........................................
Pro Forma Condensed Consolidated Statements of
Income - Nine Months Ended March 31, 2000...........................
Pro Forma Condensed Consolidated Statements of
Income - Year Ended June 30, 1999...................................
Notes to Pro Forma Condensed Consolidated
Financial Statements................................................
SHAREHOLDER MEETINGS....................................................
Matters to be Considered at the Special Meetings.....................
Record Date and Voting...............................................
Required Vote; Revocability of Proxies...............................
Solicitation of Proxies..............................................
THE MERGER..............................................................
The Parties..........................................................
NewMil...............................................................
Nutmeg...............................................................
Background of the Merger.............................................
Recommendation of the Nutmeg Board of Directors and
Reasons for the Merger..............................................
Purpose and Effects of the Merger....................................
Structure............................................................
Exchange Ratio and Shareholder Elections.............................
Options..............................................................
Regulatory Approvals.................................................
Conditions to the Merger.............................................
Conduct of Business Pending the Merger...............................
Third Party Proposals................................................
Expenses; Breakup Fee................................................
Fairness Opinion of McConnell, Budd & Downes, Inc....................
Representations and Warranties.......................................
Termination and Amendment of the Merger
Agreement...........................................................
Federal Income Tax Consequences......................................
Resales of NewMil's Common Stock Received in the
Merger..............................................................
Employee Benefits....................................................
Interests of Nutmeg Directors and Executive
Officers in the Merger That are Different Than
Those of Nutmeg Shareholders........................................
Existing Nutmeg Change of Control Agreements.........................
Board Membership.....................................................
Indemnification......................................................
Option Agreement.....................................................
INFORMATION ABOUT NUTMEG................................................
Business.............................................................
Supervision and Regulation...........................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................
Security Ownership of Certain Beneficial Owners......................
Security Ownership of Management.....................................
INFORMATION ABOUT NEWMIL................................................
Incorporation by References..........................................
Filings and Period of Report or Date Filed...........................
Security Ownership of Certain Beneficial Owners......................
Security Ownership of Management.....................................
MARKET PRICES AND DIVIDENDS
NewMil's Common Stock................................................
Nutmeg's Common Stock................................................
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF
SHAREHOLDER RIGHTS......................................................
NewMil's Common Stock................................................
NewMil's Shareholder Rights Agreement................................
Nutmeg's Common Stock................................................
Nutmeg's Series B preferred stock....................................
Comparison of Charter Provisions.....................................
Directors............................................................
Call of Special Meetings.............................................
Shareholder Action without a Meeting.................................
Limitation on Liability of Directors and
Indemnification.....................................................
Cumulative Voting....................................................
Preemptive Rights....................................................
Notice of Meetings...................................................
Quorum...............................................................
General Vote.........................................................
Record Date..........................................................
Procedures for Certain Business Combinations.........................
Anti-Greenmail.......................................................
Amendment to Certificate of Incorporation, Federal
State Charter and Bylaws............................................
Applicable Law.......................................................
Delaware Takeover Statute............................................
Connecticut Regulatory Restrictions on Acquisitions
of Stock............................................................
Federal Law..........................................................
</TABLE>
ii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ...........................
SHAREHOLDER PROPOSALS ..........................................................
OTHER MATTERS ..................................................................
EXPERTS ........................................................................
INDEPENDENT PUBLIC ACCOUNTANTS .................................................
LEGAL MATTERS ..................................................................
Appendix A - Opinion of McConnell, Budd & Downes, Inc. .........................
Appendix B - Audited Financial Statements of Nutmeg Federal Savings and Loan
Association for December 31, 1999 and 1998 and the years ended December 31,
1999, 1998 and 1997. ........................................................
Appendix C - Unaudited Financial Statements of Nutmeg Federal Savings and
Association for the three months ended March 31, 2000 and March 31, 1999.
Appendix D - NewMil Bancorp, Inc.'s Form 10-K for fiscal year ended June 30,
1999
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are NewMil and Nutmeg proposing to merge? How will I benefit?
A: In general, we believe that the business potential for the combination of
NewMil and Nutmeg exceeds what NewMil and Nutmeg could accomplish by
themselves. We expect that the merger will enhance shareholder value for all
shareholders.
More specifically, we believe that the combined companies will be stronger
than either NewMil or Nutmeg on a stand-alone basis. After the merger,
NewMil will have gained new bank facilities to serve the City of Danbury,
and the towns of Ridgefield and Bethel. Nutmeg customers will enjoy the
expanded services and products offered by NewMil.
The proposed transaction is expected to have a positive impact on NewMil's
earnings per share in the first year. It should also result in financial
benefits from combining the operations of the two companies. The stability
and continuity of NewMil after the merger will be enhanced because three
members of Nutmeg's Board of Directors have agreed to serve on the Board of
Directors of NewMil and New Milford Savings Bank.
Q: What will Nutmeg shareholders receive in the merger?
A: If the merger takes place, each share of Nutmeg's common stock will be
converted into $8.25 and each share of Series B preferred stock into
$14.4375 of cash or common stock of NewMil, as elected by each Nutmeg
shareholder subject to certain limitations. These figures may be adjusted
upward based upon the sale of loan servicing rights by Nutmeg prior to
closing. The number of shares of NewMil common stock you will receive, if
your election to receive common stock is honored, will depend upon NewMil's
average trading price over a 15 day period ending prior to closing. A
special procedure has been set up to allow you to change your election after
the exact exchange ratio has been set.
Q: What happens to my future dividends?
A: Before the merger takes place, Nutmeg expects to continue to pay regular
quarterly cash dividends on its common stock, which currently are $0.05 per
share, and on its Series B preferred stock at its 8% annual dividend rate;
Series B preferred stock dividends will be prorated to the date of closing,
subject to Nutmeg's equity accounts being equal to or greater at closing
than at March 31, 2000. After the merger, any dividends will be based on
what NewMil pays. NewMil presently pays dividends at a quarterly dividend
rate of $0.10 per share. An exchange ratio of .825 would mean an equivalent
quarterly dividend of $0.0825 per share for Nutmeg's common stock, and an
equivalent quarterly dividend for Nutmeg's Series B preferred stock of
$0.144375 per share.
Q: What do I need to do now to vote?
A: Just indicate on the enclosed proxy card how you want to vote, and sign,
date and return it as soon as possible in the enclosed envelope. If you sign
and send in your proxy card and do not indicate how you want to vote, your
proxy card will be voted FOR approval of the merger agreement and the
merger. For Nutmeg shareholders, not returning a proxy card, or not voting
in person at the special meeting or abstaining from voting, will have the
same effect as voting AGAINST the merger agreement and the merger.
You can choose to attend the special meeting and vote your shares in person
instead of completing and returning a proxy card. If you do complete and
return a proxy card, you may change your vote at any time up to and
including the time of the vote on the day of the special meeting by
following the directions on pages ___ and ____.
Q: How does a Nutmeg shareholder make an election between cash and NewMil
common stock?
A: Complete the enclosed election form and return it with your proxy card to
American Stock Transfer & Trust Company. Nutmeg shareholders can change
their election at any time up until the date of the special meeting by
delivering to American Transfer a written revocation or change form. In
addition, for a 48 hour period beginning on the day following the day the
actual exchange ratio is set, you may change your election by [telephoning
or e-mailing] American Transfer. This election change period should begin
shortly after the special meeting and will be announced on NewMil's website,
"www.newmil.com." Nutmeg shareholders who do not properly make an election
will be assumed to have elected to receive cash.
Q: Will Nutmeg shareholders actually receive the cash and/or stock they elect?
A. Not necessarily. NewMil has committed to satisfy elections for stock up to
60% of the total consideration paid to Nutmeg shareholders. NewMil
ii
<PAGE>
has also committed to satisfy elections for cash up to 50% of the total
consideration. If Nutmeg shareholders elect stock or cash in excess of those
limits, NewMil will reduce the overages on a basis proportional to the
Nutmeg shareholdings of those Nutmeg shareholders whose elections need to be
changed.
Q: Who can vote?
A: You are entitled to vote at the Nutmeg special meeting if you owned shares
of Nutmeg's common or Series B preferred stock at the close of business on
______________, 2000. You will have one vote for each share of Nutmeg's
common stock or Series B preferred stock that you owned at that time.
You are entitled to vote at the NewMil special meeting if you owned shares
of NewMil common stock at the close of business on ___________, 2000. You
will have one vote for each share of NewMil common stock that you owned at
that time.
Q: If my shares are held in street name by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions to your
broker on how you want your shares voted.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. There are three ways for you to revoke your proxy and change your vote.
First, you may send a written notice to the Secretary of Nutmeg's or
NewMil's Board of Directors stating that you would like to revoke your
proxy. Second, you may complete and submit a new proxy card. Third, you may
vote in person at the special meeting. If you have instructed a broker to
vote your shares, you must follow directions received from your broker to
change your vote.
Q: Should Nutmeg shareholders send in their stock certificates now?
A: No. After the merger takes place, Nutmeg shareholders will receive
instructions on how to exchange Nutmeg certificates for NewMil certificates.
Q: What needs to be done to complete the merger?
A: Our obligations to complete the merger depend on a number of conditions
being met. In addition to our compliance with the merger agreement, these
include:
1. Approval of the merger agreement and merger by NewMil and Nutmeg
shareholders.
2. Approval of the merger by federal and state regulatory authorities.
3. Receipt of a legal opinion that, for United States tax purposes, Nutmeg
shareholders who exchange their shares for shares of NewMil's common
stock will not recognize any gain or loss as a result of the merger,
except in connection with the payment of cash instead of fractional
shares. This opinion will be subject to various limitations and we
recommend that you read the fuller description of tax consequences
provided in this document beginning on page ___.
4. Approval by Nasdaq of listing of NewMil's common stock to be issued in
the merger.
5. The absence of any injunction or legal restraint blocking the merger or
government proceedings trying to block the merger.
When the law permits, NewMil or Nutmeg could decide to complete the merger
even though one or more of these conditions hasn't been met. We can't be
certain when, or if, the conditions to the merger will be satisfied or
waived, or that the merger will be completed.
Q: Whom can I call with questions or to obtain copies of this Proxy
Statement/Prospectus and other documents?
A: David F. Lucas, Senior Vice President, Nutmeg Federal Savings & Loan
Association, 301 Main Street, Danbury, Connecticut 06810, telephone (203)
792-3332.
B. Ian McMahon, Chief Financial Officer, NewMil Bancorp, Inc., 19 Main
Street, New Milford, Connecticut 06776, telephone (860) 355-7630.
A copy of the merger agreement including each of its exhibits and the other
documents described in this Proxy Statement/Prospectus will be provided to
you promptly without charge if you call or write to B. Ian McMahon, Chief
Financial Officer, NewMil Bancorp, Inc., 19 Main Street, New Milford,
Connecticut 06776, telephone (860) 355-7360. Such documents were also filed
as exhibits to the registration statement filed with the SEC to register the
shares of NewMil's common stock to be issued in the merger. See "Where You
Can Find More Information."
iii
<PAGE>
SUMMARY
The following is a brief summary of information located elsewhere in this
document. It does not contain all of the information that is important to you.
Before you vote, you should give careful consideration to all of the information
contained in or incorporated by reference into this document to fully understand
the merger. See "Where You Can Find More Information" on page ____. Each item
in this summary refers to the page where that subject is discussed in more
detail.
Generally Tax Free Transaction for Nutmeg Shareholders Who Receive Stock in the
Merger (pages ____)
Nutmeg shareholders will not recognize gain or loss for federal income tax
purposes on the shares of NewMil stock they receive in the merger. To the
extent they elect to receive cash or are allocated cash in exchange for their
Nutmeg stock, or if they receive cash instead of fractional shares, they will
recognize gain or loss for federal income tax purposes. Nutmeg and NewMil will
not be obligated to complete the merger unless we receive a legal opinion to
that effect. Different tax consequences may apply to Nutmeg shareholders
because of their individual circumstances or because special tax rules apply to
them, for example, if they:
. are a tax-exempt organization;
. are a dealer in securities;
. are a financial institution;
. are an insurance company;
. are a non-United States person;
. are subject to the alternative minimum tax;
. are a trader in securities who elects to apply a mark-to-market method of
accounting;
. acquired shares of Nutmeg's common or Series B preferred stock from the
exercise of options or otherwise as compensation or through a qualified
retirement plan; or
. hold shares of Nutmeg's common or Series B preferred stock as part of a
straddle, hedge, or conversion transaction.
Tax matters are very complicated. Nutmeg shareholders should consult their tax
advisor for a full explanation of the tax consequences of the merger to you.
Both Boards Of Directors Recommend Approval (pages ___)
Both the Nutmeg and NewMil boards of directors unanimously approved the merger
agreement and the merger and recommend that their shareholders vote FOR approval
of these matters.
Nutmeg's Financial Advisor Says Consideration Fair, From a Financial Point of
View, to Nutmeg Shareholders (page ___)
In deciding to approve the merger, Nutmeg's Board of Directors considered the
opinion of McConnell, Budd & Downes, Inc., Nutmeg's financial advisor. The
opinion concluded that the proposed consideration to be received by the holders
of Nutmeg's common and Series B preferred stock in the merger is fair to the
shareholders from a financial point of view. This opinion is attached as
Appendix A to this document. We encourage Nutmeg shareholders to read this
----------
opinion carefully in order completely to understand the assumptions made,
matters considered and limitation of the review made by McConnell, Budd &
Downes, Inc. in providing this opinion.
Differences in the Rights of Shareholders (pages ____)
The rights of Nutmeg shareholders after the merger will be governed by the
certificate of incorporation and bylaws of NewMil rather than the federal stock
charter and bylaws of Nutmeg. These rights will be governed by the General
Corporation Law of the State of Delaware, not the federal law applicable to
Nutmeg, since NewMil is incorporated in Delaware. Some of the provisions
included in NewMil's certificate of incorporation and bylaws may serve to
prevent a change in control of NewMil even if desired by a majority of the
shareholders. These provisions are:
. removal of a director only for cause by a two-thirds vote of the
shareholders at a shareholders' meeting; and
. Somewhat higher super majority voting requirements to amend certificate of
incorporation.
In addition, NewMil has adopted a shareholder rights agreement designed to
protect against an inadequate tender offer or to deter coercive or unfair
takeover tactics.
Nutmeg Management's Monetary Interest in the Merger (page ____)
At the close of business on January 31, 2000, excluding all options to purchase
Nutmeg common stock, Nutmeg's directors and executive officers and their
affiliates owned a total of 574,689 shares of Nutmeg's common stock, which was
approximately 39.95% of the total number of shares of Nutmeg's common stock
that were outstanding on that date. They also owned a total of
1
<PAGE>
182,161 shares of Nutmeg's Series B preferred stock, which was 37.40% of the
total number of shares of Nutmeg's Series B preferred stock that were
outstanding on that date. Nutmeg directors and executive officers have agreed to
vote their shares in favor of the merger agreement and merger.
Certain of Nutmeg's directors and executive officers have interests in the
merger as directors and employees that are different from those of other Nutmeg
shareholders. These interests are described at page ____
Regulatory Approvals We Must Obtain For the Merger (page ___)
For the merger to take place, we need to receive the regulatory approvals of the
Federal Deposit Insurance Corporation and the Connecticut Commissioner of
Banking. We have filed applications with these regulators. We expect to
receive a waiver from the Board of Governors of the Federal Reserve System of
any application filing requirement under the Bank Holding Company Act. In
addition, Nutmeg must make a notice filing with the United States Office of
Thrift Supervision.
As of the date of this document, we haven't yet received the required approvals.
While we don't know of any reason why we would not be able to obtain the
necessary approvals in a timely manner, we can't be certain when or if we will
get them.
Termination of the Merger Agreement (page __)
The merger agreement specifies a number of situations when NewMil and Nutmeg may
terminate the agreement, which are described on page __. The merger agreement
may be terminated at any time prior to the effective time by our mutual consent
and by either of us under specified circumstances, including if the merger is
not consummated by March 31, 2001, if we do not receive the needed shareholder
or regulatory approvals or if the other party breaches its agreements.
Regardless of whether the merger is completed, we will each pay our own fees and
expenses, except that NewMil will pay the costs and expenses incurred in
printing and mailing this document and the filing and registration fees to the
Securities and Exchange Commission. If the agreement is terminated because the
shareholder vote fails at one of the parties, the other party will be entitled
to be reimbursed for its expenses up to $150,000. In addition, if Nutmeg has
been approached about a competing transaction, it will owe a $300,000 break-up
fee. If the agreement is terminated because of a material misrepresentation or
covenant breach by Nutmeg, or a failure by Nutmeg to timely call the special
shareholder meeting or recommend approval of the merger, in addition to expenses
up to $150,000, Nutmeg will pay an additional $300,000 break-up fee. If the
agreement is terminated because of a material misrepresentation or covenant
breach by NewMil, or a failure by NewMil to timely call the special shareholder
meeting or recommend approval of the merger, in addition to expenses up to
$150,000, NewMil will pay $500,000 ($600,000 if the breach occurs after Nutmeg's
loan servicing rights have been contracted for sale).
Option To Discourage Other Parties From Making Other Proposals to Acquire Nutmeg
(page ___)
In connection with the merger agreement, Nutmeg granted NewMil an option to
purchase shares of Nutmeg common stock not to exceed 19.99% of Nutmeg's
outstanding common and Series B preferred stock at an exercise price of $7.00
per share. The option agreement is intended to discourage other parties from
making alternative acquisition-related proposals to Nutmeg.
In addition to the option to purchase Nutmeg's common stock, under the
circumstances mentioned in the next paragraph, NewMil may require Nutmeg to
repurchase the option or shares acquired upon a previous exercise of the option
at a predetermined price. Alternatively, upon the occurrence of these
circumstances, NewMil may surrender the option and/or any shares received upon a
previous exercise of the option and receive a payment price as set forth in the
option agreement.
NewMil cannot exercise its option unless a business combination or acquisition
transaction concerning Nutmeg or related activities, including the sale of a
substantial amount of Nutmeg's assets or stock are proposed or occur. We do not
know of any event that has occurred as of the date of this document that would
permit NewMil to exercise its option.
Information About the Special Meetings (page ____)
A special meeting of Nutmeg shareholders will be held on _____________, 2000, at
_____ a.m. at the _____________________________, Connecticut, _______________
and a special meeting of NewMil shareholders will be held on ___________, 2000
at ____ a.m. at ______________, Connecticut. Each meeting will be for the
following purposes:
. to vote on the merger agreement, the merger and the other transactions
contemplated by the merger agreement; and
. to address any other matters that properly come before the special
meetings, or any adjournments or postponements of the meetings, including a
motion to adjourn the special meetings to another time and/or place to
solicit additional proxies in favor of
2
<PAGE>
the merger agreement and the merger or otherwise.
The Companies Involved In The Merger (page ____)
NewMil Bancorp, Inc. and New Milford Savings Bank
19 Main Street
New Milford, Connecticut 06776
(860) 355-7600
NewMil is a Delaware corporation and the holding company of New Milford Savings
Bank, NewMil's Connecticut savings bank subsidiary. Both NewMil and New Milford
Savings Bank are headquartered in New Milford, Connecticut. At March 31, 2000,
NewMil had total consolidated assets of $383,719,000, total deposits of
$307,021,000, and shareholders' equity of $33,305,000, or 8.68% of total assets.
Nutmeg Federal Savings & Loan Association
301 Main Street,
Danbury, Connecticut 06810
(203) 792-3332
Nutmeg is a federally chartered savings and loan association headquartered in
Danbury, Connecticut. At March 31, 2000, Nutmeg had total assets of
$121,889,000, total deposits of $105,522,000, and shareholders' equity of
$10,595,000, or 8.69% of total assets.
3
<PAGE>
Share Information and Market Prices
NewMil's common stock is traded on the Nasdaq Stock Market's National
Market Tier under the trading symbol "NMSB". Nutmeg's common and Series B
preferred stock are traded on the Nasdaq Stock Market's Small Cap Tier. The
table below presents the per share closing prices of NewMil's common stock on
Nasdaq, and the average bid and asked prices of Nutmeg common and Series B
preferred stock on Nasdaq as of the dates specified and the pro forma equivalent
market value of the shares of NewMil common stock to be exchanged for each share
of Nutmeg's common stock and Series B preferred stock in the merger. May 30,
2000 was the last trading date before public announcement of the merger
agreement. The pro forma equivalent market value of Nutmeg's common stock and
Series B preferred stock on May 30, 2000 was determined by multiplying the
closing price of NewMil's common stock by an exchange ratio of .825 and 1.44375,
respectively. For more information about the exchange ratio and how it may
change, see "The Merger -- Exchange Ratio and Shareholder Elections" and for
more information about the stock prices and dividends of NewMil and Nutmeg, see
"Market Prices and Dividends."
<TABLE>
<CAPTION>
Closing Price Average Bid and Asked Price
------------- ---------------------------
Nutmeg's Series B
Preferred Stock
Nutmeg's Common Pro Forma
NewMil's Nutmeg's Nutmeg's Stock Pro Forma Equivalent
Common Common Series B Equivalent Market Market
Date Stock Stock Preferred Stock Value Value
<S> <C> <C> <C> <C> <C>
May 30, 2000 $ 9.875 $ 8.172 $ 11.938 $ 8.147 $ 14.257
August __, 2000 $________ $________ $________ $________ $________
</TABLE>
Nutmeg's shareholders are advised to obtain current market quotations for
NewMil's common stock. The market price of NewMil's common stock will fluctuate
between the date of this Proxy Statement/Prospectus and the date on which the
merger takes place. No assurance can be given as to the market price of NewMil's
common stock at the time of the merger; Nutmeg may not terminate the merger
agreement because of changes in the price of NewMil's common stock. See "The
Merger -- Termination and Amendment of the Merger Agreement."
Comparative Per Share Data
The following table shows historical information about net income per
share, cash dividends per share and book value per share, and similar
information reflecting the merger, which we refer to as "pro forma" information.
In presenting the comparative pro forma information for the time periods shown,
we assumed that we had been merged throughout those periods.
We also assumed that the merger will be accounted for as a "purchase" for
accounting and financial reporting purposes. The information listed as
"equivalent pro forma" was obtained by multiplying the pro forma amounts by an
assumed exchange ratio of .825. We present this information to reflect the fact
that Nutmeg common shareholders will receive less than one share of NewMil
common stock for each share of Nutmeg common stock exchanged in the merger. We
have assumed an exchange ratio for Nutmeg Series B preferred stock of 1.44375.
We expect that we will incur merger and integration charges as a result of
combining our companies. We also anticipate that the merger will provide the
combined company with financial benefits that include reduced operating
expenses. These charges and benefits are not reflected in the pro forma data.
While helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, the pro forma information does not reflect
these anticipated financial benefits and, accordingly, does not attempt to
predict or suggest future results. It also does not necessarily reflect what the
historical results of the combined company would have been had our companies
been combined.
The information in the following table is based on, and you should read it
together with, the historical financial information that NewMil has presented in
its Form 10-K for the year ended June 30, 1999 included as Appendix D to this
document, and in its subsequent filings with the SEC which are incorporated into
this document by reference. See "Where You Can Find More Information" on page
___ for a description of where you can find NewMil's prior filings. This
information should also be read in conjunction with Nutmeg's historical
financial information that Nutmeg has presented in Appendices B and C to this
document.
4
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Nine Months Year
Ended Ended
March 31, 2000 June 30, 1999
-------------- -------------
<S> <C> <C>
Net Income per Common Share (Basic)/(1)/:
NewMil - historical $ 0.80 $ 0.80
Nutmeg - historical $ 0.51 $ 0.63
Pro Forma Combined $ 0.64 $ 0.63
Equivalent Pro Forma $ 0.53 $ 0.52
Net Income per Common Share (Diluted)/(1)/:
NewMil - historical $ 0.76 $ 0.76
Nutmeg - historical $ 0.42 $ 0.52
Pro Forma Combined $ 0.62 $ 0.60
Equivalent Pro Forma $ 0.51 $ 0.50
Cash Dividends per Common Share/(1)/:
NewMil - historical $ 0.30 $ 0.35
Nutmeg - historical $ 0.15 $ 0.19
Pro Forma Combined $ 0.26 $ 0.31
Equivalent Pro Forma $ 0.21 $ 0.26
Cash Dividends per Preferred Share:
NewMil - historical $ -- --
Nutmeg - historical $ 0.53 $ 0.70
Pro Forma Combined $ 0.53 $ 0.70
Equivalent Pro Forma $ 0.43 $ 0.58
Book Value per Common Share/(1)/:
NewMil - historical $ 9.23 $ 9.04
Nutmeg - historical $ 4.40 $ 4.25
Pro Forma Combined $ 9.41 $ 9.23
Equivalent Pro Forma $ 7.76 $ 7.61
For Preferred Shareholders
</TABLE>
/(1)/ The number of common shares of Nutmeg is determined by adding 1.75 times
the number of outstanding Series B preferred shares to the number of outstanding
common shares.
5
<PAGE>
SELECTED FINANCIAL DATA
The tables below present summary historical financial and other data for
NewMil and Nutmeg as of the dates and for the periods indicated. This summary
data is based on and should be read in conjunction with NewMil's historical
consolidated financial statements and related notes which it has presented in
its Form 10-K for the year ended June 30, 1999 included as Appendix D to this
document, and in its subsequent filings with the SEC which are incorporated by
reference into this document. This summary should also be read in conjunction
with Nutmeg's historical financial statements and related notes that appear in
Appendices B and C in this document. For additional information about NewMil and
Nutmeg, see "Where You Can Find More Information." You should read all of the
selected financial information we provide in the following tables together with
the historical financial information. All adjustments necessary for a fair
presentation of financial position and results of operations have been included.
The historical operating results of both NewMil and Nutmeg for the nine months
ended March 31, 2000 and 1999, respectively, are not necessarily indicative of
results which may be expected for the entire year. All per share data of NewMil
and Nutmeg have been adjusted retroactively to give effect to stock dividends
and stock splits.
Selected Consolidated Financial Data - NewMil
(Dollars in Thousands)
<TABLE>
<CAPTION>
At or for the
Nine Months Ended
March 31, At or for the Year Ended June 30,
-------------------------------------------------
(unaudited)
--------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Condition and
Other Data
Total assets $383,719 $358,279 $352,117 $367,569 $323,061 $309,363 $308,671
Loans receivable, net 216,055 206,165 210,036 162,849 166,141 150,558 150,442
Securities 139,919 116,484 118,202 162,267 119,368 125,583 127,194
Deposits 307,021 305,188 300,123 293,877 275,392 259,267 252,420
Federal Home Loan
Bank advances and other
borrowings 34,800 15,000 15,000 37,500 13,000 14,776 20,499
Shareholders' equity 33,305 34,542 33,135 33,409 31,719 31,892 32,721
Number of banking
offices 14 15 14 15 13 13 12
Operating Data
Net interest income $ 10,405 $ 9,446 $ 12,649 $ 12,459 $ 11,935 $ 11,399 $ 10,681
Provision for loan losses (495) 75 100 250 400 400 400
Noninterest income 1,383 2,956 3,434 2,864 2,086 1,643 1,830
Noninterest expenses 7,843 8,197 10,438 9,920 9,133 8,853 9,761
Income before income
taxes and extraordinary
items 4,440 4,130 5,545 5,153 4,488 3,789 2,350
Income tax expense
(benefits) 1,513 1,876 2,264 2,164 1,886 1,547 (3,874)
-------- -------- -------- -------- -------- -------- --------
Extraordinary Item, net
of taxes -- (87) (87) -- -- -- --
Cumulative effect of
change in accounting
principles, net of taxes -- (162) (162) -- -- -- --
-------- --------
Net income 2,927 2,005 3,032 2,989 2,602 2,242 6,224
-------- -------- -------- -------- -------- -------- --------
Income available to
common shareholders $ 2,927 $ 2,005 $ 3,032 $ 2,989 $ 2,602 $ 2,242 $ 6,224
======== ======== ======== ======== ======== ======== ========
</TABLE>
6
<PAGE>
Significant Statistical Data - NewMil
<TABLE>
<CAPTION>
At or for the
Nine Months Ended
March 31, At or for the Year Ended June 30,
-------------------------------------------------
(unaudited)
--------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
For The Period:
Net income per common
share:
Basic $ 0.80 $ 0.52 $ 0.80 $ 0.78 $ 0.65 $ 0.51 $ 1.39
Diluted $ 0.76 $ 0.50 $ 0.76 $ 0.74 $ 0.63 $ 0.50 $ 1.37
Cash dividends per
common share $ 0.30 $ 0.26 $ 0.35 $ 0.30 $ 0.23 $ 0.17 $ 0.06
Return on average
shareholders' equity 11.78% 7.76% 8.84% 9.04% 8.02% 6.71% 23.75%
Interest rate spread 3.65% 3.15% 3.19% 3.31% 3.53% 3.58% 3.41%
Net interest margin 4.09% 3.59% 3.64% 3.78% 3.98% 4.01% 3.70%
Noninterest expenses to
average assets 2.99% 3.00% 2.89% 2.91% 2.94% 2.97% 3.25%
At End Of Period:
Diluted weighted average
common shares (000's) 3,827 4,019 3,985 4,066 4,143 4,487 4,554
Book value per common
share $ 9.23 $ 9.15 $ 9.04 $ 8.71 $ 8.27 $ 7.84 $ 7.29
Tangible book value per
common share $ 9.23 $ 9.15 $ 9.04 $ 8.71 $ 8.27 $ 7.84 $ 7.29
Shareholders' equity to
total assets 8.68% 9.64% 9.41% 9.09% 9.82% 10.31% 10.60%
Non-performing assets to
total assets 0.41% 0.50% 0.45% 0.46% 1.11% 2.09% 2.88%
Allowance for loan losses
to Non-performing loans 394.85% 284.92% 403.64% 360.26% 175.25% 114.33% 74.52%
</TABLE>
7
<PAGE>
Selected Consolidated Financial Data and Significant Statistical Data - Nutmeg
(Dollars in Thousands)
<TABLE>
<CAPTION>
At or for the
Three Months Ended
March 31, At or for the Year Ended December 31,
-----------------------------------------------
(unaudited)
-------------------
Financial Condition and 2000 1999 1999 1998 1997 1996 1995
Other Data ------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $121,889 $113,773 $116,827 $111,337 $105,729 $93,298 $85,724
Loans, net 98,241 89,872 94,186 93,362 92,790 84,406 70,763
Deposits 105,522 94,041 93,901 90,728 86,121 77,561 75,184
Shareholders' equity 10,595 9,834 10,419 9,681 8,891 5,632 5,399
Number of banking
offices 4 3 3 3 3 3 3
Operating Data
Net interest income $ 1,286 $ 1,167 $ 4,920 $ 4,548 $ 4,015 $ 3,538 $ 3,287
Provision for loan losses (50) - (25) 100 154 85 70
Noninterest income 330 382 1,629 1,923 1,677 1,433 1,039
Noninterest expenses 1,185 1,091 4,690 4,370 4,070 4,418 3,347
-------- -------- -------- -------- -------- ------- -------
Income before income taxes 481 458 1,884 2,001 1,468 468 909
Income tax expense 159 156 584 878 623 186 385
-------- -------- -------- -------- -------- ------- -------
Net income $ 322 $ 302 $ 1,300 $ 1,123 $ 845 $ 282 $ 524
======== ======== ======== ======== ======== ======= =======
</TABLE>
Significant Statistical Data - Nutmeg
<TABLE>
<CAPTION>
At or for the
Three Months Ended
March 31, At or for the Year Ended December 31,
-----------------------------------------------
(unaudited)
-------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income per common
share
Basic $ 0.17 $ 0.15 $ 0.67 $ 0.58 $ 0.51 $ 0.20 $ 0.40
Diluted $ 0.14 $ 0.12 $ 0.55 $ 0.48 $ 0.42 $ 0.16 $ 0.31
Cash dividends declared
per common share $0.050 $0.048 $0.193 $0.167 $0.123 $0.063 $ 0.00
Cash dividends declared
per preferred share $0.175 $0.175 $ 0.70 $ 0.70 $0.394 $0.228 $0.228
Return on average
shareholders' equity 12.18% 11.34% 12.87% 12.10% 11.33% 5.05% 10.22%
Interest rate spread 4.92% 4.51% 4.88% 4.49% 4.26% 4.20% 4.05%
Net interest margin 4.92% 4.68% 4.95% 4.56% 4.33% 4.23% 4.11%
Noninterest expenses to
average assets 4.32% 4.21% 4.22% 4.05% 4.09% 5.01% 3.96%
At End of Period:
Diluted weighted average
common shares (000's) 2,372 2,364 2,373 2,347 2,032 1,703 1,673
Book value per common
share $ 4.40 $ 4.07 $ 4.29 $ 3.85 $ 3.55 $ 4.03 $ 3.94
Tangible book value per
common share $ 4.40 $ 4.07 $ 4.29 $ 3.85 $ 3.55 $ 4.03 $ 3.94
Shareholders' equity to
total assets 8.69% 8.64% 8.92% 8.70% 8.41% 6.04% 6.30%
Nonaccrual assets to total
assets .45% .90% .59% .94% .89% 1.58% 1.21%
Allowance for loan losses 89.38% 51.76% 73.47% 50.91% 49.36% 32.00% 39.52%
to nonaccrual loans
</TABLE>
8
<PAGE>
NEWMIL BANCORP, INC.
AND
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following presents the unaudited pro forma condensed balance sheets as
of March 31, 2000 and pro forma condensed consolidated statements of income for
the year ended June 30, 1999 and for the nine months ended March 31, 2000 after
giving effect to the acquisition of Nutmeg by NewMil (accounted for as a
purchase). The unaudited pro forma combined financial statements do not give
effect to the anticipated cost savings, revenue enhancements or business
adjustments which are expected to occur. The purchase price may be adjusted
upward based on the sale by Nutmeg of certain loan servicing rights prior to
closing. In addition, certain adjustments included in the unaudited pro forma
combined financial statements are based on estimates and are subject to change
as additional information becomes available.
The information in the following tables is based on, and should be read
together with, the historical financial statements of NewMil and Nutmeg, which
are incorporated by reference or included in this document, and the unaudited
comparative per share data which appears elsewhere in this document. The pro
forma data is presented for comparative purposes only and is not necessarily
indicative of the combined financial position or results of operations in the
future because it does not give effect to the anticipated cost savings, revenue
enhancements or business adjustments which are expected to occur. The proposed
transaction is expected to have a positive impact on NewMil's earnings per share
in the first year. The pro forma data is also not necessarily indicative of the
combined financial position or results of operations which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma financial statements are presented.
NEWMIL BANCORP, INC.
AND
NUTMEG FEDERAL SAVINGS & LOAN ASSOCIATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
MARCH 31, 2000
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NewMil Nutmeg Pro Forma Pro Forma
------ ------ --------- ---------
Adjustments
-----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 16,520 $ 4,395 $ 20,915
Securities:
Available-for-sale at market 98,790 6,261 105,051
Held-to-maturity at amortized cost
(fair value: NewMil $39,308) 41,129 -- 41,129
Loans (net of allowance for loan
losses: NewMil: $4,983 and Nutmeg
$488 216,055 98,241 314,296
Loans held for sale -- 1,765 1,765
Other real estate owned, net 307 -- 307
Loan servicing rights (Note H) -- 9,099 $ (9,099) --
Goodwill (Note D) -- -- 8,202 8,202
Bank premises and equipment, net 5,846 499 6,345
Accrued interest income 2,330 892 3,222
Deferred tax asset, net 2,092 324 2,416
Other assets (Note D) 650 413 2,000 3,063
-------- -------- -------- --------
Total Assets $383,719 $121,889 $ 1,103 $506,711
======== ======== ======== ========
LIABILITIES & SHAREHOLDERS'
EQUITY
Deposits (Note H) $307,021 $105,522 $(10,500) $402,043
Federal Home Loan Bank advances (Note G) 34,800 3,000 10,860 48,660
Due to brokers 5,871 5,871
Accrued interest and other liabilities 2,722 2,772 5,494
-------- -------- -------- --------
Total Liabilities 350,414 111,294 360 462,068
-------- -------- -------- --------
Total Shareholders' Equity (Note E) 33,305 10,595 743 44,643
-------- -------- -------- --------
Total Liabilities & Shareholders Equity $383,719 $121,889 $ 1,103 $506,711
======== ======== ======== ========
</TABLE>
9
<PAGE>
NEWMIL BANCORP, INC.
AND
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended March 31, 2000
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NewMil Nutmeg Pro Forma Pro Forma
------ ------ --------- ---------
Adjustments
-----------
<S> <C> <C> <C> <C>
Net Interest Income (Notes G & H) $10,405 $3,811 $ (456) $13,760
Provision for Loan Losses (495) (50) (545)
Non-Interest Income (Note H) 1,383 1,193 (469) 2,107
Non-Interest Expense (Notes F & H) 7,843 3,645 108 11,596
------- ------ ------ -------
Income Before Income Taxes 4,440 1,409 (1,003) 4,816
Provision for income taxes 1,513 420 (173) 1,760
------- ------ ------ -------
Net Income $ 2,927 $ 989 $ (859) $ 3,057
======= ====== ====== =======
Earnings per common share
Diluted $ 0.76 $ 0.42 $ 0.62
Basic $ 0.80 $ 0.51 $ 0.64
Dividends per common share $ 0.30 $ 0.15 $ 0.26
</TABLE>
NEWMIL BANCORP, INC.
AND
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30, 1999
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NewMil Nutmeg Pro Forma Pro Forma
------ ------ --------- ---------
Adjustments
-----------
<S> <C> <C> <C> <C>
Net Interest Income (Notes G & H) $12,649 $4,718 $ (656) $16,711
Provision for Loan Losses 100 (15) 85
Non-Interest Income (Note H) 3,434 1,747 (625) 4,556
Non-Interest Expense (Notes F & H) 10,438 4,539 144 15,121
------- ------ ------- -------
Income Before Income Taxes, Extraordinary
Items and Accounting Change 5,545 1,941 (1,425) 6,061
Provision for income taxes 2,264 754 (248) 2,770
------- ------ ------- -------
Income before cumulative effect of
accounting change and extraordinary item 3,281 1,187 (1,177) 3,291
Effect of change in accounting principle,
net of taxes (162) (162)
Extraordinary item, net of taxes (87) (87)
------- ------ ------- -------
Net Income $ 3,032 $1,187 $(1,177) $ 3,042
======= ====== ======= =======
Earnings per common share
Diluted $ 0.76 $ 0.52 $ 0.60
Basic $ 0.80 $ 0.63 $ 0.63
Dividends per common share $ 0.35 $ 0.19 $ 0.31
</TABLE>
10
<PAGE>
NEWMIL BANCORP, INC.
AND
NUTMEG FEDERAL SAVINGS & LOAN ASSOCIATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE A: BASIS OF PRESENTATION
The unaudited pro forma combined balance sheet combines the historical
consolidated balance sheets of NewMil and Nutmeg as if the merger had become
effective on March 31, 2000. The pro forma combined statement of income for the
year ended June 30, 1999 combines the historical consolidated statements of
income of NewMil and Nutmeg as if the merger had become effective on July 1,
1998.
The Merger is accounted for as a purchase. Under this method of accounting,
assets and liabilities of Nutmeg are adjusted to their estimated fair value and
combined with the recorded book values of the assets and liabilities of NewMil.
For purposes of the pro forma financial statements, estimates of the fair
value of Nutmeg's assets and liabilities as of March 31, 2000 have been
combined with the recorded values of the assets and liabilities of NewMil. Fair
value adjustments are subject to update as additional information becomes
available.
NOTE B: PURCHASE PRICE
The purchase price is based on exchanging the equivalent of $8.25 in cash
or common stock of NewMil for each share of Nutmeg's common stock and $14.4375
in cash or common stock of NewMil for each share of Nutmeg preferred stock.
These figures may be adjusted upward based on the sale by Nutmeg of certain loan
servicing rights prior to closing. The number of shares of NewMil common stock
into which a share of Nutmeg common stock will be converted will be determined
by dividing $8.25 by the average of the high and low prices of NewMil common
stock on each of the 15 trading days ending on the third trading day before the
effective time of the merger. For the purpose of the pro forma financial
statements, a market price of $10.00 has been assumed for NewMil common stock
for determining the number of shares of NewMil common stock that will be issued.
Accordingly, the share exchange is based on exchanging 0.825 of a share of
NewMil common stock for each share of Nutmeg common stock and 1.44375 of a share
of NewMil common stock for each share of Nutmeg preferred stock. Because the
price of NewMil common stock may vary before the effective time of the merger,
the actual number of shares of NewMil common stock into which a share of Nutmeg
common stock will be converted will not be known until the end of such 15 day
period. NewMil will not be required to exchange shares of NewMil common stock
for more than 60% of the combined total of Nutmeg common and preferred shares
(treating each share of Nutmeg preferred stock as the equivalent of 1.75 shares
of Nutmeg common stock.)
For the purposes of the pro forma financial statements, NewMil common stock
has been exchanged for 60% of the purchase price and cash for 40% of the
purchase price. Furthermore, it has been assumed that all Nutmeg stock options
will be converted into cash. Accordingly, the number of the shares of Nutmeg
common and preferred stock used in calculating the purchase price to be paid in
connection with the Merger reflects an exchange of cash and NewMil common stock
for the outstanding shares of Nutmeg common and preferred stock, exclusive of
Nutmeg's stock options.
The total purchase price and the cash and market value of NewMil common
stock to be issued in connection with the Merger is calculated as follows:
Total
Equivalent
Common Preferred Common
11
<PAGE>
<TABLE>
<CAPTION>
Stock Stock Stock
----- ----- -----
<S> <C> <C> <C>
Nutmeg shares outstanding on March 31, 2000 1,433,406 489,722
Exchange ratio 1.75
Nutmeg common stock equivalent shares 1,433,406 857,101 2,290,507
Purchase price per share $8.25
Total purchase price $18,896,683
Exchange of cash 7,558,683
Exchange of NewMil common stock $11,338,000
Estimated price per share of NewMil common stock $10.00
NewMil common stock to be issued 1,133,800
</TABLE>
NOTE C: PURCHASE ACCOUNTING ADJUSTMENTS
Purchase accounting adjustments as of March 31, 2000, are based on the
best available information and are subject to update as additional information
becomes available. Purchase accounting adjustments, net of applicable taxes,
are as follows:
<TABLE>
<S> <C>
Cost of exercising Nutmeg's stock options $ 652,000
Estimated cost of Nutmeg's change of control agreements 548,000
Professional fees, printing and mailing 654,000
Termination of service bureau contract 46,000
Total purchase accounting adjustments, net of taxes $1,900,000
</TABLE>
NOTE D: CALCULATION OF GOODWILL ADJUSTMENT AND TOTAL GOODWILL DUE TO
MERGER
(IN THOUSANDS)
<TABLE>
<S> <C>
Purchase price $ 18,897
Nutmeg total shareholders equity (10,595)
Estimated purchase accounting adjustments, net of taxes 1,900
Estimated core deposit intangible (2,000)
Goodwill adjustment $ 8,202
</TABLE>
For purposes of the pro forma combined balance sheet, estimates have
been made of the purchase accounting adjustments, net of taxes, as of March 31,
2000. Purchase accounting adjustments are subject to update as additional
information becomes available.
NOTE E: STOCKHOLDERS' EQUITY
The net equity impact of the Merger is $743,000, which represents the
purchase price of $18,897,000, reduced by cash consideration of $7,599,000 and
Nutmeg's stockholders' equity of $10,595,000. In the Merger, NewMil will
exchange cash of $7,599,000 and NewMil common stock with a market value of
$11,338,000 in exchange for Nutmeg's 1,433,406 common shares and 489,722
preferred shares (based on the number of shares outstanding as of March 31,
2000). NewMil will issue 1,133,800 new shares of common stock, based on an
estimated price of $10.00 per share.
NOTE F: GOODWILL AND CORE DEPOSIT INTANGIBLE AMORTIZATION
The pro forma income statements include an adjustment for the amortization of
pro forma goodwill on a straight line basis over 20 years and the amortization
of the core deposit intangible on a straight line basis over 7 years. Total
amortization expense amounts for goodwill and the core deposit intangible for
the nine month period ended March 31, 2000 and the year ended June 30, 1999 are
$522,000 and $696,000 respectively.
NOTE G: FEDERAL HOME LOAN BANK ADVANCES
12
<PAGE>
The cash consideration paid to Nutmeg common and preferred stockholders of
$7,559,000, together with cash payments related to purchase accounting
adjustments of $1.9 million and a net payment of $1.4 million related to the
sale of Nutmeg's loan servicing rights will increase the combined pro forma
borrowings by $10.8 million. The pro forma income statements for the nine month
period ended March 31, 2000 and the year ended June 30, 1999 include $489,000
and $700,000, respectively, in interest expense associated with the additional
borrowings.
NOTE H: SALE OF LOAN SERVICING RIGHTS
Before the completion of the Merger, Nutmeg will sell its loan servicing
rights. For the purpose of these pro forma financial statements, no gain or
loss has been anticipated on the sale. The actual adjustment may be materially
different depending upon a number of factors that can not be predicted at this
time. The sale of Nutmeg's loan servicing rights will result in the elimination
of Nutmeg's loan servicing rights of $9,099,000 and related escrow deposit
balances of approximately $10,500,000 (based on balances as of March 31, 2000).
For the purposes of these pro forma financial statements, the elimination of
income earned and direct costs related to Nutmeg's loan servicing operation does
not have a significant impact on the pro forma consolidated results of
operations for either the nine month period ended March 31, 2000 or the year
ended June 30, 1999. The income statement impact of the sale of the loan
servicing rights is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) Nine Months
Ended Year Ended
March 31, 2000 June 30, 1999
<S> <C> <C>
Net interest income $ 33 $ 44
Non interest income (469) (625)
Non interest expense (414) (552)
Income before tax (22) (29)
Income taxes (7) (10)
Net income $(15) $(19)
</TABLE>
13
<PAGE>
SHAREHOLDER MEETINGS
Matters to be Considered at the Special Meetings.
We are first mailing this document to the holders of Nutmeg's common and
Series B preferred stock and to holders of NewMil common stock on or about
__________, 2000. It is accompanied by a proxy card furnished in connection
with the solicitation of proxies by the Nutmeg Board of Directors for use at the
special meeting of Nutmeg's shareholders on _________________, 2000, at ______
a.m., at the ________________, Connecticut ______________ and by the NewMil
Board of Directors for use at the special meeting of NewMil's shareholders on
______________________. At the special meetings, the holders of Nutmeg's common
and Series B preferred stock and the holders of NewMil's common stock will
consider and vote on:
. the proposal to approve and adopt the merger agreement, the merger and
the other transactions contemplated by the merger agreement, and
. any other business that properly comes before the special meeting, or
any adjournments or postponements of the meeting, including, without
limitation, a motion to adjourn the special meeting to another time
and/or place for the purpose of soliciting additional proxies in order
to approve the merger agreement and the merger or otherwise.
Record Date and Voting.
Nutmeg.
The Nutmeg Board of Directors has fixed the close of business on
________________, 2000 as the record date for determining the Nutmeg
shareholders entitled to receive notice of and to vote at the special meeting.
Only holders of record of Nutmeg's common and Series B preferred stock at the
close of business on that day will be entitled to vote at the special meeting or
at any adjournment or postponement of the meeting. At the close of business on
___________________, 2000, there were _________________ shares of Nutmeg's
common and ___ shares of Nutmeg's Series B preferred stock outstanding and
entitled to vote at the special meeting, held by approximately ____________
shareholders of record.
Each holder of Nutmeg's common stock and Series B preferred stock on
________________, 2000 will be entitled to one vote for each share held of
record on each matter that is properly submitted at the special meeting or any
adjournment or postponement of the meeting. The presence, in person or by
proxy, of the holders of a majority of Nutmeg's common stock and of Nutmeg's
Series B preferred stock issued and outstanding and entitled to vote at the
special meeting is necessary to constitute a quorum. Abstentions and broker
non-votes will be included in the calculation of the number of shares
represented at the special meeting in order to determine whether a quorum has
been achieved. Since approval of the merger agreement requires the affirmative
vote of the holders of at least a majority of the shares of Nutmeg's common
stock as well as a majority of the shares of Nutmeg's Series B preferred stock
and at least two-thirds of all shares of both classes issued and outstanding
combined, abstentions and broker non-votes will have the same effect as a vote
against the merger agreement.
If a quorum is not obtained, or if fewer shares of Nutmeg's common or
Series B preferred stock are voted in favor of the proposal for approval of the
merger agreement than the number required for approval, it is expected that the
special meeting will be adjourned to allow additional time for obtaining
additional proxies. In that event, proxies will be voted to approve an
adjournment, except for proxies as to which instructions have been given to vote
against the merger agreement. The holders of a majority of the shares present in
person or by proxy at the special meeting would be required to approve any
adjournment of the special meeting or any other such business that properly
comes before the special meeting.
If your proxy card is properly executed and received by Nutmeg in time to
be voted at the special meeting, the shares represented by the proxy card will
be voted in accordance with the instructions marked on the proxy card. Executed
proxies with no instructions indicated on the proxy card will be voted FOR the
merger agreement and the merger.
The Nutmeg Board of Directors is not aware of any other matters that may
properly come before the special meeting. If any other matters properly come
before the special meeting, the persons named in the accompanying proxy will
vote the shares represented by all properly executed proxies on those matters as
determined by a majority of the Nutmeg Board of Directors.
To vote on the merger agreement, you need to properly complete the proxy
card and return it in the enclosed envelope or attend the special meeting and
vote in person.
14
<PAGE>
You should not forward any stock certificates with your proxy card. If the
------------------------------------------------------------------
merger takes place, Nutmeg stock certificates should be delivered in accordance
with instructions that will be sent to Nutmeg shareholders by NewMil's exchange
agent promptly after the effective time of the merger.
NewMil.
The NewMil Board of Directors has fixed the close of business on
________________, 2000 as the record date for determining the NewMil
shareholders entitled to receive notice of and to vote at the special meeting.
Only holders of record of NewMil's common stock at the close of business on that
day will be entitled to vote at the special meeting or at any adjournment or
postponement of the meeting. At the close of business on ___________________,
2000, there were _________________ shares of NewMil's common stock outstanding
and entitled to vote at the special meeting, held by approximately ____________
shareholders of record.
Each holder of NewMil's common stock on ________________, 2000 will be
entitled to one vote for each share held of record on each matter that is
properly submitted at the special meeting or any adjournment or postponement of
the meeting. The presence, in person or by proxy, of the holders of a majority
of NewMil's common stock issued and outstanding and entitled to vote at the
special meeting is necessary to constitute a quorum. Abstentions and broker
non-votes will be included in the calculation of the number of shares
represented at the special meeting in order to determine whether a quorum has
been achieved. Since approval of the merger agreement requires the affirmative
vote of the holders of at least a majority of the shares of NewMil's common
stock cast at the special meeting, abstentions will have the same effect as a
vote against the merger agreement.
If a quorum is not obtained, or if fewer shares of NewMil's common stock
are voted in favor of the proposal for approval of the merger agreement than the
number required for approval, it is expected that the special meeting will be
adjourned to allow additional time for obtaining additional proxies. In that
event, proxies will be voted to approve an adjournment, except for proxies as to
which instructions have been given to vote against the merger agreement. The
holders of a majority of the shares present in person or by proxy at the special
meeting would be required to approve any adjournment of the special meeting or
any other such business that properly comes before the special meeting.
If your proxy card is properly executed and received by NewMil in time to
be voted at the special meeting, the shares represented by the proxy card will
be voted in accordance with the instructions marked on the proxy card. Executed
proxies with no instructions indicated on the proxy card will be voted FOR the
merger agreement and the merger.
The NewMil Board of Directors is not aware of any other matters that may
properly come before the special meeting. If any other matters properly come
before the special meeting, the persons named in the accompanying proxy will
vote the shares represented by all properly executed proxies on those matters as
determined by a majority of the NewMil Board of Directors.
Required Vote; Revocability of Proxies.
To vote on the merger agreement, you need to properly complete the proxy
card and return it in the enclosed envelope or attend the special meeting and
vote in person.
In order to approve and adopt the merger agreement, the merger of Nutmeg
and New Milford Savings Bank and the other transactions contemplated by the
merger agreement, the holders of at least a majority of the shares of Nutmeg's
common stock issued and outstanding on _________________, 2000, and a majority
of the shares of Nutmeg's Series B preferred stock issued and outstanding on
___________, 2000, as well as two-thirds of all issued and outstanding stock of
both classes combined, must affirmatively vote FOR the merger agreement and the
merger.
