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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from July 1, 2000 to December 31, 2000
Commission file number 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main Street, New Milford, CT 06776
(Address of principal executive offices) (Zip code)
(860) 355-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicated by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendments to this Form 10-K [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the average bid and
asked prices of such stock, as of March 9, 2001, is $39,266,501.
The number of shares of Common Stock outstanding as of March 9,
2001, is 4,522,621.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive Proxy Statement dated March
30, 2001 for the 2001 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 December 31, 2000,
June 30, 2000 and June 30, 1999 . . . . . . . . . . .34
Consolidated Statements of Income for the six month
periods ended December 31, 2000 and 1999 and the years
ended June 30, 2000, 1999 and 1998. . . . . . . . . .35
Consolidated Statements of Changes in Shareholders
Equity for the three years ended June 30, 2000 and
the six month period ended December 31, 2000. . . . .37
Consolidated Statements of Cash Flows for the six month
periods ended December 31, 2000 and 1999 and 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 NewMil 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 recent 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, Individual
Retirement Accounts and sweep accounts. The Bank provides 24x7 access
to banking through automated teller machines in thirteen branches,
through its internet site at www.newmil.com and through bank by phone.
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. The general economic climate over the past several years
has been favorable. Should these conditions deteriorate, NewMil's
operations could be adversely impacted.
Market Area and Competition
- ---------------------------
The Bank conducts its business through eighteen full service offices and
one special needs office located in Litchfield, Fairfield and New Haven
Counties. The Bank's service area, which has a population of
approximately 460,000, 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. In recent years
several out of state financial institutions, almost all larger and with
greater financial resources than the Bank, have acquired Connecticut
financial institutions and begun operations in Connecticut. This has
increased competitiveness in NewMil's market areas. NewMil may consider
additional expansion within or outside of Connecticut provided
appropriate opportunities and conditions exist. For a discussion of
the recent acquisition of Nutmeg Federal Savings & Loan, by NewMil, see
Item 7 "Management Discussion and Analysis of Financial Condition and
Results of Operations - Business".
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.
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 23 and 25.
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 ("the
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
through 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 152 full-time and 19 part-time employees at December 31,
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 period. At December 31, 2000, the Bank
had three wholly-owned subsidiaries, NewMil Mortgage Company, Asset
Recovery Management Company and New Mil Asset Company. NewMil 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 18 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 ten full
service locations are leased by the Bank. The following table sets
forth certain information regarding the Bank's branch offices, as of
December 31, 2000.
Lease
Date Owned expir-
acquired or ation
Branch office Location /opened leased date
- ------------- -------- ------- ------ ----
(a)
Bethel Stony Hill Road,
Bethel, CT 2000 Leased 2005
Brookfield Route 7,
Brookfield, CT 1964 Leased 2005
Boardman Terrace 53 Main Street,
New Milford, CT 1977 Owned ---
Bridgewater (b) Routes 57 & 133,
Bridgewater, CT 1981 Owned ---
Canaan Main St. & Granite Ave.,
Canaan, CT 1982 Owned ---
Danbury Main Street,
Danbury, CT 2000 Leased 2001
Danbury North Street Shopping Center,
Danbury, CT 2000 Leased 2002
Kent 50 North Main St.,
Kent, CT 1960 Owned ---
Lanesville 291 Danbury Road,
New Milford, CT 1989 Owned ---
Morris Route 109 & 63,
Morris, CT 1981 Owned ---
New Fairfield Routes 37 & 39,
New Fairfield, CT 1969 Leased 2002
New Milford (c) 19 Main Street,
New Milford, CT 1902 Owned ---
New Preston (d) Routes 202 & 45,
New Preston, CT 1979 Owned ---
Norwalk 187 Main Street
Norwalk, CT 1997 Leased 2004
Pomperaug Woods(e) Heritage Road
Southbury, CT 2000 N/A ---
Ridgefield Route 7
Ridgefield, CT 2000 Leased 2004
Sharon Route 41,
Sharon, CT 1971 Leased 2002
Sherman Routes 37 & 39,
Sherman, CT 1976 Leased 2004
Southbury Grand Union Supermarket
775 Main Street South,
Southbury, CT 1997 Leased 2003
(a) Information concerning the Bank's lease payments can be found at
Note 13 on page 52.
(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
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 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 55 and 56. 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 pages 29 and 30.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth NewMil's consolidated financial and other
data at the dates and for the periods indicated. The results for and as
of the six month period ended December 31, 2000 reflect the acquisition
of Nutmeg Federal Savings and Loan Association on November 9, 2000.
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 six months ended
December 31,
2000 1999
Statement of Income ---- ----
Interest & dividend
income $15,709 $12,006
Interest expense 7,801 5,144
Net interest income 7,908 6,862
Provision for loan
losses (416) (495)
Non-interest income:
Losses on sales of
securities, net - (109)
Gain on sale of non-
performing loan - -
Gains on sales
of OREO 39 23
Gains on sales of
loans, net 93 84
Service fees & other 1,051 944
Non-interest expense 6,382 5,435
Income before
income taxes 3,125 2,864
Income tax expense 1,119 960
Income before effect
of accounting change
& extraordinary item 2,006 1,904
Cumulative effect of
change in accounting
principle, net of
taxes - -
Extraordinary item,
net of taxes - -
Net income 2,006 1,904
Financial Condition
Total assets $523,578 $341,798
Loans, net 332,544 214,312
Allowance for loan
losses 5,518 5,029
Securities 140,398 108,582
Deposits 437,793 299,254
Borrowings 27,500 7,500
Shareholders' equity 47,517 33,137
Non-performing assets 1,741 2,094
Per Share Data
Income before effect
of accounting change
& extraordinary item
Diluted $0.50 $0.50
Basic 0.52 0.52
Net income
Diluted 0.50 0.50
Basic 0.52 0.52
Cash dividends 0.21 0.21
Book value 10.35 9.10
At or for the six months ended
December 31,
2000 1999
Statistical Data ---- ----
Net interest margin 3.86% 4.08%
Efficiency ratio 70.20 69.24
Effective tax rate 35.81 33.52
Return on average assets 0.93 1.10
Return on average
shareholders' equity 10.49 11.48
Dividend payout ratio 40.38 40.38
Allowance for loan
losses to total loans 1.63 2.29
Non-performing assets
to total assets 0.33 0.61
Tier 1 leverage capital 8.06 9.84
Total risk-based capital 12.98 18.53
Average shareholders'
equity to average
assets 8.89 9.66
Weighted average equivalent
shares outstanding,
diluted 4,035 3,840
Shares outstanding at end
of period (excluding
Treasury stock) 4,591 3,640
At or for the years ended June 30,
2000 1999 1998 1997 1996
Statement of Income ---- ---- ---- ---- ----
Interest & 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:
Losses on sales of
securities, 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 & 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
& extraordinary item 4,015 3,281 2,989 2,602 2,242
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 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
& 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 end
of period (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 NewMil 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 eighteen full-service offices
in Litchfield, Fairfield and New Haven Counties and one special needs
office in New Haven County. NewMil and the Bank were formed in 1987 and
1858, respectively.
Change in Fiscal Year End
In December 2000 NewMil changed its fiscal year end to December 31 from
June 30. Previously, NewMil had changed its tax year to a calendar year
basis, effective for calendar year 1999, to take advantage of
Connecticut tax legislation related to banks and financial service
companies.
Acquisition of Nutmeg Federal Savings and Loan Association
On November 9, 2000, NewMil acquired Nutmeg Federal Savings and Loan
Association ("Nutmeg") for a total purchase price of $20.3 million, in
consideration for which, NewMil paid $10.3 million in cash and issued
1.0 million shares of common stock. Based on the terms of the
agreement, Nutmeg shareholders received $8.38 per common share and
$14.67 per preferred share, including a net gain (after expenses and
taxes payable) on Nutmeg's sale of certain loan servicing rights.
Nutmeg was a federally chartered savings and loan association
headquartered in Danbury, Connecticut, with $109.1 million in assets and
$84.7 million in deposits with four branch locations, including two in
Danbury, one in Bethel and one in Ridgefield, Connecticut.
Change in Name of NewMil Bank
On October 1, 2000 the Bank changed its name to NewMil Bank from New
Milford Savings Bank, projecting the image of a contemporary, full-
service bank in today's competitive banking environment. Market research
had indicated that, while the Bank was perceived as a solid community
bank offering excellent customer service, the Bank's former name did not
communicate the broad range of up-to-date products and services offered
to both consumers and businesses. In recent years the banking industry
has experienced vast changes, from deregulation and inter-state
consolidation to the growth of electronic banking. In addition, the
Bank's ongoing branch expansion and the Nutmeg acquisition have expanded
the Bank's customer base well beyond the greater New Milford area.
OVERVIEW
NewMil earned net income of $2,006,000, or $0.50 per share, for the six
month period ended December 31, 2000, compared with net income of
$1,904,000, or $0.50 per share, for the six month period ended December
31, 1999. Net income for the current period included certain one-time
expenses related to the Nutmeg acquisition, the change in the name of
the subsidiary NewMil Bank and the change in NewMil's fiscal year end.
NewMil incurred expenses of $370,000 associated with the Bank's name
change and an advertising campaign related to both the name change and
the Nutmeg acquisition. Expenses related to the acquisition totaled
$108,000 and included the cost of converting Nutmeg data systems and
certain employee payments. These expenses were offset in part by a
negative loan loss provision of $416,000 due to the recovery of a
previously changed off loan.
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 of the Six Months Ended December 31, 2000 and 1999
Analysis of Net Interest and Dividend Income
- --------------------------------------------
Net interest income increased $1,046,000, or 15.2%, to $7,908,000 for
the six month period ended December 31, 2000. This resulted from a
$73.3 million increase in average earning assets for the period, offset
in part by a 22 basis point decrease in the net interest margin. The
increase in earning assets is due primarily to the Nutmeg acquisition in
November 2000. The net interest margin decreased to 3.86% from 4.08%.
This decrease was due mostly to the effects of higher market interest
rates during 2000 as compared with 1999, and to changes in deposit
pricing and 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.
Six months ended December 31, Average balance Income/expense
(dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Loans(a) $262,761 $217,313 $10,833 $8,349
Mortgage backed securities (b) 88,191 86,839 2,963 2,782
Other securities(b)(c) 58,746 32,251 1,913 875
-------- -------- ------- ------
Total earning assets 409,698 336,403 15,709 12,006
------- ------
Other assets 20,600 10,733
-------- --------
Total assets $430,298 $347,136
======== ========
NOW accounts $43,701 $36,464 249 209
Money market accounts 91,555 72,311 1,866 1,062
Savings & other 52,137 48,827 647 595
Certificates of deposit 144,095 124,198 4,027 2,920
------- ------- ----- -----
Total interest-bearing
deposits 331,488 281,800 6,789 4,786
Borrowings 31,390 11,750 1,012 358
------- ------- ----- -----
Total interest-bearing funds 362,878 293,550 7,801 5,144
----- -----
Demand deposits 25,360 18,720
Other liabilities 3,805 1,689
Shareholders' equity 38,255 33,177
------- -------
Total liabilities &
shareholders' equity $430,298 $347,136
======== ========
Net interest income $ 7,908 $6,862
======= ======
Spread on interest-bearing funds
Net interest margin(d)
Six months ended December 31, Average
yield/rate
(dollars in thousands) 2000 1999
---- -----
Loans(a) 8.25% 7.68%
Mortgage backed securities (b) 6.72 6.41
Other securities(b)(c) 6.51 5.43
Total earning assets 7.67 7.14
Other assets
Total assets
NOW accounts 1.14 1.15
Money market accounts 4.08 2.94
Savings & other 2.48 2.44
Certificates of deposit 5.59 4.70
Total interest-bearing deposits 4.10 3.40
Borrowings 6.45 6.09
Total interest-bearing funds 4.30 3.51
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities &
shareholders' equity
Net interest income
Spread on interest-bearing funds 3.37 3.63
Net interest margin(d) 3.86 4.08
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal
funds sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume
and rate.
