<PAGE>
C o m m u n i t y
Growing with the Community Since 1858
--------------------------------------------------------------------------------
S i n c e 1 8 5 8
[PHOTO]
S e l e c t e d H i g h l i g h t s
Reported record earnings of $4.02 million or $1.05 per share for the year
ending June 30, 2000.
Announced a definitive agreement May 31, 2000 to acquire Nutmeg Federal
Savings and Loan Association of Danbury.
Introduced our state-of-the-art Internet-based Online Banking service for
retail and business customers.
Developed a new Sweep Investment Service to meet the cash management
needs of our business banking customers.
Opened a special needs branch at Pomperaug Woods, an independent
life-care retirement community located in Southbury.
Launched a strategic marketing initiative to position New Milford Savings
Bank as the premier community bank in our market and the first choice for
local businesses.
[MAP SHOWING NEWMIL BANK LOCATIONS AND NUTMEG FEDERAL LOCATIONS]
1
<PAGE>
T o O u r
To Our Shareholders
--------------------------------------------------------------------------------
S h a r e h o l d e r s
[PHOTO]
DEAR SHAREHOLDER
By any standard that measures a company's overall progress, our 2000 fiscal year
was one of the most successful in our 142-year history. Net income was up 32%
over last year, to a record of $4.02 million. We made significant gains in
market share in both the commercial and retail sectors. We invested in
state-of-the-art technology that enabled the introduction of new innovative
services and important enhancements in customer service, while improving our
ability to manage our business effectively. We also announced plans to expand
our franchise into the lucrative Danbury market through the acquisition of
Nutmeg Federal.
We handled well the challenges of the year, including the much-anticipated Y2K
event, and seized the opportunities - in particular the market opportunities
created by a robust economic environment and changes in the competitive
landscape.
Perhaps the most significant external event in our marketplace was the
acquisition of our primary market competitor by an out-of-state institution.
This has presented us with tremendous opportunity to increase market share and
to promote our local decision-making and superior customer service - true points
of differentiation for customers who are continually having to adjust to
consolidation in our industry.
Response in both the commercial and retail segments of our business has been
very strong. Our commercial lending group achieved its best year ever and New
Milford Savings Bank is now the dominant independent community bank in western
Connecticut. Late last Fall, we began an extensive television advertising
campaign, supported by an intense new business calling effort, to promote our
excellent small business lending capabilities. Our strengths in serving this
market are now much better known throughout western Connecticut. We are winning
new business daily from people who value the local decision-making and service
our institution offers.
During the year, we enhanced our service offerings with the introduction of our
Sweep Investment Service to better meet the cash management needs of small
business customers. Also, on the retail side, our branch network saw
double-digit net deposit growth driven by more competitively priced deposit
products and a heightened awareness by the public of the importance of a true
community bank. One particularly successful initiative was the introduction of
our tiered rate Super Money Market account, which has grown to $23 million in
just several months.
Our Generations Gold Family Club has continued to show impressive growth, with
more than 3,500 members now enjoying savings on everything from air travel to
groceries. The program is supported by more than 600 area business partners,
whose discounts on merchandise are now so numerous that we created a special
online directory www.shopgengold.com.
Two years ago, we invested in Oracle-based client server technology, which is
state-of-the-art in the industry. This investment has enabled us to realize
efficiencies in many areas of operation and customer service and bring a number
of product innovations to our customers. We streamlined account opening
procedures, using the enhanced branch automation system. We also refined many
products preparing for full Internet banking - an offering we would not have
been able to make without this technology. We introduced our leading edge Online
Banking service, which provides customers access to their accounts 24 hours a
day, seven days a week. Unlike many others, this is a "real time" system,
allowing customers to do their banking via the Internet from
2
<PAGE>
[PHOTO]
[PHOTO]
our home page, www.newmil.com. The service is growing daily and provides our
customers a safe, secure way to manage accounts, check balances, transfer
funds and, soon, pay bills. Many enhancements to our on-line capabilities
are planned for the coming year.
For several years, one of our key strategies for enhancing shareholder value
has been to grow our institution through acquisition. On May 31, 2000, we
announced a definitive agreement to acquire Nutmeg Federal in Danbury. This
acquisition will extend our franchise into the attractive Danbury
marketplace; add Bethel and Ridgefield, two highly desirable locations; and
expand our presence in Fairfield County. We are very excited about the
opportunities that this acquisition will bring, and are currently planning
for all phases of the integration, which we anticipate will take place early
in November.
NewMil Bank
Serving the Community Since 1858
Over time, we have conducted market research to determine, among other
things, if our 142-year old name - New Milford Savings Bank - accurately
reflects the institution of today, with its many expanded banking services,
and whether the name is consistent with our vision for the Bank going
forward. We have suspected that - while our name has not been a deterrent to
developing new business, once given the opportunity to demonstrate our
capabilities - customers unfamiliar with the Bank did not think of us first
for commercial banking services. We also believed that the name was
potentially limiting, given our expanded geographic reach.
The research validated our views and confirmed that, especially among
non-customers in the business community, many believed our primary focus to
be in the area of retail and mortgage banking - traditional "savings bank"
services. There was, in fact, a disconnect between what we were actually
offering in the marketplace and what our name communicated about us. As a
result, our Board of Directors and management recently announced a new name
for our 142-year institution. NewMil Bank... rooted in our 142-year heritage
and aligned more closely to the identity of our holding company, NewMil
Bancorp, but projecting the image of a contemporary, full-service banking
company and positioning us well for the future. NewMil Bank will be the
household and business banking name of choice in western Connecticut.
We believe that we are strongly positioned to continue to improve our market
share and, in turn, the value of our franchise. We have a clearly defined
vision of our future, with a strong sense of optimism and the highest
recognition of our primary responsibility to our shareholders.
On behalf of the entire Board of Directors of NewMil Bancorp, we wish to
acknowledge the efforts of our valued employees, and thank you for your
continued confidence and support.
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman, President and CEO
3
<PAGE>
H i g h l i g h t s
Highlights of the Year
--------------------------------------------------------------------------------
2 0 0 0
[GRAPHIC]
Building on our 142-year history as western Connecticut's premier community
bank, we successfully expanded our array of services and undertook a number
of exciting initiatives in 2000.
ONLINE BANKING
In May, we introduced our state-of-the-art Online Banking service. With
Online Banking, our customers can obtain balance information, verify payment
of checks, move funds, reconcile bank accounts and, soon, pay bills - all in
a safe, secure and dynamic online environment. Since its introduction,
Online Banking has been enthusiastically received by our retail and business
customers and should serve to strengthen our existing relationships and
attract new customers.
BUSINESS BANKING
During the year, we enhanced our efforts in the business banking sector,
with renewed emphasis on serving the needs of small and medium sized
businesses. The robust economic environment contributed to our success in
this area, and to that of our customers. We blended our individualized
personal attention with an innovative array of products and services
designed to meet the specialized needs of our small business customers. For
example, we introduced a series of competitively priced checking accounts
and created our Sweep Investment Service, which provides commercial checking
customers attractive rates on excess funds that are swept daily into a
tiered-rate Repurchase Agreement.
Our Bank is now recognized as the institution of choice for small businesses
that seek a committed financial partner.
[PHOTO]
[PHOTO]
RETAIL BANKING
Our Retail Banking Group continued to focus on building valuable customer
relationships by providing a broad range of products and services coupled
with superior customer service.
Our supermarket branch office in the Grand Union Company's superstore in
Southbury continues to surpass our deposit projections since its opening
three years ago, and has attracted both personal and business customer
relationships. The convenience of seven-day-a-week banking has been
particularly attractive to busy consumers. As of June 30, the branch had
nearly $20 million on deposit.
In April, the Bank opened a special needs branch at Pomperaug Woods, an
independent life-care retirement community located in Southbury. The branch,
which is open three hours per week and is staffed by employees of our
Southbury branch office, is an efficient and practical way to provide a much
needed service to an attractive market segment.
Our Generations Gold Club checking accounts continued to attract customer
attention with a variety of money saving benefits. This value-added approach
to consumer banking has proven to be extremely popular with our customers,
and with 600 plus merchants participating in the program, it has become one
of our most successful products.
Our Mortgage Lending Team, with many innovative products, continued to build
relationships with local realtors and builders, and helped many individual
borrowers realize their dreams. New product development, aggressive
marketing and competitive pricing also helped fuel demand for home equity
lines of credit among current and new customers.
CUSTOMER SERVICE
New Milford Savings Bank's 142-year tradition of customer service is a great
source of pride for each of our employees. During 2000, we continued to
invest in the development of our employees and to ensure that our staff is
well equipped to serve our customers knowledgeably and efficiently. Our
business customers also appreciate the same superior customer service
illustrated by our flexibility, quick response to credit requests, and
ability to structure customized commercial loans and mortgage to meet their
individual needs.
