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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main Street, New Milford, CT 06776
(Address of principal executive offices) (Zip code)
(860) 355-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendments to this Form 10-K [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the average bid and
asked prices of such stock, as of September 1, 2000, is
$26,484,503. The number of shares of Common Stock outstanding as of
September 1, 2000, is 3,611,025.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement dated
September 15, 2000 for the 2000 Annual Meeting of Shareholders are
incorporated by reference into Part III (Items 10, 11, 12 and 13).
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . 8
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 9
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . 10
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 12
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . 33
Consolidated Balance Sheets as of June 30, 2000
and 1999 . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Income for
the years ended June 30, 2000, 1999 and 1998 . . . . 35
Consolidated Statements of Changes in Shareholders
Equity for the years ended June 30, 2000, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows for the years
ended June 30, 2000, 1999 and 1998 . . . . . . . . . 39
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . 60
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . 61
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . 61
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 61
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . 61
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . .62
PART I
Item 1. BUSINESS
General
- -------
NewMil Bancorp, Inc., ("NewMil"), a Delaware corporation formed in 1987,
is the registered bank holding company for New Milford Savings Bank
("the Bank"), a wholly-owned subsidiary. NewMil's activity is currently
limited to the holding of the Bank's outstanding capital stock and the
Bank is NewMil's only subsidiary and its primary investment. NewMil's
net income is presently derived from the business of the Bank. Future
establishment or acquisition of subsidiaries by NewMil is possible. For
a discussion of the pending acquisition of Nutmeg Federal Savings &
Loan, by NewMil, see Item 7 "Management Discussion and Analysis of
Financial Condition and Results of Operations - Business".
Nevertheless, it is expected that the Bank will account for most of
NewMil's net income in the foreseeable future.
The Bank, which was organized in 1858, is a Connecticut chartered and
Federal Deposit Insurance Corporation ("FDIC") insured savings bank
headquartered in New Milford, Connecticut. The Bank's principal business
consists of attracting deposits from the public and using such deposits,
with other funds, to make various types of loans and investments. The
Bank offers both consumer and commercial deposit accounts, including
checking accounts, interest bearing "NOW" accounts, money market
accounts, certificates of deposit, savings accounts and Individual
Retirement Accounts. The Bank provides 24-Hour access to banking
through automated teller machines in ten branches, bank by phone and
through its internet site at www.newmil.com.
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank sells some of the residential mortgages that it originates on
a servicing released basis. The Bank offers a broad range of mortgage
and commercial loans to the companies and small businesses of its
service area including lines of credit, term loans, Small Business
Administration ("SBA") loans, commercial real estate mortgages, and
construction and development mortgages. In addition, the Bank offers
services including money orders, travelers' checks and safe deposit
boxes. Although empowered, the Bank is not currently offering trust
services.
NewMil's results of operations are significantly affected by general
economic and competitive conditions, the real estate market, changes in
interest rates, government policies and actions of regulatory
authorities. Should the general economic climate stall, or reverse,
NewMil's operations could be negatively impacted by adverse economic
conditions.
Market Area and Competition
- ---------------------------
The Bank conducts its business through fourteen offices located in
Litchfield, Fairfield and New Haven Counties. The Bank's service area,
which has a population of approximately 300,000, enjoys a balance of
manufacturing, trade, and service employment and is home to a number of
Fortune 500 companies. Although the Bank's primary market area is
Litchfield and northern Fairfield counties, the Bank has depositors and
borrowers that live outside of these areas.
The Bank faces strong competition in attracting and retaining deposits
and in making mortgage and other loans. Its most direct competition for
deposits has historically come from other savings banks, commercial
banks and savings and loan associations located in its market area.
Although the Bank expects this continuing competition to have an effect
upon the cost of funds, it does not anticipate any substantial adverse
effect on maintaining the current deposit base. The Bank is competitive
within its market area in the various deposit products it offers to
depositors. Due to this fact, management feels they have the ability to
maintain the deposit base. The Bank does not rely upon any individual,
group or entity for a significant portion of its deposits.
The Bank's competition for real estate loans comes primarily from
mortgage banking companies, savings banks, savings and loan
associations, commercial banks, insurance companies, and other
institutional lenders. The Bank competes for loan originations
primarily through the interest rates and loan fees it charges and the
efficiency and quality of services it offers borrowers, real estate
brokers and builders. Factors which affect competition include, among
others, the general availability of funds and credit, general and local
economic conditions, current interest rate levels and volatility in the
mortgage markets.
Congress passed legislation in 1994 providing for a phase-in of full
interstate branching. Connecticut law has since 1990 provided for full
interstate banking and, more recently, has adopted legislation allowing
interstate branching, subject to certain limitations. A number of out
of state institutions, almost all larger and with greater financial
resources than the Bank, have begun operations in Connecticut in recent
years. This has increased competitiveness in NewMil's market areas.
NewMil may consider expansion within or outside of Connecticut provided
appropriate opportunities and conditions exist. For a discussion of the
pending acquisition of Nutmeg Federal Savings & Loan, by NewMil, see
Item 7 "Management Discussion and Analysis of Financial Condition and
Results of Operations - Business".
Distribution of Assets, Liabilities and Stockholders' Equity; Interest
- ----------------------------------------------------------------------
Rates and Interest Differential
- -------------------------------
For tables and discussion of the average balances, interest rates and
interest differential of NewMil for the years 2000, 1999 and 1998, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" on pages 15 through 17. For
tables and discussion of an analysis of the effect on net interest
income of volume and rate changes on NewMil for 2000 over 1999 and 1999
over 1998, see "Management's Discussion and Analysis of Financial
condition and Results of Operations - Results of Operations" on pages 16
and 17. In this analysis, the change due to volume was calculated as
the change in average balance multiplied by the prior year's weighted
average rate, the change in rate was calculated as the change in average
rate multiplied by the prior year's average balance, and the change in
rate/volume was calculated as the change in average rate multiplied by
the change in average balance. Principal amounts of non-accruing loans
have been included in the average loan balances used to determine the
rate earned on loans. Interest income on non-accruing loans is included
in income only to the extent that cash payments have been received.
Securities
- ----------
For information concerning NewMil's securities portfolio activities see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the captions "Results of Operations" on pages 14
through 21, "Financial Condition" on pages 23 through 28 and "Note 2 -
Securities" on pages 44 and 45.
Lending Activities
- ------------------
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank also offers a broad range of mortgage and commercial loans to
the companies and small businesses of its service area including lines
of credit, term loans, SBA loans, commercial real estate mortgages, and
construction and development mortgages.
One-to-Four Family Residential Mortgage Loans: The Bank offers a
variety of fixed and adjustable rate loans, including adjustable rate
loans that have fixed rates for an initial period ranging from 1 to 10
years and adjust annually thereafter. The Bank offers amortization
periods of up to 30 years. The Bank's adjustable rate loans generally
have a limit on the maximum rate change per interest rate adjustment of
2.0% to 3.0%, and have limits on the total interest rate adjustments
during the life of a loan ranging from 4.0% to 6.0%, depending on the
initial rate and type of loan. The Bank's adjustable rate loans include
loans whose interest rate adjustments are based on U.S. Treasury
constant maturity indices and other indices.