Six months ended December 31, 2000 versus 1999
(in thousands) Change in interest due to
Volume Rate Vol/rate Net
Interest-earning assets: ------ ---- -------- ---
Loans $1,746 $ 610 $ 128 $2,484
Mortgage backed securities 43 136 2 181
Other securities 719 175 144 1,038
------ ------ ----- ------
Total 2,508 921 274 3,703
------ ------ ----- ------
Interest-bearing liabilities:
Deposits 844 985 174 2,003
Borrowings 598 21 35 654
------ ------ ----- ------
Total 1,442 1,006 209 2,657
------ ------ ----- ------
Net change to interest income $1,066 $ (85) $ 65 $1,046
====== ====== ===== ======
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 $3,703,000, or 30.8%, to
$15.7 million for the 2000 period. Loan income increased $2,484,000, or
29.8%, as a result of higher loan volume and a higher average yield.
Average loans increased $45.4 million, or 20.9%, to $262.8 million in
2000 as compared with 1999, due to internal growth and the Nutmeg
acquisition in 2000. The increase in average loan yield, up 57 basis
points, is due to higher market interest rates in 2000 and the changes
in portfolio mix. Investment income increased $1,219,000, or 33.3%, in
2000 as a result of higher average volume and higher average yields.
Average securities increased $27.8 million, or 23.4%. The increase in
average investment yield, up 49 basis points, was due to higher
reinvestment yields during 2000 and changes in portfolio mix.
Interest Expense
- ----------------
Interest expense increased $2,657,000, or 51.7%, to $7.8 million for the
2000 period primarily as a result of the Nutmeg acquisition, changes in
deposit mix, higher average borrowings and higher market interest rates.
Deposit expense increased $2,003,000, or 41.9%, as a result of higher
deposit volume, higher deposit rates and changes in deposit mix. Average
interest-bearing deposits increased $49.7 million, or 17.6%. NOW
accounts increased $7.2 million, or 19.9%, money market accounts
increased $19.2 million, or 26.6%, savings accounts increased $3.3
million, or 6.8%, and certificates of deposits increased $19.9 million,
or 16.0%. The average cost of interest-bearing deposits increased 70
basis points to 4.10%. Borrowings expense increased $654,000 as a
result of higher average borrowings, up $19.6 million, and a higher cost
of borrowings, up 36 basis points.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table sets forth changes in the allowance for loan losses
and other selected statistics:
Six months ended
December 31,
(dollars in thousands) 2000 1999
Balance, beginning of ---- ----
period $4,978 $4,989
Provision for loan losses (416) (495)
Allowance acquired from
purchase of Nutmeg 584 -
Charge-offs:
Real estate mortgages 39 -
Commercial & industrial 5 20
Consumer loans 5 2
------ ------
Total charge-offs 49 22
------ ------
Recoveries:
Real estate mortgages 4 1
Commercial & industrial 417 554
Consumer loans - 2
------ ------
Total recoveries 421 557
------ ------
Net (recoveries) charge-offs (372) (535)
------ ------
Balance, end of period $5,518 $5,029
====== ======
Ratio of allowance for
loan losses:
to non-performing loans 346.8% 267.2%
to total gross loans 1.6 2.3
Loan loss provision
to average loans (0.2) (0.2)
Ratio of net (recoveries)
charge-offs to average
loans outstanding (0.2) (0.2)
Years ended June 30,
(dollars in thousands) 2000 1999 1998 1997 1996
Balance, beginning of ---- ---- ---- ---- ----
period $4,989 $5,004 $5,452 $4,866 $5,372
Provision for loan losses (470) 100 250 400 400
Allowance acquired from
purchase of Nutmeg - - - - -
Charge-offs:
Real estate mortgages 172 165 633 90 884
Commercial & 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 & 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 period $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 (recoveries)
charge-offs to average
loans outstanding (0.2) 0.1 0.4 (0.1) 0.6
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. 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.
(dollars in thousands) December 31, 2000 June 30, 2000
----------------- -------------
Allowance Loans(a) Allowance Loans(a)
--------- -------- --------- --------
Real Estate Mortgages
Residential
1-to-4 family $ 942 55.6% $ 666 57.2%
5-or-more family 477 5.8 548 1.8
Commercial 2,145 18.6 1,075 22.6
Land & land development 319 1.0 374 0.9
Home equity credit 604 7.1 474 8.8
------ ----- ------ -----
Total mortgage loans 4,487 88.1 3,137 91.3
Commercial & industrial 609 10.8 928 7.6
Installment 42 0.6 45 0.4
Collateral & other 19 0.5 16 0.7
Unallocated 361 0.0 852 0.0
------ ----- ------ -----
Total allowance $5,518 100.0 $4,978 100.0
====== ===== ====== =====
(dollars in thousands) June 30, 1998 June 30, 1997
------------- -------------
Allowance Loans(a) Allowance Loans(a)
--------- -------- --------- --------
Real Estate Mortgages
Residential
1-to-4 family $ 978 50.8% $1,131 52.9%
5-or-more family 694 3.3 906 2.8
Commercial 2,026 20.8 1,669 18.5
Land & land development 440 2.1 683 4.9
Home equity credit 212 12.6 205 11.8
------ ----- ------ -----
Total mortgage loans 4,350 89.6 4,594 90.9
Commercial & industrial 188 8.5 184 7.2
Installment 24 0.7 34 0.7
Collateral 0 1.2 0 1.2
Unallocated 442 0.0 640 0.0
------ ----- ------ -----
Total allowance $5,004 100.0 $5,452 100.0
====== ===== ====== =====
June 30, 1999
-------------
(dollars in thousands) Allowance Loans(a)
--------- --------
Real Estate Mortgages
Residential
1-to-4 family $ 959 59.8%
5-or-more family 461 2.9
Commercial 1,937 17.4
Land & land development 258 1.1
Home equity credit 195 9.0
------ ------
Total mortgage loans 3,810 90.2
Commercial & industrial 239 8.5
Installment 18 0.4
Collateral & other 0 0.9
Unallocated 922 0.0
------ ------
Total allowance $4,989 100.0
====== ======
June 30, 1996
-------------
(dollars in thousands) Allowance Loans(a)
--------- --------
Real Estate Mortgages
Residential
1-to-4 family $1,258 57.31%
5-or-more family 290 2.10
Commercial 1,942 19.55
Land & land development 512 6.09
Home equity credit 147 9.30
------ ------
Total mortgage loans 4,149 94.35
Commercial & industrial 139 3.94
Installment 12 0.32
Collateral 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 negative provisions for loan losses of $416,000 and $495,000
for the six month periods ended December 31, 2000 and 1999,
respectively, due to cash recoveries from a previously charged off loan.
Excluding these recoveries, NewMil's provision for loan losses would
have been $0 and $50,000 for the 2000 and 1999 periods, respectively. In
addition, $584,000 was added to the allowance in 2000 as a result of the
Nutmeg acquisition. Over the past several years the benefits from a
steady improvement in loan quality, offset in part by effect of modest
loan portfolio growth, has enabled NewMil to reduce its provision for
loan losses. The ratio of non-performing loans to total loans has
declined to 0.47% at December 31, 2000, compared with 0.37%, 0.57%,
0.83% and 1.81% at June 30, 2000, 1999, 1998 and 1997, respectively.
The ratio of past due loans (including non-performing loans) to total
loans was 1.14% at December 31, 2000, compared with 0.97% and 1.58% at
June 30, 2000 and 1999, respectively. The decrease in the ratio of the
allowance for loan losses to total loans of 1.63% at December 31, 2000
compared with 2.18% and 2.32% at June 30, 2000 and 1999, respectively,
results from both loan portfolio growth and improvements in credit
quality. During the six months ended December 31, 2000 gross loans
increased by $109.7 million, including $99.5 million acquired with
Nutmeg, of which 53% represented 1-to-4 family residential mortgage
loans, 42% represented commercial mortgage, commercial and industrial,
and residential multifamily loans and 5% represented home equity and
other loan categories. 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 NewMil remains
adequately reserved both against total loans and non-performing loans at
December 31, 2000. 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 February 2001 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 unallocated reserve declined to
$361,000 at December 31, 2000 from $852,000 at June 30, 2000,
principally as a result of the combination of Nutmeg's loan portfolio
and allowance for loan losses with NewMil's. Nutmeg did not maintain an
unallocated reserve.
Non-Interest Income
- -------------------
Non-interest income increased $241,000 or 25.6%, for the six month
period ended December 31, 2000. This increase is attributable to
increased revenue from services charges, the elimination of a loss on
the sale of securities and offset by a gain from the sale of a branch in
1999. The principal categories of non-interest income are as follows:
Six months ended December 31, 2000 1999 Change
(dollars in thousands) ---- ---- ------
Service charges on
deposit accounts $ 808 $ 672 $136 20.2%
Gains on sales of
loans, net 93 84 9 10.7
Losses on sales of
securities, net - (109) 109 100.0
Gain on sale of branch - 75 (75) (100.0)
Gains on sales of OREO 39 23 16 69.6
Loan servicing 43 34 9 26.5
Other 200 163 37 22.7
------ ----- ---- ----
Total non-interest income $1,183 $ 942 $241 25.6%
====== ===== ==== ====
The increase in service charges on deposit accounts in 2000 reflects
increased transaction volume resulting from both growth in transaction
deposit accounts and accounts added with the Nutmeg purchase. The
increase in gains from sales of residential mortgage loans resulted from
loan sales of $5.3 million in 2000 compared with $4.6 million in 1999.
Loans sold into the secondary market are generally pre-arranged on a
loan by loan basis prior to closing and are sold service-released. The
1999 loss from security sales related to the sale of three mortgage
backed securities that experienced higher than expected prepayment
speeds. The Bank did not sell any securities during the 2000 period.
The gain from the sale of a branch in 1999 related to the receipt of an
additional sale premium resulting from certain competitive events not
occurring within a time frame stipulated in the sale agreement for the
Winsted Branch, sold in May 1999. The increase in loan servicing fees
in 2000 resulted from the acquisition of a $24.1 million loan servicing
portfolio with the Nutmeg purchase, offset by portfolio run-off. At
December 31, 2000 the Bank's loan servicing portfolio totaled $38.3
million, up from $16.9 million at June 30, 2000.
Operating Expenses
- ------------------
Operating expenses increased $947,000, or 17.4%, for the six month
period ended December 31, 2000. The principal categories of operating
expenses are as follows:
Six months ended December 31, 2000 1999 Change
(dollars in thousands) ---- ---- ------
Salaries $2,805 $2,396 $ 409 17.1%
Employee benefits 164 600 (436) (72.7)
Occupancy 569 473 96 20.3
Equipment 709 420 289 68.8
Marketing 527 140 387 276.4
Professional 256 212 44 20.8
Printing & office supplies 241 164 77 47.0
Postage & telecommunications 201 177 24 13.6
Collections & OREO 8 144 (136) (94.4)
Amortization of intangible assets 82 - 82 -
Other operating 820 709 111 15.7
------ ------ ----- ----
Total operating expenses $6,382 $5,435 $ 947 17.4%
====== ====== ===== ====
The increase in salaries in 2000 was due primarily to annual salary
increases, higher incentive compensation awards, increases in staffing
and staff added with the Nutmeg purchase. The decrease in employee
benefits in 2000 resulted from the recognition of net periodic pension
income of $283,000, from NewMil's frozen defined benefit pension plan
(the plan), $80,000 from the settlement of a medical claim dispute with
a third party and $73,000 in lower medical costs due to changing from a
self-insured to a fully-insured medical plan. NewMil measured net
periodic pension cost for the 1999 year period under the premise that
the plan would be terminated sometime in fiscal 2000. During the
quarter ended December 31, 1999, NewMil made a strategic decision not to
terminate the plan and to 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 $283,000 of pension income in 2000 as compared
with $0 in 1999. The increase in occupancy and equipment expense was
due to higher depreciation expense and equipment and building
maintenance expense associated with the Nutmeg purchase. Marketing
expense increased as a result of advertising campaigns to promote the
Bank's name change and the acquisition of Nutmeg. The increase in
professional fees was principally associated with the change in the
fiscal year end. The increase in printing and office supplies resulted
from both the Bank's name change and the Nutmeg acquisition. The
decrease in collections and OREO expense reflects the diminished level
of non-performing assets. The amortization of intangible assets relates
to the acquisition of Nutmeg, accounted for as a purchase transaction.
Changes in postage and telecommunications and other operating expenses
reflect the recent growth in the Bank's assets and the Nutmeg
acquisition.
Income Taxes
- ------------
Net income for the six month period ended December 31, 2000 included an
income tax provision of $1,119,000, for an effective tax rate of 35.8%,
as compared with an income tax provision of $960,000, for an effective
tax rate of 33.5%, for the 1999 period.
For further information on income taxes see Note 8 of Notes to
Consolidated Financial Statements.