4
<PAGE>
F i n a n c i a l
Financial Information
--------------------------------------------------------------------------------
I n f o r m a t i o n
6 Quarterly Financial Data
7 Selected Consolidated Financial Data
8 Management's Discussion and Analysis
17 Report of Independent Accountants
18 Consolidated Balance Sheets
19 Consolidated Statements of Income
20 Consolidated Statements of Changes in
Shareholders' Equity
21 Consolidated Statements of Cash Flows
22 Notes to Consolidated Financial Statements
32 Directors and Officers
5
<PAGE>
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(in thousands except ratios and Year ended June 30, 2000 Year ended June 30, 1999
per share amounts) June 30, Mar 31, Dec 31, Sept 30, June 30, Mar 31, Dec 31, Sept 30,
-----------------------------------------------------------------------------------------------------------------------------------
STATEMENTOF INCOME
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $ 6,865 $ 6,304 $ 6,047 $ 5,959 $ 5,867 $ 5,944 $ 6,148 $ 6,497
Interest expense 3,206 2,761 2,571 2,573 2,664 2,716 3,112 3,315
Net interest income 3,659 3,543 3,476 3,386 3,203 3,228 3,036 3,182
Provision for loan losses 25 -- 25 (520) 25 25 25 25
Non-interest income:
Securities losses, net -- -- -- (109) -- -- -- --
Gains on sales of loans, net 33 30 30 54 96 161 152 138
Gain on sale of branch -- -- -- 75 -- -- -- --
Gain on sale of OREO 23 -- 23 -- -- 478 754 110
Service fees and other 454 411 444 425 382 360 394 409
Non-interest expense 2,493 2,408 2,590 2,845 2,241 2,856 2,869 2,472
Income before income taxes 1,651 1,576 1,358 1,506 1,415 1,346 1,442 1,342
Income tax provision 563 553 456 504 388 466 870 540
Income before effect of accounting
change and extraordinary item 1,088 1,023 902 1,002 1,027 880 572 802
Effect of change in accounting
principal, net of taxes -- -- -- -- -- -- (162) --
Extraordinary item, net of taxes -- -- -- -- -- -- (87) --
Net income 1,088 1,023 902 1,002 1,027 880 323 802
FINANCIAL CONDITION
Total assets $392,572 $383,719 $341,798 $ 338,383 $352,117 $358,279 $ 357,764 $369,777
Loans, net 223,734 216,055 214,312 213,561 210,036 206,165 189,862 169,668
Allowance for loan losses 4,978 4,983 5,029 5,001 4,989 5,100 5,068 5,005
Securities 144,307 139,919 108,582 104,736 118,202 116,484 135,923 167,005
Deposits 319,626 307,021 299,254 295,408 300,123 305,188 305,381 295,323
Borrowings 35,750 34,800 7,500 7,500 15,000 15,000 15,000 37,500
Shareholders' equity 34,325 33,305 33,137 33,566 33,135 34,542 34,856 34,574
Non-performing assets 1,218 1,569 2,094 2,511 1,569 1,792 1,672 2,781
PER SHARE DATA
Earnings, diluted $ 0.29 $ 0.27 $ 0.23 $ 0.26 $ 0.27 $ 0.22 $ 0.21 $ 0.20
Cash dividends 0.10 0.10 0.10 0.10 0.09 0.09 0.08 0.08
Book value 9.52 9.23 9.10 9.13 9.04 9.15 9.09 9.04
Market price: (a)
High 11.250 13.313 13.375 11.250 11.750 13.000 14.000 13.500
Low 9.844 10.000 10.938 10.344 9.500 11.000 11.000 10.000
STATISTICAL DATA
Net interest margin 3.96% 4.11% 4.14% 4.02% 3.77% 3.80% 3.45% 3.54%
Efficiency ratio 59.80 60.44 65.19 74.26 60.88 67.57 66.17 63.34
Return on average assets 1.14 1.15 1.04 1.15 1.16 0.99 0.35 0.87
Return on average
shareholders' equity 13.09 12.40 10.78 12.19 12.16 10.15 3.72 9.43
Weighted average equivalent
shares outstanding, diluted 3,756 3,792 3,840 3,827 3,874 3,998 4,030 4,031
</TABLE>
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 September 1, 2000, there were 1,444 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.
6
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
At or for the years ended June 30,
(in thousands, except ratios and per share amounts) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME
<S> <C> <C> <C> <C> <C>
Interest and dividend income $ 25,175 $ 24,456 $ 24,655 $ 22,851 $ 21,837
Interest expense 11,111 11,807 12,196 10,916 10,438
Net interest income 14,064 12,649 12,459 11,935 11,399
Provision for loan losses (470) 100 250 400 400
Non-interest income:
Securities (losses) gains, net (109) -- (271) (9) 27
Gain on sale of non-performing loan -- -- 778 -- --
Gains on sales of OREO 46 1,342 359 567 388
Gains on sales of loans, net 147 547 480 181 10
Service fees and other 1,809 1,545 1,518 1,347 1,218
Non-interest expense 10,336 10,438 9,920 9,133 8,853
Income before income taxes 6,091 5,545 5,153 4,488 3,789
Income tax expense 2,076 2,264 2,164 1,886 1,547
Income before effect of accounting change and
extraordinary item 4,015 3,281 2,989 2,602 2,242
Cumulative effect of change in accounting
principal, net of taxes -- (162) -- -- --
Extraordinary item, net of taxes -- (87) -- -- --
Net income 4,015 3,032 2,989 2,602 2,242
FINANCIAL CONDITION
Total assets $ 392,572 $ 352,117 $ 367,569 $ 323,061 $309,363
Loans, net 223,734 210,036 162,849 166,141 150,558
Allowance for loan losses 4,978 4,989 5,004 5,452 4,866
Securities 144,307 118,202 162,267 119,368 125,583
Deposits 319,626 300,123 293,877 275,392 259,267
Borrowings 35,750 15,000 37,500 13,000 14,776
Shareholders' equity 34,325 33,135 33,409 31,719 31,892
Non-performing assets 1,218 1,569 1,684 3,585 6,480
PER SHARE DATA
Income before effect of accounting change and
extraordinary item
Diluted $ 1.05 $ 0.82 $ 0.74 $ 0.63 $ 0.50
Basic 1.10 0.87 0.78 0.65 0.51
Net income
Diluted 1.05 0.76 0.74 0.63 0.50
Basic 1.10 0.80 0.78 0.65 0.51
Cash dividends 0.40 0.35 0.30 0.23 0.17
Book value 9.52 9.04 8.71 8.27 7.84
STATISTICAL DATA
Net interest margin 4.06% 3.64% 3.78% 3.98% 4.01%
Efficiency ratio 64.77 64.90 64.74 63.67 66.90
Effective tax rate 34.08 40.83 42.00 42.02 40.83
Return on average assets 1.12 0.84 0.88 0.84 0.75
Return on average shareholders' equity 12.11 8.84 9.04 8.02 6.71
Dividend payout ratio 36.36 43.75 38.57 35.28 33.18
Allowance for loan losses to total loans 2.18 2.32 2.98 3.18 3.13
Non-performing assets to total assets 0.31 0.45 0.46 1.11 2.09
Tier 1 leverage capital 9.19 9.53 9.28 10.25 10.39
Total risk-based capital 16.83 19.40 21.26 19.85 20.98
Average shareholders' equity to average assets 9.26 9.49 9.69 10.44 11.22
Weighted average equivalent shares outstanding, diluted 3,807 3,985 4,066 4,143 4,487
Shares outstanding at June 30 (excluding Treasury stock) 3,606 3,664 3,834 3,834 4,070
</TABLE>
7
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
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 full service offices in Litchfield,
Fairfield and New Haven Counties and one limited service office in New Haven
County. NewMil and the Bank were formed in 1987 and 1858, respectively.
In May 2000, NewMil announced a definitive agreement to acquire Nutmeg Federal
Savings and Loan Association ("Nutmeg"). Nutmeg is a federally chartered savings
and loan association headquartered in Danbury, Connecticut. Nutmeg has $122.8
million in assets with four branch locations, two in Danbury, one in Bethel and
one in Ridgefield Connecticut, as of June 30, 2000. Based on the terms of the
agreement, Nutmeg shareholders will receive $8.25 per common share plus any net
gain (after expenses and taxes payable) on Nutmeg's sale of certain loan
servicing rights. Nutmeg shareholders will receive either cash or shares of
NewMil common stock. Nutmeg's preferred shareholders will receive $14.4375 per
preferred share plus any net gain (after expenses and taxes payable) on Nutmeg's
sale of certain loan servicing rights. NewMil expects to close the transaction,
with a total purchase price of approximately $20.0 million,and complete the
conversion during the quarter ending December 2000.
OVERVIEW
NewMil earned net income of $4,015,000, or $1.05 per share, for the year ended
June 30, 2000, compared with net income of $3,032,000, or $0.76 per share, for
fiscal year 1999. Net income for the 1999 fiscal year included the effect of
both a change in accounting principle, 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.
Excluding the effect of the accounting change and extraordinary item NewMil's
income grew 22.4% in 2000, reflecting improved core earnings, driven by higher
net interest income, a negative loan loss provision and slightly lower
non-interest expense, partly offset by a decrease in non-interest income.
Similarly, earnings per share before the effect of the accounting change and
extraordinary item increased 28.0%, 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.
In 1999, NewMil used the proceeds from the sale of the securities to prepay
$22.5 million of Federal Home Loan Bank fixed rate advances. In addition, 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, in
1999.
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%. 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 included 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 2000 AND 1999
ANALYSIS OF NET INTEREST AND DIVIDEND INCOME
Net interest income increased $1,415,000, or 11.2%, to $14,064,000 in 2000. This
resulted from a 42 basis point increase in the net interest margin and a lower
volume of interest-bearing liabilities. The net interest margin increased to
4.06% from 3.64%. This increase was due mostly to the effects of higher market
interest rates during 2000 as compared with 1999, 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.
8
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30, Average balance Income/expense Average yield/rate
(dollars in thousands) 2000 1999 1998 2000 1999 1998 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (a) $219,293 $192,052 $170,287 $ 17,108 $ 15,426 $ 15,005 7.80% 8.03% 8.81%
Mortgage backed securities (d) 87,905 90,273 42,014 5,739 5,374 2,532 6.53 5.95 6.03
Other securities (b) (d) 39,509 65,630 117,690 2,328 3,656 7,118 5.89 5.57 6.05
-------------------------------------------------------------------------------------------------------
Total earning assets 346,707 347,955 329,991 25,175 24,456 24,655 7.26 7.03 7.47
-------------------------------
Other assets 11,252 13,473 11,024
----------------------------------------------------------------------
Total assets $357,959 $361,428 $341,015
======================================================================
NOW accounts $ 38,158 $ 33,065 $ 29,008 434 387 389 1.14 1.17 1.34
Money market accounts 71,478 68,365 62,687 2,186 2,018 1,921 3.06 2.95 3.06
Savings & other 48,932 48,383 40,933 1,185 1,234 1,116 2.42 2.55 2.73
Certificates of deposit 125,218 133,421 138,202 6,073 6,713 7,477 4.85 5.03 5.41
-------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 283,786 283,234 270,830 9,878 10,352 10,903 3.48 3.66 4.03
Borrowings 20,084 24,432 22,208 1,233 1,455 1,293 6.14 5.96 5.82
-------------------------------------------------------------------------------------------------------
Total interest-bearing funds 303,870 307,666 293,038 11,111 11,807 12,196 3.66 3.84 4.16
-------------------------------
Demand deposits 19,041 17,185 12,884
Other liabilities 1,897 2,278 2,037
Shareholders' equity 33,151 34,299 33,056
----------------------------------------------------------------------
Total liabilities and
shareholders' equity $357,959 $361,428 $341,015
======================================================================
Net interest income $ 14,064 $ 12,649 $ 12,459
===============================
Spread on interest-bearing funds 3.60 3.19 3.31
Net interest margin (c) 4.06 3.64 3.78
(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.