The Bank's initial rates on adjustable rate mortgage loans are offered
at levels which are intended to be competitive within the Bank's service
area and which are frequently at a discount from fully indexed
contractual rates. The Bank charges origination fees ranging from no
fee to several percent, depending on the initial rate and type of loan.
Adjustable rate mortgage loans allow the Bank to maintain a degree of
rate sensitivity, though the extent of this sensitivity is limited by
the repricing intervals and caps contained in each loan type.
The Bank's residential mortgage loans are underwritten based on the
borrower's income in accordance with secondary market or investor
standards. In evaluating a potential residential mortgage borrower, the
Bank considers a number of factors, including the creditworthiness of
the borrower, the capacity of the borrower to repay the loan, an
appraisal of the property to be mortgaged and a review of the loan to
value ratio.
Much of the residential mortgage loans that the Bank originates are
originated for sale to generate fee income. All such loans are sold on
a servicing released basis. The Bank has not sold loans on a servicing
retained basis since 1994.
Collateral and Installment Loans: The Bank makes collateral and
installment loans, including home equity lines of credit, home equity
loans, automobile and other personal loans. While the Bank offers fixed
rates on its consumer loans and home equity loans, its home equity lines
of credit are generally offered at or a spread over or under the Prime
Rate. Home equity loans and lines of credit have risks similar to those
associated with residential mortgages discussed above.
Commercial Mortgage and Multi-Family Mortgage Loans: The Bank also
makes loans collateralized by mortgages on commercial and multi-family
residential properties. Commercial and multi-family loans are offered
on an adjustable rate basis, generally with a daily repricing frequency
and with the interest adjustment tied to the Prime Rate. Loans may also
be structured with fixed rate terms ranging from 1 to 5 years.
Loans collateralized by commercial properties, including multi-family
residential properties, can involve greater credit risks than one- to
four-family residential mortgage loans. The commercial real estate
business is cyclical and subject to downturns, over-building,
fluctuations in market value and local economic conditions. Typically,
such loans are substantially larger than one- to four-family residential
mortgage loans. Because repayment is often dependent on the cash flow
of a successfully operated or managed property, repayment of such loans
may be more susceptible to adverse conditions in the real estate market
or the economy generally than is the case with residential mortgages.
Construction Loans: The Bank also makes construction loans to
individuals and professional builders for the purpose of constructing 1-
to-4 family residential properties, either as a primary residence or for
investment or resale.
Commercial and Industrial Loans: The Bank offers unsecured commercial
business loans, generally adjustable-rate loans with the adjustment of
interest based on the Prime Rate plus a spread. The Bank believes it
has been conservative in its underwriting standards for this market with
the goal of obtaining quality loans for the portfolio. The Bank also
offers SBA and other Government guaranteed loans. The Bank's loan
products are targeted for, and tailored to the needs of, the local
business and professional community in the Bank's market area.
For further discussion of the composition and quality of the loan
portfolio see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the caption and "Financial
Condition - Loans" on pages 25 and 26.
For information on the reduction in interest income associated with non-
accrual loans for the year ended June 30, 2000 see "Note 4 - Non-
Performing Assets" on page 46 and 47. For discussion of the Bank's
policy for placing loans on non-accrual status refer to "Note 1 -
Summary of Significant Accounting Policies - Loans" on pages 41 and 42.
For information concerning loan portfolio composition and concentrations
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Financial Condition- Loans" on
pages 25 and 26.
Summary of Loan Loss Experience
- -------------------------------
For a discussion of the factors considered by management in determining
the provision for loan losses, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under the caption
"Results of Operations - Provision and Allowance for Loan Losses" on
pages 17 through 19.
Deposits
- --------
For a table on the average balances and rates on deposits, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" on pages 14 through 16.
Certificate of deposits with balances of $100,000 and greater amounted
to $16,101,000 and $14,654,000 at June 30, 2000 and 1999, respectively.
The Bank generally attracts deposits from its market area and uses those
deposits to fund lending and investment activities. The Bank has no
brokered deposits.
Return on Equity and Assets
- ---------------------------
For selected statistical information required by this item see "Selected
Financial Data" on pages 11 and 12.
Short-term Borrowings
- ---------------------
For the information required by this item see "Note 6 - Borrowings" on
page 47.
Supervision and Regulation
- --------------------------
Federal Bank Holding Company Regulation: NewMil is registered under,
and is subject to, the Bank Holding Company Act of 1956, as amended.
This Act limits the types of companies which NewMil may acquire or
organize and the activities in which it or they may engage. In general,
NewMil and the Bank are prohibited from engaging in or acquiring direct
or indirect control of any corporation engaged in non-banking activities
unless such activities are so closely related to banking as to be a
proper incident thereto. In addition, NewMil must obtain the prior
approval of the Board of Governors of the Federal Reserve System ("FRB")
to acquire control of any bank; to acquire, with certain exceptions,
more than 5 percent of the outstanding voting stock of any other
corporation; or, to merge or consolidate with another bank holding
company. As a result of such laws and regulation, NewMil is restricted
as to the types of business activities it may conduct and the Bank is
subject to limitations on, among others, the types of loans and the
amounts of loans it may make to any one borrower. The Financial
Modernization Act of 1999 created, among other things, a new entity,
the "financial holding company." Such entities can engage in a broader
range of activities those that are "financial in nature", including
insurance underwriting, securities underwriting and merchant banking.
Financial holding companies can be established relatively easily
though a notice filing with the FRB, which acts as the "umbrella
regulator" for such entities. NewMil may determine to become a
financial holding company in the future.
Federal Reserve System: NewMil is required by the Board of Governors of
the Federal Reserve System to maintain cash reserves against its
deposits. After exhausting all other sources of funds, NewMil may
request to borrow from the Federal Reserve. Bank holding companies
registered with the FRB are, among other things, restricted from making
direct investments in real estate. Both NewMil and the Bank are subject
to extensive supervision and regulation, which focus on, among other
things, the protection of depositors' funds.
The Federal Reserve System also regulates the national supply of bank
credit in order to influence general economic conditions. These
policies have a significant influence on overall growth and distribution
of loans, investments and deposits, and affect the interest rates
charged on loans or paid for deposits.
Fluctuations in interest rates, which may result from government fiscal
policies and the monetary policies of the Federal Reserve System, have
a strong impact on the income derived from loans and securities, and
interest paid on deposits. While NewMil and its subsidiary strive to
anticipate changes and adjust their strategies for such changes, the
level of earnings can be materially affected by economic circumstances
beyond their control.
NewMil and the Bank are subject to minimum capital requirements
established, respectively, by the FRB and the FDIC. For information on
these capital requirements and NewMil and the Bank's capital ratios see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Capital Resources" on page 31 and Note 9 to the
Financial Statements - Shareholders Equity under Capital Requirements.
Connecticut Banking Law and FDIC Regulation: The Bank is a state
chartered savings bank organized under the Banking Law of the State of
Connecticut. Deposits are insured by the FDIC and FDIC insurance
premiums are assessed on the Bank's deposit base on a semi-annual basis
at variable rates dependent upon the Bank's capital rating and other
safety and soundness considerations. The Bank is subject to regulation,
examination and supervision by the Connecticut Banking Department and
the FDIC. Both the Connecticut Banking Department and the FDIC issue
regulations and require the filing of reports describing the activities
and financial condition of the banks under their jurisdiction. Each
agency conducts periodic examinations to test safety, soundness and
compliance with various regulatory requirements and generally supervises
the operations of such banks.