In addition to the votes by Nutmeg shareholders, the holders of a majority
of the shares of NewMil's common stock cast at the special meeting must be voted
FOR the merger agreement and the merger.
The required vote of Nutmeg's shareholders is based on the total number of
outstanding shares of Nutmeg's common stock and Series B preferred stock and not
on the number of shares which are actually voted. Not returning a proxy card,
not voting in person at the special meeting and abstaining from voting will have
the same effect as voting AGAINST the merger agreement and the merger.
15
<PAGE>
All of the directors and executive officers of Nutmeg beneficially owned as
of January 31, 2000, excluding all options to purchase shares of Nutmeg's
common and Series B preferred stock, a total of 574,689 shares of Nutmeg's
common and 182,161 shares of Series B preferred stock, which was approximately
39.95% of the outstanding shares of Nutmeg's common and 37.40% of the shares
of Series B preferred stock on that date. We expect all of these persons to vote
their shares in favor of the merger agreement and the merger.
All of the directors and executive officers of NewMil beneficially owned as
of June 20, 2000, excluding all options to purchase shares of NewMil's common
stock, a total of 130,008 shares of NewMil's common stock, which was
approximately 3.60% of the outstanding shares of NewMil's common stock on that
date. We expect all of these persons to vote their shares in favor of the
merger agreement and the merger. Additionally, Nutmeg owned ____ shares of
NewMil's common stock as of __________, 2000, all of which we expect will be
voted in favor of the merger agreement and merger.
All of the directors and executive officers of Nutmeg beneficially owned as
of ______________, 2000, any excluding all options to purchase shares of
NewMil's common stock, a total of _____________ shares of NewMil's common stock,
which was approximately ____% of the outstanding shares of NewMil's common stock
on that date. We expect all of these persons to vote their shares in favor of
the merger agreement and the merger.
None of the directors and executive officers of NewMil beneficially owned
as of ______________, 2000, any shares of Nutmeg's common or Series B preferred
stock.
If you submit a proxy card, attending the special meeting will not
automatically revoke your proxy. However, you may revoke a proxy at any time
before it is voted by:
. in the case of a Nutmeg shareholder, delivering to Frank Molinaro,
Secretary, Nutmeg Federal Savings & Loan Association, 301 Main Street,
Danbury, Connecticut 06801, a written notice of revocation before the
special meeting,
. in the case of a NewMil shareholder, delivering to Betty F. Pacocha,
Secretary, NewMil Bancorp, Inc., 19 Main Street, New Milford,
Connecticut 06776, a written notice of revocation before the special
meeting,
. delivering to Nutmeg or NewMil, as appropriate, a duly executed proxy
bearing a later date before the special meeting, or
. attending the special meeting and voting in person.
Simply attending the special meeting without voting will not automatically
revoke your proxy.
Nutmeg and NewMil are not obligated to complete the merger unless, among
other things, the merger agreement and the merger are approved by the required
votes of the shareholders of both companies. For a description of the
conditions to the merger, see "The Merger -- Conditions to the Merger."
Solicitation of Proxies.
In addition to solicitation by mail, directors, officers and employees of
Nutmeg and NewMil may solicit proxies for the special meeting from shareholders
personally or by telephone or telecopier without receiving additional
compensation for these activities. The cost of soliciting proxies will be paid
separately by Nutmeg and NewMil. In addition, Nutmeg has retained [ ], a
proxy solicitation firm, to assist in proxy solicitation for the special
meeting. Nutmeg and NewMil also will make arrangements with brokerage firms and
other custodians, nominees and fiduciaries to send proxy materials to their
principals and will reimburse those parties for their expenses in doing so.
16
<PAGE>
THE MERGER
The information in this section is qualified in its entirety by reference
to the full text of the merger agreement including each of its exhibits and the
option agreement, all of which are incorporated by reference into this document
and the material features of which are described in this Proxy
Statement/Prospectus. A copy of the merger agreement including each of its
----------------------------------------------------
exhibits and the other documents described in this Proxy Statement/Prospectus
-----------------------------------------------------------------------------
will be provided to you promptly without charge if you call or write to B. Ian
------------------------------------------------------------------------------
McMahon, NewMil Bancorp, Inc., 19 Main Street, New Milford, Connecticut 06776.
-----------------------------------------------------------------------------
Such documents were also filed as exhibits to the registration statement filed
with the SEC to register the shares of NewMil's common stock to be issued in the
merger. See "Where You Can Find More Information."
The Parties.
NewMil, New Milford Savings Bank and Nutmeg have entered into an agreement
and plan of merger. Under this agreement, NewMil will acquire Nutmeg through
the merger of Nutmeg into New Milford Savings Bank, NewMil's wholly owned
subsidiary.
NewMil.
NewMil is a Delaware corporation and the holding company of New Milford
Savings Bank, NewMil's savings bank subsidiary. Both NewMil and New Milford
Savings Bank are headquartered in New Milford, Connecticut. Deposits at New
Milford Savings Bank are insured by the FDIC. Through New Milford Savings Bank,
NewMil currently serves customers from 14 full service and one special needs
banking offices located in Fairfield and Litchfield Counties, Connecticut.
NewMil, through New Milford Savings Bank, conducts a community banking business
with an emphasis on servicing the needs of individuals and small businesses.
At March 31, 2000, NewMil had total consolidated assets of $383.7 million,
total deposits of $307.0 million, and shareholders' equity of $33.3 million or
8.7% of total assets. At that date, NewMil also had loans receivable net, of
$216.1 million, which included $128.4 million in residential mortgage loans,
$55.1 million in commercial real estate loans, $15.9 million in commercial and
industrial loans and $21.7 million in consumer loans, consisting primarily of
home equity loans. At March 31, 2000, non-performing loans and other real
estate owned were $1.6 million. At that date, NewMil's allowance for loan losses
was $5.0 million, or 394.85% of non-performing loans. For additional information
about NewMil, see "Information About NewMil".
NewMil, as a bank holding company, is regulated by the Federal Reserve
Board. New Milford Savings Bank, as a state savings bank, is regulated by the
Connecticut Department of Banking and the Federal Deposit Insurance Corporation.
Nutmeg.
Nutmeg is a federally chartered savings and loan association headquartered
in Danbury, Connecticut, with additional offices in the neighboring towns of
Bethel and Ridgefield. Deposits at Nutmeg are insured by the FDIC through
its SAIF funds. Nutmeg operates as a community-oriented banking institution
dedicated to providing mortgage products and small business loan services and
products with an emphasis on personalized service.
At March 31, 2000, Nutmeg had total consolidated assets of $121.9 million,
total deposits of $105.5 million, and shareholders' equity of $10.6 million, or
8.69% of total assets. At that date, Nutmeg also had loans receivable, net of
$98.2 million, which included $60.7 million in residential mortgage loans, $18.2
million in commercial real estate loans, $16.0 million in commercial and
industrial loans and $2.4 million in consumer loans, consisting primarily of
home equity loans. At March 31, 2000, nonaccrual loans and other real estate
owned were $460,000. At that date, Nutmeg's allowance for loan losses
was $488,000, or 106% of nonaccrual loans. Nutmeg had $0 in other real estate
owned at March 31, 2000. For additional information about Nutmeg, see
"Information About Nutmeg".
Nutmeg, as a federally chartered savings and loan association, is regulated
by the Office of Thrift Supervision.
17
<PAGE>
Background of the Merger.
Nutmeg.
Nutmeg was organized in 1977 as a federally chartered mutual savings and
loan association headquartered in Danbury, Connecticut. Nutmeg converted from
mutual to capital stock form in 1984. Nutmeg is a member of the FHLB and
operates four banking offices, two in Danbury and one each in Bethel and
Ridgefield, Connecticut.
The Board of Directors of Nutmeg periodically reviews Nutmeg's strategy in
light of general conditions in the banking and thrift industries, competitive
and economic conditions in its market, results of its operations and future
prospects, legislative and regulatory changes and other developments affecting
the banking and thrift industries generally and Nutmeg specifically.
Over the past several years, Nutmeg's Board of Directors has considered a
variety of strategic alternatives, including expanding its business as an
independent company as well as evaluating potential business combinations with
other financial institutions. In June of 1997, Nutmeg completed its offering of
Series B preferred stock, which increased Nutmeg's capital base allowing Nutmeg
to expand both its basic banking business and its mortgage servicing portfolio.
In June of 1998, Nutmeg engaged McConnell, Budd & Downes, Inc. ("MB&D") to
review and advise Nutmeg's Board of Directors on further strategic initiatives,
including possible combinations with other financial institutions. During 1998
and 1999, Nutmeg, with the advice of MB&D, held preliminary discussions with
several organizations, including NewMil, regarding potential business
combinations. However, during this time, none of the discussions advanced to a
level at which due diligence examinations were conducted. In the first quarter
of 2000, discussions with NewMil and another financial institution became more
serious, and, during the last week of March, 2000, both NewMil and the other
party submitted to Nutmeg written, non-binding indications of interest in
acquiring Nutmeg.
At a meeting held April 3, 2000, Nutmeg's Board of Directors' Planning
Committee evaluated both indications from a financial standpoint and reviewed
publicly available financial information regarding both parties with the advice
of MB&D. Following this review, the Nutmeg Planning Committee elected to
continue negotiations with both parties. A due diligence review of Nutmeg's
business was conducted by NewMil in late April, and NewMil submitted an updated
indication of interest dated May 1, 2000. The other party conducted its due
diligence review of Nutmeg in early May.
At a meeting held May 11, 2000, Nutmeg's Board of Directors, with
representatives of MB&D and Day, Berry & Howard LLP, reviewed the updated offer
from NewMil and authorized the Directors' Planning Committee to negotiate the
terms of a definitive agreement with NewMil. On May 24, 2000, both parties met
to complete negotiations of the material terms of the merger agreement.
On May 26, 2000, a final indication of interest was received by Nutmeg from
the other party who had conducted a due diligence review. At a meeting held on
May 30, 2000, Nutmeg's Board of Directors, along with representatives of MB&D
and Day, Berry & Howard LLP, reviewed both the final indication received from
the other party and the final version of the merger agreement that had been
negotiated with NewMil. After a comprehensive review of the financial terms,
structure and contingencies associated with the other party's offer, Nutmeg's
Board of Directors elected to reject the other party's offer and proceed with
the NewMil proposal. Nutmeg's Board of Directors then reviewed the proposed
agreement with NewMil and elected to approve the agreement with NewMil.
NewMil.
NewMil was organized in 1987 to operate principally as a bank holding
company for New Milford Savings Bank, which was originally organized in 1858 and
converted to public ownership in 1986.
NewMil has indicated for several years its desire to utilize excess capital
to effect combination transactions to enhance shareholder value. NewMil
believes that the acquisition of Nutmeg is in furtherance of that objective.
Nutmeg's offices are located in towns adjacent to or within NewMil's current
market areas including the City of Danbury, the largest municipality in northern
Fairfield County. The combination will further NewMil's expansion in Fairfield
County which has a population with one of the highest per capita incomes in the
United States.
18
<PAGE>
Recommendation of the Nutmeg Board of Directors and Reasons for the Merger.
The Board of Directors of Nutmeg has approved the merger agreement and has
determined that the merger is fair to and in the best interests of Nutmeg and
its shareholders. Nutmeg's Board of Directors believes that the merger will
enable holders of Nutmeg's common stock to realize increased value due to the
premium over Nutmeg's market price prior to the public announcement of the
merger and book value per share offered by NewMil. The Board also believes that
the merger may enable those Nutmeg shareholders who elect to receive shares of
NewMil common stock to participate in opportunities for appreciation of NewMil's
common stock. In reaching its decision to approve the merger agreement, the
Board consulted with its outside counsel, Day, Berry & Howard LLP, regarding the
legal terms of the merger and the Board's fiduciary obligations in its
consideration of the proposed merger, its financial advisor, MB&D, regarding the
financial aspects and fairness of the proposed merger agreement, as well as with
management of Nutmeg. Without assigning any relative or specific weight,
Nutmeg's Board considered the following material factors, both from a short-term
and long-term perspective:
. Nutmeg's Board's familiarity with, and review of, the business,
financial condition, results of operations and prospects of Nutmeg,
including, but not limited to, its potential growth, development,
productivity and profitability and the business risks associated with
the merger;
. The current and prospective environment in which Nutmeg operates,
including national and local economic conditions, the highly
competitive environment for financial institutions generally, the
increased regulatory burden on financial institutions, and the trend
toward consolidation in the financial services industry;
. The potential appreciation in market and book value of Nutmeg's common
stock on both a short-and long-term basis, as a stand-alone entity;
. The proposal by the FASB to eliminate pooling of interests accounting
treatment by year end 2000 and its potential affect on acquisition
values;
. Information concerning NewMil's business, financial condition, results
of operations, asset quality and prospects including the long-term
growth potential of NewMil's common stock, the future growth prospects
of NewMil combined with Nutmeg following the proposed merger, the
potential synergies expected from the merger and the business risks
associated with the merger;
. The fact that the exchange of NewMil's common stock for Nutmeg's
common and Series B preferred stock can be effected on a tax-free
basis for Nutmeg shareholders (except for cash paid), and the
potential for appreciation and growth for the market and book value of
NewMil's common stock following the proposed merger;
. The oral presentation and written opinion of MB&D that the terms of
the merger agreement are fair to the holders of Nutmeg's common and
Series B preferred stock from a financial point of view;
. The advantages and disadvantages of Nutmeg remaining an independent
institution or affiliating with a larger institution;
. The fact that three of the directors of Nutmeg will become directors
of NewMil and New Milford Savings Bank;
. The short- and long-term interests of Nutmeg and its shareholders, the
interests of the employees, customers, creditors and suppliers of
Nutmeg, and the interests of Nutmeg's communities all of which can be
served to advantage by an appropriate affiliation with a larger
institution with increased economies of scale and with a greater
capacity to serve all of the banking needs of the community; and
. The compatibility of the businesses and management philosophies of
Nutmeg and NewMil, and NewMil's strong commitment to the communities
it serves.
On the basis of these considerations, the merger agreement was
approved by Nutmeg's Board of Directors.
19
<PAGE>
Purpose and Effects of the Merger.
The purpose of the merger is to enable NewMil to acquire the assets and
business of Nutmeg. After the merger, it is expected that all of Nutmeg's
branch banking offices will remain open and will be operated as banking offices
of New Milford Savings Bank.
The merger will result in an expansion of New Milford Savings Bank's
primary market area to include Nutmeg's banking offices in Connecticut,
including the City of Danbury, the largest municipality in northern Fairfield
County. The assets and business of New Milford Savings Bank's banking offices
will broaden NewMil's existing operations in Fairfield County, one of the
wealthiest in the nation, and where New Milford Savings Bank currently has four
banking offices. NewMil expects to achieve reductions in the current operating
expenses of Nutmeg upon the consolidation of Nutmeg's operations into New
Milford Savings Bank. Upon completion of the merger, except as discussed below,
the issued and outstanding shares of Nutmeg's common and Series B preferred
stock automatically will be converted into shares of NewMil's common stock or
cash. See "-- Exchange Ratio and Shareholder Elections."
Structure.
Nutmeg will merge into New Milford Savings Bank, with New Milford Savings
Bank as the surviving corporation. When the merger takes place, except as
discussed below, each issued and outstanding share of Nutmeg's common and Series
B preferred stock will be converted into the right to receive, at the election
of the holder, NewMil common stock, cash or a combination of NewMil common stock
and cash based on the exchange ratio and the results of the elections made by
Nutmeg's shareholders, as described below. Cash will be paid instead of
fractional shares. The consideration to be received by Nutmeg shareholders may
be increased based on the results of the required sale by Nutmeg prior to
closing of loan servicing rights. See "-- Exchange Ratio and Shareholder
Elections". Shares of Nutmeg's common and Series B preferred stock held as
treasury stock or held directly or indirectly by Nutmeg, NewMil or any of their
subsidiaries, other than trust account shares and shares related to a previously
contracted debt, will be canceled and shall cease to exist.
We expect that the merger will take place in the fourth quarter of 2000, or
as soon as possible after we receive all required regulatory and shareholder
approvals and all regulatory waiting periods expire. If the merger does not
take place by March 31, 2001, the merger agreement may be terminated by either
NewMil or Nutmeg unless both agree to extend it.
The merger agreement permits NewMil to modify the structure of this
transaction so long as:
. there are no material adverse federal income tax consequences to
Nutmeg's shareholders from the modification;
. the consideration to be paid to Nutmeg's shareholders under the merger
agreement is not changed or reduced in amount;
. the modification will not materially change the rights or benefits of
any director, officer or employee of Nutmeg provided in the merger
agreement; and
. the modification will not be reasonably likely to delay materially or
jeopardize receipt of any required regulatory approvals. NewMil
presently has no intent to modify the structure of the merger.
Exchange Ratio and Shareholder Elections.
The merger agreement provides that at the effective time of the merger,
except as discussed below, all outstanding shares of Nutmeg's common and Series
B preferred stock automatically will be converted into the right to receive, at
the election of the Nutmeg shareholder, either a number of shares of NewMil's
common stock or an amount of cash or a combination of stock and cash.
If a holder of Nutmeg common stock elects to receive NewMil common stock,
the number of shares of NewMil common stock into which a share of Nutmeg common
stock will be converted will be determined by dividing $8.25 by the average of
the high and low prices of NewMil common stock on each of the 15 trading days
ending on the third trading day before the effective time of the merger. Because
the price of NewMil common stock may vary during such 15 day period, the actual
number of shares of NewMil common stock into which a share of Nutmeg common
stock will be converted will not be known until the end of such 15 day period.
If NewMil should publicly announce that it is a party to a pending
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transaction involving the acquisition by a third party of a significant amount
of NewMil common stock, the period in which the average price of NewMil common
stock is determined will be changed to a different 15 day period that begins 30
trading days before the date of such public announcement. We do not know of any
transaction that would require that such 15 day period be changed. The $8.25
amount may be increased if Nutmeg realizes a net gain on the sale of its loan
servicing rights which it is required to sell before the effective time of the
merger.
If a holder of Nutmeg common stock elects to receive cash, the amount of
cash into which a share of Nutmeg common stock will be converted will be $8.25,
increased if Nutmeg realizes a net gain on the sale of loan servicing rights as
discussed above.
A share of Nutmeg Series B preferred stock will be converted into 1.75
times the number of shares of NewMil common stock or 1.75 times the amount of
cash into which a share of Nutmeg common stock would be converted.
We have included an election form with the notice of the special meeting of
Nutmeg's shareholders. Nutmeg's shareholders may specify on the election form
the number of shares of their Nutmeg common and Series B preferred stock that
they desire to have converted into NewMil common stock and the number of shares
of Nutmeg common and Series B preferred stock that they desire to be exchanged
for cash. Any shareholder who does not submit an election form by the deadline
of 5:00 p.m. New York City time on ______, 2000 will be deemed to have elected
to receive cash in exchange for his or her shares (subject to adjustment,
however, if necessary to satisfy Nutmeg shareholders who elect cash. Any Nutmeg
shareholder may change an election as long as a revised election form is
submitted in time for it to be received by the exchange agent before the
deadline. NewMil will announce a special 48 hour election change period on the
day following the day the final exchange ratio is set. This will take place
after the special meetings and shortly before the closing date. The announcement
will be made on NewMil's internet web site (www.newmil.com). It will enable
Nutmeg shareholders to change elections by communicating with the exchange agent
by facsimile transmission or e-mail as described in the announcement.
NewMil will not be required to exchange shares of NewMil common stock for
more than 60% of the combined total of Nutmeg common and preferred shares
(treating each share of Nutmeg Series B preferred stock as the equivalent of
1.75 shares of Nutmeg common stock.) Therefore, if the holders of Nutmeg common
and Series B preferred stock elect to receive NewMil common stock in the merger
in exchange for more than 60% of the outstanding shares of Nutmeg common and
Series B preferred stock (treating each share of Nutmeg Series B preferred stock
as the equivalent of 1.75 shares of Nutmeg common stock), NewMil will have the
right to reduce the amount of NewMil common stock and increase the amount of
cash into which the shares of Nutmeg common and Series B preferred stock of the
holders who have elected to receive NewMil common stock will be converted. This
adjustment will be allocated among the holders of Nutmeg common and Series B
preferred stock who have elected to receive NewMil common stock proportional to
their Nutmeg share holdings.
NewMil will also not be required to exchange cash for more than 50% of the
combined total of Nutmeg common and preferred shares. Therefore, if the holders
of Nutmeg common and Series B preferred stock elect to receive cash in the
merger for more than 50% of the outstanding shares of Nutmeg common and Series B
preferred stock (treating each share of Nutmeg Series B preferred stock as the
equivalent of 1.75 shares of Nutmeg common stock), NewMil will have the right to
reduce the amount of cash and increase the amount of NewMil common stock into
which the shares of Nutmeg common and Series B preferred stock of the holders
who have elected to receive cash will be converted. Such adjustment will be
allocated among such holders of Nutmeg common and Series B preferred stock as
nearly as practicable in proportion to their holdings as to which an election to
receive cash may have been made.
As of the date of this Joint Proxy Statement/Prospectus, Nutmeg has entered
into a contract for the sale of its loan servicing rights which will, if closed
in accordance with the contract terms, result in a net gain on the sale of
$______, or $______ per common stock share of Nutmeg ($____ per Series B
preferred stock share) which will result in an identical increase in the value
of the stock or cash consideration received by Nutmeg stockholders from NewMil.
No assurance can now be given that the sale will be closed on the current terms
of the contract. The actual adjustment may be materially different depending
upon a number of factors which can not be predicted at this time.
Shares of Nutmeg's common stock held as treasury stock and shares held
directly or indirectly by Nutmeg, NewMil or any of their subsidiaries, other
than trust account shares and shares related to a previously contracted debt,
will be canceled. Certificates for fractions of shares of NewMil's common stock
will not be issued. Instead of a fractional share of NewMil's common stock, a
Nutmeg shareholder will be entitled to receive an amount of cash equal to the
fraction of a share of NewMil's common stock to which the shareholder would
otherwise be entitled multiplied by $8.25, increased if Nutmeg has realized a
gain on the sale of its loan servicing rights as discussed above.
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The conversion of Nutmeg's common and Series B preferred stock into shares
of NewMil's common stock and/or cash at the exchange ratio described above will
occur automatically upon completion of the merger.
NewMil will deposit with the exchange agent the certificates representing
NewMil's common stock to be issued to Nutmeg shareholders and the cash to be
paid to Nutmeg shareholders in exchange for Nutmeg's common and Series B
preferred stock in accordance with the elections of Nutmeg's shareholders, along
with cash to be paid instead of fractional shares. As soon as practicable after
the merger takes place, the exchange agent will mail a letter of transmittal and
instructions for use in surrendering certificates to each shareholder who held
Nutmeg's common or Series B preferred stock immediately before the effective
time. Upon surrendering his or her certificate(s) representing shares of
Nutmeg's common or Series B preferred stock, together with the signed letter of
transmittal, a Nutmeg shareholder who is entitled to receive NewMil common stock
shall be entitled to receive promptly certificate(s) representing a number of
shares of NewMil's common stock determined in accordance with the exchange ratio
and a check representing the amount of cash payable in lieu of fractional
shares, if any. A Nutmeg shareholder who is entitled to receive cash in
exchange for his or her Nutmeg stock shall, upon surrendering the certificate(s)
representing such stock, be entitled to receive promptly a check for the amount
of such cash. No dividends or distributions on NewMil's common stock payable to
any Nutmeg shareholder will be paid until the shareholder surrenders the
certificate(s) representing the shares of Nutmeg's common or Series B preferred
stock for exchange. No interest will be paid or accrued to Nutmeg shareholders
on any cash payable to such shareholders in the merger.
If any certificate representing shares of NewMil's common stock is to be
issued in a name other than that in which the certificate for shares surrendered
in exchange is registered, or cash is to be paid to a person other than the
registered holder, it will be a condition of issuance or payment that the
certificate so surrendered be properly endorsed or otherwise be in proper form
for transfer and that the person requesting the exchange either:
. pay to the exchange agent in advance any transfer or other taxes
required by reason of the issuance of a certificate or payment to a
person other than the registered holder of the certificate
surrendered, or
. establish to the satisfaction of the exchange agent that the tax has
been paid or is not payable.
After the close of business on the day before the merger takes place, there
will be no transfers on Nutmeg's stock transfer books of shares of Nutmeg's
common or Series B preferred stock, and any shares of this kind that are
presented to the exchange agent after the merger takes place will be canceled
and exchanged for cash in accordance with the exchange ratio.
Any portion of the NewMil common stock and cash deposited by NewMil with
the exchange agent that remains unclaimed by Nutmeg shareholders for six months
after the effective time of the merger will be returned to NewMil. Any Nutmeg
shareholder who has not exchanged shares of Nutmeg's common or Series B
preferred stock in accordance with the merger agreement before that time may
look only to NewMil for the shares of NewMil common stock, cash or cash payable
in lieu of fractional shares, exchangeable for these shares and for any unpaid
dividends or distributions after that time. No interest will be payable to such
shareholder. Neither NewMil, Nutmeg, the exchange agent nor any other person
will be liable to any Nutmeg shareholder for any amount properly delivered to a
public official under applicable abandoned property, escheat or similar laws.
Stock certificates for shares of Nutmeg's common or Series B preferred
stock should NOT be returned to Nutmeg with the enclosed proxy card. After the
merger takes place, you will receive instructions on how to exchange your Nutmeg
certificates for NewMil certificates or for cash.
Options.
As of the record date, there were outstanding options to purchase [286,552]
shares of Nutmeg's common stock at an average exercise price of [$4.85] per
share. Under the merger agreement, each Nutmeg option that is outstanding and
unexercised immediately before the effective time shall be converted
automatically, at the effective time, into cash or NewMil common stock equal to
the difference between the option exercise price and $8.25, as adjusted.
Whether the conversion of the option will be into cash or NewMil common stock
will be based on the option holder's election under the same procedures and
restrictions that apply to all Nutmeg shareholders.
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Regulatory Approvals.
For the acquisition of Nutmeg and the merger of New Milford Savings Bank
and Nutmeg to take place, we must receive approvals of the Federal Deposit
Insurance Corporation and the Connecticut Commissioner of Banking, apply for a
waiver from the Board of Governors of the Federal Reserve System and provide a
notice to the Office of Thrift Supervision. In this section, we refer to these
approvals as the "required regulatory approvals". NewMil and Nutmeg have agreed
to use their best efforts to obtain the required regulatory approvals.
New Milford Savings Bank has filed with the FDIC an application for
approval of the merger of New Milford Savings Bank and Nutmeg. We refer to that
merger in this section as the "bank merger". The bank merger is subject to the
approval of the FDIC under the Bank Merger Act provisions of the Federal Deposit
Insurance Act. These approvals require consideration by the FDIC of various
factors, including assessments of the competitive effect of the contemplated
transaction, the managerial and financial resources and future prospects of the
resulting institution, and the effect of the contemplated transaction on the
convenience and needs of the communities to be served. The Community
Reinvestment Act of 1977, commonly referred to as the "CRA", also requires that
the FDIC, in deciding whether to approve the bank merger, assess the records of
performance of New Milford Savings Bank and Nutmeg in meeting the credit needs
of the communities they serve, including low and moderate income neighborhoods.
As part of the review process, it is not unusual for the FDIC to receive
protests and other adverse comments from community groups and others. New
Milford Savings Bank currently has a "satisfactory" CRA rating from the FDIC.
Nutmeg currently has an "outstanding" CRA rating from the OTS. The FDIC
regulations require publication of notice and an opportunity for public comment
concerning the applications filed in connection with the bank merger, and
authorize the FDIC to hold informal and formal meetings in connection with the
applications if the FDIC, after reviewing the applications or other materials,
determines it desirable to do so or receives a request for an informal meeting.
Any meeting or comments provided by third parties could prolong the period
during which the bank merger is subject to review by the FDIC. As of the date
of this Proxy Statement/Prospectus, NewMil is not aware of any protests, adverse
comments or requests for a meeting filed with the FDIC concerning the bank
merger. The bank merger may not take place for a period of 15 to 30 days
following FDIC approval, during which time the Department of Justice has
authority to challenge the bank merger on antitrust grounds. The FDIC will
determine the precise length of the period in consultation with the Department
of Justice. The commencement of an antitrust action would stay the
effectiveness of any approval granted by the FDIC unless a court specifically
orders otherwise. If the Department of Justice does not start a legal action
during the waiting period, it may not challenge the transaction afterward,
except in an action under Section 2 of the Sherman Antitrust Act.
An application has been filed with the Connecticut Commissioner of Banking
in connection with the merger of Nutmeg into New Milford Savings Bank. In
reviewing the application, the Connecticut Commissioner will review and
consider, among other things, whether the investment and lending policies of the
two institutions are consistent with safe and sound banking practices and will
benefit the economy of the state, whether the services or proposed services of
the two institutions are consistent with safe and sound banking practices and
will benefit the economy of the state, the competitive effects of the
transaction, and the financial and managerial resources of the two institutions.
The Connecticut Commissioner also will review the institutions' record under the
CRA. The Connecticut Commissioner may, at his discretion, hold a public hearing
on the proposed transaction.
NewMil has requested from the Board of Governors of the Federal Reserve
System a waiver of any application filing requirement under the Bank Holding
Company Act of 1956 that would otherwise apply to the merger.
Nutmeg has filed a formal notice with the OTS advising of the proposed
merger. The OTS has the power to challenge the merger under several possible
theories. No such challenges are presently anticipated.
NewMil and Nutmeg are not aware of any other material governmental
approvals that are required for the merger and the bank merger to take place
that are not described above. If any other approval or action is required, we
presently expect that we would seek the approval or take the necessary action.
The transaction cannot take place without the required regulatory
approvals, which we have not received yet. There is no assurance that we will
receive these approvals, and if we do, when we will receive them. Also, there
is no assurance that the Department of Justice will not challenge the merger,
or, if a challenge is made, what the result of a challenge would be.
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Conditions to the Merger.
Under the merger agreement, NewMil and Nutmeg are not required to complete
the transaction unless the following conditions are satisfied:
. the merger agreement is not terminated on or before the effective time
of the merger;
. the merger agreement and the merger are approved by the affirmative
vote of the holders of at least two-thirds of the issued and
outstanding shares of both Nutmeg's common stock and Series B
preferred stock entitled to vote at the special meeting as well as at
least a majority of the issued and outstanding shares of Nutmeg's
common stock and Series B preferred stock as separate classes;
. the merger agreement and the merger are approved by the affirmative
vote of the holders of a majority of the shares of NewMil common stock
cast at the NewMil special meeting;
. NewMil's common stock to be issued in the merger is authorized for
quotation on the Nasdaq Stock Market's National Market Tier (or such
other exchange on which the stock may become listed);
. all required regulatory approvals are obtained and remain in full
force and effect, all statutory waiting periods related to these
approvals expire, and none of the regulatory approvals or statutory
waiting periods contains a non-customary provision that NewMil
reasonably considers to be burdensome or otherwise alters the benefits
of the merger agreement;
. the registration statement filed with the SEC to cover the shares of
NewMil's common stock to be issued in the merger is effective and is
not subject to a stop order or any threatened stop order;
. no order, injunction or decree preventing the merger from taking place
is in effect and the completion of the merger continues to be legal;
and
. NewMil and Nutmeg receive a favorable tax opinion from NewMil's
counsel that is reasonably satisfactory to NewMil and Nutmeg,
including an opinion as to the non-recognition of gain or loss by
Nutmeg shareholders who elect to receive NewMil common stock.
NewMil is not required to complete the merger unless the following additional
conditions are satisfied or waived:
. the representations and warranties of Nutmeg contained in the merger
agreement are true and correct in all material respects as of the date
of the merger agreement and as of the effective time of the merger;
. Nutmeg performs in all material respects all covenants and agreements
contained in the merger agreement to be performed by Nutmeg by the
effective time;
. the amount of Nutmeg's shareholders' equity as shown on its balance
sheet immediately after it has sold its loan servicing rights is at
least as great as the shareholders' equity shown on Nutmeg's balance
sheet as of March 31, 2000;
. Nutmeg obtains the consents, approvals or waivers of other persons
that are required to permit NewMil and New Milford Savings Bank to
succeed to any obligations, rights or interests of Nutmeg under any
agreement, except where the failure to obtain consents, approvals or
waivers would not have a material adverse effect on NewMil or New
Milford Savings Bank;
. no proceeding initiated by any governmental entity seeking an
injunction preventing the merger from taking place is pending;
. NewMil receives the written opinion of Day, Berry & Howard LLP,
counsel to Nutmeg, dated as of the closing date, as to such matters as
NewMil reasonably requests; and
. NewMil receives letters, known as "comfort letters", from Seward and
Monde, Nutmeg's independent public accountants, as to Nutmeg's
financial data included in this Proxy Statement/Prospectus.
Nutmeg is not required to complete the merger unless the following additional
conditions are satisfied or waived:
. the representations and warranties of NewMil contained in the merger
agreement are true and correct in all material respects as of the date
of the merger agreement and as of the effective time of the merger;
. NewMil performs in all material respects all covenants and agreements
contained in the merger agreement required to be performed by it by
the effective time;
. NewMil and New Milford Savings Bank obtain the consents, approvals or
waivers of other persons that are required in connection with the
transaction contemplated by the merger;
. no proceeding initiated by any governmental entity seeking an
injunction preventing the merger from taking place is pending; and
. Nutmeg receives the written opinion of Tyler Cooper & Alcorn, LLP,
counsel to NewMil, dated the closing date, as to such matters as
Nutmeg reasonably requests.
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Conduct of Business Pending the Merger.
The merger agreement contains various restrictions on the operations of
Nutmeg before the effective time of the merger. In general, the merger
agreement obligates Nutmeg to continue to carry on its business in the ordinary
course consistent with past practices and with prudent banking practices, with
specific limitations on the lending activities and other operations of Nutmeg.
The merger agreement prohibits Nutmeg from:
. declaring or paying any dividends or other distributions on its
capital stock other than regular quarterly cash dividends on Nutmeg's
common and Series B preferred stock and accrued dividends on Nutmeg's
Series B preferred stock through the closing date of the merger,
provided such payment does not result in Nutmeg's shareholders' equity
being less than it was at March 31, 2000. Nutmeg is permitted to pay a
regular dividend on its common stock to the holders of Nutmeg common
stock who receive NewMil common stock in the merger if such holders
would otherwise fail to receive a quarterly cash dividend from either
Nutmeg or NewMil;
. splitting, combining or reclassifying any of its capital stock;
. issuing or authorizing or proposing the issuance of any securities,
other than the issuance of additional shares of Nutmeg common stock
upon the exercise or fulfillment of options issued or existing under
Nutmeg's stock option plans in accordance with their present terms;
. amending its certificate of incorporation or bylaws;
. authorizing or permitting any of its officers, directors, employees or
agents to solicit, initiate or encourage, directly or indirectly, any
inquiries or proposals concerning any tender or exchange offer,
merger, consolidation, or business combination involving Nutmeg or the
acquisition of any substantial equity interest in Nutmeg;
. making capital expenditures aggregating in excess of $25,000;
. entering any new line of business;
. acquiring an equity interest in the assets of other business
organizations except in connection with foreclosures, settlements or
loan restructures in the ordinary course of business consistent with
prudent banking practices;
. taking any action intended or reasonably expected to result in any of
its representations and warranties being or becoming untrue or in any
of the merger conditions not being satisfied;
. changing its methods of accounting in effect at December 31, 1999,
except as required by changes in regulatory or generally accepted
accounting principles;
. adopting or amending any employee plans or agreements between Nutmeg
and its present or former employees, officers, directors or
independent contractors;
. increasing the compensation of any employee or director except in
accordance with past practices in the ordinary course of business;
. entering into, modifying or renewing any agreement or arrangement
providing for the payment to any director, officer or employer of
compensation or benefits;
. hiring any new employee at an annual compensation in excess of
$20,000;
. paying any retention payments to employees except for retention
payment bonuses totaling in the aggregate no more than $50,000;
. paying any severance payments to employees except for severance
payments totaling in the aggregate no more than $50,000;
. paying expenses of any employees or directors for attending
conventions or similar meetings except in accordance with past
practices in the ordinary course of business;
. promoting any employee to the rank of vice president or higher;
. making contributions to employee benefit plans that are larger than
the minimum amount required by law or that are not deductible for tax
purposes;
. incurring any indebtedness for borrowed money or assuming the
obligations of a third party;
. selling, opening or closing any banking or other office;
. making any equity investments in real estate, other than in connection
with foreclosures or settlements in lieu of foreclosures in the
ordinary course of business consistent with past banking practices;
. making any new loans or modifying any existing loans with any
affiliated person of Nutmeg;
. making any investment, or incurring any deposit liabilities, other
than in the ordinary course of business consistent with past practice;
. purchasing any loans or selling, purchasing or leasing any real
property other than consistent with past practices;
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. originating any unsecured consumer loans in excess of $10,000,
commercial business loans in excess of $250,000, commercial real
estate loans in excess of $250,000 as to any loan or $250,000 in the
aggregate as to related loans or to loans to related persons, or land
acquisition loans to borrowers who intend to construct a residence
thereon in excess of the lesser of 75% of the appraised value of such
land or $100,000;
. engaging in any forward commitment, futures transaction, financial
options transactions, hedging or arbitrage transaction or covered
trading activities or making any investment in any investment security
with a maturity of more than one year;
. changing its methods of accounting; or
. purchasing any mortgage loan servicing rights except in connection
with existing agreements.
Third Party Proposals.
Under the merger agreement, Nutmeg generally may not authorize or permit
any of its officers, directors, employees or agents to solicit, initiate or
encourage any inquiries relating to any third party proposal relating to a
tender offer or exchange offer or acquisition of a substantial equity interest
in or acquisition of a substantial portion of the assets of or any merger or
consolidation with Nutmeg. There is also a prohibition against holding
substantive discussions or negotiations and providing confidential information
regarding these kinds of proposals. Nevertheless, the Nutmeg Board of Directors
may disregard these restrictions if, based on advice of counsel, it reasonably
determines in the exercise of its fiduciary duty that this kind of information
must be furnished and discussions and negotiations must be entered into.
Expenses; Breakup Fee.
The merger agreement generally provides that all costs and expenses
incurred in connection with the merger agreement and the transactions
contemplated by the merger agreement shall be paid for by the party incurring
such expense, except that NewMil will pay all filing and other fees paid to the
SEC in connection with the merger. However, if the merger agreement is
terminated by NewMil or Nutmeg as a result of a material breach of a
representation, warranty, covenant or other agreement contained in the merger
agreement by the other party, the merger agreement provides for the non-
terminating party to pay all documented reasonable expenses of the terminating
party up to $150,000 plus a breakup fee. The breakup fee that would be payable
by Nutmeg to NewMil would be $300,000. The breakup fee that would be payable by
NewMil to Nutmeg would be either $500,000 or, if Nutmeg has entered into a
contract to sell its loan servicing rights, the breakup fee would be $600,000.
If the merger agreement is terminated because either party's shareholders have
not given the approvals required under the merger agreement, that party will be
required to pay the other party's documented reasonable expenses up to $150,000.
In the event Nutmeg shareholders do not approve the merger agreement after a
third party announces a competing acquisition proposal for at least 10% of
Nutmeg's common stock or any director, officer or 5% holder of Nutmeg's common
stock announces opposition to the merger agreement, Nutmeg shall also pay all
documented reasonable costs of NewMil up to $150,000 plus a breakup fee of
$300,000. Some of these events would also permit NewMil to exercise its rights
under the option agreement. See "--Option Agreement."
Fairness Opinion of McConnell, Budd & Downes, Inc.
On May 30, 2000, McConnell, Budd & Downes, Inc., ("MB&D") Nutmeg's
financial advisor, delivered its oral opinion to the Board of Directors of
Nutmeg that, as of that date, the consideration offered by NewMil was fair, from
a financial point of view, to Nutmeg Common and Preferred Shareholders. The
basis for this opinion has been updated for the purposes of this Proxy
Statement/Prospectus and the opinion remains unchanged.
We have attached as Exhibit A to this Proxy Statement/Prospectus the full
text of the MB&D opinion, which describes the assumptions made, matters
considered and limits on the review undertaken. The following is a summary of
the opinion and matters which MB&D considered. We urge you to read the MB&D
opinion in its entirety.
Nutmeg retained MB&D on June 26, 1998 to act as financial advisor to Nutmeg
and provide assistance in evaluating Nutmeg's strategic alternatives, to include
a potential combination with another financial institution. Nutmeg retained
MB&D based on its qualifications and experience in the financial analysis of
banking and thrift institutions generally, its knowledge of the Connecticut
banking market and its experience with merger and acquisition transactions
involving banking institutions. As part of its investment banking business,
which is focused exclusively on the financial services industry, MB&D is
regularly engaged in the valuation of financial institutions and their
securities in connection with its equity brokerage business generally and
mergers and acquisitions in particular.
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Members of the Corporate Finance Advisory Group of MB&D have extensive
experience in advising financial institution clients on mergers and
acquisitions. As part of its business as a NASD broker-dealer, MB&D may, at
times purchase securities from or sell securities to Nutmeg, NewMil or their
affiliates. As a market-maker in securities, MB&D may, at times, as part of its
business have a long or short position in, and buy or sell securities of, Nutmeg
or NewMil for its own account or the accounts of customers. In addition, as
part of its business, the employees of MB&D may have direct or indirect
investments in the securities of either or both Nutmeg or NewMil. MB&D acted as
financial advisor and placement agent for Nutmeg in its issuance of Series B
Convertible Series B preferred stock in 1997 and has acted as a Nasdaq market-
maker in Nutmeg Common and preferred stock since 1996.
With respect to the proposed transaction involving NewMil, MB&D advised
Nutmeg during the evaluation and negotiation process leading up to the execution
of the merger documents. In rendering its advice, MB&D provided Nutmeg with a
number of analyses as to a range of consideration values that might be achieved
in a hypothetical transaction. NewMil and Nutmeg arrived at the financial terms
of the agreement through negotiations in which MB&D advised Nutmeg and
participated directly. The opinion of MB&D addresses only the value of the
consideration offered to Nutmeg common and preferred shareholders. It does not
constitute a recommendation to any shareholder as to how he or she should vote
at the Nutmeg special meeting. The opinion is necessarily based upon conditions
as of the date of the opinion and upon information made available to MB&D
through the date of this proxy statement / prospectus. Nutmeg's Board of
Directors did not impose any limitations on MB&D with respect to the
investigations it made, the matters it considered, or the procedures it followed
in rendering its opinions.
Materials reviewed and analyses performed:
In connection with its rendering and / or updating its opinion, MB&D
reviewed the following documents and considered the following subjects:
. the Merger Agreement and other related merger documents;
the proxy statement / prospectus in substantially the form mailed to
. Nutmeg shareholders;
publicly available financial information with regard to both Nutmeg
and NewMil;
. internal financial information and forecasts prepared by the
managements of both Nutmeg and NewMil;
discussions with members of Nutmeg's senior management and Board of
. Directors concerning past and current results of operations, Nutmeg's
current financial condition and management's opinion of Nutmeg's
future prospects;
. discussions with members of Nutmeg's senior management regarding the
current earnings contribution of the mortgage servicing business, the
risks, capital requirements and growth potential of that business and
the range of potential sale values for Nutmeg's mortgage servicing
portfolio;
. discussions with members of NewMil's senior management concerning past
and current results of operations, NewMil's current financial
condition and management's opinion of NewMil's future prospects;
. the historical record of reported market prices, trading volume and
dividend payments for Nutmeg common and Series B preferred stock and
NewMil common stock;
. the current state of and future prospects for the economy of
Connecticut in general and the market areas served by Nutmeg and
NewMil in particular;
. specific merger analysis models developed by MB&D to evaluate
potential acquisitions and business combinations of banking and thrift
companies;
. the reported financial terms of selected recent acquisitions and
business combinations of financial institutions for purposes of
comparison to the proposed transaction; and
. such other studies and analyses which MB&D considers appropriate.
In the course of rendering the opinion, MB&D did not complete any
independent valuation or appraisal of the assets or liabilities of either Nutmeg
or NewMil and has not been provided with such valuations or appraisals from any
other source.
The preparation of a fairness opinion is a complicated process, involving a
determination as to the most appropriate and relevant methods of financial
analysis and the application of those methods to particular circumstances. In
arriving at its fairness opinion, MB&D did not attribute any particular weight
to any one specific analysis or factor considered by it and made qualitative as
well as quantitative judgments as to the significance of each analysis and
factor. Therefore, MB&D believes that its analyses must be considered as a
whole and feels that attributing undue weight to any single analysis or factor
considered could create a misleading or incomplete view of the process leading
to the formation of its opinion.
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<PAGE>
In its analyses, MB&D made certain assumptions with respect to banking
industry performance, general business and economic conditions and other
factors, many of which are beyond the control of either Nutmeg or NewMil.
Estimates referred to in MB&D's analyses are not necessarily indicative of
actual values or predictive of future results or values, which may vary
significantly from those set forth.
Consideration Analysis:
The proposed consideration to be paid to Nutmeg common shareholders in
exchange for their shares equals $8.25 per Common share plus any net gain (after
expenses and taxes payable) on Nutmeg's sale of certain loan servicing rights.
The consideration is payable in either cash or in shares of NewMil common
stock, with the amount of NewMil Common Stock to be exchanged for each Nutmeg
share to be determined during a 15 day pricing period ending prior to closing of
the transaction. The proposed consideration to be paid to Nutmeg preferred
shareholders in exchange for their shares equals $14.4375 per preferred share
plus any net gain (after expenses and taxes payable) on Nutmeg's sale of the
loan servicing rights. The consideration to be paid to the Nutmeg Preferred
shareholders is also payable in either cash or shares of NewMil common stock as
described above. The consideration to be received by Nutmeg common and
preferred shareholders is subject to the limitation that no more than 50% of the
total consideration to be paid to all shareholders and option holders in the
transaction will be paid in cash. In addition, no more than 60% of the total
consideration to be paid to all shareholders and option holders in the
transaction will be paid in NewMil common stock.
The $14.4375 base value offered per Nutmeg preferred share reflects the
conversion value of the Series B preferred stock based upon its current
conversion ratio of 1.75 Nutmeg common shares per preferred share (as adjusted
for common Stock splits and Common Stock Dividends) multiplied by the $8.25 base
value offered for shares of Nutmeg common stock. Under the terms of the Series B
preferred stock, as issued, in the event of a change of control of Nutmeg,
conversion of the Series B preferred stock to Nutmeg common stock becomes
mandatory. The proposed merger with NewMil, if completed, would be such a
change of control.
On May 30, 2000, MB&D rendered its oral opinion as to the fairness of the
consideration based upon the $8.25 and $14.4375 base values offered, with no
assumed increase in consideration value receivable from the sale of the loan
servicing rights. In updating its opinion as of the date of this proxy
statement / prospectus, MB&D has made no change to this methodology, and all
analyses included herein are presented solely on the base amounts offered.
Multiple of historical earnings for Nutmeg common stock: The base value of
$8.25 per Nutmeg common share represents a multiple of 15.0 times Nutmeg's
reported earnings per common share for both the year ended December 31, 1999 and
the twelve months of reported earnings ended March 31, 2000. Nutmeg's reported
earnings per common share assume conversion of all shares of Nutmeg Series B
preferred stock into common stock.
Multiple of stated and tangible book values of Nutmeg common stock: The base
value of $8.25 per Nutmeg common share represents a multiple of 1.76 times
Nutmeg's stated and tangible book values per common share as of March 31, 2000.
Nutmeg's stated and tangible book values per common share assume conversion of
all shares of Nutmeg Series B preferred stock into common stock.
Premium above Nutmeg's tangible book value as a percentage of deposits: The
premium above Nutmeg's tangible book value, expressed as a percentage of
Nutmeg's deposits, to be paid to Nutmeg common, preferred and option holders is
8.61% using reported data for Nutmeg as of March 31, 2000.
Percentage of market value of Nutmeg common and Series B preferred stock:
Nutmeg Common and Series B preferred stocks are listed on the Nasdaq SmallCap
Market. However, a limited trading market exists in both securities. Trades
were reported in Nutmeg common stock on seven days during the four calendar
weeks prior to the May 31, 2000 announcement of the merger agreement. There
were no reported trades in Nutmeg Series B preferred stock during the four
calendar weeks prior to May 31, 2000. Due to this limited trading activity,
comparison is made here to the quoted bid for each security as reported on the
Nasdaq SmallCap Market. The $8.25 base value per Nutmeg common share represents
a 7.1% premium to the average closing reported bid quote for Nutmeg common stock
during the four calendar weeks prior to May 31, 2000. The $14.4375 base value
per Nutmeg preferred share represents a 37.5% premium to the average closing
reported bid quote for Nutmeg Series B preferred stock during the four calendar
weeks prior to May 31, 2000.
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<PAGE>
Discounted Cash Flow Analysis:
MB&D reviewed a discounted cash flow model that it prepared based upon
projections that assume Nutmeg operates as a stand-alone, independent
organization with the mortgage servicing business intact. Such projections have
been reviewed with Nutmeg's management. The model uses Nutmeg's actual reported
earnings of $1.32 million for the twelve months ended March 31, 2000 and its
current annual Common Stock dividend rate per share of $.20. Using a time
horizon of three calendar years ending March 31, 2003, MB&D used growth rates
for both Nutmeg's earnings and common stock dividends of 10%, 12% and 15%,
factoring in both the economic risks inherent in Nutmeg's basic banking business
as well as the interest rate risk component of the mortgage servicing portfolio.
MB&D also assigned a range of possible future market or hypothetical transaction
price/earnings ratios of 12 to 15 times earnings in order to project possible
future values for Nutmeg Common Stock.
Given the model's time horizon, and a discount rate of 12%, these
assumptions resulted in the range of present discounted values for a share of
Nutmeg Common Stock of $6.86 to $9.60. Factoring in the higher cash dividend
stream for shares of Nutmeg Series B preferred stock until its call / conversion
date in June, 2002, and assuming that a holder of Nutmeg Series B preferred
stock would convert into Nutmeg common shares at that time, MB&D's assumptions
resulted in a range of present discounted values for a share of Nutmeg Series B
preferred stock of $12.62 to $17.39. In each case, the stated base value of the
consideration offered in the proposed NewMil transaction fell within the range
of hypothetical present values of Nutmeg shares.
The point of such a discounted cash flow exercise is not to make a precise
estimate of Nutmeg's value in the marketplace at a future date. Precise
predictions are well beyond the capability of both MB&D and Nutmeg due to the
large number of variables involved, many of which are beyond the control of
management. Rather, the point of the exercise is to employ reasonable earnings
estimates to analyze whether one given course of action may be preferable over
another.
MB&D advised Nutmeg's Board of Directors that although discounted cash flow
analysis is a frequently used valuation methodology, it relies on numerous
assumptions, including discount rates, terminal values, future earnings
performance, the sustainability and market value of Nutmeg's mortgage servicing
business and dividend payout rates. The accuracy of these assumptions for time
periods over one year is very difficult and contains the possibility of
inaccuracy despite MB&D's attempts to be both accurate and conservative in its
analysis. Consequently, any or all of these assumptions may vary from actual
future performance.
Analysis of comparable transactions:
MB&D is reluctant to place emphasis on the analysis of comparable
transactions as a valuation methodology due to what it considers to be inherent
limitations of the application of the results to specific cases. Such analysis
as routinely employed by industry observers and financial advisors fails to
adequately take into consideration such factors as:
. material differences in the underlying capitalization of the
comparable institutions being acquired;
. differences in the historic earnings (or loss) patterns of the
compared institutions which can depict a very different trend than do
recent financial results;
. non-recurring profits or losses which can distort earnings multiples;
. material differences in the form or forms of consideration used in the
transactions;
. differences in accounting methods used for compared transactions; and
. less quantifiable differences and unreported factors, such as the
varying degrees of perceived risk in the business of acquired
institutions, demographic and geographic characteristics of the
compared institutions' markets and perceived ability to achieve cost
savings in compared transactions.