(d) Average balances of investments are based on historical cost.
</TABLE>
The following table sets forth the changes in interest due to volume and rate
for the three years ended June 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
2000 versus 1999 1999 versus 1998
Years ended June 30, Change in interest due to Change in interest due to
(in thousands) Volume Rate Vol/rate Net Volume Rate Vol/rate Net
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 2,188 $ (443) $ (63) $ 1,682 $ 1,918 $(1,327) $ (170) $ 421
Mortgage backed securities (141) 520 (14) 365 2,908 (31) (35) 2,842
Other securities (1,455) 211 (84) (1,328) (3,149) (562) 249 (3,462)
-----------------------------------------------------------------------------------------------------------------------------------
Total 592 288 (161) 719 1,677 (1,920) 44 (199)
-----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 20 (493) (1) (474) 499 (1,004) (46) (551)
Borrowings (259) 45 (8) (222) 129 30 3 162
-----------------------------------------------------------------------------------------------------------------------------------
Total (239) (448) (9) (696) 628 (974) (43) (389)
-----------------------------------------------------------------------------------------------------------------------------------
Net change to interest income $ 831 $ 736 $ (152) $ 1,415 $ 1,049 $ (946) $ 87 $ 190
===================================================================================================================================
</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 increased $719,000, or 2.9%, to $25.2 million
in 2000. Loan income increased $1,682,000, or 10.9%, as a result of higher loan
volume offset by lower average yield. Average loans increased $27.2 million, or
14.2%, to $219.3 million in 2000 as compared with 1999. The decrease in average
loan yield, down 23 basis points, was mostly due to the changes in portfolio
mix. Most of the growth has been in commercial and residential mortgage loans.
Investment income decreased $963,000, or 10.7%, in 2000 as a result of lower
average volume offset in part by higher average yield. Average securities
decreased $28.5 million, or 18.3%. The increase in average investment yield, up
54 basis points, was due to higher reinvestment yields during 2000 and changes
in portfolio mix.
INTEREST EXPENSE
Interest expense decreased $696,000, or 5.9%, to $11.1 million in 2000 primarily
as a result of changes in the deposit mix coupled with lower average borrowings.
Deposit expense decreased $474,000, or 4.6%, as a result of a decline in deposit
rates and a favorable change in deposit mix, partially offset by
interest-bearing deposit growth of $552,000, or 0.2%. The average cost of
interest-bearing deposits declined by 18 basis points to 3.48%. Deposit growth
occurred in all deposit categories, except higher cost certificates of deposit.
NOW accounts increased $5.1 million, or 15.4%, money market accounts increased
$3.1 million, or 4.6% and savings accounts increased $549,000, or 1.1%, while
certificates of deposits decreased $8.2 million, or 6.1%.
Borrowings expense decreased $222,000, primarily as a result of a decrease in
average borrowings offset, in part, by a 18 basis point increase in average cost
of borrowing.
9
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
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 three years:
Years ended June 30,
(dollars in thousands) 2000 1999 1998
-----------------------------------------------------------------------
Balance, beginning of year $ 4,989 $ 5,004 $ 5,452
Provision for losses (470) 100 250
Charge-offs (177) (176) (706)
Recoveries 636 61 8
-----------------------------------------------------------------------
Balance, end of year $ 4,978 $ 4,989 $ 5,004
=======================================================================
Ratio of allowance for loan losses:
to non-performing loans 584.3% 403.6% 360.3%
to total gross loans 2.2 2.3 3.0
Loan loss provision to average loans (0.2) 0.1 0.1
Net charge-offs (recoveries) to average
loans (0.2) 0.1 0.4
NewMil had a negative provision of $470,000 for loan losses in 2000, down from a
provision of $100,000 in 1999 and $250,000 in 1998. The reduction in the
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. The negative
provision, in 2000, resulted from a loan loss recovery of $545,000, related to a
loan that had been charged off in prior years. The recovery represents cash
received from the borrower's bankruptcy court proceedings. During fiscal year
2000 non-performing loans decreased $384,000, or 31.1%, to $852,000 at June 30,
2000 and, as a result, the reserve coverage to non-performing loans increased to
584.3% at June 30, 2000 from 403.6% at June 30, 1999. Past due performing loans
(accruing loans 30-89 days past due) also decreased in 2000 and at June 30, 2000
represented 0.6% of gross loans. The decrease in the ratio of the allowance for
loan losses to total gross loans during 2000, to 2.2% at June 30, 2000 compared
to 2.3% at June 30, 1999, is due to reduction in non-performing loans offset by
loan portfolio growth of $13.7 million, or 6.4% during 2000. Loan growth has
been primarily concentrated in commercial mortgage loans. NewMil remains
adequately reserved both against total loans and non-performing loans. For a
discussion on loan quality see "Asset Quality and Portfolio Risk".
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, 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 examined by the FDIC, 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 June 30, 2000 remained substantially the same.
NON-INTEREST INCOME
Non-interest income decreased $1,541,000 or 44.9%, to $1,893,000 in 2000. This
decrease is attributable to gains on sales of OREO in 1999, a decrease in loan
sales in 2000 and security losses in 2000, offset by an increase in service
charges. The principal categories of non-interest income are as follows:
Years ended June 30,
(dollars in thousands) 2000 1999 Change
-------------------------------------------------------------------------------
Service charges on deposit accounts $ 1,329 $ 1,154 $ 175 15.2%
Gains on sales of loans, net 147 547 (400) (73.1)
Securities (losses) gains, net (109) -- (109) (100.0)
Gain on branch sale 75 -- 75 100.0
Gains on sales of OREO 46 1,342 (1,296) (96.6)
Loan servicing 66 81 (15) (18.5)
Other 339 310 29 9.4
-------------------------------------------------------------------------------
Total non-interest income $ 1,893 $ 3,434 $(1,541) (44.9)%
===============================================================================
The increase in service charges on deposit accounts in 2000 reflects increased
transaction volume, resulting from growth in demand deposit and NOW accounts
coupled with an increase in the Bank's fee structure. The loss from security
sales was a result of the sale of three securities which had under performed due
to higher than expected prepayment speeds. The gain from the sale of a branch,
in 2000, is the result of an additional premium which resulted from certain
competitive events not occurring within a time frame stipulated in the sale
agreement for the Winsted Branch which was sold in May 1999. The decrease in
gains from sales of residential mortgage loans resulted from loan sales of $7.9
million in 2000 compared with $28.0 million in 1999. Secondary market loan sales
are generally pre-arranged on a loan by loan basis prior to origination and
loans are sold service-released.
The significant decrease in OREO gains in 2000 is a result of the low level of
OREO that the Bank had during the year. The 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. The decrease in loan servicing fees in 2000 resulted from run-off
in the mortgage servicing portfolio, which at June 30, 2000 totaled $16.9
million, down from $20.2 million at June 30, 1999. Any loans that the Bank has
sold, since 1994, have been on a servicing released basis.
OPERATING EXPENSES
Operating expenses decreased $102,000, or 1.0%, in 2000. The principal
categories of operating expenses are as follows:
Years ended June 30,
(dollars in thousands) 2000 1999 Change
------------------------------------------------------------------------
Salaries $ 4,878 $ 4,766 $ 112 2.4%
Employee benefits 665 1,252 (587) (46.9)
Occupancy 986 995 (9) (0.9)
Equipment 919 779 140 18.0
Professional, collection
and OREO expense 565 284 281 98.9
Insurance 107 88 19 21.6
Postage and telecommunications 354 421 (67) (15.9)
Marketing 327 216 111 51.4
Service bureau 214 261 (47) (18.0)
Other operating 1,321 1,376 (55) (4.0)
------------------------------------------------------------------------
Total operating expenses $10,336 $10,438 $ (102) (1.0)%
========================================================================
The increase in salaries in 2000 was due primarily to annual salary increases
and higher incentive compensation awards which were offset by overtime, in 1999,
related to the conversion of the Bank's core data processing systems to a new
in-house system. The decrease in employee benefits results primarily from the
recognition of net periodic pension income, on NewMil's frozen
10
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
defined benefit pension plan (the plan), of $468,000 and from lower health
benefits expenses in 2000. 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 ended
December 31, 1999, NewMil made a strategic decision not to terminate the plan
and will continue the plan in a frozen status. This change in strategy was
deemed a significant event per paragraph 53 of SFAS No. 87 "Employers'
Accounting for Pensions" which necessitated a change in measurement assumptions.
These different measurement assumptions resulted in $468,000 of pension income
during the year 2000 as compared to $178,000 in 1999. The increase in occupancy
and equipment expense is primarily due to higher depreciation expense and
building maintenance expense in 2000. The increase in professional, collection
and OREO expense is a result of the cost of additional consulting work related
to various corporate initiatives that the Bank undertook in 2000. Marketing
expense increased as a result of a Cable TV campaign in 2000. All other
operating expenses, including shareholder relations, office expense and other,
decreased $150,000 or 7.0% in 2000.
INCOME TAXES
Net income for 2000 included an income tax provision of $2,076,000, for an
effective tax rate of 34.1%, as compared with an income tax provision of
$2,264,000, for an effective tax rate of 40.8%, for 1999.
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 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%. 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.
SFAS 133 has no financial impact on the results of operations for the year ended
June 30, 2000 as NewMil has no derivative financial instruments.
COMPARISON BETWEEN 1999 AND 1998
OVERVIEW
NewMil earned net income of $3,032,000, or $0.76 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 principles, resulting from the adoption of SFAS 133,
and an extraordinary item, resulting from the prepayment of Federal Home Loan
Bank advances.
ANALYSIS OF NET INTEREST 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.
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 FOR LOAN LOSSES
NewMil provided $100,000 for loan losses in 1999, down from $250,000 in 1998 and
$400,000 in 1997. 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.
NON-INTEREST INCOME
Non-interest income increased $570,000, or 19.9%, to $3,434,000 in 1999. This
increase is a result of gains on sale 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,
(dollars in thousands) 1999 1998 Change
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 1,154 $ 1,122 $ 32 2.9%
Gains on sales of loans, net 547 480 67 14.0
Loan servicing 81 101 (20) (19.8)
Securities (losses) gains, net -- (271) 271 100.0
Gains on sales of OREO, net 1,342 359 983 273.8
Gains on sale of non-performing loans -- 778 (778) (100.0)
Other 310 295 15 5.1
---------------------------------------------------------------------------------------
Total non-interest income $ 3,434 $ 2,864 $ 570 19.9%
=======================================================================================
</TABLE>
11
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
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.
