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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-16455
NEWMIL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1186389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19 Main Street, P.O. Box 600, New Milford, CT 06776
(Address of principal executive offices) (Zip code)
(860) 355-7600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes [ x ] No [ ]
The number of shares of Common Stock outstanding as of June 30, 2002,
is 4,341,341.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001
Consolidated Statements of Income for the three month and six month
periods ended June 30, 2002 and June 30, 2001
Consolidated Statements of Changes in Shareholders' Equity for the
six month periods ended June 30, 2002 and June 30, 2001
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2002 and June 30, 2001
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
PART II Other Information
Item 1. Legal Proceedings
Item 4. Submission of matters to a vote of security holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
(dollars in thousands) 2002 2001
---- ----
ASSETS
Cash and due from banks $ 21,848 $ 21,579
Federal funds sold 26,674 4,615
--------- ---------
Total cash and cash equivalents 48,522 26,194
Securities
Available-for-sale at market 201,256 181,623
Held-to-maturity at amortized cost
(fair value: $27,485 and $31,087) 26,667 30,785
Loans (net of allowance for loan
losses: $5,507 and $5,502) 341,738 340,368
Other real estate owned 173 116
Bank premises and equipment, net 6,133 6,092
Accrued interest income 4,012 3,870
Intangible assets (net of accumulated
amortization: $880 and $737) 9,161 9,305
Deferred tax asset, net - 619
Other assets 12,030 8,054
-------- --------
Total Assets $649,692 $607,026
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 45,301 $ 39,898
NOW accounts 74,993 63,415
Money market 138,351 120,888
Savings and other 75,801 70,001
Certificates of deposit 196,979 181,914
-------- --------
Total deposits 531,425 476,116
Federal Home Loan Bank advances 49,089 67,540
Repurchase agreements 6,580 5,783
Accrued interest and other liabilities 9,311 6,993
-------- --------
Total Liabilities 596,405 556,432
-------- --------
Commitments and contingencies - -
-------- --------
Shareholders' Equity
Common stock - $.50 per share par value
Authorized: 20,000,000
Shares issued: 5,990,138 2,995 2,995
Paid-in capital 42,434 42,568
Retained earnings 20,496 18,105
Accumulated other comprehensive income, net 4,651 2,921
Treasury stock, at cost: 1,648,797 and
1,599,578 shares (17,289) (15,995)
-------- --------
Total Shareholders' Equity 53,287 50,594
-------- --------
Total Liabilities and Shareholders' Equity $649,692 $607,026
======== ========
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income
Interest and fees on loans $5,947 $6,777 $12,203 $13,660
Interest and dividends on
securities 3,139 2,535 6,283 4,929
Interest on federal funds sold 86 48 130 121
------ ------ ------- -------
Total interest and dividend
income 9,172 9,360 18,616 18,710
------ ------ ------- -------
Interest expense
Deposits 2,874 3,882 5,703 7,973
Borrowed funds 582 375 1,188 785
------ ------ ------- -------
Total interest expense 3,456 4,257 6,891 8,758
------ ------ ------- -------
Net interest and dividend income 5,716 5,103 11,725 9,952
Provision for loan losses - - - -
------ ------ ------- -------
Net interest and dividend income
after provision for loan losses 5,716 5,103 11,725 9,952
------ ------ ------- -------
Non-interest income
Service charges on deposit accounts 589 515 1,147 999
Gains on sales of mortgage loans, net 57 131 218
190
Loan servicing fees 17 38 35 79
Other 213 105 364 204
------ ------ ------- -------
Total non-interest income 876 789 1,764 1,472
------ ------ ------- -------
Non-interest expense
Salaries & Benefits 2,163 1,813 4,422 3,507
Occupancy 341 316 710 644
Equipment 284 330 568 661
Marketing 134 117 292 190
Postage & telecommunications 127 143 273 266
Printing and office supplies 95 110 225 211
Professional, collections and OREO 182 178 431 327
Service bureau 90 90 184 173
Amortization of intangibles 72 163 144 326
Other 494 405 1,102 790
------ ------ ------- -------
Total non-interest expense 3,982 3,665 8,351 7,095
------ ------ ------- -------
Income before income taxes, 2,610 2,227 5,138 4,329
Income tax provision 840 799 1,651 1,556
------ ------ ------- -------
Net income $1,770 $1,428 $ 3,487 $ 2,773
====== ====== ======= =======
Per common share
Diluted earnings $0.38 $0.31 $0.75 $0.59
Basic earnings 0.40 0.32 0.80 0.61
Cash dividends 0.125 0.110 0.250 0.220
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Common Stock Paid-in Retained
(dollars in thousands) Shares Amount capital earnings
------ ------ ------- --------
Balances at
December 31, 2000 5,990,138 $2,995 $42,755 $14,447
Net income for period - - - 2,773
Net unrealized gain on
securities available-for-sale,
net of taxes - - - -
Total comprehensive income
Cash dividends paid - - - (998)
Exercise of stock options - - (66) -
Common stock issued - - (61) -
Common stock repurchased - - - -
--------- ------ ------- -------
Balances at
June 30, 2001 5,990,138 $2,995 $42,628 $16,222
========= ====== ======= =======
Balances at
December 31, 2001 5,990,138 $2,995 $42,568 $18,105
Net income for year - - - 3,487
Net unrealized gain on
securities available-for-sale,
net of taxes - - - -
Total comprehensive income
Cash dividends paid - - - (1,096)
Exercise of stock options - - (284) -
Tax benefit from exercise of
non-qualified stock options - - 147 -
Common stock issued - - 3 -
Common stock repurchased - - - -
--------- ------ ------- -------
Balances at
June 30, 2002 5,990,138 $2,995 $42,434 $20,496
========= ====== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (cont.)