Comparison of the Years Ended June 30, 2000 and 1999
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
effects of the accounting change and the 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 SFAS 133 (Accounting for
Derivative Instruments and Hedging Activities) and took advantage of its
provisions by reclassifying $21 million of securities from held-to-
maturity to available-for-sale, and then sold those securities,
realizing a loss, net of tax, of $162,000 on the transfer and sale.
This loss has been reported separately in net income as the cumulative
effect of adopting SFAS 133. The securities were previously carried
below cost as held-to-maturity, and an unrealized loss, net of taxes, of
$654,000 against these securities had been included in shareholders'
equity prior to their sale. NewMil used the proceeds from the sale of
the securities to prepay $22.5 million of Federal Home Loan Bank fixed
rate advances. NewMil incurred a prepayment fee for the early
extinguishment of debt, net of taxes, of $87,000 that has been reported
in net income as an extraordinary item.
During 1999 NewMil formed a Passive Investment Company ("PIC") and
changed its tax year to a calendar year basis to take advantage of a
change in Connecticut tax statutes. The Connecticut statute, effective
January 1, 1999, allowed 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 and NewMil's
combined Federal and State statutory tax rate became 34%. The formation
of the PIC required NewMil to establish a valuation allowance against
its existing deferred State tax assets that were 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.
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.
Years ended June 30, Average balance Income/expense
(dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Loans(a) $219,293 $192,052 $17,108 $15,426
Mortgage backed securities(b) 87,905 90,273 5,739 5,374
Other securities(b)(c) 39,509 65,630 2,328 3,656
-------- -------- ------- -------
Total earning assets 346,707 347,955 25,175 24,456
-------- -------- ------- -------
Other assets 11,252 13,473
-------- --------
Total assets $357,959 $361,428
======== ========
NOW accounts $38,158 $33,065 434 387
Money market accounts 71,478 68,365 2,186 2,018
Savings & other 48,932 48,383 1,185 1,234
Certificates of deposit 125,218 133,421 6,073 6,713
-------- -------- ------- -------
Total interest-bearing
deposits 283,786 283,234 9,878 10,352
Borrowings 20,084 24,432 1,233 1,455
-------- -------- ------- -------
Total interest-bearing funds 303,870 307,666 11,111 11,807
Demand deposits 19,041 17,185 ------- -------
Other liabilities 1,897 2,278
Shareholders' equity 33,151 34,299
-------- --------
Total liabilities &
shareholders' equity $357,959 $361,428
======== ========
Net interest income $14,064 $12,649
Spread on interest-bearing funds ======= =======
Net interest margin(d)
Years ended June 30, Average
yield/rate
(dollars in thousands) 2000 1999
---- ----
Loans(a) 7.80% 8.03%
Mortgage backed securities(b) 6.53 5.95
Other securities(b)(c) 5.89 5.57
Total earning assets 7.26 7.03
Other assets
Total assets
NOW accounts 1.14 1.17
Money market accounts 3.06 2.95
Savings & other 2.42 2.55
Certificates of deposit 4.85 5.03
Total interest-bearing deposits 3.48 3.66
Borrowings 6.14 5.96
Total interest-bearing funds 3.66 3.84
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities &
shareholders' equity
Net interest income
Spread on interest-bearing funds 3.60 3.19
Net interest margin(d) 4.06 3.64
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal
funds sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume.
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
====== ====== ===== ======
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
- ---------------------------------------
NewMil had a negative provision of $470,000 for loan losses in 2000,
compared with a provision of $100,000 in 1999. The negative provision
resulted from a loan loss recovery of $545,000, related to a loan that
had been charged off in prior years, without which the provision would
have been $75,000. The decline in the provision resulted from an
improvement in loan quality as evidenced by the steady reduction in non-
performing loans over the past five years, offset in part by loan
portfolio growth. During 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 to 2.2% at
June 30, 2000 compared with 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.
Non-Interest Income
- -------------------
Non-interest income decreased $1,541,000 or 44.9%, to $1,893,000 in
2000. The 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)
Losses on sales of
securities, net (109) - (109) (100.0)
Gain on sale of branch 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 transactions
accounts, coupled with changes in the Bank's fee structure. The loss
from security sales related to the sale of three securities that
experienced higher than expected prepayment speeds. The gain from the
sale of a branch in 1999 related to the receipt of an additional sale
premium resulting from certain competitive events not occurring within
a time frame stipulated in the sale agreement for the Winsted Branch,
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. The gains on sales of OREO 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 portfolio run-off. The mortgage servicing portfolio
totaled $16.9 million at June 30, 2000, down from $20.2 million at June
30, 1999.
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 & OREO 565 284 281 98.9
Insurance 107 88 19 21.6
Postage & 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, 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
resulted primarily from the recognition of net periodic pension income,
on NewMil's frozen defined benefit pension plan, of $468,000 and from
lower health benefits expenses in 2000. NewMil measured net periodic
pension cost for the first two quarters of 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 to 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 was primarily due to higher depreciation expense and
building maintenance expense in 2000. The increase in professional,
collection and OREO expense was a result of the cost of additional
consulting work related to various corporate initiatives undertaken by
the Bank during 2000. Marketing expense increased as a result of a
Cable TV advertising 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.
In 1998 Connecticut tax legislation was passed which made sweeping
changes to the corporation business tax treatment of banks and financial
service companies. The new law, effective for calendar year 1999,
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.
Effective January 1, 1999, NewMil formed a PIC and changed its tax year
to a calendar year basis to take advantage of the change in
Connecticut's tax legislation. NewMil transferred qualifying mortgage
loans into its PIC and income of the PIC and its dividends to NewMil
became exempt from Connecticut Corporation Business Tax. As a result,
NewMil's combined Federal and State statutory tax rate became 34%.
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 had 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
Overview
- --------
During the six month period ended December 31, 2000 total assets grew
$131.0 million, or 33.4%, to $523.6 million. This was due both to the
purchase of Nutmeg, with assets of $109.1 million and deposits of $84.7
million, and to internal loan and deposit growth of $9.3 million and
$33.5 million, respectively, for the period. Net loans increased $108.8
million, or 48.6%, to $332.5 million at December 31, 2000, while
deposits grew $118.2 million, or 37.0%, to $437.8 million. Investments
decreased $3.9 million, or 2.7%, to $140.4 million at December 31, 2000
and borrowings decreased $3.7 million, to $32.1 million. Non-performing
assets increased $523,000 to $1.7 million, but represent only 0.33% of
assets at December 31, 2000 compared with 0.31% at June 30, 2000. Book
value per share increased $0.83 to $10.35 at December 31, 2000, after
cash dividends of $0.21, representing a 37.8% payout ratio. At December
31, 2000 tier 1 leverage and total risk-based capital ratios were 8.06%
and 12.98%, respectively, and NewMil was "well capitalized" as defined
by the Federal Reserve Board.
Securities
- ----------
During the six month period ended December 31, 2000 securities decreased
$3.9 million, or 2.7%, to $140.4 million at December 31, 2000, due to
portfolio run-off, while federal funds sold increased $6.0 million. The
principal categories of securities are as follows (including both
available-for-sale and held-to-maturity):
December 31, June 30, June 30,
(dollars in thousands) 2000 2000 1999
---- ---- ----
U.S. Government
Agency notes $10,294 $ 9,822 $ -
Corporate Bonds 22,718 22,034 -
Municipal Bonds 10,795 10,800 10,558
Mortgage backed securities 84,832 89,851 92,996
Collateralized mortgage
obligations 8,232 9,035 11,883
Federal Home Loan Bank
stock & other 3,527 2,765 2,765
-------- -------- --------
Total securities $140,398 $144,307 $118,202
======== ======== ========
The change in portfolio mix in 2000 resulted from the portfolio run-off
and changes in the fair value of securities available for sale. The
portfolio has a projected weighted average duration and life of 4.1
years and 5.9 years, respectively, based on median projected prepayment
speeds at current interest rates. At December 31, 2000, securities
totaling $103.2 million, or 73.5%, were classified as available-for-sale
and securities totaling $37.2 million, or 26.5%, 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
December 31, 2000 Value Value Yield
----- ----- -----
US Government Agency notes
After 1 but within 5 years $ 10,294 $ 10,294 7.12%
Corporate Bonds
After 1 but within 5 years 22,718 22,718 7.51
Mortgage backed securities 65,525 65,525 6.94
Collateralized mortgage obligations 1,157 1,157 4.67
Federal Home Loan Bank stock & other 3,527 3,527 5.59
-------- --------
Total Securities Available-for-sale $103,221 $103,221 7.65
======== ========
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
Federal Home Loan Bank stock & other 2,765 2,765 5.48
-------- --------
Total Securities Available-for-sale $104,528 $104,528 7.61
======== ========
June 30, 1999
Mortgage backed securities $70,106 $70,106 6.40%
Collateralized mortgage obligations 1,264 1,264 4.96
Federal Home Loan Bank stock & other 2,765 2,765 5.48
------- -------
Total Securities Available-for-sale $74,135 $74,135 7.19
======= =======
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
December 31, 2000 Value Value Yield
----- ----- -----
Municipal Bonds
After 1 but within 5 years $ 250 $ 248 5.75%
After 10 years 10,545 10,147 6.14
Mortgage backed securities 19,307 19,603 6.83
Collateralized mortgage obligations 7,075 6,855 5.58
------- -------
Total Securities Held-to-maturity $37,177 $36,853 6.39
======= =======
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
======= =======
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 the six month period ended December 31, 2000 net loans grew
$108.8 million, or 48.6%, to $332.5 million. This was due both to the
purchase of Nutmeg, with net loans of $99.5 million, and to loan growth
of $9.3 million. Loan originations and advances for portfolio totaled
$41.6 million for 2000, up $10.8 million, or 39.3% from $29.8 million in
1999, which period included $4.2 million of residential mortgage loans
purchased. Loan repayments totaled $32.7 million for 2000, up from
$30.2 million in 1999. Residential mortgage loans originated for sale
totaled $5.4 million in 2000 compared with $4.7 million in 1999. Loans
originated for sale are sold on a servicing released basis.
The Commercial Lending department specializes in lending to small and
mid-size companies and professional practices and provides short-term
and long-term financing, construction loans, commercial mortgages and
property improvement loans. The department also works extensively with
several government-assisted lending programs. The Residential Mortgage
Department, in addition to traditional portfolio lending, originates
loans for sale to the secondary market on a service-released basis,
which enables the Bank to offer a very comprehensive residential
mortgage product line. The department also offers home equity loans and
lines of credit and consumer installment loans.
