Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended
March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main St., P.O. Box 600, New Milford, Conn. 06776
(Address of principal executive offices) (Zip Code)
(860) 355-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
The number of shares of Common Stock outstanding as of March 31,
2000 is 3,608,225.
NEWMIL BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
March 31, 2000 and June 30, 1999. . . . . . . . . . . . .3
Consolidated Statements of Income
for the three month and nine month periods
ended March 31, 2000 and 1999 . . . . . . . . . . . . . .4
Consolidated Statements of Changes in
Shareholders' Equity for the nine month
periods ended March 31, 2000 and 1999 . . . . . . . . . .6
Consolidated Statements of Cash Flows
for the nine month periods ended
March 31, 2000 and 1999 . . . . . . . . . . . . . . . . .7
Notes to Consolidated Financial Statements. . . . . . . .8
Item 2 Management's Discussion and Analysis
of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . 15
Item 3 Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . . . . . 28
PART II OTHER INFORMATION
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . 29
Item 4 Submission of matters to a vote of
security holders. . . . . . . . . . . . . . . . . . . . 29
Item 5 Other information . . . . . . . . . . . . . . . . . . . 29
Item 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . 29
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<S>
<C> <C>
March 31, June 30,
2000 1999
---- ----
(unaudited)
ASSETS
Cash and due from banks $ 12,161 $ 9,719
Federal funds sold 4,359 3,167
-------- --------
Total cash and cash equivalents 16,520 12,886
Securities:
Available-for-sale at market 98,790 74,135
Held-to-maturity at amortized cost
(market value: $39,308 and $42,911) 41,129 44,067
Loans (net of allowance for
loan losses: $4,983 and $4,989) 216,055 210,036
Other real estate owned 307 333
Bank premises and equipment, net 5,846 6,238
Accrued income 2,352 2,190
Deferred tax asset, net 2,091 1,788
Other assets 629 444
-------- --------
Total Assets $383,719 $352,117
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 18,988 $ 18,622
NOW accounts 40,943 34,660
Money market 70,253 71,252
Savings and other 50,019 49,443
Certificates of deposit 126,818 126,146
-------- --------
Total deposits 307,021 300,123
Federal Home Loan Bank advances 34,800 15,000
Due to brokers 5,871 -
Accrued interest and other liabilities 2,722 3,859
Total Liabilities 350,414 318,982
Commitments and contingencies - -
Shareholders' Equity
Common stock - $.50 per share par value
Authorized - 20,000,000 shares
Issued - 5,990,138 shares 2,995 2,995
Paid-in capital 43,332 43,773
Retained earnings 12,472 10,637
Accumulated other comprehensive income (1,678) (1,132)
Treasury stock, at cost - 2,381,913
and 2,325,924 shares (23,816) (23,138)
-------- --------
Total Shareholders' Equity 33,305 33,135
-------- --------
Total Liabilities and Shareholders' Equity $383,719 $352,117
======== ========
</TABLE>
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<S>
<C> <C> <C> <C>
Three months ended Nine months ended
March 31 March 31
2000 1999 2000 1999
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $4,307 $4,009 $12,656 $11,344
Interest on securities 1,923 1,810 5,403 6,535
Dividend income 44 44 128 124
Interest on federal funds sold 30 81 123 586
------ ------ ------ ------
Total interest and dividend income 6,304 5,944 18,310 18,589
------ ------ ------ ------
INTEREST EXPENSE
Deposits 2,391 2,492 7,177 7,914
Borrowed funds 370 224 728 1,229
------ ------ ------ ------
Total interest expense 2,761 2,716 7,905 9,143
------ ------ ------ ------
Net interest and dividend income 3,543 3,228 10,405 9,446
------ ------ ------ ------
PROVISION FOR LOAN LOSSES - 25 (495) 75
------ ------ ------ ------
Net interest and dividend
income after provision
for loan losses 3,543 3,203 10,900 9,371
------ ------ ------ ------
NON-INTEREST INCOME
Service charges on deposit accounts 312 265 984 866
Gain on sale of branch - - 75 -
Gains on sales of mortgage loans, net 30 161 114 451
Securities losses, net - - (109) -
Gains on sales of OREO - 478 23 1,342
Loan servicing fees 16 19 50 62
Other 83 76 246 235
------ ------ ------ ------
Total non-interest income 441 999 1,383 2,956
------ ------ ------ ------
NON-INTEREST EXPENSE
Salaries 1,194 1,316 3,590 3,673
Employee benefits 96 345 696 907
Occupancy 242 268 715 780
Equipment 217 222 637 668
Insurance 29 26 85 78
Professional, collection and
OREO expense 142 107 498 348
Other 488 572 1,622 1,743
------ ------ ------ ------
Total non-interest expense 2,408 2,856 7,843 8,197
------ ------ ------ ------
Income before income taxes,
cumulative effect of accounting
change and extraordinary item 1,576 1,346 4,440 4,130
Provision for income taxes 553 466 1,513 1,876
------ ------ ------ ------
Income before cumulative effect
of accounting change and
extraordinary item 1,023 880 2,927 2,254
Cumulative effect of accounting
change, net of taxes - - - (162)
Extraordinary item - - - (87)
------ ------ ------ ------
NET INCOME $1,023 $ 880 $2,927 $2,005
====== ====== ====== ======
</TABLE>
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<S>
<C> <C> <C> <C>
Three months ended Nine months ended
March 31 March 31
2000 1999 2000 1999
---- ---- ---- ----
Diluted earnings per share
Income before cumulative effect of
accounting change and
extraordinary item $0.27 $0.22 $0.76 $0.56
Cumulative effect of change in
accounting principle, net of tax (0.00) (0.00) (0.00) (0.04)
Extraordinary item, net of tax (0.00) (0.00) (0.00) (0.02)
----- ----- ----- -----
Net income $0.27 $0.22 $0.76 $0.50
===== ===== ===== =====
Basic earnings per share
Income before cumulative effect of
accounting change and
extraordinary item $0.28 $0.23 $0.80 $0.58
Cumulative effect of change in
accounting principle, net of tax (0.00) (0.00) (0.00) (0.04)
Extraordinary item, net of tax (0.00) (0.00) (0.00) (0.02)
Net income $0.28 $0.23 $0.80 $0.52
===== ===== ===== =====
Dividends per share $0.10 $0.09 $0.30 $0.26
===== ===== ===== =====
</TABLE>
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<S>
<C> <C> <C>
Common Paid-in Retained
Stock capital earnings
----- ------- --------
Balances at June 30, 1998 $2,995 $43,881 $8,933
Net income - - 2,005
Change in net unrealized
gains (losses) on
securities, net of taxes - - -
Total comprehensive income
Cash dividends paid - - (996)
Proceeds from exercise
of stock options - (108) -
Acquisition of
treasury stock - - -
------ ------- ------
Balances at March 31, 1999 $2,995 $43,773 $9,942
====== ======= ======
Balances at June 30, 1999 $2,995 $43,773 $10,637
Net income - - 2,927
Change in net unrealized
gains (losses) on securities,
net of taxes - - -
Total comprehensive income
Cash dividends paid - - (1,092)
Proceeds from exercise of
stock options - (441) -
Acquisition of treasury stock - - -
------ ------- -------
Balances at March 31, 2000 $2,995 $43,332 $12,472
====== ======= =======
</TABLE>
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<S>
<C> <C> <C>
Accumulated
other
comprehensive
income Total
Treasury Unrealized shareholders
stock gains (losses) equity
----- -------------- ------
Balances at June 30, 1998 $(21,195) $(1,205) $33,409
Net income - - 2,005
Change in net unrealized
gains (losses) on securities,
net of taxes - 907 907
-------
Total comprehensive income 2,912
-------
Cash dividends paid - - (996)
Proceeds from exercise
of stock options 168 - 60
Acquisition of
treasury stock (843) - (843)
-------- ------- -------
Balances at March 31, 1999 $(21,870) $ (298) $34,542
======== ======= =======
Balances at June 30, 1999 $(23,138) $(1,132) $33,135
Net income - - 2,927
Change in net unrealized
gains (losses) on securities,
net of taxes - (546) (546)
-------
Total comprehensive income 2,381
-------
Cash dividends paid - - (1,092)
Proceeds from exercise
of stock options 814 - 373
Acquisition of
treasury stock (1,492) - (1,492)
------- ------- -------