(unaudited)
Accumulated
other Total
Treasury comprehensive shareholders'
Stock Income Equity
----- ------ ------
Balances at
December 31, 2000 $(13,435) $ 755 $47,517
Net income for period - - 2,773
Net unrealized gain on
securities available-for-sale,
net of taxes - 613 613
-------
Total comprehensive income 3,386
-------
Cash dividends paid - - (998)
Exercise of stock options 91 - 25
Common stock issued 850 - 789
Common stock repurchased (2,167) - (2,167)
--------- ------- -------
Balances at
June 30, 2001 $(14,661) $ 1,368 $48,552
======== ======= =======
Balances at
December 31, 2001 $(15,995) $ 2,921 $50,594
Net income for year - - 3,487
Net unrealized gain on
securities available-for-sale,
net of taxes - 1,730 1,730
-------
Total comprehensive income 5,217
-------
Cash dividends paid - - (1,096)
Exercise of stock options 407 - 123
Tax benefit from exercise of
non-qualified stock options - - 147
Common stock issued 41 - 44
Common stock repurchased (1,742) - (1,742)
-------- ------- -------
Balances at
June 30, 2002 $(17,289) $ 4,651 $53,287
======== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
June 30,
(in thousands) 2002 2001
---- ----
Operating Activities
Net income $ 3,487 $2,773
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses - -
Provision for depreciation and amortization 407 471
Amortization of intangible assets 144 326
Amortization and accretion of securities
premiums and (discounts), net 437 (28)
Gains on sales of loans, net (218) (190)
Loans originated for sale (14,261) (10,716)
Proceeds from sales of loans 14,479 10,906
Tax benefit from exercise of non-qualified
stock options 147 -
Deferred income (benefit) tax provision (96) 84
Increase in accrued interest income (157) (52)
Increase (decrease) in other liabilities 2,315 (575)
Increase in other assets, net (4,135) (553)
------- -------
Net cash provided by operating activities 2,549 2,446
------- -------
Investing Activities
Purchases of securities available-for-sale (20,270) (29,629)
Purchases of mortgage backed securities
available-for-sale (15,211) (3,307)
Proceeds from maturities and principal
repayments of securities 4,054 920
Principal collected on mortgage backed
securities 18,096 9,041
Loan repayments (advances), net (1,427) (11,517)
Purchases of Bank premises and equipment, net (448) (217)
------- -------
Net cash used by investing activities (15,206) (34,709)
------- -------
Financing Activities
Net increase in deposits 55,309 32,265
Net increase in repurchase agreements 797 937
FHLB (repayments), net (18,450) 10,485
Common Stock repurchased (1,742) (2,167)
Proceeds from Common Stock reissued 44 789
Cash dividends paid (1,096) (998)
Proceeds from exercise of stock options 123 25
------- -------
Net cash provided by financing activities 34,985 41,336
------- -------
Increase in cash and cash equivalents 22,328 9,073
Cash and federal funds sold, beginning of period 26,194 27,813
------- -------
Cash and federal funds sold, end of period $48,522 $36,886
======= =======
Cash paid during period
Interest to depositors $ 5,690 $ 7,787
Interest on borrowings 1,197 693
Income taxes 1,650 1,430
Non-cash transfers
From Loans to OREO 57 -
From OREO to Loans - 59
NEWMIL BANCORP, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements of NewMil Bancorp, Inc.
("NewMil") include those of NewMil and its wholly-owned subsidiary,
NewMil Bank (the "Bank"). Certain prior period amounts in the
statement of income and balance sheets have been reclassified to
conform with the current financial presentation. In the opinion of
management, the interim unaudited consolidated financial statements
include all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position of NewMil and the
statements of income and shareholder's equity and cash flows for the
interim periods presented.
The financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial
statements, management is required to make extensive use of estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet, and revenues and
expenses for the period. Actual results could differ significantly
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation of
real estate acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowance for
loan losses and valuation of real estate, management obtains
independent appraisals for significant properties.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which is not required for interim reporting
purposes, has been condensed or omitted. Operating results for the
three month period ended June 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2002. The accompanying condensed financial statements should be read
in conjunction with the financial statements and notes thereto included
in NewMil's Annual Report for the period ended December 31, 2001.
NOTE 2 - SECURITIES
Securities classified available-for-sale (carried at fair value)
were as follows:
Estimated Gross Gross
fair unrealized unrealized Amortized
(in thousands) value gains losses cost
----- ----- ------ ----
June 30, 2002
U.S. Government Agency notes
After 1 but within 5 years $ 41,840 $ 1,250 $ 11 $ 40,601
Corporate Bonds
After 1 but within 5 years 38,899 2,147 38 36,790
Mortgage backed securities 104,348 3,573 - 100,775
Collateralized mortgage
obligations 12,316 202 - 12,114
-------- ------ ---- --------
Total debt securities 197,403 7,172 49 190,280
FHLB capital stock and other 3,853 1 - 3,852
-------- ------ ---- --------
Total securities
available-for-sale $201,256 $7,173 $ 49 $194,132
======== ====== ==== ========
Estimated Gross Gross
fair unrealized unrealized Amortized
(in thousands) value gains losses cost
----- ----- ------ ----
December 31, 2001
U.S. Government Agency notes
After 1 but within 5 years $ 21,151 $ 606 $ - $ 20,545
Corporate Bonds
After 1 but within 5 years 38,803 2,009 1 36,795
Mortgage backed securities 102,407 1,670 28 100,765
Collateralized mortgage
obligations 15,513 260 - 15,253
-------- ------ ---- --------
Total debt securities 177,874 4,545 29 173,358
FHLB capital stock and other 3,749 1 - 3,748
-------- ------ ---- --------
Total securities
available-for-sale $181,623 $4,546 $ 29 $177,106
======== ====== ==== ========
Securities classified as held-to-maturity (carried at amortized cost)
were as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
(in thousands) cost(a) gains losses value
------- ----- ------ -----
June 30, 2002
Municipal bonds
After 1 but within 5 years $ 500 $ 6 $ - $ 506
After 10 years 10,532 81 50 10,563
Mortgage backed securities 11,336 630 - 11,966
Collateralized mortgage
obligations 4,299 151 - 4,450
------- ----- ----- -------
Total securities
held-to-maturity $26,667 $ 868 $ 50 $27,485
======= ===== ===== =======
December 31, 2001
Municipal bonds
After 1 but within 5 years $ 500 $ 5 $ - $ 505
After 10 years 10,536 - 370 10,166
Mortgage backed securities 14,385 534 - 14,919
Collateralized mortgage
obligations 5,364 133 - 5,497
------- ----- ----- -------
Total securities
held-to-maturity $30,785 $ 672 $ 370 $31,087
======= ===== ===== =======
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
At June 30, 2002 securities with a carrying value and market value of
$2,423,000 and $2,441,000, respectively, were pledged as collateral
against public funds and securities with a carrying value and
market value of $17,825,000 and $17,834,000, respectively, were pledged
as collateral against repurchase agreements. Also, securities with a
carrying value and market value of $7,373,000 and $7,787,000,
respectively, were pledged as collateral for Treasury, tax
and loan payments as well as possible Federal Reserve discount window
borrowings.