The principal categories of the loan portfolio are as follows:
December 31, June 30, June 30,
(in thousands) 2000 2000 1999
Real Estate Mortgages: ---- ---- ----
Residential
1-to-4 family $187,755 $130,770 $128,371
5-or-more family 19,759 4,185 6,152
Commercial 63,089 51,633 37,456
Land & land development 3,423 1,995 2,410
Home equity credit 24,121 20,257 19,429
-------- -------- --------
Total mortgage loans 298,147 208,840 193,818
Commercial & industrial 36,390 17,404 18,211
Installment & other 3,868 2,439 2,850
-------- -------- --------
Total loans, gross 338,405 228,683 214,879
Deferred loan origination
fees and purchase premium, net (343) 29 146
Allowance for loan losses (5,518) (4,978) (4,989)
-------- -------- --------
Total loans, net $332,544 $223,734 $210,036
======== ======== ========
June 30, June 30, June 30,
(in thousands) 1998 1997 1996
Real Estate Mortgages: ---- ---- ----
Residential
1-to-4 family $ 85,274 $ 90,885 $ 89,159
5-or-more family 5,500 4,812 3,262
Commercial 34,878 31,850 30,408
Land & land development 3,571 8,334 9,472
Home equity credit 21,208 20,274 14,474
-------- -------- --------
Total mortgage loans 150,431 156,155 146,775
Commercial & industrial 14,357 12,424 6,130
Installment & other 3,118 3,122 2,658
-------- -------- --------
Total loans, gross 167,906 171,701 155,563
Deferred loan origination
fees and purchase premium, net (53) (108) (139)
Allowance for loan losses (5,004) (5,452) (4,866)
-------- -------- --------
Total loans, net $162,849 $166,141 $150,558
======== ======== ========
The loan portfolio's maturity distribution is as follows (non-accrual
loans have been presented in the after 5 years category):
December 31, 2000 Within After
(in thousands) Within 1-5 5
1 year years years Total
Real Estate Mortgages: ------ ----- ----- -----
Residential
1-to-4 family $ 8,623 $20,779 $158,353 $187,755
5-or-more family 3,793 8,484 7,482 19,759
Commercial 11,393 21,788 29,908 63,089
Land & land development 1,429 936 1,058 3,423
Home equity credit 2,927 12,432 8,762 24,121
Commercial & industrial 15,211 11,172 10,007 36,390
Installment & other 736 1,405 1,727 3,868
------- ------- -------- --------
Total loans, gross $44,112 $76,996 $217,297 $338,405
======= ======= ======== ========
The amount of loans due after one year that have fixed interest rates
and variable or adjustable interest rates are as follows:
December 31, 2000 Fixed Adjustable
(in thousands) interest interest
rates rates
Real Estate Mortgages: ----- -----
1-to-4 family residential $50,807 $130,659
5-or-more family residential 3,828 14,516
Commercial 20,871 39,005
Land & land development 43 2,402
Home equity credit - 23,979
Commercial and industrial 10,328 19,239
Installment 1,861 49
Collateral & other - 1,861
------- --------
Total loans, gross $87,738 $231,710
======= ========
Non-performing assets
- ---------------------
The principal categories of non-performing assets are as follows:
December 31, June 30, June 30,
(in thousands) 2000 2000 1999
---- ---- ----
Non-accruing loans $1,240 $ 621 $1,051
Accruing loans past due
90 days or more 351 231 185
Accruing restructured loans - - -
------ ------ ------
Total non-performing loans 1,591 852 1,236
OREO, net 150 366 333
------ ------ ------
Total non-performing assets $1,741 $1,218 $1,569
====== ====== ======
December 31, June 30, June 30, June 30,
(in thousands) 1998 1997 1996
---- ---- ----
Non-accruing loans $ 761 $2,054 $3,809
Accruing loans past due
90 days or more 628 783 166
Accruing restructured loans - 274 281
------ ------ ------
Total non-performing loans 1,389 3,111 4,256
OREO, net 295 474 2,224
------ ------ ------
Total non-performing assets $1,684 $3,585 $6,480
====== ====== ======
The composition of non-performing assets is as follows:
Non-Performing Assets Real Estate
(dollars in thousands) --------------------------------------
Land & land
Residential Commercial development Total
December 31, 2000 ----------- ---------- ----------- -----
Non-accrual loans $614 $223 $403 $1,240
Accruing loans past
due 90 or more days 292 59 - 351
Restructured loans - - - -
Other real estate owned 58 92 - 150
---- ---- ---- ------
Totals $964 $374 $403 $1,741
==== ==== ==== ======
June 30, 2000
Non-accrual loans $216 $ 2 $403 $ 621
Accruing loans past
due 90 or more days 231 - - 231
Restructured loans - - - -
Other real estate owned 58 308 - 366
---- ---- ---- ------
Totals $505 $310 $403 $1,218
==== ==== ==== ======
June 30, 1999
Non-accrual loans $196 $452 $403 $1,051
Accruing loans past
due 90 or more days 185 - - 185
Restructured loans - - - -
Other real estate owned 333 - - 333
---- ---- ---- ------
Totals $714 $452 $403 $1,569
==== ==== ==== ======
During the six month period ended December 31, 2000 non-performing
assets increased $523,000 to $1.7 million at December 31, 2000,
primarily due to the Nutmeg acquisition. However, non-performing assets
represent only 0.33% of total assets at December 31, 2000, compared with
0.31% at June 30, 2000. The low level of non-performing assets reflects
NewMil's rigorous ongoing credit management process and favorable
economic climate.
Changes in non-performing assets are as follows:
Six months
ended Years ended
December 31, June 30,
(dollars in thousands) 2000 2000 1999
---- ---- ----
Balance, beginning of period $ 1,218 $1,569 $1,684
Loans placed on non-accrual status 424 899 920
Non-accrual loans acquired with Nutmeg 416 - -
Non-accrual loan payments (104) (523) (150)
Loans returned to accrual status (68) (278) (3)
Non-accrual loan charge-offs (49) (173) (156)
Change in accruing loans past
due 90 or more days, net 120 46 (442)
Payments to improve OREO - 31 107
Decrease in OREO valuation reserve - - 82
Gross proceeds from OREO sales (255) (399) (1,815)
Gains on OREO sales, net 39 46 1,342
------- ------ ------
Balance, end of period $ 1,741 $1,218 $1,569
======= ====== ======
Percent of total assets 0.33% 0.31% 0.45%
Had non-accrual loans as of December 31, 2000 and June 30, 2000 and 1999
been current in accordance with their original terms, gross interest
income of $61,000, $68,000 and $98,000, respectively, would have been
recorded in net income. The amount of interest on these loans that was
included in income was $13,000, $15,000 and $59,000, respectively, for
the three periods. Accruing loans past due 90 days or more at December
31, 2000 consist of mortgage loans 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 during the
six months ended December 31, 2000 sold $255,000 of OREO from which net
gains of $39,000 were realized.
In addition to non-performing assets, at December 31, 2000 NewMil had
$3,349,000 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
- -----------------------
During the six month period ended December 31, 2000 deposits grew $118.2
million, or 37.0%, to $437.8 million. This was due both to the purchase
of Nutmeg, with deposits of $84.7 million and four full-service branch
offices, and to deposit growth of $33.5 million. The deposit growth is
attributed to an extensive advertising campaign by the Bank and changes
in the Bank's market resulting from the sale of a competing community
bank to a large out-of-state bank. NewMil has 18 full-service branch
offices and one special needs office located in Fairfield, Litchfield
and New Haven Counties.
The scheduled maturities of certificates of deposit with balances in
excess of $100,000 are as follows:
December 31, 2000 Less Within Within Over
(in thousands) than 3 3 - 6 6- 12 one
months months months year Total
Certificates of deposit ------ ------ ------ ---- -----
over $100,000 $10,925 $8,667 $4,085 $1,947 $25,624
======= ====== ====== ====== =======
During the six month period ended December 31, 2000 borrowings decreased
$3.7 to $32.1 million. The decrease was funded by NewMil's deposit
growth, offset by cash paid for the Nutmeg acquisition and borrowings of
$10.0 million assumed from Nutmeg. Borrowings at December 31, 2000
consisted of overnight repurchase agreements of $4.6 million, and
Federal Home Loan Bank advances of $27.5 million with terms ranging from
one day to 93 months and fixed rates ranging from 4.49% to 6.58%.
Borrowings at June 30, 2000 had terms ranging from one day to nine
months and fixed rates from 5.91% to 7.42%.
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 for the six month period ended December 31, 2000
provided net cash flows of $2.1 million. During 2000 investing
activities used net cash of $5.7 million, principally net cash paid
through the Nutmeg acquisition and net loan advances. Financing
activities provided net cash of $18.8 million, principally from
increased deposits and repurchase agreements, offset by net borrowing
repayments. Funds provided by operating activities and financing
activities were utilized to fund investing activities and a $15.2
million increase in cash and overnight federal funds sold.
Operating activities for the six month period ended December 31, 1999
used net cash of $0.5 million. Investing activities provided net cash
of $4.8 million, principally as a result of securities repayments, sales
and maturities offset, in part, by securities and loans purchased.
Financing activities used net cash of $9.4 million, principally due to
repayment of borrowings, net deposit withdrawals, dividends paid and
treasury stock purchases. Funds provided by investing activities,
together with a $5.0 million decrease in cash and overnight federal
funds sold, were utilized to fund financing activities.
At December 31, 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 $123
million, to net deposits and short term unsecured liabilities, was
54.1%, well in excess of NewMil's minimum guideline of 15%.
At December 31, 2000, NewMil had outstanding commitments to fund new
loan originations of $4.4 million, construction mortgage commitments of
$5.8 million and unused lines of credit of $32.0 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 representatives from senior management and the Board of
Directors. 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 December 31, 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.
December 31, 2000 Within Within
(dollars in thousands) Within 6 7-12 1-5
months months years
ASSETS ------ ------ -----
Securities $ 19,087 $ 6,567 $72,500
Federal funds sold 6,029 - -
Cash & due from banks 99 - -
Loans, net 109,301 62,752 113,659
Other assets - - -
--------- --------- --------
Total assets 134,516 69,319 186,159
--------- --------- --------
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) - - -
NOW accounts - - -
Money market 107,131 - -
Savings & other 65,657 - -
Certificates of
deposit 91,789 56,416 24,649
Federal Home Loan
Bank advances 26,500 - -
Repurchase agreements 4,591 - -
Other liabilities - - -
Stockholders' equity - - -
--------- --------- --------
Total sources of funds 295,668 56,416 24,649
--------- --------- --------
Cumulative
interest-rate
sensitivity gap $(161,152) $(148,249) $(13,261)
========= ========= ========
Percent of total assets (30.8)% (28.3)% 2.5%
December 31, 2000
(dollars in thousands) After Non-interest-
5 years bearing Total
ASSETS ------- ------- -----
Securities $41,100 $ 1,144 $140,398
Federal funds sold - - 6,029
Cash & due from banks - 21,685 21,784
Loans, net 49,629 (2,797) 332,544
Other assets - 22,823 22,823
--------- --------- --------
Total assets 90,729 42,855 $523,578
--------- --------- ========
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) - 37,325 37,325
NOW accounts 54,785 - 54,785
Money market - - 107,131
Savings & other - - 65,657
Certificates of
deposit 41 - 172,895
Federal Home Loan
Bank advances 1,000 - 27,500
Repurchase agreements - - 4,591
Other liabilities - 6,177 6,177
Stockholders' equity - 47,517 47,517
--------- --------- --------
Total sources of funds 55,826 91,019 $523,578
--------- --------- ========
Cumulative
interest-rate
sensitivity gap $48,164 $ -
======= =======
Percent of total assets 9.20% - %
At December 31, 2000, NewMil's one year cumulative gap was -$148.2
million, or 28.3% 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 December 31, 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 horizon was within NewMil's tolerance limit
for the periods presented.
Change in Rate % Change in Net Income
December 31, June 30, June 30,
2000 2000 1999
---- ---- ----
+200 bp (8.9)% (8.6)% 2.9%
-200 bp (6.2) (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 the six month period ended December 31, 2000 shareholders' equity
increased $13.2 million, or 38.4%, to $47.5 million, while book value
per share increased 8.7% to $10.35 at December 31, 2000. The increase
in shareholders' equity resulted from net income of $2,006,000, Common
Stock of $10.0 million issued in consideration for the purchase of
Nutmeg, net unrealized gains of $2.1 million on securities available for
sale, net of taxes, a $112,000 tax benefit from the exercise of non-
qualified stock options and proceeds from the exercise of stock options
of $73,000, offset, in part, by treasury stock purchases of $343,000 and
dividend payments of $758,000.
Repurchases of Common Stock
- ---------------------------
During the six month period ended December 31, 2000 NewMil repurchased
31,999 shares of common stock for total consideration of $343,000, or
$10.75 per average share, under a 40,000 share repurchase plan announced
in December 1999 and a 40,000 share repurchase plan announced in
February 2000. As of December 31, 2000 NewMil had repurchased 40,000
shares under the December 1999 plan and 10,001 shares under the February
2000 plan.
In December 2000 NewMil announced its intention to repurchase 229,716,
or 5%, of its outstanding shares of 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.
Capital Requirements
- --------------------
NewMil and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board (the "FRB") and
the FDIC. At December 31, 2000 NewMil's leverage capital ratio was
8.06% and its tier I and total risk-based capital ratios were 11.72% and
12.98%, respectively. At December 31, 2000 the Bank's leverage capital,
and tier I and total risk-based capital ratios were 8.04%, 11.99% and
13.24%, respectively. At June 30, 2000 the Bank's leverage capital, and
tier I and total risk-based capital ratios were 9.05%, 15.76% and
17.02%, respectively. The decrease in the Bank's capital ratios at
December 31, 2000 resulted from the acquisition of Nutmeg. In addition,
NewMil's intangible assets acquired pursuant to the Nutmeg purchase
transaction are not recognized for regulatory capital. 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 December
31, 2000 was $3,180,000. 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, 1998 and 2000 NewMil increased its quarterly cash dividend
to $0.06, $0.08, $0.09 and $0.11, respectively. In July 1999 NewMil
increased its quarterly dividend to $0.10. For the six month period
ended December 31, 2000 total dividends of $0.21 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
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" ("SFAS 140"). This Statement
replaces FASB Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
It revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125 provisions without
reconsideration. This Statement will be effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Management anticipates that SFAS 140
will not have a significant effect on NewMil's results of operations or
its financial position based on its current operations.