Balances at March 31, 2000 $(23,816) $(1,678) $33,305
========= ======= =======
</TABLE>
<TABLE>
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
(in thousands) Nine months ended
(unaudited) March 31,
2000 1999
---- ----
Operating Activities
Net income $2,927 $2,005
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses (495) 75
Provision for depreciation and amortization 552 564
(Increase) decrease in deferred income tax asset (22) 167
Amortization and accretion of securities
premiums and discounts, net 185 602
Securities losses, net 109 -
Cumulative effect of accounting change, net - 162
Extraordinary loss on debt extinguishment, net - 87
Realized gains on loan sales, net (114) (451)
Realized gains on OREO sales, net (23) (1,342)
(Increase) decrease in accrued income (160) 51
(Decrease) increase in accrued interest expense
and other liabilities (1,146) 756
Increase in other assets, net (189) (369)
------- -------
Net cash provided by
operating activities 1,624 2,307
------- -------
Investing Activities
Proceeds from sales of securities
available-for-sale - 20,933
Proceeds from sales of mortgage backed securities
available-for-sale 8,411 -
Proceeds from maturities and principal
repayments of securities 2,153 25,284
Purchases of securities held-to-maturity - (10,565)
Purchases of securities available-for-sale (18,311) -
Purchases of mortgage backed securities
available-for-sale (21,540) (15,598)
Principal collected on mortgage backed securities 12,320 26,433
Loan advances, net (1,355) (5,408)
Loans purchased for portfolio (4,164) (37,580)
Proceeds from sales of OREO 190 1,815
Payments to improve OREO (31) (107)
Purchases of Bank premises
and equipment, net (160) (945)
------- -------
Net cash (used) provided by
investing activities (22,487) 4,262
------- -------
Financing Activities
Net increase in deposits 6,908 11,321
Net advances (repayments) from FHLB advances 19,800 (22,500)
Cash dividends paid (1,092) (996)
Treasury stock purchased (1,492) (843)
Proceeds from exercise of stock options 373 60
------- -------
Net cash provided (used) by
financing activities 24,497 (12,958)
------- -------
Increase (decrease) in cash and
cash equivalents 3,634 (6,389)
Cash and federal funds sold, beginning of year 12,886 30,476
------- -------
Cash and federal funds sold, end of period $16,520 $24,087
======= =======
Cash paid during period
Interest to depositors $ 7,165 $7,904
Interest on borrowings 692 1,334
Income taxes 1,067 1,510
Non-cash transfers
From loans to OREO 109 60
From securities held-to-maturity to
securities available-for-sale 21,509
</TABLE>
NEWMIL BANCORP, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements of NewMil Bancorp, Inc.
("NewMil") include those of NewMil and its wholly-owned subsidiary, New
Milford Savings Bank (the "Bank"). Certain prior period amounts in the
statement of income and balance sheets have been reclassified to conform
with the current financial presentation. In the opinion of management,
the interim unaudited consolidated financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position of NewMil and its operations and
cash flows for the interim periods presented.
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make extensive use of estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the balance sheet, and revenues and expenses for the
period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for
loan losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and valuation of real
estate, management obtains independent appraisals for significant
properties.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting purposes,
has been condensed or omitted. Operating results for the nine month
period ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2000. The
accompanying condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in
NewMil's Annual Report for the year ended June 30, 1999.
NOTE 2 - SECURITIES
Securities classified available-for-sale (carried at fair value) were as
follows:
<TABLE>
<S> <C> <C> <C> <C>
(dollars in thousands) Estimated Gross Amort-
fair unrealized ized
value gains losses cost
----- ----- ------ ----
March 31, 2000
US Agency Obligations
Within 5 years $ 9,791 $ 31 $ 22 $ 9,782
Mortgage backed securities 70,862 40 2,126 72,948
Collateralized mortgage
obligations 1,166 - 151 1,317
Other Bonds and Notes
Within 5 years 14,206 - 198 14,404
-------- ---- ------ --------
Total debt securities 96,025 71 2,497 98,451
Equity securities 2,765 - - 2,765
Total securities -------- ---- ------ --------
available-for-sale $ 98,790 $ 71 $2,497 $101,216
======== ==== ====== ========
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>
<TABLE>
Securities classified held-to-maturity (carried at amortized cost) were
as follows:
<S> <C> <C> <C>
(dollars in thousands) Gross Estimated
Amortized unrealized fair
cost(a) gains losses value
------- ----- ------ -----
March 31, 2000
Municipal Bonds
After 10 years $10,552 $ - $ 955 $ 9,597
Mortgage backed securities 22,002 3 456 21,549
Collateralized mortgage
obligations 8,575 11 424 8,162
------- ---- ------ -------
Total securities
held-to-maturity $41,129 $ 14 $1,835 $39,308
======= ==== ====== =======
June 30, 1999
Municipal Bonds
After 10 years $10,558 $ - $ 866 $ 9,692
Mortgage backed securities 22,890 37 - 22,927
Collateralized mortgage
obligations 10,619 51 378 10,292
------- ---- ------ -------
Total securities
held-to-maturity $44,067 $ 88 $1,244 $42,911
======= ==== ====== =======
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
</TABLE>
Securities with an amortized cost of $786,000 and a market value of
$743,000 were pledged as collateral against public funds at March 31,
2000.
Cash proceeds and realized gains and losses from sales of securities
during the nine month periods ended March 31 are as follows:
<TABLE>
<S> <C> <C> <C>
(dollars in thousands) Cash Realized Realized
proceeds gains losses
-------- ----- ------
Nine months ended March 31, 2000
Available-for-sale
Mortgage backed securities $ 8,411 $ - $109
======= ===== ====
Nine months ended March 31, 1999
Available-for-sale
Collateralized mortgage
obligations (a) $20,933 $ - $274
======= ===== ====
(a) This sale was transacted under the provisions of SFAS 133 with the
loss being reported as the cumulative effect of a change in accounting
principle.
NOTE 3 - LOANS
Major classifications of loans are as follows:
March 31, June 30,
(in thousands) 2000 1999
---- ----
Real estate mortgages:
One-four family residential $128,381 $128,371
Five or more family residential 4,383 6,152
Commercial 48,578 47,894
Land 2,101 2,410
Commercial and industrial 15,867 7,773
Home equity lines of credit 19,252 19,429
Installment and other 2,419 2,850
-------- --------
Total loans, gross 220,981 214,879
Deferred loan origination fees
and purchase premium, net 57 146
Allowance for loan losses (4,983) (4,989)
-------- --------
Total loans, net $216,055 $210,036
======== ========
Impaired loans
With valuation allowance $347 $300
With no valuation allowance 452 453
---- ----
Total impaired loans $799 $753
==== ====
Valuation allowance $ 86 $173
</TABLE>
Changes in the allowance for loan losses during the nine month periods
ended March 31, are as follows:
<TABLE>
<S> <C> <C>
(in thousands) 2000 1999
---- ----
Balance, beginning of period $4,989 $5,004
Provision for losses (495) 75
Charge-offs (73) (36)
Recoveries 562 57
------ ------
Balance, end of period $4,983 $5,100
====== ======
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
<TABLE>
The components of non-performing assets were as follows:
<S> <C> <C>
March 31, June 30,
(in thousands) 2000 1999
---- ----
Non-accrual loans $1,008 $1,051
Accruing loans past due
90 days or more 254 185
Accruing troubled debt
restructured loans - -
------ ------
Total non-performing loans 1,262 1,236
------ ------
Other real estate owned 307 333
------ ------
Total non-performing assets $1,569 $1,569
====== ======
</TABLE>
Other real estate owned (OREO) includes collateral acquired through
foreclosure, forgiveness of debt or otherwise in lieu of debt.