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 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.
OPERATING EXPENSES
Operating expenses increased $518,000, or 5.2%, in 1999. The principal
categories of operating expenses are as follows:
Years ended June 30,
(dollars in thousands) 1999 1998 Change
------------------------------------------------------------------------------
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%
==============================================================================
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, with a similar effective tax rate of 42.0%, for 1998.
FINANCIAL CONDITION
During fiscal year 2000 total assets increased $40.5 million, or 11.5%, to
$392.6 million at June 30, 2000. This was due to purchases of securities and an
increase in net loans of $13.7 million. Investments increased $26.1 million, or
22.1%, to $144.3 million at June 30, 2000. Net loans increased by $13.7 million,
or 6.5%, to $223.7 million at June 30, 2000. On the liability side, deposits
grew $19.5 million, or 6.5%, and borrowings increased $20.8 million, to $35.8
million at June 30, 2000. Non-performing assets decreased $351,000, or 22.4%, to
$1.2 million, and represent only 0.31% of assets at June 30, 2000. Book value
per share increased 5.3% to $9.52 at June 30, 2000, after cash dividends of
$0.40, representing a 38.1% payout ratio. At June 30, 2000 tier 1 leverage and
total risk-based capital ratios were 9.19% and 16.83%, respectively, and NewMil
was "well capitalized" as defined by the Federal Reserve Board.
SECURITIES
During 2000 securities increased $26.1 million, or 22.1%, to $144.3 million at
June 30, 2000, while federal funds sold decreased $3.2 million. The increase in
securities and loan growth was funded by both deposit growth and increased
borrowings during 2000. The principal categories of securities are as follows
(including both available-for-sale and held-to-maturity):
June 30,
(dollars in thousands) 2000 1999 1998
------------------------------------------------------------------------------
U.S. Treasury
notes $ -- --% $ -- --% $ 18,330 11.3%
U.S. Government
Agency notes 9,822 6.8 -- -- 993 0.6
Corporate Bonds 22,034 15.3 -- -- -- --
Municipal Bonds 10,800 7.5 10,558 8.9 -- --
Mortgage backed
securities 89,851 62.3 92,996 78.7 94,602 58.3
Collateralized
mortgage
obligations 9,035 6.2 11,883 10.1 45,817 28.2
Equity securities 2,765 1.9 2,765 2.3 2,525 1.6
------------------------------------------------------------------------------
Total securities $ 144,307 100.0 $ 118,202 100.0 $ 162,267 100.0
==============================================================================
The change in portfolio mix in 2000 resulted from the portfolio run-off, the
sale of mortgage backed securities, and the replacement of these with new
purchases, which included corporate bonds, Government Agency securities, and
mortgage backed securities ("MBS").
NewMil's securities portfolio consists of MBSs', CMOs', Government Agency,
corporate bonds, bank qualified municipal bonds and Federal Home Loan Bank
stock. At June 30, 2000, 92.4% of the portfolio consisted of fixed rate
securities, principally MBS, corporate bonds and to a lesser extent, Government
agency, CMOs and municipal bonds. At June 30, 2000 total fixed rate securities
had a projected weighted average duration and life of 4.5 years and 6.1 years,
respectively, based on median projected prepayment speeds at current interest
rates. At June 30, 2000 5.6% 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
7.2 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 2.0% of the portfolio at June 30, 2000, was represented primarily
by Federal Home Loan Bank stock.
At June 30, 2000, securities totaling $104.5 million, or 72.4%, were classified
as available-for-sale and securities totaling $39.8 million, or 27.6%, were
classified as held-to-maturity.
12
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
LOANS
During 2000 net loans grew $13.7 million, or 6.5%, to $223.7 million at June 30,
2000. Loan originations and advances for portfolio, including $4.2 million of
residential mortgage loans purchased, totaled $74.7 million for 2000, down 19.2%
from $92.4 million in 1999. Loan repayments totaled $61.0 million for 2000, down
from $83.4 million in 1999. The decrease in loan repayments was due primarily to
refinancing of residential mortgage loans and HELOCS, in 2000. Residential
mortgage loans originated for sale decreased by $20.1 million to $7.9 million,
in 2000, compared with $28.0 million in 1999. This decrease also reflects the
slowdown in refinancing in 2000. Loans originated for sale are sold on a
servicing released basis.
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.
The following table sets forth information on the composition of NewMil's loan
portfolio by loan type for each of the last five years:
<TABLE>
<CAPTION>
June 30,
(in thousands) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate Mortgages:
Residential
1-4 family $ 130,770 $ 128,371 $ 85,274 $ 90,885 $ 89,159
5-more family 4,185 6,152 5,500 4,812 3,262
Commercial 51,633 37,456 34,878 31,850 30,408
Land 1,995 2,410 3,571 8,334 9,472
Home equity credit 20,257 19,429 21,208 20,274 14,474
-----------------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 208,840 193,818 150,431 156,155 146,775
Commercial and industrial 17,404 18,211 14,357 12,424 6,130
Installment 806 950 1,161 1,140 502
Collateral and other 1,633 1,900 1,957 1,982 2,156
-----------------------------------------------------------------------------------------------------------------------------------
Total loans, gross 228,683 214,879 167,906 171,701 155,563
Deferred loan origination fees and purchase premium, net 29 146 (53) (108) (139)
Allowance for loan losses (4,978) (4,989) (5,004) (5,452) (4,866)
-----------------------------------------------------------------------------------------------------------------------------------
Total loans, net $ 223,734 $ 210,036 $ 162,849 $ 166,141 $ 150,558
===================================================================================================================================
</TABLE>
NON-PERFORMING ASSETS
The following table sets forth non-performing assets for each of the last five
years:
<TABLE>
<CAPTION>
June 30,
(in thousands) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans $ 621 $ 1,051 $ 761 $ 2,054 $ 3,809
Accruing loans past due 90 days or more 231 185 628 783 166
Accruing restructured loans -- -- -- 274 281
-----------------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 852 1,236 1,389 3,111 4,256
OREO, net 366 333 295 474 2,224
-----------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 1,218 $ 1,569 $ 1,684 $ 3,585 $ 6,480
===================================================================================================================================
</TABLE>
The following table details the composition of non-performing assets as of the
dates presented.
Non-Performing Assets
<TABLE>
<CAPTION>
Accruing loans Other Total
Non-accrual past due 90 Restructured real estate non-performing
(in thousands) loans or more days loans owned assets
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 2000
Real estate:
Residential $ 216 $ 231 $ -- $ 58 $ 505
Commercial 2 -- -- 308 310
Land and land development 403 -- -- -- 403
-----------------------------------------------------------------------------------------------------------------------------------
Totals $ 621 $ 231 $ -- $ 366 $ 1,218
===================================================================================================================================
June 30, 1999
Real estate:
Residential $ 196 $ 185 $ -- $ 333 $ 714
Commercial 452 -- -- -- 452
Land and land development 403 -- -- -- 403
-----------------------------------------------------------------------------------------------------------------------------------
Totals $ 1,051 $ 185 $ -- $ 333 $ 1,569
===================================================================================================================================
</TABLE>
13
-----
NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
During 2000 non-performing assets decreased $351,000, or 22.4%, to $1.2 million
at June 30, 2000, and represented only 0.31% 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.
Years ended June 30,
(dollars in thousands) 2000 1999
--------------------------------------------------------------------------------
Balance, beginning of year $ 1,569 $ 1,684
Loans placed on non-accrual status 899 920
Non-accrual loan payments (523) (150)
Loans returned to accrual status (278) (3)
Non-accrual loan charge-offs (173) (156)
Change in accruing loans past
due 90 or more days, net 46 (442)
Payments to improve OREO 31 107
Decrease in OREO valuation reserve -- 82
Gross proceeds from OREO sales (399) (1,815)
Gains on OREO sales, net 46 1,342
--------------------------------------------------------------------------------
Balance, end of year $ 1,218 $ 1,569
================================================================================
Percent of total assets 0.31% 0.45%
Had non-accrual loans as of June 30, 2000 and 1999, been current in accordance
with their original terms, gross interest income of $68,000 and $98,000 would
have been recorded in net income for 2000 and 1999, respectively. The amount of
interest on these loans that was included in income was $15,000 and $59,000 in
2000 and 1999, respectively. Accruing loans past due 90 days or more at June 30,
2000 consist of two residential mortgage loans, both 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 2000 sold $399,000 of OREO from which
net gains of $46,000 were realized.
In addition to non-performing assets, at June 30, 2000 NewMil had $3,724,000 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 documenta-
tion 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 $19.5 million, or 6.5%, during 2000 to $319.6 million. Money
Market and NOW accounts grew $13.5 million, or 12.7%, certificates grew $4.7
million, or 3.7% and demand deposits grew $2.1 million, or 11.2%, while savings
decreased $791,000, or 1.6%. NewMil has 14 full service branch offices and one
limited service office located in Fairfield, Litchfield and New Haven Counties.
The growth in deposits, during 2000, along with increased borrowings, up $20.8
million to $35.8 million, funded the growth in loans and investments. Borrowings
at June 30, 2000 consisted of Federal Home Loan Bank advances with terms ranging
from one day to nine months and fixed rates ranging from 5.91% to 7.42% the one
day advances are at a variable interest rate. Borrowings at June 30, 1999 had
terms of twenty to forty-four months and fixed rates between 5.91% 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 2000 provided net cash flows of $2.2 million, down from
$5.6 million in 1999. During 2000 investing activities used net cash of $40.1
million, principally for loan advances and purchases and net security purchases.
Financing activities provided net cash of $37.7 million, principally from
increased deposits, borrowings and proceeds from the exercise of stock options,
offset by shareholder dividends and purchases of treasury stock. Funds provided
by operating activities and financing activities were utilized to fund investing
activities.
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 purchases of treasury stock, offset by
increased net deposits. Funds provided by operating activities coupled with
$17.6 million decreased cash and cash equivalents, due primarily to a decrease
in federal funds sold, were utilized to fund investing and financing activities.
At June 30, 2000, 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 $186.6 million, to net deposits and
short-term unsecured liabilities, was 52.5%, well in excess of NewMil's minimum
guideline of 15%.