NOTE 3 - LOANS
The composition of the loan portfolio is as follows:
June 30, December 31,
(in thousands) 2002 2001
Real estate mortgages ---- ----
1-to-4 family residential $194,065 $180,513
5-or-more family residential 13,277 14,649
Commercial 78,458 78,091
Land & land development 2,509 2,997
Home equity credit 26,994 32,580
Commercial & industrial 29,184 34,254
Installment & other 3,024 3,089
-------- --------
Total loans, gross 347,511 346,173
Deferred loan origination fees & purchase
premium, net (266) (303)
Allowance for loan losses (5,507) (5,502)
-------- --------
Total loans, net $341,738 $340,368
======== ========
Impaired loans
June 30, December 31,
(in thousands) 2002 2001
---- ----
With no valuation allowance $ 68 $ 77
With valuation allowance 607 696
----- -----
Total impaired loans $ 675 $ 773
----- -----
Valuation allowance 100 100
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 loans 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, 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 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 during the six month periods
ended June 30, are as follows:
June 30,
(in thousands) 2002 2001
---- ----
Balance, beginning of period $5,502 $5,518
Provision for losses - -
Charge-offs (176) (69)
Recoveries 181 27
------ ------
Balance, end of period $5,507 $5,476
====== ======
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
June 30, December 31,
(in thousands) 2002 2001
---- ----
Non-accrual loans $ 849 $ 985
Accruing loans past due 90 days or more 287 760
Accruing troubled debt restructured loans - -
------ ------
Total non-performing loans 1,136 1,745
Real estate acquired in settlement of loans 173 116
------ ------
Total non-performing assets $1,309 $1,861
====== ======
Other real estate owned (OREO) includes collateral acquired through
foreclosure, forgiveness of debt or otherwise in lieu of debt.
NOTE 5 - EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average
number of common shares outstanding during the year. The computation
of diluted earnings per share is similar to the computation of basic
earnings per share except the denominator is increased to include the
number of additional common shares that would have been outstanding
if dilutive potential common shares had been issued. Shares used in
the computations are as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Basic 4,373 4,491 4,378 4,521
Effect of dilutive stock options 248 152 251 162
----- ----- ----- -----
Diluted 4,621 4,643 4,629 4,683
===== ===== ===== =====
NOTE 6 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Comprehensive income
Net income $1,770 $1,428 $3,487 $2,773
Net unrealized gains(losses) on
securities during period 2,512 (568) 1,730 613
------ ------ ------ ------
Comprehensive income $4,282 $ 860 $5,217 $3,386
====== ====== ====== ======
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
------ ------- ------
Three months ended June 30, 2002
Net unrealized gains on securities
available-for-sale arising
during the period $3,801 $(1,292) $2,509
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 5 (2) 3
------ ------- ------
Net unrealized gains on
securities during period $3,806 $(1,294) $2,512
====== ======= ======
Three months ended June 30, 2001
Net unrealized losses on securities
available-for-sale arising
during the period $ (860) $ 293 $ (567)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity (1) - (1)
------ ------- -------
Net unrealized gains on
securities during period $ (861) $ 293 $ (568)
====== ======= =======
Six months ended June 30, 2002
Net unrealized gains on securities
available-for-sale arising
during the period $2,608 $ (887) $ 1,721
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 13 (4) 9
------ ------ ------
Net unrealized gains on
securities during period $2,621 $ (891) $1,730
====== ====== ======
Six months ended June 30, 2001
Net unrealized gains on securities
available-for-sale arising
during the period $ 931 $ (316) $ 615
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity (2) - (2)
------ ------ ------
Net unrealized gains on
securities during period $ 929 $ (316) $ 613
====== ====== ======
NOTE 7 - INCOME TAXES
The components of the income tax provision are as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Current provision
Federal $ 792 $ 757 $1,555 $1,472
State - - - -
----- ----- ------ ------
Total 792 757 1,555 1,472
----- ----- ------ ------
Deferred provision
Federal 48 42 96 84
State - - - -
----- ----- ------ ------
Total 48 42 96 84
----- ----- ------ ------
Income tax provision $ 840 $ 799 $1,651 $1,556
===== ===== ====== ======
Connecticut tax legislation 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
("PIC"). In accordance with this legislation, in 1999 NewMil formed
a PIC, NewMil Mortgage Company. NewMil's effective tax rates for
the six month periods ended June 30, 2002 and 2001 are 32.1% and
35.9%, respectively, and reflect the full impact of the Connecticut
legislation.
NOTE 8 - SHAREHOLDERS' EQUITY
Capital Requirements
- --------------------
NewMil and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. The
Bank was classified at its most recent notification as "well
capitalized". NewMil and the Bank's regulatory capital ratios at
June 30, 2002 are as follows:
NewMil Bank
------ ----
Leverage ratio 6.39% 6.30%
Tier I risk-based ratio 11.00 10.86
Total risk-based ratio 12.26 12.11
Restrictions on Subsidiary's Dividends and Payments
- ---------------------------------------------------
NewMil's ability to pay dividends is dependent on the Bank's ability
to pay dividends to NewMil. There are certain restrictions on the
payment of dividends and other payments by the Bank to NewMil. Under
Connecticut law the Bank is prohibited from declaring a cash dividend
on its common stock except from its net earnings for the current year
and retained net profits for the preceding two years. In some
instances, further restrictions on dividends may be imposed on NewMil
by the Federal Reserve Bank.
NewMil Bancorp, Inc. and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations of NewMil and its subsidiary should be read
in conjunction with NewMil's Annual Report on Form 10-K for the
period ended December 31, 2001.
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 (the "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 to both retail and commercial markets, and
conducts its business from eighteen full-service offices in
Connecticut's 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.
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.