Employees
- ---------
The Bank had 118 full-time and 26 part-time employees at June 30, 2000.
Management considers the Bank's relationship with its employees to be
good. The Bank's employees are not represented by any collective
bargaining groups.
Subsidiaries
- ------------
The Bank is NewMil's only subsidiary and accounts for 100% of NewMil's
income for the current fiscal year. At June 30, 2000, the Bank had
three wholly-owned subsidiaries, NMSB Mortgage Company, Asset Recovery
Management Company and New Mil Asset Company. NMSB Mortgage Company is
a passive investment company ("PIC") that holds loans collateralized by
real estate originated or purchased by the Bank. Income of the PIC and
its dividends to NewMil are exempt from the Connecticut Corporate
Business Tax. Asset Recovery Management Company and New Mil Asset
Company were both formed to hold and develop certain foreclosed real
estate and are presently inactive.
Item 2. PROPERTIES
The Bank conducts its business at its main office, located at 19 Main
Street, New Milford, Connecticut, and through 14 full service branches
located in Litchfield, Fairfield and New Haven Counties in addition to
one limited service branch located in Southbury, Connecticut. The Bank
owns its main office and seven of its branches. The remaining six full
service locations are leased by the Bank. The following table sets
forth certain information regarding the Bank's branch offices, as of
June 30, 2000.
Owned Lease
Date or expiration
Branch office Location opened leased date
- ------------- -------- ------ ------ ----
(a)
Kent 50 North Main St.,
Kent, CT 1960 Owned ---
New Fairfield Routes 37 & 39,
New Fairfield, CT 1969 Leased 2002
Brookfield Route 7,
Brookfield, CT 1964 Leased 2005
Sherman Routes 37 & 39,
Sherman, CT 1976 Leased 2004
Bridgewater (b) Routes 57 & 133,
Bridgewater, CT 1981 Owned ---
New Milford (c) 19 Main Street,
New Milford, CT 1902 Owned ---
Boardman Terrace 53 Main Street,
New Milford, CT 1977 Owned ---
New Preston (d) Routes 202 & 45,
New Preston, CT 1979 Owned ---
Morris Route 109 & 63,
Morris, CT 1981 Owned ---
Sharon Route 41,
Sharon, CT 1971 Leased 2002
Canaan Main St. & Granite Avenue,
Canaan, CT 1982 Owned ---
Lanesville 291 Danbury Road,
New Milford, CT 1989 Owned ---
Southbury Grand Union Supermarket
775 Main Street South,
Southbury, CT 1997 Leased 2003
Pomperaug Woods(e) Heritage Road
Southbury, CT 2000 N/A ---
Norwalk 187 Main Street
Norwalk, CT 1997 Leased 2004
(a) Information concerning the Bank's lease payments can be found at
Note 13 on page 55 and 56.
(b) The Bank owns an additional building on this site which is leased
at an annual rent of $5,000.
(c) Main Office.
(d) The Bank owns an additional building on this site which is leased
at an annual rent of $14,800.
(e) The Bank operates a limited service office, one day a week, at
this locations for the residents of Pomperaug Woods. Pomperaug
Woods is an independent life-care retirement community located
in Southbury, Connecticut.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against NewMil or the Bank or any
of their properties, other than ordinary routine litigation incidental
to the Company's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matter was submitted to a vote of
the shareholders of NewMil.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
For the information required by this item see "Quarterly Financial Data
(unaudited)" on pages 59 and 60. For a discussion of NewMil's dividend
policy and restrictions on dividends see "Management Discussion and
Analysis of Financial Condition and Results of Operations" under the
caption "Dividend Restrictions" on page 31.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth NewMil's consolidated financial and other
data at the dates and for the periods indicated. This data has been
derived from NewMil's audited consolidated financial statements.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share amounts)
At or for the years ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Income
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
At or for the years ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
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
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
NewMil Bancorp, Inc. ("NewMil"), a Delaware corporation, is a bank
holding company for New Milford Savings Bank ("Bank"), a Connecticut-
chartered and Federal Deposit Insurance Corporation ("FDIC") insured
savings bank headquartered in New Milford, Connecticut. NewMil's
principal business consists of the business of the Bank. The Bank is
engaged in customary banking activities, including general deposit
taking and lending activities, and conducts its business from fourteen
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.
Year ended June 30, 2000 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans (a) $219,293 $17,108 7.80%
Mortgage backed securities (d) 87,905 5,739 6.53
Other securities (b) (d) 39,509 2,328 5.89
-------- -------
Total earning assets 346,707 25,175 7.26
Other assets 11,252 -------
--------
Total assets $357,959
========
NOW accounts $38,158 434 1.14
Money market accounts 71,478 2,186 3.06
Savings & other 48,932 1,185 2.42
Certificates of deposit 125,218 6,073 4.85
-------- -------
Total interest-bearing deposits 283,786 9,878 3.48
Borrowings 20,084 1,233 6.14
-------- -------
Total interest-bearing funds 303,870 11,111 3.66
Demand deposits 19,041 -------
Other liabilities 1,897
Shareholders' equity 33,151
Total liabilities and --------
shareholders' equity $357,959
========
Net interest income $14,064
=======
Spread on interest-bearing funds 3.60
Net interest margin (c) 4.06
Year ended June 30, 1999 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans (a) $192,052 $15,426 8.03%
Mortgage backed securities (d) 90,273 5,374 5.95
Other securities (b) (d) 65,630 3,656 5.57
-------- -------
Total earning assets 347,955 24,456 7.03
Other assets 13,473 ------
--------
Total assets $361,428
========
NOW accounts $33,065 387 1.17
Money market accounts 68,365 2,018 2.95
Savings & other 48,383 1,234 2.55
Certificates of deposit 133,421 6,713 5.03
-------- -------
Total interest-bearing deposits 283,234 10,352 3.66
Borrowings 24,432 1,455 5.96
-------- -------
Total interest-bearing funds 307,666 11,807 3.84
Demand deposits 17,185 -------
Other liabilities 2,278
Shareholders' equity 34,299
--------
Total liabilities and
shareholders' equity $361,428
========
Net interest income $12,649
=======
Spread on interest-bearing funds 3.19
Net interest margin (c) 3.64
Year ended June 30, 1998 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans (a) $170,287 $15,005 8.81%
Mortgage backed securities (d) 42,014 2,532 6.03
Other securities (b) (d) 117,690 7,118 6.05
-------- -------
Total earning assets 329,991 24,655 7.47
Other assets 11,024 -------
--------
Total assets $341,015
========
NOW accounts $29,008 389 1.34
Money market accounts 62,687 1,921 3.06
Savings & other 40,933 1,116 2.73
Certificates of deposit 138,202 7,477 5.41
-------- -------
Total interest-bearing deposits 270,830 10,903 4.03
Borrowings 22,208 1,293 5.82
-------- -------
Total interest-bearing funds 293,038 12,196 4.16
Demand deposits 12,884 -------
Other liabilities 2,037
Shareholders' equity 33,056
Total liabilities and --------
shareholders' equity $341,015
========
Net interest income $12,459
=======
Spread on interest-bearing funds 3.31
Net interest margin (c) 3.78
(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.