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 incorporated 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 as of
December 31 , 2000, June 30, 2000 and June 30, 1999 and the related
consolidated statements of income, changes in shareholders' equity,
and cash flows for the six-month period ended December 31, 2000 and
for the 12-month periods ended June 30, 2000, 1999 and 1998,
present fairly, in all material respects, the financial position of
NewMil Bancorp, Inc. and its subsidiary at December 31, 2000, June
30, 2000 and June 30, 1999 and the results of their operations and
their cash flows for the six-month period ended December 31, 2000
and for the 12-month periods ended June 30, 2000, 1999 and 1998 in
conformity with accounting principles generally accepted in the
United States of America. 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 of
America, 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 our opinion.
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
January 24, 2001
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, June 30, June 30,
2000 2000 1999
ASSETS ---- ---- ----
Cash and due from banks $ 21,784 $ 12,623 $ 9,719
Federal funds sold 6,029 - 3,167
-------- -------- --------
Total cash and cash equivalents 27,813 12,623 12,886
Securities
Available-for-sale at market 103,221 104,528 74,135
Held-to-maturity at amortized
cost (fair value: $36,853, $38,005
and $42,911) 37,177 39,779 44,067
Loans (net of allowance for loan losses:
$5,518, $4,978 and $4,989) 332,544 223,734 210,036
Other real estate owned 150 366 333
Bank premises and equipment, net 6,491 5,679 6,238
Accrued interest income 3,499 2,747 2,190
Intangible assets (net of accumulated
amortization: $82) 9,459 - -
Deferred tax asset, net 1,135 2,000 1,788
Other assets 2,089 1,116 444
-------- -------- --------
Total Assets $523,578 $392,572 $352,117
======== ======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 37,325 $ 20,703 $ 18,622
NOW accounts 54,785 43,950 34,660
Money market 107,131 75,465 71,252
Savings and other 65,657 48,652 49,443
Certificates of deposit 172,895 130,856 126,146
-------- -------- --------
Total deposits 437,793 319,626 300,123
Federal Home Loan Bank advances 27,500 35,750 15,000
Repurchase agreements 4,591 - -
Accrued interest and other liabilities 6,177 2,871 3,859
-------- -------- --------
Total Liabilities 476,061 358,247 318,982
-------- -------- --------
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 2,995
Paid-in capital 42,755 43,332 43,773
Retained earnings 14,447 13,199 10,637
Accumulated other comprehensive
income, net 755 (1,362) (1,132)
Treasury stock, at cost: 1,398,963,
2,384,113 and 2,325,924 shares (13,435) (23,839) (23,138)
-------- -------- --------
Total Shareholders' Equity 47,517 34,325 33,135
-------- -------- --------
Total Liabilities and
Shareholders' Equity $523,578 $392,572 $352,117
======== ======== ========
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Six months ended
December 31,
2000 1999
---- ----
Interest and dividend income (unaudited)
Interest and fees on loans $10,833 $ 8,349
Interest and dividends
on securities 4,775 3,564
Interest on federal funds sold 101 93
------- -------
Total interest and dividend
income 15,709 12,006
------- -------
Interest expense
Deposits 6,789 4,786
Borrowed funds 1,012 358
------- -------
Total interest expense 7,801 5,144
------- -------
Net interest and dividend income 7,908 6,862
Provision for loan losses (416) (495)
------- -------
Net interest and dividend income
after provision for loan losses 8,324 7,357
------- -------
Non-interest income
Service charges on deposit
accounts 808 672
Gains on sales of mortgage
loans, net 93 84
Gain on sale of OREO 39 23
Gain of sale of non-
performing loan - -
Gain on sale of branch - 75
Loss on sale of securities, net - (109)
Loan servicing fees 43 34
Other 200 163
------- -------
Total non-interest income 1,183 942
------- -------
Non-interest expense
Salaries 2,805 2,396
Employee benefits 164 600
Occupancy 569 473
Equipment 709 420
Professional, collections
and OREO 264 356
Marketing 527 140
Other 1,344 1,050
------- -------
Total non-interest expense 6,382 5,435
------- -------
Income before income taxes,
cumulative effect of accounting
change and extraordinary item 3,125 2,864
Income tax provision 1,119 960
------- -------
Income before cumulative effect of
accounting change and
extraordinary item 2,006 1,904
Cumulative effect of change in
accounting principle, net of taxes - -
Extraordinary item, net of taxes - -
------- -------
Net income $ 2,006 $ 1,904
======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Six months ended
December 31,
2000 1999
---- ----
Diluted earnings per share (unaudited)
Income before cumulative effect
of accounting change and
extraordinary item $0.50 $0.50
Cumulative effect of change
in accounting principle,
net of taxes - -
Extraordinary item, net of taxes - -
----- -----
Net income $0.50 $0.50
===== =====
Basic earnings per share
Income before cumulative effect
of accounting change and
extraordinary item $0.52 $0.52
Cumulative effect of change
in accounting principle,
net of taxes - -
Extraordinary item, net of taxes - -
----- -----
Net income $0.52 $0.52
===== =====
Dividends per share $0.21 $0.20
===== =====
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
Gains on sales of mortgage
loans, net 147 547 480
Gain on sale of OREO 46 1,342 359
Gain of sale of non-
performing loan - - 778
Gain on sale of branch 75 - -
Loss on sale of securities, net (109) - (271)
Loan servicing fees 66 81 101
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
Other 1,996 2,146 2,031
------- ------- -------
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
(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 - (0.04) -
Extraordinary item, net of taxes - (0.02) -
----- ----- -----
Net income $1.05 $0.76 $0.74
===== ===== =====
Basic earnings per share
Income before cumulative effect
of accounting change and
extraordinary item $1.10 $0.87 $0.78
Cumulative effect of change
in accounting principle,
net of taxes - (0.05) -
Extraordinary item, net of taxes - (0.02) -
----- ----- -----
Net income $1.10 $0.80 $0.78
===== ===== =====
Dividends per share $0.40 $0.35 $0.30
===== ===== =====
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
Net unrealized gain
on securities
available-for-sale,
net of taxes - - - -
Total comprehensive
income
3,273
Cash dividends paid - - - (1,153)
Exercise of stock
options:
Issuance of
new shares 2,000 1 12 -
Issuance of
treasury stock - - (312) -
Common stock issued - - (11) -
Common stock
repurchased - - - -
--------- ------ ------- -------
Balances at
June 30, 1998 5,990,138 2,995 43,881 8,933
Net income for year - - - 3,032
Net unrealized gain
on securities
available for sale,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (1,328)
Exercise of stock
options - - (108) -
Common stock
repurchased - - - -
--------- ------ ------- -------
Balances at
June 30, 1999 5,990,138 2,995 43,773 10,637
Net income for year - - - 4,015
Net unrealized
loss on securities
available for sale,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (1,453)
Exercise of stock
options - - (441) -
Common stock
repurchased - - - -
--------- ------ ------- -------
Balances at
June 30, 2000 5,990,138 $2,995 $43,332 $13,199
========= ====== ======= =======
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, continued:-
(dollars in thousands)
Common Stock Paid-in Retained
Shares Amount capital earnings
Balances at ------ ------ ------- --------
June 30, 2000 5,990,138 $2,995 $43,332 $13,199
Net income for period - - - 2,006
Net unrealized
gain on securities
available for sale,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (758)
Exercise of stock
options - - (124) -
Tax benefit from
exercise of non-
qualified stock
options - - 112 -
Common stock issued
in consideration
for purchase
acquisition - - (565) -
Common stock
repurchased - - - -
--------- ------ ------- -------
Balances at
December 31, 2000 5,990,138 $2,995 $42,755 $14,447
========= ====== ======= =======
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
Net unrealized gain
on securities
available-for-sale,
net of taxes - 284 284
-------
Total comprehensive income 3,273
-------
Cash dividends paid - - (1,153)
Exercise of stock
options:
Issuance of
new shares - - 13
Issuance of
treasury stock 584 - 272
Common stock issued 61 - 50
Common stock
repurchased (765) - (765)
-------- ------- -------
Balances at
June 30, 1998 (21,195) (1,205) 33,409
Net income for year - - 3,032
Net unrealized gain
on securities
available for sale,
net of taxes - 73 73
-------
Total comprehensive income 3,105
-------
Cash dividends paid - - (1,328)
Exercise of stock
options 167 - 59
Common stock
repurchased (2,110) - (2,110)
-------- ------- -------
Balances at
June 30, 1999 (23,138) (1,132) 33,135
Net income for year - - 4,015
Net unrealized
loss on securities
available for sale,
net of taxes - (230) (230)
-------
Total comprehensive
income 3,785
-------
Cash dividends paid - - (1,453)
Exercise of stock
options 813 - 372
Common stock
repurchased (1,514) - (1,514)
-------- ------- -------
Balances at
June 30, 2000 $(23,839) $(1,362) $34,325
======== ======= =======
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, continued:-
(dollars in thousands)
Accumulated other Total
Treasury comprehensive shareholders'
stock income equity
Balances at ----- ------ ------
June 30, 2000 $(23,839) $(1,362) $34,325
Net income for period - - 2,006
Net unrealized
gain on securities
available for sale,
net of taxes - 2,117 2,117
-------
Total comprehensive income 4,123
-------
Cash dividends paid - - (758)
Exercise of stock
options 197 - 73
Tax benefit from
exercise of non-
qualified stock
options - - 112
Common stock issued
in consideration
for purchase
acquisition 10,550 - 9,985
Common stock
repurchased (343) - (343)
-------- ------ -------
Balances at
December 31, 2000 $(13,435) $ 755 $47,517
======== ====== =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six months ended
December 31,
2000 1999
---- ----
Operating Activities (unaudited)
Net income $ 2,006 $ 1,904
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses (416) (495)
Provision for depreciation
and amortization 499 368
Provision for OREO recoveries - -
Amortization of intangible assets 82 -
Amortization and accretion of
securities premiums and
discounts, net (65) 153
Gains on sales of loans, net (93) (84)
Gains on sales of OREO, net (39) (23)
Gain on sale of branch - (75)
Losses on sales of securities, net - 109
Cumulative effect of accounting
change, net - -
Extraordinary loss on debt
extinguishment, net - -
Loans originated for sale (5,275) (4,599)
Proceeds from sales of loans
originated for sale 5,368 4,683
Tax benefit from exercise of
non-qualified stock options 112 -
Deferred income tax (benefit)
provision (74) (14)
(Increase) decrease in accrued
interest income (98) 30
Increase (decrease) in accrued
interest expense and other
liabilities 161 (2,372)
(Increase) decrease in other
assets, net (49) (39)
Net cash provided (used) by ------- -------
operating activities 2,119 (454)
------- -------
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
(in thousands)
Six months ended
December 31,
2000 1999
---- ----
Investing Activities (unaudited)
Purchases of securities
available-for-sale - (8,536)
Purchases of mortgage backed
securities
Available-for-sale - (2,034)
Held-to-maturity - -
Proceeds from sales of securities
Available-for-sale - -
Held-to-maturity - -
Proceeds from sales of mortgage
backed securities available-
for-sale - 8,411
Proceeds from maturities and
principal repayments of
securities 850 1,685
Principal collected on mortgage
backed securities 7,095 9,119
Loan (advances) repayments, net (8,870) 366
Loans purchased - (4,164)
Net cash paid through purchase
acquisition (4,268) -
Proceeds from sale of non-
performing loan - -
Proceeds from sales of OREO 255 190
Payments to improve OREO - (28)
Purchases of Bank premises and
equipment (790) (135)
Net cash (used) provided by ------- -------
investing activities (5,728) 4,874
------- -------
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
(in thousands)
Six months ended
December 31,
2000 1999
---- ----
Financing Activities (unaudited)
Net increase (decrease) in
deposits $33,486 $ (866)
Net increase in repurchase
agreements 4,591 -
FHLB (repayments) advances, net (18,250) (7,500)
Common Stock repurchased (343) (1,038)
Proceeds from Common Stock
reissued - 417
Cash dividends paid (758) (730)
Proceeds from exercise of
stock options 73 336
------- -------
Net cash provided (used) by
financing activities 18,799 (9,381)
------- -------
Increase (decrease) in cash and
cash equivalents 15,190 (4,961)
Cash and federal funds sold,
beginning of period 12,623 12,886
------- -------
Cash and federal funds sold,
end of period $27,813 $ 7,925
======= =======
Cash paid during period
Interest to depositors $6,668 $4,786
Interest on borrowings 1,021 394
Income taxes 970 817
Non-cash transfers
From securities held-to-maturity
to securities available-for-sale - -
From loans to OREO - 18
Financed portion of OREO sales 218 113
Assets acquired and liabilities
assumed in purchase acquisition
Fair value of noncash assets
acquired 107,190 -
Fair value of liabilities
assumed 99,256 -
Common stock issued 9,985 -
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 depreciation
and amortization 760 695 626
Provision for OREO recoveries - (82) (55)
Amortization of intangible assets - - -
Amortization and accretion of
securities premiums and
discounts, net 155 763 185
Gains on sales of loans, net (147) (547) (1,258)
Gains on sales of OREO, net (46) (1,342) (359)
Gain on sale of branch (75) - -
Losses on sales of securities, 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 sales of loans
originated for sale 7,524 28,144 25,812
Tax benefit from exercise of
non-qualified stock options - - -
Deferred income tax (benefit)
provision (94) 496 763
(Increase) decrease in accrued
interest income (557) 69 (245)
Increase (decrease) in accrued
interest expense and other
liabilities (988) 1,251 (166)
(Increase) decrease in other
assets, net (596) 346 141
------- ------- -------
Net cash provided (used) by
operating activities 2,213 5,577 3,623
------- ------- -------
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
(in thousands)
Years ended June 30,
2000 1999 1998
Investing Activities ---- ---- ----
Purchases of securities
available-for-sale (32,218) (10,805) (50,071)
Purchases of mortgage backed
securities
Available-for-sale (21,540) (15,598) (93,403)
Held-to-maturity - (18,198) -
Proceeds from sales of securities
Available-for-sale - 20,933 35,877
Held-to-maturity - - 7,325
Proceeds from sales of mortgage
backed securities available-
for-sale 8,411 - 1,042
Proceeds from maturities and
principal repayments of
securities 2,821 33,603 44,152
Principal collected on mortgage
backed securities 15,808 33,497 12,196
Loan (advances) repayments, net (9,418) (9,053) 2,427
Loans purchased (4,164) (38,556) (644)
Net cash paid through purchase
acquisition - - -
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) provided 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 (decrease) in
deposits $19,503 $ 6,247 $ 18,485
Net increase in repurchase
agreements - - -
FHLB (repayments) advances, net 20,750 (22,587) 24,500
Common Stock repurchased (1,514) (2,110) (765)
Proceeds from Common 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
------- ------- -------
Increase (decrease) in cash and
cash equivalents (263) (17,590) 5,848
Cash and federal funds sold,
beginning of period 12,886 30,476 24,628
------- ------- -------
Cash and federal funds sold,
end of period $12,623 $12,886 $30,476
======= ======= =======
Cash paid during period
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
Assets acquired and liabilities
assumed in purchase acquisition
Fair value of noncash assets
acquired - - -
Fair value of liabilities
assumed - - -
Common stock issued - - -
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 NewMil
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 18 full-service offices and one special
needs 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, is 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.