At June 30, 2000, NewMil had outstanding commitments to fund new loan
originations of $5.3 million, construction mortgage commitments of $4.2 million
and unused lines of credit of $24.8 million. These commitments will be met in
the normal course of business. NewMil believes that its liquidity sources will
continue to provide funding sufficient to support operating activities, loan
originations and commitments, and deposit withdrawals.
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 an earnings 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 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 interestrate 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, 2000, 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.
14
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000 Within Within Non-
Within 6 7-12 1-5 After interest-
(dollars in thousands) months months years 5 years bearing Total
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Securities $ 19,378 $ 6,225 $ 71,637 $ 49,132 $ (2,065) $ 144,307
Federal funds sold -- -- -- -- -- --
Due from banks 99 -- -- -- 12,524 12,623
Loans 73,878 29,307 79,528 42,390 3,609 228,712
Other assets -- -- -- -- 6,930 6,930
-----------------------------------------------------------------------------------------------------------------------------------
Total assets 93,355 35,532 151,165 91,522 20,998 392,572
===================================================================================================================================
SOURCE OF FUNDS
Deposits
Demand (non interest-bearing) -- -- -- -- 20,703 20,703
NOW accounts -- -- -- 43,950 -- 43,950
Money market 75,465 -- -- -- -- 75,465
Savings and other 48,652 -- -- -- -- 48,652
Certificates of deposit 65,461 33,557 31,800 38 -- 130,856
Federal Home Loan Bank advances 28,250 7,500 -- -- -- 35,750
Other liabilities -- -- -- -- 2,871 2,871
Stockholders' equity -- -- -- -- 34,325 34,325
-----------------------------------------------------------------------------------------------------------------------------------
Total sources of funds 217,828 41,057 31,800 43,988 57,899 $ 392,572
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-rate sensitivity gap $ (124,473) $ (129,998) $ (10,633) $ 36,901 $ --
===================================================================================================================================
Percent of total assets (31.7)% (33.1)% (2.7)% 9.4% --%
</TABLE>
At June 30, 2000, its one year cumulative gap was -$130.0 million, or 33.1% 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 +/-200 basis points from the current rate environment. During the
year ended June 30, 2000 interest rates did not move +/-200 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, 2000 and 1999, horizon is within NewMil's
tolerance limit.
% Change in
Change Net Income
in Rate 2000 1999
---------------------------------------------------------------
+200 bp (8.6)% 2.9%
-200 bp (5.0)% (9.5)%
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 2000 shareholders' equity increased $1,190,000, or 3.6%, to $34.3
million, while book value per share increased 5.3% to $9.52 at June 30, 2000.
The increase in shareholders' equity resulted from earnings of $4,015,000 and
proceeds from the exercise of stock options of $372,000, offset, in part, by
treasury stock purchases of $1,514,000, dividend payments of $1,453,000 and a
$230,000 increase in the adjustment to shareholders equity for net unrealized
holding losses on securities.
In July 1996, April 1999, July 1999, December 1999 and February 2000 NewMil
announced its intention to repurchase 406,989 (10% of the outstanding shares),
100,000, 50,000, 40,000 and 40,000 respectively, of it outstanding common stock
in the open market and unsolicited negotiated transactions, including block
purchases. 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 2000 NewMil repurchased
128,190 shares, or 3.5%, of its outstanding shares of common stock, as of July
1, 1999. As of June 30, 2000 NewMil had repurchased 406,989 of its outstanding
common stock, under the July 1996 plan, 190,000 of its outstanding common
stock, under the April 1999, July 1999 and December 1999 plans, and 10,001
shares of its outstanding shares, under the February 2000 plan. This represents
95.3% of the total planned repurchases with total consideration of $6,526,000
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,
2000 NewMil's leverage capital ratio was 9.19% and its tier I and total
risk-based capital ratios were 15.56% and 16.83%, respectively. At June 30, 2000
the Bank's leverage capital ratio was 9.05% and its tier I and total risk based
capital ratios were 15.76% and 17.02%, 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.
15
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
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, 2000 is $1,452,000. In some instances, further restrictions
on dividends may be imposed on 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 1996, 1997 and
1998 NewMil increased its quarterly cash dividend to $0.06, $0.08 and $0.09,
respectively. In July 1999 NewMil increased its quarterly dividend to $0.10. For
2000 total dividends of $0.40 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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements which are expected to impact NewMil
at this time.
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 per-
formance 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.
16
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
Report of Independent Accountants
PRICEWATERHOUSECOOPERS [LOGO]
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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000 in conformity with accounting principles generally accepted
in the United States. 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 auditing standards generally accepted in the
United States, 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 19, 2000
17
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
(dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,623 $ 9,719
Federal funds sold --- 3,167
------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 12,623 12,886
Securities
Available-for-sale at market 104,528 74,135
Held-to-maturity at amortized cost (fair value: $38,005 and $42,911) 39,779 44,067
Loans (net of allowance for loan losses: $4,978 and $4,989) 223,734 210,036
Other real estate owned 366 333
Bank premises and equipment, net 5,679 6,238
Accrued interest income 2,747 2,190
Deferred tax asset, net 2,000 1,788
Other assets 1,116 444
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 392,572 $ 352,117
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 20,703 $ 18,622
NOW accounts 43,950 34,660
Money market 75,465 71,252
Savings and other 48,652 49,443
Certificates of deposit 130,856 126,146
------------------------------------------------------------------------------------------------------------------------------------
Total deposits 319,626 300,123
Federal Home Loan Bank advances 35,750 15,000
Accrued interest and other liabilities 2,871 3,859
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 358,247 318,982
------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies --- ---
------------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock - $.50 per share par value
Shares authorized: 20,000,000
Shares issued: 5,990,138 2,995 2,995
Paid-in capital 43,332 43,773
Retained earnings 13,199 10,637
Accumulated other comprehensive income, net (1,362) (1,132)
Treasury stock, at cost: 2,384,113 and 2,325,924 shares (23,839) (23,138)
------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 34,325 33,135
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 392,572 $ 352,117
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
18
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended June 30,
(in thousands except per share amounts) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 17,108 $ 15,426 $ 15,005
Interest and dividends on securities 7,915 8,235 8,886
Interest on federal funds sold 152 795 764
------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 25,175 24,456 24,655
------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 9,878 10,352 10,903
Borrowed funds 1,233 1,455 1,293
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,111 11,807 12,196
------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income 14,064 12,649 12,459
Provision for loan losses (470) 100 250
------------------------------------------------------------------------------------------------------------------------------------
Net interest and dividend income after provision for loan losses 14,534 12,549 12,209
------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 1,329 1,154 1,122
Gain on sale of branch 75 --- ---
Gain on sale of OREO 46 1,342 359
Gain on sale of non-performing loan --- --- 778
Gains on sales of mortgage loans, net 147 547 480
Loan servicing fees 66 81 101
Securities losses, net (109) --- (271)
Other 339 310 295
------------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,893 3,434 2,864
------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries 4,878 4,766 4,216
Employee benefits 665 1,252 1,183
Occupancy 986 995 1,018
Equipment 919 779 922
Professional, collections and OREO 565 284 315
Marketing 327 216 235
Insurance 107 88 92
Other 1,889 2,058 1,939
------------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 10,336 10,438 9,920
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, cumulative effect of
accounting change and extraordinary item 6,091 5,545 5,153
Income tax provision 2,076 2,264 2,164
------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change and extraordinary item 4,015 3,281 2,989
------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in
accounting principle, net of taxes --- (162) ---
Extraordinary item, net of taxes --- (87) ---
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,015 $ 3,032 $ 2,989
====================================================================================================================================
Diluted earnings per share
Income before cumulative effect of accounting
change and extraordinary item $ 1.05 $ 0.82 $ 0.74
Cumulative effect of change in
accounting principle, net of taxes --- (0.04) ---
Extraordinary item, net of taxes --- (0.02) ---
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.05 $ 0.76 $ 0.74
====================================================================================================================================
Basic earnings per share
Income before cumulative effect of accounting
change and extraordinary item $ 1.10 $ 0.87 $ 0.78
Cumulative effect of change in accounting
principle, net of taxes --- (0.05) ---
Extraordinary item, net of taxes --- (0.02) ---
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.10 $ 0.80 $ 0.78
====================================================================================================================================
Dividends per share $ 0.40 $ 0.35 $ 0.30
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
19
----
NEWMIL BANCORP AND SUBSIDIARY
</TABLE>
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
other Total
Common Stock Paid-in Retained Treasury comprehensive shareholders'
(dollars in thousands) Shares Amount capital earnings stock income equity
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
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
Net income for year -- -- -- 4,015 -- -- 4,015
Change in net unrealized gains
(losses) on securities,
net of taxes -- -- -- -- -- (230) (230)
Total comprehensive income 3,785
--------------------------------------------------------------------------------------------------------------------
Cash dividends paid -- -- -- (1,453) -- -- (1,453)
Proceeds from exercise
of stock options:
Issuance of treasury stock -- -- (441) -- 813 -- 372
Acquisition of treasury stock -- -- -- -- (1,514) -- (1,514)
--------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2000 5,990,138 $2,995 $ 43,332 $ 13,199 $(23,839) $(1,362) $ 34,325
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
20
------ NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30,
(in thousands) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 4,015 $ 3,032 $ 2,989
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses (470) 100 250
Provision for OREO recoveries -- (82) (55)
Provision for depreciation and amortization 760 695 626
Deferred income tax (benefit) provision (94) 496 763
Amortization and accretion of securities premiums and discounts, net 155 763 185
Securities losses, net 109 -- 271
Cumulative effect of accounting change, net -- 162 --
Extraordinary loss on debt extinguishment, net -- 87 --
Loans originated for sale (7,377) (27,597) (25,331)
Proceeds from loans originated for sale 7,524 28,144 25,812
Realized gains on loan sales, net (147) (547) (1,258)
Realized gains on OREO sales, net (46) (1,342) (359)
Realized gains on branch sale (75) -- --
(Increase) decrease in accrued interest income (557) 69 (245)
(Decrease) increase in accrued interest expense and other liabilities (988) 1,251 (166)
(Increase) decrease in other assets, net (596) 346 141
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,213 5,577 3,623
------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 8,411 20,933 35,877
Proceeds from sale of security held-to-maturity -- -- 7,325
Proceeds from maturities and principal repayments of securities 2,821 33,603 44,152
Purchases of securities available-for-sale (32,218) (10,805) (50,071)
Proceeds from sales of mortgage backed securities available-for-sale -- -- 1,042
Purchases of mortgage backed securities:
held-to-maturity -- (18,198) --
available-for-sale (21,540) (15,598) (93,403)
Principal collected on mortgage backed securities 15,808 33,497 12,196
Loan (advances) repayments, net (9,418) (9,053) 2,427
Purchase of loans (4,164) (38,556) (644)
Proceeds from sale of non-performing loan -- -- 1,835
Proceeds from sales of OREO 398 1,815 1,294
Payments to improve OREO (31) (107) (498)
Purchases of Bank premises and equipment (201) (979) (709)
------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (40,134) (3,448) (39,177)
------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 19,503 6,247 18,485
FHLB advances (repayments), net 20,750 (22,587) 24,500
Treasury stock purchased (1,514) (2,110) (765)
Proceeds from Treasury Stock reissued -- -- 50
Cash dividends paid (1,453) (1,328) (1,153)
Proceeds from exercise of stock options 372 59 285
------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 37,658 (19,719) 41,402
------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (263) (17,590) 5,848
Cash and federal funds sold, beginning of year 12,886 30,476 24,628
------------------------------------------------------------------------------------------------------------------------
Cash and federal funds sold, end of year $ 12,623 $ 12,886 $ 30,476
========================================================================================================================
CASH PAID DURING YEAR
Interest to depositors $ 9,807 $ 10,344 $ 10,904
Interest on borrowings 1,203 1,562 1,151
Income taxes 1,723 2,285 1,115
NON-CASH TRANSFERS
From securities held-to-maturity to securities available-for-sale -- 21,509 --
From loans to OREO 354 335 202
Financed portion of OREO sales 218 -- 378
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
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 full service offices and 1 limited
service office 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
2000 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, manage-
ment 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. 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, including impaired loans, is generally dis-
continued 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 collec-
tion. When a loan is placed on non-accrual status, interest previously accrued
but not collected is charged against current income. Income on such loans,
including impaired loans, is then recognized only to the extent that cash is
received and future collection of principal is probable.
