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 September 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 September 30,
2002, is 4,262,241.
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
(dollars in thousands) 2002 2001
---- ----
ASSETS
Cash and due from bank $ 27,322 $ 21,579
Federal funds sold 44,650 4,615
-------- --------
Total cash and cash equivalents 71,972 26,194
Securities
Available-for-sale at market 193,457 181,623
Held-to-maturity at amortized cost
(fair value: $26,332 and $31,087) 25,224 30,785
Loans (net of allowance for loan
losses: $5,498 and $5,502) 341,616 340,368
Other real estate owned 116 116
Bank premises and equipment, net 6,560 6,092
Accrued interest income 3,682 3,870
Intangible assets (net of accumulated
amortization: $952 and $737) 9,090 9,305
Deferred tax asset, net - 619
Other assets 12,220 8,054
-------- --------
Total Assets $663,937 $607,026
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 48,013 $ 39,898
NOW accounts 72,564 63,415
Money market 143,145 120,888
Savings and other 75,522 70,001
Certificates of deposit 207,226 181,914
-------- --------
Total deposits 546,470 476,116
Federal Home Loan Bank advances 47,098 67,540
Repurchase agreements 10,309 5,783
Accrued interest and other liabilities 6,232 6,993
-------- --------
Total Liabilities 610,109 556,432
-------- --------
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 42,375 42,568
Retained earnings 21,737 18,105
Accumulated other comprehensive income, net 5,733 2,921
Treasury stock, at cost: 1,732,897 and
1,599,578 shares (19,012) (15,995)
-------- --------
Total Shareholders' Equity 53,828 50,594
-------- --------
Total Liabilities and Shareholders' Equity $663,937 $607,026
======== ========
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income
Interest and fees on loans $5,906 $6,661 $18,109 $20,321
Interest and dividends on
securities 3,017 2,723 9,300 7,652
Interest on federal funds sold 141 44 271 164
------ ------ ------- -------
Total interest and dividend
income 9,064 9,428 27,680 28,137
------ ------ ------- -------
Interest expense
Deposits 2,831 3,633 8,534 11,605
Borrowed funds 581 479 1,769 1,265
------ ------ ------- -------
Total interest expense 3,412 4,112 10,303 12,870
------ ------ ------- -------
Net interest and dividend income 5,652 5,316 17,377 15,267
Provision for loan losses - - - -
------ ------ ------- -------
Net interest and dividend income
after provision for loan losses 5,652 5,316 17,377 15,267
------ ------ ------- -------
Non-interest income
Service charges on deposit accounts 580 535 1,727 1,534
Gains on sales of mortgage loans, net 131 116 348 306
Loan servicing fees 14 30 48 109
Other 225 127 591 332
------ ------ ------- -------
Total non-interest income 950 808 2,714 2,281
------ ------ ------- -------
Non-interest expense
Salaries & benefits 2,255 1,917 6,677 5,425
Occupancy 334 320 1,045 964
Equipment 289 317 858 978
Marketing 99 102 392 293
Postage & telecommunications 131 135 404 401
Printing and office supplies 99 111 324 322
Professional, collections and OREO 168 175 599 502
Service bureau 104 112 288 285
Amortization of intangibles 72 163 215 489
Other 438 474 1,538 1,262
------ ------ ------- -------
Total non-interest expense 3,989 3,826 12,340 10,921
------ ------ ------- -------
Income before income taxes, 2,613 2,298 7,751 6,627
Income tax provision 839 822 2,489 2,378
------ ------ ------- -------
Net income $1,774 $1,476 $ 5,262 $ 4,249
====== ====== ======= =======
Per common share
Diluted earnings $0.39 $0.32 $1.15 $0.91
Basic earnings 0.41 0.33 1.21 0.95
Cash dividends 0.125 0.110 0.375 0.330
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 - - - 4,249
Net unrealized gain on
securities available-for-sale,
net of taxes - - - -
Total comprehensive income
Cash dividends paid - - - (1,483)
Exercise of stock options - - (146) -
Common stock issued - - (61) -
Tax benefit from exercise of
non-qualified stock options - - 20 -
Common stock repurchased - - - -
--------- ------ ------- -------
Balances at
September 30, 2001 5,990,138 $2,995 $42,568 $17,213
========= ====== ======= =======
Balances at
December 31, 2001 5,990,138 $2,995 $42,568 $18,105
Net income for year - - - 5,262
Net unrealized gain on
securities available-for-sale,
net of taxes - - - -
Total comprehensive income
Cash dividends paid - - - (1,630)
Exercise of stock options - - (403) -
Tax benefit from exercise of
non-qualified stock options - - 207 -
Common stock issued - - 3 -
Common stock repurchased - - - -
--------- ------ ------- -------
Balances at
September 30, 2002 5,990,138 $2,995 $42,375 $21,737
========= ====== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Cont'd)
(unaudited)
Accumulated Total
Treasury other comprehensive shareholders'
(dollars in thousands) stock income equity
----- ------ ------
Balances at
December 31, 2000 $(13,435) $ 755 $47,517
Net income for period - - 4,249
Net unrealized gain on
securities available-
for-sale, net of taxes - 3,286 3,286
-------
Total comprehensive income 7,535
-------
Cash dividends paid - - (1,483)
Exercise of stock options 280 - 134
Common stock issued 850 - 789
Tax benefit from exercise of
non-qualified stock options - - 20
Common stock repurchased (3,320) - (3,320)