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average common
shares outstanding during the year. The computation of diluted earnings
per share is similar to the computation of basic earnings per share
except the denominator is increased to include the number of additional
common shares that would have been outstanding if dilutive potential
common shares had been issued. Shares used in the computations for the
three and nine month periods ended March 31, are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three months ended Nine months ended
March 31, March 31,
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Basic 3,621 3,804 3,644 3,825
Effect of dilutive stock options 171 194 183 194
----- ----- ----- -----
Diluted 3,792 3,998 3,827 4,019
===== ===== ===== =====
</TABLE>
NOTE 6 - COMPREHENSIVE INCOME
The components of comprehensive income for the three and nine month
periods ended March 31, are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three months ended Nine months ended
March 31, March 31,
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Comprehensive income
Net income $1,023 $ 880 $2,927 $2,005
Net unrealized (losses) gains on
securities during period (76) (151) (546) 907
------ ------ ------ ------
Comprehensive income $ 947 $ 729 $2,381 $2,912
====== ====== ====== ======
</TABLE>
The components of other comprehensive income, and related tax effects
were as follows:
<TABLE>
<S> <C> <C> <C>
(in thousands) Before Tax Net of
tax (expense) tax
amount benefit amount
------ ------- ------
Three months ended March 31, 2000
Net unrealized losses on securities
available-for-sale arising
during the period $(123) $ 42 $ (81)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 8 (3) 5
----- ----- -----
Net unrealized losses on
securities during period $(115) $ 39 $ (76)
===== ===== =====
Nine months ended March 31, 2000
Net unrealized losses on securities
available-for-sale arising
during the period $(975) $ 332 $(643)
Reclassification adjustment for realized
losses included in net income 109 (37) 72
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 38 (13) 25
----- ----- -----
Net unrealized losses on
securities during period $(828) $ 282 $(546)
===== ===== =====
Three months ended March 31, 1999
Net unrealized loss on securities
available-for-sale arising
during the period $(318) $ 108 $(210)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 89 (30) 59
------ ----- -----
Net unrealized gains on
securities during period $ (229) $ 78 $(151)
====== ===== =====
Nine months ended March 31, 1999
Net unrealized gains on securities
available-for-sale arising
during the period $ 240 $(150) $ 90
Reclassification adjustment for
realized loss included in net income 274 (112) 162
Accretion of unrealized loss on
securities transferred from
held-to-maturity to available-for
sale 817 (369) 448
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 552 (345) 207
------ ----- ------
Net unrealized gains on
securities during period $1,883 $(976) $ 907
====== ====== ======
</TABLE>
NOTE 7 - INCOME TAXES
The components of the provision for income taxes for the three and nine
month periods ended March 31 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three months ended Nine month ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
Current provision
Federal $ 561 $ 458 $1,535 $1,404
State - - - 305
----- ----- ------ ------
Total 561 458 1,535 1,709
----- ----- ------ ------
Deferred provision
Federal (8) 8 (22) (262)
State - - - 429
----- ----- ------ ------
Total (8) 8 (22) 167
----- ----- ------ ------
Income tax provision $ 553 $ 466 $1,513 $1,876
===== ===== ====== ======
</TABLE>
On May 19, 1998 Connecticut legislation was passed which made sweeping
changes to the corporation business tax treatment of banks and financial
service companies. The new law permits banks to shelter certain
mortgage income from the Connecticut corporation business tax through
the use of a new special purpose entity called a "passive investment
company" ("PIC"). In general, the PIC can earn mortgage interest
income, and pay dividends to its parent company, free from the
Connecticut corporation business tax. The legislation was effective for
income years commencing on or after January 1, 1999.
NewMil formed a PIC, NMSB Mortgage Company, and changed its tax year to
a calendar year basis to take advantage of the Connecticut statute.
Effective January 1, 1999 NewMil transferred mortgages into the PIC and
income of the PIC and its dividends to NewMil became exempt from the
Connecticut Corporation Business Tax. Effective January 1, 1999,
NewMil's combined Federal and State effective tax rate became 34%,
compared with an effective rate, during the first three quarters of the
prior fiscal year, of 45.4%.
The formation of the PIC, in the quarter ended December 31, 1998, has
required NewMil to establish a valuation allowance against its existing
deferred State tax assets that are no longer expected to be realized in
future years. Accordingly, NewMil's income tax provision for the second
quarter ended December 31, 1998 includes a charge of $266,000.
NOTE 8 - SHAREHOLDERS' EQUITY
Capital Requirements
NewMil and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the Federal Deposit Insurance Corporation (the "FDIC"). NewMil's and
the Bank's regulatory capital ratios at March 31, 2000, were as follows:
<TABLE>
<S> <C> <C>
NewMil Bank
------ ----
Leverage ratio 9.65% 9.62%
Tier I risk-based ratio 16.78% 17.21%
Total risk-based ratio 18.05% 18.47%
NewMil and the Bank are categorized as "well capitalized". A well
capitalized institution, as defined by the Prompt Corrective Action
rules issued by the FDIC and the FRB, is one which maintains a total
risk-based ratio of 10% or above, a Tier I risk-based ratio of 6% or
above and a leverage ratio of 5% or above. In addition to meeting these
numerical thresholds, well capitalized institutions may not be subject
to any written order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital
level.
Restrictions on Subsidiary's Dividends and Payments
NewMil's ability to pay dividends is dependent on the Bank's ability to
pay dividends to NewMil. There are certain restrictions on the payment
of dividends and other payments by the Bank to NewMil. Under
Connecticut law the Bank is prohibited from declaring a cash dividend on
its common stock except from its net earnings for the current year and
retained net profits for the preceding two years. Consequently, the
maximum amount of dividends payable by the Bank to NewMil for the nine
month period ended March 31, 2000 is $1,198,000. In some instances,
further restrictions on dividends may be imposed on NewMil by the
Federal Reserve Bank.
NewMil Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations of NewMil and its subsidiary should be read in conjunction
with NewMil's Annual Report on Form 10-K for the year ended June 30,
1999.
BUSINESS
NewMil Bancorp, Inc. ("NewMil"), a Delaware corporation, is a bank
holding company for New Milford Savings Bank (the "Bank"), a
Connecticut-chartered and Federal Deposit Insurance Corporation (the
"FDIC") insured savings bank headquartered in New Milford, Connecticut.
The principal business of NewMil consists of the business of the Bank.
The Bank is engaged in customary banking activities, including general
deposit taking and lending activities to both retail and commercial
markets, and conducts its business from fourteen offices in Litchfield,
New Haven and Fairfield Counties. NewMil and the Bank were formed in
1987 and 1858, respectively.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 2000 and 1999
Overview
NewMil earned net income of $1,023,000, or 27 cents per share (diluted),
for the quarter ended March 31, 2000 as compared with $880,000, or 22
cents per share (diluted), for the quarter ended March 31, 1999.
Analysis of net interest and dividend income
Net interest and dividend income increased $315,000, or 9.8%, for the
quarter ended March 31, 2000 as compared with the prior year period.
This increase resulted from a 31 basis point increase in the net
interest margin to 4.11% from 3.80%, coupled with an increase of $4.8
million in average earning assets.
The following table sets forth the components of NewMil's net interest
income and yields on average interest-earning assets and interest-
bearing funds for the three month periods ended March 31, 2000 and 1999.