With these reservations in mind, MB&D thus examined statistics associated
with twenty-six transactions in which thrift institutions with assets less than
$250 million in the Northeast and Mid-Atlantic regions were acquired between
March 1, 1998 and June 15, 2000. The results follow:
<TABLE>
<CAPTION>
Nutmeg / NewMil Sample Median
---------------- --------------
<S> <C> <C>
Transaction price to Tangible Book Value 176.0% 151.1%
Transaction price to trailing 12-month Earnings 15.0x 26.9x
Premium to Tangible Book Value as % of Deposits 8.6% 8.4%
</TABLE>
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<PAGE>
Within this larger sample, only three transactions represented combinations
in which the acquired company's reported net income exceeded .90% of assets
during its trailing twelve months of reported earnings. (Nutmeg reported a
return on assets of 1.17% and 1.04%% for 1999 and 1998, respectively.) The
proposed transaction with NewMil compares to this smaller sample of stronger
performing companies as follows:
<TABLE>
<CAPTION>
Nutmeg / NewMil Sample Median
---------------- --------------
<S> <C> <C>
Transaction price to Tangible Book Value 176.0% 129.5%
Transaction price to trailing 12-month Earnings 15.0x 15.5x
Premium to Tangible Book Value as % of Deposits 8.6% 9.4%
</TABLE>
Compensation of MB&D:
Nutmeg has agreed to pay MB&D an aggregate fee equal to 1.00% of the value
of the total consideration received by Nutmeg common and preferred shareholders,
including the value of in-the-money options, determined at the time of closing
of the merger. Of this amount, Nutmeg has paid MB&D $80,000, which includes
$50,000 upon delivery of the attached fairness opinion for inclusion in this
proxy statement / prospectus. The balance will be paid on the date when the
merger is completed. Separately, Nutmeg paid MB&D $10,000 for additional
advisory services rendered during 1999, not associated with the NewMil
transaction.
In addition, Nutmeg will reimburse MB&D for its reasonable out-of-pocket
expenses incurred in connection with the engagement. Nutmeg has also agreed to
indemnify MB&D, its directors, officers and employees against losses, claims,
damages and liabilities relating to or arising out of the engagement, including
liabilities under the federal securities laws.
Representations and Warranties.
In the merger agreement, Nutmeg made representations and warranties to
NewMil. The material representations and warranties of Nutmeg are the
following:
. the proper organization and good standing of Nutmeg;
. insurance of the Nutmeg's deposit accounts by the FDIC;
. capitalization of Nutmeg;
. the existence of corporate power and authority of Nutmeg to execute,
deliver and perform its various obligations under the transaction
documents;
. board approval of the merger agreement, bank merger agreement and
option agreement;
. listing of all consents and approvals required to complete the merger;
. accurate disclosure of loan portfolio and timely filing of reports;
. proper presentation of financial statements;
. no broker's fees other than a financial advisor fee to McConnell, Budd
& Downes, Inc.;
. the absence of any material adverse change in Nutmeg;
. the absence of legal proceedings;
. timely filing of tax returns and absence of tax claims;
. existence of employee benefit plans and material compliance with
applicable law;
. existence of material contracts and their effectiveness;
. absence of regulatory agreements with banking regulators;
. material compliance with environmental law;
. adequacy of loss reserves;
. existence of properties and assets, absence of encumbrances, and
existence of good title;
. existence of insurance policies;
. operations in material compliance with applicable laws;
. existence of loans, their material compliance with applicable laws,
proper organization of loan information, and proper perfection of
security interests;
. receipt of shareholder agreements by affiliates of Nutmeg with regard
to supporting the merger agreement and limiting transfer of shares of
Nutmeg's common stock owned by such affiliates;
. absence of Nutmeg or its directors' and affiliates' ownership of
NewMil common stock, except as listed in the disclosure schedule;
. receipt of the fairness opinion of McConnell, Budd & Downes, Inc.; and
. compliance by Nutmeg with the CRA and other applicable consumer
compliance laws.
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<PAGE>
In the merger agreement, NewMil made representations and warranties to
Nutmeg. The material representations and warranties of NewMil are the
following:
. the proper organization and good standing of NewMil and New Milford
Savings Bank;
. capitalization of NewMil and ownership of shares of New Milford
Savings Bank;
. existence of corporate power and authority to execute, deliver and
perform NewMil's and New Milford Savings Bank's obligations under the
transaction documents;
. listing of regulatory consents and approvals to complete the merger;
. proper presentation of financial statements;
. NewMil's filings with the SEC comply in all material respects with
applicable requirements;
. absence of material regulatory agreements or legal proceedings;
. absence of any material adverse change in NewMil;
. absence of NewMil or its affiliates' ownership of more than 5% of the
common stock of Nutmeg;
. existence of employee benefit plans and material compliance with
applicable law;
. compliance with the CRA and other applicable consumer compliance laws;
. the absence of legal proceedings;
. timely filing of tax returns and absence of tax claims; and
. compliance with applicable laws.
Termination and Amendment of the Merger Agreement.
Before or after NewMil's and Nutmeg's shareholders approve the merger
agreement, it may be terminated:
by mutual written consent of NewMil and Nutmeg;
by NewMil or Nutmeg if:
. 30 days pass after any required regulatory approval is denied or
regulatory application is withdrawn at a regulator's request unless
action is taken during the 30 day period for a rehearing or to file an
amended application;
. the merger has not taken place on or before March 31, 2001, unless the
failure to complete the merger by that date is due to the terminating
party's failure to perform its obligations in the merger agreement; or
. NewMil's or Nutmeg's shareholders do not approve the merger agreement;
. by NewMil, provided that NewMil is not in breach of any
representation, warranty or covenant contained in the merger
agreement, if there is a breach of any representation, warranty,
covenant or agreement in the merger agreement by Nutmeg, if the breach
or breaches would entitle NewMil not to consummate the merger if the
breach occurred or continued on the date of the closing of the merger
and the breach is not cured within 30 days after receiving written
notice of the breach;
. by NewMil, if Nutmeg fails to call and hold within 50 days of the
effectiveness of the Registration Statement filed with the SEC a
meeting of Nutmeg shareholders to approve the merger agreement, fails
to recommend that Nutmeg shareholders approve the merger and merger
agreement, or fails to oppose a competing third party proposal, or if
Nutmeg authorizes or permits any of its officers, directors, employees
or agents to solicit competing third party proposals;
. by Nutmeg, provided that Nutmeg is not in breach of any
representation, warranty or covenant contained in the merger
agreement, if there is a breach of any representation, warranty,
covenant or agreement in the merger agreement by NewMil, if the breach
or breaches would entitle Nutmeg not to consummate the merger if the
breach occurred or continued on the date of the closing of the merger
and the breach is not cured within 30 days after receiving written
notice of the breach; and
. by Nutmeg, if NewMil fails to call and hold within 50 days of the
effectiveness of the registration statement filed with the SEC a
meeting of NewMil shareholders to approve the merger agreement or
fails to recommend that NewMil shareholders approve the merger
agreement.
The merger agreement also permits, subject to applicable law, the boards of
directors of NewMil and Nutmeg to:
. amend the merger agreement except as provided below;
. extend the time for performance of any of the obligations or other
acts of the other party;
. waive any inaccuracies in the representations and warranties contained
in the merger agreement or in any document delivered under the merger
agreement; or
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<PAGE>
. waive compliance with any of the agreements or conditions contained in
the merger agreement.
After approval of the merger agreement by Nutmeg's shareholders, no
amendment of the merger agreement may be made without further shareholder
approval if the amendment would reduce the amount or change the form of the
consideration to be delivered to Nutmeg's shareholders under the merger
agreement.
Federal Income Tax Consequences.
The following summary discusses the material federal income tax
consequences of the merger to Nutmeg shareholders. The summary is based on the
Internal Revenue Code of 1986, as amended, referred to in this section as the
Code, applicable U.S. Treasury regulations under the Code, administrative
rulings and judicial authority, all as of the date of this document. All of the
foregoing authorities are subject to change, and any change could affect the
continuing validity of this summary. The summary assumes that the holders of
shares of Nutmeg's common stock hold their shares as a capital asset. The
summary does not address the tax consequences that may be applicable to
particular Nutmeg shareholders in light of their individual circumstances or to
Nutmeg shareholders who are subject to special tax rules, including:
tax-exempt organizations;
dealers in securities;
financial institutions;
insurance companies;
non-United States persons;
shareholders who acquired shares of Nutmeg's common stock through the
exercise of options or otherwise as compensation or through a qualified
retirement plan;
shareholders who are subject to the alternative minimum tax;
shareholders who hold shares of Nutmeg's common stock as part of a
straddle, hedge, or conversion transaction; and
traders in securities who elect to apply a mark-to-market method of
accounting.
This summary also does not address any consequences arising under the tax
laws of any state, locality, or foreign jurisdiction or under any federal laws
other than those pertaining to the federal income tax.
One of the conditions for the merger to take place is that NewMil and
Nutmeg must receive opinions from NewMil's counsel, Tyler Cooper & Alcorn, LLP,
dated as of the effective date that the merger and the bank merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code and that NewMil and Nutmeg will each be a party to
the reorganization in respect of the merger within the meaning of Section 368(b)
of the Code, and that, accordingly,
. no gain or loss will be recognized by NewMil, Nutmeg or New Milford
Savings Bank as a result of the merger;
. no gain or loss will be recognized by the shareholders of Nutmeg who
exchange their Nutmeg common and/or Series B preferred stock solely
for NewMil common stock in the merger (except with respect to cash
received in lieu of a fractional share interest in NewMil common
stock);
. no gain or loss will be recognized with respect to the NewMil common
stock received in the merger by the shareholders of Nutmeg who
exchange their Nutmeg common and/or Series B preferred stock in part
for NewMil common stock (except with respect to cash received in lieu
of a fractional share interest in NewMil common stock) and in part for
cash but gain or loss will be recognized with respect to the cash
received in the merger;
. the aggregate tax basis of the NewMil common stock received (including
a fractional share interest deemed received) by shareholders who
exchange all or a portion of their Nutmeg common or Series B preferred
stock solely or partially for NewMil common stock in the merger will
be the same as the aggregate tax basis of the Nutmeg common stock
surrendered in exchange for the NewMil common stock; and
. the holding period of the NewMil common stock received by a Nutmeg
shareholder in the merger (including a fractional share interest
deemed received) will include the holding period of the Nutmeg common
or Series B preferred stock surrendered in exchange for the NewMil
common stock.
The opinions will be based on the Code, the U.S. Treasury regulations
promulgated under the Code and related administrative interpretations and
judicial decisions, all as in effect as of the effective time of the merger, on
the assumption that the merger takes place as described in the merger agreement,
and on the basis of facts, representations or assumptions
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<PAGE>
set forth or referred to in the opinions. Unlike a ruling from the Internal
Revenue Service, an opinion of counsel is not binding on the Internal Revenue
Service and there can be no assurance that the Internal Revenue Service will not
take a position contrary to one or more of the positions reflected in the
opinions or that those positions will be upheld by the courts if challenged by
the Internal Revenue Service.
Unless an exemption applies, the exchange agent will be required to
withhold, and will withhold, 31% of any cash payments to which a Nutmeg
shareholder or other payee is entitled pursuant to the merger, unless the
shareholder or other payee provides his or her tax identification number (social
security number or employer identification number) and certifies that the number
is correct. Each shareholder and, if applicable, each other payee, is required
to complete and sign the Form W-9 that will be included as part of the
transmittal letter to avoid being subject to backup withholding, unless an
applicable exemption exists and is proved in a manner satisfactory to NewMil and
the exchange agent.
The federal income tax consequences set forth above are based upon present
law and do not purport to be a complete analysis or listing of all potential tax
effects that may apply to a holder of Nutmeg's common or Series B preferred
stock. The tax effects that are applicable to a particular holder of Nutmeg
common or Series B preferred stock may be different from the tax effects that
are applicable to other holders of Nutmeg common or Series B preferred stock,
including the application and effect of state, local and other tax laws other
than those pertaining to the federal income tax, and thus, holders of Nutmeg
common or Series B preferred stock are urged to consult their own tax advisors.
Resales of NewMil's Common Stock Received in the Merger.
NewMil is registering the sale of the shares of its common stock to be
issued in the merger under the Securities Act of 1933 (the "Securities Act").
The shares will be freely transferable under the Securities Act, except for
shares received by Nutmeg shareholders who are deemed to be affiliates of Nutmeg
before the merger and/or affiliates of NewMil thereafter. These affiliates only
may resell their shares pursuant to an effective registration statement under
the securities act covering the shares, in compliance with Securities Act Rule
145 or under another exemption from the Securities Act's registration
requirements. This Proxy Statement/Prospectus does not cover any resales of
NewMil's common stock by NewMil or Nutmeg affiliates. Affiliates will generally
include individuals or entities who control, are controlled by or are under
common control with Nutmeg or NewMil, and may include officers or directors, as
well as principal shareholders of Nutmeg or NewMil.
Employee Benefits.
To the extent permissible under applicable law, Nutmeg employees who become
employees of New Milford Savings Bank at the effective time generally will be
given credit for service at Nutmeg for eligibility to participate in and the
satisfaction of vesting and service requirements (but not for benefit accrual
purposes) under the New Milford Savings Bank 401(k) savings plan (but not under
the New Milford Savings Bank defined benefit pension plan).
Employees of Nutmeg who become employees of New Milford Savings Bank will
be eligible immediately to participate in New Milford Savings Bank's health and
welfare plans on the same basis as apply generally to other employees at New
Milford Savings Bank.
New Milford Savings Bank expects, subject to its normal hiring process, to
offer employment to each Nutmeg employee with direct customer contact except
those who duplicate functions served by current New Milford Savings Bank
employees. Further, New Milford Savings Bank will provide the same
consideration to Nutmeg employees who are not retained for open employment
positions at New Milford Savings Bank as it gives New Milford Savings Bank
employees as vacancies occur, subject to such employee's qualifications. NewMil
has agreed to honor existing written change of control contracts with three
senior officers of Nutmeg that were disclosed to NewMil prior to the execution
of the merger agreement.
Interests of Nutmeg Directors and Executive Officers in the Merger That are
Different Than Those of Nutmeg Shareholders.
In considering the recommendation of the Nutmeg Board of Directors, the
Nutmeg shareholders should be aware that certain members of Nutmeg's senior
management and of the Nutmeg Board of Directors have interests in the
transaction that are different from, or in addition to, the interests of
shareholders generally. The Nutmeg Board of Directors knew about these
additional interests and considered them when approving the merger agreement.
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<PAGE>
NewMil has agreed to honor existing written, change of control contracts
with the three senior officers of Nutmeg to the extent that these contracts do
not provide for any payments that are not deductible or that constitute excess
parachute payments under the Code.
Existing Nutmeg Change of Control Agreements.
Nutmeg has entered into agreements with three executives providing for
payments following a termination of employment or specified other events, after
a change in control occurs. Nutmeg is a party to change of control agreements
with the following Nutmeg executive officers:
Name Title
---- -----
Henry A. Bessel, Jr. President and Chief Executive Officer
William D. Starbuck Executive Vice President and Chief Lending Officer
David F. Lucas Senior Vice President, Chief Financial Officer and
Treasurer
Each of these agreements provides for two potential payments if there is a
"change in control" of Nutmeg, while the executive is an officer of Nutmeg. The
first payment is due within thirty (30) days following the "change in control"
event, and is payable in a lump sum equal to twenty-five percent (25%) of two
times the officer's annual compensation (either base salary at the time or total
compensation in the most recent fiscal year). The second payment is due within
15 days of the officer's termination of employment within two years after the
change of control, unless terminated for cause. The second payment will equal 2
years' annual compensation minus any compensation paid to the officer following
the change of control. The officer can also trigger this payment by himself
terminating for "good reason", including assignment of inferior duties, result
in significantly less authority, reduction in base salary or relocation more
than 20 miles from Danbury. Finally, the agreements provide for a continuation
of employee's participation in employee benefit plans for one year after the
change of control, at no extra cost to the officer.
In no event shall the severance amount exceed one dollar less than an
aggregate amount which would cause all or any portion of the severance amount to
be deemed a "parachute payment" under Section 280G of the Code.
The merger will constitute a change in control for purposes of the change
of control agreements. NewMil is presently discussing with Messrs. Starbuck and
Lucas possible employment with New Milford Savings Bank.
Board Membership.
Following the merger, NewMil and New Milford Savings Bank will add Paul N.
Jaber, John Otto and Anthony M. Rizzo, Sr. from the Nutmeg Board of Directors to
serve as additional members of NewMil's and New Milford Savings Bank's Boards
of Directors. Each person will be assigned to one of their three classes of
directors, to serve a term commensurate with members of his class. The non-
employee directors of Nutmeg serving at the effective time of the merger will be
invited to serve on the advisory board of New Milford Savings Bank that is now
being organized.
Mr. Jaber is 57 years old and an attorney with the firm of Collins,
Hannafin, Garamella, Jaber & Tuozzolo, P.C. Mr. Jaber owns ____ shares of NewMil
common stock, representing a ___% interest of the issued and outstanding shares.
Mr. Otto is 64 years old and the owner of The Otto Company, a plumbing services
company. He owns ____ shares of NewMil common stock, representing a ____%
interest of the issued and outstanding shares. Mr. Rizzo is 59 years old and the
owner of A.M. Rizzo Electrical Contractors, Inc. He owns ____% shares of NewMil
common stock, representing a ____% interest of the issued and outstanding
shares. Messrs. Jaber, Otto and Rizzo will be compensated for services on the
NewMil and New Milford Savings Bank boards on the same basis as all of the board
members. Each non-employee director of NewMil receive an annual stipend of
$8,500, $350 for each Board meeting attended and $150 for each committee meeting
attended. Officers of the Corporation who are also directors receive no
compensation as directors. No additional compensation is paid for service on
the New Milford Savings Bank Board.
Indemnification.
In the merger agreement, NewMil agrees to indemnify, defend and hold
harmless each person who is, has been, or before the completion of the merger
becomes, a director, officer or employee of Nutmeg to the fullest extent
permitted under applicable law and NewMil's certificate of incorporation and
bylaws or the charter and by-laws of New Milford Savings Bank, for any claims
made against the person because he or she is or was a director, officer or
employee of Nutmeg or in
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<PAGE>
connection with the merger agreement. NewMil also agrees to use reasonable
efforts to cause such persons to be covered under a directors' and officers'
liability insurance policy of substantially the same coverage as Nutmeg's prior
to the merger, for a total premium cost of not more than $30,000 and for not
less than three years.
Option Agreement.
As a condition of and inducement to NewMil's entering into the merger
agreement, NewMil and Nutmeg have also entered into an option agreement. Under
the option agreement, Nutmeg granted NewMil an option, referred to in this
section as the "Nutmeg option," which entitles NewMil to purchase, subject to
the terms of the option agreement, up to 457,280 shares of Nutmeg's common stock
which is equal to approximately 19.99% of the total number of shares of Nutmeg's
common and Series B preferred stock then outstanding at a price per share of
$7.00. That price is subject to adjustment in specified circumstances. The
Nutmeg option is intended to discourage the making of alternative acquisition-
related proposals and, under specified circumstances, may significantly increase
the cost to a potential third party of acquiring Nutmeg compared to its cost had
Nutmeg not entered into the option agreement. Therefore, the Nutmeg option is
likely to discourage third parties from proposing a competing offer to acquire
Nutmeg even if the offer involves a higher price per share for Nutmeg's common
and Series B preferred stock than the per share consideration to be paid under
the merger agreement.
The following brief summary of the option agreement is qualified in its
entirety by reference to the option agreement. A copy of the option agreement,
as well as the other documents described in this document, will be provided to
you without charge if you call or write to B. Ian McMahon, Chief Financial
Officer, NewMil Bancorp, Inc., 19 Main Street, New Milford, Connecticut 06776,
telephone (860) 355-7630.
Subject to applicable law, regulatory restrictions and Nutmeg's certificate
of incorporation, NewMil may exercise the Nutmeg option, in whole or in part,
following the occurrence of both a preliminary purchase event and a purchase
event both as defined below. A preliminary purchase event means, in substance:
. the entry by Nutmeg, without the prior written consent of NewMil, into
a letter of intent or definitive agreement to engage in an acquisition
transaction, as defined below, with any third party;
. the acquisition by any other person of beneficial ownership or the
right to acquire beneficial ownership of 10% or more of the
outstanding shares of Nutmeg's common stock;
. any third party makes a proposal, which is or becomes public, to
Nutmeg or its shareholders to enter into an acquisition transaction;
. a third party files a regulatory application with regard to an
acquisition transaction with Nutmeg;
. Nutmeg willfully breaches the merger agreement permitting NewMil to
terminate thereunder; or
. for any reason whatsoever, Nutmeg's Board of Directors fails to
recommend, withdraws or modifies its recommendation that Nutmeg's
shareholders approve the merger agreement or if the Board fails to
oppose a competing acquisition transaction.
A purchase event, as defined in the option agreement includes either:
. the acquisition by any person of beneficial ownership of 25% or more
of the then outstanding common stock of Nutmeg;
. entering into an agreement to enter into an acquisition transaction,
as defined in the next paragraph, except that the percentage referred
to in that definition is 25% instead of 10%; or
. termination of the merger agreement by NewMil due to willful or
intentional breach by Nutmeg.
For purposes of the option agreement, the term "acquisition transaction"
means:
. a merger, acquisition, consolidation or other business combination
involving Nutmeg;
. a purchase, lease or other acquisition of all or substantially all of
the assets of Nutmeg; or
. a purchase or the acquisition, including through merger,
consolidation, share exchange or otherwise, of beneficial ownership of
securities representing 10% or more of the voting power of Nutmeg.
The Nutmeg option terminates and, thus, may no longer be exercised by
NewMil upon the occurrence of any of the following events:
. the completion of the merger;
. 12 months after the first occurrence of a purchase event, as defined
above;
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. 18 months after the termination of the merger agreement following the
occurrence of a preliminary purchase event, as defined above, unless
NewMil terminated the agreement as a result of a willful or
intentional material breach of any representation, warranty, covenant
or agreement by Nutmeg, or if the Nutmeg Board of Directors fails to
take some necessary action or Nutmeg enters into an acquisition
transaction with a third party. In such case, the option will
terminate 24 months after the termination of the merger agreement;
. upon termination of the merger agreement, prior to the occurrence of a
purchase event or preliminary purchase event, (A) by both parties, if
the merger agreement is terminated by mutual written consent; (B) by
either NewMil or Nutmeg, if the merger agreement has been terminated
as a result of regulatory denial or requested withdrawal of a
regulatory application; or if the merger has not occurred by March 31,
2001; or (C) by Nutmeg, if the merger agreement is terminated as a
result of a material breach of any representation, warranty, covenant
or other agreement NewMil; or,
. 12 months after the termination of the merger agreement, if the Nutmeg
shareholders have failed to approve the merger agreement.
The Nutmeg option may not be assigned by NewMil or Nutmeg to any other
person without the express written consent of the other party, except that
NewMil may assign its rights in whole or in part after the occurrence of a
preliminary purchase event, as defined above.
In the event that before the Nutmeg option is terminated, Nutmeg enters
into a letter of intent or definitive agreement:
. to consolidate or merge with any third party, and Nutmeg is not the
continuing or surviving corporation in the consolidation or merger;
. to permit any third party to merge into Nutmeg, and Nutmeg is the
continuing or surviving corporation, but, in connection with the
merger, the then outstanding shares of Nutmeg's common stock will be
changed into or exchanged for stock or other securities of any third
party or cash or any other property or the then outstanding shares of
Nutmeg's common stock will represent after the merger less than 50% of
the outstanding shares and share equivalents of the merged company; or
. to sell or otherwise transfer all or substantially all of its assets
to any third party.
In that case, then the agreement governing the transaction must make proper
provision so that the Nutmeg option will, upon the completion of that
transaction, be converted into, or exchanged for, a substitute option, at the
election of NewMil, of either the acquiring corporation, or any person that
controls the acquiring corporation.
The substitute option will be exercisable for shares of the issuer's common
stock in a number and at an exercise price in accordance with the option
agreement and will otherwise have the same terms as the Nutmeg option, except
that the number of shares subject to the substitute option may not exceed 19.99%
of the issuer's outstanding shares of common stock.
Upon the occurrence of a purchase event, as defined above, prior to the
termination of the option, at the request of NewMil, Nutmeg will be obligated to
prepare, file and keep current for a period of one year an offering circular
which meets the standards of a shelf registration statement filed with the SEC
with respect to the shares to be issued upon exercise of the Nutmeg option under
applicable federal and state securities laws, and to repurchase the Nutmeg
option, and any shares of Nutmeg's common stock thus far purchased pursuant to
the Nutmeg option, at prices determined as set forth in the option agreement,
except to the extent prohibited by applicable law, regulation or administrative
policy.
INFORMATION ABOUT NUTMEG
Business.
Nutmeg is a federal savings and loan association headquartered in Danbury,
Connecticut. Deposits at Nutmeg are FDIC insured. Nutmeg is engaged
principally in the business of collecting deposits, making residential and
commercial mortgage loans, making small business loans, and servicing mortgages
for itself and others. Nutmeg currently serves customers from four banking
offices located in Danbury (2), Ridgefield and Bethel, Connecticut.
At December 31, 1999, Nutmeg had total assets of $116.8 million, total
deposits of $93.9 million, and shareholders' equity of $10.4 million, or 8.92%
of total assets. At December 31, 1999, Nutmeg had loans receivable, net of
$94.2 million,
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which included $58.9 million in residential real estate loans, $16.8 million in
commercial real estate loans, $14.7million in commercial loans and $2.7million
in home equity credit lines and consumer loans. At December 31, 1999,
nonperforming loans were $683,000. At that date, Nutmeg's allowance for loan
losses was $504,000, or 74% of nonperforming loans.
Supervision and Regulation.
Nutmeg, as a federal savings and loan association, is primarily regulated
by the Office of Thrift Supervision.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
GENERAL
In 1999, Nutmeg had net income of $1,300,000 or $.67 basic earnings per
share compared to net income of $1,123,000 or $.58 basic earnings per share in
1998, an increase of $ 177,000 or 15.76%. The increase in net income was
primarily caused by an increase in net interest income of $372,000 and the
formation of a Passive Investment Corporation ("PIC") which permits financial
institutions to shelter certain mortgage income from Connecticut corporation
business tax. Shareholders' equity increased $738,000 or 7.62%. Total assets
increased by $5,490,000 or 4.93%. The increase in total assets resulted
primarily from a $3,462,000 or 56.03% increase in loan servicing rights and a
$3,819,000 increase in securities available-for-sale. In addition, gross loans
increased from $94,829,000 at December 31, 1998 to $95,343,000 at December 31,
1999. Non-performing assets decreased by $185,000 or 17.67% from $1,047,000 at
December 31, 1998 to $862,000 at December 31, 1999.
FINANCIAL CONDITION
Shareholders' equity increased from $9,681,000 at December 31, 1998 to
$10,419,000 at December 31, 1999. The increase in shareholders' equity was due
to net income of $1,300,000 for the year ending December 31, 1999, and issuance
of common stock due to the exercise of stock options of $74,000, partially
offset by declared Series B preferred stock dividends of $343,000, declared
common stock dividends of $275,000 and a decrease in accumulated other
comprehensive income of $18,000.
Nutmeg's gross loans increased by $514,000 or .54% from $94,829,000 at
December 31, 1998 to $95,343,000 at December 31, 1999. For the year ended
December 31, 1999 loan originations totaled $48,246,000 as compared to
$52,510,000 for the year ended December 31, 1998, a decrease of $4,264,000 or
8.12%. Fixed rate mortgages are normally sold by Nutmeg in the secondary market
while adjustable rate mortgages are held-to-maturity. Nutmeg's loans held-for-
sale portfolio increased by $1,298,000 or 158.29% from $820,000 in 1998 to
$2,118,000 in 1999 due to reduced sales of Small Business Administration
("SBA") loan guarantees to the secondary market during 1999.
Nutmeg's allowance for loan losses decreased by $27,000 from $531,000 at
December 31, 1998 to $504,000 at December 31, 1999. This decrease is primarily
the result of improved quality of Nutmeg's loan portfolio in 1999. Nutmeg will
continue to monitor the adequacy of its allowance for loan losses based on the
results of internal reviews and local economic conditions. At December 31, 1999
non-performing loans (consisting of impaired and 90 days past due accruing
loans) were .72% of gross loans.
During 1999, foreclosed real estate increased from $35,000 at December 31,
1998 to $179,000 at December 31, 1999. This was a result of Nutmeg's foreclosure
of two residential properties in 1999. All foreclosed real estate is available-
for-sale and is recorded at the lower of carrying value of the loan or fair
value less estimated selling costs.
Federal Home Loan Bank of Boston (FHLB) advances increased by $492,000 from
$6,508,000 at December 31, 1998 to $7,000,000 at December 31, 1999. Deposits
increased by $3,173,000 or 3.50% from $90,728,000 in 1998 to $93,901,000 in
1999. Nutmeg's philosophy is to allow its asset size to be determined by loan
demand and to fund loans with local deposits and tax and insurance escrows from
Nutmeg's mortgage servicing portfolio.
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At December 31, 1999 securities are intended to be available-for-sale and
are so classified. These securities are recorded at market value totaling
$3,819,000 at December 31, 1999.
During 1999, Nutmeg purchased at a total cost of $4,918,000 the servicing
rights for loans with outstanding principal balances totaling approximately
$466,900,000. For further information, please refer to Note 4 of the Audited
Financial Statements of Nutmeg attached as Appendix B. During the years ended
December 31, 1999 and 1998 Nutmeg originated servicing rights totaling $310,000
and $436,000, respectively.
EFFECTS OF INFLATION
Nutmeg's financial statements have been prepared in terms of historical
dollars, without considering changes in the relative purchase power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Interest rates do not generally move in the same direction or in the same
magnitude as prices of goods and services. Nevertheless, inflation can directly
affect the value of loan collateral, in particular real estate. Sharp decreases
in real estate prices may result in significant loan losses or losses on real
estate acquired. Inflation, or disinflation, could significantly affect Nutmeg's
earnings in future periods.
COMPARATIVE ANALYSIS
Year Ended December 31, 1999
and
Year Ended December 31, 1998
The following table sets forth the dollar amount and percentage increase in
the components of Nutmeg's Statements of Income during the periods indicated and
is followed by management's discussion of the various changes.
Comparison Year Ended
December 31, 1999 and December 31, 1998
(Decrease) Increase Percent Change
-------------------- ---------------
Interest income $(149,000) (1.91)%
Interest expense (521,000) (16.02)
Net interest income 372,000 8.18
Provision for loan losses (125,000) (125.00)
Noninterest income (294,000) (15.29)
Noninterest expenses 320,000 7.32
Income before income tax expense (117,000) (5.85)
Income tax expense (294,000) (33.49)
INTEREST INCOME
Interest income decreased $149,000 or 1.91% for the year ended December 31,
1999 as compared to December 31, 1998.
Interest on loans in 1999 was $7,336,000 and $7,676,000 in 1998, a decrease
of $ 340,000. This decrease was due to a decrease in the average yield on
Nutmeg's loans portfolio outstanding from 7.95% in 1998 to 7.93% in 1999. Non-
performing loans have decreased from $1,012,000 at December 31, 1998 to $683,000
at December 31, 1999 but continue to negatively impact interest income.
Interest on loans is earned from a portfolio that consists of loans to
individuals and businesses in the form of mortgages, commercial loans and
various types of consumer loans. A schedule of loans by type can be found in
Note 3 of the Audited Financial Statements attached as Appendix B.
In 1999, loan origination fees net of direct costs were amortized to
interest income in the amount of $ 340,000 as compared to amortization of
$472,000 in 1998. The average yield on Nutmeg's loan portfolio was 7.93% in 1999
as compared with 7.95% in 1998. The average yield on Nutmeg's loan portfolio
decreased primarily due to prepayments of higher rate fixed rate mortgages due
to an overall reduction in interest rates.
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Interest and dividends on securities increased from $124,000 at December
31, 1998 to $ 315,000 at December 31, 1999, an increase of $ 191,000 or 154.03%.
This increase was due to a higher average balance of the securities portfolio in
1999.
INTEREST EXPENSE
Interest expense decreased by $521,000 or 16.02% for the year ended
December 31, 1999 as compared to the year ended December 31, 1998.
Interest expense on deposits decreased from $2,834,000 at December 31, 1998
to $ 2,528,000 at December 31, 1999, a decrease of $306,000 or 10.80%. Average
deposits increased from $89,070,000 in 1998 to $93,124,000 in 1999 while the
average rate paid for these funds decreased from 3.20% to 2.72%.
Interest expense on borrowings from the FHLB decreased from $405,000 in
1998 to $ 197,000 in 1999. Interest expense on FHLB borrowings decreased because
the average borrowings of Nutmeg decreased from $6,845,000 in 1998 to $3,785,000
in 1999, while the average rate paid on borrowings decreased from 5.92% in 1998
to 5.35% in 1999.
NET INTEREST INCOME
Net interest income represents the difference between interest earned on
loans and securities and interest paid on deposits and borrowings. The level of
net interest income is a function of volume, rate and mix of both interest
earning assets and interest bearing liabilities. Nutmeg finances its earning
assets with a combination of interest bearing deposits, borrowings and interest
free funds such as demand deposits and common stock.
Net interest income increased 8.18% to $4,920,000 in 1999 from $4,548,000
in 1998. This increase was due primarily to the increase of average loans
outstanding in 1999 by $1,944,000 which earn higher yields than the vehicles
from which they were funded and due to a decrease in Nutmeg's cost of funds
resulting from an increase in the average balance of transaction accounts in
1999.
In 1999, the spread on interest bearing funds, which represents the yield
on average earning assets less the yield on average interest bearing liabilities
was 4.88% compared to 4.49% in 1998.
PROVISIONS FOR LOAN LOSSES AND ASSET QUALITY
Of fundamental importance to a lending institution is the analysis of
credit risk. In addition to the review of the portfolio by lending officers,
Nutmeg has established a committee of the Board of Directors (Loan Audit
Committee) and in addition has contracted with an independent company to review:
1) all loans where the borrower's outstanding indebtedness to Nutmeg exceeds
$250,000; 2) all unsecured loans exceeding $50,000; 3). Small Business
Administration guaranteed loans and 4) special mention and classified loans. The
independent contractor's review consisted of 139 loans totaling $29,414,000.
Nutmeg's Classified Asset Committee consisting of Senior Management, the Loan
Audit Committee and the Property Review Committee meets at least quarterly to
review overall asset quality, classify loans based upon performance and review
loan loss reserve adequacy. In addition, Nutmeg's Board of Directors meets each
month to review past-due, non-performing and classified loans and loans where
significant concentration exists. A concentration is defined as loans to one
borrower where the total loans to that borrower exceeds 15% of capital. In
addition, Nutmeg has implemented a policy relating to internal classification of
assets in order to monitor and assess the quality of the loan portfolio.
Nutmeg's problem assets are classified as substandard, doubtful or loss.
"Substandard" loans are characterized by the possibility that Nutmeg could
sustain some loss if certain identifiable factors are not corrected. Loans
classified as "Doubtful" have weaknesses making collection, liquidation in full,
on the basis of currently known facts, conditions and values questionable and
improbable. Loans classified as "Loss" are considered uncollectible and of such
little value that their identification as bankable assets is not warranted and
such amounts are charged-off. As of December 31, 1999, loans aggregating
$670,000 were classified by Nutmeg as substandard and $13,000 were classified as
doubtful as compared to $972,000 of loans classified as substandard and none as
doubtful at December 31, 1998. These loans represented .58% of total assets in
1999 and .87% in 1998.
Nutmeg views as non-performing loans those loans on which it is probable
that Nutmeg will be unable to collect all amounts due according to the
contractual terms of the loan (impaired loans) and loans past due 90 days or
more on which it was still accruing interest. Nutmeg's policy is to discontinue
the accrual of interest on a loan when management believes,
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after considering economic and business conditions, periods of delinquency and
collection efforts, that the borrower's financial condition is such that the
collection of interest is doubtful or when a loan is specifically determined to
be impaired. Interest income is generally not recognized on specific impaired
loans unless the likelihood of future loss is remote. Interest payments received
on such loans are applied as a reduction of the loan principal balance.
At December 31, 1999 and 1998, Nutmeg had loans amounting to approximately
$683,000 and $401,000, respectively that were specifically classified as
impaired. The average balance of these loans amounted to approximately $736,000,
$253,000 and $806,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The allowance for loan losses relating to these loans amounted to
approximately $13,000 and $12,000 at December 31, 1999 and 1998, respectively.
The reserve for loan losses represents an allowance to provide for loan
losses inherent in the loan portfolio. Loans or portions thereof deemed
uncollectible are charged against these reserves while recoveries of amounts
previously charged off are added to these reserves. The provision for loan
losses is the amount charged against earnings to bring the reserve to the
appropriate level. Nutmeg determines its reserve for loan losses based upon an
evaluation of total loan portfolio quality through a process which considers the
general experience of the portfolio as well as the reserve requirements with
respect to weaknesses in individual loans. Reserves are established which, in
management's opinion, are adequate to absorb credit losses based upon current
information available. While Nutmeg believes its loan loss reserve as of
December 31, 1999, totaling $504,000 is adequate at this time, an economic
downturn or erosion of real estate values in 2000 could result in future
deterioration in asset quality which may require additional loan loss reserves.
Management and the Board of Directors of Nutmeg will continue to evaluate the
adequacy of the reserve in 2000 by monitoring the status of the regional
economy, particularly the real estate market, and its impact on the financial
condition of borrowers.
NONINTEREST INCOME
Noninterest income decreased $294,000 or 15.29% in 1999 to $1,629,000 from
$1,923,000 in 1998. This decrease can be attributed to lower gains on sale of
mortgage loans and lower loan fees. Gains on the sale of loans decreased by
$210,000 due to lower sales of fixed rate mortgages to the Federal National
Mortgage Association and the sale of SBA guarantees in the secondary market.
Loan fees including service fees charged on loans serviced for others decreased
by $72,000 or 9.05% from 1998 to 1999. This primarily resulted from loan
servicing rights being amortized at a faster rate due to higher repayment of the
principal balances of the loans than was anticipated. During 1999 and 1998,
Nutmeg acquired the servicing rights for loans with outstanding principal
balances totaling approximately $466,900,000 and $239,000,000, respectively. In
addition, during 1999 and 1998, Nutmeg originated the servicing rights for loans
with outstanding principal balances totaling approximately $20,323,000 and
$31,500,000, respectively.
NONINTEREST EXPENSES
Noninterest expenses increased by $320,000 or 7.32% to $4,690,000 for the
year ended December 31, 1999, compared to $4,370,000 for the year ended December
31, 1998. Salaries and employee benefits for the year ended December 31, 1999,
were $2,378,000, compared to $2,222,000 for the year ended December 31, 1998, an
increase of $156,000 or 7.02%. The increase in salaries and employee benefits
resulted from increases in salaries to remain competitive with the market and
small increases in staff to support Nutmeg's growth. Occupancy and equipment
expense for the year ended December 31, 1999 was $597,000 compared to $582,000
for the year ended December 31, 1998, an increase of $15,000 or 2.58%. The
increase in occupancy and equipment resulted from an increase in depreciation
expense on new data processing equipment purchased in 1998 and 1999. This new
equipment was purchased primarily to replace equipment that was not year 2000
compliant. As compared to 1998, foreclosed real estate expense decreased by
$20,000 to $33,000 in 1999. Other operating expenses increased in 1999 by
$168,000 to $1,626,000 as compared to $1,458,000 in 1998. For further
information, please refer to Note 13 of the audited financial statements
attached as Appendix B. Federal Deposit Insurance Corporation ("FDIC") deposit
insurance expense for the year ended December 31, 1999 was $56,000 compared to
$55,000 for the year ended December 31, 1998, an increase of $1,000 or 1.82%.
This increase was the result of slightly higher deposit balances in 1999.
Nutmeg's deposits are insured by the FDIC's Savings Association Insurance
Fund ("SAIF"). SAIF institutions are assessed for deposit insurance purposes in
a manner substantially similar to those insured by the FDIC's Bank Insurance
Fund ("BIF"), whereby rates are assessed within a range set by the FDIC from
time to time based upon certain safety and soundness criteria. SAIF assessment
rates currently range from 0 to 27 basis points. Nutmeg's assessment rate at
December 31, 1999 was zero -0- basis points.
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In addition, effective January 1, 1998, the Financing Corporation ("FICO")
assessment to service interest on FICO bond obligations (previously an
obligation assessed against SAIF institutions only) was set for the first
semiannual period at 1.30 basis points annually for BIF deposits and 6.48 basis
points for SAIF deposits. By law BIF/FICO assessments must be one-fifth of
SAIF/FICO assessments until the insurance funds are merged or January 1, 2000,
whichever is earlier.
INCOME TAXES
As compared to 1998, income tax expense decreased by $294,000 to $584,000
for the year ended December 31, 1999. Income tax expense for 1999 consists of
provisions for Federal and State income taxes of $583,000 and $1,000,
respectively, as compared to Federal and State taxes of $663,000 and $215,000,
respectively, for the year ended December 31, 1998. During 1999, Nutmeg
established a wholly owned subsidiary ("PIC"). The PIC was established to own
and service mortgage loans in its portfolio. Under Connecticut State law certain
mortgage income from the PIC and its dividend to Nutmeg are sheltered from
Connecticut corporation business tax.
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
Nutmeg's Board of Directors establishes policies and objectives with regard
to asset/liability management and oversees the implementation of such policies.
Senior management meets weekly to review and establish rates on Nutmeg's
loan/deposit products, and meets monthly to establish policies and strategies to
monitor Nutmeg's flow of funds and coordinate the sources, uses and pricing of
those funds.
As rates on deposits have become deregulated and subject to competitive
pressures, thrift institutions have become increasingly concerned about the
extent to which they are able to match the maturities of interest-earning assets
with interest-earning liabilities. Interest rate risks arise when assets mature
or when their rates of interest change in time frames that are different from
those of interest-bearing liabilities. Interest rate risk may be analyzed by
examining the extent to which Nutmeg's "net portfolio value" (NPV) changes with
changes in interest rates. NPV is defined as the sum of the present value of
assets, the present value of liabilities and the present value of off-balance-
sheet positions, assuming various changes in interest rates. NPV can further be
defined as the present value of shareholders' equity assuming various changes in
interest rates. At December 31, 1999, Nutmeg showed the following NPV at various
interest rates:
** Interest Rate Sensitivity of Net Portfolio Value (NPV) **
Net Portfolio Value
(Amounts in Thousands)
Change in rates $ Amount $ Change % Change
--------------- -------- -------- --------
+ 300 bp 16,272 127 +1
+ 200 bp 16,841 696 +4
+ 100 bp 16,883 738 +5
0 bp 16,145
- 100 bp 14,355 -1,791 - 11%
- 200 bp 12,792 -3,354 - 21%
- 300 bp 12,087 -4,058 - 25%
bp means basis point; one basis point equals 1/100th of one percent.
The NPV table above indicates that Nutmeg has interest rate risk within a
range Nutmeg believes to be reasonable. Nutmeg has greater interest rate risk
when interest rates decrease. If interest rates increase by 100 or 200 basis
points, Nutmeg's NPV increases. The NPV modeled at each change in rates exceeds
Nutmeg's core capital ratio. See note 18 of the Audited Financial Statements
attached as Appendix B. If the portfolio volume or maturing/repricing mix or
assumptions used to calculate NPV change, this may increase interest rate risk
significantly. Management is unable to predict the effect of changes in the
portfolio or in the assumptions used on NPV.
LIQUIDITY MANAGEMENT
Nutmeg manages its liquidity position to ensure sufficient cash flow to
fund loans, depositor withdrawals and other operating cash outflows. Principal
sources of funds are deposits, loan amortization and prepayments, maturities of
securities, borrowings from the FHLB and funds provided by operations. For
additional information, please refer to the Statements of
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Cash Flows included in the audited financial statements attached as Appendix B.
Liquidity management is both a daily and a long term function of business
management. Excess liquidity is generally invested in short term investments
such as overnight deposits at the FHLB and U.S. Treasury Bills. If Nutmeg
requires funds beyond its ability to generate them internally, borrowing
capability exists at the FHLB, which provides an additional source of borrowing
capacity of approximately $30,798,000 at December 31, 1999. At December 31, 1999
and 1998 borrowings from the FHLB were $7,000,000 and $6,508,000 respectively.
Applicable regulations currently require Nutmeg to maintain an average
daily balance of liquid assets (primarily cash and eligible investments) of not
less than 4% of the average daily balance of its liquidity base during the
previous month (generally net withdrawable accounts and borrowings due within
the year). As of December 31, 1999 and 1998, Nutmeg's average liquidity ratio
was 8.70% and 10.70%, respectively.
COMMITTED RESOURCES
At December 31, 1999, Nutmeg's committed resources included undisbursed
loans of approximately $440,000, unused lines of credit to loan customers of
approximately $2,584,000, commitments to fund loans of $1,795,000 and standby
letters of credit of $25,000. In most instances agreements with borrowers allow
Nutmeg to unilaterally terminate unused commercial and personal lines of credit
at any time. Nutmeg intends to fund the commitments in the normal course of
business from deposit growth, principal and interest collections from existing
loans, securities and, if necessary, additional borrowings from the FHLB. For
further detail see Note 20 to the Audited Financial Statements attached as
Appendix B.
CAPITAL AND CAPITAL REQUIREMENTS
Nutmeg is subject to capital rules promulgated by the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). The OTS
has imposed a three part capital test under these rules: 1). Tangible capital of
not less than 1.5% of total assets; 2). Core capital of not less than the
capital requirements applicable to national banks (which at December 31, 1999
was at least 3% of total assets) and, 3). Risk-based capital of 8.0% of risk-
adjusted assets at December 31, 1999. The risk-based ratio is arrived at by
assigning different risk "weightings" to assets based on their risk profile.
Nutmeg currently exceeds OTS regulatory capital requirements. These capital
requirements and the actual levels maintained by Nutmeg are summarized in Note
18 to the audited financial statements attached as Appendix B. At December 31,
1999, Nutmeg had a core capital ratio of 8.82%, and a Tangible capital ratio of
8.82% and a Risk-based capital ratio of 13.58% all of which exceeded OTS
requirements.
The enactment in recent years of such major banking legislation as the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and
the Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Improvement Act") have added significantly to the regulatory and enforcement
powers of the FDIC which, together with the OTS, regulate Nutmeg. The
Improvement Act, through its prompt corrective action provisions, further
increases the supervisory powers of the FDIC and the other federal regulatory
agencies with regard to undercapitalized institutions, by establishing a
statutory framework that requires every insured depository institution to comply
with a system of supervisory actions based on the capital classification of the
institution. Final regulations promulgated by each of the federal banking
agencies implement the prompt corrective action provisions of the Improvement
Act by defining the capital measures for each of the capital categories and by
establishing specific capital levels for each capital category. The following
table identifies generally the capital measures and thresholds defined under the
FDIC and OTS rules:
<TABLE>
<CAPTION>
Total Risk-Based Ratio Tier 1 Risk-Based Ratio Tier 1 Leverage Ratio
---------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Well Capitalized 10% or above & 6% or above & 5% or above
Adequately Capitalized 8% or above & 4% or above & 4% or above
Undercapitalized Under 8% or Under 4% or Under 4%
Significantly
Undercapitalized Under 6% Under 3% or Under 3%
Critically A ratio of tangible equity to
Undercapitalized total assets equal to or under 2%
</TABLE>
As of December 31, 1999 Nutmeg's total risk-based capital ratio was 13.58%.
As of December 31, 1999 Nutmeg's Tier 1 risk-based ratio was 12.95%. Under the
prompt corrective action rules, as of December 31, 1999 Nutmeg is in the "well
capitalized" category.
42
<PAGE>
REGULATORY AND COMPETITIVE MATTERS
Nutmeg is involved in a heavily regulated business. Legislation and
accompanying regulation have increased the powers of Nutmeg's regulators in
recent years, and imposed numerous additional operational standards on its
activities. Federal and Connecticut state law currently allow acquisitions,
mergers and establishments of de novo institutions, by out of state institutions
in Connecticut subject to certain limited restrictions. On November 12,1999 the
Gramm-Leach-Bliley Act was signed into law by President Clinton. GLB eliminates
many of the historic barriers to affiliations among banking and thrift
institutions, securities firms and insurance companies. GLB provides flexibility
to those institutions by use of a new entity, the "financial holding company".
GLB adopts a system of functional regulation of activities to include various
state and federal supervisory agencies depending upon the activity being
conducted. The trend of banking industry toward consolidation and the offering
of diversified products and services is expected to be enhanced by the adoption
of GLB. The adoption of GLB is expected to increase competition for all
financial institutions, including Nutmeg, although the actual effects
thereof cannot be determined at this time.
The Community Reinvestment Act of 1977 ("CRA") was enacted to encourage
every financial institution to help meet the credit needs of its entire
community, including low and moderate-income neighborhoods, consistent with the
institution's safe and sound operation. Under CRA, state and federal regulators
are required, when examining financial institutions and when considering
application for approval of certain merger, acquisition or other transactions,
to take into account the institution's record in helping to meet the credit
needs of its entire community, including low to moderate income neighborhoods.
In reviewing an institution's CRA record for this purpose, state and federal
regulators will consider reports of regulatory examination, comments received
from interested members of the public or community groups, and the description
of the institution's CRA activities in its publicly available CRA statement,
supplemented, as necessary, by the institution. Banking regulators generally
have the power to disapprove proposed merger or acquisition transactions
involving banking organizations that are deemed by the FRB to have
unsatisfactory examination records of CRA compliance. Following its most recent
CRA examination during 1999, Nutmeg received the highest classification, an
"Outstanding" rating regarding its compliance with CRA.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED March 31, 2000 AND 1999
GENERAL
Nutmeg's net income increased 6.62% in the first quarter of 2000 to
$322,000 compared to $302,000 in the first quarter of 1999. Results in the first
quarter of 2000 increased primarily due to a 10.20% increase in net interest
income compared to the first quarter of 1999. Net income before income taxes
increased to $481,000 in the first quarter of 2000 compared to $458,000 in the
first quarter of 1999. The basic earnings per share for the first quarter of
2000 is $.17 compared to $.15 in the first quarter of 1999. Total assets
increased by $5,062,000 or by 4.33% to $121,889,000 at March 31, 2000 from
$116,827,000 at December 31, 1999. Total liabilities increased by $4,886,000 or
4.59%. Deposits increased during the first quarter of 2000 by $11,621,000 to
$105,522,000 at March 31, 2000 from $93,901,000 at December 31, 1999.
Shareholders' equity increased $176,000 or 1.69% to $10,595,000 during the
period January 1, 2000 through March 31, 2000. In 1999, Nutmeg formed the PIC, a
new wholly-owned subsidiary to take advantage of new State of Connecticut tax
laws affecting banks and other financial institutions.
FINANCIAL CONDITION
Nutmeg's financial condition improved during the first quarter of 2000. Net
income increased by 6.62% from $302,000 for the first quarter of 1999 to
$322,000 for the first quarter of 2000, while basic earnings per share increased
from $.15 in 1999 to $.17 in 2000. Shareholders' equity increased from
$10,419,000 at December 31, 1999 to $10,595,000 at March 31, 2000. The increase
in shareholders' equity was due to net income of $322,000 for the quarter ending
March 31, 2000 and the exercise of common stock options of $10,000 offset by
declared common stock dividends of $73,000 and declared Series B preferred stock
dividends of $85,000.
Nutmeg's gross loans increased by $3,901,000 or 4.09% from $95,343,000 at
December 31, 1999 to $99,244,000 at March 31, 2000. The increase in loans since
December 31, 1999 is the result of lower prepayments during 2000 as compared to
1999. Loan rates were significantly lower in 1999 causing borrowers to refinance
existing debt. New loan originations totaling $7,575,000 during the first
quarter of 2000 as compared to $12,974,000 during the quarter ending March 31,
1999.
43
<PAGE>
Nutmeg's allowance for loan losses decreased by $16,000 from $504,000 at
December 31, 1999 to $488,000 at March 31, 2000. Nutmeg charged off loans
totaling $13,000 and had a loan recovery totaling $47,000 in the first quarter
of 2000. In addition, Nutmeg reduced its loan loss reserve by $50,000 during the
first quarter of 2000, while no provision was made for the first quarter of
1999. Nutmeg will continue to monitor the adequacy of its allowance for loan
losses based on the results of internal reviews, levels of impaired loans and
local economic conditions. At March 31, 2000 impaired loans (consisting of
nonaccrual and 90 days past due accruing loans) were $460,000, or .55% of gross
loans.
Federal Home Loan Bank of Boston (FHLB) advances at March 31, 2000 were
$3,000,000 compared to $7,000,000 at December 31, 1999, a decrease of
$4,000,000. Deposits increased by $11,621,000 or 12.38% from $93,901,000 at
December 31, 1999 to $105,522,000 at March 31, 2000. During the first quarter of
2000 Nutmeg had a net inflow of deposits and FHLB advances totaling $7,621,000
or 7.56%. The large increase in deposits was the result of increases in
transaction account and certificate of deposit balances.