RESULTS OF OPERATIONS
For the three month periods ended June 30, 2002 and 2001
Overview
- --------
NewMil earned net income of $1,770,000, or 38 cents per share
(diluted), for the quarter ended June 30, 2002 as compared with
$1,428,000, or 31 cents per share (diluted), for the quarter ended
June 30, 2001.
Analysis of net interest and dividend income
- --------------------------------------------
Net Interest and dividend income increased $613,000, or 12.0%, for the
quarter ended June 30, 2002 as compared with the prior year period.
This increase resulted from favorable changes in both volume and rate.
Average earning assets have increased $69.4 million due to internal
growth. The favorable change in interest due to rate is due mostly to
a significant decrease in the cost of interest-bearing deposits,
resulting from lower market interest rates, off-set by lower yielding
earning assets, the impact on asset/liability re-pricing during 2002
as compared with 2001, and to changes in balance sheet mix. The net
interest margin decreased 5 basis points to 3.96% from 4.01% over the
period, primarily due to changes in balance sheet mix resulting from
the asset growth. The following table sets forth the components of
NewMil's net interest income and yields on average interest-earning
assets and interest-bearing funds.
Three months ended June 30, Average Income/
Balance Expense
(dollars in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Loans(a) $341,702 $344,659 $5,947 $6,777
Mortgage backed securities (b) 116,611 81,991 1,773 1,352
Other securities (b)(c) 119,105 81,338 1,452 1,231
-------- -------- ------ ------
Total earning assets 577,418 507,988 9,172 9,360
------ ------
Other assets 49,825 39,268
-------- --------
Total assets $627,243 $547,256
======== ========
NOW accounts $ 70,542 $ 59,369 173 167
Money market accounts 134,855 119,714 739 957
Savings & other 74,850 65,329 327 391
Certificates of deposit 189,194 176,616 1,635 2,367
-------- -------- ------ ------
Total interest-bearing
deposits 469,441 421,028 2,874 3,882
Borrowings 57,216 33,820 582 375
-------- -------- ------ ------
Total interest-bearing funds 526,657 454,848 3,456 4,257
------ ------
Demand deposits 42,266 38,055
Other liabilities 6,204 5,995
Shareholders' equity 52,116 48,358
-------- --------
Total liabilities &
shareholders' equity $627,243 $547,256
======== ========
Net interest income $5,716 $5,103
====== ======
Spread on interest-bearing funds
Net interest margin(d)
(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.
Three months ended June 30, (cont.)
(dollars in thousand)
Average Yield/Rate
2002 2001
---- ----
Loans(a) 6.96% 7.87%
Mortgage backed securities (b) 6.08 6.60
Other securities (b)(c) 4.88 6.05
Total earning assets 6.35 7.37
Other assets
Total assets
NOW accounts 0.98 1.13
Money market accounts 2.19 3.20
Savings & other 1.75 2.39
Certificates of deposit 3.46 5.36
Total interest-bearing deposits 2.45 3.69
Borrowings 4.07 4.44
Total interest-bearing funds 2.63 3.74
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities &
shareholders' equity
Net interest income
Spread on interest-bearing funds 3.72 3.63
Net interest margin(d) 3.96 4.01
(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.
Three months ended June 30, 2002 versus 2001
(in thousands) Change in interest due to
Volume Rate Volume/rate Net
------ ---- ----------- ---
Interest-earning assets:
Loans $ (58) $ (779) $ 7 $ (830)
Mortgage backed securities 571 (106) (44) 421
Other securities 572 (239) (112) 221
------ ------ ------ ------
Total 1,085 (1,124) (149) (188)
------ ------ ------ ------
Interest-bearing liabilities:
Deposits 446 (1,304) (150) (1,008)
Borrowings 259 (31) (21) 207
------ ------- ------ ------
Total 705 (1,335) (171) (801)
------ ------- ------ ------
Net change to interest income $ 380 $ 211 $ 22 $ 613
====== ======= ====== ======
Interest income
- ---------------
Total interest and dividend income decreased $188,000 or 2.0%, for the
quarter ended June 30, 2002 as compared with the same period a year
ago. Loan income decreased $830,000, or 12.2%, primarily as a result
of a lower average yield. Average loans decreased $3.0 million, or
0.9%, primarily due to higher loan repayments during the period. The
decrease in the average loan yield, down 102 basis points, was due to
lower market interest rates throughout 2002, and to changes in
portfolio mix. Investment income increased $642,000, or 24.9%, as a
result of higher average volume and lower average yields. Average
securities increased $72.4 million, or 44.3%. The decrease in average
investment yield, down 86 basis points to 5.47%, was due to lower market
rates on new securities added during 2002, and to changes in portfolio
mix.
Interest expense
- ----------------
Interest expense for the quarter ended June 30, 2002 decreased $801,000,
or 18.8%, as compared with the same period a year ago as a result of a
significant decline in the cost of funds, offset in part by deposit
growth and higher average borrowings. Deposit expense decreased
$1,008,000, or 26.0%, as a result of lower deposit rates and changes
in deposit mix. Average interest-bearing deposits increased $48.4
million, or 11.5%. The average cost of interest-bearing deposits
decreased 124 basis points to 2.45%. Interest expense on borrowings
increased $207,000, or 55.2%, as a result of increased average
borrowings, up $23.4 million, offset in-part by a lower borrowing cost,
down 37 basis points to 4.07%.
Provision and Allowance for loan losses
- ----------------------------------------
NewMil made no provision for loan losses during the quarters ending
June 30, 2002 and 2001. During the past several years the allowance
for loan losses has benefited from an improvement in loan quality.
These factors have enabled the Bank to reduce its provision for loan
losses to zero while maintaining reserve adequacy. The following
table sets forth key ratios for the periods presented.
June 30, December 31, June 30,
(in thousands) 2002 2001 2001
---- ---- ----
Ratio of allowance for loan losses:
to non-performing loans 484.77% 315.3% 333.4%
to total gross loans 1.6 1.6 1.6
Ratio of non-performing loans
to total loans 0.3 0.5 0.5
During the six months ended June 30, 2002 non-performing loans declined
$609,000, or 34.9%, while gross loans increased slightly, by $1.4
million, or 0.4%. NewMil believes it remains adequately reserved both
against total loans and non-performing loans. For a discussion on loan
quality see "Non-Performing Assets".