</TABLE>
<TABLE>
<S> <C> <C> <C>
Three months ended March 31, 2000 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $219,544 $4,307 7.85%
Mortgage backed securities 84,571 1,387 6.56
Other securities(b) 40,625 610 6.01
------- ------
Total earning assets 344,740 6,304 7.31
Other assets 11,060 ------
--------
Total assets $355,800
========
NOW accounts $ 37,324 105 1.13
Money market accounts 67,901 497 2.93
Savings & other 48,893 296 2.42
Certificates of deposit 123,762 1,493 4.83
-------- ------
Total interest-bearing deposits 277,880 2,391 3.44
Borrowings 24,789 370 5.97
-------- ------
Total interest-bearing funds 302,669 2,761 3.65
Demand deposits 18,180 ------
Other liabilities 1,947
Shareholders' equity 33,004
Total liabilities and --------
shareholders' equity $355,800
========
Net interest income $3,543
======
Spread on interest-bearing funds 3.66
Net interest margin(c) 4.11
<C> <C> <C>
Three months ended March 31, 1999 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $203,623 $4,009 7.88%
Mortgage backed securities 88,362 1,286 5.82
Other securities(b) 47,921 649 5.42
-------- ------
Total earning assets 339,906 5,944 7.00
-------- ------
Other assets 14,738
--------
Total assets $354,644
========
NOW accounts $ 33,716 94 1.12
Money market accounts 68,758 492 2.86
Savings & other 49,753 297 2.39
Certificates of deposit 132,598 1,609 4.85
-------- ------
Total interest-bearing deposits 284,825 2,492 3.50
Borrowings 15,000 224 5.97
-------- ------
Total interest-bearing funds 299,825 2,716 3.62
Demand deposits 17,717 ------
Other liabilities 2,416
Shareholders' equity 34,686
Total liabilities and --------
shareholders' equity $354,644
========
Net interest income $3,228
======
Spread on interest-bearing funds 3.38
Net interest margin(c) 3.80
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal
funds sold.
(c) Net interest income divided by average interest-earning assets.
</TABLE>
The following table sets forth the changes in interest due to volume and
rate for the three month periods ended March 31, 2000 and 1999.
<TABLE>
<S> <C> <C> <C> <C>
Three months ended March 31, 2000 versus 1999
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $ 313 $ (14) $ (1) $ 298
Mortgage backed securities (55) 163 (7) 101
Other securities (99) 71 (11) (39)
----- ----- ----- -----
Total 159 220 (19) 360
Interest-bearing liabilities: ----- ----- ----- -----
Deposits (61) (41) 1 (101)
Borrowings 146 - - 146
----- ----- ----- -----
Total 85 (41) 1 45
----- ----- ----- -----
Net change to interest income $ 74 $ 261 $ (20) $ 315
===== ===== ===== =====
</TABLE>
Interest income
- ---------------
Total interest and dividend income increased $360,000, or 6.1%, for the
quarter ended March 31, 2000 as compared with the same period a year
ago. This increase resulted from a $4.8 million, or 1.4%, increase in
average earning assets and an increase in average yield of 31 basis
points to 7.31%.
Loan interest and fee income increased $298,000, or 7.4%, for the
quarter ended March 31, 2000 as compared with the prior year period as
a result of an increase in average loan balances offset in part by a
decrease in average yield. Average yield declined 3 basis points to
7.85%. Average loan balances increased $15.9 million, or 7.8%. The
increased volume was primarily in the lower yielding residential
mortgage loan portfolio.
Interest and dividends on investments and federal funds sold increased
$62,000, or 3.2%, as a result of higher average yield which increased 70
basis points to 6.38% offset, in part, by a $11.1 million, or 8.1%,
decrease in average balances. The decrease in volume resulted from
sales, maturities and monthly repayments on MBS and CMOs. The yield
increase of 70 basis points is due to an increase in the yield on
floating rate securities coupled with higher yields on securities
purchased in the current year.
Interest expense
- ----------------
Interest expense for the quarter ended March 31, 2000 increased $45,000,
or 1.7%, as compared with the same period a year ago as a result of a
$2.8 million, or 1.0%, increase in average borrowings and deposit
balances for the period coupled with a 3 basis point increase in the
cost of funds to 3.65%.
Deposit expense decreased $101,000, or 4.1%, as a result a decrease of
$6.9 million, or 2.4%, in average interest bearing deposit balances for
the period coupled with a 6 basis points decrease in the average cost of
deposits. Deposit expense has also benefitted from a more favorable
deposit mix as higher cost time deposits have decreased while lower cost
NOW deposits have increased. During the twelve month period ended March
31, 2000, average savings account balance have decreased by $860,000, or
1.7%, Money Market accounts have decreased $857,000, or 1.2% and
Certificates of deposit have decreased by $8.8 million, or 6.7%. NOW
account balances have increased $3.6 million, or 10.7%. The average
rate paid on Certificate of deposit has declined to 4.83% from 4.85% a
year ago, while NOW deposit rates have increased to 1.13% from 1.12% a
year ago, Savings rates have increased to 2.42% from 2.39% and Money
Market rates have increased to 2.93% from 2.86%.
Interest expense on borrowings increased $146,000, or 65.2%, as a result
of increased average borrowings. Average borrowings for the current
quarter were $9.8 million, or 65.3%, higher than the prior year period.
The average cost of borrowing was unchanged from the quarter ended March
31, 1999 at 5.97%. NewMil's current borrowings are for terms of less
than one year.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil did not make a provision for loan losses during the quarter ended
March 31, 2000, compared with a provision of $25,000 for the prior year
period. The following table details key ratios for the periods ended
March 31, 2000, June 30, 1999 and March 31, 1999:
<TABLE>
<S> <C> <C> <C>
Mar 31, 2000 June 30, 1999 Mar 31, 1999
------------ ------------- ------------
Ratio of allowance for loan losses:
to non-performing loans 394.9% 403.6% 284.9%
to total gross loans 2.3 2.3 2.4
<TABLE/>
Since June 30, 1999, non-performing loans have increased $26,000, or
2.1%. NewMil remains adequately reserved both against total loans and
non-performing loans. For a discussion on loan quality see "Non-
Performing Assets".
The Bank determines its allowance and provisions for loan losses based
upon a detailed evaluation of the loan portfolio through a process which
considers numerous factors, including estimated credit losses based upon
internal and external portfolio reviews, delinquency levels and trends,
estimates of the current value of underlying collateral, concentrations,
portfolio volume and mix, changes in lending policy, historical loan
loss experience, current economic conditions and examinations performed
by regulatory authorities. Determining the level of the allowance at
any given period is difficult, particularly during deteriorating or
uncertain economic periods. Management must make estimates using
assumptions and information which is often subjective and changing
rapidly. The review of the loan portfolio is a continuing event in the
light of a changing economy and the dynamics of the banking and
regulatory environment. In management's judgement the allowance for
loan losses at March 31, 2000, is adequate. Should the economic climate
deteriorate, borrowers could experience difficulty and the level of non-
performing loans, charge-offs and delinquencies could rise and require
increased provisions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for loan losses. Such agencies could require the Bank
to recognize additions to the allowance based on their judgements of
information available to them at the time of their examination. The
Bank was last examined by its banking regulators in August 1999 and no
additions to the allowance were requested as a result of this
examination.
The allowance for loan losses is reviewed and approved by the Bank's
Board of Directors on a quarterly basis. The allowance for loan losses
is computed by taking the portfolio and segregating it into various risk
rating categories. Some loans have been further segregated and carry
specific reserve amounts. All other loans that do not have specific
reserves assigned are reserved based on a loss percentage assigned to
the outstanding balance. The percentage applied to the outstanding
balance varies depending on the risk rating. In addition the Bank
maintains an unallocated reserve. The level of unallocated reserves
from June 30, 1999 to March 31, 2000 remained substantially the same.
Non-interest income
- -------------------
The following table details the principal categories of non-interest
income for the three month periods ended March 31:
</TABLE>
<TABLE>
<S> <C> <C> <C>
(in thousands) 2000 1999 Change
---- ---- ------
Service charges on
deposit accounts $ 312 $ 265 $ 47 17.7%
Gains on sales of OREO - 478 (478) (100.0)
Gains on sales of mortgage
loans, net 30 161 (131) (81.4)
Loan servicing 16 19 (3) (15.8)
Other 83 76 7 9.2
----- ----- -----
Total non-interest income $ 441 $ 999 $(558) (55.9)
===== ===== =====
</TABLE>
The decrease in non-interest income results primarily from gains
recorded on the sales of OREO properties in 1999 coupled with lower
gains on sales of residential mortgage loans in 2000. The gains on sale
of OREO in 1999 result primarily from the sale of our interest in a
partnership that had been developing an OREO property over the past
several years. The decrease in gains on sales of residential mortgage
loans resulted from lower loan sales volume, $1.3 million in 2000
compared with $8.4 million in 1999. Secondary market loan sales are
generally pre-arranged on a loan by loan basis prior to origination and
loans are sold with servicing rights released. The decrease in loan
servicing fees results from portfolio run-off. The Bank has not sold
loans with servicing rights retained since June 1995.