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.
Years ended June 30, 2000 versus 1999
(in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $2,188 $(443) $(63) $1,682
Mortgage backed securities (141) 520 (14) 365
Other securities (1,455) 211 (84) (1,328)
------ ---- ---- ------
Total 592 288 (161) 719
------ ---- ---- ------
Interest-bearing liabilities:
Deposits 20 (493) (1) (474)
Borrowings (259) 45 (8) (222)
------ ------ ----- ------
Total (239) (448) (9) (696)
------ ------ ----- ------
Net change to interest income $ 831 $ 736 $(152) $1,415
====== ====== ===== ======
Years ended June 30, 1999 versus 1998
(in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $1,918 $(1,327) $(170) $ 421
Mortgage backed securities 2,908 (31) (35) 2,842
Other securities (3,149) (562) 249 (3,462)
------ ------ ----- ------
Total 1,677 (1,920) 44 (199)
------ ------ ----- ------
Interest-bearing liabilities:
Deposits 499 (1,004) (46) (551)
Borrowings 129 30 3 162
------ ------ ----- ------
Total 628 (974) (43) (389)
------ ------ ----- ------
Net change to interest income $1,049 $ (946) $ 87 $ 190
====== ====== ===== ======
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.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table sets forth changes in the allowance for loan losses
and other selected statistics for each of the past five years:
Years ended June 30, 2000 1999 1998 1997 1996
(dollars in thousands) ---- ---- ---- ---- ----
Balance, beginning of
year $4,989 $5,004 $5,452 $4,866 $5,372
Provision for loan losses (470) 100 250 400 400
Charge-offs:
Real estate mortgages 172 165 633 90 884
Commercial and industrial - - - 23 30
Consumer loans 5 11 73 11 5
------ ------ ------ ------ ------
Total charge-offs 177 176 706 124 919
------ ------ ------ ------ ------
Recoveries:
Real estate mortgages 631 52 4 308 10
Commercial and industrial - - - - -
Consumer loans 5 9 4 2 3
------ ------ ------ ------ ------
Total recoveries 636 61 8 310 13
Net (recoveries) ------ ------ ------ ------ ------
charge-offs (459) 115 698 (186) 906
------ ------ ------ ------ ------
Balance, end of year $4,978 $4,989 $5,004 $5,452 $4,866
====== ====== ====== ====== ======
Ratio of allowance for
loan losses:
to non-performing loans 584.3% 403.6% 360.3% 175.3% 114.3%
to total gross loans 2.2 2.3 3.0 3.2 3.1
Loan loss provision
to average loans (0.2) 0.1 0.1 0.2 0.3
Ratio of net charge-offs
(recoveries) to average
loans outstanding (0.21%) 0.06% 0.41% (0.11%) 0.59%
The following table sets forth the allocation of the allowance for loan
losses among the broad categories of the loan portfolio and the
percentage of loans in each category to total loans at June 30, for each
of the past five years. Although the allowance has been allocated among
loan categories for purposes of the table, it is important to recognize
that the allowance is applicable to the entire portfolio. Furthermore,
charge-offs in the future may not necessarily occur in these amounts or
proportions.
June 30, 2000 1999
---- ----
(dollars in thousands) Allowance Loans(a) Allowance Loans(a)
--------- -------- --------- --------
Real Estate Mortgages
1-4 family residential $ 666 57.19% $ 959 59.75%
5-more family residential 548 1.83 461 2.86
Commercial 1,075 22.58 1,937 17.43
Land 374 0.87 258 1.12
Home equity credit lines 474 8.86 195 9.04
----- ------ ------ ------
Total mortgage loans 3,137 91.33 3,810 90.20
Commercial and industrial 928 7.61 239 8.48
Installment 45 0.35 18 0.39
Collateral 16 0.71 0 0.93
Unallocated 852 0.00 922 0.00
------ ------ ------ ------
Total allowance $4,978 100.00 $4,989 100.00
====== ====== ====== ======
June 30, 1998 1997
---- ----
(dollars in thousands) Allowance Loans(a) Allowance Loans(a)
--------- -------- --------- --------
Real Estate Mortgages
1-4 family residential $ 978 50.79% $1,131 52.94%
5-more family residential 694 3.27 906 2.80
Commercial 2,026 20.77 1,669 18.55
Land 440 2.13 683 4.85
Home equity credit lines 212 12.63 205 11.81
------ ------ ------ ------
Total mortgage loans 4,350 89.59 4,594 90.95
Commercial and industrial 188 8.55 184 7.24
Installment 24 0.69 34 0.66
Collateral 0 1.17 0 1.15
Unallocated 442 0.00 640 0.00
------ ------ ------ ------
Total allowance $5,004 100.00 $5,452 100.00
====== ====== ====== ======
June 30, 1996
----
(dollars in thousands) Allowance Loans(a)
--------- --------
Real Estate Mortgages
1-4 family residential $1,258 57.31%
5-more family residential 290 2.10
Commercial 1,942 19.55
Land 512 6.09
Home equity credit lines 147 9.30
----- ------
Total mortgage loans 4,149 94.35
Commercial and industrial 139 3.94
Installment 12 0.32
Other 0 1.39
Unallocated 566 0.00
------ ------
Total allowance $4,866 100.00
====== ======
(a) Percent of loans in each category to total loans.
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, 2000 1999 Change
(dollars in thousands) ---- ---- ------
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, 2000 1999 Change
(dollars in thousands) ---- ---- ------
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 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:
Years ended June 30, 1999 1998 Change
(dollars in thousands) ---- ---- ------
Service charges on
deposit accounts $1,154 $1,122 $ 32 2.9%
Gains on sales of
loans, net 547 480 67 14.0
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%
====== ====== ==== ====
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, 1999 1998 Change
(dollars in thousands) ---- ---- ------
Salaries $4,766 $4,216 $ 550 13.1%
Employee benefits 1,252 1,183 69 5.8
Occupancy 995 1,018 (23) (2.3)
Equipment 779 922 (143) (15.5)
Professional, collection
and OREO expense 284 315 (31) (9.8)
Insurance 88 92 (4) (4.4)
Postage and telecommunications 421 424 (3) (0.7)
Marketing 216 235 (19) (8.1)
Service bureau 261 221 40 18.1
Other operating 1,376 1,294 82 6.3
------- ------ ----- ----
Total operating expenses $10,438 $9,920 $ 518 5.2%
======= ====== ===== ====
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 $ - 0.0% $ - 0.0% $ 18,330 11.3%
U.S. Government
Agency notes 9,822 6.8 - 0.0 993 0.6
Corporate Bonds 22,034 15.3 - 0.0 - 0.0
Municipal Bonds 10,800 7.5 10,558 8.9 - 0.0
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 an
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.