-------- ------- -------
Balances at
September 30, 2001 $(15,625) $ 4,041 $51,192
======== ======= =======
Balances at
December 31, 2001 $(15,995) $ 2,921 $50,594
Net income for year - - 5,262
Net unrealized gain on
securities available-
for-sale, net of taxes - 2,812 2,812
-------
Total comprehensive income 8,074
-------
Cash dividends paid - - (1,630)
Exercise of stock options 605 - 202
Tax benefit from exercise of
non-qualified stock options - - 207
Common stock issued 41 - 44
Common stock repurchased (3,663) - (3,663)
-------- ------- -------
Balances at
September 30, 2002 $(19,012) $ 5,733 $53,828
======== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30,
(in thousands) 2002 2001
---- ----
Operating Activities
Net income $ 5,262 $ 4,249
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses - -
Provision for depreciation and amortization 601 722
Amortization of intangible assets 215 489
Amortization and accretion of securities
premiums and (discounts), net 685 (25)
Gains on sales of loans, net (348) (306)
Gains on sale of OREO, net (7) -
Loans originated for sale (21,906) (17,777)
Proceeds from sales of loans 22,254 18,083
Tax benefit from exercise of
non-qualified stock options 207 20
Deferred income tax provision 146 125
Decrease (increase) in accrued
interest income 174 (384)
Decrease in other liabilities (762) (587)
Increase in other assets, net (5,748) (690)
Net cash provided by operating activities 773 3,919
------- -------
Investing Activities
Purchases of securities available-for-sale (25,271) (30,100)
Purchases of mortgage backed securities
available-for-sale (15,211) (54,279)
Proceeds from maturities and
principal repayments of securities 8,847 1,816
Principal collected on mortgage
backed securities 28,936 14,846
Loan advances, net (681) (11,988)
Proceeds from sale of OREO 64 -
Purchases of Bank premises and equipment, net (1,070) (331)
------- -------
Net cash used by investing activities (4,386) (80,036)
------- -------
Financing Activities
Net increase in deposits 70,354 29,998
Net increase in repurchase agreements 4,526 2,390
FHLB (repayments) advances, net (20,442) 40,500
Common Stock repurchased (3,663) (3,320)
Proceeds from Common Stock reissued 44 789
Cash dividends paid (1,630) (1,483)
Proceeds from exercise of stock options 202 134
------- -------
Net cash provided by financing activities 49,391 69,008
------- -------
Increase (decrease) in cash and cash
equivalents 45,778 (7,109)
Cash and federal funds sold, beginning of period 26,194 27,813
------- -------
Cash and federal funds sold, end of period $71,972 $20,704
======= =======
Cash paid during period
Interest to depositors $ 8,545 $11,681
Interest on borrowings 1,775 1,297
Income taxes paid 2,591 1,890
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 September 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:
Gross Gross
Estimated unrealized unrealized Amortized
(in thousands) fair value gains losses cost
---------- ----- ------ ----
September 30, 2002
U.S. Government Agency notes
After 1 but within 5 years $ 47,698 $ 2,167 $ - $ 45,531
Corporate Bonds
After 1 but within 5 years 39,193 2,413 7 36,787
Mortgage backed securities 95,083 4,087 - 90,996
Collateralized mortgage
obligations 7,630 98 - 7,532
-------- ------- ----- --------
Total debt securities 189,604 8,765 7 180,846
FHLB capital stock and other 3,853 1 - 3,852
-------- ------- ----- --------
Total securities
available-for-sale $193,457 $ 8,766 $ 7 $184,698
======== ======= ===== ========
Gross Gross
Estimated unrealized unrealized Amortized
(in thousands) fair 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 unrealized unrealized Amortized
(in thousands) fair value gains losses cost
---------- ----- ------ ----
September 30, 2002
Municipal bonds
After 1 but within 5 years $ 500 $ 5 $ - $ 505
After 10 years 10,529 297 - 10,826
Mortgage backed securities 10,196 641 - 10,837
Collateralized mortgage
obligations 3,999 165 - 4,164
------- ------ ------ -------
Total securities
held-to-maturity $25,224 $1,108 $ - $26,332
======= ====== ====== =======
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 September 30, 2002 securities with a carrying value and market value
of $2,423,000 and $2,489,000, respectively, were pledged as collateral
against public funds and securities with a carrying value and market
value of $17,380,000 and $17,385,000, respectively, were pledged as
collateral against repurchase agreements. Also, securities with a
carrying value and market value of $6,694,000 and $7,119,000,
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:
September 30, December 31,
(in thousands) 2002 2001
---- ----
Real estate mortgages
1-to-4 family residential $193,817 $180,513
5-or-more family residential 12,030 14,649
Commercial 79,863 78,091
Land & land development 1,821 2,997
Home equity credit 25,454 32,580
Commercial & industrial 31,652 34,254
Installment & other 2,688 3,089
-------- --------
Total loans, gross 347,325 346,173
Deferred loan origination fees, net (211) (303)
Allowance for loan losses (5,498) (5,502)
-------- --------
Total loans, net $341,616 $340,368
======== ========
Impaired loans
September 30, December 31,
(in thousands) 2002 2001
---- ----
With no valuation allowance $ 68 $ 77