NewMil 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,
current economic conditions and historical loan loss experience over
a 10-to-15 year economic cycle, 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 that 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 judgment NewMil remains
adequately reserved both against total loans and non-performing loans
at June 30, 2002. 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 judgments 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.
Non-interest income
- -------------------
The following table details the principal categories of non-interest
income.
June 30,
(in thousands) 2002 2001 Change
---- ---- ------
Service charges on
deposit accounts $589 $515 $ 74 14.4%
Gains on sales of mortgage
loans, net 57 131 (74) (56.5)
Loan servicing 17 38 (21) (55.3)
Increase in cash surrender value
of bank-owned life insurance 124 - 124 -
Other 89 105 (16) (15.2)
---- ---- -----
Total non-interest income $876 $789 $87 11.0%
==== ==== === =====
The increase in non-interest income for the quarter ended June 30, 2002
as compared to the prior year period resulted primarily from growth in
service fees and the increase in the cash surrender value of bank-owned
life insurance, offset in-part by lower gains on sales of residential
mortgages, lower loan servicing fees and lower other income. The
increase in service fees is due to the growth in the number of deposit
accounts serviced during the 2002 period as compared with the 2001
period. The Bank purchased bank-owned life insurance in December 2001
and March 2002. The decrease in the gains on sales of residential
mortgage loans resulted from lower loan sales volume, $4.8 million in
2002 compared to $7.4 million in 2001. Secondary market loan sales
are generally pre-arranged on a loan-by-loan basis prior to origination
and loans are sold with servicing rights released. The decrease
in loan servicing fees resulted from run-off in the loan servicing
portfolio.
Operating expenses
- ------------------
The following table details the principal categories of operating
expenses.
June 30,
(in thousands) 2002 2001 Change
---- ---- ------
Salaries and benefits $2,163 $1,813 $350 19.3%
Occupancy 341 316 25 7.9
Equipment 284 330 (46) (13.9)
Professional, collection & OREO 182 178 4 2.2
Postage and telecommunications 127 143 (16) (11.2)
Printing and office supplies 95 110 (15) (13.6)
Marketing 134 117 17 14.5
Service bureau 90 90 - -
Amortization of intangibles 72 163 (91) (55.8)
Other 494 405 89 22.0
------ ------ ---- -----
Total operating expenses $3,982 $3,665 $317 8.6%
====== ====== ==== =====
The increase in compensation expense for the quarter ended June 30,
2002 as compared with the prior year period was due primarily to
year-over-year salary increases, additional employees, higher
accrued bonuses, increased supplemental retirement plan expense and a
decrease in the pension plan benefit. The increase in occupancy expense
results primarily from higher property taxes and cleaning service
expense. The decrease in equipment expense is primarily due to
lower depreciation expense. The decrease in postage and
telecommunications is due to implementing certain telecommunications
network changes as well as the general timing of various direct mailing
campaigns during the 2002 and 2001 periods, offset by increased costs
related to deposit and loan account growth. The decrease in printing
and office supplies reflects a reduction in usage. The increase in
marketing resulted from increased advertising activities during the
current quarter. The decline in the amortization of intangible assets
in the 2002 period resulted from the discontinuance of goodwill
amortization as a result of the adoption of SFAS 142 effective
January 1, 2002. Changes in other operating expense also reflect
increased costs associated with the internal growth of NewMil.
Income taxes
- ------------
Net income for the quarter included an income tax provision of
$840,000, representing a 32.2% effective rate, as compared with a
provision of $799,000 a year ago, representing a 35.9% effective
rate. The difference between NewMil's effective tax rate and the
corporate tax rate of 34% is attributable to the amortization of
intangibles during the 2002 and 2001 periods and other book/tax
differences.
RESULTS OF OPERATIONS
For the six month periods ended June 30, 2002 and 2001
Overview
- --------
NewMil earned net income of $3,487,000, or 75 cents per share
(diluted), for the six months ended June 30, 2002 as compared with
$2,773,000, or 59 cents per share (diluted), for the six months
ended June 30, 2001.
Analysis of net interest and dividend income
- --------------------------------------------
Net Interest and dividend income increased $1,773,000, or 17.8%, for
the six months ended June 30, 2002 as compared with the prior year
period. This increase resulted from a $71.3 million increase in
average earning assets, and by a 10 basis point increase in the net
interest margin. The increase in earning assets is due to internal
growth. The increase in the net interest margin to 4.12% from
4.02%, is due mostly to a significant decrease in the cost of funds,
resulting from lower market interest rates, steepening in the yield
curve and its impact on asset/liability repricing during 2002 as
compared with 2001 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.
Six months ended June 30, Average Income/
Balance Expense
(dollars in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Loans(a) $340,323 $340,355 $12,203 $13,660
Mortgage backed securities (b) 117,329 83,833 3,599 2,791
Other securities (b)(c) 110,877 73,024 2,814 2,259
-------- -------- ------- -------
Total earning assets 568,529 497,212 18,616 18,710
------- -------
Other assets 47,780 35,998
-------- --------
Total assets $616,309 $533,210
======== ========
NOW accounts $ 66,615 $ 54,936 326 308
Money market accounts 130,497 116,098 1,389 2,044
Savings & other 72,790 64,947 634 793
Certificates of deposit 186,133 176,366 3,354 4,828
-------- -------- ------- -------
Total interest-bearing deposits 456,035 412,347 5,703 7,973
Borrowings 61,427 31,457 1,188 785
-------- -------- ------- -------
Total interest-bearing funds 517,462 443,804 6,891 8,758
------- -------
Demand deposits 40,561 36,086
Other liabilities 6,606 5,236
Shareholders' equity 51,680 48,084
-------- --------
Total liabilities &
shareholders' equity $616,309 $533,210
======== ========
Net interest income $11,725 $ 9,952
======= =======
Spread on interest-bearing funds
Net interest margin(d)
(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.
Six months ended June 30, (cont.)