The composition, maturity distribution and weighted average yields of
securities available-for-sale are as follows:
(dollars in thousands) Carrying Market
Value Value Yield
----- ----- -----
June 30, 2000
US Government Agency notes
After 1 but within 5 years $ 9,822 $ 9,822 7.12%
Corporate Bonds
After 1 but within 5 years 22,034 22,034 7.51
Mortgage backed securities 68,787 68,787 6.91
Collateralized mortgage obligations 1,120 1,120 5.12
Equity securities 2,765 2,765 5.48
-------- --------
Total Securities Available-for-sale $104,528 $104,528 7.61
======== ========
(dollars in thousands) Carrying Market
Value Value Yield
----- ----- -----
June 30, 1999
Mortgage backed securities $70,106 $70,106 6.40%
Collateralized mortgage obligations 1,264 1,264 4.96
Equity securities 2,765 2,765 5.48
------- -------
Total Securities Available-for-sale $74,135 $74,135 7.19
======= =======
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1998 ----- ----- -----
U.S. Treasury and Government
U.S. Treasury Obligation
Within 1 year $ 18,330 $ 18,330 6.32%
Agency Obligations
After 5 but within 10 years 993 993 6.17
Mortgage backed securities 87,796 87,796 6.55
Collateralized mortgage obligations 2,447 2,447 4.45
Equity securities 2,525 2,525 6.00
-------- --------
Total Securities Available-for-sale $112,091 $112,091 6.45
======== ========
The composition, maturity distribution and weighted average yields of
securities held-to-maturity are as follows:
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 2000 ----- ----- -----
Municipal Bonds
After 1 but within 5 years $ 250 $ 234 5.75%
After 10 years 10,550 9,638 6.14
Mortgage backed securities 21,064 20,671 6.81
Collateralized mortgage obligations 7,915 7,462 6.08
------- -------
Total Securities Held-to-maturity $39,779 $38,005 6.48
======= =======
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1999 ----- ----- -----
Municipal Bonds
After 10 years $10,558 $ 9,692 6.14%
Mortgage backed securities 22,890 22,927 6.67
Collateralized mortgage obligations 10,619 10,292 5.88
------- -------
Total Securities Held-to-maturity $44,067 $42,911 6.14
======= =======
June 30, 1998
Mortgage backed securities $ 6,806 $ 6,905 6.59%
Collateralized mortgage obligations 43,370 43,006 6.08
------- -------
Total Securities Held-to-maturity $50,176 $49,911 6.14
======= =======
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 principal categories of the loan portfolio are as follows:
June 30, (in thousands) 2000 1999
Real estate mortgages ---- ----
One-four family residential $130,770 57.2% $128,371 59.8%
Five or more family residential 4,185 1.8 6,152 2.9
Commercial 51,633 22.6 37,456 17.4
Land and land development 1,995 0.9 2,410 1.1
Commercial and industrial 17,404 7.6 18,211 8.5
Home equity lines of credit 20,257 8.8 19,429 9.0
Installment and other 2,439 1.1 2,850 1.3
-------- ----- -------- -----
Total loans, gross $228,683 100.0 $214,879 100.0
======== ===== ======== =====
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 past five years:
June 30, (in thousands) 2000 1999 1998 1997 1996
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 orig-
ination 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
======== ======== ======== ======== ========
The following tables reflect NewMil's loan portfolio maturity
distribution as of June 30, 2000 (non-accrual loans have been presented
in the after 5 years category):
June 30, 2000 Within After
(in thousands) Within 1-5 5
1 year years years Total
Real Estate Mortgages: ------ ----- ----- -----
Residential
1-4 family $15,215 $40,039 $75,516 $130,770
5-more family 878 2,014 1,293 4,185
Commercial 14,989 24,435 12,209 51,633
Land 1,180 274 541 1,995
Home equity credit lines 5,250 12,007 3,000 20,257
Commercial and industrial 7,178 7,925 2,301 17,404
Installment 345 413 48 806
Collateral and other 1,633 - - 1,633
------- ------- ------- --------
Total loans, gross $46,668 $87,107 $94,908 $228,683
======= ======= ======= ========
The following table shows as of June 30, 2000 the amount of loans due
after one year that have fixed interest rates and variable or adjustable
interest rates:
June 30, 2000 (in thousands) Fixed Adjustable
interest interest
rates rates
Real Estate Mortgages: ----- -----
1-4 family residential $29,316 $ 86,239
5-more family residential - 3,307
Commercial 1,152 35,492
Land - 815
Home equity credit lines - 15,007
Commercial and industrial 5,553 4,673
Installment 410 51
Collateral and other - -
------- --------
Total loans, gross $36,431 $145,584
======= ========
Non-performing assets
- ---------------------
The following table sets forth non-performing assets for each of the
last five years:
June 30, (in thousands) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
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
====== ====== ====== ====== ======
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%
The following table details the composition of non-performing assets as
of the dates presented.
Non-Performing Assets Accruing Other Total
(dollars in Non- loans past Restruc- real non-
thousands) accrual due 90 or tured estate performing
loans more days loans owned assets
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
====== ==== ==== ===== ======
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 documentation supporting the borrower's current financial
position, (ii) potential weaknesses in the borrowers' ability to service
the loan, (iii) possible collateral value deficiency, and (iv) other
risk factors such as geographic location, industry focus and negatively
trending financial results. These deficiencies create some uncertainty,
but not serious doubt, as to the borrowers' ability to comply with the
loan repayment terms in the future. Management believes that reserves
for these loans are adequate.
Deposits and borrowings
- -----------------------
Deposits grew $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 following table shows the scheduled maturities of certificates of
deposit with balances in excess of $100,000:
June 30, 2000 (in thousands) Less Within Within Over
than 3 3 - 6 6- 12 one
months months months year Total
------ ------ ------ ---- -----
Certificates of deposit
over $100,000 $5,207 $2,900 $4,928 $3,066 $16,101
====== ====== ====== ====== =======
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 interest rate risk within limits approved by the Board of
Directors.
The following table sets forth NewMil's interest rate sensitivity
position, or gap position, at June 30, 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.
June 30, 2000 Within Within
(dollars in thousands) Within 6 7-12 1-5
months months years
------ ------ -----
ASSETS
Securities $ 19,378 $ 6,225 $71,637
Federal funds sold - - -
Due from banks 99 - -
Loans 73,878 29,307 79,528
Other assets - - -
------ ------ -------
Total assets 93,355 35,532 151,165
SOURCE OF FUNDS ------ ------ -------
Deposits
Demand (non
interest-bearing) - - -
NOW accounts - - -
Money market 75,465 - -
Savings and other 48,652 - -
Certificates of
deposit 65,461 33,557 31,800
Federal Home Loan
Bank advances 28,250 7,500 -
Other liabilities - - -
Stockholders'
equity - - -
Total sources ------- ------ ------
of funds 217,828 41,057 31,800
------- ------ ------
Cumulative
interest-rate
sensitivity
gap $(124,473) $(129,998) $(10,633)
========= ========= ========
Percent of
total assets (31.7)% (33.1)% (2.7)%
June 30, 2000
(dollars in thousands) After Non-interest
5 years bearing Total
------- ------- -----
ASSETS
Securities $49,132 $(2,065) $144,307
Federal funds sold - - -
Due from banks - 12,524 12,623
Loans 42,390 3,609 228,712
Other assets - 6,930 6,930
------ ------ --------
Total assets 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
Savings and other - - 48,652
Certificates of
deposit 38 - 130,856
Federal Home Loan
Bank advances - - 35,750
Other liabilities - 2,871 2,871
Stockholders'
equity - 34,325 34,325
Total sources
of funds 43,988 57,899 $392,572
Cumulative ------ ------ ========
interest-rate
sensitivity
gap $36,901 $ -
======= =======
Percent of
total assets 9.4% - %
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 % Change in
in Rate Net Income
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.