Intangible Assets
Intangible assets consist of core deposit intangibles and goodwill.
Intangible assets equal the excess of the purchase price over the fair
value of the tangible net assets acquired in acquisitions accounted for
using the purchase method of accounting. The core deposit intangibles
are being amortized on a declining balance method over a period of seven
years from the acquisition date. Goodwill is being amortized on a
straight-line basis over a period of twenty five years from the
acquisition date. On a periodic basis, management assesses intangible
assets for impairment. If a permanent loss in value is indicated, an
impairment charge to income will be recognized.
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
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 are
as follows:
Six months ended Years ended
December 31, June 30,
(in thousands) 2000 1999 2000 1999 1998
---- ---- ---- ---- ----
Basic 3,890 3,656 3,635 3,793 3,845
Effect of dilutive stock options 145 184 172 192 221
----- ----- ----- ----- -----
Diluted 4,035 3,840 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.
Recent Accounting Pronouncements
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" ("SFAS 140"). This Statement
replaces FASB Statement No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
It revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125 provisions without
reconsideration. This Statement will be effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Management anticipates that SFAS 140
will not have a significant effect on NewMil's results of operations or
its financial position based on its current operations.
NOTE 2 - BUSINESS COMBINATIONS
On November 9, 2000, NewMil acquired Nutmeg Federal Savings and Loan
Association ("Nutmeg") in a tax free stock-for-stock and cash-for-stock
exchange for a total purchase price of $20.3 million, in consideration
for which NewMil paid $10.3 million in cash and issued 1.0 million
shares of common stock. Nutmeg was a federally chartered savings and
loan association headquartered in Danbury, Connecticut with $109.1
million in assets and $84.7 million in deposits with four branch
locations, including two in Danbury, one in Bethel and one in
Ridgefield, Connecticut. In connection with the acquisition, NewMil
recorded goodwill of $8.1 million and a core deposit intangible of $1.4
million.
NOTE 3 - SECURITIES
Securities classified as available-for-sale (carried at fair value) were
as follows:
Estimated Gross un- Gross un- Amort-
(in thousands) fair realized realized ized
value gains losses cost
December 31, 2000 ----- ----- ------ ----
US Government Agency notes
After 1 but within 5 years $ 10,294 $ 481 $ - $ 9,813
Corporate Bonds
After 1 but within 5 years 22,718 488 - 22,230
Mortgage backed securities 65,525 927 489 65,087
Collateralized mortgage
obligations 1,157 - 160 1,317
-------- ------ ------ --------
Total debt securities 99,694 1,896 649 98,447
Equity securities 3,527 - - 3,527
-------- ------ ------ --------
Total securities
available-for-sale $103,221 $1,896 $ 649 $101,974
======== ====== ====== ========
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
======== ====== ====== ========
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:
(in thousands) Gross un- Gross un- Estimated
Amortized realized realized fair
cost(a) gains losses value
December 31, 2000 ------- ----- ------ -----
Municipal bonds
After 1 but within 5 years $ 250 $ - $ 2 $ 248
After 10 years 10,545 - 398 10,147
Mortgage backed securities 19,307 296 - 19,603
Collateralized mortgage
obligations 7,075 2 222 6,855
-------- ------ ------ --------
Total securities
held-to-maturity $ 37,177 $ 298 $ 622 $ 36,853
======== ====== ====== ========
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
======== ====== ====== ========
(in thousands) Gross un- Gross un- Estimated
Amortized realized realized fair
cost(a) gains losses value
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
Six months ended December 31, 2000 -------- ----- ------
US Treasury Notes,
available-for-sale $ 4,653 $ - $ -
======= ===== =====
Six months ended December 31, 1999
Mortgage backed securities,
available-for-sale $ 8,411 $ - $ 109
======= ===== =====
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 December 31, 2000 securities with a carrying value and market value
aggregating approximately $786,000 and $780,000, respectively, were
pledged as collateral against public funds and securities with a
carrying value and market value aggregating approximately $20,344,000
and $20,489,000, respectively, were pledged as collateral against
repurchase agreements.
NOTE 4 - LOANS
The composition of the loan portfolio is as follows:
December 31, June 30,
(in thousands) 2000 2000 1999
Real estate mortgages ---- ---- ----
1-to-4 family residential $187,755 $130,770 $128,371
5-or-more family residential 19,759 4,185 6,152
Commercial 63,089 51,633 37,456
Land & land development 3,423 1,995 2,410
Home equity credit 24,121 20,257 19,429
Commercial & industrial 36,390 17,404 18,211
Installment & other 3,868 2,439 2,850
-------- -------- --------
Total loans, gross 338,405 228,683 214,879
Deferred loan origination fees &
purchase premium, net (343) 29 146
Allowance for loan losses (5,518) (4,978) (4,989)
-------- -------- --------
Total loans, net $332,544 $223,734 $210,036
======== ======== ========
Impaired loans (in thousands)
With no valuation allowance $ 224 $ 2 $453
With valuation allowance 500 502 300
Total impaired loans 724 504 753
Valuation allowance 238 234 173
Commitments to lend additional
amounts to impaired borrowers - - -
Average impaired loans 626 864 627
Amount of impaired loans based on:
Discounted cash flows - - -
Collateral values 724 504 753
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 are as follows:
Six months
ended Years ended
December 31, June 30,
(in thousands) 2000 2000 1999 1998
---- ---- ---- ----
Balance, beginning of period $4,978 $4,989 $5,004 $5,452
Provision for losses (416) (470) 100 250
Allowance acquired from
purchase of Nutmeg 584 - - -
Charge-offs (49) (177) (176) (706)
Recoveries 421 636 61 8
------ ------ ------ ------
Balance, end of period $5,518 $4,978 $4,989 $5,004
====== ====== ====== ======
NOTE 5 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
December 31, June 30,
(in thousands) 2000 2000 1999
---- ---- ----
Non-accrual loans $1,240 $ 621 $1,051
Accruing loans past due
90 days or more 351 231 185
Accruing troubled debt
restructured loans - - -
------ ------ ------
Total non-performing loans 1,591 852 1,236
Real estate acquired in
settlement of loans 150 366 333
------ ------ ------
Total non-performing assets $1,741 $1,218 $1,569
====== ====== ======
The reductions in interest income associated with non-accrual loans are
as follows:
Six months
ended Years ended
December 31, June 30,
(in thousands) 2000 2000 1999 1998
---- ---- ---- ----
Income in accordance with
original terms $ 61 $ 68 $ 98 $ 77
Income recognized 13 15 59 58
---- ---- ---- ----
Reduction in interest income $ 48 $ 53 $ 39 $ 19
==== ==== ==== ====
NOTE 6 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
December 31, June 30,
(in thousands) 2000 2000 1999
---- ---- ----
Land $ 1,140 $ 1,140 $ 1,140
Buildings and improvements 6,447 6,170 6,156
Equipment 3,849 3,103 3,112
Leasehold improvements 596 403 459
Total cost 12,032 10,816 10,867
Accumulated depreciation
and amortization (5,541) (5,137) (4,629)
Bank premises and equipment, net $ 6,491 $ 5,679 $ 6,238
======= ======= =======
NOTE 7 - BORROWINGS
Fixed rate advances from the Federal Home Loan Bank of Boston are as
follows:
December 31, June 30,
(in thousands) 2000 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 - -
6.57% due January 3, 2001 4,500 - - -
6.50% due January 17, 2001 10,000 - - -
6.58% due January 24, 2001 4,500 - - -
5.91% due March 5, 2001 7,500 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
4.49% due October 6, 2008 1,000 - - -
------- ------- ------- -------
Total $27,500 $35,750 $15,000 $37,500
======= ======= ======= =======
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 December 31, 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.
NewMil enters into repurchase agreements directly with its customers.