(dollars in thousands)
Average Yield/Rate
2002 2001
---- ----
Loans(a) 7.17% 8.03%
Mortgage backed securities (b) 6.13 6.66
Other securities (b)(c) 5.08 6.19
Total earning assets 6.55 7.53
Other assets
Total assets
NOW accounts 0.98 1.12
Money market accounts 2.13 3.52
Savings & other 1.74 2.44
Certificates of deposit 3.60 5.47
Total interest-bearing deposits 2.50 3.87
Borrowings 3.87 4.99
Total interest-bearing funds 2.66 3.95
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities & shareholders' equity
Net interest income
Spread on interest-bearing funds 3.89 3.58
Net interest margin(d) 4.12 4.02
(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 June 30, 2002 versus 2001
(in thousands) Change in interest due to
Volume Rate Volume/rate Net
------ ---- ----------- ---
Interest-earning assets:
Loans $ (1) $(1,456) $ - $(1,457)
Mortgage backed securities 1,115 (220) (87) 808
Other securities 1,171 (406) (210) 555
------- ------- ----- -------
Total 2,285 (2,082) (297) (94)
------- ------- ----- -------
Interest-bearing liabilities:
Deposits 845 (2,816) (299) (2,270)
Borrowings 748 (177) (168) 403
------- -------- ----- -------
Total 1,593 (2,993) (467) (1,867)
------- -------- ----- -------
Net change to interest income $ 692 $ 911 $ 170 $ 1,773
======= ======== ===== =======
Interest income
- ---------------
Total interest and dividend income decreased $94,000 or 0.5%, for the
six months ended June 30, 2002 as compared with the same period a year
ago. Loan income decreased $1,457,000, or 10.7%, primarily as a result
of a lower average yield. Average loans were unchanged at $340.3
million. The decrease in the average loan yield, down 86 basis points,
was due to lower market interest rates throughout 2002, and to changes
in portfolio mix. Loan income for the six months ended June 30,
2002 included $192,000 of interest recaptured from a former
non-performing loan. Investment income increased $1,363,000, or 27.0%,
as a result of higher average volume and lower average yields. Average
securities increased $71.4 million, or 45.5%. The decrease in average
investment yield, down 82 basis points to 5.62%, was due to lower
market rates on new securities added during 2002, and to changes in
portfolio mix.
Interest expense
- ----------------
Interest expense for the six month period ended June 30, 2002 decreased
$1,867,000, or 21.3%, as compared with the same period a year ago as a
result of a significant decline in the cost of funds, offset in part by
deposit growth and higher average borrowings. Deposit expense decreased
$2,270,000, or 28.5%, as a result of lower deposit rates and changes in
deposit mix. Average interest-bearing deposits increased $43.7 million,
or 10.6%. The average cost of interest-bearing deposits decreased 137
basis points to 2.50%. Interest expense on borrowings increased
$403,000, or 51.3%, as a result of increased average borrowings, up
$30.0 million, offset in-part by a lower borrowing cost, down 112 basis
points.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil made no provision for loan losses during the six months ending
June 30, 2002 and 2001. During the past several years the allowance
for loan losses has benefited from an improvement in loan quality.
These factors have enabled the Bank to reduce its provision for loan
losses to zero while maintaining reserve adequacy. For a detailed
discussion of the Bank's allowance for loan losses refer to "Results of
Operations - For the three month periods ended June 30, 2002 and 2001"
above.
Non-interest income
- -------------------
The following table details the principal categories of non-interest
income.
June 30,
(in thousands) 2002 2001 Change
---- ---- ------
Service charges on
deposit accounts $1,147 $ 999 $ 148 14.8%
Gains on sales of mortgage
loans, net 218 190 28 14.7
Loan servicing 35 79 (44) (55.7)
Increase in cash surrender value of
bank-owned life insurance 210 - 210 -
Other 154 204 (50) (24.5)
------ ------ ---- ----
Total non-interest income $1,764 $1,472 $292 19.8%
====== ====== ==== =====
The increase in non-interest income for the six month period ended
June 30, 2002 as compared to the prior year period results primarily
from growth in service fee income, the increase in the cash surrender
value of bank-owned life insurance and increased gains on sales
of residential mortgage loans. The increase in service charges on
deposit accounts is due to growth in the number of deposit accounts
serviced during the 2002 period as compared to the 2001 period.
Bank-owned life insurance was acquired in December 2001 and March 2002.
The increase in the gains on sales of residential mortgage loans
resulted from higher loan sales volume, $14.3 million in 2002 compared
to $10.7 million in 2001. Secondary market loan sales are generally
pre-arranged on a loan-by-loan basis prior to origination and loans are
sold with servicing rights released. The decrease in loan servicing
fees resulted from run-off in the loan servicing portfolio. Other fees
declined primarily due to lower commissions earned on issuances of
official checks and money orders during the period.
Operating expenses
- ------------------
The following table details the principal categories of operating
expenses.
June 30,
(in thousands) 2002 2001 Change
---- ---- ------
Salaries and benefits $4,422 $3,507 $915 26.1%
Occupancy 710 644 66 10.2
Equipment 568 661 (93) (14.1)
Professional, collection and OREO 431 327 104 31.8
Postage and telecommunications 273 266 7 2.6
Printing and office supplies 225 211 14 6.6
Marketing 292 190 102 53.7
Service bureau 184 173 11 6.4
Amortization of intangibles 144 326 (182) (55.8)
Other 1,102 790 312 39.5
------ ------ ------ ----
Total operating expenses $8,351 $7,095 $1,256 17.7%
====== ====== ====== =====
The increase in compensation expense for the six month periods ended
June 30, 2002 as compared with the prior year period was due primarily
to year-over-year salary increases and accrued bonus increases,
increased supplemental retirement plan expense and a decrease in the
pension plan benefit. The increase in occupancy expense results
primarily from higher property taxes, maintenance and repairs. The
decrease in equipment expense is primarily due to lower equipment and
software maintenance costs and lower depreciation expenses on computer
equipment and software. The increase in professional, collection and
OREO expenses is due to consulting services for establishing bank-owned
life insurance, human resource surveys, computer hardware and software
testing, and various other planned 2002 engagements. The increase in
postage and telecommunications is due to the higher number of deposit
accounts serviced and increased postage costs. The increase in printing
and office supplies is also due primarily to the higher number of
deposit accounts serviced throughout our branch network. Marketing
expense increased primarily as a result of increased advertising
activities during the current period. Service bureau expense has
increased as a result of growth in the number of deposit accounts since
the prior year period. The decrease in the amortization of intangible
assets in the 2002 period relates to the discontinuance of goodwill
amortization as a result of the adoption of SFAS 142 effective January
1, 2002. Changes in other operating expense also reflect the increased
costs associated with the internal growth of NewMil. Professional,
collection and OREO up 31.8%.