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 performance than the
effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the
prices of goods and services. Notwithstanding this, inflation can
directly affect the value of loan collateral, in particular real estate.
Sharp decreases in real estate prices have, in past years, resulted in
significant loan losses and losses on real estate acquired. Inflation,
or disinflation, could significantly affect NewMil's earnings in future
periods.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth in the ASSET/LIABILITY MANAGEMENT AND MARKET
RISK section included under Item 7 of this report is incorporate by
reference herein.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Shareholders of NewMil Bancorp, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, changes in
shareholders' equity, and cash flows present fairly, in all
material respects, the financial position of NewMil Bancorp, Inc.
and its subsidiary at June 30, 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
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30,
2000 1999
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
======== ========
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Years ended June 30,
2000 1999 1998
---- ---- ----
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
======= ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME - continued
(in thousands except per share amounts)
Years ended June 30,
2000 1999 1998
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 0.0 (0.04) 0.0
Extraordinary item, net of taxes 0.0 (0.02) 0.0
----- ----- -----
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 0.0 (0.05) 0.0
Extraordinary item, net of taxes 0.0 (0.02) 0.0
----- ----- -----
Net income $1.10 $0.80 $0.78
===== ===== =====
Dividends per share $0.40 $0.35 $0.30
===== ===== =====
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Common Stock Paid-in Retained
Shares Amount capital earnings
Balances at ------ ------ ------- --------
June 30, 1997 $5,988,138 $2,994 $44,192 $7,097
Net income for year - - - 2,989
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (1,153)
Proceeds from
exercise of
stock options:
Issuance of
new shares 2,000 1 12 -
Issuance of
treasury stock - - (312) -
Proceeds from
issuance of
treasury stock - - (11) -
Acquisition of
treasury stock - - - -
Balances at ---------- ------ ------- -------
June 30, 1998 $5,990,138 $2,995 $43,881 $ 8,933
Net income for year - - - 3,032
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (1,328)
Proceeds from
exercise of
stock options:
Issuance of
treasury stock - - (108) -
Acquisition
of treasury stock - - - -
Balances at --------- ------ ------- -------
June 30, 1999 5,990,138 $2,995 $43,773 $10,637
Accumulated other Total
Treasury comprehensive shareholders'
stock income equity
----- -------- --------
Balances at
June 30, 1997 $(21,075) $(1,489) $31,719
Net income for year - - 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)
Proceeds from
exercise of
stock options:
Issuance of
new shares - - 13
Issuance of
treasury stock 584 - 272
Proceeds from
issuance of
treasury stock 61 - 50
Acquisition of
treasury stock (765) - (765)
Balances at -------- ------- -------
June 30, 1998 $(21,195) $(1,205) $33,409
Net income for year - - 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)
Proceeds from
exercise of
stock options:
Issuance of
treasury stock 167 - 59
Acquisition
of treasury stock (2,110) - (2,110)
Balances at -------- ------- -------
June 30, 1999 $(23,138) $(1,132) $33,135
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Common Stock Paid-in Retained
Shares Amount capital earnings
Balances at ------ ------ ------- --------
June 30, 1999 $5,990,138 $2,995 $43,773 $10,637
Net income for year - - - 4,015
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (1,453)
Proceeds from
exercise of
stock options:
Issuance of
treasury stock - - (441) -
Acquisition
of treasury stock - - - -
Balances at ---------- ------ ------- -------
June 30, 2000 $5,990,138 $2,995 $43,332 $13,199
========== ====== ======= =======
Accumulated other Total
Treasury comprehensive shareholders'
stock income equity
----- -------- --------
Balances at
June 30, 1999 $(23,138) $(1,132) $33,135
Net income for year - - 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)
Proceeds from
exercise of
stock options:
Issuance of
treasury stock 813 - 372
Acquisition
of treasury stock (1,514) - (1,514)
Balances at -------- ------- -------
June 30, 2000 $(23,839) $(1,362) $34,325
======== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended June 30,
2000 1999 1998
Operating Activities ---- ---- ----
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)
------- ------ -------
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
(in thousands)
Years ended June 30,
2000 1999 1998
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
NewMil Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NewMil Bancorp, Inc. ("NewMil") is the bank holding company for New
Milford Savings Bank (the "Bank"), a State chartered savings bank.
NewMil's activity is currently limited to the holding of the Bank's
outstanding capital stock and the Bank is the Company's only subsidiary
and its primary investment. The Bank is a Connecticut chartered and
Federal Deposit Insurance Corporation (the "FDIC") insured savings bank
headquartered in New Milford, Connecticut. The Bank's principal
business consists of attracting deposits from the public and using such
deposits, with other funds, to make various types of loans and
investments. The Bank conducts its business through 14 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,
management obtains independent appraisals for significant properties.
NewMil's loans are generally collateralized by real estate located
principally in Connecticut. In addition, substantially all OREO is
located in Connecticut. Accordingly, the collectability of a
substantial portion of the Company's loan portfolio and OREO through
foreclosure is particularly susceptible to changes in market conditions.
While management uses available information to recognize losses on loans
and OREO, future additions to the allowance or write-downs of OREO may
be necessary based on changes in economic conditions, particularly in
Connecticut. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review NewMil's
allowance for loan losses and valuation of OREO. Such agencies may
require NewMil to recognize additions to the allowance or write-downs
based on their judgements of information available to them at the time
of their examination.
Securities
Securities that may be sold as part of NewMil's asset/liability or
liquidity management or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar
factors, are classified as available-for-sale and carried at their fair
market value. Unrealized holding gains and losses on such securities
are reported net of related taxes, if applicable, as a separate
component of shareholders' equity. Securities that NewMil has the
ability and positive intent to hold to maturity are classified as held-
to-maturity and carried at amortized cost. 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
discontinued when principal or interest is past due by 90 days or more,
or earlier when, in the opinion of management, full collection of
principal or interest is unlikely unless such loans are well
collateralized and in the process of collection. When a loan is placed
on non-accrual status, interest previously accrued but not collected is
charged against current income. Income on such loans, 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.
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 differences and
carryforwards when realization is assured beyond a reasonable doubt.
Bank Premises and Equipment
Bank premises, furniture and equipment are carried at cost, less
accumulated depreciation and amortization computed on the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized on the straight-line basis over the shorter
of the estimated useful lives of the improvements or the term of the
related leases.
Statement of Cash Flows
For the purpose of the Consolidated Statements of Cash Flows, cash and
cash equivalents include cash and due from banks, interest-bearing
deposits at other financial institutions and overnight federal funds
sold.
Computation of Earnings per Share
Effective December 31, 1997, NewMil adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS"). It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures. This statement was effective
for financial statements issued for periods ending after December 15,
1997 and has been applied for all periods presented.