These agreements are offered as an overnight or short term investments
to NewMil's customers. Information concerning short term borrowings
represented by securities sold under agreements to repurchase is
presented as follows:
December 31, June 30,
(dollars in thousands) 2000 2000 1999
---- ---- ----
Repurchase agreements $ 4,591 $ - $ -
Book value of collateral
US Government Agency notes 20,344 - -
Market value of collateral 20,489 - -
Weighted average rate 5.82% - -
Weighted average maturity 1 day - -
NOTE 8 - 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:
Six months
ended Years ended
December 31, June 30,
(in thousands) 2000 2000 1999 1998
Current provision ---- ---- ---- ----
Federal $1,193 $2,170 $1,498 $ 888
State - - 270 513
------ ------ ------ ------
Total 1,193 2,170 1,768 1,401
------ ------ ------ ------
Deferred (benefit) provision
Federal (74) (94) 93 690
State - - 403 73
------ ------ ------ ------
Total (74) (94) 496 763
------ ------ ------ ------
Income tax provision $1,119 $2,076 $2,264 $2,164
====== ====== ====== ======
The following is a reconciliation of the expected federal statutory tax
to the income tax provision:
Six months
ended Years ended
December 31, June 30,
2000 2000 1999 1998
Income tax at statutory ---- ---- ---- ----
federal tax rate 34.0% 34.0% 34.0% 34.0%
Connecticut Corporation tax,
net of federal tax benefit 0.0 0.0 8.4 7.5
Goodwill 0.9 - - -
Other 0.9 0.1 (1.6) 0.5
---- ---- ---- ----
Effective income tax rates 35.8% 34.1% 40.8% 42.0%
==== ==== ==== ====
The components of NewMil's net deferred tax asset are as follows:
December 31, June 30,
2000 2000
(in thousands) Federal State Federal State
------- ----- ------- -----
Deferred tax assets
Unrealized losses on
securities available-for-
sale and transferred to
held-to-maturity $ - $ - $ 702 $ 155
Net operating losses - 1,356 - -
Capital loss carryforwards - - - -
Bad debt expense, book 1,876 414 1,692 373
Accrued pension expense 161 35 119 26
Deferred income - - 93 20
Other 212 60 203 45
------ ------ ------ ------
Total deferred tax assets 2,249 1,865 2,809 619
------ ------ ------ ------
Deferred tax liabilities
Unrealized gains on
securities available-for-
sale and transferred to
held-to-maturity 388 - - -
Post Retirement Benefits - - 152 33
Bad debt expense, tax 683 151 621 137
Other 42 6 36 6
------ ------ ------ ------
Total deferred tax
liabilities 1,113 157 809 176
------ ------ ------ ------
Net deferred tax asset 1,136 1,708 2,000 443
Valuation reserve - (1,708) - (443)
------ ------ ------ ------
Net deferred tax asset $1,136 $ - $2,000 $ -
====== ====== ====== ======
The allocation of deferred tax expense involving items charged to income
and items charged directly to shareholders' equity and items charged to
goodwill are as follows:
December 31, June 30,
2000 2000
(in thousands) Federal State Federal State
------- ----- ------- -----
Deferred tax expense
(benefit) allocated to:
Shareholders' equity $1,090 $ - $(118) $ -
Goodwill (152) - - -
Income (74) - (94) -
------ ------ ------ ------
Total deferred tax
expense (benefit) $ 864 $ - $(212) $ -
====== ====== ====== ======
June 30, 1999
(in thousands) Federal State
Deferred tax assets ------- -----
Unrealized losses on
securities available-for-
sale and transferred to
held-to-maturity $ 584 $ 146
Net operating losses - -
Capital loss carry forwards 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
Unrealized gains on
securities available-for-
sale and transferred to
held-to-maturity - -
Post Retirement Benefits - -
Bad debt expense, tax 564 154
Other 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 income
and items charged directly to shareholders' equity and items charged to
goodwill are as follows:
June 30, 1999
(in thousands) Federal State
Deferred tax expense ------- -----
(benefit) allocated to:
Shareholders' equity $ 28 $191
Goodwill - -
Income 93 403
Total deferred tax ---- ----
expense (benefit) $121 $594
==== ====
NewMil will only recognize a deferred tax asset when, based upon
available evidence, realization is more likely than not.
At December 31, 2000 and at June 30, 2000 and 1999, a valuation
allowance was established for the entire amount of the state deferred
tax assets as a result of Connecticut legislation that 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, in
1999 NewMil formed a PIC, NewMil Mortgage Company. No tax benefit is
expected to be realized on the reversal of the state deferred tax
assets.
The effective tax rates for the six month period ended December 31, 2000
and the fiscal year ended June 30, 2000 of 35.8% and 34.1%,
respectively, reflect the full 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 9 - RETIREMENT PLANS
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 was as follows:
September 30, March 31,
(in thousands) 2000 2000 1999
---- ---- ----
Change in benefit obligation:
Benefit obligation, beginning of year $4,241 $6,240 $5,875
Service cost - - -
Interest cost 205 330 359
Impact of assumption change (280) (1,960) -
Experience loss (gain) 1,347 (141) -
Plan participants' contributions - - -
Actuarial gain - - 221
Benefits paid (119) (228) (215)
------ ------ ------
Benefit obligation, end of year 5,394 4,241 6,240
------ ------ ------
Change in plan assets:
Fair value of plan assets,
beginning of year 9,791 8,623 7,821
Actual return on plan assets (84) 1,396 1,017
Employer contribution - - -
Plan participant's contribution - - -
Benefits paid (119) (228) (215)
------ ------ ------
Fair value of plan assets,
end of year 9,588 9,791 8,623
------ ------ ------
Funded status 4,194 5,550 2,383
Unrecognized prior service cost - - -
Unrecognized net actuarial (gain) loss (3,435) (5,104) (2,405)
Unrecognized transition (asset)
obligation - - -
------ ------ ------
Prepaid benefit cost $ 759 $ 446 $ (22)
====== ====== ======
Six months
ended Years ended
December 31, June 30,
(dollars in thousands) 2000 2000 1999 1998
---- ---- ---- ----
Weighted-average assumptions:
Discount rate 8.0% 7.5% 6.0% 6.0%
Expected return on plan assets 8.5 8.5 6.0 6.0
Components of net periodic cost:
Interest cost $ 205 $ 330 $ 359 $ 314
Expected return on plan assets (409) (623) (462) (362)
Recognized net gain (109) (175) (75) (32)
----- ----- ----- -----
Net pension income $(313) $(468) $(178) $ (80)
===== ===== ===== =====
For the first half of the fiscal year ended June 30, 2000 NewMil
measured net periodic pension cost under the premise that the plan would
be terminated during 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 ended June 30, 2000.
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 $59,000
and $41,000 to the Plan for the six month periods ended December 31,
2000 and 1999, respectively, and $100,000, $79,000 and $75,000 for the
years ended June 30, 2000, 1999 and 1998, respectively. The plan allows
for NewMil to make non-contributory profit sharing contributions. No
profit sharing contributions were made during 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 was $30,000 and $30,000
for the six month periods ended December 31, 2000 and 1999,
respectively, and $67,000, $60,000 and $50,000 the years ended June 30,
2000, 1999 and 1998, respectively. As of December 31, 2000, NewMil's
post-retirement liability was $368,000.
NOTE 10 - 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 December 31,
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". The Bank's actual regulatory capital position and minimum
capital requirements as defined "For Capital Adequacy Purposes" and "To
Be Well Capitalized Under Prompt Corrective Action Provisions" are as
follows:
December 31, 2000 June 30, 2000
(dollars in thousands) Amount Ratio Amount Ratio
------ ----- ------ -----
Actual Capital Position
Tier 1 leverage $37,201 8.04% $35,146 9.05%
Tier 1 risk-based 37,201 11.99 35,146 15.76
Total risk-based 41,101 13.24 37,961 17.02
Minimum Requirement For
Capital Adequacy
Tier 1 leverage 18,517 4.00 15,533 4.00
Tier 1 risk-based 12,416 4.00 8,922 4.00
Total risk-based 24,831 8.00 17,843 8.00
Minimum Requirement To
Be Well Capitalized
Tier 1 leverage 23,146 5.00 19,416 5.00
Tier 1 risk-based 18,623 6.00 13,382 6.00
Total risk-based 31,039 10.00 22,304 10.00
June 30, 1999
(dollars in thousands) Amount Ratio
------ -----
Actual Capital Position
Tier 1 leverage $34,268 9.53%
Tier 1 risk-based 34,268 18.13
Total risk-based 36,662 19.40
Minimum Requirement For
Capital Adequacy
Tier 1 leverage 14,381 4.00
Tier 1 risk-based 7,319 4.00
Total risk-based 14,639 8.00
Minimum Requirement To
Be Well Capitalized
Tier 1 leverage 17,977 5.00
Tier 1 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 December
31, 2000 is $3,180,000. In some instances, further restrictions on
dividends may be imposed on NewMil by the FRB.
Repurchases of Common Stock
- ---------------------------
During the six month period ended December 31, 2000 NewMil repurchased
31,999 shares of common stock for total consideration of $343,000, or
$10.75 per average share, under a 40,000 share repurchase plan announced
in December 1999 and a 40,000 share repurchase plan announced in
February 2000. As of December 31, 2000 NewMil had repurchased 40,000
shares under the December 1999 plan and 10,001 shares under the February
2000 plan.
In December 2000 NewMil announced its intention to repurchase 229,716,
or 5%, of its outstanding shares of 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.
NOTE 11 - COMPREHENSIVE INCOME
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:
Six months
ended Years ended
December 31, June 30,
(in thousands) 2000 2000 1999 1998
---- ---- ---- ----
Net income $2,006 $4,015 $3,032 $2,989
Net unrealized gains (losses)
on securities during period 2,117 (230) 73 284
Comprehensive income $4,123 $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
------ ------- ------
Six months ended December 31, 2000
Net unrealized gains on securities
available-for-sale arising
during the period $3,199 $(1,088) $2,111
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 9 (3) 6
------ ------- ------
Net unrealized gains on
securities during period $3,208 $(1,091) $2,117
====== ======= ======
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)
======= ===== =====
(in thousands) Before Tax Net of
tax (expense) tax
amount benefit amount
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 12 - 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):
Six months
ended Years ended
December 31, June 30,
(in thousands) 2000 2000 1999
---- ---- ----
Balance, beginning of period $ 582 $ 520 $ 579
Advances 160 210 160
Related parties added during period 757 - -
Repayments (17) (148) (219)
------ ----- -----
Balance, end of period $1,482 $ 582 $ 520
====== ===== =====
NOTE 12 - STOCK OPTIONS
NewMil's 1986 Stock Option and Incentive Plan ("Employee 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 employee Plan
by the Salary and Benefits Committee of the Board. The Employee 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.
NewMil's 1992 Stock Option Plan for Outside Directors ("Director 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 Director 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 option and SARS are
as follows:
Employee Plan Director Plan
------------- -------------
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
------- ----- ------- -----
June 30, 1997 369,536 $ 4.835 96,000 $ 4.898
Granted - - 17,000 12.783
Exercised (52,701) 5.362 - -
Lapsed (1,084) 6.726 - -
------- -------
June 30, 1998 315,751 4.953 113,000 6.085
Granted 25,000 12.438 14,000 11.031
Exercised (14,400) 5.362 - -
Lapsed - - - -
------- -------
June 30, 1999 326,351 5.562 127,000 5.414
Granted 54,500 10.926 3,000 10.938
Exercised (66,001) 5.465 (4,000) 3.000
Lapsed (1,500) 7.375 - -
------- -------
June 30, 2000 313,350 6.507 126,000 6.848
Granted - - 17,000 9.969
Exercised (17,000) 4.320 - -
Lapsed - - - -
------- -------
December 31, 2000 296,350 6.633 143,000 7.219
======= =======
Options exercisable at
December 31, 2000 296,350 126,000
======= =======
Options available
under plan 113,548 43,000
======= ======
The following table summarizes information about NewMil's Employee and
Director stock option plans, as of December 31, 2000:
Weighted
average Weighted
Range of remaining average
exercise Number of options contractual exercise
price Outstanding Exercisable life price
----- ----------- ----------- ---- -----
$ 3.00 - $ 5.99 196,850 196,850 2.6 $ 3.67
6.00 - 8.99 101,000 101,000 5.1 6.64
9.00 - 11.99 99,500 82,500 8.6 10.81
12.00 - 12.84 42,000 42,000 7.5 12.58
------- ------- -- ------
439,350 411,350 5.0 $ 6.82
======= ======= === ======
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. 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.