Income taxes
- ------------
Net income for the year included an income tax provision of $1,651,000,
representing a 32.1% effective rate, as compared with a provision of
$1,556,000 a year ago, representing a 35.9% effective rate. The
difference between NewMil's effective tax rate and the corporate tax
rate of 34% is attributable to the amortization of intangibles during
the 2002 and 2001 periods and other book/tax differences.
FINANCIAL CONDITION
During the six month period ended June 30, 2002 total assets grew $42.7
million, or 7.0%, to $649.7 million. This increase was due to deposit
growth of $55.3 million, or 11.6%, offset by a decrease in borrowings
of $17.7 million, or 24.1%. During the period securities increased
$15.5 million, or 7.3%, and overnight federal funds sold increased
$22.1 million, while net loans increased $1.4 million, or 0.4%.
Non-performing assets declined to $1,309,000, or 0.20% of total assets
at June 30, 2002.
Securities
- ----------
During the period ended June 30, 2002 securities increased $15.5
million, or 7.3%, to $227.9 million and overnight federal funds sold
increased $22.1 million to $26.7 million. During the period NewMil
purchased $15.2 million of fixed rate mortgage backed securities and
$20.2 million of fixed rate agency securities.
NewMil's securities portfolio consists of US Government Agency notes,
mortgage backed securities (MBS), corporate bonds, bank qualified
municipal bonds, collateralized mortgage obligations (CMOs), and
Federal Home Loan Bank and other equity securities. At June 30,
2002, the portfolio had a projected weighted average duration and
life of 3.1 years and 4.0 years, respectively, based on median
projected prepayment speeds at current interest rates. At June
30, 2002, securities totaling $201.3 million, or 88.3%, were classified
as available-for-sale and securities totaling $26.7 million, or 11.7%,
were classified as held-to-maturity.
Loans
- -----
During the period ended June 30, 2002 net loans increased 1.4 million,
or 0.4%. Loan originations and advances totaled $77.5 million, while
loan repayments were $76.1 million. In addition, NewMil originated and
sold in the secondary market $14.3 million of residential mortgage loans
during the period. Major loan classifications are as follows:
(in thousands)
June 30, December 31,
2002 2001
---- ----
Real Estate Mortgages:
Residential
1-to-4 family $194,065 $180,513
5-or-more family 13,277 14,649
Commercial 78,458 82,422
Land & land development 2,509 2,998
Home equity credit 26,994 32,580
-------- --------
Total mortgage loans 315,303 313,162
Commercial and industrial 29,184 29,922
Installment and other 3,024 3,089
-------- --------
Total loans, gross 347,511 346,173
Deferred loan origination
fees and purchase
premium, net (266) (303)
Allowance for loan losses (5,507) (5,502)
-------- --------
Total loans, net $341,738 $340,368
======== ========
The Commercial Lending department specializes in lending to small and
mid-size companies and professional practices and provides short-term
and long-term financing, construction loans, commercial mortgages and
property improvement loans. The department also works with several
government-assisted lending programs. 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 mortgage
product line. The department also offers home equity loans and lines
of credit and consumer installment loans.
Non-performing assets
The composition of non-performing assets is as follows:
(in thousands)
June 30, December 31,
2002 2001
---- ----
Non-accruing loans $ 849 $ 985
Accruing loans past due
90 days or more 287 760
Accruing restructured loans - -
------ ------
Total non-performing loans 1,136 1,745
OREO, net 173 116
------ ------
Total non-performing assets $1,309 $1,861
====== ======
In addition to non-performing assets, at June 30, 2002 NewMil had
$1,752,000 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.
NewMil pursues the resolution of all non-performing assets through
restructurings, credit enhancements or collections. When collection
procedures do not bring a loan into performing or restructured status,
NewMil generally initiates action to foreclose the property or to
acquire it by deed in lieu of foreclosure. NewMil actively markets
all OREO property.
LIQUIDITY
NewMil manages its liquidity position to ensure that there is sufficient
funding availability at all times to meet both anticipated and
unanticipated deposit withdrawals, loan originations and advances,
securities purchases and other operating cash outflows. NewMil's
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 June 30, 2002
provided net cash of $2,549,000. Investing activities utilized net
cash of $15,206,000, principally for securities purchases, offset in
part by security repayments and maturities, and to a lesser degree
net loan advances. Financing activities provided net cash of
$34,985,000, principally from increases in deposits and repurchase
agreements, offset in part by FHLB repayments, cash dividends paid
and treasury stock purchases.
At June 30, 2002, NewMil's liquidity ratio, as represented by cash,
short term available-for-sale securities, marketable assets and the
ability to borrow against held-to-maturity securities and loans
through unused FHLB and other short term borrowing capacity, of
approximately $90 million, to net deposits and short term unsecured
liabilities, was 60.8%, well in excess of NewMil's minimum guideline
of 15%. At June 30, 2002, NewMil had outstanding commitments to fund
new loan originations of $22.7 million, construction mortgage
commitments of $5.9 million and unused lines of credit of $34.8
million. These commitments will be met in the normal course of
business. NewMil believes that its liquidity sources will continue
to provide funding sufficient to support operating activities, loan
originations and commitments, and deposit withdrawals.
CAPITAL RESOURCES
During the period ended June 30, 2002 shareholders' equity increased
$2.7 million to $53.3million and book value per share increased $0.75
to $12.27. Positively impacting shareholders' equity was net income of
$3,487,000, or $0.75 per share (diluted), other comprehensive
income of $1,730,000 (net increase in the unrealized gains on
securities available-for-sale, net of taxes), common stock issued of
$44,000, stock option exercise proceeds of $123,000 and a tax benefit
from the exercise of non-qualified stock options of $147,000.
Offsetting these increases in shareholder's equity were treasury
stock purchases of $1,742,000 and dividend payments of $1,096,000.