EFFECTS OF INFLATION
Inflation affects the growth of total assets by increasing the level of
loan demand and creating the need to increase equity capital at sometimes higher
than normal rates in order to maintain an appropriate ratio of equity to assets.
Interest in particular can be significantly affected by inflation, but neither
the timing nor the magnitude of changes in interest rates coincide with changes
in the consumer price index, which is one of the indicators used to measure the
rate of inflation. Adjustments in interest rates may be delayed because of
regulatory restraints by the Federal Reserve Board, competitive market
conditions and terms of existing loan agreements. In addition to its effects on
interest rates, inflation can directly affect Nutmeg by increasing its cost of
funds and operating expenses.
COMPARATIVE ANALYSIS
The following table sets forth the dollar amount and percentage increase
(decrease) in the components of Nutmeg's Statements of Income during the periods
indicated and is followed by management's discussion of the various changes.
Comparison of Quarters Ended
March 31, 2000 and March 31, 1999
(Decrease) Increase Percent Change
------------------- --------------
Interest income $148,000 7.74%
Interest expense 29,000 3.89
Net interest income 119,000 10.20
Provision for loan losses (50,000) (100.00)
Noninterest income (52,000) (13.61)
Noninterest expenses 94,000 8.61
Income before income taxes 23,000 5.02
Income taxes 3,000 1.92
INTEREST INCOME
Interest income increased by $148,000 for the quarter ended March 31, 2000
as compared to March 31, 1999.
Interest on loans in the first quarter of 2000 was $1,961,000 as compared
to $1,841,000 in the first quarter of 1999, an increase of $120,000. This
increase was due primarily to higher average loan balances in 2000 resulting
from the large increase in commercial loans. Impaired loans have decreased from
$683,000 at December 31, 1999 to $460,000 at March 31, 2000. Interest on loans
is earned from a portfolio that consists of loans to individuals and businesses
in the form of mortgages, commercial loans and various types of consumer loans.
The average yield on Nutmeg's loan portfolio was 7.91% in the first quarter
of 2000 as compared with 7.87% in same period of 1999. The average yield on
Nutmeg's loan portfolio increased primarily due to increases in rates on
adjustable rate loans.
Interest and dividends on securities increased from $71,000 at March 31,
1999 to $99,000 at March 31, 2000, an increase of $28,000 or 39.44%. This
increase was due to higher average balance in interest bearing deposits for the
first quarter of 2000 as compared to the first quarter of 1999.
44
<PAGE>
INTEREST EXPENSE
Interest expense increased by $29,000 or 3.89% for the quarter ended March
31, 2000 as compared to the quarter ended March 31, 1999. Average deposits
increased in 2000 while the average rate paid for these funds decreased from
3.02% for the quarter ended March 31, 1999 to 2.86% for the quarter ended March
31, 2000. This decrease in the cost of deposits reflects higher average balances
of transaction and savings accounts.
Interest expense on borrowings from the Federal Home Loan Bank of Boston
decreased from $78,000 in the first quarter of 1999 to $65,000 in the first
quarter of 2000. This decrease was the result of the average rate paid on
borrowings decreased from 5.33% in 1999 to 5.16% in 2000 while the average
balances of FHLB advances also decreased.
NET INTEREST INCOME
Net interest income represents the difference between interest earned on
loans and securities and interest paid on deposits and borrowings. The level of
net interest income is a function of volume, rate and mix of both interest
earning assets and interest bearing liabilities. Nutmeg finances its earning
assets with a combination of interest bearing deposits, borrowings and interest
free funds such as demand deposits and common stock.
Net interest income increased by 10.20% to $1,286,000 in the first quarter
of 2000 from $1,167,000 in the first quarter of 1999. The increase in net
interest income was due to the increase in Nutmeg's loan portfolio, primarily
commercial loans and commercial mortgages which typically yield more than
residential mortgages or investment securities.
For the first quarter of 2000, the interest spread, which represents the
yield on average earning assets less the yield on average interest bearing
liabilities was 4.92% compared to 4.51% in the first quarter of 1999.
PROVISIONS FOR LOAN LOSSES AND ASSET QUALITY
Of fundamental importance to a lending institution is the analysis of
credit risk. In addition to the review of the portfolio by lending officers,
Nutmeg has established a committee of the Board of Directors (Loan Audit
Committee) and in addition has contracted an independent company, to
periodically review: 1) all loans where the borrower's outstanding indebtedness
to Nutmeg exceeds $250,000; 2) all unsecured loans exceeding $50,000; and 3)
special mention and classified loans. Nutmeg's Classified Asset Committee
consisting of Senior Management, the Loan Audit Committee and the Property
Review Committee meet at least quarterly to review overall asset quality,
classify loans based upon performance and review loan loss reserve adequacy. In
addition, Nutmeg's Board of Directors meets each month to review past-due, non-
performing and classified loans and loans where significant concentration
exists. A concentration is defined as loans to one borrower where the total
loans to that borrower exceed 15% of capital plus general loan loss reserves. In
addition, Nutmeg has implemented a policy relating to internal classification of
assets in order to monitor and assess the quality of the loan portfolio.
Nutmeg's problem assets may be classified as either substandard, doubtful
or loss. "Substandard" loans are characterized by the possibility that Nutmeg
could sustain some loss if certain identifiable factors are not corrected. Loans
classified as "doubtful" have weaknesses making collection, or liquidation in
full, on the basis of currently known facts, conditions and values questionable
and improbable. Loans classified as "loss" are considered uncollectible and of
such little value that their identification as bankable assets is not warranted
and such amounts are charged-off. As of March 31, 2000, loans aggregating
$670,000 were classified by Nutmeg as substandard and none were classified
doubtful as compared to $670,000 of classified loans at December 31, 1999. These
loans represented .55% of total assets as of March 31, 2000 and .58% as of
December 31, 1999. Non-performing assets include nonaccrual loans and foreclosed
property, loans past due 90 days or more and still accruing and restructured
loans. In the first quarter of 2000, there were $13,000 in net loan charge-offs
and write-downs of foreclosed properties as compared to $2,000 during the first
quarter ended March 31, 1999.
Impaired loans are defined under generally accepted accounting principles
to include loans where accrued interest receivable is doubtful of collection and
future interest income should no longer be accrued and the income receivable
should be reversed through a charge to income. Generally no interest income is
recognized for loans on which a default in the payment of interest has existed
for a period of greater than 90 days unless there are factors known to
management which reflect favorably on the ability of the customer to fulfill the
obligation. The recognition of interest income on nonaccrual loans is resumed
when its collectibility is no longer in doubt. Impaired loans as of March 31,
2000 as compared to December 31, 1999 decreased $615,000 from $1,075,000 to
$460,000.
45
<PAGE>
During 2000, foreclosed real estate decreased from $179,000 at December 31,
1999 to none at March 31, 2000. This was the result of the sale of three
foreclosed properties, a single family residential homes.
The reserve for loan losses represents an allowance to provide for loan
losses inherent in the loan portfolio. Loans or portions thereof, deemed
uncollectible are charged against these reserves while recoveries of amounts
previously charged-off are added to these reserves. The provision for loan
losses is the amount charged against earnings to bring the reserve to the
appropriate level. Nutmeg determines its reserve for loan losses based upon an
evaluation of total loan portfolio quality through a process which considers the
general experience of the portfolio as well as the reserve requirements with
respect to weaknesses in individual loans. Reserves are established which in
management's opinion, are adequate to absorb credit losses based upon current
information available. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash flows. While
Nutmeg believes its loan loss reserve as of March 31, 2000, totaling $488,000,
is adequate at this time, an economic downturn and further erosion of real
estate values in 2000 may result in future deterioration in asset quality which
may require additional loan loss reserves.
NONINTEREST INCOME
Noninterest income decreased $52,000 or 13.61% in the first quarter of 2000
to $330,000 from $382,000 in the first quarter of 1999. This decrease can be
attributed to decreased gains from the sale of fixed rate mortgages into the
secondary market.
NONINTEREST EXPENSES
Noninterest expenses increased by $94,000 or 8.61% to $1,185,000 as of
March 31, 2000, compared to $1,091,000 as of March 31, 1999. Salaries and
employee benefits for the quarter ended March 31, 2000, were $641,000, compared
to $574,000 for the quarter ended March 31, 1999, an increase of $67,000 or
11.67%. This increase was the result of the addition to staff for Nutmeg's Stony
Hill, Bethel office which opened in early May 2000. Occupancy and equipment
expense increased $7,000 from $145,000 for the quarter ended March 31, 1999 to
$152,000 for the quarter ended March 31, 2000, an increase of 4.82%. Other
operating expenses increased by $25,000 or 6.87% to $389,000 for the quarter
ended March 31, 2000 as compared to $364,000 for the quarter ended March 31,
1999. This increase resulted primarily from increases in data processing and
postage expense due to the increased number of serviced loans.
Foreclosed real estate expense decreased by $4,000. Management and the
Board of Directors has reduced its inventory of real estate owned to zero.
INCOME TAXES
As compared to the quarter ended March 31, 1999, income tax expense for the
quarter ended March 31, 2000 increased by $3,000 to $159,000.
LIQUIDITY MANAGEMENT
Nutmeg manages its liquidity position to ensure sufficient cash flow to
fund loans, deposit withdrawals and other operating cash outflows. Principal
sources of funds are deposits, loan amortization and prepayments, maturities of
investment securities, borrowings from the Federal Home Loan Bank of Boston and
funds provided by operations. For additional information, please refer to the
Statements of Cash Flows included in the unaudited financial statements attached
as Appendix C.
Liquidity management is both a daily and long term function of business
management. Excess liquidity is generally invested in short term investments
such as overnight deposits at the Federal Home Loan Bank of Boston and U.S.
Treasury Bills. If Nutmeg requires funds beyond its ability to generate them
internally, borrowing capability exists at the Federal Home Loan Bank of Boston,
which provides an additional source of borrowing capacity of approximately
$36,316,000. At March 31, 2000 and December 31, 1999 borrowings from the FHLB
were $3,000,000 and $7,000,000, respectively.
Applicable regulations currently require Nutmeg to maintain a ratio of cash
and eligible investments to net withdrawable savings deposits and borrowings due
within the year of not less than 5%. As of March 31, 2000 and December 31,
1999, Nutmeg's liquidity ratio was 11.10% and 8.70%, respectively.
COMMITTED RESOURCES
46
<PAGE>
At March 31, 2000, Nutmeg's committed resources included undisbursed loans
of approximately $290,000, unused lines of credit to loan customers of
approximately $2,278,000, commitments to fund loans of $2,455,000 and standby
letters of credit of $25,000. In most instances agreements with borrowers allow
Nutmeg to unilaterally terminate unused commercial and personal lines of credit
at any time. Nutmeg intends to fund the commitments in the normal course of
business from deposit growth, principal and interest collections from existing
loans, investments and, if necessary, additional borrowing from the Federal Home
Loan Bank of Boston. For further detail see footnote to the financial statements
titled "Commitments and Contingent Liabilities" included in the unaudited
financial statements attached as Appendix C.
CAPITAL AND CAPITAL REQUIREMENTS
Nutmeg is subject to capital rules promulgated by the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). The OTS
has imposed a three part capital test under these rules: 1). Tangible capital of
not less than 1.5% of total assets; 2). Core capital ratio no less stringent
than the capital requirements applicable to national banks which at March 31,
2000 was at least 3% of total assets; 3). Risk-based capital of 8.0% of risk-
adjusted assets at March 31, 2000. The risk-based ratio is arrived at by
assigning different risk "weightings" to assets based on their risk profile.
Nutmeg currently exceeds OTS regulatory capital requirements. At March 31, 2000,
Nutmeg had a Core capital ratio of 8.50%, a Tangible capital ratio of 8.50% and
a Risk-based Capital ratio of 13.62%.
The FDIC also has regulations requiring a minimum leverage capital ratio
(shareholder's equity divided by average total assets for the most recent
quarter) from 4.00 to 5.00 percent or more, based upon the risk profile of
Nutmeg. Nutmeg's core capital to total assets ratio is 8.50% which exceeds the
minimum FDIC requirements as of March 31, 2000.
The following table identifies generally the capital measures and
thresholds defined under the FDIC and OTS rules:
<TABLE>
<CAPTION>
Total Risk - Based Ratio Tier 1 Risk-Based Ratio Tier 1 Leverage Ratio
------------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Well Capitalized 10% or above & 6% or above & 5% or above
Adequately Capitalized 8% or above & 4% or above & 4% or above
Undercapitalized Under 8% or Under 4% or Under 4%
Significantly
Undercapitalized Under 6% or Under 3% or Under 3%
Critically A ratio of tangible equity to total
Undercapitalized assets equal to or under 2%
</TABLE>
To fall within the "well capitalized" or "adequately capitalized" category,
the financial institution must meet the requirements of all three capital
measurements. "Undercapitalized" and "significantly undercapitalized"
institutions will be categorized as such if they fall within any one of the
capital measurements. Under the prompt corrective action rules, as of March 31,
2000 Nutmeg is in the "well capitalized" category.
Security Ownership of Certain Beneficial Owners.
The following table shows, as of the most recent practicable date (August
___, 2000) those persons known to Nutmeg (including any "group" as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) to be beneficial owners of more than 5% of the common stock.
Except as indicated in the notes following the table below, the principal
shareholders have sole voting and investment power with respect to the shares
listed as being beneficially owned by them.
In preparing the following table, Nutmeg has relied on information
furnished to it by the beneficial owner or filed with the OTS and mailed to
Nutmeg. The percentages shown are calculated on the basis of the number of
outstanding shares of Nutmeg's common stock on January 31, 2000, which was
1,428,644 shares, and the number of shares of common stock for which the
individual may exercise an option within sixty days and/or convert Series B
preferred stock.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
---------------------------------------------------------------------
Jackie Chan 104,949(1) 7.19%
34 Ward Drive South
Danbury, Connecticut 06810
47
<PAGE>
John N. Deep 107,292(2) 7.30%
60 Clapboard Ridge Road
Danbury, Connecticut 06811
Constantine S. Macricostas 124,662(3) 8.15%
100 Ocean Trail Way, Unit #1203
Jupiter, FL 33477
Richard Portelance 125,904(4) 8.63%
14 Mountain Drive
New Milford, Connecticut 06776
Anthony M. Rizzo, Sr. 117,773(5) 7.97%
38 Clapboard Ridge Road
Danbury, Connecticut 06811
Henry A. Bessel, Jr. 96,732(6) 6.68%
One Smoke Ridge
Sherman, Connecticut 06784
David F. Lucas 26,152(7) 1.80%
79 Nicole Drive
Naugatuck, Connecticut 06770
(1) Includes 9,600 shares of Series B preferred stock, which are convertible
into 16,800 shares of Common Stock, purchased in Mr. Chan's wife's name,
and 3,800 shares of Series B preferred stock which are convertible into
6,650 shares of common stock; 55,027 shares with shared voting and
investment power, and 14,689 shares exercisable by option within sixty
days.
(2) Includes 16,000 shares of Series B preferred stock, which are convertible
into 28,000 shares of Common Stock; 27,507 shares owned by Mr. Deep's wife;
10,725 shares with shared investment power and 12,970 shares exercisable by
option within sixty days.
(3) Includes 56,000 shares of Series B preferred stock, which are convertible
into 98,000 shares of Common Stock and 956 shares owned by Mr. Macricostas'
wife, and 2,851 shares exercisable by option within sixty days.
(4) Includes 8,020 shares of Series B preferred stock, which are convertible
into 14,035 shares of Common Stock; 871 shares exercisable by option within
sixty days; 2,854 shares with shared voting and investment power; 27,988
shares of Common Stock and 4,328 shares of Series B preferred stock, which
are convertible into 7,574 shares of Common Stock, owned by Mr.
Portelance's wife; and 1,173 shares owned by Mr. Portelance's son.
(5) Includes 27,720 shares of Series B preferred stock, which are convertible
into 48,510 shares of Common Stock; 68,827 shares owned jointly with Mr.
Rizzo's wife, and 436 shares exercisable by option within sixty days.
(6) Includes 10,552 shares of Series B preferred stock which are convertible
into 18,466 shares of Common Stock, with 18,190 exercisable by option
within sixty days.
(7) Includes 2,993 shares of Series B preferred stock which are convertible
into 5,238 shares of Common Stock with 23,170exercisable by option within
60 days.
Security Ownership of Management.
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<PAGE>
The following table sets forth information, as of January 31, 2000,
regarding the number of shares and percentages of the Common Stock beneficially
owned, either directly or indirectly, by the directors and nominees and by all
of the directors and executive officers of Nutmeg as a group. Except as
indicated in the notes following the table below, the directors and nominees
have sole voting and investment power with respect to the shares listed as being
beneficially owned by them. The percentages shown are calculated on the basis of
the number of outstanding shares of Nutmeg's common stock on January 31, 2000
and on the number of shares of common stock for which the individual or group
may exercise an option within sixty days and/or convert Series B preferred
stock.
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
---------------- ------------------------- --------
Henry A. Bessel 96,732(1) 6.68%
Jackie Chan 104,949(2) 7.19%
Manuel A. Correia 45,704(3) 3.16%
John N. Deep 107,292(4) 7.30%
Alan Dinho 11,596(5) .81%
Paul N. Jaber 65,270(6) 4.46%
Constantine S. Macricostas 124,662(7) 8.15%
Frank P. Molinaro 37,866(8) 2.61%
Orlando Monteiro 35,194(9) 2.44%
John J. Otto 39,789(10) 2.76%
Richard Portelance 125,904(11) 8.63%
Anthony M. Rizzo, Sr. 117,773(12) 7.97%
John A. Val 53,400(13) 3.65%
Directors and Executive Officers 1,030,687(14) 54.13%
as a Group (15 persons)
(1) Includes 10,552 shares of Series B preferred stock which are convertible
into 18,466 shares of Common Stock, with 18,190 shares exercisable by
option within sixty days.
(2) Includes 9,600 shares of Series B preferred stock, which are convertible
into 16,800 shares of Common Stock, purchased in Mr. Chan's wife's name,
and 3,800 shares of Series B preferred stock which are convertible into
6,650 shares of common stock; 55,027 shares with shared voting and
investment power, and 14,689 shares exercisable by option within sixty
days.
(3) Includes 13,202 shares owned by Mr. Correia's wife, 1,400 shares of Series
B preferred stock which are convertible into 2,450 shares of common stock
700 of which are owned by Mr. Correia's wife, and 14,253 shares exercisable
by option within sixty days.
(4) Includes 16,000 shares of Series B preferred stock, which are convertible
into 28,000 shares of Common Stock; 27,507 shares owned by Mr. Deep's wife;
10,725 shares with shared investment power and 12,970 share exercisable by
option within sixty days.
(5) Includes 10,725 shares with shared voting and investment power; and 871
shares exercisable by option within sixty days.
(6) Includes 12,000 shares of Series B preferred stock, which are convertible
into 21,000 shares of Common Stock and 2,201 shares of Series B preferred
stock, which are convertible into 3,852 shares of Common Stock; and 9,727
shares of which Mr. Jaber has the right to acquire beneficial ownership
pursuant to the power to revoke a trust, discretionary account or similar
arrangement (included in this total are 1,000 shares of Series B preferred
stock which are convertible into 1,750 shares of common stock) and 6,812
shares exercisable by option within sixty days.
(7) Includes 56,000 shares of Series B preferred stock, which are convertible
into 98,000 share of Common Stock and 956 shares owned by Mr. Macricostas'
wife, and 2,851 shares exercisable by option within sixty days.
(8) Includes 4,814 shares of Series B preferred stock, which are convertible
into 8,425 shares of Common Stock; 2,342 shares with shared voting and
investment power; 14,076 shares exercisable by option within sixty days; 5
shares of
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<PAGE>
Common Stock and 1,376 shares of Series B preferred stock, which are
convertible into 2,408 shares of Common Stock owned by Mr. Molinaro's wife.
(9) Includes 4,375 shares with shared voting and investment power, 425 shares
owned by Mr. Monteiro's wife, and 14,253 shares exercisable by option
within sixty days.
(10) Includes 28,201 shares with shared voting and investment power and 1,370
shares of Series B preferred stock, which are convertible into 2,398 shares
of Common Stock, and 9,190 shares exercisable by option within sixty days.
(11) Includes 8,020 shares of Series B preferred stock, which are convertible
into 14,035 share of Common Stock; 871 shares exercisable by option within
sixty days; 2,854 shares with shared voting and investment power; 27,988
shares of Common Stock and 4,328 shares of Series B preferred stock, which
are convertible into 7,574 shares of Common Stock, owned by Mr.
Portelance's wife; and 1,173 shares owned by Mr. Portelance's son.
(12) Includes 27,720 shares of Series B preferred stock, which are convertible
into 48,510 shares of Common Stock; 68,827 shares owned jointly with Mr.
Rizzo's wife, and 436 shares exercisable by option within sixty days.
(13) Includes 12,500 shares of Series B preferred stock, which are convertible
into 21,875 shares of Common Stock; 18,324 shares with shared voting and
investment power; and 12,768 shares exercisable by option within sixty days
(14) Includes 183,014 shares of Series B preferred stock, which are convertible
into 320,275 shares of Common Stock; and 155,144 shares exercisable by
option within sixty days.
INFORMATION ABOUT NEWMIL
Incorporation by References.
This Proxy Statement/Prospectus is accompanied by NewMil's latest Form 10-K
filing for the fiscal year ended June 30, 1999. The Form 10-K includes NewMil's
financial statements audited by PricewaterhouseCoopers LLP. In addition, the SEC
allows NewMil to incorporate by reference information into this Proxy
Statement/Prospectus, which means that NewMil can disclose important information
to you by referring you to another document filed separately with the SEC. The
information that NewMil incorporates by reference is considered a part of this
Proxy Statement/Prospectus, except for any information superseded by information
presented in this Proxy Statement/Prospectus. This Proxy Statement/Prospectus
incorporates important business and financial information about NewMil and its
subsidiaries that is not included in or delivered with this document, as
follows:
Filings and Period of Report or Date Filed.
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000
. Quarterly Report on Form 10-Q for the quarter ended December 31, 1999
. Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
. Current Report on Form 8-K filed December 10, 1999
. Current Report on Form 8-K filed on June 9, 2000
A copy of the latest 10-Q will be provided to you promptly without charge
if you call or write to B. Ian McMahon, NewMil Bancorp, Inc., 19 Main Street,
New Milford, CT 06776, Telephone (860)355-7630. Since the filing of NewMil's
latest Form 10-Q, there have been no material changes in NewMil's affairs other
than the transaction contemplated by this Proxy Statement/Prospectus.
NewMil incorporates by reference additional documents that it may file with
the SEC between the date of this document and the date of the NewMil special
meeting. These documents include periodic reports, such as annual reports on
form 10-K, quarterly reports on form 10-Q and current reports on form 8-K, as
well as proxy statements.
Security Ownership of Certain Beneficial Owners.
Information concerning security ownership of beneficial owners is contained
in NewMil's most recent 10-K filing and is incorporated herein by reference.
Security Ownership of Management.
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Information concerning security ownership of management is contained in
NewMil's most recent 10-K filing and is incorporated herein by reference.
MARKET PRICES AND DIVIDENDS
NewMil's Common Stock.
The table below sets forth the range of high and low sale prices of
NewMil's common stock as reported on the Nasdaq National Market, as well as cash
dividends paid during the periods indicated:
Market Price Cash
----------------------- ----
High Low Dividends Paid
---- ---- --------------
Quarter Ended:
September 30, 1998 $13.500 $10.000 $0.08
December 31, 1998 $14.000 $11.000 $0.09
March 31, 1999 $13.000 $11.000 $0.09
June 30, 1999 $11.750 $ 9.500 $0.09
September 30, 1999 $11.750 $10.125 $0.10
December 31, 1999 $13.375 $11.000 $0.10
March 31, 2000 $13.313 $10.125 $0.10
June 30, 2000 $10.625 $ 9.875 $0.10
Period Ended:
August __, 2000 $ $
On May 30, 2000, the last trading day before the public announcement of the
merger, the closing price of NewMil's common stock on the Nasdaq was $9.875. On
August _____________, 2000, the most recent practicable date before the printing
of this document, the closing price of NewMil's common stock on the Nasdaq was
$_______.
Nutmeg's Common Stock.
The table below sets forth the range of high and low bid and asked prices
of Nutmeg's common stock as reported on the Nasdaq Small Cap Market, as well as
cash dividends paid during the periods indicated, restated to reflect all stock
dividends:
Bid and Asked Price Cash
------------------- ----
High Low Dividends Paid
---- --- --------------
Quarter Ended:
March 31, 1998 $8.02 $8.74 $0.038
June 30, 1998 $7.88 $8.60 $0.038
September 30, 1998 $8.98 $9.69 $0.038
December 31, 1998 $8.69 $9.40 $0.048
March 31, 1999 $8.50 $9.25 $0.048
June 30, 1999 $8.00 $8.75 $0.048
September 30, 1999 $8.00 $8.45 $0.048
December 31, 1999 $7.75 $8.00 $0.050
March 31, 2000 $8.28 $6.69 $0.050
June 30, 2000 $8.09 $7.75 $0.050
Period Ended:
August ___, 2000 $ $ $
On May 30, 2000, the last trading day before the public announcement of the
merger, the high and low bid and asked prices of Nutmeg's common stock reported
on the Nasdaq Small Cap Market was $8.000 and $8.171875. On _____________,
2000, the most recent practicable date before the printing of this document, the
high and low bid and asked prices of Nutmeg's common stock on the Nasdaq Small
Cap Market was $______ and $______.
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DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS
Set forth below is a description of NewMil's capital stock, as well as a
summary of the material differences between the rights of holders of Nutmeg's
common and Series B preferred stock and their prospective rights as holders of
NewMil's common stock. If the merger agreement is approved and the merger takes
place, some of the holders of Nutmeg's common and Series B preferred stock will
become holders of NewMil's common stock. As a result, NewMil's certificate of
incorporation, as amended, and bylaws, as amended, and the applicable provisions
of the General Corporation Law of the State of Delaware, referred to in this
section as the "Delaware corporation law", will govern the rights of current
holders of Nutmeg's common and Series B preferred stock who receive NewMil
common stock in exchange for their shares of Nutmeg common or Series B preferred
stock. The rights of those shareholders are governed at the present time by the
federal stock charter, as amended, and the bylaws, as amended, of Nutmeg and the
applicable provisions of Federal law.
The following comparison is based on the current terms of the governing
documents of NewMil and Nutmeg and on the provisions of the Delaware corporation
law and Federal law. The discussion is intended to highlight important
similarities and differences between the rights of holders of NewMil's common
stock and Nutmeg's common and Series B preferred stock.
NewMil's Common Stock.
NewMil is authorized to issue 20,000,000 shares of common stock, par value
$.50 per share. As of March 31, 2000, 3,608,225 shares of NewMil's common stock
were outstanding and NewMil had outstanding stock options granted to directors,
officers and other employees for another 439,350 shares of NewMil's common
stock. Each share of NewMil's common stock has the same relative rights and is
identical in all respects to each other share of NewMil's common stock. NewMil's
common stock is non-withdrawable capital, is not of an insurable type and is not
insured by the FDIC or any other governmental entity.
Holders of NewMil's common stock are entitled to one vote per share on each
matter properly submitted to shareholders for their vote, including the election
of directors. NewMil's common stock is not subject to additional calls or
assessments by NewMil, and all shares of NewMil's common stock currently
outstanding are fully paid and nonassessable. For a discussion of the voting
rights of NewMil's common stock, its lack of preemptive rights, the
classification of NewMil's Board of Directors and provisions of NewMil's
certificate of incorporation and bylaws that may prevent a change in control of
NewMil or that would operate only in an extraordinary corporate transaction
involving NewMil or its subsidiaries, see "--Certificate of Incorporation,
Federal Stock Charter and Bylaw Provisions."
Holders of NewMil's common stock are entitled to receive dividends declared
by the Board of Directors of NewMil out of any assets legally available for
distribution.
In the unlikely event of any liquidation, dissolution or winding up of
NewMil, the holders of NewMil's common stock would be entitled to receive all
remaining assets of NewMil available for distribution, in cash or in kind, after
payment or provision for payment of all debts and liabilities of NewMil.
NewMil's Shareholder Rights Agreement.
Pursuant to the rights agreement, the Board of Directors of NewMil declared
a dividend distribution of one right for each five outstanding shares of common
stock (a "Right"). Such Rights are evidenced by the stock certificate and the
summary of the rights agreement, for those shares outstanding as of the Record
Date, and by the stock certificate alone, for shares issued after the Record
Date. NewMil adopted a rights agreement on July 14, 1994 (the "Record Date") to
protect shareholders in the event of an inadequate takeover offer or to deter
coercive or unfair takeover tactics. In general, each Right entitles a holder to
purchase from NewMil one share of NewMil common stock at a price of twenty
dollars ($20.00) subject to adjustment.
Upon the close of business on the earliest of:
. the tenth day after a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of 10% or more
of the outstanding shares of NewMil common stock,
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. the tenth day (or such later day as may be determined by action of the
NewMil board prior to such time as any person becomes an Acquiring
Person) after the date of the commencement of a tender offer or
exchange offer by any person (other than NewMil) to acquire beneficial
ownership of 10% of NewMil's common stock (when added to any shares as
to which such person is the owner prior to the commencement), or
. the tenth day (or such later day as may be determined by action of the
NewMil board prior to such time as any person becomes an Acquiring
Person) after the filing by any person of a registration statement
under the Securities Act of 1933, as amended, with respect to a
contemplated exchange offer to acquire beneficial ownership of 10% or
more of the issued and outstanding common stock (when added to any
shares as to which such person is the beneficial owner immediately
prior to such filing) (the earliest date being called the
"Distribution Date"),
the Shareholder can exercise the Right and purchase one share of NewMil common
stock for each Right exercised.
As soon as practicable after the Distribution Date, NewMil will mail
separate certificates evidencing the Rights to holders of record of NewMil
common stock as of the close of business on the Distribution Date and such
certificate alone will evidence the Rights. The rights are not exercisable
until the Distribution Date and will expire on July 18, 2004 unless earlier
redeemed by NewMil.
In the event that NewMil is acquired in a merger or other business
combination, each holder of a Right will have the right to receive, upon the
exercise of the Right, the number of shares of common stock of the surviving
company which at the time of such transaction would have a market value of four
times the exercise price of the Right. If NewMil is the surviving company in a
merger with any person, the rights agreement provides that each holder of a
Right (other than the Acquiring Person) would have the right to receive, upon
the exercise of the Right, that number of shares of NewMil having a market value
of four times the exercise price of the Right.
A copy of the NewMil rights agreement has been filed with the SEC. See
"Where You Can Find More Information" for information on where you can obtain a
copy. A copy of the NewMil rights agreement also is available free of charge
from NewMil. This summary description of the NewMil rights does not purport to
be complete and is qualified in its entirety by reference to the rights
agreement.
Nutmeg's Common Stock.
The federal stock charter of Nutmeg authorizes 6,000,000 shares of Nutmeg's
common stock, par value $.003 per share, of which 1,435,324 shares were
outstanding as of May 30, 2000 and 2,000,000 shares of Nutmeg Series B preferred
stock, par value $.005 per share, of which 487,001 shares were outstanding as of
May 30, 2000. As of May 30, 2000 there are (i) 103,127 shares of Nutmeg common
stock subject to unexercised options under the director stock option plans, (ii)
183,425 shares of Nutmeg common stock subject to unexercised options under the
Employer stock option plan, and (iii) 457,280 shares of Nutmeg common stock
reserved for issuance upon exercise of the option to be issued to NewMil
pursuant to the Option Agreement.
Each share of Nutmeg common stock also has the same relative rights and is
identical in all respects to each other share of Nutmeg common stock. As with
NewMil's common stock, Nutmeg common stock is non-withdrawable capital, is not
of an insurable type and is not insured by the FDIC or any other governmental
entity.
Holders of Nutmeg common stock also are entitled to one vote per share on
each matter properly submitted to shareholders for their vote, including the
election of directors. Holders of Nutmeg common stock have distribution and
liquidation rights similar to those of holders of NewMil's common stock. Nutmeg
common stock is also not subject to additional calls or assessments by Nutmeg,
and all shares of Nutmeg common stock currently outstanding are fully paid and
nonassessable. For a discussion of the voting rights of Nutmeg common stock, its
lack of preemptive rights and provisions in Nutmeg's federal stock charter which
may prevent a change in control of Nutmeg, see "-- Certificate of Incorporation,
Federal Stock Charter and Bylaw Provisions."
Nutmeg's Series B preferred stock.
Nutmeg's federal stock charter authorizes 2,000,000 shares of Series B
preferred stock, par value $.005 per share, of which 487,001 shares are
outstanding as of May 30, 2000.
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By a vote of the Nutmeg board on April 24, 1997, 490,000 shares of Series B
preferred stock were established and designated. The relative rights and
preferences of the Series B preferred stock are as follows:
(a) Dividends are payable quarterly at a fixed rate equal to 8.00%. The
shares of the Series B preferred stock have a preference with respect
to dividends senior to the holders of the common stock. Dividends
that are not paid when due will not cumulate and be paid in the
future. In the event dividends are not paid on the Series B preferred
stock in any dividend period, holders of shares of the Series B
preferred stock are entitled to receive a number of shares of common
stock in an amount which represents the value of the unpaid dividend.
(b) The shares of the Series B preferred stock are not entitled generally
to vote on shareholder matters, except as otherwise provided in the
federal state charter or as required by law. However, a majority vote
of the Series B preferred stock, voting as a class, is required to
approve (i) a merger, consolidation, sale, lease or conveyance of the
property or business of Nutmeg in exchange for securities of another
corporation if the Series B preferred stock is exchanged for
securities of the other corporation, or (ii) the issuance of a series
of Series B preferred stock having dividend or liquidation preferences
senior to the Series B preferred stock.
(c) Nutmeg has the option to redeem all or a part of the Series B
preferred stock at any time or from time to time after the fifth
anniversary date of the original date of issuance (upon not less than
thirty (30) or more than sixty (60) days' notice) at a redemption
price of $8.75 per share. Accrued and unpaid dividends for the
immediately preceding dividend period will be added to the redemption
price.
(d) The Series B preferred stock is entitled, before any distribution or
payment to the holders of the common stock or other security ranking
junior to the Series B preferred stock, to a preference of $8.75 per
share in the event of a voluntary or involuntary liquidation or
dissolution of Nutmeg. Notwithstanding the foregoing, however, until
the occurrence of a voluntary or involuntary liquidation, such
liquidation preference shall not be considered a matured liability or
indebtedness of Nutmeg; shall not represent a present or vested
interest in Nutmeg's assets and shall not be taken into account in
determining surplus or net income available for dividends.
(e) Shares of Series B preferred stock will be convertible at a price of
$8.75 per share into shares of common stock. Accordingly, each share
of Series B preferred stock may be converted into one (1) share of
common stock plus cash in lieu of fractional shares. The conversion
price shall be subject to adjustment as set forth in sub-paragraph
(f), below. If any of the Series B preferred stock is called for
redemption by Nutmeg, the conversion rights pertaining thereto
terminate at the close of business on the business day next preceding
the redemption date so long as there is no default in the payment of
the then applicable redemption price. In the event of a change in
control of Nutmeg, the conversion of the Series B preferred stock to
common stock will be mandatory.
(f) If at any time the number of shares of Nutmeg common stock is
increased by a stock dividend payable in shares of common stock, or by
a stock split or similar event affecting the common stock, or if the
number of shares of common stock is decreased by a combination or
reverse split or similar event affecting the common stock, then the
conversion price of the Series B preferred stock in effect immediately
prior to such event with respect to the Series B preferred stock then
outstanding will, concurrently with the effective date of such event,
be appropriately increased or decreased, as the case may be, so that
the number of shares of common stock issuable on conversion of each
share of Series B preferred stock then outstanding shall be increased
or decreased, as the case may be, in proportion to such increase or
decrease in outstanding shares of common stock.
(g) The Series B preferred stock has a stated value (the price to be paid
by all subscribers) of $8.75 per share. Such stated value does not
represent a determination by Nutmeg's Board of Directors for purposes
of the capital accounts of Nutmeg.
Comparison of Charter Provisions.
The following discussion is a general summary of provisions of NewMil's
certificate of incorporation and bylaws, and a comparison of those provisions to
similar types of provisions in the federal stock charter and bylaws of Nutmeg.
The discussion is necessarily general and, for provisions contained in NewMil's
certificate of incorporation and bylaws or in
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Nutmeg's federal stock charter and bylaws, reference should be made to the
documents themselves. Some of the provisions included in NewMil's certificate of
incorporation and bylaws may serve to discourage a change in control of NewMil
even if desired by a majority of shareholders. These provisions are designed to
encourage potential acquirers to negotiate directly with the Board of Directors
of NewMil and to discourage other takeover attempts.
Directors.
Some of the provisions of NewMil's certificate of incorporation and bylaws
will impede changes in majority control of NewMil's Board of Directors. The
certificate of incorporation provides that the Board of Directors will be
divided into three classes, with directors in each class elected for three-year
staggered terms. The certificate of incorporation further provides that the
Board of Directors is to be made up of no less than 6 and no more than 15
members. The bylaws also provide that:
. except with respect to directors serving at the time the bylaws became
effective, no person shall be eligible for election as director and no
director shall be eligible for re-election after having reached
his/her 70/th/ birthday, and
. in the event that any director is unable to attain an attendance
record of 75% in any fiscal year, such director's office shall be
immediately vacated.
Like NewMil, Nutmeg also has three classes of directors, with directors in
each class elected for three-year staggered terms. Unlike NewMil, Nutmeg's
certificate of incorporation provides that:
. at the time of election, each director must own in his individual
capacity one hundred shares of Nutmeg common or Series B preferred
stock;
. any director who reaches the age of 72 during his term shall be deemed
to have automatically resigned and be designated with the status of
Director Emeritus; and
. the position of any director who fails to attend six consecutive
meetings of the board shall become vacant if the majority of the Board
of Directors determines that such absence was without good cause.
NewMil's certificate of incorporation and bylaws provide that a vacancy
occurring in the Board of Directors, including a vacancy created by any increase
in the number of directors, is to be filled for the remainder of the unexpired
term by a majority vote of the directors then in office. Similarly, Nutmeg's
bylaws provide that any vacancy on the Board of Directors may be filled by a
majority of the directors then in office, although less than a quorum. A
director of Nutmeg elected to fill a vacancy, including a vacancy created by an
increase in the number of directors, is filled by election by the Board of
Directors for a term continuing only until the next election of the directors by
the shareholders.
NewMil's certificate of incorporation provides that a director may be
removed only for cause and then only by the affirmative vote of at least two-
thirds of the total votes eligible to be voted at a duly constituted meeting of
shareholders called for that purpose. If there is an interested shareholder
(any person who is the beneficial owner of 10% or more of the voting power of
the outstanding voting stock or an affiliate of NewMil who in the 2 years prior
to the date of the vote was the beneficial owner of 10% or more of the
outstanding voting stock) such two-thirds vote must include the affirmative vote
of not less than two-thirds of the voting power of the issued and outstanding
shares entitled to vote by the shareholders other than the interested
shareholders.
Nutmeg's directors may be removed at any time only for cause by the
affirmative vote of a majority of the shares then entitled to vote at an
election of directors.
NewMil's bylaws impose restrictions on the nomination by shareholders of
candidates for election to the Board of Directors and the proposal by
shareholders of business to be acted upon at an annual meeting of shareholders.
The bylaws of Nutmeg contain similar provisions.
Call of Special Meetings.
NewMil's certificate of incorporation provides that a special meeting of
shareholders may be called at any time but only by the President or by the Board
of Directors unless otherwise required by law. Shareholders are not authorized
to call a special meeting. Nutmeg's bylaws provide that the chairman,
president, or the Board of Directors can call such a special meeting and shall
do so at the request of the holders of 10% of the outstanding stock of Nutmeg
entitled to vote.
Shareholder Action without a Meeting.
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NewMil's certificate of incorporation provides that shareholder action must
be effected at a duly called annual or special meeting and may not be effected
by written consent. Nutmeg's bylaws provide that shareholders may act by
written consent without a meeting with the unanimous consent of all of the
shareholders entitled to vote.
Limitation on Liability of Directors and Indemnification.
NewMil's certificate of incorporation provides that no director shall be
personally liable to the corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director other than liability:
. for any breach of the director's duty of loyalty to the corporation or
its shareholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for any payment of a dividend or approval of a stock repurchase that
is illegal under Section 174 of the Delaware corporation law; or
. for any transaction from which a director derived an improper personal
benefit.
Nutmeg's organizational documents do not so limit the liability of its
directors. Nutmeg's directors are indemnified as provided by applicable law.
NewMil's bylaws also provide generally for the indemnification of the
officers, directors, and employees of NewMil (and for other persons as provided
for in Delaware corporation law) to the full extent required or permitted of
corporations subject to Delaware corporation law.
Cumulative Voting.
Neither NewMil nor Nutmeg shareholders may cumulate voting rights in the
election of directors.
Preemptive Rights.
Both NewMil's certificate of incorporation and Nutmeg's federal stock
charter provide that shareholders do not have any preemptive rights regarding
the entity's securities.
Notice of Meetings.
NewMil's bylaws require that notice be given not less than 10 nor more than
60 days prior to each annual or special meeting of shareholders. Nutmeg's
bylaws require that notice of an annual or special meeting be given not less
than 10 nor more than 50 days prior to a meeting.
Quorum.
Both NewMil's and Nutmeg's bylaws provide that the holders of a majority of
the issued and outstanding shares of stock of the company entitled to vote at a
meeting constitutes a quorum.
General Vote.
NewMil's bylaws provide that any matter brought before a meeting of
shareholders will be decided by the affirmative vote of a majority of the votes
cast on the matter except as otherwise required by law or NewMil's certificate
of incorporation or bylaws. Nutmeg's bylaws adopt Robert's Rules of Order which
similarly require the affirmative vote of a majority of the votes cast on the
matter, unless otherwise prescribed by the board or the bylaws.
Record Date.
NewMil's bylaws provide that the record date for determination of
shareholders entitled to notice of or to vote at a meeting and for other
specified purposes may not be less than 10 nor more than 60 days before the date
of the meeting or other action. Nutmeg's bylaws provide that the Board of
Directors may set a record date which shall not be a date earlier than the date
on which such action is taken by the Board of Directors, nor more than 60 nor
less than 10 days before the particular event requiring such determination is to
occur.
Procedures for Certain Business Combinations.
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NewMil's certificate of incorporation requires that business combinations
between NewMil or any majority-owned subsidiary of NewMil and a 10% or more
shareholder or its affiliates or associates, referred to collectively in this
section as the interested shareholder, be approved first by the Board of
Directors and then by the affirmative vote of (i) the holders of at least two-
thirds of the voting powers of the then outstanding shares of voting stock of
NewMil and (ii) the holders of at least two-thirds of the voting powers of the
then outstanding shares of voting stock, exclusive of any shares held by or on
behalf of interested shareholders. The types of business combinations with an
interested shareholder covered by this provision include: any merger or
consolidation with any interested shareholder or other corporation which is (or
after such merger or consolidation, would be) an affiliate or associate of an
interested shareholder that was an interested shareholder prior to the
transaction; any sale, lease, exchange, mortgage, pledge or other disposition to
or with an interested shareholder of any of the assets of NewMil or subsidiary
measured at the time of the approval of the transaction an aggregate book value
of 10% or more of the total market value of the outstanding shares of NewMil or
of its net worth as of the end of its most recent fiscal quarter; an issuance or
transfer of equity securities having an aggregate market value in excess of 5%
of the aggregate market value of NewMil's outstanding shares; the issuance or
transfer by NewMil or any subsidiary of any securities of NewMil or any
subsidiary having an aggregate market value of five percent or more of the total
market value of the outstanding shares of NewMil to any interested shareholder
or any affiliate or associate of any interested shareholder; the adoption of any
plan or proposal of liquidation or dissolution proposed by or on behalf of an
interested shareholder; and any reclassification of securities, recapitalization
of NewMil or any merger or consolidation of NewMil with any of its subsidiaries
or any other transaction which has the effect of increasing the proportionate
ownership interest of the interested shareholder. Nutmeg's federal stock
charter and bylaws do not contain a similar provision.
Anti-Greenmail.
NewMil's certificate of incorporation requires approval by a majority of
the outstanding shares of voting stock before NewMil may directly or indirectly
purchase or otherwise acquire any voting stock beneficially owned by a holder of
3% or more of NewMil's voting stock, if the holder has owned the shares for less
than two years. Any shares beneficially held by the person are required to be
excluded in calculating majority shareholder approval. This provision would not
apply to any purchase or other acquisition of securities made as part of a
tender or exchange offer by NewMil to purchase securities of the same class made
on the same terms to all holders of such securities and complying with the
applicable requirements of the Securities Exchange Act of 1934 and the rules and
regulations thereunder.
Nutmeg's federal stock charter does not contain a similar provision.
Amendment to Certificate of Incorporation, Federal Stock Charter and
Bylaws.
Certain provisions of NewMil's certificate of incorporation described above
may not be repealed or amended unless such amendment is approved by the
affirmative vote of the holders of two-thirds of the voting power of the issued
and outstanding shares entitled to vote on that issue, provided that, if there
is an interested shareholder, the two-thirds vote must include two-thirds of the
voting power of the issued and outstanding shares entitled to vote on that issue
other than the interested shareholder. Certain provisions of NewMil's bylaws
may be amended by a majority vote of the Board of Directors or by the
affirmative vote of the holders of a majority of the voting power of shares
entitled to vote on that issue, provided that certain provisions described above
may be amended only upon the affirmative vote of the holders of two-thirds of
the voting power of the issued and outstanding shares entitled to vote on that
issue. If there is an interested shareholder, the two-thirds vote must include
two-thirds of the voting power of the issued and outstanding shares entitled to
vote on that issue other than the interested shareholder.
Nutmeg's federal stock charter may not be amended unless such amendment is
first proposed by the Nutmeg board, preliminarily approved by the board and
approved by the affirmative vote of a majority of the total votes eligible to be
cast at the shareholder meeting. Nutmeg's bylaws may be amended by affirmative
vote of a majority of the full Board of Directors or by the affirmative vote of
a majority of the votes cast by the Nutmeg shareholders at a shareholder
meeting.
Applicable Law.
The following discussion is a general summary of particular federal and
state statutory and regulatory provisions that may be deemed to have an anti-
takeover effect.
Delaware Takeover Statute.
Section 203 of the Delaware corporation law applies to Delaware
corporations such as NewMil with a class of voting stock listed on a national
securities exchange, authorized for quotation on the Nasdaq Stock Market, or
held of record by
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2,000 or more persons. It restricts transactions which may be entered into by
the corporation and some of its shareholders. Section 203 provides, in essence,
that a shareholder acquiring more than 15% of the outstanding voting stock of a
corporation subject to the statute and that person's affiliates and associates,
referred to in this section as an interested shareholder, but less than 85% of
its shares may not engage in specified business combinations with the
corporation for a period of three years after the date on which the shareholder
became an interested shareholder unless before that date the corporation's board
of directors approved either the business combination or the transaction in
which the shareholder became an interested shareholder or at or after that time
the business combination is approved by the corporation's board of directors and
authorized at an annual or special meeting of shareholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock of the corporation not
owned by the interested shareholder. Section 203 defines the term business
combination to include a wide variety of transactions with or caused by an
interested shareholder in which the interested shareholder receives or could
receive a benefit on other than a pro rata basis with other shareholders,
including mergers, consolidations, specified types of asset sales, specified
issuances of additional shares to the interested shareholder, transactions with
the corporation which increase the proportionate interest of the interested
shareholder or transactions in which the interested shareholder receives
specified other benefits.
Connecticut Regulatory Restrictions on Acquisitions of Stock.
Connecticut banking statutes prohibit any person from directly or
indirectly offering to acquire or acquiring voting stock of a Connecticut-
chartered savings bank, like New Milford Savings Bank, or a holding company of
that kind of company, like NewMil, or a federal savings and loan association
having its principal office in Connecticut, like Nutmeg, that would result in
the person becoming, directly or indirectly, the beneficial owner of more than
10% of any class of voting stock of that entity unless the person had previously
filed an acquisition statement with the Connecticut Commissioner of Banking and
the offer or acquisition has not been disapproved by the Connecticut
Commissioner.
Federal Law.
Federal law provides that, subject to some exemptions, no person acting
directly or indirectly or through or in concert with one or more other persons
may acquire control of an insured institution or holding company of an insured
institution, without giving at least 60 days prior written notice providing
specified information to the appropriate federal banking agency. In the case of
NewMil and New Milford Savings Bank, the appropriate federal banking agency is
the Board of Governors of the Federal Reserve System and the FDIC, respectively,
and in the case of Nutmeg, the appropriate federal banking agency is the Office
of Thrift Supervision. Control is defined for this purpose as the power,
directly or indirectly, to direct the management or policies of an insured
institution or to vote 25% or more of any class of voting securities of an
insured institution. Control is presumed to exist where the acquiring party has
voting control of at least 10% of any class of the institution's voting
securities and other conditions are present. The Office of Thrift Supervision,
the FDIC or the Board of Governors of the Federal Reserve System may prohibit
the acquisition of control if the agency finds, among other things, that:
. the acquisition would result in a monopoly or substantially lessen
competition;
. the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
. the competence, experience or integrity of any acquiring person or any
of the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition
of control by that person.
WHERE YOU CAN FIND MORE INFORMATION
Nutmeg and NewMil have included with this joint Proxy Statement/Prospectus
certain historical financial information as Appendices B, C and D. The
following paragraphs describe where you can find additional information about
the two companies.
NewMil files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information that NewMil files with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements and other information about
issuers that file electronically with the SEC. The address of the SEC's Internet
site is http://www.sec.gov. NewMil can be found on the Internet at
------------------
http://www.newmil.com. NewMil's common stock is traded on the Nasdaq Stock
---------------------
Market's National Market Tier under the trading symbol "NMSB".
58
<PAGE>
Nutmeg is also subject to the information requirements of the 1934
Securities Exchange Act, and in accordance therewith files reports, proxy
statements, and other information with the Office of Thrift Supervision (the
"OTS"). The reports, proxy statements and other information filed by Nutmeg
with the OTS can be inspected and copied at public reference facilities
maintained by the OTS at its Public Files in the Registration and Disclosure
Section at Room F-643, 1776 F Street, N.W., Washington, D.C. 20006. Copies of
such material may be ordered from such Section by telephone request at
prescribed rates by calling (202) 898-8920. Nutmeg can be found on the Internet
at http://www.nutmegfederal.com. Nutmeg's common stock is traded on the Nasdaq
under the trading symbol "NTMG".
NewMil has filed with the SEC a registration statement on Form S-4 under
the 1933 Securities Act relating to NewMil's common stock to be issued to
Nutmeg's shareholders in the merger. As permitted by the rules and regulations
of the SEC, this Proxy Statement/Prospectus does not contain all the information
set forth in the registration statement. You can obtain that additional
information from the SEC's principal office in Washington, D.C. or the SEC's
Internet site as described above. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated by reference into this
Proxy Statement/Prospectus about the contents of any contract or other document
are not necessarily complete and, in each instance where the contract or
document is filed as an exhibit to the registration statement, reference is made
to the copy of that contract or document filed as an exhibit to the registration
statement, with each statement of that kind in this Proxy Statement/Prospectus
being qualified in all respects by reference to the document.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document, and in documents
that we incorporate by reference. These kinds of statements are subject to risks
and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of our operations. When we use
words like believes, expects, anticipates or similar expressions, we are making
forward-looking statements.
You should note that many factors, some of which are discussed elsewhere in
this document and in the documents that we incorporate by reference, could
affect our future financial results and could cause those results to differ
materially from those expressed in our forward-looking statements. These
factors include the following:
. the effect of economic conditions;
. inability to realize expected cost savings in connection with business
combinations and other acquisitions;
. higher than expected costs related to integration of combined or
merged businesses;
. deposit attrition;
. adverse changes in interest rates;
. change in any applicable law, rule, regulation or practice with
respect to tax or accounting issues or otherwise; and
. adverse changes or conditions in capital or financial markets.