Six months
ended Years ended
December 31, June 30,
(net income in thousands) 2000 2000 1999 1998
Net income ---- ---- ---- ----
As reported $2,006 $4,015 $3,032 $2,989
Pro forma 1,962 3,808 2,918 2,938
Earnings per share, diluted
As reported 0.50 1.05 0.76 0.74
Pro forma 0.49 1.00 0.73 0.72
Dividend yield 4.21% 3.64% 2.35% 1.54%
Expected volatility 40.00 38.00 28.59 30.00
Risk-free interest rate 5.68 6.03 5.89 5.37
Expected lives, years 10 8 10 10
Fair value of options
granted during year $3.94 $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. NewMil's loan
commitments are as follows:
December 31, June 30,
(in thousands) 2000 2000 1999
---- ---- ----
Unused lines of credit $32,030 $24,813 $23,879
Construction mortgages 5,796 4,154 2,697
Loan commitments 4,385 5,338 6,104
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 $149,000 and $118,000 for the six month periods ended December
31, 2000 and 1999, respectively, and $243,000, $253,000 and $232,000 for
the years ended June 30, 2000, 1999 and 1998, respectively. Future
minimum lease payments at December 31, 2000 are as follows:
2001 $515,958
2002 356,892
2003 304,390
2004 269,609
2005 80,490
After 2005 96,667
----------
$1,624,006
==========
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:
December 31, 2000 June 30, 2000
----------------- -------------
(in thousands) Estimated Estimated
Carrying fair Carrying fair
value value value value
Financial Assets ----- ----- ----- -----
Cash and due from banks $ 21,784 $ 21,784 $ 12,623 $ 12,623
Federal funds sold 6,029 6,029 - -
Securities available-
for-sale 103,221 103,221 104,528 104,528
Securities held-to-maturity 37,177 36,853 39,779 38,005
Loans 338,406 341,989 228,683 223,768
Allowance for loan losses (5,518) - (4,978) -
Deferred loan origination
fees and purchase
premium, net 343 - 29 -
------- ------- ------- -------
Loans, net 332,544 341,989 223,734 223,768
Accrued interest receivable 3,499 3,499 2,747 2,747
Financial Liabilities
Deposits Demand
(non-interest bearing) $ 37,325 $ 37,325 $ 20,703 $ 20,703
NOW accounts 54,785 54,785 43,950 43,950
Money market 107,131 107,131 75,465 75,465
Savings and other 65,657 65,657 48,652 48,652
Certificates of deposit 172,895 172,934 130,856 131,040
------- ------- ------- -------
Total deposits 437,793 437,832 319,626 319,810
FHLB advances 27,500 27,512 35,750 35,703
Repurchase agreements 4,591 4,591 - -
Accrued interest payable 334 334 234 234
June 30, 1999
(in thousands) Estimated
Carrying fair
value value
Financial Assets
Cash and due from banks $ 9,719 $ 9,719
Federal funds sold 3,167 3,167
Securities available-for-sale 74,135 74,135
Securities held-to-maturity 44,067 42,911
Loans 214,879 212,488
Allowance for loan losses (4,989) -
Deferred loan origination
fees and purchase
premium, net 146 -
Loans, net 210,036 212,488
------- -------
Accrued interest receivable 2,190 2,190
Financial Liabilities
Deposits
Demand (non-interest
bearing) $ 18,622 $ 18,622
NOW accounts 34,660 34,660
Money market 71,252 71,252
Savings and other 49,443 49,443
Certificates of deposit 126,146 126,971
------- -------
Total deposits 300,123 300,948
FHLB advances 15,000 14,855
Repurchase agreements - -
Accrued interest payable 133 133
NOTE 15 - NEWMIL BANCORP, INC. (parent company only) FINANCIAL
INFORMATION
The unconsolidated balance sheets and statements of income and cash
flows of NewMil Bancorp, Inc. are presented as follows:
Balance Sheets December 31, June 30,
(in thousands) 2000 2000 1999
Assets ---- ---- ----
Due from bank $ 255 $ 497 $ 329
Investment in NewMil Bank 47,753 33,081 32,171
Other assets 2 815 673
------- ------- -------
Total Assets $48,010 $34,393 $33,173
======= ======= =======
Liabilities and Shareholders'
Equity
Liabilities $ 493 $ 68 $ 38
Shareholders' equity 47,517 34,325 33,135
------- ------- ------
Total Liabilities and
Shareholders' Equity $48,010 $34,393 $33,173
======= ======= =======
Six months
ended Years ended
Statements of Income December 31, June 30,
(in thousands) 2000 2000 1999 1998
---- ---- ---- ----
Fee income $ - $ - $ 100 $ -
Dividends from subsidiary 759 2,904 3,682 1,155
Expenses 119 148 175 163
------ ------ ------ ------
Income before taxes and
undistributed net income
of subsidiary 640 2,756 3,607 992
Income tax benefit - - - -
------ ------ ------ ------
Income before equity in
undistributed net income
of subsidiary 640 2,756 3,607 992
Equity in undistributed
(equity distributed in
excess of) net income
of subsidiary 1,366 1,259 (575) 1,997
------ ------ ------ ------
Net income $2,006 $4,015 $3,032 $2,989
====== ====== ====== ======
Six months
ended Years ended
Statements of Cash Flows December 31, June 30,
(in thousands) 2000 2000 1999 1998
---- ---- ---- ----
Net income $2,006 $ 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 (1,366) (1,259) 575 (1,997)
Other 146 7 26 (26)
------ ------ ------ ------
Net cash provided by
operating activities 786 2,763 3,633 966
------ ------ ------ ------
Financing Activities:
Cash dividends paid (758) (1,453) (1,328) (1,153)
Proceeds from Common Stock
reissued - - - 50
Common Stock repurchased (343) (1,514) (2,110) (765)
Proceeds from exercise of
stock options 73 372 59 285
------ ------ ------ ------
Net cash used by
financing activities (1,028) (2,595) (3,379) (1,583)
------ ------ ------ ------
(Decrease) increase in cash
and cash equivalents (242) 168 254 (617)
Cash and cash equivalents,
beginning of period 497 329 75 692
------ ------ ------ ------
Cash and cash equivalents,
end of period $ 255 $ 497 $ 329 $ 75
====== ====== ====== ======
NOTE 16 - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
Selected quarterly consolidated financial data for the years ended
December 31, 2000 and 1999 is as follows (in thousands except ratios and
per share amounts):
Year ended December 31, 2000
March 31, June 30, Sept 30, Dec 31,
--------- -------- -------- -------
Statement of Income
Interest and dividend income $6,304 $6,865 $7,149 $8,560
Interest expense 2,761 3,206 3,541 4,260
Net interest income 3,543 3,659 3,608 4,300
Provision for loan losses - 25 - (416)
Non-interest income:
Gains on sales of loans, net 30 33 48 45
Gain on sale of OREO - 23 39 -
Service fees and other 411 454 476 576
Non-interest expense 2,408 2,493 2,613 3,770
Income before income taxes 1,576 1,651 1,558 1,567
Income tax provision 553 563 518 601
Net income 1,023 1,088 1,040 966
Financial Condition
Total assets $383,719 $392,572 $406,774 $523,578
Loans, net 216,055 223,734 229,050 332,544
Allowance for loan losses 4,983 4,978 4,982 5,518
Securities 139,919 144,307 141,553 140,398
Deposits 307,021 319,626 331,083 437,793
Borrowings 34,800 35,750 33,245 27,500
Shareholders' equity 33,305 34,325 35,877 47,517
Non-performing assets 1,569 1,218 928 1,741
Per Share Data
Earnings, diluted $0.27 $0.29 $0.28 $0.22
Cash dividends 0.10 0.10 0.10 0.11
Book value 9.23 9.52 9.95 10.35
Market price: (a)
High 13.313 11.250 11.875 11.250
Low 10.000 9.844 10.000 9.625
Statistical Data
Net interest margin 4.11% 3.96% 3.82% 3.90%
Efficiency ratio 60.44 59.80 62.65 76.61
Return on average assets 1.15 1.14 1.06 0.83
Return on average
shareholders' equity 12.40 13.09 11.97 9.25
Weighted average equivalent
shares outstanding, diluted 3,792 3,756 3,761 4,310
(a) The above market prices reflect interdealer prices, without retail
markup, markdown or commissions, and may not necessarily represent
actual transactions.
Selected Quarterly Consolidated Financial Data (unaudited) continued:
Year ended December 31, 2000
March 31, June 30, Sept 30, Dec 31,
--------- -------- -------- -------
Statement of Income
Interest and dividend
income $5,944 $5,867 $5,959 $6,047
Interest expense 2,716 2,664 2,573 2,571
Net interest income 3,228 3,203 3,386 3,476
Provision for loan losses 25 25 (520) 25
Non-interest income:
Losses on sales of
securities, net - - (109) -
Gains on sales of loans, net 161 96 54 30
Gain on sale of branch - - 75 -
Gains on sales of OREO 478 - - 23
Service fees and other 360 382 425 444
Non-interest expense 2,856 2,241 2,845 2,590
Income before income taxes 1,346 1,415 1,506 1,358
Income tax provision 466 388 504 456
Net income 880 1,027 1,002 902
Financial Condition
Total assets $358,279 $352,117 $338,383 $341,798
Loans, net 206,165 210,036 213,561 214,312
Allowance for loan losses 5,100 4,989 5,001 5,029
Securities 116,484 118,202 104,736 108,582
Deposits 305,188 300,123 295,408 299,254
Borrowings 15,000 15,000 7,500 7,500
Shareholders' equity 34,542 33,135 33,566 33,137
Non-performing assets 1,792 1,569 2,511 2,094
Per Share Data
Earnings, diluted $0.22 $0.27 $0.26 $0.23
Cash dividends 0.09 0.09 0.10 0.10
Book value 9.15 9.04 9.13 9.10
Market price: (a)
High 13.000 11.750 11.250 13.375
Low 11.500 9.500 10.344 10.938
Statistical Data
Net interest margin 3.80% 3.77% 4.02% 4.14%
Efficiency ratio 67.57 60.88 74.26 65.19
Return on average assets 0.99 1.16 1.15 1.04
Return on average
shareholders' equity 10.15 12.16 12.19 10.78
Weighted average equivalent
shares outstanding, diluted 3,998 3,874 3,827 3,840
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: NMIL. As of March 9, 2001, there were 1,607
shareholders of record of NewMil's Common Stock.
(a) The above market prices reflect interdealer prices, without retail
markup, markdown or commissions, and may not necessarily represent
actual transactions.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosures
between NewMil and its independent accountants for which a Form 8-K was
required to be filed during the six month period ended December 31, 2000
or for the period from December 31, 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 6 through 8 of
NewMil's Proxy Statement dated March 30, 2001 for the 2001 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
- -----------------------------
Position with
Name Age NewMil Bank Officer Since
---- -- ----------- -------------
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 8 through 14 of
NewMil's Proxy Statement dated March 30, 2001 for the 2001 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 March 30, 2001 for the 2001 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 March 30, 2001 for the 2001 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)
3.2.1 Amendment to Bylaws of NewMil (incorporated by reference
to the Registrant's 1999 Form 10-K).
4.1 Instruments Defining Rights of Security Holders
(Included in Exhibits 3.1 and 3.2)
10.1 [intentionally deleted]
10.2 [intentionally deleted]
10.3 [intentionally deleted]
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 [intentionally deleted]
10.7 Employment agreement between NewMil 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 NewMil Bank and
management (Messrs. Grant, McMahon and Shannon; Ms.
Farrell) (incorporated by reference to the Registrant's
1996 Form 10-K).
10.10 [intentionally deleted]
10.12 [intentionally deleted]
10.13 First and Second Amendments to Employment Agreement of
Francis J. Wiatr, as of August 1998 (incorporated by
reference to the 1998 Form 10-K).
10.14 The Second Amended and Restated 1986 Stock Option and
Incentive Plan for Officers and Key Employees (incorporated
by reference to the S-8 POS dated January 25, 2001).
10.15 The Third Amended and Restated 1992 Stock Option Plan for
Outside Directors of NewMil Bancorp, Inc. (incorporated by
reference to the S-8 POS dated January 25, 2001).
10.16 Employment Agreement between NewMil Bank and Senior Vice
President, William D. Starbuck dated as of November 10,
2000.
11.1 Statement regarding Computation of Net Income Per Common
Share.
21.1 Subsidiaries of the Registrant.
23.0 Consent of PricewaterhouseCoopers LLP.
99.1 Proxy Statement dated March 30, 2001 for the 2001 Annual
Meeting of Shareholders, of NewMil Bancorp, Inc.
(incorporated by reference to the Registrants definitive
Proxy Statement for the Annual Meeting of Shareholders'
scheduled for May 3, 2001).
(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
March 28, 2001
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
March 28, 2001
/s/ Joseph Carlson II
Joseph Carlson II
Director
March 28, 2001
/s/ Kevin L. Dumas
Kevin L. Dumas
Director
March 28, 2001
/s/ Paul N. Jaber
Paul N. Jaber
Director
March 28, 2001
/s/ Laurie G. Gonthier
Laurie G. Gonthier
Director
March 28, 2001
/s/ Robert J. McCarthy
Robert J. McCarthy
Director
March 28, 2001
/s/ John J. Otto
John J. Otto
Director
March 28, 2001
/s/ Betty F. Pacocha
Betty F. Pacocha
Director and Secretary
March 28, 2001
/s/ Suzanne L. Powers
Suzanne L. Powers
Director
March 28, 2001
/s/ Anthony M. Rizzo, Sr.
Anthony M. Rizzo, Sr.
Director
March 28, 2001
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
March 28, 2001
/s/ Mary C. Williams
Mary C. Williams
Director
March 28, 2001
/s/ B. Ian McMahon
B. Ian McMahon
Chief Financial Officer
and Chief Accounting Officer
March 28, 2001