Loans, including impaired 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 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 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.
22
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
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 appraisals.
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 differencesand 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:
(in thousands) 2000 1999 1998
----------------------------------------------------------
Basic 3,635 3,793 3,845
Effect of dilutive stock options 172 192 221
----------------------------------------------------------
Diluted 3,807 3,985 4,066
==========================================================
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). 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. NewMil does not have any operating segments, as defined
by SFAS 131, and therefore, has not disclosed the additional information.
PENDING BANK ACQUISITION AT JUNE 30, 2000
In May 2000, NewMil announced a definitive agreement to acquire Nutmeg Federal
Savings and Loan Association ("Nutmeg"). Nutmeg is a federally chartered savings
and loan association headquartered in Danbury, Connecticut. Nutmeg has $122.8
million in assets with four branch locations, two in Danbury, one in Bethel and
one in Ridgefield Connecticut, as of June 30, 2000. Based on the terms of the
agreement, Nutmeg shareholders will receive $8.25 per common share plus any net
gain (after expenses and taxes payable) on Nutmeg's sale of certain loan
servicing rights. Nutmeg shareholders will receive either cash or shares of
NewMil common stock. Nutmeg's preferred shareholders will receive $14.4375 per
preferred share plus any net gain (after expenses and taxes payable) on Nutmeg's
sale of certain loan servicing rights NewMil expects to close the transaction,
with a total purchase price of approximately $20.0 million, and complete the
conversion during the quarter ending December 2000.
Note 2
SECURITIES
--------------------------------------------------------------------------------
Securities classified as available-for-sale (carried at fair value) were as
follows:
Estimated Gross Gross
fair unrealized unrealized Amortized
(in thousands) value gains losses cost
------------------------------------------------------------------------
June 30, 2000
U.S. Government Agency notes
After 1 but within 5 years $ 9,822 $ 41 $ 11 $ 9,792
Corporate Bonds
After 1 but within 5 years 22,034 98 263 22,199
Mortgage backed securities 68,787 346 1,967 70,408
Collateralized mortgage
obligations 1,120 -- 197 1,317
------------------------------------------------------------------------
Total debt securities 101,763 485 2,438 103,716
Equity securities 2,765 -- -- 2,765
------------------------------------------------------------------------
Total securities
available-for-sale $104,528 $485 $2,438 $106,481
========================================================================
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
========================================================================
23
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
Securities classified as held-to-maturity (carried at amortized cost) were as
follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
(in thousands) cost (a) gains losses value
--------------------------------------------------------------------------------
June 30, 2000
Municipal bonds
After 1 but within 5 years $ 250 $-- $ 16 $ 234
After 10 years 10,550 912 9,638
Mortgage backed securities 21,064 4 397 20,671
Collateralized mortgage
obligations 7,915 6 459 7,462
--------------------------------------------------------------------------------
Total securities
held-to-maturity $39,779 $ 10 $1,784 $38,005
================================================================================
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.
Cash proceeds and realized gains and losses from sales of securities were as
follows:
Cash Realized Realized
(in thousands) proceeds gains losses
----------------------------------------------------------------------
Year ended June 30, 2000
Mortgage backed securities
Available-for-sale $ 8,411 $-- $109
======================================================================
Year ended June 30, 1999
Collateralized mortgage obligations
Available-for-sale $20,933 $-- $274
======================================================================
Year ended June 30, 1998
U.S. 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
======================================================================
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, 2000 securities with a carrying value and market value aggregating
approximately $786,000 and $747,000, respectively, were pledged as collateral
against public funds.
Note 3
LOANS
--------------------------------------------------------------------------------
The composition of the loan portfolio was as follows:
June 30,
(in thousands) 2000 1999
----------------------------------------------------------------------------
Real estate mortgages
One-four family residential $ 130,770 $ 128,371
Five or more family residential 4,185 6,152
Commercial 51,633 37,456
Land loans 1,995 2,410
Commercial and industrial 17,404 18,211
Home equity lines of credit 20,257 19,429
Installment and other 2,439 2,850
----------------------------------------------------------------------------
Total loans, gross 228,683 214,879
Deferred loan origination fees and
purchase premium, net 29 146
Allowance for loan losses (4,978) (4,989)
----------------------------------------------------------------------------
Total loans, net $ 223,734 $ 210,036
============================================================================
Impaired loans at June 30 (in thousands)
With no valuation allowance $ 2 $ 453
With valuation allowance 502 300
----------------------------------------------------------------------------
Total impaired loans 504 753
----------------------------------------------------------------------------
Valuation allowance 234 173
Commitments to lend additional amounts to
impaired borrowers -- --
Average impaired loans 864 627
Amount of impaired loans based on:
Discounted cash flows -- --
Collateral values 504 753
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
24
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
PAGE>
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:
Year ended June 30,
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------
Balance at beginning of year $ 4,989 $ 5,004 $ 5,452
Provision for losses (470) 100 250
Charge-offs (177) (176) (706)
Recoveries 636 61 8
-----------------------------------------------------------------------
Balance at end of year $ 4,978 $ 4,989 $ 5,004
=======================================================================
Note 4
NON-PERFORMING ASSETS
--------------------------------------------------------------------------------
The components of non-performing assets were as follows:
June 30,
(in thousands) 2000 1999
---------------------------------------------------------------------
Non-accrual loans $ 621 $1,051
Accruing loans past due 90 days or more 231 185
Accruing troubled debt restructured loans -- --
---------------------------------------------------------------------
Total non-performing loans 852 1,236
Real estate acquired in settlement of loans 366 333
---------------------------------------------------------------------
Total non-performing assets $1,218 $1,569
=====================================================================
The reductions in interest income associated with non-accrual loans were as
follows:
Year ended June 30,
(in thousands) 2000 1999 1998
---------------------------------------------------------------------
Income in accordance with original terms $68 $98 $77
Income recognized 15 59 58
---------------------------------------------------------------------
Reduction in interest income $53 $39 $19
=====================================================================
Note 5
BANK PREMISES AND EQUIPMENT
---------------------------------------------------------------------
The components of NewMil's premises and equipment were as follows:
June 30,
(in thousands) 2000 1999
---------------------------------------------------------------------
Land $ 1,140 $ 1,140
Buildings and improvements 6,170 6,156
Equipment 3,103 3,112
Leasehold improvements 403 459
---------------------------------------------------------------------
Total cost 10,816 10,867
Accumulated depreciation and amortization (5,137) (4,629)
---------------------------------------------------------------------
Bank premises and equipment, net $ 5,679 $ 6,238
=====================================================================
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:
(in thousands) 2000 1999 1998
---------------------------------------------------------------------
5.68% due March 3, 1999 $ -- $ -- $ 12,500
5.80% due March 3, 2000 -- -- 10,000
7.42% due July 1, 2000 3,250 -- --
6.56% due July 5, 2000 3,500 -- --
6.57% due July 12, 2000 1,500 -- --
6.55% due July 19, 2000 7,000 -- --
6.60% due July 26, 2000 8,000 -- --
6.13% due August 16, 2000 5,000 -- --
5.91% due March 5, 2001 7,500 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 $ 35,750 $ 15,000 $ 37,500
=====================================================================
In June 2000 NewMil began to offer repurchase agreements to its customers. These
agreements are offered as an overnight or short-term investment for NewMil's
customers. As of June 30, 2000 there were none outstanding.
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, 2000.