The forward-looking statements are made as of the date of this document,
and we assume no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
No person is authorized to give any information or to make any
representation not contained in this document, and, if given or made, that
information or representation should not be relied upon as having been
authorized. This document does not constitute an offer to sell, or a
solicitation of an offer to purchase, any of NewMil's common stock offered by
this document, or the solicitation of a proxy, in any jurisdiction in which it
is unlawful to make that kind of offer or solicitation. Neither the delivery of
this document nor any distribution of NewMil's common stock offered pursuant to
this Proxy Statement/Prospectus shall, under any circumstances, create an
implication that there has been no change in the affairs of Nutmeg or NewMil or
the information in this document or the documents or reports incorporated by
reference into this document since the date of this document.
59
<PAGE>
SHAREHOLDER PROPOSALS
If the merger were not to be completed and Nutmeg were to hold an annual
meeting of shareholders in 2001, any proposal which a Nutmeg shareholder wishes
to have included in the Nutmeg proxy statement and form of proxy for that
meeting must be received by Nutmeg at its principal executive offices at 301
Main Street, Danbury, Connecticut 06810, prior to December 1, 2000. Nothing in
this paragraph shall be deemed to require Nutmeg to include in its proxy
statement and form of proxy for such meeting any shareholder proposal which does
not meet the requirements of the OTS in effect at the time. If the merger
agreement is approved and the merger takes place, Nutmeg will not have an annual
meeting of shareholders in 2001. If the merger does not take place, Nutmeg
anticipates that its 2001 annual meeting will be held in April, 2001.
OTHER MATTERS
We do not expect that any matters other than those described in this
document will be brought before the special meeting. If any other matters are
presented, however, it is the intention of the persons named in the Nutmeg or
NewMil proxy card, to vote proxies in accordance with the determination of a
majority of Nutmeg's or NewMil's Board of Directors, including, without
limitation, a motion to adjourn or postpone the special meeting to another time
and/or place for the purpose of soliciting additional proxies in order to
approve the merger agreement or otherwise.
EXPERTS
The consolidated financial statements of NewMil as of June 30, 1999 and
1998 and for each of the three years in the period then ended, have been
included in this document and in the registration statement in reliance on the
report of PricewaterhouseCoopers LLP, independent certified public accountants,
and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Nutmeg, included with this
document at December 31, 1999 and 1998 and for each of the years in the three-
year period ended December 31, 1999, have been audited by Seward and Monde,
independent auditors, as stated in their report, and have been so included in
reliance upon the report of that firm given upon their authority as experts in
accounting and auditing.
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of PricewaterhouseCoopers LLP will be present at the
NewMil special meeting and a representative of Seward and Monde will be present
at the Nutmeg meeting. The representative will have the opportunity to make a
statement if he/she desires to do so and is expected to be available to respond
to appropriate questions.
LEGAL MATTERS
The validity of NewMil's common stock to be issued in the merger and
certain tax matters in connection with the merger are expected to be passed upon
by Tyler Cooper & Alcorn, LLP, Hartford, Connecticut. Day, Berry & Howard LLP
is expected to pass on certain legal matters for Nutmeg in connection with the
merger.
60
<PAGE>
APPENDIX A
[MB&D LETTERHEAD]
The Board of Directors
Nutmeg Federal Savings & Loan Association
301 Main Street
Danbury, CT 06810
The Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, to both the Common and Preferred stockholders of Nutmeg Federal
Savings & Loan Association ("Nutmeg") of the consideration offered by NewMil
Bancorp, Inc. ("NewMil") in connection with the proposed acquisition of Nutmeg
by NewMil pursuant to an Agreement and Plan of Merger (the "Merger Agreement")
dated May 30, 2000 by and between Nutmeg and NewMil. Pursuant to the Merger
Agreement, Nutmeg will merge with and into NewMil, with NewMil being the
surviving corporation.
As is more specifically set forth in the Merger Agreement, upon
consummation of the merger, each outstanding share of Nutmeg common stock,
except for shares held by NewMil and its subsidiaries or by Nutmeg and its
subsidiaries (in both cases, other than shares held in a fiduciary capacity or
as a result of debts previously contracted), will be converted into and
exchangeable for $8.25 plus any net gain (after expenses and taxes payable) on
Nutmeg's sale of certain mortgage servicing rights. The consideration is payable
in either cash or in shares of NewMil Common Stock, with the amount of NewMil
Common Stock to be exchanged for each Nutmeg share to be determined during a 15
day pricing period ending prior to closing of the transaction. The proposed
consideration to be paid to Nutmeg Preferred shareholders in exchange for their
shares equals $14.4375 per Preferred share plus any net gain (after expenses and
taxes payable) on Nutmeg's sale of the mortgage servicing rights. The
consideration to be paid to the Nutmeg Preferred shareholders is also payable in
either cash or shares of NewMil Common Stock as described above. The
consideration to be received by Nutmeg Common and Preferred shareholders is
subject to the limitation that no more than 50% of the total consideration to be
paid to all shareholders and option holders in the transaction will be paid in
cash. In addition, no more than 60% of the total consideration to be paid to all
shareholders and option holders in the transaction will be paid in NewMil Common
Stock. The Merger Agreement may be terminated under certain conditions prior to
the effective time of the merger by the Board of Directors of either party based
on defined criteria.
McConnell, Budd & Downes, Inc., as part of its investment banking business,
is regularly engaged in the valuation of bank holding companies and banks,
thrift holding companies and thrifts and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements,
competitive bidding processes, market making as a Nasdaq market maker, secondary
<PAGE>
distributions of listed securities and valuations for corporate, estate and
other purposes. Our experience and familiarity with Nutmeg includes having
worked as a financial advisor to Nutmeg throughout the process and negotiations
leading up to the proposed merger with NewMil. In the course of our role as
financial advisor to Nutmeg in connection with the merger, we have received fees
for our services and will receive additional fees contingent on the occurrence
of certain defined events. While the payment of all or a significant portion of
fees related to financial advisory services provided in connection with arm's-
length mergers and other business combination transactions upon consummation of
such transactions, as is the case with this transaction, might be viewed as
giving such financial advisors a financial interest in the successful completion
of such transactions, such compensation arrangements are standard and customary
for transactions of the size and type of this transaction.
In arriving at our opinion, we have reviewed the Merger Agreement and the
joint proxy statement/prospectus in substantially the form in which this letter
appears as an exhibit. We have also reviewed publicly available business,
financial and shareholder information relating to Nutmeg and its subsidiaries
and certain publicly available financial and shareholder information relating to
NewMil.
In connection with the foregoing, we have (i) reviewed Nutmeg's Annual
Reports to Stockholders, Annual Reports on Form 10-KSB and related financial
information for the four calendar years ended December 31, 1999 and Nutmeg's
Quarterly Report on Form 10-Q and related unaudited financial information for
the quarter ended March 31, 2000; (ii) reviewed NewMil's Annual Reports to
Stockholders, Annual Reports on Form 10-K and related financial information for
the four calendar years ended December 31, 1999 and NewMil's Quarterly Report on
Form 10-Q and related unaudited financial information for the quarter ended
March 31, 2000; (iii) reviewed certain internal financial information and
financial forecasts, relating to the business, earnings, cash flows, assets and
prospects of the respective companies furnished to McConnell, Budd & Downes,
Inc. by Nutmeg and NewMil, respectively; (iv) held discussions with members of
the senior management and board of Nutmeg concerning the past and current
results of operations of Nutmeg, its current financial condition and
management's opinion of its future prospects; (v) held discussions with members
of Nutmeg's senior management regarding the current earnings contribution of the
mortgage servicing business, the risks, capital requirements and growth
potential of that business and the range of potential sale values for Nutmeg's
mortgage servicing portfolio; (vi) held discussions with members of senior
management of NewMil concerning the past and current results of operations of
NewMil, its current financial condition and management's opinion of its future
prospects; (vii) reviewed the historical record of reported prices, trading
volume and dividend payments for Nutmeg Common and Preferred and NewMil Common
Stock; (viii) considered the current state of and future prospects for the
economy of Connecticut generally and the relevant market areas served by Nutmeg
and NewMil in particular; (ix) reviewed specific merger analysis models employed
by McConnell, Budd & Downes, Inc. to evaluate potential business combinations of
financial institutions; (x) reviewed the reported financial terms of selected
recent business combinations of financial institutions; and (xi) performed such
other studies and analyses as McConnell, Budd & Downes, Inc. considered
appropriate under the circumstances associated with this particular transaction.
<PAGE>
In the course of our review and analysis we considered, among other things,
such topics as the anticipated future earnings and dividend per share results
for Nutmeg on a stand-alone basis, the capital adequacy of each of the parties,
measures of asset quality and apparent adequacy of the reserve for loan losses
for each of the parties. We also considered the composition of deposits and the
composition of the loan portfolio of each of Nutmeg and NewMil. We considered
the current earnings contribution and the range of potential sale values of
Nutmeg's mortgage servicing business, the risks and capital requirements
inherent to that business and the future viability and growth potential of the
mortgage servicing business for Nutmeg. We considered the operating environment
for both companies, both in terms of the overall environment for savings
institutions and as regards the operating and competitive environment for
community institutions in the markets in which Nutmeg and NewMil operate. In
addition, we considered the historical trading range, trading pattern and
relative market liquidity of the common shares of each of the parties. In the
conduct of our review and analysis we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial
information provided to us by Nutmeg and NewMil and or otherwise publicly
obtainable. In reaching our opinion we have not assumed any responsibility for
the independent verification of such information or any independent valuation or
appraisal of any of the assets or the liabilities of either Nutmeg or NewMil,
nor have we obtained from any other source, any current appraisals of the assets
or liabilities of either Nutmeg or NewMil. We have also relied on the management
of Nutmeg and NewMil as to various financial and operating forecasts and of the
assumptions on which they are based, which were included in our analyses.
In the course of rendering this opinion, which is being rendered prior to
the receipt of certain required regulatory approvals necessary before
consummation of the merger, we assume that no conditions will be imposed by any
regulatory agency in connection with its approval of the merger that will have a
material adverse effect on the results of operations, the financial condition or
the prospects of NewMil following consummation of the merger.
Based upon and subject to the foregoing, it is our opinion, that as of the
date of this letter, the consideration is fair to the Common and Preferred
stockholders of Nutmeg from a financial point of view.
Very truly yours,
McConnell, Budd & Downes, Inc.
<PAGE>
Appendix B
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Nutmeg Federal Savings and
Loan Association
Danbury, Connecticut
We have audited the accompanying consolidated statements of condition of Nutmeg
Federal Savings and Loan Association and its subsidiary as of December 31, 1999
and 1998, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nutmeg Federal
Savings and Loan Association and its subsidiary as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Seward and Monde
North Haven, Connecticut
January 31, 2000
-1-
<PAGE>
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
CONSOLIDATED STATEMENTS of CONDITION
(In Thousands)
-------
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,975 $ 1,029
Interest bearing deposits 1,453 6,997
Securities available-for-sale, at market 3,819 0
Federal Home Loan Bank stock 762 762
Loans, net 94,186 93,362
Loans held for sale 2,118 820
Office premises and equipment 472 579
Accrued interest receivable 825 776
Deferred income taxes 316 50
Foreclosed real estate, net 179 35
Loan servicing rights 9,641 6,179
Income taxes receivable 10 25
Other assets 1,071 723
---------------- -----------------
$ 116,827 $ 111,337
================ =================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 93,901 $ 90,728
Advances from borrowers for taxes and insurance 420 568
Federal Home Loan Bank advances 7,000 6,508
Other liabilities 5,087 3,852
---------------- -----------------
106,408 101,656
---------------- -----------------
Commitments and contingencies (Notes 14 and 20)
Shareholders' Equity:
Series B, 8.00% non-cumulative convertible preferred stock,
par value $.005, authorized 2,000,000 shares;
issued and outstanding 489,772 shares (liquidation preference
of $8.75 per share, aggregating $4,285,505) 2 2
Common stock, par value $.003, authorized 6,000,000
shares; issued and outstanding 1,428,644
shares in 1999 and 1,402,583 shares in 1998 4 4
Additional paid-in capital 8,117 8,043
Retained earnings 2,314 1,632
Accumulated other comprehensive income (18) 0
---------------- -----------------
Total shareholders' equity 10,419 9,681
---------------- -----------------
$ 116,827 $ 111,337
================ =================
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
--------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Interest income:
Interest on loans:
First mortgage loans $ 6,108 $ 6,732 $ 6,390
Commercial and other loans 1,228 944 732
Interest and dividends on securities:
Interest 265 75 152
Dividends 50 49 49
---------------- ---------------- ----------------
Total interest income 7,651 7,800 7,323
---------------- ---------------- ----------------
Interest expense:
Interest on deposits 2,528 2,834 2,780
Interest on borrowed funds 197 405 506
Other 6 13 22
---------------- ---------------- ----------------
Total interest expense 2,731 3,252 3,308
---------------- ---------------- ----------------
Net interest income 4,920 4,548 4,015
---------------- ---------------- ----------------
Provision for loan losses (25) 100 154
---------------- ---------------- ----------------
Net interest income after
provision for loan losses 4,945 4,448 3,861
---------------- ---------------- ----------------
Noninterest income:
Service fees charged on deposits 382 350 361
Securities gains, net 12 56 0
Gain on sale of loans 481 691 414
Loan fees 724 796 876
Other operating income 30 30 26
---------------- ---------------- ----------------
1,629 1,923 1,677
---------------- ---------------- ----------------
Noninterest expenses:
Salaries and employee benefits 2,378 2,222 2,084
Occupancy and equipment 597 582 511
Foreclosed real estate expense 33 53 86
SAIF deposit insurance premium 56 55 49
Other operating expenses 1,626 1,458 1,340
---------------- ---------------- ----------------
4,690 4,370 4,070
---------------- ---------------- ----------------
Income before income tax expense 1,884 2,001 1,468
Income tax expense 584 878 623
---------------- ---------------- ----------------
Net income $ 1,300 $ 1,123 $ 845
================ ================ ================
Earnings per share of common stock:
Basic $ 0.67 $ 0.58 $ 0.51
================ ================ ================
Diluted $ 0.55 $ 0.48 $ 0.42
================ ================ ================
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
(In Thousands)
--------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid - in Retained Comprehensive
Stock Stock Capital Earnings Income Total
----------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ - $ 4 $ 5,044 $ 584 $ - $ 5,632
Comprehensive income
Net income - - - 845 - 845
Other comprehensive income, net of tax:
Change in net unrealized gains on
securities available-for-sale, net of
deferred income taxes of $16 - - - - 24 24
Total comprehensive income - - - - - 869
------------
Issuance of preferred stock, net 2 - 2,683 - - 2,685
Stock options exercised - - 58 - - 58
Cash dividends declared - common stock - - - (160) - (160)
Cash dividends declared - preferred stock - - - (193) - (193)
----------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1997 2 4 7,785 1,076 24 8,891
Comprehensive income
Net income - - - 1,123 - 1,123
Other comprehensive income, net of tax:
Change in net unrealized gains on
securities available-for-sale, net of
deferred income taxes of $6 - - - - 9 9
Less: reclassification adjustment for
gains included in net income, net of
deferred income tax benefit of $22 - - - - (33) (33)
------------
Total comprehensive income - - - - - 1,099
------------
Stock options exercised - - 258 - - 258
Cash dividends declared - common stock - - - (223) - (223)
Cash in lieu of fractional shares
- common stock - - - (1) - (1)
Cash dividends declared - preferred stock - - - (343) - (343)
----------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1998 2 4 8,043 1,632 - 9,681
Comprehensive income
Net income - - - 1,300 - 1,300
Other comprehensive income, net of tax:
Change in net unrealized losses on
securities available-for-sale, net of
deferred income tax benefit of $10 - - - - (18) (18)
------------
Total comprehensive income - - - - - 1,282
------------
Stock options exercised - - 74 - - 74
Cash dividends declared - common stock - - - (275) - (275)
Cash dividends declared - preferred stock - - - (343) - (343)
----------- ---------- ------------ ------------ ------------ ------------
Balance at December 31, 1999 $ 2 $ 4 $ 8,117 $ 2,314 $ (18) $ 10,419
=========== ========== ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
CONSOLIDATED STATEMENTS of CASH FLOWS
(In Thousands)
--------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,300 $ 1,123 $ 845
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses (25) 100 154
Provision for losses on foreclosed
real estate 0 9 17
Provision for depreciation and
amortization 187 197 149
Amortization of premiums and
(accretion) of discounts on
securities, net (1) 0 (2)
Amortization of net deferred
loan fees (340) (472) (202)
Amortization of loan servicing rights 1,766 952 590
Gain on sale of loans (481) (691) (414)
Securities gains, net (12) (56) 0
Loss (gain) on sale of foreclosed
real estate, net (17) 9 9
Net change in loans held for sale (1,298) 1,422 (1,696)
Decrease (increase) in accrued
interest receivable (49) 81 (238)
Decrease (increase) in deferred
income taxes (256) 14 (13)
Decrease (increase) in other assets (348) 142 (306)
Decrease in income taxes receivable 15 14 119
Increase in other liabilities 1,087 1,097 1,816
------------ ------------ ------------
Net cash provided by
operating activities 1,528 3,941 828
------------ ------------ ------------
Investing activities:
Proceeds from sale of securities
available-for-sale 887 2,350 0
Purchase of securities available-for-sale (4,721) 0 0
Purchase of securities held-to-maturity 0 0 (698)
Maturities of securities held-to-maturity 0 0 500
Net decrease (increase) in loans (152) 397 (8,644)
Proceeds from sale of foreclosed
real estate 47 702 355
Purchase of equipment (80) (143) (342)
Purchase and origination of loan servicing
rights (5,228) (3,529) (1,568)
------------ ------------ ------------
Net cash used by
investing activities (9,247) (223) (10,397)
------------ ------------ ------------
</TABLE>
-5-
<PAGE>
NUTMEG FEDERAL SAVINGS AND LOAN ASSOCIATION
CONSOLIDATED STATEMENTS of CASH FLOWS
(In Thousands)
...Continued...
--------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Financing activities:
Increase in deposits 3,173 4,607 8,560
Proceeds from exercise of stock options 74 258 58
Issuance of preferred stock, net 0 0 2,685
Proceeds of FHLB advances 59,510 96,352 189,901
Repayment of FHLB advances (59,018) (97,238) (191,105)
Cash dividends - preferred stock (343) (343) (193)
Cash dividends - common stock (275) (223) (160)
Cash in lieu of fractional shares -
common stock 0 (1) 0
---------------- ---------------- ----------------
Net cash provided by
financing activities 3,121 3,412 9,746
---------------- ---------------- ----------------
Increase (decrease) in cash
and cash equivalents (4,598) 7,130 177
Cash and cash equivalents - January 1 8,026 896 719
---------------- ---------------- ----------------
Cash and cash equivalents - December 31 $ 3,428 $ 8,026 $ 896
================ ================ ================
Supplemental Disclosures:
Cash paid during the year for:
Interest expense $ 2,714 $ 3,245 $ 3,322
Income taxes 140 425 7
Noncash investing activity:
Addition to foreclosed real estate 174 94 722
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
FEDERAL SAVINGS and LOAN ASSOCIATION
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
----------
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
Nature of Operations
--------------------
The Association provides a variety of financial services to individuals
and corporate customers through its headquarters in Danbury,
Connecticut and two branch offices. The Association's primary deposit
products are savings and demand deposit accounts and certificates of
deposit. Its primary lending products are residential, commercial, and
commercial real estate loans.
Consolidation
-------------
The consolidated financial statements include the accounts of Nutmeg
Federal Savings and Loan Association and its wholly-owned subsidiary,
Nutmeg Passive Investment Company (herein collectively referred to as
the "Association"). All significant intercompany items and transactions
have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant
change 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 allowances for loan losses and foreclosed real estate, management
obtains independent appraisals for significant properties.
The Association's loans receivable consist primarily of residential and
commercial real estate loans located within its primary market area in
western Connecticut. Although the Association has a diversified loan
portfolio, its debtors' ability to honor their contracts is
substantially dependent upon the general economic conditions of the
region. Accordingly, the ultimate collectibility of a substantial
portion of the Association's loan portfolio is susceptible to changes
in market conditions.
-7-
<PAGE>
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Association's allowances for loan
losses and foreclosed real estate. Such agencies may require the
Association to recognize additions to the allowances based on their
judgments about information available to them at the time of their
examination.
Securities
----------
Securities that may be sold as part of the Association's
asset/liability or liquidity management or in response to or in
anticipation of changes in interest rates and resulting prepayment
risk, or for other similar factors, are classified as
available-for-sale and carried at fair market value. Unrealized holding
gains and losses on such securities are reported net of related taxes,
as a component of accumulated other comprehensive income. Securities
that the Association has the ability and positive intent to hold to
maturity are classified as held-to-maturity and carried at amortized
cost.
The amortization of premiums and accretion of discounts is recorded
over the life of the security using a method which approximates the
interest method. Realized gains and losses on the sales of all
securities are reported in income and computed using the specific
identification cost basis.
Federal Home Loan Bank Stock
----------------------------
The investment in Federal Home Loan Bank of Boston stock is stated at
cost.
Loans and Allowance for Loan Losses
-----------------------------------
Loans originated and retained are done so with the general intent to
hold such loans to maturity and are carried at the amount of the unpaid
principal, reduced by unamortized nonrefundable fees and an allowance
for loan losses.
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. Realized gains and losses on sales of
loans are reported in earnings when proceeds are received.
Loan origination fees received and certain direct loan origination
costs are deferred and the net amount is amortized as an adjustment to
the related loan's yield using a method which approximates the interest
method over the life of the related loan.
The Association evaluates the collectibility of both contractual
interest and contractual principal of all loans when assessing the need
for a loss accrual. When a loan is impaired, the Association measures
impairment based on the present value of the expected future cash flows
discounted at the loan's effective interest rate, or the fair value of
the collateral, less estimated selling costs, if the loan is
collateral-dependent and foreclosure is probable. The Association
recognizes an impairment by creating a valuation allowance. A loan is
impaired when, based on current information, it is probable that the
Association will be unable to collect all amounts due according to the
-8-
<PAGE>
contractual terms of the loan.
The allowance for loan losses is increased through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that the collection of principal
is unlikely. The allowance is an amount that management believes will
be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans,
overall portfolio quality, the review of specific problem loans and
current economic conditions that may affect the borrowers' ability to
pay.
Interest income on mortgage and other loans is credited to operations
as earned based upon the principal amount outstanding. Accrual of
interest is discontinued on a loan when management believes, after
considering economic and business conditions, period of delinquency and
collection efforts, that the borrowers' financial condition is such
that collection of interest is doubtful or when a loan is specifically
determined to be impaired. Any unpaid interest previously accrued on
those loans is reversed from income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of future
loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
Office Premises and Equipment
-----------------------------
Leasehold improvements and furniture, fixtures and equipment are
carried at cost less accumulated depreciation and amortization.
Furniture, fixtures and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets. The
cost of leasehold improvements is amortized using the straight-line
method over the terms of the related leases, or if shorter, the
estimated useful lives.
Foreclosed Real Estate
----------------------
Real estate acquired through foreclosure is recorded at the lower of
the carrying value of the loan or fair value less estimated selling
costs. Costs relating to the subsequent development or improvement of
the property are capitalized and holding costs are charged to expense.
If subsequent economic conditions warrant further decreases in the net
fair value of the foreclosed real estate, management adjusts the values
through a provision for losses charged to expense.
Loan Servicing Rights
---------------------
Effective January 1, 1997 the Association adopted the provisions of
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" ("SFAS 125"). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishing of liabilities. The adoption of this standard did not
have a material effect on the Association's financial condition or its
results of operations.
-9-
<PAGE>
The cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues using a method
which approximates the interest method. Impairment of loan servicing
rights is assessed based on the fair value of those rights. For
purposes of measuring impairment, the rights are stratified based on
loan types, interest and prepayment rates and other risk
characteristics of the underlying loans.
The Association evaluates the carrying value of the servicing portfolio
by estimating the future net servicing income of the portfolio based on
management's best estimate of remaining loan lives.
Income Taxes
------------
Deferred income taxes and tax benefits are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled.
Cash and Cash Equivalents
-------------------------
For purposes of the Statements of Cash Flows, cash and cash equivalents
include cash on hand, deposits at other financial institutions and
interest bearing deposits.
Earnings Per Share
------------------
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). 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. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures. This statement was effective for periods ending after
December 15, 1997 and has been applied for all periods presented.
Comprehensive Income
--------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
Comprehensive income includes net income and any changes in equity that
are not recorded in the consolidated statements of income. The purpose
of reporting comprehensive income is to report a measure of all changes
in equity of an enterprise that result from recognized transactions and
other economic events of the period.
-10-
<PAGE>
2 - SECURITIES
--------------
Securities classified available-for-sale (carried at market value) at December
31 are as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- -------------- --------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 3,847 $ - ($ 28) $ 3,819
=============== ============== =============== ==============
</TABLE>
The amortized cost and market value of securities at December 31, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties.
1999
---------------------------------
Amortized Market
Cost Value
-------------- --------------
(In Thousands)
Due after one year
through five years $ 3,847 $ 3,819
============== ==============
Gross realized gains on sales of available-for-sale securities were $12,000 and
$57,000, in 1999 and 1998 respectively. There were no gross realized losses on
sales of available-for-sale securities in 1999. Gross realized losses on sales
of available-for-sale securities were $1,000 in 1998. There were no sales of
securities held-to-maturity for the years ended December 31, 1999, 1998 and
1997.
During 1997, the Association transferred securities classified as
held-to-maturity to the available-for-sale classification due to increased
demand for loans. At transfer, the amortized cost and the related net unrealized
gain of these securities totaled $2,294,000 and $41,000, respectively.
-11-
<PAGE>
3 - LOANS
---------
Loans receivable at December 31 are summarized as follows:
1999 1998
----------- -----------
(In Thousands)
First mortgage loans:
Principal balances:
Secured by one-to-four family residences $ 58,917 $ 65,241
Secured by other properties 16,863 18,073
Construction loans 2,161 2,300
----------- -----------
77,941 85,614
Less - undisbursed portion of
construction loans ( 440) ( 655)
----------- -----------
Total first mortgage loans 77,501 84,959
----------- -----------
Other loans:
Principal balances:
Home equity 1,084 1,274
Commercial 14,704 6,516
Consumer and other 1,614 1,425
----------- -----------
Total other loans 17,402 9,215
----------- -----------
Less:
Allowance for loan losses ( 504) ( 531)
Net deferred loan origination fees ( 213) ( 281)
----------- -----------
Loans, net $ 94,186 $ 93,362
=========== ===========
Total loans are summarized between fixed and variable rates at December 31 as
follows:
1999 1998
------------ ----------
(In Thousands)
Fixed $ 16,677 $ 15,020
Variable 78,666 79,809
------------ ----------
$ 95,343 $ 94,829
============ ==========
-12-
<PAGE>
At December 31, 1999 and 1998, the Association had loans amounting to
approximately $683,000 and $401,000, respectively that were specifically
classified as impaired. The average balance of these loans amounted to
approximately $736,000, $253,000 and $806,000 for the years ended December 31,
1999, 1998 and 1997, respectively. The allowance for loan losses relating to
these loans amounted to approximately $13,000 and $12,000 at December 31, 1999
and 1998, respectively. The following is a summary of cash receipts on these
loans and how they were applied:
1999 1998 1997
----------- ----------- -----------
(In Thousands)
Cash receipts applied
to reduce principal balance $ 205 $ 23 $ 3
Cash receipts recognized
as interest income 22 29 5
----------- ----------- -----------
Total cash receipts $ 227 $ 52 $ 8
=========== =========== ===========
The Association has no commitments to loan additional funds to the borrowers of
impaired loans.
Changes in the allowance for loan losses during the years ended December 31 were
as follows:
1999 1998 1997
----------- ----------- -----------
(In Thousands)
Balance, beginning of year $ 531 $ 466 $ 473
Provisions charged to
operations ( 25) 100 154
Loan recoveries 1 52 21
Loans charged off ( 3) ( 87) ( 182)
----------- ----------- -----------
Balance, end of year $ 504 $ 531 $ 466
=========== =========== ===========
-13-
<PAGE>
4 - LOAN SERVICING
------------------
The principal balances of loans serviced for the benefit of others at December
31 are as follows:
1999 1998 1997
------------ ------------ -----------
(In Thousands)
Balances serviced $ 917,405 $ 550,238 $ 368,345
Portions owned by others ( 917,372) ( 550,190) ( 368,282)
------------ ------------ ------------
The Association's interest -
included in loans $ 33 $ 48 $ 63
============ ============ ============
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $7,384,000 and $4,219,000 at December 31, 1999 and
1998, respectively.
The Association may originate and sell certain residential mortgages for the
purpose of providing liquidity. For some loans, the Association may retain an
interest in their repayment; however, in most cases, the Association retains the
servicing rights. Risk of loss to the Association for loans sold is limited to
any interest in the loan which the Association may retain.
During 1999 and 1998, the Association purchased at a total cost of $4,918,000
and $3,093,000, respectively the servicing rights for loans with outstanding
principal balances totaling approximately $466,900,000 and $239,000,000,
respectively.
The amortization of the cost of loan servicing rights for the years ended
December 31 was as follows:
1999 1998 1997
----------- ----------- -----------
(In Thousands)
Balance, beginning of year $ 6,179 $ 3,602 $ 2,624
Purchased during the year 4,918 3,093 1,383
Originated during the year 310 436 185
Amortization ( 1,766) ( 952) ( 590)
----------- ----------- -----------
Balance, end of year $ 9,641 $ 6,179 $ 3,602
=========== =========== ===========
-14-
<PAGE>
5 - ACCRUED INTEREST RECEIVABLE
-------------------------------
Accrued interest receivable at December 31 is summarized as follows:
1999 1998
------------ ------------
(In Thousands)
Securities $ 64 $ 28
Loans 761 748
------------ ------------
$ 825 $ 776
============ ============
6 - OFFICE PREMISES AND EQUIPMENT
---------------------------------
Office premises and equipment at December 31 are summarized as follows:
1999 1998
----------- -----------
(In Thousands)
Leasehold improvements $ 506 $ 583
Furniture, fixtures and equipment 1,040 1,108
----------- -----------
1,546 1,691
Less, Accumulated depreciation and amortization ( 1,074) ( 1,112)
----------- -----------
$ 472 $ 579
=========== ===========
Depreciation expense amounted to $158,000, $168,000 and $124,000 in 1999, 1998
and 1997, respectively.
7 - FORECLOSED REAL ESTATE
--------------------------
Foreclosed real estate at December 31 is summarized as follows:
1999 1998
----------- -----------
(In Thousands)
Residential land and buildings $ 214 $ 70
Less, Allowance for losses ( 35) ( 35)
----------- -----------
Net value $ 179 $ 35
=========== ===========
-15-
<PAGE>
The following summarizes the activity in the allowance for estimated losses for
the years ended December 31:
1999 1998 1997
----------- ----------- -----------
(In Thousands)
Balance, beginning of year $ 35 $ 41 $ 343
Sale of foreclosed real estate - ( 15) ( 319)
Provisions for estimated losses
charged to operations - 9 17
----------- ----------- -----------
Balance, end of year $ 35 $ 35 $ 41
=========== =========== ===========
The components of foreclosed real estate expense for the years ended December 31
are summarized as follows:
1999 1998 1997
------------ ----------- -----------
(In Thousands)
Expenses of holding foreclosed
real estate $ 50 $ 35 $ 60
Loss (gain) on sale of foreclosed
real estate, net ( 17) 9 9
Provision for estimated losses - 9 17
------------ ----------- -----------
Net expense $ 33 $ 53 $ 86
============ =========== ===========
-16-
<PAGE>
8 - DEPOSITS
------------
Deposits at December 31 consisted of the following:
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
----------------------------- ---------------------------
Rates* Amount Rates* Amount
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
(In Thousands)
Demand $ 21,202 $ 13,110
NOW and Super NOW 0.54% 7,134 0.54% 11,267
Passbook 2.57 25,228 2.61 23,712
Money market 1.18 1,640 1.19 1,632
------------- ------------
55,204 49,721
------------- ------------
Certificates of Deposit:
Through 4% 11,208 2,641
4.01 - 5.00 10,283 13,700
5.01 - 6.00 12,329 19,232
6.01 - 7.00 4,877 5,434
------------- ------------
4.75% 38,697 5.03% 41,007
------------- ------------
$ 93,901 $ 90,728
============= ============
</TABLE>
* Weighted average stated rates at year-end.
The maturity distribution of certificates of deposit issued with a minimum
denomination of $100,000 at December 31, 1999 was (in thousands):
Under six months $ 1,975
Over six months to twelve months 2,006
Over twelve months 559
-------------
Total $ 4,540
=============
-17-
<PAGE>
At December 31, 1999, scheduled maturities of certificates of deposit were as
follows:
Weighted
Average
% of Interest
Amount Total Rate
------------ ---------- -------------
(In Thousands)
Within three months $ 11,767 30.4 % 4.17 %
Over three months to six
months 8,237 21.3 4.42
Over six months to one year 13,500 34.9 5.15
Over one year to two years 1,366 3.5 5.28
Over two years to three years 1,718 4.4 6.00
Over three years 2,109 5.5 5.45
$ 38,697 100.0 % 4.75 %
=========== =========== ===========
Interest expense on deposits for the years ended December 31 is summarized as
follows:
1999 1998 1997
----------- ----------- -----------
(In Thousands)
NOW and Super NOW $ 55 $ 53 $ 46
Passbook 652 582 519
Money market 16 20 28
Certificates of deposit 1,805 2,179 2,187
----------- ----------- -----------
$ 2,528 $ 2,834 $ 2,780
=========== =========== ===========
-18-
<PAGE>
9 - FEDERAL HOME LOAN BANK ADVANCES
-----------------------------------
Advances from Federal Home Loan Bank (FHLB) consisted of the following at
December 31:
Interest Rate Maturity 1999 1998
------------- --------- ---------- ----------
(In Thousands)
5.01 - 5.43 % 1999 $ - $ 2,500
4.80 - 6.17 2000 6,000 1,500
4.49 2001 1,000 2,008
5.2 2002 - 500
---------- ----------
$ 7,000 $ 6,508
========== ==========
The FHLB advances included fixed rate loans totaling $3,000,000 and $6,508,000
at December 31, 1999 and 1998, respectively and variable rate loans totaling
$4,000,000 at December 31, 1999. The FHLB advances are secured by a blanket lien
on first mortgage residential loans.
The Association has a cash management line of credit with the FHLB aggregating
$2,750,000, of which no amounts were outstanding at December 31, 1999 and 1998.
10 - INCOME TAXES
-----------------
The components of the provision for income taxes are as follows:
1999 1998 1997
----------- ---------- -----------
(In Thousands)
Current:
Federal $ 849 $ 651 $ 473
State 1 215 161
Deferred:
Federal ( 177) 2 ( 8)
State - - ( 3)
Change in income
tax laws - 10 -
Change in valuation
allowance ( 89) - -
----------- ---------- -----------
Totals $ 584 $ 878 $ 623
=========== ========== ===========
-19-
<PAGE>
Connecticut legislation was passed during 1998, effective January 1, 1999, that
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 Association formed a PIC called the
Nutmeg Passive Investment Company. Effective January 1, 1999 the Association
transferred mortgages into the PIC and income of the PIC and its dividends to
the Association became exempt from the Connecticut Corporation business tax.
A reconciliation of the income tax provision to that computed using the
statutory tax rate for the years ended December 31 is as follows:
1999 1998 1997
----------- ---------- -----------
(In Thousands)
Federal income tax
statutory rates $ 641 $ 680 $ 499
Connecticut
corporation tax, net 1 142 106
Bad debt allowance ( 9) 22 ( 2)
Change in income
tax laws - 10 -
Change in valuation
allowance ( 89) - -
Other, net 40 24 20
----------- ---------- -----------
$ 584 $ 878 $ 623
=========== ========== ===========
-20-
<PAGE>
The components of the Association's net deferred tax asset at December 31 is as
follows:
1999 1998
----------- ------------
(In Thousands)
Deferred tax assets:
Bad debt allowance $ 171 $ 180
Net deferred loan
origination fees 1 2
Deferred compensation 133 77
Purchased mortgage
servicing 323 152
Net unrealized losses
on available-for-sale
securities 10 -
Office premises
and equipment 9 3
----------- ------------
Total deferred
tax assets 647 414
----------- ------------
Deferred tax liabilities:
Originated loan
servicing ( 240) ( 184)
----------- ------------
Total deferred
tax liabilities ( 240) ( 184)
----------- ------------
Net deferred tax asset 407 230
Valuation reserve ( 91) ( 180)
----------- ------------
Net deferred tax asset $ 316 $ 50
=========== ============
-21-
<PAGE>
The change in the total valuation allowance for the years ended December 31 is
as follows:
1999 1998 1997
----------- ----------- ------------
(In Thousands)
Balance, beginning of year $ 180 $ 187 $ 191
Decrease in allowance ( 89) ( 7) ( 4)
----------- ----------- ------------
Balance, end of year $ 91 $ 180 $ 187
=========== =========== ============
11 - RETIREMENT PLANS
---------------------
The Association maintains a retirement plan covering substantially all employees
under Section 401(k) of the Internal Revenue Code. This plan allows employees to
defer a portion of their income on a pre-tax basis. The Association's
contribution is determined as a percent of the employee contribution and was
$97,000, $90,000 and $89,000 for 1999, 1998 and 1997, respectively.
The Association has established deferred compensation arrangements for the
directors whereby participating directors defer earned fees to future years with
benefits commencing at retirement or pre-retirement at death or disability. The
liabilities under these arrangements are being accrued from the commencement of
the plans over the participants' remaining periods of service. These plans do
not hold any assets. As of December 31, 1999 and 1998, the deferred compensation
liability related to the plans was $392,000 and $226,000, respectively.
12 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------------------------
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires the Association to
disclose fair value information for certain of its financial instruments
including securities, loans, loan servicing rights, deposits, borrowings and
other such instruments. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and due from banks, Interest bearing deposits, Federal Home Loan Bank
stock, Accrued interest receivable:
The carrying amount is a reasonable estimate of fair value.
Securities
----------
Securities classified as available-for-sale are carried at fair value.
Fair values for securities classified as available-for-sale and
held-to-maturity are based on quoted market prices.
-22-
<PAGE>
Loans
-----
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
mortgage, construction, commercial, consumer, and home equity lines of
credit and by performing and nonperforming categories. The mortgage
portfolio is further segmented into fixed and adjustable rate interest
terms.
The fair value of performing loans is calculated by discounting future
cash flows, adjusted for prepayment estimates, using estimated market
discount rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Fair
value for nonperforming loans is calculated by discounting estimated
cash flows using a rate commensurate with the risk associated with the
estimated cash flows.
Loans held for sale
-------------------
Cost approximates market for loans held for sale, therefore the
carrying amount is a reasonable estimate of fair value.
Loan servicing rights
---------------------
Fair values are estimated using discounted cash flows based on a
current market interest rate.
Deposits
--------
The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, money market and NOW
accounts, and club accounts is equal to the amount payable on demand.
The fair value of certificates of deposit is based on the discounted
value of contractual cash flows using rates currently offered for
deposits of similar remaining maturities.
Federal Home Loan Bank advances
-------------------------------
Rates currently available to the Association for debt with similar
terms and remaining maturities are used to estimate fair value of
existing debt.
Off-balance sheet items
-----------------------
The estimated fair value of the Association's off-balance sheet items
is considered to approximate the contract amount.
-23-
<PAGE>
Financial instruments are summarized as follows:
December 31, 1999 December 31, 1998
--------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ----------
(In Thousands)
Financial assets:
Cash and due from
banks $ 1,975 $ 1,975 $ 1,029 $ 1,029
Interest bearing deposits 1,453 1,453 6,997 6,997
Securities available-
for-sale 3,819 3,819 - -
Federal Home Loan
Bank stock 762 762 762 762
Loans, net of allowance
for loan losses 94,186 95,027 93,362 94,005
Loans held for sale 2,118 2,118 820 820
Accrued interest
receivable 825 825 776 776
Loan servicing rights 9,641 12,047 6,179 6,469
Financial liabilities:
Deposits 93,901 95,013 90,728 91,064
Federal Home Loan Bank
advances 7,000 7,024 6,508 6,559
-24-
<PAGE>
13 - OTHER NONINTEREST EXPENSE
------------------------------
Other noninterest expense amounts are summarized as follows for the years ended
December 31:
1999 1998 1997
----------- ----------- -----------
(In Thousands)
Data processing $ 347 $ 271 $ 322
Advertising 118 118 120
Professional fees 140 126 143
Office supplies 100 115 90
Insurance 37 41 36
Directors' fees 190 179 151
Other loan expenses 179 127 70
Other 515 481 408
----------- ----------- -----------
$ 1,626 $ 1,458 $ 1,340
=========== =========== ===========
14 - LEASE COMMITMENTS
----------------------
The Association occupies office space under several lease agreements, the
longest of which expires in February, 2004. The Association is responsible for
maintenance, utilities and insurance and for pro rata portions of the lessor's
costs for property taxes and insurance. Certain leases are also subject to
periodic cost of living index adjustments.
Net rental expense under the above operating leases was $185,000, $179,000 and
$178,000 for 1999, 1998 and 1997, respectively. Future minimum payments under
noncancelable operating leases having initial or remaining terms in excess of
one year are as follows:
2000 $ 186,000
2001 175,000
2002 56,000
2003 19,000
2004 3,000
-----------
$ 439,000
===========
-25-
<PAGE>
15 - EARNINGS PER SHARE
-----------------------
The following data show the amounts used in computing earnings per share and the
effect on income and the weighted average number of shares of dilutive potential
common stock.
1999 1998 1997
------------ ------------ ------------
(In Thousands, except
number of shares)
Net income 1,300 1,123 845
Less: preferred dividends $ (343) $ (343) $ (193)
------------ ------------ ------------
Income available to common
stockholders used in basic
EPS 957 780 652
Convertible preferred stock 343 343 193
------------ ------------ ------------
Income available to common
stockholders after assumed
conversions of dilutive
securities $ 1,300 $ 1,123 $ 845
============ ============ ============
Weighted average number of
common shares used in
basic EPS 1,418,340 1,351,248 1,285,163
Effect of dilutive securities:
Stock options 97,908 139,122 150,477
Convertible preferred
stock 857,100 857,100 596,123
------------ ------------ ------------
Weighted number of common
shares and dilutive potential
common stock used in
diluted EPS 2,373,348 2,347,470 2,031,763
============ ============ ============
16 - STOCK OPTION PLANS
-----------------------
On April 28, 1994 the Association's stockholders ratified the Association's 1994
stock incentive plan (the "1994 Plan") to provide for the grant of options and
stock appreciation rights ("SARS") to officers and employees. The 1994 Plan
reserves 79,186 common shares for such options. The 1994 Plan provides that
options are to be granted at an exercise price which is not less than the fair
market value of the Association's stock on the date of the grant and carry a
ten-year expiration period. SARS granted under the 1994 Plan permit holders of
such rights to receive a payment of the difference between the fair market value
of the Association's stock at the date of exercise and at the date of grant.
-26-
<PAGE>
In addition to the 1994 Plan, the Association has a stock option plan (the
"Reserve Plan") for officers and employees that reserves 65,478 common shares
for such options. The options under the Reserve Plan are generally exercisable
cumulatively at 20% per year, are priced at fair market value at date of grant,
and carry a ten-year expiration period.
On April 30, 1998 the Association's stockholders ratified an additional stock
option plan for officers and employees (the "1998 Plan"). The 1998 Plan reserves
78,750 common shares for such options. The options are priced at the greater of
par value or fair market value of a common share at date of grant. The options
may be exercisable in full at any time during their term or in cumulative or
non-cumulative installments and generally carry a ten-year expiration period.
On April 28, 1994 the Association's stockholders also ratified the Association's
stock option plan for non-employee directors (the "Director Plan"). The Director
Plan reserves 138,579 common shares for such options. The options are generally
exercisable cumulatively at 20% per year, are priced at fair market value at
date of grant, and carry a ten-year expiration period. The Director Plan allows
directors to receive deferred compensation options under the plan in lieu of
cash compensation.
In addition to the Director Plan, the Association has an incentive stock option
plan (the "Incentive Plan") for non-employee directors. This plan reserves
169,308 shares for such options. Each director at December 31, 1986 received
options for 3,276 shares. From 1987 until 1997, each director received options
for 435 shares for each year of service, granted on the date of each annual
meeting at which directors are elected, at an exercise price equal to the fair
market value of the Association's stock on such date. All such options carry a
ten-year expiration period.
The Association has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Association's stock option plans been
determined based on the fair value at the grant date for awards in 1999, 1998
and 1997 consistent with the provisions of SFAS 123, the Association's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
--------- ---------- -------
(In Thousands, except
per share amounts)
Net income - as reported $ 1,300 $ 1,123 $ 845
Net income - pro forma $ 1,272 $ 1,093 $ 823
Basic earnings per share
- as reported $ .67 $ .58 $ .51
Basic earnings per share
- pro forma $ .66 $ .55 $ .49
Diluted earnings per share
- as reported $ .55 $ .48 $ .42
Diluted earnings per share
- pro forma $ .54 $ .47 $ .41
-27-
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: dividend yield of 5.00% in
1999, 5.00% in 1998 and 4.09% in 1997; expected volatility of 23.75% in 1999,
24.65% in 1998 and 23.76% in 1997; risk-free interest rate of 6.33% in 1999 and
5.25% in 1998 and 6.00% in 1997; and expected lives of 5 years.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning 244,322 $ 3.67 311,582 $ 2.79 312,754 $ 2.66
Granted 40,302 8.78 38,052 8.06 22,889 4.29
Exercised (26,242) 2.84 (103,641) 2.50 (22,255) 2.49
Cancelled - - (1,671) 5.72 (1,806) 3.15
------------ ----------- ----------- ----------- ----------- -----------
Outstanding,
ending 258,382 $ 4.58 244,322 $ 3.67 311,582 $ 2.79
============ =========== =========== =========== =========== ===========
Exercisable,
ending 188,868 $ 3.73 183,258 $ 3.14 234,085 $ 2.64
============ =========== =========== =========== =========== ===========
Weighted average
fair value of
options, granted
during the year $ 5.26 $ 6.95 $ 8.07
============ =========== ===========
</TABLE>
The range of exercise prices for options outstanding at December 31, 1999, 1998
and 1997 was $1.64 - $8.38, $1.64 - $8.38 and $1.51 - $4.29, respectively with a
weighted average contractual life of 6 years for 1999, 1998 and 1997.
17 - CAPITAL
------------
At the annual meeting of stockholders on April 24, 1997, the Association's
Charter was amended to increase the number of authorized preferred shares from
300,000 to 2,000,000 to conduct an offering to raise additional capital. In June
1997, the Association successfully completed the offering. Shares sold totaled
328,572 and the Association received net proceeds of $2,685,000. Furthermore,
concurrent with the offering, Series A preferred shareholders exchanged all
outstanding shares of Series A preferred stock for 161,200 shares of Series B
preferred stock.
-28-
<PAGE>
On November 10, 1997, the Board of Directors approved a 4-for-3 common stock
split to stockholders of record on December 1, 1997. On November 17, 1998, the
Board of Directors approved a 5-for-4 common stock split to shareholders of
record on December 1, 1998. On November 4, 1999, the Board of Directors declared
a 5% stock dividend of the Association's common stock payable to stockholders of
record on December 8, 1999. All references in the financial statements to number
of shares and per share amounts have been restated to reflect the stock splits
and dividend.
Under Connecticut law, the Association 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.
18 - REGULATORY MATTERS
-----------------------
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators, that if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total
risk-based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital and tangible capital to total assets.
Management believes, as of December 31, 1999, that the Association meets all
capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office of Thrift
Supervision categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To remain categorized as well
capitalized, the Association will have to maintain minimum total risk-based,
Tier I risk-based, Tier I leverage and tangible capital ratios as disclosed in
the table below. There are no conditions or events since the most recent
notification that management believes have changed the Association's prompt
corrective action category.
The Association's actual capital amounts and ratios are also presented in the
table.
-29-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------------------------------
To Be Well Capitalized
Minimum For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Stockholders' equity,
and ratio to total
assets 8.92% $ 10,419
Intangible assets ( 120)
Tangible capital, and ------------
ratio to adjusted total
assets 8.82% $ 10,299 1.5% $ 1,751
============ ============
Tier I capital, and
ratio to adjusted total
assets 8.82% $ 10,299 4.0% $ 4,668 5.0% $ 5,835
============ ============ ============
Tier I capital, and
ratio to risk-weighted
assets 12.95% $ 10,299 4.0% $ 3,182 6.0% $ 4,773
============ ============
Allowance for loan
losses 504
Total risk-based ------------
capital, and ratio to
risk-weighted assets 13.58% $ 10,803 8.0% $ 6,365 10.0% $ 7,956
============ ============ ============
Total assets $ 116,827
============
Adjusted total assets $ 116,707
============
Risk-weighted assets $ 79,558
============
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------------------------
To Be Well Capitalized
Minimum For Capital For Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Stockholders' equity,
and ratio to total
assets 8.72% $ 9,681
Intangible assets ( 301)
------------
Tangible capital, and
ratio to adjusted total
assets 8.45% $ 9,380 1.5% $ 1,666
============ ============
Tier I capital, and
ratio to adjusted total
assets 8.45% $ 9,380 4.0% $ 4,441 5.0% $ 5,552
============ ============ ============
Tier I capital, and
ratio to risk-weighted
assets 13.04% $ 9,380 4.0% $ 2,878 6.0% $ 4,317
============ ============ ============
Allowance for loan
losses 531
Total risk-based ------------
capital, and ratio to
risk-weighted assets 13.78% $ 9,911 8.0% $ 5,755 10.0% $ 7,194
============ ============ ============
Total assets $ 111,337
============
Adjusted total assets $ 111,036
============
Risk-weighted assets $ 71,943
============
</TABLE>
-31-
<PAGE>
19 - RELATED PARTY TRANSACTIONS
-------------------------------
The Association has granted loans to certain of its officers and Directors and
to their associates. The aggregate dollar amount of these loans were $1,835,000
and $1,539,000 at December 31, 1999 and 1998, respectively. All loans were made
in the ordinary course of business.
Loan activity for the periods ended December 31 was as follows:
1999 1998 1997
----------- ----------- ----------
(In Thousands)
Balance, beginning of year $ 1,539 $ 866 $ 860
Additional borrowings 545 1,196 162
Payments and deletions ( 249) ( 523) ( 156)
----------- ----------- ----------
Balance, end of year $ 1,835 $ 1,539 $ 866
=========== =========== ==========
At December 31, 1999, mortgage loans totaling $137,000 were made prior to May
1989 and did not require the payment of points and, in some cases, were made at
an annual interest rate of one percent below the market rate. In addition, loans
totaling $1,698,000 were granted on substantially the same terms and required
substantially similar collateral as loans with others.
For the years ended December 31, 1999, 1998 and 1997, payments aggregating
approximately $136,000, $86,000 and $145,000, respectively, were made for
professional services to firms in which certain Directors had more than a 10%
interest.
20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
------------------------------------------------------
The Association is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the balance
sheet.
The following table summarizes these financial instruments at December 31:
1999 1998
-------- -------
(In Thousands)
Commitments to extend credit:
Outstanding construction mortgages $ 440 $ 655
Unused lines of credit 2,584 1,985
Commitments to fund loans 1,795 3,805
Standby letters of credit 25 19
-32-
<PAGE>
The Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer and generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Association evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Association upon
extension of credit, is based on management's credit evaluation of the
counterparty.
Standby letters of credit are written conditional commitments issued by the
Association to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
-33-
<PAGE>
APPENDIX C
NUTMEG FEDERAL SAVINGS and LOAN ASSOCIATION
CONSOLIDATED STATEMENTS of CONDITION
(In Thousands)
(unaudited)
-----------
<TABLE>
<CAPTION>
March 31 December 31
---------- -----------
2000 1999
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,594 $ 1,975
Interest bearing deposits 2,801 1,453
Securities available-for-sale 5,499 3,819
Federal Home Loan Bank stock 762 762
Loans, net 98,241 94,186
Loans held for resale, at which cost
approximates market value 1,765 2,118
Office premises and equipment 499 472
Accrued interest receivable 892 825
Deferred income taxes 324 316
Foreclosed real estate, net -0- 179
Loan servicing rights 9,099 9,641
Income taxes receivable -0- 10
Other assets 413 1,071
--------- ---------
$ 121,889 $ 116,827
========= =========
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 105,522 $ 93,901
Advances from borrowers for taxes and
insurance 593 420
Federal Home Loan Bank advances 3,000 7,000
Other liabilities 2,179 5,087
--------- ---------
111,294 106,408
--------- ---------
Commitments and contingencies (See Note 12)
Shareholders' Equity:
Series B, 8.00% non-cumulative convertible
preferred stock, par value $.005, authorized
2,000,000 shares; issued and outstanding 487,617
shares in 2000 and 489,772 shares in 1999 2 2
(liquidation preference of $8.75 per share,
aggregating $4,266,649)
Common stock, par value $.003, authorized
6,000,000 shares; issued and outstanding
1,433,406, shares in 2000 and 1,428,644 shares
in 1999 5 4
Additional paid-in capital 8,126 8,117
Retained earnings 2,478 2,314
Accumulated other comprehensive income (16) (18)
--------- ---------
Total shareholders' equity 10,595 10,419
--------- ---------
$ 121,889 $ 116,827
========= =========
</TABLE>
See notes to unaudited financial statements.