Operating expenses
- ------------------
The following table details the principal categories of operating
expenses for the three month periods ended March 31:
<TABLE>
<S> <C> <C> <C>
(in thousands) 2000 1999 Change
---- ---- ------
Salaries $1,194 $1,316 $(122) (9.3)%
Employee benefits 96 345 (249) (72.2)
Occupancy 242 268 (26) (9.7)
Equipment 217 222 (5) (2.3)
Insurance 29 26 3 11.5
Professional fees, Collection
and OREO expense 142 107 35 32.7
Postage and telecommunications 90 107 (17) (15.9)
Marketing 57 26 31 119.2
Other operating 341 439 (98) (22.3)
------ ------ -----
Total operating expenses $2,408 $2,856 $(448) (15.7)
====== ====== =====
The decrease in salaries for the quarter ended March 31, 2000 as
compared with the prior year period was due primarily to a higher
accrual for bonuses in 1999 offset by annual salary increases of
approximately 4.5% in 2000. The decrease in employee benefits results
primarily from the recognition of net periodic pension income, on
NewMil's frozen defined benefit pension plan (the plan), of $235,000 and
from slightly lower health benefits expenses in 1999. NewMil was
measuring net periodic pension cost for the first two quarters of the
fiscal year 2000 under the premise that the plan would be terminated at
sometime in fiscal 2000. During the quarter, NewMil made a strategic
decision not to terminate the plan and will continue the plan in a
frozen state. This change in strategy was deemed a significant event
per paragraph 53 of SFAS No. 87 "Employers' Accounting for Pensions"
which necessitated the change in measurement assumptions. These
different measurement assumptions resulted in $235,000 of pension income
during the quarter. The decrease in occupancy expense results from
lower costs in the current year resulting from the closure of the
Winsted Office in May 1999. The increase in professional, collection
and OREO expense results from higher consulting fees relating to several
corporate initiatives, in the current quarter. Marketing expense
increased as a result of CABLE TV advertising, in the current quarter.
Other operating expense decreased as a result of recent changes in our
correspondent banking relations and lower appraisal expense.
Income taxes
- ------------
Net income for the quarter included an income tax provision of $553,000,
representing a 35.1% effective rate, as compared with a provision of
$466,000 a year ago, representing a 34.6% effective rate.
RESULTS OF OPERATIONS
For the nine month periods ended March 31, 2000 and 1999
Overview
- --------
NewMil earned net income of $2,927,000, or 76 cents per share (diluted),
for the nine month period ended March 31, 2000 as compared with
$2,005,000, or 50 cents per share (diluted), for the period ended March
31, 1999.
Net income for the nine month period ended March 31, 1999 included a
number of special adjustments resulting from the formation of a
Connecticut PIC, the adoption of SFAS 133 and related securities sales
and prepayment of above market rate Federal Home Loan Bank advances.
Excluding these adjustments, income from core operations for the nine
month period ended March 31, 2000 increased 16.2% to $2,927,000 as
compared with $2,520,000 for the nine month period ended March 31, 1999.
In December 1998 NewMil formed a Connecticut Passive Investment Company
("PIC") and changed its Federal tax year to a calendar year basis to
take advantage of changes in Connecticut tax statutes effective for the
1999 calendar year. NewMil's income tax provision for the quarter ended
December 31, 1998 included a deferred tax charge of $266,000 arising
from the formation of the PIC. NewMil was required to establish a
valuation allowance against deferred State tax assets that were no
longer expected to be realized in future years. During the quarter
ended December 31, 1998 NewMil adopted the provisions of SFAS 133
(Accounting for Derivative Instruments and Hedging Activities) and
simultaneously reclassified securities totaling $21 million from held-
to-maturity to available-for-sale, and then sold those securities.
NewMil realized a loss, net of tax, of $162,000 on the transfer and sale
of these securities. This loss has been reported separately in net
income as the cumulative effect of adopting SFAS 133. NewMil used the
proceeds from the sale of the securities to prepay $22.5 million of
Federal Home Loan Bank fixed rate advances. NewMil incurred a
prepayment fee, net of taxes, of $87,000 that has been reported in net
income as an extraordinary item for this early extinguishment of debt.
Analysis of net interest and dividend income
- --------------------------------------------
Net interest and dividend income increased $959,000, or 10.2%, for the
nine months ended March 31, 2000 as compared with the prior year period.
This increase resulted from a 50 basis point increase in the net
interest margin to 4.09% from 3.59%, offset in part by a $11.4 million,
or 3.3% decrease in average earning assets.
The following table sets forth the components of NewMil's net interest
income and yields on average interest-earning assets and interest-
bearing funds for the nine month periods ended March 31, 2000 and 1999.
</TABLE>
<TABLE>
<S>
<C> <C> <C>
Nine months ended March 31, 2000 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $218,051 $12,656 7.74%
Mortgage backed securities 86,089 4,169 6.46
Other securities(b) 35,021 1,485 5.65
-------- -------
Total earning assets 339,161 18,310 7.20
Other assets 10,842 -------
--------
Total assets $350,003
========
NOW accounts $ 36,749 314 1.14
Money market accounts 70,851 1,559 2.93
Savings & other 48,849 891 2.43
Certificates of deposit 124,054 4,413 4.74
-------- -------
Total interest-bearing deposits 280,503 7,177 3.41
Borrowings 16,065 728 6.04
-------- -------
Total interest-bearing funds 296,568 7,905 3.55
Demand deposits 18,541 -------
Other liabilities 1,774
Shareholders' equity 33,120
Total liabilities and --------
shareholders' equity $350,003
========
Net interest income $10,405
=======
Spread on interest-bearing funds 3.65
Net interest margin(c) 4.09
<C> <C> <C>
Nine months ended March 31, 1999 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans(a) $185,012 $11,344 8.18%
Mortgage backed securities 93,487 4,165 5.94
Other securities(b) 72,059 3,080 5.70
-------- -------
Total earning assets 350,558 18,589 7.07
Other assets 13,562 -------
--------
Total assets $364,120
========
NOW accounts $ 32,487 289 1.19
Money market accounts 67,840 1,511 2.97
Savings & other 47,815 936 2.61
Certificates of deposit 134,965 5,178 5.12
-------- -------
Total interest-bearing deposits 283,107 7,914 3.73
Borrowings 27,564 1,229 5.95
-------- -------
Total interest-bearing funds 310,671 9,143 3.92
Demand deposits 16,798 -------
Other liabilities 2,183
Shareholders' equity 34,468
Total liabilities and --------
shareholders' equity $364,120
========
Net interest income $ 9,446
=======
Spread on interest-bearing funds 3.15
Net interest margin(c) 3.59
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal
funds sold.
(c) Net interest income divided by average interest-earning assets.
</TABLE>
The following table sets forth the changes in interest due to volume and
rate for the nine month periods ended March 31, 2000 and 1999.
<TABLE>
<S> <C> <C> <C> <C>
Nine months ended March 31, 2000 versus 1999
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $ 2,026 $(606) $(108) $1,312
Mortgage backed securities (330) 362 (28) 4
Other securities (1,583) (24) 12 (1,595)
------- ----- ----- ------
Total 113 (268) (124) (279)
Interest-bearing liabilities: ------- ----- ----- ------
Deposits (73) (670) 6 (737)
Borrowings (513) 20 (8) (501)
------- ----- ----- ------
Total (586) (650) (2) (1,238)
------- ----- ----- ------
Net change to interest income $ 699 $ 382 $(122) $ 959
======= ===== ===== ======
</TABLE>
Interest income
- ---------------
Total interest and dividend income decreased $279,000, or 1.5%, for the
nine month period ended March 31, 2000 as compared with the same period
a year ago. This decrease resulted from an $11.4 million, or 3.3%,
decrease in average earning assets offset in part by an increase in
average yield of 13 basis points to 7.20%.