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 June 30, 2002 NewMil's tier 1 leverage capital ratio
was 6.39% and its tier 1 and total risk-based capital ratios were
11.00% and 12.26%, respectively. At June 30, 2002 the Bank's tier 1
leverage capital ratio was 6.30% and its tier 1 and total risk-based
capital ratios were 10.86% and 12.11%, respectively. NewMil and the
Bank are categorized as "well capitalized". A well capitalized
institution, which is the highest capital category for an institution
as defined by the Prompt Corrective regulations issued by the FDIC and
the FRB, is one which maintains a total risk-based ratio of 10% or
above, a Tier I risk-based ratio of 6% or above and a leverage ratio
of 5% or above, and is not subject to any written order, written
agreement, capital directive, or prompt corrective action directive
to meet and maintain a specific capital level.
Dividends
- ---------
NewMil's ability to pay dividends is dependent on the Bank's ability
to pay dividends to NewMil. There are certain restrictions on the
payment of dividends and other payments by the Bank to NewMil.
Under Connecticut law the Bank is prohibited from declaring a cash
dividend on its common stock except from its net earnings for the
current calendar year and retained net profits for the preceding
two years. In some instances, further restrictions on dividends
may be imposed on NewMil by the Federal Reserve Bank.
NewMil believes that the payment of cash dividends to its shareholders
is appropriate, provided that such payment considers NewMil's capital
needs, asset quality, and overall financial condition and does
not adversely affect the financial stability of NewMil or the Bank.
The continued payment of cash dividends by NewMil will be dependent
on NewMil's future core earnings, financial condition and capital
needs, regulatory restrictions, and other factors deemed relevant
by the Board of Directors of NewMil.
Item 3. QUANTITATIVE and QUALITATIVE DISCLOSURE of MARKET RISK
Market risk is the exposure to losses resulting from changes in
interest rates, foreign currency exchange rates, commodity prices
and equity prices. The primary market risk to which NewMil is
exposed is interest rate risk. NewMil has no foreign currency or
commodity price risk and equity price risk is considered limited due
to the fact that NewMil has minimal investments in equities and
investments in corporate bonds are in the highest credit grades.
NewMil manages interest rate risk through an Asset Liability Committee
comprised of representatives from senior management and the Board of
Directors. The objective of interest rate risk management is to
achieve and maintain a high and stable net interest margin under
changing interest rate environments. NewMil seeks to manage interest
rate risk within limits approved by the Board of Directors. NewMil
monitors exposure to interest rate risk on a quarterly basis using
earnings simulation analysis and gap analysis. Earnings simulation
analysis measures the amount of short-term earnings at risk under both
rising and falling rate scenarios as compared with current interest
rates. Balance sheet gap analysis identifies short-, medium- and
long-term interest rate positions or exposure. NewMil's interest rate
risk has not significantly changed from the prior year.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against NewMil or the
Bank or any of their properties, other than ordinary routine litigation
incidental to NewMil's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are filed as Exhibits to this Form
10-Q, as required by Item 601 of Regulation S-K.
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of NewMil (incorporated
by reference to the Registrant's 2001 Form 10-K).
3.1.1 Amendment to Certificate of Incorporation of NewMil
increasing authorized shares of common stock from
6,000,000 to 25,000,000 (incorporated by reference
to the Registrant's 2001 Form 10-K).
3.2 Bylaws of NewMil (incorporated by reference to
Registrant's 2001 Form 10-K).
4.1 Instruments Defining Rights of Security Holders
(Included in Exhibits 3.1 and 3.2).
10.1 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
(incorporated by reference to the Registrant's 2001
Form 10-K).
10.2 Employment agreement with its President and CEO,
Francis J. Wiatr, dated January 23, 2002
(incorporated by reference to the Registrant's 2001
Form 10-K).
10.3 Dividend reinvestment plan for NewMil Bancorp's
shareholders (incorporated by reference to the
Registrant's 1996 Form 10-K).
10.5 The Second Amended and Restated 1986 Stock Option
and Incentive Plan for Officers and Key Employees
(incorporated by reference to the Registrant's S-8
post effective amendment dated January 25, 2001).
10.6 The Third Amended and Restated 1992 Stock Option
Plan for Outside Directors of NewMil Bancorp, Inc.
(incorporated by reference to the Registrant's S-8
post effective amendment dated January 25, 2001).
10.7 Employment agreement between NewMil Bank and Senior
Vice President, William D. Starbuck dated as of
November 10, 2000 (incorporated by reference to the
Registrant's 2001 Form 10-K).
10.8 Form of Director Group Carve-Out Split Dollar Life
Insurance Agreement (incorporated by reference to the
Registrant's 2001 Form 10-K).
10.9 Form of Executive Officer Group Term Carve Out Split
Dollar Policy for Terrence Shannon, Roberta Reed and
B. Ian McMahon (incorporated by reference to the
Registrant's 2001 Form 10-K).
10.10 Salary Continuation and Split Dollar Agreement with
Francis J. Wiatr (incorporated by reference to the
Registrant's 2001 Form 10-K).
10.11 Change in control agreement between NewMil Bancorp,
Inc. and Terrence J. Shannon (replaces Exhibit 10.4
in Registrant's 2001 Form 10-K).
10.12 Change in control agreement between NewMil
Bancorp, Inc. and Roberta Reed.
10.13 Change in control agreement between NewMil Bancorp,
Inc. and B. Ian McMahon (replaces Exhibit 10.4
in Registrant's 2001 Form 10-K).
10.14 Change in control agreement between NewMil Bancorp,
Inc. and Betty F. Pacocha.
10.15 Salary Continuation Agreement and Split Dollar
Agreement between NewMil Bank and Terrence J. Shannon.
11.1 Computation of Net Income per Common Share.
99.2 Sarbanes-Oxley Certification by Francis J. Wiatr,
Chairman, President and CEO.
99.3 Sarbanes-Oxley Certification by B. Ian McMahon,
Chief Financial Officer.
(b) Report on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NEWMIL BANCORP, INC.
July 26, 2002 By: /s/ Francis J. Wiatr
------------------------
Francis J. Wiatr,
Chairman, President and CEO
July 26, 2002 By: /s/ B. Ian McMahon
-----------------------
B. Ian McMahon,
Chief Financial Officer