-1-
<PAGE>
NUTMEG FEDERAL SAVINGS and LOAN ASSOCIATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(unaudited)
-----------
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
Interest income:
Interest on loans:
First mortgage loans $ 1,511 $ 1,589
Commercial and other loans 450 252
Interest and dividends on
securities:
Interest 86 59
Dividends 13 12
------- -------
Total interest income 2,060 1,912
------- -------
Interest expense:
Interest on deposits 708 665
Interest on borrowed funds 65 78
Other 1 2
------- -------
Total interest expense 774 745
------- -------
Net interest income 1,286 1,167
------- -------
Provision for loan losses (50)
------- -------
Net interest income after
provision for loan losses 1,336 1,167
------- -------
Noninterest income:
Service fees charged on deposits 102 95
Gain on sale of loans 67 140
Loan fees 157 142
Other operating income 4 5
------- -------
330 382
------- -------
Noninterest expenses:
Salaries and employee benefits 641 574
Occupancy and equipment 152 145
Foreclosed real estate expense (10) (6)
SAIF deposit insurance premium 13 14
Other operating expenses 389 364
------- -------
1,185 1,091
------- -------
Income before income
tax expense 481 458
Income tax expense 159 156
------- -------
Net income $ 322 $ 302
======= =======
...Continued...
-2-
<PAGE>
NUTMEG FEDERAL SAVINGS and LOAN ASSOCIATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
...Continued...
(unaudited)
-----------
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
------ ------
Basic earnings per share
of common stock $ .17 $ .15
======= =======
Fully diluted earnings per share
of common stock $ .14 $ .12
======= =======
See notes to unaudited financial statements.
-3-
<PAGE>
NUTMEG FEDERAL SAVINGS and LOAN ASSOCIATION
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
(In Thousands)
(unaudited)
-----------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-in Comp. Retained
Stock Stock Capital Income Earnings Total
------- ------- --------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 2 $ 4 $ 8,043 $ -0- $ 1,632 $ 9,681
Net Income for the three months ended
March 31, 1999 302 302
Stock options exercised 3 3
Cash Dividends Declared-Common Stock (66) (66)
Cash Dividends Declared-Preferred Stock (86) (86)
------- ------- ------- ------- ------- -------
Balance at March 31, 1999 $ 2 $ 4 $ 8,046 $ 0 $ 1,782 $ 9,834
======= ======= ======= ======= ======= =======
Balance at December 31, 1999 $ 2 $ 4 $ 8,117 ($18) $ 2,314 $10,419
Net Income for the three months ended
March 31, 2000 322 322
Change in net unrealized losses on securities
available-for-sale 2 2
-------
Total Comprehensive Income 324
-------
Stock options exercised 1 9 10
Cash Dividends Declared-Common Stock (73) (73)
Cash Dividends Declared-Preferred Stock (85) (85)
------- ------- ------- ------- ------- -------
Balance at March 31, 2000 $ 2 $ 5 $ 8,126 ($ 16) $ 2,478 $10,595
======= ======= ======= ====== ======= =======
</TABLE>
See notes to unaudited financial statements.
-4-
<PAGE>
NUTMEG FEDERAL SAVINGS and LOAN ASSOCIATION
CONSOLIDATED STATEMENTS of CASH FLOWS
(In Thousands)
(unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net income $ 322 $ 302
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Provision for loan losses (50)
Provision for depreciation and
amortization 49 47
Accretion of discounts on securities, net (5)
Amortization of net deferred
loan fees (30) (132)
Amortization of cost of loan
servicing rights acquired 663 400
Gain on sale of loans (67) (140)
Gain on sale of foreclosed real
estate, net (16)
Net change in loans held for resale 353 (247)
Increase in accrued
interest receivable (67) (1)
Increase in deferred income taxes (10)
(Increase) decrease in other
assets 658 (254)
Decrease in income taxes receivable 10
Increase (decrease) in other
liabilities (2,735) (1,385)
------- -------
Net cash provided (used) by
operating activities (925) (1,410)
------- -------
Investing activities:
Purchase of securities-Available-for-sale (1,671)
Net (increase) decrease in loans (3,908) 3,677
Proceeds from the sale of foreclosed real estate 195
Purchase of equipment (76) (17)
Purchase and origination of loan servicing rights (121) (153)
------- -------
Net cash provided
by investing activities (5,581) 3,507
------- -------
</TABLE>
...Continued...
-5-
<PAGE>
NUTMEG FEDERAL SAVINGS and LOAN ASSOCIATION
CONSOLIDATED STATEMENTS of CASH FLOWS
(In Thousands)
...Continued...
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Financing activities:
Increase in deposits 11,621 3,313
Proceeds of FHLB advances 52,208 5,065
Repayment of FHLB advances (56,208) (4,710)
Proceeds from the exercise of common stock options 10 3
Cash dividends - Preferred stock ( 85) ( 86)
Cash dividends - Common stock ( 73) ( 66)
-------- --------
Net cash provided by
financing activities 7,473 3,519
-------- --------
Increase in cash and cash equivalents 967 5,616
Cash and cash equivalents - January 1 3,428 8,026
-------- --------
Cash and cash equivalents - March 31 $ 4,395 $ 13,642
======== ========
Supplemental Disclosures:
Cash paid during the period for:
Interest expense $ 779 $ 763
Income taxes $ 855 178
Noncash investing activity:
Addition to foreclosed real estate $ -0- $ 85
</TABLE>
See notes to unaudited financial statements.
-6-
<PAGE>
NUTMEG FEDERAL SAVINGS and LOAN ASSOCIATION
NOTES to FINANCIAL STATEMENTS
March 31, 2000
--------
1. BASIS OF PRESENTATION:
------------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principals for interim financial information
and with the instructions to form 10-Q. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principals
for complete financial statements. However in the opinion of management, all
adjustments (consisting of recurring accruals) considered necessary for fair
presentation have been included. Operating results for the three month period
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the financial statements and footnotes thereto in Nutmeg Federal Savings and
Loan's annual report on Form 10-K for the year ended December 31, 1999.
The consolidated financial statements include the amounts of Nutmeg Federal
Savings & Loan Association and its wholly-owned subsidiary Nutmeg Passive
Investment Company. There are significant intercompany items that have been
eliminated in the consolidation.
2. RECLASSIFICATIONS
--------------------
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
3. LOANS
--------
Loans receivable are summarized as follows:
March 31, December 31,
2000 1999
--------- ------------
(In Thousands)
First mortgage loans:
Principal balances:
Secured by one-to-four family
residences $ 60,709 $ 58,917
Secured by other properties 18,173 16,863
Construction loans 1,975 2,161
-------- --------
80,857 77,941
Less - undisbursed portion of
construction loans ( 290) ( 440)
-------- --------
Total first mortgage loans 80,567 77,501
-------- --------
Other loans:
Principal balances:
Home equity 887 1,084
Commercial 15,977 14,704
Consumer and other 1,523 1,614
-------- --------
Total other loans 18,387 17,402
-------- --------
Less:
Allowance for loan losses ( 488) ( 504)
Net deferred loan - origination fees ( 225) ( 213)
-------- --------
Loans, net $ 98,241 $ 94,186
======== ========
-7-
<PAGE>
At March 31, 2000 and 1999 the Association had loans amounting to approximately
$460,000 and $1,075,000 respectively, that were classified as impaired. The
allowance for loan losses related to these loans amounted to approximately
$5,900 and $20,400 at March 31, 2000 and 1999, respectively. The following is a
summary of cash receipts on these loans and how they were applied in 1999 and
2000:
March 31, March 31,
2000 1999
---- ----
(In Thousands)
Cash receipts applied to reduce principal balance $ -0- $ 8
Cash receipts recognized as interest income -0- $ 5
----- -----
Total cash receipts $ -0- $ 13
===== =====
If interest on these loans had been recognized at its contractual interest
rates, interest income on these loans would have been approximately $12,000 in
2000 and $21,600 in 1999.
The Association has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
Changes in the allowance for loan losses during the three month periods
indicated were as follows:
March 31, March 31,
2000 1999
---- ----
(In Thousands)
Balance at beginning of year $ 504 $ 531
Provision charged to operations (50)
Loan recoveries 47
Loans charged off (13) (2)
----- -----
$ 488 $ 529
===== =====
The Association grants residential and commercial loans to customers primarily
in Danbury, Connecticut and surrounding towns in northern Fairfield County.
Although the Association has a diversified loan portfolio, its debtors' ability
to honor their contracts is substantially dependent upon the general economic
conditions of the region.
4. LOAN SERVICING:
------------------
The Association may originate and sell certain residential mortgages for
the purpose of providing liquidity. For some loans, the Association may
retain an interest in their repayment; however, in all cases, the
Association retains the servicing rights. Risk of loss to the
Association for loans sold is limited to any interest in the loan which
the Association may retain. The principal balances of loans serviced for
the benefit of others are as follows:
March 31, December 31,
--------- ------------
2000 1999
---- ----
(In Thousands)
Balances serviced $ 941,580 $ 917,405
Portions owned by others (941,552) (917,372)
--------- ---------
The Association's interest -
included in loans $ 28 $ 33
========= =========
-8-
<PAGE>
The amortization of the cost of loan servicing rights acquired for the
three months ended is as follows:
March 31, March 31,
2000 1999
---- ----
(In Thousands)
Balance at beginning $ 9,641 $ 6,179
Originated during period 121 153
Amortization ( 663) ( 400)
------- -------
$ 9,099 $ 5,932
======= =======
5. FORECLOSED REAL ESTATE:
-------------------------
Foreclosed real estate is summarized as follows:
March 31, December 31,
2000 1999
---- ----
(In Thousands)
Residential land and buildings $ 0 $ 214
Less, Allowance for losses ( 35)
------- -------
Net value $ 0 $ 179
======= =======
The following summarizes the activity in the allowance for estimated
losses:
March 31, March 31,
2000 1999
---- ----
(In Thousands)
Balance at beginning of year $ 35 $ 35
Sale of foreclosed real estate ( 35)
------- ------
Balance at end of quarter $ 0 $ 35
======= =======
The components of foreclosed real estate expense are summarized as follows:
March 31, March 31,
2000 1999
---- ----
(In Thousands)
Expenses of holding foreclosed
real estate $ 6 ($ 6)
Gain on sale of foreclosed
properties, net ( 16)
Provision for estimated losses
------- -------
Net expense ($10) ($ 6)
======= =======
-9-
<PAGE>
7. DEPOSITS:
------------
Deposits consisted of the following:
March 31, December 31,
2000 1999
---- ----
(In Thousands)
Demand $ 21,509 $ 21,202
NOW and Super NOW 11,439 7,134
Passbook 26,828 25,228
Money market 1,283 1,640
Certificates of deposit 44,463 38,697
-------- --------
Total deposits $105,522 $ 93,901
======== ========
8. FEDERAL HOME LOAN BANK ADVANCES:
-----------------------------------
Advances from Federal Home Loan Bank (FHLB) consisted of the following:
March 31, December 31,
Interest Rate Maturity 2000 1999
------------- -------- ------ ------
(In Thousands)
4.80 - 6.17% 2000 2,000 $ 6,000
4.49 2001 1,000 1,000
------- -------
$ 3,000 $ 7,000
======= =======
The FHLB advances were all fixed rate loans at March 31, 2000 and December
31, 1999.
All stock in the FHLB of Boston and first mortgage loans on residential
property with unpaid principal amounts equal to 200% of the above FHLB advances
are pledged as collateral to secure the FHLB advances.
The Association has a cash management line of credit with Federal Home Loan
Bank aggregating $2,750,000, of which no amounts were outstanding at March 31,
2000 and at December 31, 1999.
9. INCOME TAXES
---------------
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The components of the net deferred tax asset at March 31, 2000 and
December 31, 1999 were as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
(In Thousands)
Deferred tax assets: Federal Federal
------- -------
Bad debt allowance $ 165 $ 171
Net deferred loan fees 1 1
Deferred compensation 133 133
Purchased mortgage servicing 323 323
Net unrealized losses on securities
available for sale 10 10
Other 23 9
--- ---
Total deferred tax asset 655 647
--- ---
Deferred tax liabilities:
Originated mortgage servicing ( 240) ( 240)
Net unrealized gains on securities
available for sale
---- ----
Total deferred tax liabilities ( 240) ( 240)
---- ----
Net deferred tax asset 415 407
Valuation reserve ( 91) ( 91)
---- ----
Net deferred tax asset $ 324 $ 316
===== =====
-10-
<PAGE>
A reconciliation of the income tax provision to that computed using the
statutory tax rate for the three month ended March 31 is as follows:
2000 1999
---- ----
(In Thousands)
Federal income tax at
statutory rates $ 164 $ 156
Bad debt allowance (17)
Other, net 12
----- -----
$ 159 $ 156
===== =====
10. EARNINGS PER SHARE:
-----------------------
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of
dilutive potential common stock.
March 31, March 31,
2000 1999
-------------------------------------------------------------------------------
(In Thousands Except Number of Shares)
Net income $ 322 $ 302
Less: preferred dividends (85) (86)
-------------------------------------------------------------------------------
Income available to common shareholders
used in basic EPS 237 216
Convertible preferred stock 85 86
-------------------------------------------------------------------------------
Income available to common shareholders
after assumed conversions of dilutive securities $ 322 $ 302
-------------------------------------------------------------------------------
Weighted average number of common shares
used in basic EPS 1,430,326 1,404,420
Effect of dilutive securities:
Stock options 86,840 118,426
Convertible preferred stock 854,960 857,098
-------------------------------------------------------------------------------
Weighted average number of common shares and dilutive
potential common stock used in dilutive EPS 2,372,126 2,379,944
-------------------------------------------------------------------------------
11. REGULATORY MATTERS:
-----------------------
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)
of 1989 was signed into law on August 9, 1989 and, as a result, the OTS
adopted new capital regulations effective December 7, 1989.
Current OTS regulations require the Association to have minimum
regulatory tangible capital equal to 1.5 percent of total assets, a
minimum 3.0 percent leverage capital ratio and an 8.0 percent risk-based
capital ratio.
In addition, capital regulations of the FDIC are also relevant to the
Association. The FDIC has adopted risk-based capital rules which are
similar but not identical to those of the OTS. The FDIC also has
regulations requiring a minimum leverage core capital ratio
(shareholder's equity divided by average total assets for the most
recent quarter) from 4.00 to 5.00 percent, based upon the risk profile
of the Association.
The regulatory capital positions reported by the Association at March
31, 2000 were as follows:
Regulatory Capital
---------------------------------
Core Tangible Risk-Based
---- -------- ----------
(In Thousands)
Stockholders' equity per
financial statements $ 10,595 $ 10,595 $ 10,595
Adjustment loan servicing rights (118) (118) (118)
Capital adjustments:
General loss reserve 488
-------- -------- --------
Regulatory capital 10,477 10,477 10,965
-------- -------- --------
Minimum required capital 3,657 1,828 6,424
-------- -------- --------
Excess $ 6,820 $ 8,649 $ 4,541
======== ======== ========
-11-
<PAGE>
Regulatory Capital
---------------------------------------
Core Tangible Risk-Based
---- -------- ----------
Core capital as a percentage
of adjusted tangible assets 8.50%
Percentage required 3.00
Tangible capital as a
percentage of tangible assets 8.50%
Percentage required 1.50
Risk-based capital as a
percentage of risk weighted
assets 13.62%
Percentage required 8.00
12. COMMITMENTS AND CONTINGENT LIABILITIES:
-------------------------------------------
In the normal course of business, there are various commitments and
contingent liabilities outstanding that are not presented in the
accompanying financial statements.
The following table summarizes these financial instruments at March 31,
2000 and December 31, 1999:
March 31, December 31,
2000 1999
---- ----
(In Thousands)
Commitments to extend credit:
Outstanding construction mortgages $ 290 $ 440
Unused lines of credit 2,278 2,584
Commitments to fund loans 2,455 1,795
Standby letters of credit 25 25
The Association does not anticipate any material losses as a result of
commitments and contingent liabilities.
-12-
<PAGE>
APPENDIX D
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 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 Street, New Milford, CT 06776
(Address of principal executive offices) (Zip code)
(860) 355-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
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
-
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the average bid and asked prices of such stock, as of
August 27, 1999, is $30,110,045. The number of shares of Common Stock
outstanding as of August 27, 1999, is 3,630,114.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive Proxy Statement dated September 27, 1999
for the 1999 Annual Meeting of Shareholders are incorporated by reference into
Part III (Items 10, 11, 12 and 13).
<PAGE>
TABLE OF CONTENTS
Page
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. BUSINESS................................................... 3
Item 2. PROPERTIES................................................. 7
Item 3. LEGAL PROCEEDINGS.......................................... 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 8
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 9
Item 6. SELECTED FINANCIAL DATA.................................... 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.............................. 12
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 33
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 59
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 60
Item 11. EXECUTIVE COMPENSATION..................................... 60
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 60
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 13
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................... 61
</TABLE>
<PAGE>
PART I
Item 1. BUSINESS
General
-------
NewMil Bancorp, Inc., ("NewMil"), a Delaware corporation formed in 1987, is the
registered bank holding company for New Milford Savings Bank ("the Bank"), a
wholly-owned subsidiary. NewMil's activity is currently limited to the holding
of the Bank's outstanding capital stock and the Bank is NewMil's only subsidiary
and its primary investment. NewMil's net income is presently derived from the
business of the Bank. Future establishment or acquisition of subsidiaries by
NewMil is possible. Nevertheless, it is expected that the Bank will account for
most of NewMil's net income in the foreseeable future.
The Bank, which was organized in 1858, is a Connecticut chartered and Federal
Deposit Insurance Corporation ("FDIC") insured savings bank headquartered in New
Milford, Connecticut. The Bank's principal business consists of attracting
deposits from the public and using such deposits, with other funds, to make
various types of loans and investments. The Bank offers both consumer and
commercial deposit accounts, including checking accounts, interest bearing "NOW"
accounts, money market accounts, certificates of deposit, savings accounts and
Individual Retirement Accounts. The Bank offers 24-Hour banking through
automated teller machines in ten branches.
The Bank offers a broad range of mortgage and consumer loans to the residents of
its service area including residential mortgages, home equity credit lines and
loans, installment loans and collateral loans. The Bank sells some of the
residential mortgages that it originates on a servicing released basis. The
Bank offers a broad range of mortgage and commercial loans to the companies and
small businesses of its service area including lines of credit, term loans,
Small Business Administration ("SBA") loans, commercial real estate mortgages,
and construction and development mortgages. In addition, the Bank offers
services including money orders, travelers' checks and safe deposit boxes.
Although empowered, the Bank is not currently offering trust services.
NewMil's results of operations are significantly affected by general economic
and competitive conditions, the real estate market, changes in interest rates,
government policies and actions of regulatory authorities. Should the general
economic climate stall, or reverse, NewMil's operations could be negatively
impacted by adverse economic conditions.
Market Area and Competition
---------------------------
The Bank conducts its business through fourteen offices located in Litchfield,
Fairfield and New Haven Counties. The Bank's service area, which has a
population of approximately 300,000, enjoys a balance of manufacturing, trade,
and service employment and is home to a number of Fortune 500 companies.
Although the Bank's primary market area is Litchfield and northern Fairfield
counties, the Bank has depositors and borrowers that live outside of these
areas.
The Bank faces strong competition in attracting and retaining deposits and in
making mortgage and other loans. Its most direct competition for deposits has
historically come from other savings banks, commercial banks and savings and
loan associations located in its market area. Although the Bank expects this
continuing competition to have an effect upon the cost of funds, it does not
anticipate any substantial adverse
3
<PAGE>
effect on maintaining the current deposit base. The Bank is competitive within
its market area in the various deposit products it offers to depositors. Due to
this fact, management feels they have the ability to maintain the deposit base.
The Bank does not rely upon any individual, group or entity for a significant
portion of its deposits.
The Bank's competition for real estate loans comes primarily from mortgage
banking companies, savings banks, savings and loan associations, commercial
banks, insurance companies, and other institutional lenders. The Bank competes
for loan originations primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it offers borrowers, real
estate brokers and builders. Factors which affect competition include, among
others, the general availability of funds and credit, general and local economic
conditions, current interest rate levels and volatility in the mortgage markets.
Congress passed legislation in 1994 providing for a phase-in of full interstate
branching. Connecticut law has since 1990 provided for full interstate banking
and, more recently, has adopted legislation allowing interstate branching,
subject to certain limitations. A number of out of state institutions, almost
all larger and with greater financial resources then the Bank, have begun
operations in Connecticut in recent years. This has increased competitiveness
in NewMil's market areas. NewMil may consider expansion within or outside of
Connecticut provided appropriate opportunities and conditions exist.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
--------------------------------------------------------------------------------
Interest Differential
---------------------
For tables and discussion of the average balances, interest rates and interest
differential of NewMil for the years 1999, 1998 and 1997, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations" on pages 13 through 15. For tables and discussion of an
analysis of the effect on net interest income of volume and rate changes on
NewMil for 1999 over 1998 and 1998 over 1997, see "Management's Discussion and
Analysis of Financial condition and Results of Operations - Results of
Operations" on pages 15 and 16. In this analysis, the change due to volume was
calculated as the change in average balance multiplied by the prior year's
weighted average rate, the change in rate was calculated as the change in
average rate multiplied by the prior year's average balance, and the change in
rate/volume was calculated as the change in average rate multiplied by the
change in average balance. Principal amounts of non-accruing loans have been
included in the average loan balances used to determine the rate earned on
loans. Interest income on non-accruing loans is included in income only to the
extent that cash payments have been received.
Securities
----------
For information concerning NewMil's securities portfolio activities see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the captions "Results of Operations" on pages 13 through 20,
"Financial Condition" on pages 22 through 27 and "Note 2 -Securities" on pages
42 through 44.
Lending Activities
------------------
The Bank offers a broad range of mortgage and consumer loans to the residents of
its service area including residential mortgages, home equity credit lines and
loans, installment loans and collateral loans. The Bank also offers a broad
range of mortgage and commercial loans to the companies and small businesses of
its service area including lines of credit, term loans, SBA loans, commercial
real estate mortgages, and
4
<PAGE>
construction and development mortgages.
One-to-Four Family Residential Mortgage Loans: The Bank offers a variety of
fixed and adjustable rate loans, including adjustable rate loans that have fixed
rates for an initial period ranging from 1 to 10 years and adjust annually
thereafter. The Bank offers amortization periods of up to 30 years. The Bank's
adjustable rate loans generally have a limit on the maximum rate change per
interest rate adjustment of 2.0% to 3.0%, and have limits on the total interest
rate adjustments during the life of a loan ranging from 4.0% to 6.0%, depending
on the initial rate and type of loan. The Bank's adjustable rate loans include
loans whose interest rate adjustments are based on U.S. Treasury constant
maturity indices and other indices.
The Bank's initial rates on adjustable rate mortgage loans are offered at levels
which are intended to be competitive within the Bank's service area and which
are frequently at a discount from fully indexed contractual rates. The Bank
charges origination fees ranging from no fee to several percent, depending on
the initial rate and type of loan.
Adjustable rate mortgage loans allow the Bank to maintain a degree of rate
sensitivity, though the extent of this sensitivity is limited by the repricing
intervals and caps contained in each loan type.
The Bank's residential mortgage loans are underwritten based on the borrower's
income in accordance with secondary market or investor standards. In evaluating
a potential residential mortgage borrower, the Bank considers a number of
factors, including the creditworthiness of the borrower, the capacity of the
borrower to repay the loan, an appraisal of the property to be mortgaged and a
review of the loan to value ratio.
Much of the residential mortgage loans that the Bank originates are originated
for sale to generate fee income. All such loans are sold on a servicing
released basis. The Bank has not sold loans on a servicing retained basis since
1994.
Collateral and Installment Loans: The Bank makes collateral and installment
loans, including home equity lines of credit, home equity loans, automobile and
other personal loans. While the Bank offers fixed rates on its consumer loans
and home equity loans, its home equity lines of credit are generally offered at
or a spread over the Prime Rate. Home equity loans and lines of credit have
risks similar to those associated with residential mortgages discussed above.
Commercial Mortgage and Multi-Family Mortgage Loans: The Bank also makes loans
collateralized by mortgages on commercial and multi-family residential
properties. Commercial and multi-family loans are offered on an adjustable rate
basis, generally with a daily repricing frequency and with the interest
adjustment tied to the Prime Rate. Loans may also be structured with fixed rate
terms ranging from 1 to 5 years.
Loans collateralized by commercial properties, including multi-family
residential properties, can involve greater credit risks than one- to four-
family residential mortgage loans. The commercial real estate business is
cyclical and subject to downturns, over-building, fluctuations in market value
and local economic conditions. Typically, such loans are substantially larger
than one- to four-family residential mortgage loans. Because repayment is often
dependent on the cash flow of a successfully operated or managed property,
repayment of such loans may be more susceptible to adverse conditions in the
real estate market or the economy generally than is the case with residential
mortgages.
Construction Loans: The Bank also makes construction loans to individuals and
professional builders for the purpose of constructing 1-to-4 family residential
properties, either as a primary residence or for investment or resale.
5
<PAGE>
Commercial and Industrial Loans: The Bank offers unsecured commercial business
loans, generally adjustable-rate loans with the adjustment of interest based on
the Prime Rate plus a spread. The Bank believes it has been conservative in its
underwriting standards for this market with the goal of obtaining quality loans
for the portfolio. The Bank also offers SBA and other Government guaranteed
loans. The Bank's loan products are targeted for, and tailored to the needs of,
the local business and professional community in the Bank's market area.
For further discussion of the composition and quality of the loan portfolio see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption and "Financial Condition - Loans" on pages 24 and
25.
For information on the reduction in interest income associated with non-accrual
loans for the year ended June 30, 1999 see "Note 4 - Non-Performing Assets" on
page 45. For discussion of the Bank's policy for placing loans on non-accrual
status refer to "Note 1 - Summary of Significant Accounting Policies - Loans" on
pages 40 and 41. For information concerning loan portfolio composition and
concentrations see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" under the caption "Financial Condition" on pages 22
through 27.
Summary of Loan Loss Experience
-------------------------------
For a discussion of the factors considered by management in determining the
provision for loan losses, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Results of
Operations - Provision and Allowance for Loan Losses" on pages 16 through 18.
Deposits
--------
For a table on the average balances and rates on deposits, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations" on pages 13 through 15.
Certificate of deposits with balances of $100,000 and greater amounted to
$14,654,000 and $16,477,000 at June 30, 1999 and 1998, respectively. The Bank
generally attracts deposits from its market area and uses those deposits to fund
lending and investment activities. The Bank has no brokered deposits.
Return on Equity and Assets
---------------------------
For selected statistical information required by this item see "Selected
Financial Data" on pages 10 and 11.
Short-term Borrowings
---------------------
For the information required by this item see "Note 6 - Short Term Borrowed
Funds" on page 46.
Supervision and Regulation
--------------------------
Federal Bank Holding Company Regulation: NewMil is registered under, and is
subject to, the Bank Holding Company Act of 1956, as amended. This Act limits
the types of companies which NewMil may acquire or organize and the activities
in which it or they may engage. In general, NewMil and the Bank are prohibited
from engaging in or acquiring direct or indirect control of any corporation
engaged in non-banking activities unless such activities are so closely related
to banking as to be a proper
6
<PAGE>
incident thereto. In addition, NewMil must obtain the prior approval of the
Board of Governors of the Federal Reserve System to acquire control of any bank;
to acquire, with certain exceptions, more than 5 percent of the outstanding
voting stock of any other corporation; or, to merge or consolidate with another
bank holding company. As a result of such laws and regulation, NewMil is
restricted as to the types of business activities it may conduct and the Bank is
subject to limitations on, among others, the types of loans and the amount of
loans it may make to any one borrower.
Federal Reserve System: NewMil is required by the Board of Governors of the
Federal Reserve System to maintain cash reserves against its deposits. After
exhausting all other sources of funds, NewMil may request to borrow from the
Federal Reserve. Bank holding companies registered with the FRB are, among
other things, restricted from making direct investments in real estate. Both
NewMil and the Bank are subject to extensive supervision and regulation, which
focus on, among other things, the protection of depositors' funds.
The Federal Reserve System also regulates the national supply of bank credit in
order to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of loans, investments
and deposits, and affect the interest rates charged on loans or paid for
deposits.
Fluctuations in interest rates, which may result from government fiscal policies
and the monetary policies of the Federal Reserve System, have a strong impact on
the income derived from loans and securities, and interest paid on deposits.
While NewMil and its subsidiary strive to anticipate changes and adjust their
strategies for such changes, the level of earnings can be materially affected by
economic circumstances beyond their control.
NewMil and the Bank are subject to minimum capital requirements established,
respectively, by the FRB and the FDIC. For information on these capital
requirements and NewMil and the Bank's capital ratios see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Resources" on page 30 and Note 9 to the Financial Statements -
Shareholders Equity under Capital Requirements.
Connecticut Banking Law and FDIC Regulation: The Bank is a state chartered
savings bank organized under the Banking Law of the State of Connecticut.
Deposits are insured by the FDIC and FDIC insurance premiums are assessed on the
Bank's deposit base on a semi-annual basis at variable rates dependent upon the
Bank's capital rating and other safety and soundness considerations. The Bank
is subject to regulation, examination and supervision by the Connecticut Banking
Department and the FDIC. Both the Connecticut Banking Department and the FDIC
issue regulations and require the filing of reports describing the activities
and financial condition of the banks under their jurisdiction. Each agency
conducts periodic examinations to test safety, soundness and compliance with
various regulatory requirements and generally supervises the operations of such
banks.
Employees
---------
The Bank had 130 full-time and 20 part-time employees at June 30, 1999.
Management considers the Bank's relationship with its employees to be good. The
Bank's employees are not represented by any collective bargaining groups.
Subsidiaries
------------
The Bank is NewMil's only subsidiary and accounts for 100% of NewMil's income
for the current fiscal year. At June 30, 1999, the Bank had three wholly-owned
subsidiaries,
7
<PAGE>
NMSB Mortgage Company, Asset Recovery Management Company and New Mil Asset
Company. NMSB Mortgage Company is a passive investment company ("PIC") that
holds loans collateralized by real estate originated or purchased by the Bank.
Income of the PIC and its dividends to NewMil are exempt from the Connecticut
Corporate Business Tax. Asset Recovery Management Company and New Mil Asset
Company were both formed to hold and develop certain foreclosed real estate.
Item 2. PROPERTIES
The Bank conducts its business at its main office, located at 19 Main Street,
New Milford, Connecticut, and through 14 branches located in Litchfield,
Fairfield and New Haven Counties. In May 1999 the Bank closed its Winsted
branch location and sold the branch deposits to American Bank, Waterbury,
Connecticut. The Bank owns its main office and seven of its branches. The
remaining six locations are leased by the Bank. The following table sets forth
certain information regarding the Bank's branch offices, as of June 30, 1999.
<TABLE>
<CAPTION>
Lease
Owned expir-
Date or ation
Branch office Location opened leased date
------------- -------- ------ ------ ----
(a)
<S> <C> <C> <C> <C>
Kent 50 North Main St.,
Kent, CT 1960 Owned ---
New Fairfield Routes 37 & 39,
New Fairfield, CT 1969 Leased 1999
Brookfield Route 7,
Brookfield, CT 1964 Leased 2000
Sherman Routes 37 & 39,
Sherman, CT 1976 Leased 2000
Bridgewater (b) Routes 57 & 133,
Bridgewater, CT 1981 Owned ---
New Milford (c) 19 Main Street,
New Milford, CT 1902 Owned ---
Boardman Terrace 53 Main Street,
New Milford, CT 1977 Owned ---
New Preston (d) Routes 202 & 45,
New Preston, CT 1979 Owned ---
Morris Route 109 & 63,
Morris, CT 1981 Owned ---
Sharon Route 41,
Sharon, CT 1971 Leased 2002
Canaan Main St. & Granite Avenue,
Canaan, CT 1982 Owned ---
Lanesville 291 Danbury Road,
New Milford, CT 1989 Owned ---
Southbury Grand Union Supermarket
775 Main Street South,
Southbury, CT 1997 Leased 2003
Norwalk 187 Main Street
Norwalk, CT 1997 Leased 2004
</TABLE>
(a) Information concerning the Bank's lease payments can be found at Note 13 on
page 53.
(b) The Bank owns an additional building on this site which is leased at an
annual rent of $5,000.
(c) Main Office.
8
<PAGE>
(d) The Bank owns an additional building on this site which is leased at an
annual rent of $14,800.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against NewMil 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
During the fourth quarter of 1999, no matter was submitted to a vote of the
shareholders of NewMil.
9
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
For the information required by this item see "Quarterly Financial Data
(unaudited)" on pages 57 and 58. For a discussion of NewMil's dividend policy
and restrictions on dividends see "Management Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Dividend
Restrictions" on page 30.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth NewMil's consolidated financial and other data at
the dates and for the periods indicated. This data has been derived from
NewMil's audited consolidated financial statements.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share amounts)
<TABLE>
<CAPTION>
At or for the years ended June 30,
1999 1998 1997 1996 1995
--------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Income
Interest and
dividend income $ 24,456 $ 24,655 $ 22,851 $ 21,837 $ 20,283
Interest expense 11,807 12,196 10,916 10,438 9,602
Net interest income 12,649 12,459 11,935 11,399 10,681
Provision for loan
losses 100 250 400 400 400
Non-interest income:
Securities (losses)
gains, net - (271) (9) 27 226
Gain on sale of
non-performing loan - 778 - - -
Gains on sales of OREO 1,342 359 567 388 409
Gains on sales of
loans, net 547 480 181 10 28
Service fees and other 1,545 1,518 1,347 1,218 1,167
Non-interest expense 10,438 9,920 9,133 8,853 9,761
Income before
income taxes 5,545 5,153 4,488 3,789 2,350
Income tax expense
(benefit) 2,264 2,164 1,886 1,547 (3,874)
Income before effect of
accounting change and
extraordinary item 3,281 2,989 2,602 1,547 6,224
Cumulative effect of
change in accounting
principal, net of taxes (162) - - - -
Extraordinary item,
net of taxes (87) - - - -
Net income 3,032 2,989 2,602 2,242 6,224
Financial Condition
Total assets $352,117 $367,569 $323,061 $309,363 $308,671
Loans, net 210,036 162,849 166,141 150,558 150,442
Allowance for loan
losses 4,989 5,004 5,452 4,866 5,372
Securities 118,202 162,267 119,368 125,583 127,194
Deposits 300,123 293,877 275,392 259,267 252,420
Borrowings 15,000 37,500 13,000 14,776 20,499
Shareholders' equity 33,135 33,409 31,719 31,892 32,721
Non-performing assets 1,569 1,684 3,585 6,480 8,885
Per Share Data
Income before effect of
accounting change and
extraordinary item
Diluted $ 0.82 $ 0.74 $ 0.63 $ 0.50 $ 1.37
Basic 0.87 0.78 0.65 0.51 1.39
Net income
Diluted 0.76 0.74 0.63 0.50 1.37
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Basic 0.80 0.78 0.65 0.51 1.39
Cash dividends 0.35 0.30 0.23 0.17 0.06
Book value 9.04 8.71 8.27 7.84 7.29
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
At or for the years ended June 30,
1999 1998 1997 1996 1995
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Statistical Data
Net interest margin 3.64% 3.78% 3.98% 4.01% 3.70%
Efficiency ratio 64.90 64.74 63.67 66.90 77.28
Effective tax rate 40.83 42.00 42.02 40.83 (164.85)
Return on average assets 0.84 0.88 0.84 0.75 2.08
Return on average
shareholders' equity 8.84 9.04 8.02 6.71 23.75
Dividend payout ratio 43.80% 38.57% 35.28% 33.18% 4.32%
Allowance for loan
losses to total loans 2.32 2.98 3.18 3.13 3.45
Non-performing assets
to total assets 0.45 0.46 1.11 2.09 2.88
Tier 1 leverage capital 9.53 9.28 10.25 10.39 10.58
Total risk-based capital 19.40 21.26 19.85 20.98 21.36
Average shareholders'
equity to average
assets 9.49 9.69 10.44 11.22 8.74
Weighted average equivalent
shares outstanding,
diluted 3,985 4,066 4,143 4,487 4,554
Shares outstanding
at June 30 (excluding
Treasury stock) 3,664 3,834 3,834 4,070 4,491
</TABLE>
13
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
NewMil Bancorp, Inc. ("NewMil"), a Delaware corporation, is a bank holding
company for New Milford Savings Bank ("Bank"), a Connecticut-chartered and
Federal Deposit Insurance Corporation ("FDIC") insured savings bank
headquartered in New Milford, Connecticut. NewMil's principal business consists
of the business of the Bank. The Bank is engaged in customary banking
activities, including general deposit taking and lending activities, and
conducts its business from fourteen offices in Litchfield, Fairfield and New
Haven Counties. NewMil and the Bank were formed in 1987 and 1858, respectively.
OVERVIEW
NewMil earned net income of $3,032,000, or $.76 per share, for the year ended
June 30, 1999, compared with net income of $2,989,000, or $0.74 per share, for
fiscal year 1998. Net income for the 1999 fiscal year included the effect of
both a change in accounting principals, resulting from the adoption of SFAS 133,
and an extraordinary item, resulting from the prepayment of Federal Home Loan
Bank advances. Income before the effect of the accounting change and
extraordinary item was $3,281,000, or $.82 per share, for the year ended June
30, 1999, compared with net income of $2,989,000, or $0.74 per share, for fiscal
year 1998.
Excluding the effect of the accounting change and extraordinary item NewMil's
income grew 9.8% in 1999, reflecting improved core earnings, driven by higher
net interest income and non-interest income, and a lower loan loss provision,
partly offset by increased operating expenses. Similarly, earnings per share
before the effect of the accounting change and extraordinary item increased
10.8%, reflecting both the growth in net income and share repurchase activity.
Effective October 1, 1998 NewMil adopted the provisions of SFAS 133 (Accounting
for Derivative Instruments and Hedging Activities). NewMil took advantage of
the provisions of SFAS 133 by reclassifying 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. The securities were previously carried
below cost as held-to-maturity, and an unrealized loss, net of taxes, of
$654,000 against these securities had been included in shareholders' equity
prior to their sale.
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.
During 1999 NewMil formed a Passive Investment Company ("PIC") and changed its
tax year to a calendar year basis to take advantage of recent changes in
Connecticut tax statutes. The Connecticut statute, effective January 1, 1999,
allows NewMil to transfer loans collateralized by real estate into the PIC.
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 is 34%, compared with an effective rate of 40.27%
(prior to the deferred tax asset write-
14
<PAGE>
off, discussed below), for the first two quarters of the fiscal year. The
formation of the PIC 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
year ended June 30, 1999 includes a charge of $266,000.
Over the past five years NewMil has achieved a steady improvement in core
earnings. This is attributed to a continuing strategy which includes refining
both the mix and the quality of NewMil's earning assets, increasing non-interest
income, controlling operating expenses, and reducing non-performing assets.
The following discussion and analysis of NewMil's consolidated results of
operations should be read in conjunction with the Consolidated Financial
Statements and footnotes.
RESULTS OF OPERATIONS
Comparison Between 1999 and 1998
Analysis of Net Interest and Dividend Income
--------------------------------------------
Net interest income increased $190,000, or 1.5%, to $12,649,000 in 1999. This
resulted from growth of $18.0 million, or 5.4%, in average earning assets,
driven by an increase in average loans of $21.8 million, or 12.8%. The net
interest margin declined 14 basis points, to 3.64% from 3.78%. This decrease
was due mostly to the effects of lower market interest rates during 1999 as
compared with 1998, and to changes in balance sheet mix. 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 each of the past three
years.
15
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30, 1999 Average Income/ Average
(dollars in thousands) balance expense yield/rate
-------- ------- -----------
<S> <C> <C> <C>
Loans (a) $192,052 $15,426 8.03%
Mortgage backed securities 90,273 5,374 5.95
Other securities (b) 65,630 3,656 5.57
-------- -------
Total earning assets 347,955 24,456 7.03
-------
Other assets 13,473
--------
Total assets $361,428
========
NOW accounts $ 33,065 387 1.17
Money market accounts 68,365 2,018 2.95
Savings & other 48,383 1,234 2.55
Certificates of deposit 133,421 6,713 5.03
-------- -------
Total interest-bearing deposits 283,234 10,352 3.66
Borrowings 24,432 1,455 5.96
-------- -------
Total interest-bearing funds 307,666 11,807 3.84
-------
Demand deposits 17,185
Other liabilities 2,278
Shareholders' equity 34,299
--------
Total liabilities and
shareholders' equity $361,428
========
Net interest income $12,649
=======
Spread on interest-bearing funds 3.19
Net interest margin (c) 3.64
<CAPTION>
Year ended June 30, 1998 Average Income/ Average
(dollars in thousands) balance expense yield/rate
-------- ------- ----------
<S> <C> <C> <C>
Loans (a) $170,287 $15,005 8.81%
Mortgage backed securities 42,014 2,532 6.03
Other securities (b) 117,690 7,118 6.05
-------- -------
Total earning assets 329,991 24,655 7.47
-------
Other assets 11,024
--------
Total assets $341,015
========
NOW accounts $ 29,008 389 1.34
Money market accounts 62,687 1,921 3.06
Savings & other 40,933 1,116 2.73
Certificates of deposit 138,202 7,477 5.41
-------- -------
Total interest-bearing deposits 270,830 10,903 4.03
Borrowings 22,208 1,293 5.82
-------- -------
Total interest-bearing funds 293,038 12,196 4.16
-------
Demand deposits 12,884
Other liabilities 2,037
Shareholders' equity 33,056
--------
Total liabilities and
shareholders' equity $341,015
========
Net interest income $12,459
=======
Spread on interest-bearing funds 3.31
Net interest margin (c) 3.78
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30, 1997 Average Income/ Average
(dollars in thousands) balance expense yield/rate
-------- ------- -----------
<S> <C> <C> <C>
Loans (a) $163,715 $14,601 8.92%
Mortgage backed securities 16,856 1,065 6.32
Other securities (b) 118,948 7,185 6.04
-------- -------
Total earning assets 299,519 22,851 7.63
-------
Other assets 11,409
--------
Total assets $310,928
========
NOW accounts $ 24,414 363 1.49
Money market accounts 61,258 1,857 3.03
Savings & other 38,458 1,026 2.67
Certificates of deposit 129,010 6,953 5.39
-------- -------
Total interest-bearing deposits 253,140 10,199 4.03
Borrowings 13,059 717 5.49
-------- -------
Total interest-bearing funds 266,199 10,916 4.10
-------
Demand deposits 10,826
Other liabilities 1,452
Shareholders' equity 32,451
--------
Total liabilities and
shareholders' equity $310,928
========
Net interest income $11,935
=======
Spread on interest-bearing funds 3.53
Net interest margin (c) 3.98
</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 years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Years ended June 30, 1999 versus 1998
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 1,918 $(1,327) $(170) $ 421
Mortgage backed securities 2,908 (31) (35) 2,842
Other securities (3,149) (562) 249 (3,462)
------- ------- ----- -------
Total 1,677 (1,920) 44 (199)
------- ------- ----- -------
Interest-bearing liabilities:
Deposits 499 (1,004) (46) (551)
Borrowings 129 30 3 162
------- ------- ----- -------
Total 628 (974) (43) (389)
------- ------- ----- -------
Net change to interest income $ 1,049 $ (946) $ 87 $ 190
======= ======= ===== =======
<CAPTION>
Years ended June 30, 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 $ (175) $ (7) $ 404
Mortgage backed securities 1,590 (49) (74) 1,467
Other securities (76) 9 - (67)
------- ------- ----- -------
Total 2,100 (215) (81) 1,804
------- ------- ----- -------
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Interest-bearing liabilities:
Deposits 713 (8) (1) 704
Borrowings 502 43 31 576
------- ------- ----- -------
Total 1,215 35 30 1,280
------- ------- ----- -------
Net change to interest income $ 885 $ (250) $(111) $ 524
======= ======= ===== =======
</TABLE>
Net interest and dividend income represents the difference between interest and
dividends earned on loans and securities and interest paid on deposits and
borrowings. The level of net interest income is a function of volume, rates and
mix of both earning assets and interest-bearing liabilities. Net interest
income can be adversely affected by changes in interest rate levels as
determined by NewMil's "gap" position, measured by the differences between the
volume of assets and liabilities that are subject to repricing within different
future time periods.
Interest Income
---------------
Total interest and dividend income decreased $199,000, or 0.8%, to $24.5 million
in 1999. Loan income increased $421,000, or 2.8%, as a result of higher loan
volume offset by lower average yield. Average loans increased $21.8 million, or
12.8%, to $192.1 million in 1999 as compared with 1998. The decrease in average
loan yield, down 78 basis points, was mostly due to lower yields on loans
originated during 1999 coupled with the downward repricing of adjustable rate
loans and changes in portfolio mix. Most of the growth has been in residential
mortgage loans that have lower yields relative to commercial loans. Investment
income decreased $620,000, or 6.4%, in 1999 as a result of lower average volume
coupled with a slightly lower average yield. Average securities decreased $3.8
million, or 2.4%. The decrease in average investment yield, down 25 basis
points, was due to lower reinvestment yields during 1999 and changes in
portfolio mix.
Interest Expense
----------------
Interest expense decreased $389,000, or 3.2%, to $11.8 million in 1999 primarily
as a result of changes in the deposit mix offset in part by higher average
borrowings. Deposit expense decreased $551,000, or 5.1%, as a result of a
decline in deposit rates and a favorable change in deposit mix, partially offset
by interest-bearing deposit growth of $12.4 million, or 4.6%. The average cost
of interest-bearing deposits declined by 37 basis points to 3.66%. Deposit
growth occurred in all deposit categories, except higher cost certificates of
deposit. NOW accounts increased $4.1 million, or 14.0%, money market accounts
increased $5.7 million, or 9.1% and savings accounts increased $7.5 million, or
18.2%, while certificates of deposits decreased $4.8 million, or 3.5%.
Borrowings expense increased $162,000, primarily as a result of an increase in
borrowings in late 1998 to fund securities purchases.
Provision and Allowance for Loan Losses
---------------------------------------
The following table sets forth changes in the allowance for loan losses and
other selected statistics for each of the past five years:
<TABLE>
<CAPTION>
Years ended June 30, 1999 1998 1997 1996 1995
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Balance, beginning of
year $5,004 $5,452 $4,866 $5,372 $5,246
Provision for loan losses 100 250 400 400 400
Charge-offs:
Real estate mortgages 165 633 90 884 294
Commercial and industrial - - 23 30 -
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Consumer loans 11 73 11 5 1
------ ------ ------ ------ ------
Total charge-offs 176 706 124 919 295
------ ------ ------ ------ ------
Recoveries:
Real estate mortgages 52 4 308 10 20
Commercial and industrial - - - - -
Consumer loans 9 4 2 3 1
------ ------ ------ ------ ------
Total recoveries 61 8 310 13 21
------ ------ ------ ------ ------
Net (recoveries)
charge-offs 115 698 (186) 906 274
------ ------ ------ ------ ------
Balance, end of year $4,989 $5,004 $5,452 $4,866 $5,372
====== ====== ====== ====== ======
Ratio of allowance for
loan losses:
to non-performing loans 403.6% 360.3% 175.3% 114.3% 74.5%
to total gross loans 2.3 3.0 3.2 3.1 3.4
Loan loss provision
to average loans 0.1 0.1 0.2 0.3 0.3
Ratio of net charge-offs
(recoveries) to average
loans outstanding 0.06% 0.41% (0.11%) 0.59% 0.19%
</TABLE>
The following table sets forth the allocation of the allowance for loan losses
among the broad categories of the loan portfolio and the percentage of loans in
each category to total loans at June 30, for each of the past five years.
Although the allowance has been allocated among loan categories for purposes of
the table, it is important to recognize that the allowance is applicable to the
entire portfolio. Furthermore, charge-offs in the future may not necessarily
occur in these amounts or proportions.
<TABLE>
<CAPTION>
June 30, 1999 1998
---- ----
(dollars in thousands) Allowance Loans(a) Allowance Loans(a)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Real Estate Mortgages
1-4 family residential $ 959 59.75% $ 978 50.79%
5-more family residential 461 2.86 694 3.27
Commercial 1,937 17.43 2,026 20.77
Land 258 1.12 440 2.13
Home equity credit lines 195 9.04 212 12.63
------ ------
Total mortgage loans 3,810 90.20 4,350 89.59
Commercial and industrial 239 8.48 188 8.55
Installment 18 0.39 24 0.69
Collateral 0 0.93 0 1.17
Unallocated 922 - 442 -
------ ------
Total allowance $4,989 100.00 $5,004 100.00
====== ======
<CAPTION>
June 30, 1997 1996
---- ----
(dollars in thousands) Allowance Loans(a) Allowance Loans(a)
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Real Estate Mortgages
1-4 family residential $1,131 52.94% $1,258 57.31%
5-more family residential 906 2.80 290 2.10
Commercial 1,669 18.55 1,942 19.55
Land 683 4.85 512 6.09
Home equity credit lines 205 11.81 147 9.30
------ ------
Total mortgage loans 4,594 90.95 4,149 94.35
Commercial and industrial 184 7.24 139 3.94
Installment 34 0.66 12 0.32
Collateral 0 1.15 0 1.39
</TABLE>
19
<PAGE>
Unallocated 640 - 566 -
------ ------
Total allowance $5,452 100.00 $4,866 100.00
====== ======
June 30, 1995
----
(dollars in thousands) Allowance Loans(a)
--------- --------
Real Estate Mortgages
1-4 family residential $1,466 64.26%
5-more family residential 725 2.06
Commercial 1,865 18.91
Land 781 6.20
Home equity credit lines 83 5.06
------
Total mortgage loans 4,920 96.49
Commercial and industrial 71 2.08
Installment 6 0.18
Other 0 1.25
Unallocated 375 -
------
Total allowance $5,372 100.00
======
(a) Percent of loans in each category to total loans.
NewMil provided $100,000 for loan losses in 1999, down from $250,000 in 1998 and
$400,000 in 1997. The reduction in NewMil's provision over the past three years
is due principally to an ongoing improvement in loan quality as evidenced by the
steady reduction in non-performing loans over the past five years, offset in
part by loan portfolio growth. During 1999 non-performing loans decreased
$153,000, or 11.1%, to $1.2 million at June 30, 1999 and, as a result, the
reserve coverage to non-performing loans increased to 403.6%. Past due
performing loans (accruing loans 30-89 days past due) also decreased in 1999 and
at June 30, 1999 represented 1.3% of gross loans. The decrease in the ratio of
the allowance for loan losses to total gross loans during 1999, to 2.3% at June
30, 1999 compared to 3.0% at June 30, 1998, is due to loan portfolio growth of
$47.2 million, or 28.1% during 1999. Loan growth has been primarily
concentrated in residential mortgage loans that have a relatively low risk
profile. NewMil remains adequately reserved both against total loans and non-
performing loans. For a discussion on loan quality see "Asset Quality and
Portfolio Risk".
20
<PAGE>
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 June
30, 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 examined by the FDIC, in August 1998 and no additions to the
allowance were requested as a result of this examination.