Loan interest and fee income increased $1,312,000, or 11.6%, for the
nine month period ended March 31, 2000 as compared with the prior year
period as a result of an increase in average loan balances offset in
part by a decrease in average yield. Average yield declined 44 basis
points to 7.74%. Average loan balances increased $33.0 million, or
17.9%. The increased volume was primarily in lower yielding residential
mortgage loans and to a lesser extent in commercial mortgage loans.
Interest and dividends on investments and federal funds sold decreased
$1,591,000, or 22.0%, as a result of a $44.4 million, or 26.8%, decrease
in average balances offset in part by a higher average yield, which
increased 39 basis point to 6.23%. The decrease in volume results from
maturities, sales and monthly repayments on MBS and CMOs.
Interest expense
- ----------------
Interest expense for the nine month period ended March 31, 2000
decreased $1,238,000, or 13.5%, as compared with the same period a year
ago as a result of a $14.1 million, or 4.5%, decrease in average
borrowings and deposit balances for the period coupled with a 37 basis
point decrease in the cost of funds to 3.55%.
Deposit expense decreased $737,000, or 9.3%, as a result of a 32 basis
points decrease in the average cost of funds coupled with a decrease of
$2.6 million, or 0.9%, in average interest bearing deposit balances for
the period. Average savings account balances increased over the period
by $1.0 million, or 2.2%, NOW account balances increased $4.3 million,
or 13.1%, and Money Market accounts increased $3.0 million, or 4.4%.
Certificates of deposit decreased by $10.9 million, or 8.1%. The
average rate paid on Certificate of deposit declined to 4.74% from 5.12%
a year ago, while NOW deposit rates declined to 1.14% from 1.19% a year
ago, Savings rates declined to 2.43% from 2.61% and Money Market rates
declined to 2.93% from 2.97%.
Interest expense on borrowings decreased $501,000, or 40.8%, as a result
of lower average borrowings offset by a higher average borrowing cost.
Average borrowings for the current nine month period were $11.5 million,
or 41.7%, lower than the prior year period and the average borrowings
cost was 9 basis points higher than the prior year period, at 6.04%.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil had a negative provision of $495,000 for loan losses during the
nine month period ended March 31, 2000, compared with a provision of
$75,000 for the prior year period. The negative provision resulted from
a loan loss recovery of $545,000, in the September 30, 1999 quarter,
related to a loan that had been charged off in prior years. The
recovery represents cash received from the borrower's bankruptcy court
proceedings.
If it had not been for the loan loss recovery of $545,000 received
during the September 30, 1999 quarter the provision would have been
$50,000 as compared to the prior year period expense of $75,000. NewMil
remains adequately reserved both against total loans and non-performing
loans. For a detailed discussion of the Bank's allowance for loan
losses refer to the "Results of Operations - For the three month periods
ended March 31, 2000 and 1999" above.
Non-interest income
- -------------------
The following table details the principal categories of non-interest
income for the nine month periods ended March 31:
<TABLE>
<S> <C> <C> <C>
(in thousands) 2000 1999 Change
---- ---- ------
Service charges on
deposit accounts $ 984 $ 866 $ 118 13.6%
Gain on sale of branch 75 - 75 100.0
Gains on sale of OREO 23 1,342 (1,319) (98.3)
Gains on sales of mortgage loans, net 114 451 (337) (74.7)
Loan servicing 50 62 (12) (19.4)
Securities losses, net (109) - (109) (100.0)
Other 246 235 11 4.7
------ ------ -------
Total non-interest income $1,383 $2,956 $(1,573) (53.2)
====== ====== =======
</TABLE>
The decrease in non-interest income results from security losses and
lower gains on sales of OREO and mortgage loans in 2000, offset in part
by an additional premium received in fiscal year 2000 from the sale of
the Winsted Office in May 1999. The additional premium resulted from
certain competitive events not occurring within a time frame stipulated
in the sale agreement. Gains on sales of OREO in 1999 included the sale
of a property taken into OREO several years before, at which time it was
written down to its market value, and a gain from our interest in a
partnership which had been formed to develop OREO property. The
decrease in gains on sales of residential mortgage loans resulted from
lower loan sales volume, $5.9 million in 2000 compared with $22.7
million in 1999. Secondary market loan sales are generally pre-arranged
on a loan by loan basis prior to origination and loans are sold with
servicing rights released. The decrease in loan servicing fees results
from portfolio run-off. The Bank has not sold loans with servicing
rights retained since June 1995.
Operating expenses
- ------------------
The following table details the principal categories of operating
expenses for the nine month periods ended March 31:
<TABLE>
<S> <C> <C> <C>
(in thousands) 2000 1999 Change
---- ---- ------
Salaries $3,590 $3,673 $(83) (2.3)%
Employee benefits 696 907 (211) (23.3)
Occupancy 715 780 (65) (8.3)
Equipment 637 668 (31) (4.6)
Insurance 85 78 7 9.0
Professional fees, Collection
and OREO expense 498 348 150 43.1
Postage and telecommunications 267 315 (48) (15.2)
Marketing 197 153 44 28.8
Other operating 1,158 1,275 (117) (9.2)
------ ------ -----
Total operating expenses $7,843 $8,197 $(354) (4.3)
====== ====== =====
</TABLE>
The decrease in salaries expense for the nine months ended March 31,
2000 as compared with the prior year period was due primarily to lower
staffing levels offset in part by annual salary increases of
approximately 4.5%. The decrease in employee benefits is a result
primarily from the recognition of net periodic pension income of
$235,000 in the nine months ended March 31, 2000 (see "Result of
Operation for the three months ended March 31, 2000 and 1999 discussion
for more detail). The decrease in occupancy expense results from the
closure of the Winsted Office in May 1999. Professional, Collection and
OREO expense increased as a result of consulting fees relating to
several strategic initiatives that had been undertaken during the nine
month period ended March 2000. Changes in other operating expenses,
which include shareholder relations, office supplies and other expenses,
decreased $121,000 as a result of changes in operating activities.
Income taxes
- ------------
Net income for the nine month period included an income tax provision of
$1,513,000, representing a 34.1% effective rate, as compared with a
provision of $1,876,000 a year ago, representing a 45.4% effective rate.
The provision for March 31, 1999 included a charge of $266,000 resulting
from the formation of the Connecticut PIC. For a detailed discussion of
the formation of the PIC see "Results of Operation - For the three month
periods ended March 31, 2000 and 1999" above.
FINANCIAL CONDITION
Total assets increased $31.6 million, or 9.0%, to $383.7 million during
the nine month period from June 30, 1999 through March 31, 2000. During
the nine month period securities increased $21.7 million, or 18.4%, net
loans increased $6.0 million, or 2.9%, while deposits increased $6.9
million, or 2.3%, and borrowings increased $19.8 million.
Securities
- ----------
Securities increased $21.7 million, or 18.4%, during the nine month
period ended March 31, 2000, as purchases exceeded maturities and sales.
During the period NewMil purchased $21.5 million of fixed rate mortgage
backed securities, $9.8 million of agency bonds and $14.4 million of
corporate bonds, and sold $8.4 million of other fixed rate mortgage
backed securities.
NewMil's securities portfolio consists of US Agency obligations, MBS,
bank qualified municipal bonds, corporate bonds, CMOs and equity
securities. At March 31, 2000, 92.1% of the portfolio consisted of
fixed rate securities and included Agency obligations, MBS, municipal
bonds, corporate bonds and CMOs. At March 31, 2000 total fixed rate
securities had a projected weighted average duration and life of 4.4
years and 6.0 years, respectively, based on median projected prepayment
speeds at current interest rates. At March 31, 2000, 5.9% of the
portfolio consisted of floating rate CMOs and MBSs that generally re-
price monthly based on pre-determined spreads to underlying index,
subject to life-time caps and floors. The floating rate securities had
a projected weighted average duration and life of 0.1 years and 7.8
years, respectively, based on median projected prepayment speeds at
current interest rates. Floating rate MBS are tied to the Eleventh
District Cost of Funds index, while the floating rate CMOs are tied to
Treasury indices. The remaining 2.0% of the portfolio at March 31,
2000, was represented by Federal Home Loan Bank stock and Bankers Bank
Northeast stock.