Basic earnings per share is computed using the weighted-average common
shares outstanding during the year. The computation of diluted earnings
per share is similar to the computation of basic earnings per share
except the denominator is increased to include the number of additional
common shares that would have been outstanding if dilutive potential
common shares had been issued. The shares used in the computations for
the three years ended June 30, were as follows:
(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
(in thousands) fair unrealized unrealized Amortized
value gains losses cost
June 30, 2000 ----- ----- ------ ----
US 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
======== ==== ====== ========
Estimated Gross Gross
(in thousands) fair unrealized unrealized Amortized
value gains losses cost
----- ----- ------ ----
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
======== ==== ====== =======
Securities classified as held-to-maturity (carried at amortized cost)
were as follows:
Gross Gross Estimated
(in thousands) Amortized unrealized unrealized fair
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:
(in thousands) Cash Realized Realized
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
US Government Agency securities
Available-for-sale $30,009 $ 10 $ -
Mortgage backed securities
Available-for-sale 1,042 64 -
Collateralized mortgage obligations
Available-for-sale 5,868 - 242
Held-to-maturity 7,325 - 103
------- ---- ----
Total $44,244 $ 74 $345
======= ==== ====
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 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:
(in thousands)
Year ended June 30, 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
====== ====== ======
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)
June 30, 2000 Federal State
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 Federal State
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 Post-retirement Benefits". SFAS 132 standardizes the disclosure
requirements for pension and other post-retirement 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)
======= =======
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 regulatory
framework for prompt corrective action, the Bank must meet specific
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined) to average
assets (as defined) and total and Tier 1 capital (as defined) to risk-
weighted assets (as defined). Management believes, as of June 30, 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:
For Capital
(dollars in thousands) Actual Adequacy Purposes
Amount Ratio Amount Ratio
As of June 30, 2000
Tier one leverage $35,146 9.05% > $15,533 > 4.00%
Tier one risk-based 35,146 15.76 > 8,922 > 4.00
Total risk-based 37,961 17.02 > 17,843 > 8.00
As of June 30, 1999
Tier one leverage 34,268 9.53 > 14,381 > 4.00
Tier one risk-based 34,268 18.13 > 7,319 > 4.00
Total risk-based 36,662 19.40 > 14,639 > 8.00
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
As of June 30, 2000
Tier one leverage > $19,416 > 5.00%
Tier one risk-based > 13,382 > 6.00
Total risk-based > 22,304 > 10.00
As of June 30, 1999
Tier one leverage > 17,977 > 5.00
Tier one risk-based > 10,979 > 6.00
Total risk-based > 18,298 > 10.00
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
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.
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:
(in thousands) Before Tax Net of
tax (expense) tax
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
======= ===== ====
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:
Number of Weighted average
options exercise 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
=======
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:
Number of Weighted average
Options exercise 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 pro forma 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
==========
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 installment loans were current rates
offered by NewMil. Fair values for commercial loans were estimated by
assessing credit risk and interest rate risk. Such loans were valued by
discounting estimated future cash flows at a rate that incorporates both
interest and credit risk.
Deposit liabilities: The fair value for demand, savings and certain
money market deposits is equal to the amount payable on demand at the
balance sheet date which is equal to the carrying value. The fair value
of certificates of deposit was estimated by discounting cash flows using
rates currently offered by NewMil for deposits of similar remaining
maturities.
Borrowings: The fair value for borrowings was estimated by discounting
cash flows using rates currently offered by lenders for borrowings of
similar remaining maturities.
The carrying values and estimated fair values of NewMil's financial
instruments are as follows:
June 30, 2000 1999
------------------- -------------------
(in thousands) Estimated Estimated
Carrying fair Carrying fair
value value value value
----- ----- ----- -----
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
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 threes years in the period ended June 30, 2000 are presented as
follows:
Balance Sheets
June 30, (in thousands) 2000 1999
---- ----
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
======= =======
Statements of Income
Years ended June 30, (in thousands)
2000 1999 1998
---- ---- ----
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
====== ====== ======
Statements of Cash Flows
Years ended June 30, (in thousands) 2000 1999 1998
---- ---- ----
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
======= ======= =======
NOTE 16 - QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for 2000 and 1999 is as follows (in thousands
except ratios and per share amounts):
Year ended June 30, 2000
June 30, Mar 31, Dec 31, Sept 30,
-------- ------- ------- --------
Statement of Income
Interest and dividend
income $6,865 $6,304 $6,047 $5,959
Interest expense 3,206 2,761 2,571 2,573
Net interest income 3,659 3,543 3,476 3,386
Provision for loan losses 25 - 25 (520)
Non-interest income:
Securities losses, net - - - (109)
Gains on sales of
loans, net 33 30 30 54
Gain on sale of branch - - - 75
Gain on sale of OREO 23 - 23 -
Service fees and other 454 411 444 425
Non-interest expense 2,493 2,408 2,590 2,845
Income before income taxes 1,651 1,576 1,358 1,506
Income tax provision 563 553 456 504
Income before effect of accounting change
and extraordinary item 1,088 1,023 902 1,002
Effect of change in accounting
principal, net of taxes - - - -
Extraordinary item, net of taxes - - - -
Net income 1,088 1,023 902 1,002
Financial Condition
Total assets $392,572 $383,719 $341,798 $338,383
Loans, net 223,734 216,055 214,312 213,561
Allowance for loan losses 4,978 4,983 5,029 5,001
Securities 144,307 139,919 108,582 104,736
Deposits 319,626 307,021 299,254 295,408
Borrowings 35,750 34,800 7,500 7,500
Shareholders' equity 34,325 33,305 33,137 33,566
Non-performing assets 1,218 1,569 2,094 2,511
Per Share Data
Earnings, diluted $0.29 $0.27 $0.23 $0.26
Cash dividends 0.10 0.10 0.10 0.10
Book value 9.52 9.23 9.10 9.13
Market price: (a)
High 11.250 13.313 13.375 11.250
Low 9.844 10.000 10.938 10.344
Statistical Data
Net interest margin 3.96% 4.11% 4.14% 4.02%
Efficiency ratio 59.80 60.44 65.19 74.26
Return on average assets 1.14 1.15 1.04 1.15
Return on average
shareholders' equity 13.09 12.40 10.78 12.19
Weighted average equivalent
shares outstanding,
diluted 3,756 3,792 3,840 3,827
Quarterly Financial Data (unaudited) continued:
Year ended June 30, 1999
June 30, Mar 31, Dec 31, Sept 30,
-------- ------- ------- --------
Statement of Income
Interest and dividend
income $5,867 $5,944 $6,148 $6,497
Interest expense 2,664 2,716 3,112 3,315
Net interest income 3,203 3,228 3,036 3,182
Provision for loan losses 25 25 25 25
Non-interest income:
Securities losses, net - - - -
Gains on sales of
loans, net 96 161 152 138
Gain on sale of OREO - 478 754 110
Service fees and other 382 360 394 409
Non-interest expense 2,241 2,856 2,869 2,472
Income before income taxes 1,415 1,346 1,442 1,342
Income tax provision 388 466 870 540
Income before effect of
accounting change and
extraordinary item 1,027 880 572 802
Effect of change in accounting
principal, net of taxes - - (162) -
Extraordinary item, net of taxes - - (87) -
Net income 1,027 880 323 802
Financial Condition
Total assets $352,117 $358,279 $357,764 $369,777
Loans, net 210,036 206,165 189,862 169,668
Allowance for loan losses 4,989 5,100 5,068 5,005
Securities 118,202 116,484 135,923 167,005
Deposits 300,123 305,188 305,381 295,323
Borrowings 15,000 15,000 15,000 37,500
Shareholders' equity 33,135 34,542 34,856 34,574
Non-performing assets 1,569 1,792 1,672 2,781
Per Share Data
Earnings, diluted $0.27 $0.22 $0.21 $0.20
Cash dividends 0.09 0.09 0.08 0.08
Book value 9.04 9.15 9.09 9.04
Market price: (a)
High 11.750 13.000 14.000 13.500
Low 9.500 11.000 11.000 10.000
Statistical Data
Net interest margin 3.77% 3.80% 3.45% 3.54%
Efficiency ratio 60.88 67.57 66.17 63.34
Return on average assets 1.16 0.99 0.35 0.87
Return on average
shareholders' equity 12.16 10.15 3.72 9.43
Weighted average equivalent
shares outstanding,
diluted 3,874 3,998 4,030 4,031
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 inter-dealer prices, without retail
markup, markdown or commissions, and may not necessarily represent
actual transactions.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosures
between NewMil and its independent accountants for which a Form 8-K was
required to be filed during the two most recent fiscal years or for the
period from June 30, 2000 to the date hereof.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears on pages 5 through 7 of
NewMil's Proxy Statement dated September 15, 2000 for the 2000 Annual
Meeting of Shareholders, under the captions "Nominees for Election for
a Three Year Term" and "Directors Continuing in Office". Such
information is incorporated herein by reference and made a part hereof.