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:
Year ended June 30,
(in thousands) 2000 1999 1998
-------------------------------------------------------------------------------
Current provision
Federal $ 2,170 $ 1,498 $ 888
State -- 270 513
-------------------------------------------------------------------------------
Total 2,170 1,768 1,401
-------------------------------------------------------------------------------
Deferred (benefit) provision
Federal (94) 93 690
State -- 403 73
-------------------------------------------------------------------------------
Total (94) 496 763
-------------------------------------------------------------------------------
Income tax provision $ 2,076 $ 2,264 $ 2,164
===============================================================================
25
NEWMIL BANCORP AND SUBSIDIARY ----
<PAGE>
The following is a reconciliation of the expected federal statutory tax to the
income tax provision:
Year ended June 30,
2000 1999 1998
--------------------------------------------------------------------------------
Income tax at statutory federal tax rate 34.0% 34.0% 34.0%
Connecticut Corporation tax, net of
federal tax benefit 0.0 8.4 7.5
Other 0.1 (1.6) 0.5
--------------------------------------------------------------------------------
Effective income tax rates 34.1 40.8 42.0
================================================================================
The components of NewMil's net deferred tax asset were as follows:
(in thousands) Federal State
--------------------------------------------------------------------------------
June 30, 2000
Deferred tax assets
Unrealized losses on securities available-for-sale
and transferred to held-to-maturity $ 702 $ 155
Bad debt expense, book 1,692 373
Accrued pension expense 119 26
Deferred income 93 20
Other 203 45
--------------------------------------------------------------------------------
Total deferred tax assets 2,809 619
--------------------------------------------------------------------------------
Deferred tax liabilities
Post Retirement Benefits 152 33
Bad debt expense, tax 621 137
Other 36 6
--------------------------------------------------------------------------------
Total deferred tax liabilities 809 176
--------------------------------------------------------------------------------
Net deferred tax asset 2,000 443
Valuation reserve -- (443)
--------------------------------------------------------------------------------
Net deferred tax asset $ 2,000 $ --
================================================================================
June 30, 1999
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 $ --
================================================================================
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:
(in thousands) Federal State
--------------------------------------------------------------------------------
June 30, 2000
Deferred tax benefit allocated to:
Shareholders' equity $(118) $ --
Income (94) --
--------------------------------------------------------------------------------
Total deferred tax benefit $(212) $ --
================================================================================
June 30, 1999
Deferred tax expense allocated to:
Shareholders' equity $ 28 $ 191
Income 93 403
--------------------------------------------------------------------------------
Total deferred tax expense $ 121 $ 594
================================================================================
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 representing capital loss carryforwards which
were expected to expire. At June 30, 2000, no federal valuation allowance was
necessary as the capital loss carryforwards expired.
At June 30, 2000 and June 30, 1999, a valuation allowance was established for
the entire amount of the state deferred tax assets as a result of recently
enacted Connecticut legislation. The new law permits banks to shelter certain
mortgage income from the Connecticut corporation business tax through the use of
a special purpose entity called a "passive investment company". In accordance
with this legislation, NewMil formed a PIC, NMSB Mortgage Company, on January 1,
1999. The valuation allowance is necessary as no tax benefit is anticipated to
be realized on the reversal of the state deferred tax assets.
The effective tax rate for the fiscal year ended June 30, 2000 of 34.1% reflects
the first full year of the impact of the Connecticut legislation. The effective
tax rate for the fiscal year ended June 30, 1999 of 40.8% reflects the reduction
of state taxes for one-half of the year and the establishment of a full
valuation allowance for the deferred state tax assets.
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.
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:
March 31,
(in thousands) 2000 1999
--------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,240 $ 5,875
Service cost -- --
Interest cost 330 359
Impact of assumption change (1,960) --
Experience (gain) loss (141) --
Plan participants' contributions -- --
Actuarial gain -- 221
Benefits paid (228) (215)
--------------------------------------------------------------------------------
Benefit obligation at end of year 4,241 6,240
--------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 8,623 7,821
Actual return on plan assets 1,396 1,017
Employer contribution -- --
Plan participant's contribution -- --
Benefits paid (228) (215)
--------------------------------------------------------------------------------
Fair value of plan assets at end of year 9,791 8,623
--------------------------------------------------------------------------------
Funded status 5,550 2,383
Unrecognized prior service cost -- --
Unrecognized net actuarial (gain) loss (5,104) (2,405)
Unrecognized transition (asset) obligation -- --
--------------------------------------------------------------------------------
Prepaid (Accrued) benefit cost $ 446 $ (22)
================================================================================
26
---- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
Year ended June 30,
(dollars in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Weighted-average assumptions:
Discount rate 7.5% 6.0% 6.0%
Expected return on plan assets 8.5% 6.0% 6.0%
Components of net periodic cost:
Interest cost $ 330 $ 359 $ 314
Expected return on plan assets (623) (462) (362)
Recognized net gain (175) (75) (32)
--------------------------------------------------------------------------------
Net pension income $(468) $(178) $ (80)
================================================================================
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 ended December 31, 1999, NewMil made a
strategic decision not to terminate the plan and will continue the plan in a
frozen status. This change in strategy was deemed a significant event per
paragraph 53 of SFAS No. 87 "Employers' Accounting for Pensions" which
necessitated a change in measurement assumptions. These different measurement
assumptions resulted in $468,000 of pension income during the year.
No contributions were made to the Pension Plan in 2000, 1999 or 1998. 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 2000. Effective January 1, 2000, NewMil amended
the 401(k) Savings Retirement Plan in order to adopt the provisions of the IRS
safe harbor rules. For the period from July 1, 1999 to December 31, 1999 NewMil
contributed amounts equal to 50% of annual employee contributions up to 6% of
participants' compensation. Since January 1, 2000, NewMil contributes amounts
equal to 100% of annual employee contributions up to 3% of participants'
compensation and 50% of the next 2% of annual employee contributions of
participants' compensation. Since the amendment to the Plan, employees are fully
vested in NewMil's contributions. NewMil contributed $99,759, $79,196 and
$74,875 to the Plan in 2000, 1999 and 1998, respectively. This plan allows for
NewMil to make non-contributory profit sharing contributions. No profit sharing
contributions were made in 2000, 1999 or 1998.
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 2000, 1999 and 1998 was $67,315, $60,000 and
$50,000, 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 regula-
tory 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, 2000, 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, 2000, 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:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
(dollars in thousands) Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of June 30, 2000
Tier one leverage $35,146 9.05% greater than or equal to $ 15,533 greater than or equal to 4.00%
Tier one risk-based 35,146 15.76 greater than or equal to 8,922 greater than or equal to 4.00
Total risk-based 37,961 17.02 greater than or equal to 17,843 greater than or equal to 8.00
As of June 30, 1999
Tier one leverage 34,268 9.53 greater than or equal to 14,381 greater than or equal to 4.00
Tier one risk-based 34,268 18.13 greater than or equal to 7,319 greater than or equal to 4.00
Total risk-based 36,662 19.40 greater than or equal to 14,639 greater than or equal to 8.00
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of June 30, 2000
Tier one leverage greater than or equal to $19,416 greater than or equal to 5.00%
Tier one risk-based greater than or equal to 13,382 greater than or equal to 6.00
Total risk-based greater than or equal to 22,304 greater than or equal to 10.00
As of June 30, 1999
Tier one leverage greater than or equal to 17,977 greater than or equal to 5.00
Tier one risk-based greater than or equal to 10,979 greater than or equal to 6.00
Total risk-based greater than or equal to 18,298 greater than or equal to 10.00
</TABLE>
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, 2000 is $1,452,000. In some instances, further restrictions
on dividends may be imposed on NewMil by the FRB.
In July 1996, April 1999, July 1999, December 1999 and February 2000 NewMil
announced its intention to repurchase 406,989 (10% of the outstanding shares),
100,000, 50,000, 40,000 and 40,000 respectively, of its outstanding common stock
in the open market and unsolicited negotiated transactions, including block
purchases. 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 2000 NewMil repurchased
128,190 shares, or 3.5%, of its outstanding shares of common stock, as of July
1, 1999. As of June 30, 2000 NewMil had repurchased 406,989 of its outstanding
common stock, under the July 1996 plan, 190,000 of its outstanding common stock,
under the April 1999, July 1999 and December 1999 plans, and 10,001 shares of
its outstanding shares, under the February 2000 plan. This represents 95.3% of
the total planned repurchases with total consideration of $6,526,000 being paid.
27
----
<PAGE>
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 comprehensive income is the net unrealized
gain (loss) on securities.
The components of comprehensive income are as follows:
Years ended June 30,
(in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Comprehensive income
Net income $ 4,015 $ 3,032 $ 2,989
Net unrealized (losses) gains on securities
during period (230) 73 284
--------------------------------------------------------------------------------
Comprehensive income $ 3,785 $ 3,105 $ 3,273
================================================================================
The components of other comprehensive income, and related tax effects are as
follows:
Before Tax Net of
tax (expense) tax
(in thousands) amount benefit amount
------------------------------------------------------------------------------
Year ended June 30, 2000
Net unrealized losses on securities
available-for-sale arising during the period $ (501) $ 170 $ (331)
Reclassification adjustment for realized loss
included in net income 109 (37) 72
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 44 (15) 29
--------------------------------------------------------------------------------
Net unrealized losses on securities
during period $ (348) $ 118 $ (230)
================================================================================
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
================================================================================
Before Tax Net of
tax (expense) tax
(in thousands) amount benefit amount
--------------------------------------------------------------------------------
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
================================================================================
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):
Year ended June 30,
(in thousands) 2000 1999
--------------------------------------------------------------------------------
Balance, beginning of year $ 556 $ 615
Advances 245 160
Repayments (156) (219)
--------------------------------------------------------------------------------
Balance, end of year $ 645 $ 556
================================================================================
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. During the last three years there were no SARs granted
to any employee under the 1986 Plan 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, except for 75,000 options that were
issued under an Employment Agreement. These options became vested in March 1995,
1996 and 1997 in three equal traunches of 25,000 each. Changes in outstanding
stock option and SARS were as follows:
Weighted
average
Number of exercise
options price
--------------------------------------------------------------------------------
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
Granted 54,500 10.926
Exercised (66,001) 5.465
Lapsed (1,500) 7.375
--------------------------------------------------------------------------------
June 30, 2000 313,350 $ 6.507
================================================================================
28
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
All stock options outstanding as of June 30, 2000 were exercisable. As of June
30, 2000 options to purchase 23,548 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 six months after the time of the grant.
Changes in outstanding stock options were as follows:
Weighted
average
Number of exercise
options price
--------------------------------------------------------------------------------
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
Granted 3,000 10.938
Exercised (4,000) 3.000
Lapsed -- --
--------------------------------------------------------------------------------
June 30, 2000 126,000 $ 6.848
================================================================================
All stock options outstanding as of June 30, 2000 were exercisable. As of June
30, 2000 there were no options to purchase shares of Common Stock 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, 2000:
Number of Weighted
options average Weighted
Range of outstanding remaining average
exercise and contractual exercise
price exercisable life price
--------------------------------------------------------------------------------
$ 3.00 - $ 5.99 212,350 3.0 $ 3.70
6.00 - 8.99 102,500 5.6 6.65
9.00 - 11.99 82,500 8.8 10.98
12.00 - 12.84 42,000 8.0 12.58
--------------------------------------------------------------------------------
439,350 5.15 $ 6.60
================================================================================
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.