At March 31, 2000, securities totaling $98.8 million, or 70.6%, were
classified as available-for-sale and securities totaling $41.1 million,
or 29.4%, were classified as held-to-maturity.
Loans
- -----
Net loans grew $6.0 million, or 2.9%, during the nine month period ended
March 31, 2000. Loans originated and loan advances totaled $50.9
million, while loan repayments and loans sold in the secondary market
were $39.0 million and $5.9 million, respectively. Loans originated
include $4.2 million of residential mortgage loans purchased for
portfolio.
Major classifications of loans are as follows:
<TABLE>
<S>
<C> <C>
March 31, June 30,
(in thousands) 2000 1999
---- ----
Real estate mortgages:
One-four family residential $128,381 $128,371
Five or more family residential 4,383 6,152
Commercial 48,578 47,894
Land 2,101 2,410
Commercial and industrial 15,867 7,773
Home equity lines of credit 19,252 19,429
Installment and other 2,419 2,850
-------- --------
Total loans, gross 220,981 214,879
Deferred loan origination fees
and purchase premium, net 57 146
Allowance for loan losses (4,983) (4,989)
-------- --------
Total loans, net $216,055 $210,036
======== ========
</TABLE>
The Commercial Lending department specializes in lending to small and
mid-size companies and professional practices and provides short-term
and long-term financing, construction loans, commercial mortgages and
property improvement loans. The department also works with several
government-assisted lending programs. Commercial mortgage loans,
including mortgages on land and multi-family property decreased
$1,394,000, or 2.5% since June 30, 1999, and C & I loans increased
$8,094,000, or 104.1%, for the period.
The Residential Mortgage Department, in addition to traditional
portfolio lending, sells a variety of mortgage products on a service-
released basis. During the nine month period ended March 31, 2000 the
department originated and sold $5.9 million of loans to the secondary
market. From time to time the department supplements its own portfolio
originations by purchasing Connecticut residential mortgage loans from
several correspondent lenders. During the nine month period ended March
31, 2000 the department purchased $4.2 million of loans for portfolio.
Since June 30, 1999 the residential mortgage loan portfolio has
decreased by $10,000, while home equity lines decreased $177,000, or
0.9%, for the period.
Non-performing assets
- ---------------------
The following table details changes in non-performing assets during the
nine month periods ended March 31.
<TABLE>
<S>
<C> <C>
(in thousands) 2000 1999
---- ----
Balance, beginning of year $1,569 $1,683
Loans placed on non-accrual status 798 895
Change in accruing loans past
due 90 or more days, net 69 (288)
Payments to improve OREO 31 107
Loan payments (382) (125)
Loans returned to accrual status (278) (3)
Loan charge-offs (71) (30)
Gross proceeds from OREO sales (190) (1,815)
Gains on OREO sales, net 23 1,342
Reverse provision for OREO
valuation reserve - 26
------ ------
Balance, end of period $1,569 $1,792
====== ======
Percent of total assets 0.41% 0.50%
</TABLE>
During the nine month period ended March 31, 2000 non-performing assets
remained relatively flat, at $1,569,000, due principally to new loans 90
days past due and accruing, offset by a decrease in OREO and non-accrual
loans. Additions to non-accrual loans generally represent loans that
had previously been classified on NewMil's internally monitored list and
had been adequately reserved. Additions to loans 90 days past due and
still accruing represent loans which are classified on NewMil's
internally monitored list, have adequate collateral value, and are in
the process of collection.
In addition to non-performing assets, at March 31, 2000 NewMil had
$4,322,000 of performing classified loans that are considered potential
problem loans. Although not impaired, performing classified loans, in
the opinion of management, exhibit a higher than normal degree of risk
and warrant monitoring due to various considerations, including (i) the
degree of documentation supporting the borrower's current financial
position, (ii) potential weaknesses in the borrowers' ability to service
the loan, (iii) possible collateral value deficiency, and (iv) other
risk factors such as geographic location, industry focus and negatively
trending financial results. These deficiencies create some uncertainty,
but not serious doubt, as to the borrowers' ability to comply with the
loan repayment terms in the future. Management believes that reserves
for these loans are adequate.
The following table details the composition of non-performing assets as
of March 31, 2000.
<TABLE>
<S> <C> <C> <C> <C>
Non-Performing Assets Accruing
(dollars in thousands) loans Total
Non- past due non-
accrual 90 or performing
loans more days OREO assets
----- --------- ---- ------
March 31, 2000
Real estate:
Residential $ 209 $ 254 $ 215 $ 678
Commercial 396 - 92 488
Land and land
development 403 - - 403
Collateral and
installment loans - - - -
------ ------ ------ ------
Totals $1,008 $ 254 $ 307 $1,569
====== ====== ====== ======
</TABLE>
NewMil pursues the resolution of all non-performing assets through
restructurings, credit enhancements or collections. When collection
procedures do not bring a loan into performing or restructured status,
NewMil generally initiates action to foreclose the property or to
acquire it by deed in lieu of foreclosure. NewMil actively markets all
OREO property.
LIQUIDITY
NewMil manages its liquidity position to ensure that there is sufficient
funds available at all times to meet both anticipated and unanticipated
deposit withdrawals, new loan originations, securities purchases and
other operating cash outflows. The principal sources of liquidity for
NewMil are principal payments and maturities of securities and loans,
short-term borrowings through repurchase agreements and Federal Home
Loan Bank advances, net deposit growth and funds provided by operations.
Liquidity can also be provided through sales of loans and available-for-
sale securities.
Operating activities for the nine month period ended March 31, 2000
provided net cash of $1,624,000. Investing activities used net cash of
$22,487,000, principally as a result of securities and loans purchased
offset, in part, by securities repayments, sales and maturities.
Financing activities provided net cash of $24,497,000, principally due
to advances from the FHLB and a net deposit increase, offset by
dividends paid and treasury stock purchases.
At March 31, 2000, NewMil's liquidity ratio, as represented by cash,
short term available-for-sale securities, marketable assets and the
ability to borrow against held-to-maturity securities and loans through
unused FHLB and other short term borrowing capacity, of approximately
$163.4 million, to net deposits and short term unsecured liabilities,
was 57.2%, well in excess of NewMil's minimum guideline of 15%. At
March 31, 2000, NewMil had outstanding commitments to fund new loan
originations of $4.0 million, construction mortgage commitments of $4.6
million and unused lines of credit of $22.9 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.
CAPITAL RESOURCES
Shareholders' equity increased $170,000, to $33,305,000, while book
value per share increased $0.19 to $9.23, during the nine month period
ended March 31, 2000. The increase in equity resulted from net income
of $2,927,000, or $0.27 per share (diluted), and option proceeds of
$373,000, offset in part, by net unrealized losses on securities during
the period, net of taxes, of $546,000, treasury stock purchases of
$1,492,000 and dividends paid of $1,092,000.
NewMil and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the FDIC. At March 31, 2000 NewMil's leverage capital ratio was 9.65%
and its tier I and total risk-based capital ratios were 16.78% and
18.05%, respectively. At March 31, 2000 the Bank's leverage capital
ratio was 9.62% and its tier I and total risk-based capital ratios were
17.21% and 18.47%, respectively. NewMil and the Bank are categorized as
"well capitalized". A well capitalized institution, which is the
highest capital category for an institution as defined by the Prompt
Corrective regulations issued by the FDIC and the FRB, is one which
maintains a total risk-based ratio of 10% or above, a Tier I risk-based
ratio of 6% or above and a leverage ratio of 5% or above, and is not
subject to any written order, written agreement, capital directive, or
prompt corrective action directive to meet and maintain a specific
capital level.