In addition, the following information is provided.
Additional Executive Officers
- -----------------------------
Name Age Position Office Since
- ---- -------- ------------
Mary J. Akins 57 Senior Vice President 1994
John A. Baker 51 Senior Vice President 1998
Diane Farrell 47 Senior Vice President 1987
Roberta J. Reed 52 Senior Vice President 1994
Item 11. EXECUTIVE COMPENSATION
The information required by this item appears on pages 7 through 14 of
NewMil's Proxy Statement dated September 15, 2000 for the 2000 Annual
Meeting of Shareholders, under the captions: "Executive Compensation";
"Employee Benefit Plans"; "Report of the Board on Executive
Compensation"; and "Performance Graph". Such information is
incorporated herein by reference and made a part hereof.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears on pages 5 through 7 of
NewMil's Proxy Statement dated September 15, 2000 for the 2000 Annual
Meeting of Shareholders, under the caption "Nominees for Election for a
Three Year Term" and "Directors Continuing in Office". Such information
is incorporated herein by reference and made a part hereof.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears on page 14 of NewMil's
Proxy Statement dated September 15, 2000 for the 2000 Annual Meeting of
Shareholders, under the caption "Transactions with Management and
Others". Such information is incorporated herein by reference and made
a part hereof.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as exhibits to this report and
appear on the pages indicated.
Financial Statements
--------------------
None.
(b) Reports on Form 8-K
-------------------
None.
(c) Exhibits
--------
The following documents are filed as Exhibit to this Form 10-K, as
required by Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of NewMil (incorporated by
reference to Exhibit 3.1 to NewMil's Registration
Statement on Form S-4 (No. 33-10693) filed on December 9,
1986)
3.1.1 Amendment to Certificate of Incorporation of NewMil
increasing authorized shares of common stock from
6,000,000 to 20,000,000 (incorporated by reference
to the Registrant's 1994 Proxy Statement dated
September 23, 1994, page A-1).
3.2 Bylaws of NewMil (incorporated by reference to Exhibit
3.2 to NewMil's Registration Statement on Form S-4 (No.
33-10693) filed on December 9, 1986)
4.1 Instruments Defining Rights of Security Holders (Included
in Exhibits 3.1 and 3.2)
10.1 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-4 (No.
33-10693) filed on December 9, 1986)
10.2 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan Incentive Stock Option Agreement and Non-
Qualified Stock Option Agreement (incorporated by
reference to the Registrant's 1988 Form 10-K).
10.3 1992 Stock Option Plan For Outside Directors of NewMil
Bancorp, Inc. (incorporated by reference to the
Registrant's 1992 Proxy Statement dated
September 22, 1992, pages 17 through 20).
10.5 Rights Agreement between NewMil Bancorp, Inc. and
American Stock Transfer and Trust Company as Rights Agent
dated as of July 19, 1994 concerning NewMil Bancorp's
shareholder rights plan of same date (incorporated by
reference to the Registrant's 1994 Form 10-K).
10.6 The NewMil Bancorp, Inc. Amended and Restated 1986 Stock
Option and Incentive Plan (incorporated by reference to
the Registrant's 1995 Proxy Statement dated September 20,
1995, pages A-1 to A-11).
10.7 Employment agreement between New Milford Savings Bank and
its President and CEO, Francis J. Wiatr, as of March 31,
1994 (incorporated by reference to the Registrant's 1995
Form 10-K).
10.8 Dividend reinvestment plan for NewMil Bancorp's
shareholders (incorporated by reference to the
Registrant's 1996 Form 10-K).
10.9 Change in control agreements between New Milford Savings
Bank and management (Messrs. Grant, McMahon and Shannon;
Ms. Farrell) (incorporated by reference to the
Registrant's 1996 Form 10-K).
10.10 The Amended and Restated 1992 Stock Option Plan for
Outside Directors of NewMil Bancorp, Inc.
(incorporated by reference to the Registrant's 1995
Proxy Statement dated September 20, 1995, pages B-1
to B-4).
10.12 The Amended 1986 Stock Option and Incentive Plan
(extending term until 2005 and increasing shares to
525,000), approved by shareholders October 1997.
10.13 First and Second Amendments to Employment Agreement
of Francis J. Wiatr, as of August 1998.
10.14 Amendment to Bylaws of NewMil (incorporated by reference
to the Registrant's 1999 Form 10-K).
11.1 Statement regarding Computation of Net Income Per Common
Share.
20.1 Proxy Statement dated September 15, 2000 for the Annual
Meeting of Shareholders, of NewMil Bancorp, Inc.
(incorporated by reference to the Registrant's definitive
proxy statement for the annual meeting of shareholders
scheduled for October 25, 2000).
21.1 Subsidiaries of the Registrant.
23.0 Consent of PricewaterhouseCoopers LLP.
(d) Financial Statement Schedules
-----------------------------
No financial statement schedules are required to be filed as
Exhibits pursuant to Item 14(d).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NEWMIL BANCORP, INC.
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 15, 2000
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated, on the
dates indicated below.
/s/ Herbert E. Bullock
Herbert E. Bullock
Director
September 15, 2000
/s/ Joseph Carlson II
Joseph Carlson II
Director
September 15, 2000
/s/ Kevin L. Dumas
Kevin Dumas
Director
September 15, 2000
/s/ Laurie G. Gonthier
Laurie G Gonthier
Director
September 15, 2000
/s/ Robert J. McCarthy
Robert J. McCarthy
Director
September 15, 2000
/s/ Betty F. Pacocha
Betty F Pacocha
Director and Secretary
September 15, 2000
/s/ Suzanne L. Powers
Suzanne L. Powers
Director
September 15, 2000
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 15, 2000
/s/ Mary C. Williams
Mary C. Williams
Director
September 15, 2000
/s/ B. Ian McMahon
B. Ian McMahon
Chief Financial Officer
and Chief Accounting Officer
September 15, 2000