Non-Interest Income
-------------------
Non-interest income increased $570,000 or 19.9%, to $3,434,000 in 1999. This
increase is attributable to gains on sales of OREO in 1999 and security losses
in 1998, offset by a gain on the sale of a non-performing loan in 1998. The
principal categories of non-interest income are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1999 1998 Change
------ ------ -------
<S> <C> <C> <C> <C>
(in thousands)
Service charges on
deposit accounts $1,154 $1,122 $ 32 2.9%
Gains on sales of
loans, net 547 480 67 14.0
Securities (losses)
gains, net - (271) 271 100.0
Gains on sales of OREO 1,342 359 983 273.8
Gain on sale of
non-performing loan - 778 (778) (100.0)
Loan servicing 81 101 (20) (19.8)
Other 310 295 15 5.1
------ ------ ----- ------
Total non-interest income $3,434 $2,864 $ 570 19.9%
====== ====== ===== ======
</TABLE>
The increase in service charges on deposit accounts in 1999 reflects increased
transaction volume, resulting from growth in demand deposit and NOW accounts and
increased debit card transactions volume. The increase in gains from sales of
residential mortgage loans resulted from loan sales of $28.0 million in 1999
compared with $25.8 million in 1998. Secondary market loan sales are generally
pre-arranged on a loan by loan basis prior to origination and loans are sold
service-released.
The net securities losses in 1998 were realized on securities sales of $44.2
million and included a loss of $103,000 from the sale of a collateralized
mortgage obligation ("CMO") that was classified as held-to-maturity. In October
1997 NewMil engaged a financial securities consultant to analyze this CMO.
Based on this review NewMil determined that it was highly probable that NewMil
would likely receive substantially less than the contractual interest on this
CMO and that the CMO could experience a significant decline in market value.
NewMil concluded that these and other changes in
21
<PAGE>
circumstances surrounding this CMO were isolated, non-recurring, and highly
unusual, and could not have been reasonably anticipated. The significant
increase in OREO gains in 1999 resulted from the sale of two OREO properties and
the sale of the Bank's interest in a partnership formed several years ago to
develop an OREO property into a residential subdivision. In 1998 NewMil realized
a gain of $778,000 from the sale of its largest remaining non-performing loan.
The gain resulted from the sale of the loan to a buyer whose intended use of the
property added significant value which was not anticipated. The decrease in loan
servicing fees in 1999 resulted from run-off in the mortgage servicing
portfolio, which at June 30, 1999 totaled $20.2 million, down from $24.8 million
at June 30, 1998. The Bank has sold its mortgage loans on a servicing released
basis since 1994.
Operating Expenses
------------------
Operating expenses increased $518,000, or 5.2%, in 1999. The principal
categories of operating expenses are as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1999 1998 Change
---- ---- ------
<S> <C> <C> <C> <C>
(in thousands)
Salaries $ 4,766 $4,216 $ 550 13.1%
Employee benefits 1,252 1,183 69 5.8
Occupancy 995 1,018 (23) (2.3)
Equipment 779 922 (143) (15.5)
Professional, collection
and OREO expense 284 315 (31) (9.8)
Insurance 88 92 (4) (4.4)
Postage and telecommunications 421 424 (3) (0.7)
Marketing 216 235 (19) (8.1)
Service bureau 261 221 40 18.1
Other operating 1,376 1,294 82 6.3
------- ------ ----- -----
Total operating expenses $10,438 $9,920 $ 518 5.2%
======= ====== ===== =====
</TABLE>
The increase in salaries in 1999 was due primarily to annual salary increases,
overtime related to the conversion of the Bank's core data processing systems to
a new in-house system, higher loan origination and sales commissions, and higher
incentive compensation awards. Employee benefits expense increased as a result
of taxes and other benefits related to the increase in salaries, and due to
increased medical claims from the Bank's partially self insured plan. These
increases were partially offset by net income related to the Bank's curtailed
pension plan. The decrease in occupancy and equipment expense is primarily due
to reduced building maintenance expense in 1999 and the write-off, in 1998, of
obsolete computer equipment and related prepaid maintenance in preparation for
the conversion of the Bank's core data processing systems to a new client server
system. All other operating expenses, including marketing, shareholder
relations, office expense and other, increased $100,000 or 4.6% in 1999. This
increase is attributed principally to increased lending activity, various
marketing promotions and other changes in operating activities.
Income Taxes
------------
Net income for 1999 included an income tax provision of $2,264,000, for an
effective tax rate of 40.8%, as compared with an income tax provision of
$2,164,000, for an effective tax rate of 42.0%, for 1998.
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
22
<PAGE>
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 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
fiscal year, of 40.27% (prior to the deferred tax asset write-off, discussed
below). The formation of the PIC 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. The provision for the year ended June
30, 1999 included a one-time charge of $266,000 related to the formation of the
PIC, as discussed above.
For further information on income taxes see Note 7 of Notes to Consolidated
Financial Statements.
Effect of Change in Accounting Principle and Extraordinary Item
---------------------------------------------------------------
Effective October 1, 1998 NewMil adopted the provisions of SFAS 133,
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.
Comparison between 1998 and 1997
Overview
--------
NewMil earned net income of $2,989,000 or $0.74 per share, for the year ended
June 30, 1998, compared with net income of $2,602,000, or $0.63 per share, for
fiscal year 1997. Net income grew 14.9% in 1998, reflecting significantly
improved core earnings, driven by higher net interest income and non-interest
income, and a lower provision for loan losses, offset in part by increased
operating expenses. Earnings per share increased 17.5%, reflecting both the
growth in net income and share repurchase activity.
Analysis of Net Interest Income
-------------------------------
Net interest income increased $524,000, or 4.4%, to $12,459,000 in 1998. This
resulted from growth of $30.5 million, or 10.2%, in average earning assets,
driven by an increase in average investments of $23.9 million, or 17.6% coupled
with an increase in average loans of $6.6 million, or 4.0%. The net interest
margin decreased by 20 basis points, to 3.78% from 3.98%.
Interest Income
---------------
Total interest and dividend income increased $1,804,000, or 7.9%, to $24.7
million in 1998. Loan income increased $404,000, or 2.8%, as a result of higher
volume offset by slightly lower average yield. Average loans grew $6.6 million,
or 4.0%, to $170.3 million in 1998 as compared with 1997. The decrease in the
average loan yield, down 11
23
<PAGE>
basis points, resulted primarily from lower yields on new loans originated
during 1998. Investment income increased $1,400,000, or 17.0%, in 1998 as a
result of higher average volume, offset in part by a slightly lower average
yield. Average securities increased $23.9 million, or 17.6%, while average
federal funds balances remained fairly constant. The decrease in average yield,
down 3 basis points, resulted from in changes in portfolio mix and lower
reinvestment yields.
Interest Expense
----------------
Interest expense increased $1,208,000, or 11.7%, to $12.2 million in 1998
primarily as a result of deposit growth and higher average borrowings. Deposit
expense increased $704,000, or 6.9%, as a result of an increase of $17.7
million, or 7.0%, in average interest-bearing deposits. The average cost of
interest-bearing deposits remained unchanged at 4.03%. Deposit growth was
realized in all deposit categories with the greatest concentration in
certificates of deposit, which increased $9.2 million, and NOW accounts which
increased $4.6 million. Interest expense on borrowings increased $576,000
primarily as a result of additional borrowings in 1998, including term advances
at higher rates, to fund securities purchases.
24
<PAGE>
Non-Interest Income
-------------------
Non-interest income increased $778,000, or 37.3%, to $2,864,000 in 1998. The
principal categories of non-interest income are as follows:
<TABLE>
<CAPTION>
1998 1997 Change
---- ---- ------
<S> <C> <C> <C> <C>
Years ended June 30, (in thousands)
Service charges on
deposit accounts $1,122 $ 975 $147 15.1%
Gains on sales of
loans, net 480 181 299 165.2
Loan servicing 101 111 (10) (9.0)
Securities (losses)
gains, net (271) (9) (262) 2,911.1
Gains on sales of
OREO Properties, net 359 567 (208) (36.7)
Gains on sale of
non-performing loans 778 - 778 100.0
Other 295 261 34 13.0
------ ------ ---- ------
Total non-interest income $2,864 $2,086 $778 37.3%
====== ====== ==== ======
</TABLE>
The increase in service charges on deposit accounts in 1998 reflected increased
transaction volume, resulting from growth in demand deposit and NOW accounts,
fees from the Generation Gold Family Club introduced in 1998, and increased
debit card transactions volume. The increase in gains from sales of residential
mortgage loans resulted from loan sales of $25.8 million in 1998 compared with
$9.6 million in 1997. The decrease in loan servicing fees in 1998 resulted from
a decrease in the mortgage servicing portfolio, which at June 30, 1998 totaled
$24.8 million, down from $28.8 million at June 30, 1997. Net securities losses
in 1998 and 1997 were realized on security sales of $44.2 million and $23.3
million, respectively. In 1998 NewMil realized a gain of $778,000 from the sale
of its largest remaining non-performing loan. The gain resulted from the sale of
the loan to a buyer whose intended use of the property added significant value
which was not anticipated. Gains on sales of OREO decreased as a result of less
OREO and fewer sales. In 1998 and 1997 OREO proceeds from OREO sales were $1.3
million and $3.3 million, respectively.
Operating Expenses
------------------
Operating expenses increased $787,000, or 8.6%, in 1998. In 1998 NewMil opened
branch offices in Southbury and Norwalk, Connecticut, in July and October 1997,
respectively. These offices added approximately $422,000 to operating expenses,
principally compensation, occupancy and equipment expense. Other increases in
1998 included the write-off of obsolete equipment and prepaid maintenance in
preparation for the conversion of the Bank's core data processing system to a
new in-house system. These increases were offset in part by a significant
reduction in professional and legal expense. The principal categories of
operating expenses are as follows:
<TABLE>
<CAPTION>
1998 1997 Change
---- ---- ------
<S> <C> <C> <C> <C>
Years ended June 30, (in thousands)
Salaries $4,216 $3,909 $ 307 7.9%
Employee benefits 1,183 1,076 107 9.9
Occupancy 1,018 840 178 21.2
Equipment 922 683 239 35.0
Professional, collection
and OREO expense 315 699 (384) (54.9)
Insurance 92 78 14 18.0
Postage and telecommunications 424 348 76 21.8
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Years ended June 30, 1998 1997 Change
---- ---- ------
<S> <C> <C> <C> <C>
Marketing 235 209 26 12.4
Service bureau 221 198 23 11.6
Other operating 1,294 1,093 201 18.4
------ ------ ----- -----
Total operating expenses $9,920 $9,133 $ 787 8.6%
====== ====== ===== =====
</TABLE>
The increase in salaries in 1998 was due primarily to the two new branches and
annual salary increases. Employee benefits expense increased as a result of
additional health, taxes and other benefits related to the increased staffing
levels and increased medical claims from the Bank's partially self insured plan.
These increases were partly offset by net income related to the Bank's pension
plan. The increase in occupancy expense was primarily related to the two new
branches. Equipment expense for 1998 included $213,000 to write-off obsolete
computer equipment and prepaid maintenance related to the Bank's legacy computer
system. The Bank converted its core data processing system to a new client
server system in November 1998. Professional, collection and OREO expense, which
includes expenditures related to audit, accounting, legal, appraisal, property
tax, insurance, other workout related expenses together with the negative
provision for OREO losses, decreased $384,000 as a result, primarily, of a
recovery of legal expenses related to a securities arbitration claim that was
settled in 1998. The increase in insurance expense resulted from both increased
FDIC insurance premiums related to deposit growth and increase in premiums
relating to the new branches. All other operating expenses, including marketing,
shareholder relations, office expense and other, increased $326,000 or 17.6% in
1998 due principally to increased lending activity, new branch locations,
marketing promotions and other changes in operating activities.
Income Taxes
------------
Net income for 1998 included an income tax provision of $2,164,000, for an
effective tax rate of 42.0%, as compared with an income tax provision of
$1,886,000, with a similar effective tax rate of 42.0%, for 1997.
FINANCIAL CONDITION
During 1999 total assets declined $15.5 million, or 4.2%, to $352.1 million at
June 30, 1999. This was due to a sale of securities and repayment of borrowings
with the proceeds. Net loans increased by $47.2 million, or 29.0%, to $210.0
million at June 30, 1999, while securities decreased $44.1 million, or 27.2%,
and federal funds sold decreased $22.0 million, or 87.4%. On the liability side,
deposits grew $6.2 million, or 2.1%, while borrowings decreased $22.5 million,
to $15.0 million at June 30, 1999. Non-performing assets decreased $115,000, or
6.8%, to $1.6 million, and represent only 0.45% of assets at June 30, 1999. Book
value per share increased 3.8% to $9.04 at June 30, 1999, after cash dividends
of $0.35, representing a 43.8% payout ratio. At June 30, 1999 tier 1 leverage
and total risk-based capital ratios were 9.53% and 19.40%, respectively, and
NewMil was "well capitalized" as defined by the Federal Reserve Board.
Securities
----------
During 1999 securities declined $44.1 million, or 27.2%, to $118.2 million at
June 30, 1999, while federal funds sold decreased $22.0 million, to $3.6
million. These reductions were used to fund loan growth and repay borrowings
during 1999. The principal categories of securities are as follows (including
both available-for-sale and held-to-maturity):
<TABLE>
<CAPTION>
June 30, (in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury notes $ - 0.0% $ 18,330 11.3% $ 24,297 20.3%
U.S. Government
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
June 30, (in thousands)
Agency notes - 0.0 993 0.6 8,463 7.1
Municipal Bonds 10,558 8.9 - 0.0 - 0.0
Mortgage backed securities 92,996 78.7 94,602 58.3 15,130 12.7
Collateralized mortgage
obligations 11,883 10.1 45,817 28.2 69,931 58.6
Equity securities 2,765 2.3 2,525 1.6 1,547 1.3
-------- -------- -------
Total securities $118,202 100.0 $162,267 100.0 $119,368 100.0
======== ======== ========
</TABLE>
The change in portfolio mix in 1999 resulted from portfolio run-off and the sale
of certain collateralized mortgage obligations ("CMOs"), offset by new purchases
of mortgage backed securities ("MBS") and municipal bonds.
NewMil took advantage of the one-time opportunity to reclassify securities from
held- to-maturity to available-for-sale permitted with the adoption of SFAS 133
to restructure its securities portfolio. On adopting SFAS 133 effective October
1, 1998, NewMil reclassified certain securities totaling $21 million from held-
to-maturity to available-for-sale, and then sold those securities. These
securities consisted of floating rate CMOs that repriced off the Eleventh
District Cost of Funds index. At September 30, 1998 these securities had been
carried in the held-to-maturity category at $1,091,000 below cost, with a
related unrealized loss, net of taxes, in shareholders equity. The unrealized
loss was generated as a result of having transferred them from available-for-
sale to held-to-maturity at which time they were transferred at their current
market value, which was significantly below their amortized cost. The unrealized
loss, at the date of transfer, was frozen and amortized as the related
investments paid down. NewMil sold the securities during the quarter ended
December 31, 1998 and realized a loss of only $274,000. This loss has been
reported separately in net income, net of taxes, as the cumulative effect of
adopting SFAS 133.
NewMil's securities portfolio consists of MBSs', CMOs', bank qualified municipal
bonds and Federal Home Loan Bank stock. At June 30, 1999, 90.0% of the portfolio
consisted of fixed rate securities, principally MBS and to a lesser extent, CMOs
and municipal bonds. At June 30, 1999 total fixed rate securities had a
projected weighted average duration and life of 3.8 years and 4.9 years,
respectively, based on median projected prepayment speeds at current interest
rates. At June 30, 1999 7.7% of the portfolio consisted of 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
securities had a projected weighted average duration and life of 0.1 years and
3.1 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 several Treasury indices.
The remaining 2.3% of the portfolio at June 30, 1999, was represented primarily
by Federal Home Loan Bank stock.
At June 30, 1999, securities totaling $74.1 million, or 62.7%, were classified
as available-for-sale and securities totaling $44.1 million, or 37.3%, were
classified as held-to-maturity.
The composition, maturity distribution and weighted average yields of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Carrying Market
Value Value Yield
----- ----- -----
<S> <C> <C> <C>
June 30, 1999(a)
Mortgage backed securities $70,106 $70,106 6.40
Collateralized mortgage obligations 1,264 1,264 4.96
Equity securities 2,765 2,765 5.48
------- -------
Total Securities Available-for-sale $74,135 $74,135 7.19
======= =======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) Carrying Market
Value Value Yield
----- --------- ------
<S> <C> <C>
June 30, 1998(a)
U.S. Treasury and Government
U.S Treasury Obligation
Within 1 year $ 18,330 $ 18,330 6.32%
Agency Obligations
After 5 but within 10 years 993 993 6.17
Mortgage backed securities 87,796 87,796 6.55
Collateralized mortgage obligations 2,447 2,447 4.45
Equity securities 2,525 2,525 6.00
-------- --------
Total Securities Available-for-sale $112,091 $112,091 6.45
======== ========
<CAPTION>
(dollars in thousands) Carrying Market
Value Value Yield
----- -------- ------
<S> <C> <C>
June 30, 1997(a)
U.S. Treasury and Government
U.S Treasury Obligation
Within 1 year $ 6,013 $ 6,013 6.06%
After 1 but within 5 years 18,285 18,285 6.13
Agency Obligations
After 1 but within 5 years 7,499 7,499 6.26
After 5 but within 10 years 964 964 6.17
Mortgage backed securities 6,514 6,514 6.75
Collateralized mortgage obligations 8,727 8,727 5.89
Equity securities 1,547 1,547 6.21
------- -------
Total Securities Available-for-sale $49,549 $49,549 6.31
======= =======
</TABLE>
28
<PAGE>
The composition, maturity distribution and weighted average yields of securities
held- to-maturity are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) Carrying Market
Value Value Yield
----- -------- ------
<S> <C> <C>
June 30, 1999
Municipal Bonds
After 10 years $10,558 $ 9,692 6.14%
Mortgage backed securities 22,890 22,927 6.67
Collateralized mortgage obligations 10,619 10,292 5.88
------- -------
Total Securities Held-to-maturity $44,067 $42,911 6.14
======= =======
June 30, 1998
Mortgage backed securities $ 6,806 $ 6,905 6.59%
Collateralized mortgage obligations 43,370 43,006 6.08
------- -------
Total Securities Held-to-maturity $50,176 $49,911 6.14
======= =======
June 30, 1997
Mortgage backed securities $ 8,615 $ 8,606 6.49%
Collateralized mortgage obligations 61,204 59,722 5.97
------- -------
Total Securities Held-to-maturity $69,819 $68,328 6.03
======= =======
</TABLE>
Loans
-----
During 1999 net loans grew $47.2 million, or 29.0%, to $210.0 million at June
30, 1999. Loan originations and advances for portfolio, including $38.6 million
of residential mortgage loans purchased, totaled $92.4 million for 1999, up
58.5% from $58.3 million in 1998. Loan repayments totaled $83.4 million for
1999, up from $61.6 million in 1998. The increase in loan repayments was due
primarily to refinancings of residential mortgage loans caused by the low
interest rate environment, and, to a lesser extent, related home equity lines of
credit refinancing. Residential mortgage loans originated for sale increased by
$2.2 million to $28.0 millon, compared with $25.8 million in 1999. Loans
originated for sale are sold on a servicing released basis.
The principal categories of the loan portfolio are as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1999 1998
---- ----
<S> <C> <C>
Real estate mortgages
One-four family residential $128,371 59.8% $ 85,274 50.8%
Five or more family residential 6,152 2.9 5,500 3.3
Commercial 37,456 17.4 34,878 20.8
Land and land development 2,410 1.1 3,571 2.1
Commercial and industrial 18,211 8.5 14,357 8.6
Home equity lines of credit 19,429 9.0 21,208 12.6
Installment and other 2,850 1.3 3,118 1.8
-------- --------
Total loans, gross $214,879 100.0 $167,906 100.0
======== ========
</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 extensively with several government-assisted
lending programs. The Residential Mortgage Department, in addition to
traditional portfolio lending, originates loans for sale to the secondary market
on a service-released basis, which enables the Bank to offer a very
comprehensive residential mortgage product line. The department also offers home
equity loans and lines of credit and consumer installment loans.
29
<PAGE>
The following table sets forth information on the composition of NewMil's loan
portfolio by loan type for each of the past five years:
<TABLE>
<CAPTION>
June 30, (in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real Estate Mortgages:
Residential
1-4 family $128,371 $ 85,274 $ 90,885 $ 89,159 $ 98,766
5-more family 6,152 5,500 4,812 3,262 3,171
Commercial 37,456 34,878 31,850 30,408 29,068
Land 2,410 3,571 8,334 9,472 12,067
Home equity credit 19,429 21,208 20,274 14,474 7,785
-------- -------- -------- -------- --------
Total mortgage loans 193,818 150,431 156,155 146,775 150,857
Commercial and industrial 18,211 14,357 12,424 6,130 3,201
Installment 950 1,161 1,140 502 284
Collateral and other 1,900 1,957 1,982 2,156 1,903
-------- -------- -------- -------- --------
Total loans, gross 214,879 167,906 171,701 155,563 156,245
Deferred loan orig-
ination fees and
purchase premium, net 146 (53) (108) (139) (431)
Allowance for loan
losses (4,989) (5,004) (5,452) (4,866) (5,372)
------- ------- -------- -------- -------
Total loans, net $210,036 $162,849 $166,141 $150,558 $150,442
======== ======== ======== ======== =======
</TABLE>
The following tables reflect NewMil's loan portfolio maturity distribution as of
June 30, 1999 (non-accrual loans have been presented in the after 5 years
category):
<TABLE>
<CAPTION>
June 30, 1999 Within After
(in thousands) Within 1-5 5
1 year years years Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
Real Estate Mortgages:
Residential
1-4 family $17,023 $42,094 $69,254 $128,371
5-more family 980 2,372 2,800 6,152
Commercial 9,503 18,229 9,724 37,456
Land 1,369 843 198 2,410
Home equity credit lines 7,420 10,743 1,266 19,429
Commercial and industrial 5,484 8,254 4,473 18,211
Installment 420 470 60 950
Collateral and other 1,900 - - 1,900
------- ------ -------- --------
Total loans, gross $44,099 $83,005 $87,775 $214,879
======= ======= ======= ========
</TABLE>
The following table shows as of June 30, 1999 the amount of loans due after one
year that have fixed interest rates and variable or adjustable interest rates:
<TABLE>
<CAPTION>
June 30, (in thousands) Fixed Adjustable
interest interest
rates rates
----- -----
<S> <C> <C>
Real Estate Mortgages:
1-4 family residential $26,188 $ 85,160
5-more family residential 221 4,951
Commercial 455 27,498
Land - 1,041
Home equity credit lines - 12,009
Commercial and industrial 2,954 9,773
Installment 469 61
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Collateral and other - -
------- --------
Total loans, gross $30,287 $140,493
======= ========
</TABLE>
31
<PAGE>
Non-performing assets
---------------------
The following table sets forth non-performing assets for each of the last five
years:
<TABLE>
<CAPTION>
June 30, (in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accruing loans $1,051 $ 761 $2,054 $3,809 $7,175
Accruing loans past due
90 days or more 185 628 783 166 34
Accruing restructured
loans - - 274 281 -
------ ------ ------ ------ ------
Total non-performing loans 1,236 1,389 3,111 4,256 7,209
OREO, net 333 295 474 2,224 1,676
------ ------ ------ ------ ------
Total non-performing assets $1,569 $1,684 $3,585 $6,480 $8,885
====== ====== ====== ====== ======
</TABLE>
During 1999 non-performing assets decreased $115,000, or 6.8%, to $1.6 million
at June 30, 1999, and represented only 0.45% of total assets. The low level of
non-performing assets reflects NewMil's rigorous ongoing credit management
process and favorable economic climate. The following table summarizes changes
in non-performing assets during the past two years.
<TABLE>
<CAPTION>
Years ended June 30, (in thousands) 1999 1998
---- ----
<S> <C> <C>
Balance, beginning of year $ 1,684 $ 3,585
Loans placed on non-accrual status 920 1,360
Non-accrual loan payments (150) (366)
Loans returned to accrual status (3) (408)
Proceeds from non-accrual loan sales - (1,835)
Gain on non-accrual loan sale - 778
Non-accrual loan charge-offs (156) (620)
Change in accruing loans past
due 90 or more days, net (442) (155)
Change in accruing loans
restructured, net - (274)
Payments to improve OREO 107 498
Decrease in OREO valuation reserve 82 55
Gross proceeds from OREO sales (1,815) (1,293)
Gains on OREO sales, net 1,342 359
------- -------
Balance, end of year $ 1,569 $ 1,684
======= =======
Percent of total assets 0.45% 0.46%
</TABLE>
The following table details the composition of non-performing assets as of the
periods presented.
<TABLE>
<CAPTION>
Non-Performing Assets Accruing Other Total
(dollars in Non- loans past Restruc- real non-
thousands) accrual due 90 or tured estate performing
loans more days loans owned assets
----- --------- ----- ----- ------
<S> <C> <C> <C> <C> <C>
June 30, 1999
Real estate:
Residential $ 196 $ 185 $ - $ 333 $ 714
Commercial 452 - - - 452
Land and land
development 403 - - - 403
Installment and
Other - - - - -
Valuation reserve - - - - -
------ ----- ---- ----- ------
Totals $1,051 $ 185 $ - $ 333 $1,569
====== ===== ==== ===== ======
June 30, 1998
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Real estate:
Residential $ 189 $593 $ - $ 106 $ 888
Commercial 157 35 - 36 228
Land and land
development 414 - - 235 649
Installment and
Other 1 - - - 1
Valuation reserve - - - (82) (82)
------ ---- ---- ----- ------
Totals $ 761 $628 $ - $ 295 $1,684
====== ==== ==== ===== ======
</TABLE>
Had non-accrual loans as of June 30, 1999 and 1998, been current in accordance
with their original terms, gross interest income of $98,000 and $77,000 would
have been recorded in net income for 1999 and 1998, respectively. The amount of
interest on these loans that was included in income was $59,000 and $58,000 in
1999 and 1998, respectively. Accruing loans past due 90 days or more at June 30,
1999 consist of four residential mortgage loans, all of which are in the process
of collection and where the collection of accrued interest is probable. 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 and in 1999 sold $1.8 million of OREO from
which net gains of $1.3 million were realized.
In addition to non-performing assets, at June 30, 1999 NewMil had $8,238,000 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.
Deposits and borrowings
-----------------------
Deposits grew $6.2 million, or 2.1%, during 1999 to $300.1 million. Savings,
Money Market and NOW accounts grew $14.7 million, or 10.5% and demand deposits
grew $4.1 million, or 28.3%, while certificates of deposit decreased $12.6
million, or 9.1%. In May 1999 the Bank closed its Winsted Office and sold the
$4.9 million branch deposits. The Bank received a $175,000 deposit premium which
offset the branch closing expenses. NewMil has 14 branch offices located in
Fairfield, Litchfield and New Haven Counties.
The following table shows the scheduled maturities of certificates of deposit
with balances in excess of $100,000:
<TABLE>
<CAPTION>
June 30, 1999 (in thousands) Less Within Within Over
than 3 3 - 6 6- 12 one
months months months year Total
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Certificates of deposit
over $100,000 $4,663 $2,853 $4,599 $2,539 $14,654
====== ====== ====== ====== =======
</TABLE>
During 1999 NewMil sold certain securities and used the proceeds to reduce
borrowings by $22.5 million to $15.0 million. Borrowings at June 30, 1999
consisted of Federal Home Loan Bank advances with terms ranging from twenty to
forty-four months and fixed rates ranging from 5.91% to 6.02%. The borrowings
are being used to match fund certain
33
<PAGE>
securities. Borrowings at June 30, 1998 had terms of twelve to sixty months and
rates between 5.68% and 6.02%.
LIQUIDITY
NewMil 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 primary sources of liquidity 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 in 1999 provided net cash flows of $5.6 million, up from
$3.6 million in 1998. During 1999 investing activities used net cash of $3.4
million, principally for loan advances and purchases and net security purchases.
Financing activities used net cash of $19.7 million, principally to repay
borrowings, pay shareholder dividends and purchase treasury stock, offset by
increased net deposits. Funds provided by operating activities coupled with
$17.6 million decreased cash and cash equivalents, due primarily a decrease in
federal funds sold, were utilized to fund investing and financing activities.
Operating activities in 1998 provided net cash flows of $3.6 million, up from
$3.3 million in 1997. During 1998 investing activities used net cash of $39.2
million, principally for net security purchases. Financing activities provided
net cash of $41.4 million, principally from increased deposits and borrowings,
offset in part by dividends paid to shareholders and treasury stock purchases.
Funds provided by operating and financing activities were utilized to fund
investing activities and to increase cash and cash equivalents by $5.8 million.
At June 30, 1999, NewMil's liquidity ratio, as represented by cash, short-term
available-for-sale securities, marketable assets, the ability to borrow against
held- to-maturity securities and loans through unused FHLB and other short term
borrowing capacity, of approximately $176.2 million, to net deposits and short
term unsecured liabilities, was 62.0%, well in excess of NewMil's minimum
guideline of 15%.
At June 30, 1999, NewMil had outstanding commitments to fund new loan
originations of $6.1 million, construction mortgage commitments of $2.7 million
and unused lines of credit of $23.9 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.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
NewMil manages interest rate risk through an Asset Liability 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 manages interest rate risk with the objective of maintaining a high and
stable net interest margin under changing interest rate environments. Interest
rate risk is
34
<PAGE>
measured using gap analysis, to identify short- medium- and long-term interest
rate risk positions, and simulation analysis, to measure the amount of short-
term earnings at risk under rising and falling interest rate scenarios. NewMil
seeks to manage interest rate risk within limits approved by the Board of
Directors.
The following table sets forth NewMil's interest rate sensitivity position, or
gap position, at June 30, 1999, measured in terms of the volume of interest rate
sensitive assets and liabilities that are subject to repricing in future time
periods. For the purposes of this analysis, money market and savings deposits
have been presented in the within 6 month category and NOW account deposits have
been presented in the after 5 year category, although the interest rate
elasticity of money market, savings and NOW deposits cannot be tied to any one
time category. Non-accrual loans and overdrafts have been presented in the
non-interest-bearing category. Significant variations may exist in the degree of
interest rate sensitivity between individual asset and liability types within
the repricing periods presented due to differences in their repricing elasticity
relative to changes in the general level of interest rates.
35
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 Within Within Non-
(in thousands) Within 6 7-12 1-5 After interest-
months months years 5 years bearing Total
------ ------ ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities $ 26,261 $11,539 $49,616 $32,262 $ (1,476) $118,202
Federal funds sold 3,167 - - - - 3,167
Due from banks 99 - - - 9,620 9,719
Loans 77,556 28,618 65,058 38,113 5,680 215,025
Other assets - - - - 6,004 6,004
-------- ------- ------- ------- ------- --------
Total assets 107,083 40,157 114,674 70,375 19,828 $352,117
-------- ------- ------- ------- ------- ========
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) - - - - 18,622 18,622
NOW accounts - - - 34,660 - 34,660
Money market 71,252 - - - - 71,252
Savings and other 49,443 - - - - 49,443
Certificates of
deposit 63,862 38,403 23,844 37 - 126,146
Federal Home Loan
Bank advances - - 15,000 - - 15,000
Other liabilities - - - - 3,859 3,859
Stockholders'
equity - - - - 33,135 33,135
-------- ------- ------- ------- ------- --------
Total sources
of funds 184,557 38,403 38,844 34,697 55,616 $352,117
-------- ------- ------- ------ ------- ========
Cumulative
interest-rate
sensitivity
gap $(77,474) $(75,720) $ 110 $35,788 $ -
======== ======== ======== ======= =======
Percent of
total assets (22.0)% (21.5)% 0.0% 10.2% - %
</TABLE>
At June 30, 1999, its one year cumulative gap was -$75.7 million, or 21.5% of
assets. A liability sensitive gap implies that NewMil's net interest margin
could be adversely affected by a sudden increase in interest rates.
NewMil simulates earnings at risk over a twelve month horizon by ramping
interest rates +/-100 and +/-200 basis points from the current rate environment.
During the year ended June 30, 1999 interest rates did not move +/-100 basis
points from their current rates. NewMil's asset/liability management responds to
changes in interest rates and market conditions. The simulation analysis
incorporates numerous assumptions about balance sheet changes, including growth
and product mix, product pricing and the behavior of interest rates. NewMil's
policy is to ensure that the change in net income over the twelve month horizon
within the +/-200 basis point band will not decrease by 20% or more. The
following table indicates that the estimated percentage change in net income
over the next twelve month forecast, for June 30, 1999 and 1998, horizon is
within NewMil's tolerance limit.
Change % Change in
in Rate Net Income
1999 1998
+100 bp 2.0% 9.0%
-100 bp -6.0% -9.0%
+200 bp 2.9% -
-200 bp -9.5% -
36
<PAGE>
Due to the numerous assumptions in the simulation analysis, actual results will
differ from estimated results. Factors other than changes in interest rates
could also impact net income. A significant factor in determining NewMil's
ability to maintain its net interest margin in a changing interest rate
environment is its ability to manage its core deposit rates. Essentially all of
NewMil's deposit base is composed of local retail deposit accounts which tend to
be somewhat less sensitive to moderate interest fluctuations than other funding
sources and, therefore, provide a reasonably stable and cost-effective source of
funds. The entry of new competitors into NewMil's market area may pressure
NewMil to change its loan and deposit pricing which may negatively affect
NewMil's net interest margin. NewMil structures its loan and securities
portfolios to provide for portfolio repricing consistent with its interest rate
risk objectives.
CAPITAL RESOURCES
During 1999 shareholders' equity decreased $274,000, or 0.8%, to $33.1 million,
while book value per share increased 3.8% to $9.04 at June 30, 1999. The
decrease in shareholders' equity resulted from treasury stock purchases of
$2,110,000 and dividend payments of $1,328,000, offset by earnings of
$3,032,000, a $73,000 decrease in the adjustment to shareholders equity for net
unrealized holding losses on securities and $59,000 from the exercise of stock
options.
In July 1996 NewMil announced its intention to repurchase up to 10% of its
outstanding common stock in the open market and unsolicited negotiated
transactions, including block purchases. In April and July 1999 NewMil announced
its intention to buy additional shares of 100,000 and 50,000, respectively,
under the same conditions. The purpose of the repurchase plan is to offset the
future dilution from shares issued upon the exercise of stock options under
NewMil's stock option plans, and for general corporate purposes. During 1999
NewMil repurchased 184,500 shares, or 4.5%, of its outstanding shares of common
stock. As of June 30, 1999 NewMil had repurchased 406,989 shares of its
outstanding common stock, under the July 1996 plan, and 71,811 shares of its
outstanding common stock, under the April 1999 plan. This represents 94.4% of
the total planned repurchases with total consideration of $5,012,000 being paid.
NewMil and the Bank are subject to minimum capital requirements established,
respectively, by the Federal Reserve Board (the "FRB") and the FDIC. At June 30,
1999 NewMil's leverage capital ratio was 9.53% and its tier I and total
risk-based capital ratios were 18.13% and 19.40%, respectively. At June 30, 1999
the Bank's leverage capital ratio was 9.40% and its tier I and total risk-based
capital ratios were 18.46% and 19.73%, 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
Action 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.
Dividend Restrictions
---------------------
NewMil's ability to pay dividends to its shareholders is dependent on the Bank's
ability to pay dividends to NewMil. There are certain restrictions on the
payment of dividends by the Bank to NewMil. Under Connecticut law a bank is
prohibited from declaring a cash dividend on its common stock except from its
net profit 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 at June 30, 1999 is $1,064,000. In some instances, further restrictions
on dividends may be imposed on
37
<PAGE>
NewMil by the FRB.
In October 1994 NewMil resumed dividend payments with the payment of a $0.02
quarterly cash dividend, following a four year lapse. In October 1995, 1996,
1997 and 1998 NewMil increased its quarterly cash dividend to $0.05, $0.06,
$0.08 and $0.09, respectively. In July 1999 NewMil increased its quarterly
dividend to $0.10. For 1999 total dividends of $0.35 per share were paid.
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.
38
<PAGE>
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements which are expected to impact NewMil
at this time.
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 is managed by the Year 2000
Committee, comprised of representatives from each operational area of the Bank.
The Plan has 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. As of June 30, 1999 the
assessment phase was completed for all items.
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 addresses the bringing of systems into compliance, systems
replacements and retirements. As of June 30, 1999 the renovation phase was
completed for all items.
The validation phase addresses 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 has been 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 has been completed as of June 30, 1999.
The implementation phase addresses the roll out of Year 2000 compliant systems
during 1998 and 1999. As of June 30, 1999 the implementation phase was completed
for all items.
In addition, contingency plans have been developed for all systems with high
criticality ratings. Testing of these contingency plans is proceeding according
to plan and is expected to be completed by September 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.
39
<PAGE>
Federal banking agencies are conducting 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 is expected to be 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 specific 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
Due to the 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, NewMil is unable to determine at this time whether the consequences
of Year 2000 failures, 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 is expected to significantly reduce 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.
IMPACT OF INFLATION AND CHANGING PRICES
NewMil's financial statements have been prepared in terms of historical dollars,
without considering changes in the relative purchasing power of money over time
due to inflation. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effect of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services. Notwithstanding this, inflation can directly
affect the value of loan collateral, in particular real estate. Sharp decreases
in real estate prices have, in past years, resulted in significant loan losses
and losses on real estate acquired. Inflation, or disinflation, could
significantly affect NewMil's earnings in future periods.
40
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Shareholders of NewMil Bancorp, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows present fairly, in all material respects, the financial position of NewMil
Bancorp, Inc. and its subsidiary at June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of NewMil's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, NewMil changed
its method of accounting for derivative financial instruments in 1999.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
July 20, 1999
41
<PAGE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,719 $ 5,342
Federal funds sold 3,167 25,134
-------- --------
Total cash and cash equivalents 12,886 30,476
Securities
Available-for-sale at market 74,135 112,091
Held-to-maturity at amortized
cost (fair value: $42,911 and $49,911) 44,067 50,176
Loans (net of allowance for loan losses:
$4,989 and $5,004) 210,036 162,849
Other real estate owned (net of valuation
reserve: $0 and $82) 333 295
Bank premises and equipment, net 6,238 6,124
Accrued interest income 2,190 2,259
Deferred tax asset, net 1,788 2,503
Other assets 444 796
-------- --------
Total Assets $352,117 $367,569
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 18,622 $ 14,520
NOW accounts 34,660 30,202
Money market 71,252 65,257
Savings and other 49,443 45,180
Certificates of deposit 126,146 138,718
-------- --------
Total deposits 300,123 293,877
Federal Home Loan Bank advances 15,000 37,500
Accrued interest and other liabilities 3,859 2,783
-------- --------
Total Liabilities 318,982 334,160
-------- --------
Commitments and contingencies - -
-------- --------
Shareholders' Equity
Common stock - $.50 per share par value
Shares authorized: 20,000,000
Shares issued: 5,990,138 and 5,990,138 2,995 2,995
Paid-in capital 43,773 43,881
Retained earnings 10,637 8,933
Accumulated other comprehensive income, net (1,132) (1,205)
Treasury stock, at cost: 2,325,924 and
2,155,824 shares (23,138) (21,195)
-------- --------
Total Shareholders' Equity 33,135 33,409
-------- --------
Total Liabilities and Shareholders' Equity $352,117 $367,569
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $15,426 $15,005 $14,601
Interest and dividends on securities 8,235 8,886 7,531
Interest on federal funds sold 795 764 719
------- ------- -------
Total interest and dividend income 24,456 24,655 22,851
------- ------- -------
Interest expense
Deposits 10,352 10,903 10,199
Borrowed funds 1,455 1,293 717
------- ------- -------
Total interest expense 11,807 12,196 10,916
------- ------- -------
Net interest and dividend income 12,649 12,459 11,935
Provision for loan losses 100 250 400
------- ------- -------
Net interest and dividend income
after provision for loan losses 12,549 12,209 11,535
------- ------- -------
Non-interest income
Service charges on deposit accounts 1,154 1,122 975
Gain on sale of OREO properties 1,342 359 567
Gain on sale of non-performing loan - 778 -
Gains on sales of mortgage loans, net 547 480 181
Loan servicing fees 81 101 111
Securities losses, net - (271) (9)
Other 310 295 261
------- ------- -------
Total non-interest income 3,434 2,864 2,086
------- ------- -------
Non-interest expense
Salaries 4,766 4,216 3,909
Employee benefits 1,252 1,183 1,076
Occupancy 995 1,018 840
Equipment 779 922 683
Professional, collections
and OREO 284 315 699
Marketing 216 235 209
Insurance 88 92 78
Other 2,058 1,939 1,639
------- ------- -------
Total non-interest expense 10,438 9,920 9,133
------- ------- -------
Income before income taxes, cumulative
effect of accounting change
and extraordinary item 5,545 5,153 4,488
Income tax provision 2,264 2,164 1,886
------- ------- -------
Income before cumulative effect
of accounting change
and extraordinary item 3,281 2,989 2,602
------- ------- -------
Cumulative effect of change in
accounting principle, net of taxes (162) - -
Extraordinary item, net of taxes (87) - -
------- ------- -------
Net income $ 3,032 $ 2,989 $ 2,602
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE>
<TABLE>
<S> <C> <C> <C>
Diluted earnings per share $ 0.76 $ 0.74 $ 0.63
======= ======= =======
Basic earnings per share $ 0.80 $ 0.78 $ 0.65
======= ======= =======
Dividends per share $ 0.35 $ 0.30 $ 0.23
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
income Total
Trea- Unrealized share-
Common Stock Paid-in Retained sury gains holders'
------------
Shares Amount capital earnings stock (losses) equity
------ ------ ------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
June 30, 1996 5,987,388 $2,994 $44,189 $ 5,413 $(18,938) $ (1,766) $31,892
Net income for year - - - 2,602 - - 2,602
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - - - 277 277
-------
Total comprehensive
income 2,879
-------
Cash dividends paid - - - (918) - - (918)
Proceeds from
exercise of
stock options 750 - 3 - - - 3
Acquisition of
treasury stock - - - - (2,137) - (2,137)
--------- ------ ------- -------- -------- ---------- -------
Balances at
June 30, 1997 5,988,138 2,994 44,192 7,097 (21,075) (1,489) 31,719
Net income for year - - - 2,989 - - 2,989
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - - - 284 284
-------
Total comprehensive
income 3,273
-------
Cash dividends paid - - - (1,153) - - (1,153)
Proceeds from
exercise of
stock options:
Issuance of
new shares 2,000 1 12 - - - 13
Issuance of
treasury stock - - (312) - 584 - 272
Proceeds from
issuance of
treasury stock - - (11) - 61 - 50
Acquisition of
treasury stock - - - - (765) - (765)
--------- ------ ------- -------- -------- ---------- -------
Balances at
June 30, 1998 5,990,138 $2,995 $43,881 $ 8,933 $(21,195) $ (1,205) $33,409
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
45
<PAGE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
income Total
Trea- Unrealized share-
Common Stock Paid-in Retained sury gains holders'
------------
Shares Amount capital earnings stock (losses) equity
------ ------ ------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
June 30, 1998 5,990,138 $2,995 $43,881 $ 8,933 $(21,195) $(1,205) $33,409
Net income for year - - - 3,032 - - 3,032
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - - - 73 73
-------
Total comprehensive
income 3,105
-------
Cash dividends paid - - - (1,328) - - (1,328)
Proceeds from
exercise of
stock options:
Issuance of
treasury stock - - (108) - 167 - 59
Acquisition
of treasury stock - - - - (2,110) - (2,110)
--------- ------ ------- -------- -------- ------- -------
Balances at
June 30, 1999 5,990,138 $2,995 $43,773 $10,637 $(23,138) $(1,132) $33,135
========= ====== ======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Years ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income $ 3,032 $ 2,989 $ 2,602
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 100 250 400
Provision for OREO recoveries (82) (55) -
Provision for depreciation and
amortization 695 626 587
Deferred income tax provision 495 763 972
Amortization and accretion of
securities premiums and
discounts, net 763 185 58
Securities losses, net - 271 9
Cumulative effect of
accounting change, net 162 - -
Extraordinary loss on debt
extinguishment, net 87 - -
Loans originated for sale (27,597) (25,331) (9,420)
Proceeds from loans originated
for sale 28,144 25,812 9,601
Realized gains on loan sales, net (547) (1,258) (181)
Realized gains on OREO sales, net (1,342) (359) (567)
Decrease (increase) in accrued
interest income 69 (245) (150)
Increase (decrease) in accrued interest
expense and other liabilities 1,251 (166) (405)
Decrease (increase) in other
assets, net 347 141 (226)
-------- -------- --------
Net cash provided by
operating activities 5,577 3,623 3,280
-------- -------- --------
Investing Activities
Proceeds from sales of securities
available-for-sale 20,933 35,877 22,903
Proceeds from sale of security
held-to-maturity - 7,325 -
Proceeds from maturities and principal
repayments of securities 33,603 44,152 5,721
Purchases of securities:
held-to-maturity (240) - -
available-for-sale (10,565) (50,071) (25,691)
Proceeds from sales of mortgage backed
securities available-for-sale - 1,042 348
Purchases of mortgage backed securities:
held-to-maturity (18,198) - -
available-for-sale (15,598) (93,403) -
Principal collected on mortgage backed
securities 33,497 12,196 3,327
Loan (advances) repayments, net (9,053) 2,427 (15,216)
Purchase of loans (38,556) (644) -
Proceeds from sale of non-performing loan - 1,835 -
Proceeds from sales of OREO 1,815 1,294 2,001
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
47
<PAGE>
<TABLE>
<S> <C> <C> <C>
Payments to improve OREO (107) (498) (450)
Purchases of Bank premises and equipment (979) (709) (410)
-------- -------- --------
Net cash used by
investing activities (3,448) (39,177) (7,467)
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
48
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
(in thousands)
<TABLE>
<CAPTION>
Years ended June 30,
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Financing Activities
Net increase in deposits 6,247 18,485 16,053
Net repayments of
repurchase agreements - - (9,776)
FHLB (repayments) advances, net (22,587) 24,500 8,000
Treasury stock purchased (2,110) (765) (2,137)
Proceeds from Treasury Stock reissued - 50 -
Cash dividends paid (1,328) (1,153) (918)
Proceeds from exercise of stock options 59 285 3
-------- ------- -------
Net cash (used) provided by
financing activities (19,719) 41,402 11,225
-------- ------- -------
(Decrease) increase in cash and
cash equivalents (17,590) 5,848 7,038
Cash and federal funds sold, beginning
of year 30,476 24,628 17,590
-------- ------- -------
Cash and federal funds sold, end of year $ 12,886 $30,476 $24,628
======== ======= =======
Cash paid during year
Interest to depositors $ 10,344 $10,904 $10,271
Interest on borrowings 1,562 1,151 693
Income taxes 2,285 1,115 965
Non-cash transfers
From securities held-to-maturity to
securities available-for-sale 21,509 - -
From loans to OREO 335 202 545
Financed portion of OREO sales - 378 1,311
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
49
<PAGE>
NewMil Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NewMil Bancorp, Inc. ("NewMil") is the bank holding company for New Milford
Savings Bank (the "Bank"), a State chartered savings bank. NewMil's activity is
currently limited to the holding of the Bank's outstanding capital stock and the
Bank is the Company's only subsidiary and its primary investment. The Bank is a
Connecticut chartered and Federal Deposit Insurance Corporation (the "FDIC")
insured savings bank headquartered in New Milford, Connecticut. The Bank's
principal business consists of attracting deposits from the public and using
such deposits, with other funds, to make various types of loans and investments.
The Bank conducts its business through 14 offices located in Litchfield,
Fairfield and New Haven Counties. The accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles. The following is a summary of significant accounting policies:
Principles of Consolidation
The consolidated financial statements include those of NewMil and its subsidiary
after elimination of all intercompany accounts and transactions. Certain
reclassifications have been made to prior years' amounts to conform with the
1999 financial presentation.
Basis of Financial Statement Presentation
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 OREO
in connection with foreclosures or in satisfaction of loans. In connection with
the determination of the allowance for loan losses and valuation of OREO,
management obtains independent appraisals for significant properties.
NewMil's loans are generally collateralized by real estate located principally
in Connecticut. In addition, substantially all OREO is located in Connecticut.
Accordingly, the collectability of a substantial portion of the Company's loan
portfolio and OREO through foreclosure is particularly susceptible to changes in
market conditions.
While management uses available information to recognize losses on loans and
OREO, future additions to the allowance or write-downs of OREO may be necessary
based on changes in economic conditions, particularly in Connecticut. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review NewMil's allowance for loan losses and valuation of
OREO. Such agencies may require NewMil to recognize additions to the allowance
or write-downs based on their judgements of information available to them at the
time of their examination.
Securities
Securities that may be sold as part of NewMil's asset/liability or liquidity
management or in response to or in anticipation of changes in interest rates and
resulting prepayment risk, or for other similar factors, are classified as
available-for-sale and carried at their fair market value. Unrealized holding
gains and losses on such securities are reported net of related taxes, if
applicable, as a separate component of shareholders' equity. Securities that
NewMil has the ability and positive intent to hold to maturity are classified as
held-to-maturity and carried at amortized cost.
50
<PAGE>
Realized gains and losses on the sales of all securities are reported in
earnings and computed using the specific identification cost basis. Securities
that NewMil has transferred from available-for-sale to held-to-maturity are
carried at the fair value at the time of transfer, adjusted for subsequent
amortization or accretion and net of applicable taxes.
Loans
Loans are reported at their principal outstanding balance net of charge-offs,
deferred loan origination fees and costs, and unamortized premiums or discounts
on purchased loans. Loan origination and commitment fees and certain direct
origination costs are deferred and recognized over the life of the related loan
as an adjustment of yield, or taken into income when the related loan is sold.
Mortgage loans held-for-sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements calculated on the aggregate loan basis. Changes in the carrying
value are reported in earnings as gains and losses on mortgage loans. Realized
gains and losses on sales of mortgage loans are reported in earnings when the
proceeds are received from investors.
The accrual of interest on loans is generally discontinued when principal or
interest is past due by 90 days or more, or earlier when, in the opinion of
management, full collection of principal or interest is unlikely unless such
loans are well collateralized and in the process of collection. When a loan is
placed on non-accrual status, interest previously accrued but not collected is
charged against current income. Income on such loans is then recognized only to
the extent that cash is received and future collection of principal is probable.
Loans are restored to accrual status when principal and interest payments are
brought current and future payments are reasonably assured, following a
sustained period of repayment performance by the borrower in accordance with the
loan's contractual terms.
Troubled debt restructurings ("TDR") are renegotiated loans for which
concessions, such as the reduction of interest rates, deferral of interest or
principal payments, or partial forgiveness of principal and interest, have been
granted due to a deterioration in a borrower's financial condition. Interest to
be paid on a deferred or contingent basis is reported in earnings only as
collected.
Allowance for Loan Losses
NewMil periodically reviews the allowance for loan losses in order to maintain
the allowance at a level sufficient to absorb probable credit losses. NewMil's
review is 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. The allowance for loan losses is increased through charges to
earnings in the form of a provision for loan losses. When a loan or portion of
a loan is determined to be uncollectible, the portion deemed uncollectible is
charged against the allowance and subsequent recoveries, if any, are credited to
the allowance. While NewMil uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
regional economic conditions and related factors.
NewMil measures impaired loans based on the present value of the expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral, less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. NewMil recognizes impairment by creating
a valuation allowance. A loan is impaired when, based on current information,
it is probable that NewMil will be unable to collect all amounts due according
to the contractual terms of
51
<PAGE>
the loan.
Smaller-balance homogeneous loans consisting of residential mortgages and
consumer loans are evaluated for collectability by NewMil based on historical
loss experience rather than on an individual loan-by-loan basis. Impaired loans
are primarily commercial mortgages, collateralized by real estate.
Other Real Estate Owned
Real estate acquired through foreclosure, forgiveness of debt and in lieu of
debt, are stated at the lower of cost (principally loan amount) or fair value
minus estimated selling expenses. When a loan is reclassified as real estate
acquired any excess of the loan balance over its fair value less estimated
selling costs is charged against the allowance for loan losses. Costs relating
to the subsequent development or improvement of a property are capitalized, to
the extent realizable. Holding costs and any subsequent provisions to reduce
the carrying value of a property to fair value minus estimated selling expenses
are charged to earnings and classified as real estate acquired expense. Fair
value is determined by current appraisal for collateral dependent loans.
Income Taxes
Deferred income taxes are provided for differences arising in the timing of
income and expenses for financial reporting and for income tax purposes using
the asset/liability method of accounting for income taxes. Deferred income
taxes and tax benefits are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. NewMil provides deferred taxes for the estimated
future tax effects attributable to temporary differences and carryforwards when
realization is assured beyond a reasonable doubt.