Dividends
- ---------
NewMil's ability to pay dividends is dependent on the Bank's ability to
pay dividends to NewMil. There are certain restrictions on the payment
of dividends and other payments by the Bank to NewMil. Under
Connecticut law the Bank is prohibited from declaring a cash dividend on
its common stock except from its net earnings for the current calendar
year and retained net profits for the preceding two years. Consequently,
the maximum amount of dividends payable by the Bank to NewMil as of
March 31, 2000 was $1,198,000. In some instances, further restrictions
on dividends may be imposed on NewMil by the Federal Reserve Bank.
NewMil believes that the payment of cash dividends to its shareholders
is appropriate, provided that such payment considers NewMil's capital
needs, asset quality, and overall financial condition and does not
adversely affect the financial stability of NewMil or the Bank. The
continued payment of cash dividends by NewMil will be dependent on
NewMil's future core earnings, financial condition and capital needs,
regulatory restrictions, and other factors deemed relevant by the Board
of Directors of NewMil.
YEAR 2000
Year 2000 Action Plan
In early 1997 NewMil developed its Year 2000 Action Plan (Plan) to
ensure that its operating systems, and those of its outside vendors and
suppliers, will function correctly in the year 2000 and beyond. During
1999 NewMil became compliant with its Year 2000 Plan. The Plan was
managed by the Year 2000 Committee, comprised of representatives from
each operational area of the Bank. The Plan had five phases: (1)
awareness; (2) assessment; (3) renovation; (4) validation; and, (5)
implementation.
The awareness phase included development of the Plan, conducting
awareness meetings and communicating with all NewMil employees,
attending Year 2000 seminars and attending a user group meeting for the
Bank's legacy system vendor. The awareness phase was completed during
1997.
The assessment phase included the development of an inventory of all
date sensitive systems, including in-house systems and those of the
Bank's outside vendors and suppliers, a risk assessment of each element,
and specific methodology to correct non-compliant systems. The
assessment phase was completed for all items during the first six months
of 1999.
High criticality ratings were assigned to several systems, including the
Bank's legacy computer systems, that had the potential to substantially
impact the Bank's operation should they prove to be non-compliant.
The renovation phase addressed the bringing of systems into compliance,
systems replacements and retirements. The renovation phase was
completed for all items during the first six months of 1999.
The validation phase addressed systems testing by the Bank and its
outside vendors and suppliers alike. The Bank converted its in-house
computer system in November 1998 from a legacy computer system to a
client server relational database system. The Bank's new client server
system was certified Year 2000 compliant by the supplying vendor and the
Bank verified compliance in early 1999. Several third party interfaces
were scheduled for testing in early 1999 as well. All systems testing
were completed during the first six months of 1999.
The implementation phase addressed the roll out of Year 2000 compliant
systems during 1998 and 1999. The implementation phase was completed
for all items during the first six months of 1999.
In addition, contingency plans had been developed for all systems with
high criticality ratings. All testing of contingency plans was
completed as of September 30, 1999.
Also during 1999, NewMil 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. The date change has
not resulted in any significant increase in credit risk within NewMil's
commercial loan portfolio.
Federal banking agencies conducted supervisory reviews of all financial
institutions Year 2000 readiness. In February 1998 the FDIC completed
an assessment of the Bank's Year 2000 planning efforts. In September
1998 the FDIC conducted a supervisory review of the Bank's Year 2000
conversion effort. In March 1999 the FDIC and State of Connecticut
completed their Year 2000 Readiness Phase II Assessment of the Bank.
Costs
The cost of Year 2000 compliance was minimal because the Bank converted
its in-house data processing system to a new system that was certified
to be Year 2000 compliant. This cost has been capitalized and is being
depreciated over the fixed assets useful lives. Based on current
information, management believes that any additional costs related to
NewMil's Year 2000 systems issues will not have a material impact on the
operations, cash flows or financial condition of NewMil.
Risks
NewMil has not experienced any disruption of service or problems
relating to the century change. There is still general uncertainty
inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party vendors but since
the date change NewMil has not experienced any Year 2000 readiness
issues related to third party vendors. However, based on NewMil's high
level of readiness, the readiness reported by all significant third
party vendors and the fact we are over three months into year 2000
NewMil does not expect any significant disruption of service. The Year
2000 Action Plan significantly reduced NewMil's level of uncertainty
about the Year 2000 problem and, in particular, about the Year 2000
readiness of its material vendors, suppliers and commercial borrowers.
Item 3. QUANTITATIVE and QUALITATIVE DISCLOSURE of MARKET
RISK
NewMil manages interest rate risk through an ALCO Committee comprised of
senior management. The committee monitors exposure to interest rate
risk on a quarterly basis using both a traditional gap analysis and net
income simulation analysis. Traditional gap analysis identifies short
and long term interest rate positions or exposure. Net income
simulation analysis measures the amount of short-term earnings at risk
under both rising and falling rate scenarios. NewMil's interest rate
risk has not significantly changed from the prior year.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against NewMil or the
Bank or any of their properties, other than ordinary routine litigation
incidental to NewMil's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of earnings per share.
(b) Report on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWMIL BANCORP, INC.
May 8, 2000 By /s/ Francis J. Wiatr
Francis J. Wiatr,
Chairman, President and CEO
May 8, 2000 By /s/ B. Ian McMahon
B. Ian McMahon,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S MARCH 31, 2000 UNAUDITED BALANCE SHEET, INCOME STATE AND
CASH FLOW STATEMENT, AND NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,062,000
<INT-BEARING-DEPOSITS> 99,000
<FED-FUNDS-SOLD> 4,359,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,790,000
<INVESTMENTS-CARRYING> 41,129,000
<INVESTMENTS-MARKET> 39,308,000
<LOANS> 216,055,000
<ALLOWANCE> 4,983,000
<TOTAL-ASSETS> 383,719,000
<DEPOSITS> 307,021,000
<SHORT-TERM> 34,800,000
<LIABILITIES-OTHER> 8,593,000
<LONG-TERM> 0
0
0
<COMMON> 2,995,000
<OTHER-SE> 30,310,000
<TOTAL-LIABILITIES-AND-EQUITY> 383,719,000
<INTEREST-LOAN> 12,656,000
<INTEREST-INVEST> 5,531,000
<INTEREST-OTHER> 123,000
<INTEREST-TOTAL> 18,310,000
<INTEREST-DEPOSIT> 7,177,000
<INTEREST-EXPENSE> 7,905,000
<INTEREST-INCOME-NET> 10,405,000
<LOAN-LOSSES> (495,000)
<SECURITIES-GAINS> (109,000)
<EXPENSE-OTHER> 7,843,000
<INCOME-PRETAX> 4,440,000
<INCOME-PRE-EXTRAORDINARY> 4,440,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,927,000
<EPS-BASIC> 0.80
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 4.09
<LOANS-NON> 1,008,000
<LOANS-PAST> 254,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,322,000
<ALLOWANCE-OPEN> 4,989,000
<CHARGE-OFFS> 73,000
<RECOVERIES> 562,000
<ALLOWANCE-CLOSE> 4,983,000
<ALLOWANCE-DOMESTIC> 4,109,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 874,000
</TABLE>
Exhibit 11.1
NEWMIL BANCORP, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
(in thousands except per share amounts)
<TABLE>
<S> <C> <C> <C> <C>
Three month Nine month
period ended period ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
Net income
Net income - basic and diluted $1,023 $880 $2,927 $2,005
====== ==== ====== ======
Weighted Average Common and Common
Equivalent Stock
Weighted average common stock
outstanding 3,621 3,804 3,644 3,826
Assumed conversion as of the
beginning of each period or upon
issuance during a period of stock
options outstanding at the end
of each period 398 399 416 403
Assumed purchase of treasury stock
during each period with proceeds
from conversion of stock options
outstanding at the end of each
period (227) (205) (233) (210)
----- ----- ----- -----
Weighted average common and common
equivalent stock outstanding
- diluted 3,792 3,998 3,827 4,019
===== ===== ===== =====
Earnings Per Common and Common
Equivalent Share
Basic $0.28 $0.23 $0.80 $0.52
===== ===== ===== =====
Diluted $0.27 $0.22 $0.76 $0.50
===== ===== ===== =====
</TABLE>