Net income Earnings per
Year ended June 30, (in thousands) share, diluted
--------------------------------------------------------------------------------
2000
As reported $ 4,015 $ 1.05
Pro forma 3,808 1.00
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
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:
2000 1999 1998
--------------------------------------------------------------------------------
Dividend yield 3.64% 2.35% 1.54%
Expected volatility 38.00 28.59 30.00
Risk-free interest rate 6.03 5.89 5.37
Expected lives, years 8 10 10
Fair value of options granted during year $ 4.38 $ 4.43 $ 5.06
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, 2000 NewMil had commitments under
outstanding construction mortgages of $4,154,000, unused lines of credit of
$24,813,000 and outstanding commitments to fund loans of $5,338,000. 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. 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 $243,349, $253,234 and $232,240 for
2000, 1999 and 1998, respectively. Future minimum lease payments at June 30,
2000 are as follows:
2001 $ 251,273
2002 241,639
2003 185,704
2004 182,371
2005 122,329
After 2005 110,321
----------------------------------------------
$ 1,093,636
==============================================
29
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
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 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 net of
servicing and adjusted for risk. The discount rates used for consumer install-
ment 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.
The carrying values and estimated fair values of NewMil's financial instruments
are as follows:
<TABLE>
<CAPTION>
June 30,
2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated fair Carrying Estimated fair
(in thousands) value value value value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks $ 12,623 $ 12,623 $ 9,719 $ 9,719
Federal funds sold -- -- 3,167 3,167
Securities available for sale 104,528 104,528 74,135 74,135
Securities held to maturity 39,779 38,005 44,067 42,911
Loans 228,683 223,768 214,879 212,488
Allowance for loan losses (4,978) -- (4,989) --
Deferred loan origination fees and purchase premium, net 29 -- 146 --
----------------------------------------------------------------------------------------------------------------------------------
Loans, net 223,734 223,768 210,036 212,488
Accrued interest receivable 2,747 2,747 2,190 2,190
FINANCIAL LIABILITIES
Deposits
Demand (non-interest bearing) $ 20,703 $ 20,703 $ 18,622 $ 18,622
NOW accounts 43,950 43,950 34,660 34,660
Money market 75,465 75,465 71,252 71,252
Savings and other 48,652 48,652 49,443 49,443
Certificates of deposit 130,856 131,040 126,146 126,971
----------------------------------------------------------------------------------------------------------------------------------
Total deposits 319,626 319,810 300,123 300,948
FHLB advances 35,750 35,703 15,000 14,855
Accrued interest payable 234 234 133 133
</TABLE>
30
----- NEWMIL BANCORP AND SUBSIDIARY
<PAGE>
<TABLE>
<CAPTION>
Note 15
NEWMIL BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
-----------------------------------------------------------------------------------------------------------------------------------
The unconsolidated balance sheets of NewMil Bancorp, Inc. at June 30, 2000 and 1999 and its statements of income and cash flows
for each of the three years in the period ended June 30, 2000 are presented as follows:
BALANCE SHEETS
June 30,
(in thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Due from bank $ 497 $ 329
Investment in New Milford Savings Bank 33,081 32,171
Other assets 815 673
-----------------------------------------------------------------------------------------------------------------------------------
Total Assets $34,393 $33,173
===================================================================================================================================
Liabilities and Shareholders' Equity
Liabilities $ 68 $ 38
Shareholders' equity 34,325 33,135
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $34,393 $33,173
===================================================================================================================================
<CAPTION>
STATEMENTS OF INCOME
Years ended June 30,
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fee income $ -- $ 100 $ --
Dividends from subsidiary 2,904 3,682 1,155
Expenses 148 175 163
-----------------------------------------------------------------------------------------------------------------------------------
Income before taxes and undistributed net income of subsidiary 2,756 3,607 992
Income tax benefit -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiary 2,756 3,607 992
Equity in undistributed (equity distributed in excess of) net income of
subsidiary 1,259 (575) 1,997
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,015 $ 3,032 $ 2,989
===================================================================================================================================
<CAPTION>
STATEMENTS OF CASH FLOWS
Years ended June 30,
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 4,015 $ 3,032 $ 2,989
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (equity distributed in excess of) net income of subsidiary (1,259) 575 (1,997)
Other 7 26 (26)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,763 3,633 966
-----------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid (1,453) (1,328) (1,153)
Proceeds from Treasury Stock issued -- -- 50
Treasury stock purchased (1,514) (2,110) (765)
Proceeds from exercise of stock options 372 59 285
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (2,595) (3,379) (1,583)
-----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 168 254 (617)
Cash and cash equivalents, beginning of year 329 75 692
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 497 $ 329 $ 75
===================================================================================================================================
</TABLE>
31
NEWMIL BANCORP AND SUBSIDIARY -----
<PAGE>
<TABLE>
<CAPTION>
Board of Directors
NewMil Bancorp, Inc., and New Milford Savings Bank
===================================================================================================================================
<S> <C> <C> <C>
FRANCIS J. WIATR HERBERT E. BULLOCK LAURIE G. GONTHIER BETTY F. PACOCHA
Chairman, President and CEO Echo Bay Marina Vice President Executive Vice President
NewMil Bancorp PaineWebber, Inc. and Secretary
JOSEPH CARLSON II New Milford Savings Bank
Chairman, President and CEO Former Vice Chairman and CFO ROBERT J. MCCARTHY
New Milford Savings Bank Centerbank and Center Financial Former Chairman Secretary
Norco, Inc. NewMil Bancorp
WILLIS H. BARTON, JR. KEVIN L. DUMAS
Retired Retailing Executive Certified Public Accountant SUZANNE L. POWERS MARY C. WILLIAMS
Attorney, Powers and Powers Retired Executive
Officers
NewMil Bancorp
===================================================================================================================================
FRANCIS J. WIATR B. IAN MCMAHON BETTY F. PACOCHA
Chairman, President and CEO Chief Financial Officer and Secretary
Treasurer
Officers
New Milford Savings Bank
===================================================================================================================================
FRANCIS J. WIATR ROBERTA J. REED ARTHUR J. MURPHY, JR. PATRICIA A. OLSON
Chairman, President and CEO Senior Vice President Vice President and Comptroller Assistant Vice President
Residential Lending Business Development Officer
BETTY F. PACOCHA JOSEPH S. NOVAK
Executive Vice President and TERRENCE J. SHANNON Vice President LOIS V. PIKE
Secretary Senior Vice President Data Processing Assistant Vice President
Information Technology Loan Administration
B. IAN MCMAHON MARLENE B. WARREN
Senior Vice President and WILLIAM S. BARNHART Vice President AMY K. SHEA
Chief Financial Officer Vice President Branch Administration Assistant Vice President
Commercial Lending Residential Lending
MARY J. AKINS WALTER A. WHITNEY
Senior Vice President VIRGINIA M. DEXTER Vice President HENRY W. WEEKS
Commercial Lending Vice President Commercial Lending Assistant Vice President
Loan Servicing Commercial Lending
JOHN A. BAKER E. C. WOERNER, III
Senior Vice President ROBERT J. GRANATA Vice President LAURA J. CHANDLER
Loan Administration Vice President Commercial Lending Personnel Officer
Finance
DIANE FARRELL WILLIAM G. GABRIELE LAWRENCE N. GROSS
Senior Vice President JOHN G. LINDGREN Assistant Vice President Senior Credit Analyst
Marketing Vice President Business Development Officer
Business Development Officer DIANE TURCHIANO
THOMAS W. GRANT KRIS D. GRAINGER Mortgage Loan Originator
Senior Vice President LYNN D. MOHLENHOFF Assistant Vice President Residential Lending
Senior Lending Officer Vice President Loan Administration
Retail Sales Manager
Bank Branch Managers
New Milford Savings Bank
===================================================================================================================================
MARGARET A. HALLER VICKI KITTLESON DOLORES MEZO KIM PERETTI
Assistant Vice President Manager Manager Manager
Manager New Preston Office Lanesville Office Canaan Office
Boardman Terrace Office
CHERYL KRUPINSKI JANET S. MICHALEK THOMAS V. PROVENZANO
CAMMIE JOSEPH Manager Assistant Vice President Manager
Manager Kent Office Manager Southbury Office
Morris Office Sherman Office
ANITA MAGINELLI DEBORAH SWENOR
ELAINE JOHNSON Manager ROSEMARY V. O'CONNELL Manager
Manager Norwalk Office Manager New Fairfield Office
Brookfield Office Bridgewater Office
MARY MAILLET ROSALIE ZENOBIO
Manager Manager
Sharon Office Main Office
Corporate Headquarters Auditors Stock Listing Annual Meeting
NewMil Bancorp, Inc. PricewaterhouseCoopers LLP NewMil Bancorp's common stock is The Annual Meeting
19 Main Street Certified Public Accountants traded on the Nasdaq National of the Shareholders of
P.O. Box 600 100 Pearl Street Market tier of The Nasdaq Stock NewMil Bancorp, Inc.,
New Milford, CT 06776-0600 Hartford, CT 06103 Market under the symbol NMSB is scheduled for
Telephone (860) 355-7600 (NMIL as of October 1, 2000). Wednesday,
Fax (860) 354-4171 Transfer Agent-Registrar The stock is listed in financial October 25, 2000,
American Stock Transfer & publications under various at 9:30 AM at the
Web Page Trust Company abbreviations such as Candlewood Valley
www.newmil.com 59 Maiden Lane NewMil Bc. Country Club,
-------------- New York, NY 10007 New Milford, Connecticut.
24 Hour Bank-by-Phone Telephone (212) 936-5100 or Form 10-K
(800) 355-6672 or (860) 355-7500 (800) 937-5449 Copies of NewMil Bancorp's Form
10-K filed with the Securities and
For Dividend Reinvestment and Exchange Commission are available:
Stock Purchase Plan information: without charge upon written request
Contact American Stock Transfer to: Shareholder Relations
at the address shown, or call NewMil Bancorp
(718) 921-8283 or (800) 278-4353. P.O. Box 1000
New Milford, CT 06776-1000
</TABLE>
32
-----