Bank Premises and Equipment
Bank premises, furniture and equipment are carried at cost, less accumulated
depreciation and amortization computed on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line basis over the shorter of the estimated useful lives of the
improvements or the term of the related leases.
Statement of Cash Flows
For the purpose of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and due from banks, interest-bearing deposits at other
financial institutions and overnight federal funds sold.
Computation of Earnings per Share
Effective December 31, 1997, NewMil adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS
128 establishes standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
This statement was effective for financial statements issued for periods ending
after December 15, 1997 and has been applied for all periods presented.
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. The shares
used in the computations for the three years ended June 30, were as follows:
52
<PAGE>
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic 3,793 3,845 3,978
Effect of dilutive stock options 192 221 165
----- ----- -----
Diluted 3,985 4,066 4,143
===== ===== =====
</TABLE>
Segments of an Enterprise and Related Information
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 requires public companies to report financial and descriptive
information about operating segments in annual financial statements and requires
selected information about operating segments to be reported in interim
financial reports issued to shareholders. Operating segment financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and allocation of resources. SFAS 131 is
effective for financial statements for periods beginning after December 15, 1997
and requires presentation of comparative information for prior periods
presented. NewMil does not have any operating segments, as defined by SFAS 131,
and therefore, has not disclosed the additional information.
NOTE 2 - SECURITIES
Securities classified as available-for-sale (carried at fair value) were as
follows:
<TABLE>
<CAPTION>
Estimated Gross un- Gross un- Amort-
(dollars in thousands) fair realized realized ized
value gains losses cost
----- ----- ------ ----
<S> <C> <C> <C> <C>
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>
53
<PAGE>
<TABLE>
<CAPTION>
Estimated Gross un- Gross un- Amort-
(dollars in thousands) fair realized realized ized
value gains losses cost
----- ----- ------ ----
<S> <C> <C> <C> <C>
June 30, 1998
U.S. Treasury and Government
Agency obligations:
Within 1 year $ 18,330 $ 98 $ - $ 18,232
After 5 and within 10 years 993 - 7 1,000
Mortgage backed securities 87,796 46 390 88,140
Collateralized mortgage
obligations 2,447 - 163 2,610
-------- ---- ------ --------
Total debt securities 109,566 144 560 109,982
Equity securities 2,525 - - 2,525
-------- ---- ------ --------
Total securities
available-for-sale $112,091 $144 $ 560 $112,507
======== ==== ====== ========
</TABLE>
Securities classified as held-to-maturity (carried at amortized cost) were as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) Gross un- Gross un- Estimated
Amortized realized realized fair
cost(a) gains losses value
------- ----- ------ -----
<S> <C> <C> <C> <C>
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
======== ==== ====== ========
June 30, 1998
Mortgage backed securities $ 6,806 $ 99 $ - $ 6,905
Collateralized mortgage
obligations 43,370 438 802 43,006
-------- ---- ------ --------
Total securities
held-to-maturity $ 50,176 $537 $ 802 $ 49,911
======== ==== ====== ========
</TABLE>
(a) Securities transferred from available-for-sale are carried at estimated
fair value as of the transfer date and adjusted for subsequent
amortization.
Cash proceeds and realized gains and losses from sales of securities were as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) Cash Realized Realized
proceeds gains losses
-------- ----- ------
<S> <C> <C> <C>
Year ended June 30, 1999
Collateralized mortgage obligations $20,933 $ - $274
======= === ====
Year ended June 30, 1998
US Government Agency securities
Available-for-sale $30,009 $10 $ -
Mortgage backed securities
Available-for-sale 1,042 64 -
Collateralized mortgage obligations
Available-for-sale 5,868 - 242
Held-to-maturity 7,325 - 103
------- --- ----
Total $44,244 $74 $345
======= === ====
Year ended June 30, 1997
US Treasury securities
Available-for-sale $10,222 $ 2 $ 1
Mortgage backed securities
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C> <C>
Available-for-sale 348 17 -
Collateralized mortgage obligations
Available-for-sale 12,681 3 30
------- --- ----
Total $23,251 $22 $ 31
======= === ====
</TABLE>
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities".
SFAS 133 was modified by SFAS 137 to make the standard effective for all fiscal
years beginning after June 15, 2000 (July 1, 2000 for NewMil). SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivative instruments are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. NewMil does not presently have
any derivative or hedging instruments. NewMil has not had any derivative or
hedging instruments in the past three years.
In 1999 NewMil adopted the provisions of SFAS 133 and under this provision
reclassified securities totaling $21 million from held-to-maturity to available-
for-sale, and then sold those securities. NewMil realized a loss, net of taxes,
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.
In past years these securities had experienced significant market price
volatility. NewMil sold these securities to reduce it's exposure to market
risk.
At September 30, 1998 these securities were carried in the held-to-maturity
category at $1,091,000 below cost, with a related unrealized loss, net of taxes,
in shareholders equity. The unrealized loss was generated as a result of having
transferred them from available-for-sale to held-to-maturity at which time they
were transferred at their then current market value, which was significantly
below their amortized cost. The unrealized loss, at the date of transfer, was
frozen and amortized as the related investments paid down.
During 1998 NewMil sold a collateralized mortgage obligation ("CMO") with an
amortized cost of $7,428,000 which was classified as held-to-maturity and
realized a loss of $103,000. NewMil had engaged a financial securities
consultant to analyze this CMO. Based on this review NewMil determined that it
was highly probable that NewMil would likely receive substantially less than the
contractual interest on this CMO and that the CMO could experience a significant
decline in market value. NewMil 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.
At June 30, 1999 securities with a carrying value and market value aggregating
approximately $786,000 and $746,000, respectively, were pledged as collateral
against public funds.
55
<PAGE>
NOTE 3 - LOANS
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1999 1998
---- ----
<S> <C> <C>
Real estate mortgages
One-four family residential $128,371 $ 85,274
Five or more family residential 6,152 5,500
Commercial 37,456 34,878
Land loans 2,410 3,571
Commercial and industrial 18,211 14,357
Home equity lines of credit 19,429 21,208
Installment and other 2,850 3,118
-------- --------
Total loans, gross 214,879 167,906
Deferred loan origination fees and
purchase premium, net 146 (53)
Allowance for loan losses (4,989) (5,004)
-------- --------
Total loans, net $210,036 $162,849
======== ========
Impaired loans at June 30 (in thousands)
With no valuation allowance $ 453 $ 464
With valuation allowance 300 -
-------- --------
Total impaired loans 753 464
-------- --------
Valuation allowance 173 -
Commitments to lend additional
amounts to impaired borrowers - -
Average impaired loans 627 1,034
Amount of impaired loans based on:
Discounted cash flows - -
Collateral values 753 464
</TABLE>
NewMil's loans consist primarily of residential and commercial real estate loans
located principally in western Connecticut, NewMil's service area. NewMil
offers a broad range of loan and credit facilities to borrowers in its service
area, including residential mortgage loans, commercial real estate loans,
construction loans, working capital loans, and a variety of consumer loans,
including home equity lines of credit, and installment and collateral loans.
All residential and commercial mortgage loans are collateralized by first or
second mortgages on real estate. The ability and willingness of borrowers to
satisfy their loan obligations is dependent in large part upon the status of the
regional economy and regional real estate market. Accordingly, the ultimate
collectability of a substantial portion of the NewMil's loan portfolio and the
recovery of a substantial portion of OREO is susceptible to changes in market
conditions.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 5,004 $5,452 $4,866
Provision for losses 100 250 400
Charge-offs (176) (706) (124)
Recoveries 61 8 310
------- ------ ------
Balance at end of year $ 4,989 $5,004 $5,452
======= ====== ======
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
56
<PAGE>
<TABLE>
<CAPTION>
June 30, (in thousands) 1999 1998
---- ----
<S> <C> <C>
Non-accrual loans $1,051 $ 761
Accruing loans past due
90 days or more 185 628
Accruing troubled debt
restructured loans - -
------ ------
Total non-performing loans 1,236 1,389
------ ------
Real estate acquired in
settlement of loans 333 377
Valuation reserve - (82)
------ ------
Total other real estate owned, net 333 295
------ ------
Total non-performing assets $1,569 $1,684
====== ======
</TABLE>
The reductions in interest income associated with non-accrual loans were as
follows:
<TABLE>
<CAPTION>
Year ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income in accordance with
original terms $ 98 $ 77 $228
Income recognized 59 58 44
---- ---- ----
Reduction in interest income $ 39 $ 19 $184
==== ==== ====
</TABLE>
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of NewMil's premises and equipment were as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1999 1998
---- ----
<S> <C> <C>
Land $ 1,140 $ 1,140
Buildings and improvements 6,156 6,155
Equipment 3,112 2,216
Leasehold improvements 459 674
------- -------
Total cost 10,867 10,185
Accumulated depreciation
and amortization (4,629) (4,061)
------- -------
Bank premises and equipment, net $ 6,238 $ 6,124
======= =======
</TABLE>
57
<PAGE>
NOTE 6 - BORROWINGS
NewMil's borrowings consist of advances from the Federal Home Loan Bank of
Boston and repurchase agreements with major brokerage firms that are primary
dealers in government securities. Advances from the Federal Home Loan Bank of
Boston at June 30, were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
5.58% due July 2, 1997 $ - $ - $ 2,000
5.57% due July 9, 1997 - - 2,000
5.57% due July 18, 1997 - - 2,000
5.57% due July 23, 1997 - - 2,000
5.68% due March 3, 1999 - 12,500 -
5.80% due March 3, 2000 - 10,000 -
5.91% due March 5, 2001 7,500 7,500 -
6.02% due March 4, 2002 5,000 5,000 -
6.00% due March 3, 2003 2,500 2,500 -
------- ------- -------
Total $15,000 $37,500 $ 8,000
======= ======= =======
</TABLE>
The following is an analysis of repurchase agreements:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Repurchase agreements
Borrowings at June 30
maturing 30 days or less $ - $ - $ 5,000
Average borrowings during year - 493 6,713
Maximum month-end borrowings - 5,000 14,776
Accrued interest expense at June 30 - - 21
Weighted average rate at June 30 -% -% 5.64%
Weighted average rate during year - 5.71 5.47
Amount at risk by broker:
Salomon Brothers $ - $ - $ 2,629
Collateral at June 30
Carrying amount - - 7,606
Market value - - 7,585
Accrued interest income - - 44
</TABLE>
NewMil has a pre-approved line of credit of up to 2% of total assets with the
Federal Home Loan Bank of Boston ("FHLBB") under the FHLBB's IDEAL Way Line of
Credit Program. These advances are one-day variable rate loans with automatic
rollover. Under an agreement with the FHLBB NewMil is required to maintain
qualified collateral, as defined in the FHLBB's Statement of Credit Policy, free
and clear of liens, pledges and encumbrances, as collateral for the advances and
the pre-approved line of credit. NewMil maintains qualified collateral in excess
of the amount required to support the outstanding advances and the pre-approved
line of credit at June 30, 1999.
During 1999 NewMil used the proceeds from the sale of securities to prepay $22.5
million of Federal Home Loan Bank fixed rate advances. NewMil incurred a gross
prepayment fee of $147,000. The effect on the net income of this prepayment fee
was $87,000, net of taxes, and has been reported in net income as an
extraordinary item for this early extinguishment of debt.
NOTE 7 - INCOME TAXES
NewMil provides deferred taxes for the estimated future tax effects attributable
to temporary differences and carryforwards when realization is more likely than
not. The components of the income tax provision were as follows:
58
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
Year ended June 30, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current provision (benefit)
Federal $1,498 $ 888 $ 896
State 270 513 (26)
------ ------ ------
Total 1,768 1,401 870
------ ------ ------
Deferred provision
Federal 93 690 641
State 403 73 375
------ ------ ------
Total 496 763 1,016
------ ------ ------
Income tax provision $2,264 $2,164 $1,886
====== ====== ======
</TABLE>
The following is a reconciliation of the expected federal statutory tax to the
income tax provision:
<TABLE>
<CAPTION>
Year ended June 30, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory
federal tax rate 34.0% 34.0% 34.0%
Connecticut Corporation tax,
net of federal tax benefit 8.4 7.5 5.1
Other (1.6) 0.5 2.9
----- ----- -----
Effective income tax rates 40.8 42.0 42.0
===== ===== =====
</TABLE>
The components of NewMil's net deferred tax asset were as follows:
<TABLE>
<CAPTION>
(in thousands)
June 30, 1999 Federal State
------- -----
<S> <C> <C>
Deferred tax assets
Unrealized losses on securities
available-for-sale and transferred
to held-to-maturity $ 584 $ 146
Capital loss carryforwards 143 35
Bad debt expense, book 1,552 424
Accrued pension expense 22 6
Deferred income 66 18
Other 261 44
------ ------
Total deferred tax assets 2,628 673
------ ------
Deferred tax liabilities
Bad debt expense, tax 564 154
Deferred income 133 34
------ ------
Total deferred tax liabilities 697 188
------ ------
Net deferred tax asset 1,931 485
Valuation reserve (143) (485)
------ ------
Net deferred tax asset $1,788 $ -
====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998 Federal State
------- -----
<S> <C> <C>
Deferred tax assets
Unrealized losses on securities
available-for-sale and transferred
to held-to-maturity $ 612 $ 191
Capital loss carryforwards 143 35
Bad debt expense, book 1,540 475
Losses on real estate acquired 45 14
Accrued pension expense 151 47
Deferred income 50 15
Other 162 50
------ ------
Total deferred tax assets 2,703 827
------ ------
Deferred tax liabilities
Bad debt expense, tax 638 197
Deferred income 13 1
------ ------
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C>
Total deferred tax liabilities 651 198
------ -----
Net deferred tax asset 2,052 629
Valuation reserve (143) (35)
------ -----
Net deferred tax asset $1,909 $ 594
====== =====
</TABLE>
The allocation of deferred tax expense involving items charged to current year
income and items charged directly to shareholders' equity for the years ended
June 30, are as follows:
<TABLE>
<CAPTION>
(in thousands) Federal State
------- -----
<S> <C> <C>
June 30, 1999
Deferred tax expense allocated to:
Shareholders' equity $ 28 $191
Income 93 403
----- -----
Total deferred tax expense $ 121 $ 594
===== =====
June 30, 1998
Deferred tax expense allocated to:
Shareholders' equity $ 122 $ 68
Income 690 73
----- ----
Total deferred tax expense $ 812 $ 141
===== =====
</TABLE>
NewMil will only recognize a deferred tax asset when, based upon available
evidence, realization is more likely than not. At June 30, 1999, NewMil
recorded a valuation reserve of $143,000 and $485,000 against federal and state
deferred tax assets, respectively, representing capital loss carryforwards which
NewMil does not expect to utilize.
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 fiscal year, of 40.27% (prior to the deferred tax asset
write-off, discussed below). The formation of the PIC 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 year ended June 30, 1999 includes a charge
of $266,000.
NOTE 8 - RETIREMENT PLANS
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 standardizes the disclosure requirements for
pension and other postretirement benefits by requiring additional information to
facilitate financial analysis and eliminate certain disclosures that are
considered no longer useful. SFAS 132 supersedes the disclosure requirements of
SFAS Nos. 87, 88 and 106. This Statement is effective for fiscal years
beginning after December 15, 1997. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available. NewMil adopted SFAS 132 as of July 1, 1998.
60
<PAGE>
NewMil has a non-contributory defined benefit pension plan (the "Pension Plan")
covering all eligible employees. Since September 1, 1993 benefit accruals have
been suspended under the Pension Plan for all employees. The accrued benefits
are primarily based on compensation and length of service. Pension Plan assets
consist principally of cash, money market funds, bonds and equity securities.
The funded status of the Pension Plan at March 31 was as follows:
<TABLE>
<CAPTION>
March 31, (in thousands) 1999 1998
---- ----
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at
beginning of year $ 5,875 $ 5,337
Service cost - -
Interest cost 359 314
Plan participants' contributions - -
Actuarial gain 221 430
Benefits paid (215) (206)
------- -------
Benefit obligation at
end of year 6,240 5,875
------- -------
Change in plan assets:
Fair value of plan assets at
beginning of year 7,821 6,145
Actual return on plan assets 1,017 1,882
Employer contribution - -
Plan participant's contribution - -
Benefits paid (215) (206)
------- -------
Fair value of plan assets at
end of year 8,623 7,821
------- -------
Funded status 2,383 1,946
Unrecognized prior service cost - -
Unrecognized net actuarial (gain) loss (2,405) (2,147)
Unrecognized transition (asset)
obligation - -
------- -------
Accrued benefit cost $ (22) $ (201)
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average assumptions:
Discount rate 6.0% 6.0% 6.0%
Expected return on plan assets 6.0% 6.0% 6.0%
Components of net periodic cost:
Interest cost $ 359 $ 314 $ 295
Expected return on plan assets (462) (362) (332)
Recognized net (gain) loss (75) (32) (27)
Net amortization and deferral - - -
------- ------- ------
Net pension income $ (178) $ (80) $ (64)
======= ======= ======
</TABLE>
No contributions were made to the Pension Plan in 1999, 1998 or 1997. NewMil
has a supplemental pension plan which provides retirement benefits to a key
employee who is not included in the Pension Plan.
NewMil has a 401(k) Savings Retirement Plan covering all eligible employees.
Participants may contribute up to 15% of their compensation, subject to a
maximum of $10,000 per year in 1999. NewMil contributes amounts equal to 50% of
annual employee contributions up to 6% of participants' compensation. Employees
are fully vested in
61
<PAGE>
NewMil's contributions after five years of service. NewMil contributed $79,196,
$74,875 and $61,972 to the Plan in 1999, 1998 and 1997, respectively. This plan
allows for NewMil to make non-contributory profit sharing contributions. No
profit sharing contributions were made in 1999, 1998 or 1997.
NewMil provides post-retirement health benefits for current retirees and
eligible employees. Post-retirement life insurance benefits are provided for
employees that were eligible for retirement as of October 1, 1993 and current
retirees. The cost of post-retirement health care benefits is shared by NewMil
and the retiree, and benefits are based on deductible and coinsurance
provisions. The post-retirement life insurance benefits are non-contributory,
and benefits are based on a percentage of the base pay at retirement. Effective
October 1, 1993 NewMil suspended certain post-retirement benefits and introduced
a co-pay provision for new employees hired on or after October 1, 1993. NewMil
does not advance-fund its post-retirement health care and life insurance benefit
plan. Post-retirement expense for 1999, 1998 and 1997 was $60,000, $50,000 and
$60,000, respectively.
NOTE 9 - SHAREHOLDERS' EQUITY
Capital Requirements
--------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional and discretionary actions by
the regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital (as defined) to average assets (as defined) and total
and Tier 1 capital (as defined) to risk-weighted assets (as defined).
Management believes, as of June 30, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
The Bank was classified, as of its most recent notification, as "well
capitalized". At June 30, 1999, the Bank's actual regulatory capital position as
compared to both the capital position as defined "For Capital Adequacy Purposes"
and "To Be Well Capitalized Under Prompt Corrective Action Provisions" is as
follows:
62
<PAGE>
<TABLE>
<CAPTION>
For Capital
(dollars in thousands) Actual Adequacy Purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
As of June 30, 1999
Tier one leverage $34,268 9.53% * $14,381 * 4.00%
Tier one risk-based 34,268 18.13 * 7,319 * 4.00
Total risk-based 36,662 19.40 * 14,639 * 8.00
As of June 30, 1998
Tier one leverage 34,463 9.24 * 14,917 * 4.00
Tier one risk-based 34,463 20.48 * 6,731 * 4.00
Total risk-based 36,602 21.75 * 13,463 * 8.00
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
------ -----
<S> <C> <C> <C>
As of June 30, 1999
Tier one leverage * $17,977 * 5.00%
Tier one risk-based * 10,979 * 6.00
Total risk-based * 18,298 * 10.00
As of June 30, 1998
Tier one leverage * 18,648 * 5.00
Tier one risk-based * 10,097 * 6.00
Total risk-based * 16,829 * 10.00
</TABLE>
* more than and equal to
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 profit 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 at June 30, 1999 is $1,064,000. In some instances, further restrictions
on dividends may be imposed on NewMil by the FRB.
In July 1996 NewMil announced its intention to repurchase up to 10% of its
outstanding common stock in the open market and unsolicited negotiated
transactions, including block purchases. In April and July 1999 NewMil
announced its intention to buy additional shares of 100,000 and 50,000,
respectively, under the same conditions. The purpose of the repurchase plan is
to offset the future dilution from shares issued upon the exercise of stock
options under NewMil's stock option plans, and for general corporate purposes.
During 1999 NewMil repurchased 184,500 shares, or 4.5%, of its outstanding
shares of common stock. As of June 30, 1999 NewMil had repurchased 406,989
shares of its outstanding common stock, under the July 1996 plan, and 71,811
shares of its outstanding common stock, under the April 1999 plan. This
represents 94.4% of the total planned repurchases with total consideration of
$5,012,000 being paid.
NOTE 10 - COMPREHENSIVE INCOME
Effective July 1, 1998, NewMil adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes standards for reporting and display of comprehensive income and
its components. Comprehensive income includes net income and any changes in
equity from non-owner sources that are not recorded in the income statement
(such as changes in net unrealized gains (losses) on securities). The purpose
of reporting comprehensive income is to report a measure of all changes in
equity of an enterprise that result from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. NewMil's one source of other
63
<PAGE>
comprehensive income is the net unrealized gain (loss) on securities.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Years ended
June 30,
(in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Comprehensive income
Net income $ 3,032 $2,989 $2,602
Net unrealized gains on securities
during period 73 284 277
------- ------ ------
Comprehensive income $ 3,105 $3,273 $2,879
======= ====== ======
</TABLE>
The components of other comprehensive income, and related tax effects are as
follows:
<TABLE>
<CAPTION>
(in thousands) Before Tax Net of
tax (expense) tax
amount benefit amount
------ ------- ------
<S> <C> <C> <C>
Year ended June 30, 1999
Net unrealized losses on securities
available-for-sale arising
during the period $(1,417) $ 524 $ (893)
Reclassification adjustment for
realized loss included in net income 274 (112) 162
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity
and subsequently sold (Note 2) 1,030 (412) 618
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 405 (150) 255
Impact of change in effective
tax rate - (69) (69)
------- ------ ------
Net unrealized gains on
securities during period $ 292 $ (219) $ 73
======= ====== ======
Year ended June 30, 1998
Net unrealized gains on securities
available-for-sale arising
during the period $ 386 $ (154) $ 232
Reclassification adjustment for
realized loss included in net income (271) 108 (163)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 358 (143) 215
------- ------ ------
Net unrealized gains on
securities during period $ 473 $ (189) $ 284
======= ====== ======
Year ended June 30, 1997
Net unrealized gains on securities
available-for-sale arising
during the period $ 329 $ (131) $ 198
Reclassification adjustment for
realized loss included in net income (9) 3 (6)A
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 142 (57) 85
------- ------ ------
Net unrealized gains on
securities during period $ 462 $ (185) $ 277
======= ====== ======
</TABLE>
64
<PAGE>
NOTE 11 - RELATED PARTY TRANSACTIONS
In the normal course of business the Bank has granted loans to executive
officers, directors, principal shareholders and associates of the foregoing
persons considered to be related parties. Changes in loans to executive
officers, directors and their related associates are as follows (there are no
loans to principal shareholders):
<TABLE>
<CAPTION>
Year ended June 30, (in thousands) 1999 1998
---- ----
<S> <C> <C>
Balance, beginning of year $ 615 $ 583
Advances 160 70
Repayments (219) (76)
Change in related party status (Note 1) - 38
----- -----
Balance, end of year $ 556 $ 615
===== =====
</TABLE>
Note 1. Adjustment to exclude loans outstanding to persons who are no longer
considered related parties, as well as to add loans previously outstanding to
persons who became related parties during the year.
NOTE 12 - STOCK OPTIONS
NewMil's 1986 Stock Option and Incentive Plan ("1986 Plan") authorizes the
granting of both incentive and non-incentive options and stock appreciation
rights (SARs) to officers and other key employees by the Salary and Benefits
Committee of the Board. The 1986 Plan provides for the granting of options to
purchase shares of Common Stock for terms of up to 10 years at an exercise price
not less than 85% of the fair market value of NewMil's stock on the date of the
grant. The options are fully vested at the time of the grant. Changes in
outstanding stock option and SARS were as follows:
<TABLE>
<CAPTION>
Number of Weighted average
options exercise price
------- --------------
<S> <C> <C>
June 30, 1996 (Note 1) 378,620 4.968
Granted -
Exercised (750) 3.833
Lapsed (Note 1) (8,334) 10.945
-------
June 30, 1997 369,536 4.835
Granted -
Exercised (52,701) 5.362
Lapsed (1,084) 6.726
-------
June 30, 1998 315,751 4.953
Granted 25,000 12.438
Exercised (14,400) 5.362
Lapsed -
-------
June 30, 1999 326,351 5.562
=======
</TABLE>
Note 1. Includes 8,000 options with SARs.
All stock options outstanding as of June 30, 1999 were exercisable. As of June
30, 1999 options to purchase 76,548 shares of Common Stock were available to be
granted under the 1986 Stock Option and Incentive Plan.
NewMil's 1992 Stock Option Plan for Outside Directors ("1992 Plan") provides for
automatic grants of options to non-employee directors who were participants on
the effective date of the plan and were reelected as non-employee directors. At
the annual meeting in 1995 the plan was amended so that all non-employee
directors would be granted 2,000 options at June 30th of each subsequent year.
The 1992 Plan provides for the granting of options to purchase shares of Common
Stock for terms of up to 10 years at an exercise price of not less than the fair
market value (average of the bid and ask price) of NewMil's stock on the date of
the grant. The options are fully vested at the
65
<PAGE>
time of the grant. Changes in outstanding stock options were as follows:
<TABLE>
<CAPTION>
Number of Weighted average
Options exercise price
------- --------------
<S> <C> <C>
June 30, 1996 84,000 4.000
Granted 12,000 11.188
Lapsed - -
-------
June 30, 1997 96,000 4.898
Granted 17,000 12.783
Lapsed - -
-------
June 30, 1998 113,000 6.085
Granted 14,000 11.031
Lapsed - -
-------
June 30, 1999 127,000 5.414
=======
</TABLE>
All stock options outstanding as of June 30, 1999 were exercisable. As of June
30, 1999 options to purchase 3,000 shares of Common Stock were available to be
granted under the 1992 Stock Option Plan for Outside Directors.
The following table summarizes information about NewMil's Employee and Director
Stock Option Plans, as of June 30, 1999:
<TABLE>
<CAPTION>
Number of Weighted
options average Weighted
Range of outstanding remaining average
exercise and contractual exercise
price exercisable life price
----- ----------- ---- -----
<S> <C> <C> <C>
$ 3.00 - $ 5.99 244,550 4.0 $ 3.74
6.00 - 8.99 140,801 6.1 6.57
9.00 - 11.99 26,000 9.1 11.10
12.00 - 12.84 42,000 9.0 12.58
------- ---- ------
453,351 5.42 $ 5.86
======= ==== ======
</TABLE>
Effective July 1, 1996 NewMil adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). As
permitted by SFAS 123 NewMil has chosen to apply APB Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its Plans. Accordingly, no compensation expense has been
recognized for options granted under its Plans. Had compensation cost for the
NewMil's Plans been determined based on the fair value at the grant dates for
awards under the Plans consistent with the method of SFAS 123, NewMil's net
income and diluted earnings per share would have been reduced to the proforma
amounts indicated below.
<TABLE>
<CAPTION>
Net income Earnings per
Year ended June 30, (in thousands) share, diluted
-------------- --------------
<S> <C> <C>
1999
As reported $3,032 $0.76
Pro forma 2,918 0.73
1998
As reported $2,989 $0.74
Pro forma 2,938 0.72
1997
As reported $2,602 $0.63
Pro forma 2,567 0.62
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Roll-Geske Model for pricing American call options with dividends, with the
following weighted average assumptions used for grants:
66
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield 2.35% 1.54% 1.61%
Expected volatility 28.59 30.00 30.00
Risk-free interest rate 5.89 5.37 6.49
Expected lives, years 10 10 10
Fair value of options
granted during year $ 4.43 $ 5.06 $ 4.90
</TABLE>
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are various commitments and contingent
liabilities outstanding pertaining to the purchase and sale of securities and
the granting of loans and lines of credit which are not reflected in the
accompanying financial statements. At June 30, 1999 NewMil had commitments
under outstanding construction mortgages of $2,697,000, unused lines of credit
of $23,879,000 and outstanding commitments to fund loans of $6,104,000. At June
30, 1998 NewMil had commitments under outstanding construction mortgages of
$1,501,000, unused lines of credit of $19,268,000 and outstanding commitments to
fund loans of $7,254,000. NewMil does not anticipate any material losses as a
result of these transactions. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. NewMil's exposure to credit loss in the
event of non-performance by the other party to the commitment is represented by
the contractual amount of the instrument. The exposure to credit loss is
limited by evaluating the customer's credit worthiness on a case-by-case basis
and by obtaining collateral if deemed necessary. Collateral held generally
includes residential and commercial properties. NewMil generally requires an
initial loan to value ratio of no greater than 80% when real estate
collateralizes a loan commitment.
NewMil and its subsidiaries are defendants in proceedings arising out of, and
incidental to, activities conducted in the normal course of business. In the
opinion of management, resolutions of these matters will not have a material
effect on NewMil's financial condition, results of operations or cash flows.
NewMil leases facilities under operating leases which expire at various dates
through 2004. The leases have varying renewal options, generally require a
fixed annual rent, and provide that real estate taxes, insurance, and
maintenance are to be paid by NewMil. Rent expense totaled $253,234, $232,240
and $167,041 for 1999, 1998 and 1997, respectively. Future minimum lease
payments at June 30, 1999 are as follows:
2000 $ 250,425
2001 224,386
2002 211,953
2003 153,609
2004 150,276
After 2004 96,238
----------
$1,086,887
==========
NOTE 14 - ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments" (SFAS 107), requires NewMil to disclose fair
value information for certain of its financial instruments, including loans,
securities, deposits, borrowings and other such instruments. Quoted market
prices are not available for a significant portion of NewMil's financial
instruments and, as a result, the fair values presented may not be indicative of
net realizable or liquidation values. Fair values are estimates derived using
present value or other valuation techniques and are based on judgements
regarding future expected loss experience, current economic conditions, risk
characteristics, and other factors. In addition, fair value estimates are based
on market conditions and information about the financial instrument at a
specific point
67
<PAGE>
in time. Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Such items include mortgage servicing, core deposit
intangibles and other customer relationships, premises and equipment, foreclosed
real estate and income taxes. In addition, the tax ramifications relating to the
realization of the unrealized gains and losses may have a significant effect on
fair value estimates and have not been considered in the estimates.
The following is a summary of the methodologies and assumptions used to estimate
the fair value of NewMil's financial instruments pursuant to SFAS 107.
Cash, cash equivalents and other: The fair value of cash and due from banks,
---------------------------------
deposits with banks, federal funds sold, accrued interest receivable, securities
sold under repurchase agreements and accrued interest payable, is considered to
approximate the book value due to their short-term nature and negligible credit
losses.
Securities: Fair value of securities available-for-sale and held-for-sale were
-----------
determined by secondary market and independent broker quotations.
Loans: Fair values for residential mortgage and consumer installment loans were
------
estimated by discounting cash flows, adjusted for prepayments. The discount
rates used for residential mortgages were secondary market yields for
residential mortgage loans, net of servicing and adjusted for risk. The
discount rates used for consumer installment loans were current rates offered by
NewMil. Fair values for commercial loans were estimated by assessing credit
risk and interest rate risk. Such loans were valued by discounting estimated
future cash flows at a rate that incorporates both interest and credit risk.
Deposit liabilities: The fair value for demand, savings and certain money
--------------------
market deposits is equal to the amount payable on demand at the balance sheet
date which is equal to the carrying value. The fair value of certificates of
deposit was estimated by discounting cash flows using rates currently offered by
NewMil for deposits of similar remaining maturities.
Borrowings: The fair value for borrowings was estimated by discounting cash
-----------
flows using rates currently offered by lenders for borrowings of similar
remaining maturities.
68
<PAGE>
The carrying values and estimated fair values of NewMil's financial instruments
are as follows:
<TABLE>
<CAPTION>
June 30, 1999 1998
-------------------- --------------------
(dollars in thousands) Estimated Estimated
Carrying fair Carrying fair
value value value value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 9,719 $ 9,719 $ 5,342 $ 5,342
Federal funds sold 3,167 3,167 25,134 25,134
Securities available for sale 74,135 74,135 112,091 112,091
Securities held to maturity 44,067 42,911 50,176 49,911
Loans 214,879 212,488 167,906 169,692
Allowance for loan losses (4,989) - (5,004) -
Deferred loan origination
fees and purchase premium, net 146 - (53) -
-------- -------- -------- --------
Loans, net 210,036 212,488 162,849 169,692
Accrued interest receivable 2,190 2,190 2,259 2,259
Financial Liabilities
Deposits
Demand (non-interest bearing) $ 18,622 $ 18,622 $ 14,520 $ 14,520
NOW accounts 34,660 34,660 30,202 30,202
Money market 71,252 71,252 65,257 65,257
Savings and other 49,443 49,443 45,180 45,180
Certificates of deposit 126,146 126,971 138,718 139,385
-------- -------- -------- --------
Total deposits 300,123 300,948 293,877 294,544
FHLB advances 15,000 14,855 37,500 37,988
Accrued interest payable 133 133 233 233
</TABLE>
69
<PAGE>
NOTE 15 - NEWMIL BANCORP, INC. (parent company only) FINANCIAL INFORMATION
The unconsolidated balance sheets of NewMil Bancorp, Inc. at June 30, and its
statements of income and cash flows for each of the years ended June 30, are
presented as follows:
<TABLE>
<CAPTION>
Balance Sheets
June 30, (in thousands) 1999 1998
---- ----
<S> <C> <C> <C>
Assets
Due from bank $ 329 $ 75
Investment in New Milford
Savings Bank 32,171 32,454
Other assets 673 891
------- -------
Total Assets $33,173 $33,420
======= =======
Liabilities and Shareholders'
Equity
Liabilities $ 38 $ 11
Shareholders' equity 33,135 33,409
------- -------
Total Liabilities and
Shareholders' Equity $33,173 $33,420
======= =======
Statements of Income
Years ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
Fee income $ 100 $ - $ -
Dividends from subsidiary 3,682 1,155 2,919
Expenses 175 163 166
------- ------- -------
Income before taxes and
undistributed net income of subsidiary 3,607 992 2,753
Income tax benefit - - -
------- ------- -------
Income before equity in
undistributed net income of subsidiary 3,607 992 2,753
Equity in undistributed (equity distributed
in excess of) net income of subsidiary (575) 1,997 (151)
------- ------- -------
Net income $ 3,032 $ 2,989 $ 2,602
======= ======= =======
Statements of Cash Flows
Years ended June 30, (in thousands) 1999 1998 1997
------- ------- -------
Net income $ 3,032 $ 2,989 $ 2,602
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
(equity distributed in
excess of) net income
of subsidiary 575 (1,997) 151
Other 26 (26) 34
------- ------- -------
Net cash provided by
operating activities 3,633 966 2,787
------- ------- -------
Financing Activities:
Cash dividends paid (1,328) (1,153) (918)
Proceeds from Treasury Stock issued - 50 -
Treasury stock purchased (2,110) (765) (2,137)
Proceeds from exercise of
stock options 59 285 3
------- ------- -------
Net cash used by
</TABLE>
70
<PAGE>
<TABLE>
<S> <C> <C> <C>
financing activities (3,379) (1,583) (3,052)
------- ------- -------
(Decrease) increase in cash
and cash equivalents 254 (617) (265)
Cash and cash equivalents,
beginning of year 75 692 957
------- ------- -------
Cash and cash equivalents,
end of year $ 329 $ 75 $ 692
======= ======= =======
</TABLE>
71
<PAGE>
NOTE 16 - QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for 1999 and 1998 is as follows (in thousands except
ratios and per share amounts):
<TABLE>
<CAPTION>
Year ended June 30, 1999
June 30, Mar 31, Dec 31, Sept 30,
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statement of Income
Interest and dividend income $ 5,867 $ 5,944 $ 6,148 $ 6,497
Interest expense 2,664 2,716 3,112 3,315
Net interest income 3,203 3,228 3,036 3,182
Provision for loan losses 25 25 25 25
Non-interest income:
Securities gains (losses), net - - - -
Gains on sales of loans, net 96 161 152 138
Service fees and other 382 360 394 409
Gain on sale of OREO - 478 754 110
Gain on sale of non-performing loan - - - -
Non-interest expense 2,241 2,856 2,869 2,472
Income before income taxes 1,415 1,346 1,442 1,342
Income tax provision 388 466 870 540
Income before effect of accounting change and extraordinary item 1,027 880 572 802
Effect of change in accounting principal, net of taxes - - (162) -
Extraordinary item, net of taxes - - (87) -
Net income 1,027 880 323 802
Financial Condition
Total assets $352,117 $358,279 $357,764 $369,777
Loans, net 210,036 206,165 189,862 169,668
Allowance for loan losses 4,989 5,100 5,068 5,005
Securities 118,202 116,484 135,923 167,005
Deposits 300,123 305,188 305,381 295,323
Borrowings 15,000 15,000 15,000 37,500
Shareholders' equity 33,135 34,542 34,856 34,574
Non-performing assets 1,569 1,792 1,672 2,781
Per Share Data
Earnings, diluted $ 0.27 $ 0.22 $ 0.21 $ 0.20
Cash dividends 0.09 0.09 0.08 0.08
Book value 9.04 9.15 9.09 9.04
Market price: (a)
High 11.750 13.000 14.000 13.500
Low 9.500 11.000 11.000 10.000
Statistical Data
Net interest margin 3.77% 3.80% 3.45% 3.54%
Efficiency ratio 60.88 67.57 66.17 63.34
Return on average assets 1.16 0.99 0.35 0.87
Return on average shareholders' equity 12.16 10.15 3.72 9.43
Weighted average equivalent shares outstanding, diluted 3,874 3,998 4,030 4,031
</TABLE>
72
<PAGE>
Quarterly Financial Data (unaudited) continued:
<TABLE>
<CAPTION>
Year ended June 30, 1998
June 30, Mar 31, Dec 31, Sept 30,
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statement of Income
Interest and dividend income $ 6,442 $ 6,352 $ 5,969 $ 5,892
Interest expense 3,311 3,194 2,865 2,826
Net interest income 3,131 3,158 3,104 3,066
Provision for loan losses 50 50 50 100
Non-interest income:
Securities gains (losses), net - 10 (258) (23)
Gains on sales of loans, net 244 89 82 65
Service fees and other 406 361 380 371
Gain on sale of non-performing loan 778 - - -
Non-interest expense 3,072 2,275 2,042 2,172
Income before income taxes 1,437 1,293 1,216 1,207
Income tax provision 604 543 511 506
Net income 833 750 705 701
Financial Condition
Total assets $367,569 $370,276 $355,526 $317,407
Loans, net 162,849 169,206 165,684 164,561
Allowance for loan losses 5,004 4,998 5,546 5,544
Securities 162,267 181,527 166,343 121,888
Deposits 293,877 289,335 285,516 278,328
Borrowings 37,500 44,500 34,000 4,000
Shareholders' equity 33,409 32,989 33,143 32,295
Non-performing assets 1,684 2,321 3,212 4,325
Per Share Data
Earnings, diluted $ 0.21 $ 0.18 $ 0.17 $ 0.17
Cash dividends 0.08 0.08 0.08 0.06
Book value 8.71 8.59 8.54 8.42
Market price: (a)
High 14.625 14.000 14.500 14.250
Low 12.750 12.500 12.188 10.875
Statistical Data
Net interest margin 3.52% 3.67% 3.95% 3.97%
Efficiency ratio 67.38 62.88 61.73 62.43
Return on average assets 0.91 0.85 0.87 0.88
Return on average shareholders' equity 9.94 8.98 8.56 8.67
Weighted average equivalent shares outstanding, diluted 4,053 4,065 4,061 4,067
</TABLE>
73
<PAGE>
NewMil Bancorp, Inc.'s Common Stock, par value $.50 per share ("Common Stock")
trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the
symbol: NMSB. As of August 27, 1999, there were 1,535 shareholders of record of
the Company's Common Stock.
(a) The above market prices reflect interdealer prices, without retail markup,
markdown or commissions, and may not necessarily represent actual transactions.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosures between
NewMil and its independent accountants for which a Form 8-K was required to be
filed during the two most recent fiscal years or for the period from June 30,
1999 to the date hereof.
74
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears on pages 5 through 7 of NewMil's
Proxy Statement dated September 27, 1999 for the 1999 Annual Meeting of
Shareholders, under the captions "Nominees for Election for a Three Year Term"
and "Directors Continuing in Office". Such information is incorporated herein
by reference and made a part hereof.
Item 11. EXECUTIVE COMPENSATION
The information required by this item appears on pages 7 through 14 of NewMil's
Proxy Statement dated September 27, 1999 for the 1999 Annual Meeting of
Shareholders, under the captions: "Executive Compensation"; "Employee Benefit
Plans"; "Report of the Board on Executive Compensation"; and "Performance
Graph". Such information is incorporated herein by reference and made a part
hereof.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears on pages 5 through 7 of NewMil's
Proxy Statement dated September 27, 1999 for the 1999 Annual Meeting of
Shareholders, under the caption "Nominees for Election for a Three Year Term"
and "Directors Continuing in Office". Such information is incorporated herein
by reference and made a part hereof.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears on page 14 of NewMil's Proxy
Statement dated September 27, 1999 for the 1999 Annual Meeting of Shareholders,
under the caption "Transactions with Management and Others". Such information
is incorporated herein by reference and made a part hereof.
75
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report and appear on
the pages indicated.
Financial Statements
--------------------
None.
(b) Reports on Form 8-K
-------------------
None.
(c) Exhibits
--------
The following documents are filed as Exhibit to this Form 10-K, as required
by Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of NewMil (incorporated by
reference to Exhibit 3.1 to NewMil's Registration Statement
on Form S-4 (No. 33-10693) filed on December 9, 1986)
3.1.1 Amendment to Certificate of Incorporation of NewMil
increasing authorized shares of common stock from 6,000,000
to 20,000,000 (incorporated by reference to the Registrant's
1994 Proxy Statement dated September 23, 1994, page A-1).
3.2 Bylaws of NewMil (incorporated by reference to Exhibit 3.2
to NewMil's Registration Statement on Form S-4 (No. 33-
10693) filed on December 9, 1986)
4.1 Instruments Defining Rights of Security Holders (Included in
Exhibits 3.1 and 3.2)
10.1 The New Milford Savings Bank 1986 Stock Option and Incentive
Plan (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4 (No. 33-10693)
filed on December 9, 1986)
10.2 The New Milford Savings Bank 1986 Stock Option and Incentive
Plan Incentive Stock Option Agreement and Non-Qualified
Stock Option Agreement (incorporated by reference to the
Registrant's 1988 Form 10-K).
10.3 1992 Stock Option Plan For Outside Directors of NewMil
Bancorp, Inc. (incorporated by reference to the Registrant's
1992 Proxy Statement dated September 22, 1992, pages 17
through 20).
10.5 Rights Agreement between NewMil Bancorp, Inc. and American
Stock Transfer and Trust Company as Rights Agent dated as of
July 19, 1994 concerning NewMil Bancorp's shareholder rights
plan of same date
76
<PAGE>
(incorporated by reference to the Registrant's 1994 Form
10-K).
10.6 The NewMil Bancorp, Inc. Amended and Restated 1986 Stock
Option and Incentive Plan (incorporated by reference to the
Registrant's 1995 Proxy Statement dated September 20, 1995,
pages A-1 to A-11).
10.7 Employment agreement between New Milford Savings Bank and
its President and CEO, Francis J. Wiatr, as of March 31,
1994 (incorporated by reference to the Registrant's 1995
Form 10-K).
10.8 Dividend reinvestment plan for NewMil Bancorp's shareholders
(incorporated by reference to the Registrant's 1996 Form
10-K).
10.9 Change in control agreements between New Milford Savings
Bank and management (Messrs. Grant, McMahon and Shannon; Ms.
Farrell)(incorporated by reference to the Registrant's 1996
Form 10-K).
10.10 The Amended and Restated 1992 Stock Option Plan for Outside
Directors of NewMil Bancorp, Inc. (incorporated by reference
to the Registrant's 1995 Proxy Statement dated September 20,
1995, pages B-1 to B-4).
10.12 The Amended 1986 Stock Option and Incentive Plan (extending
term until 2005 and increasing shares to 525,000), approved
by shareholders October 1997.
10.13 First and Second Amendments to Employment Agreement of
Francis J. Wiatr, as of August 1998.
10.14 Amendment to Bylaws of NewMil.
11.1 Statement regarding Computation of Net Income Per Common
Share.
23.0 Consent of PricewaterhouseCoopers LLP.
20.1 Proxy Statement dated September 27, 1999 for the Annual
Meeting of Shareholders, of NewMil Bancorp, Inc.
21.1 Subsidiaries of the Registrant.
(d) Financial Statement Schedules
-----------------------------
No financial statement schedules are required to be filed as Exhibits
pursuant to Item 14(d).
77
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Francis J. Wiatr
--------------------------
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 16, 1999
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated, on the dates indicated below.
/s/ Willis H. Barton, Jr. /s/ Betty F. Pacocha
-------------------------- --------------------
Willis H. Barton, Jr. Betty F Pacocha
Director Director and Secretary
September 16, 1999 September 16, 1999
/s/ Herbert E. Bullock /s/ Suzanne L. Powers
---------------------- ---------------------
Herbert E. Bullock Suzanne L. Powers
Director Director
September 16, 1999 September 16, 1999
/s/ Joseph Carlson II /s/ Francis J. Wiatr
--------------------- --------------------
Joseph Carlson II Francis J. Wiatr
Director Chairman of the Board, President
September 16, 1999 and Chief Executive Officer
September 16, 1999
/s/ Laurie G. Gonthier /s/ Mary C. Williams
---------------------- --------------------
Laurie G. Gonthier Mary C. Williams
Director Director
September 16, 1999 September 16, 1999
/s/ Dr. John V. Haxo /s/ B. Ian McMahon
-------------------- ------------------
Dr. John V. Haxo B. Ian McMahon
Director Chief Financial Officer
September 16, 1999 and Chief Accounting Officer
September 16, 1999
/s/ Robert J. McCarthy
----------------------
Robert J. McCarthy
Director
September 16, 1999
78
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the provisions of Articles Ninth and Tenth of NewMil's
certificate of incorporation, and the provisions of Article XII of NewMil's
bylaws, as amended.
NewMil is a Delaware corporation subject to the applicable indemnification
provisions of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law"). Section 145 of the Delaware Corporation Law
provides for the indemnification, under certain circumstances, of persons who
are or were directors, officers, employees or agents of NewMil, or are or were
serving at the request of NewMil in such a capacity with another business
organization or entity, against expenses, judgments, fines and amounts paid in
settlement in actions, suits or proceedings, whether civil, criminal,
administrative, or investigative, brought or threatened against or involving
such persons because of such person's service in any such capacity. In the case
of actions brought by or in the right of NewMil, Section 145 provides for
indemnification only of expenses, and only upon a determination by the Court of
Chancery or the court in which such action or suit was brought that, in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses.
NewMil's bylaws provide for indemnification of its directors, officers,
employees and such other persons specified in Section 145 of the Delaware
Corporation Law to the full extent permitted or required of corporations subject
to the Delaware Corporation Law.
Articles Ninth and Tenth of NewMil's certificate of incorporation provides
that no director will be personally liable to NewMil or its shareholders for
monetary damages for any breach of fiduciary duty as a director other than
liability for any breach of such director's duty of loyalty to NewMil or its
shareholders, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for any payment of a
dividend or approval of a stock repurchase that is illegal under Section 174 of
the Delaware Corporation Law, or for any transaction from which the director
derived an improper personal benefit.
The foregoing indemnity and insurance provisions have the effect of
reducing directors' and officers' exposure to personal liability for actions
taken in connection with their respective positions.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
NewMil pursuant to the foregoing provisions, or otherwise, NewMil has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by NewMil of
expenses incurred or paid by a director, officer or controlling person of NewMil
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, NewMil will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
Exhibits
--------
2.1 Agreement and Plan of Merger dated May 30, 2000 by and between NewMil
Bancorp, Inc. ("NewMil") and Nutmeg Federal Savings & Loan Association
("Nutmeg").
2.2 Option Agreement dated May 30, 2000 by and between NewMil and Nutmeg.
2.3 Stockholders Agreement dated May 30, 2000 by and between NewMil and the
stockholders of Nutmeg as identified therein.
3.1 Certificate of Incorporation of NewMil filed on December 9, 1986
(incorporated by reference to Exhibit 3.1 to NewMil's Registration
Statement on Form S-4 (No. 33-10693)).
1
<PAGE>
3.1.1 Amendment to Certificate of Incorporation of NewMil increasing authorized
shares of common stock from 6,000,000 to 20,000,000 (incorporated by
reference to NewMil's 1994 Proxy Statement dated September 23, 1994, page
A-1)).
3.2 Bylaws of NewMil (incorporated by reference to Exhibit 3.2 to NewMil's
Registration Statement on Form S-4 (No. 33-10693) filed on December 9,
1986.
3.3 Amendment to Bylaws of NewMil (incorporated by reference to Exhibit 10.14
of the Registrant's 1999 Form 10-K).
4.1 Instruments defining the rights of security holders (included in Exhibits
3.1 and 3.2).
5. Opinion of Tyler Cooper & Alcorn, LLP as to the legality of the
securities being registered hereunder, including the consent of that
firm.
8. Opinion of Tyler Cooper & Alcorn, LLP as to certain tax matters,
including the consent of that firm.
10.1 The New Milford Savings Bank 1986 Stock Option and Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-4 (No. 33-10693) filed on December 9, 1986).
10.2 The New Milford Savings Bank 1986 Stock Option and Incentive Plan
Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement
(incorporated by reference to the Registrant's 1988 Form 10-K).
10.3 1992 Stock Option Plan for Outside Directors of NewMil Bancorp, Inc.
(incorporated by reference to the Registrant's 1992 Proxy Statement dated
September 22, 1992, pages 17 through 20).
10.5 Rights Agreement between NewMil Bancorp, Inc. and American Stock Transfer
and Trust Company as Rights Agent dated as of July 19, 1994 concerning
NewMil Bancorp's shareholder rights plan of same date (incorporated by
reference to the Registrant's 1994 Form 10-K).
10.6 The NewMil Bancorp, Inc. Amended and Restated 1986 Stock Option and
Incentive Plan (incorporated by reference to the Registrant's 1995 Proxy
Statement dated September 20, 1995, pages A-1 to A-11).
10.7 Employment Agreement between New Milford Savings Bank and its President
and CEO, Francis J. Wiatr, as of March 31, 1994 (incorporated by
reference to the Registrant's 1995 Form 10-K).
10.8 Dividend reinvestment plan for NewMil Bancorp's shareholders
(incorporated by reference to the Registrant's 1996 Form 10-K).
10.9 Change in control agreements between New Milford Savings Bank and
management (Messrs. Grant, McMahon and Shannon; Ms. Farrell)
(incorporated by reference to the Registrant's 1996 Form 10-K).
10.10 The Amended and Restated 1992 Stock Option Plan for Outside Directors of
NewMil Bancorp, Inc. (incorporated by reference to the Registrant's 1995
Proxy Statement dated September 20, 1995, pages B-1 to B-4).
10.12 The Amended 1986 Stock Option and Incentive Plan (extending term until
2005 and increasing shares to 525,000), approved by shareholders October
1997 (incorporated by reference to Exhibit 10.12 of the Registrant's 1999
Form 10-K).
10.13 First and Second Amendments to Employment Agreement of Francis J. Wiatr,
as of August 1998 (incorporated by reference to Exhibit 10.13 of the
Registrant's 1999 Form 10-K).
21.1 Subsidiaries of the Registrant (incorporated by reference to NewMil's
Form 10-K for the fiscal year ended June 30, 1999).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of McConnell, Budd & Downes, Inc.
23.3 Consent of Seward and Monde.
23.4 Consent of Tyler Cooper & Alcorn, LLP (included as part of Exhibit 5)
23.5 Consent of Tyler Cooper & Alcorn, LLP (included as part of Exhibit 8)
24 Power of Attorney (included on signature page)
99.1 Form of Nutmeg Proxy Card
99.2 Form of NewMil Proxy Card
2