With valuation allowance 123 696
----- -----
Total impaired loans $ 191 $ 773
----- -----
Valuation allowance $ 123 $ 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 nine month periods
ended September 30, are as
follows:
September 30,
(in thousands) 2002 2001
---- ----
Balance, beginning of period $5,502 $5,518
Provision for losses - -
Charge-offs (187) (71)
Recoveries 183 49
------ ------
Balance, end of period $5,498 $5,496
====== ======
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
September 30, December 31,
(in thousands) 2002 2001
---- ----
Non-accrual loans $ 285 $ 985
Accruing loans past due 90 days or more 536 760
Accruing troubled debt restructured loans - -
----- ------
Total non-performing loans 821 1,745
Real estate acquired in settlement of loans 116 116
----- ------
Total non-performing assets $ 937 $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 Nine months ended
September 30, September 30,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Basic 4,283 4,460 4,346 4,490
Effect of dilutive stock options 228 185 238 164
----- ----- ----- -----
Diluted 4,511 4,645 4,584 4,654
===== ===== ===== =====
NOTE 6 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Comprehensive income
Net income $1,774 $1,476 $5,262 $4,249
Net unrealized gains on
securities during period 1,082 2,673 2,812 3,286
------ ------ ------ ------
Comprehensive income $2,856 $4,149 $8,074 $7,535
====== ====== ====== ======
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 September 30, 2002
Net unrealized gains on securities
available-for-sale arising
during the period $1,635 $ (556) $1,079
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity 4 (1) 3
------ ------ ------
Net unrealized gains on
securities during period $1,639 $ (557) $1,082
====== ====== ======
Three months ended September 30, 2001
Net unrealized losses on securities
available-for-sale arising
during the period $4,046 $(1,377) $2,669
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity 5 (1) 4
------ ------- ------
Net unrealized gains on
securities during period $4,051 $(1,378) $2,673
====== ======= ======
Nine months ended September 30, 2002
Net unrealized gains on securities
available-for-sale arising
during the period $4,242 $(1,442) $2,800
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity 18 (6) 12
------ ------- ------
Net unrealized gains on
securities during period $4,260 $(1,448) $2,812
====== ======= ======
Nine months ended September 30, 2001
Net unrealized gains on securities
available-for-sale arising
during the period $4,972 $(1,691) $3,281
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity 8 (3) 5
------ ------- ------
Net unrealized gains on
securities during period $4,980 $(1,694) $3,286
====== ======= ======
NOTE 7 - INCOME TAXES
The components of the income tax provision are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Current provision
Federal $ 889 $ 781 $2,635 $2,253
State - - - -
----- ----- ------ ------
Total 889 781 2,635 2,253
----- ----- ------ ------
Deferred provision
Federal (50) 41 (146) 125
State - - - -
----- ----- ------ ------
Total (50) 41 (146) 125
----- ----- ------ ------
Income tax provision $ 839 $ 822 $2,489 $2,378
===== ===== ====== ======
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 nine month periods ended September 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 September 30, 2002
are as follows:
NewMil Bank
------ ----
Leverage ratio 6.11% 6.12%
Tier I risk-based ratio 10.92 10.93
Total risk-based ratio 12.17 12.18
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. Resultant goodwill was $8.1
million and core deposit intangible for the transaction was $1.4
million. Amortization on the goodwill has ceased and the core deposit
intangible asset is continuing to be amortized over 10 years. 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 September 30, 2002 and 2001
Overview
- --------
NewMil earned net income of $1,774,000, or 39 cents per share
(diluted), for the quarter ended September 30, 2002 as compared with
$1,476,000, or 32 cents per share (diluted), for the quarter ended
September 30, 2001.
Analysis of net interest and dividend income
- --------------------------------------------
Net interest and dividend income increased $336,000, or 6.3%, for the
quarter ended September 30, 2002 as compared with the prior year
period. This increase resulted primarily from a favorable change in
volume. Average earning assets have increased $69.3 million due to
internal growth. The 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 24 basis points to 3.80% from 4.04% 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 September 30,
Average Income/ Average
Balance Expense Yield/Rate
(dollars in thousands) 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Loans(a) $346,143 $350,032 $5,906 $6,661 6.82% 7.61%
Mortgage backed
securities (b) 107,533 88,026 1,596 1,459 5.94 6.63
Other securities (b)(c) 141,963 88,280 1,562 1,308 4.40 5.93
-------- -------- ------ ------
Total earning assets 595,639 526,338 9,064 9,428 6.09 7.17
------ ------
Other assets 51,612 39,972
-------- --------
Total assets $647,251 $566,310
======== ========
NOW accounts $ 67,828 $ 60,236 134 171 0.79 1.14
Money market accounts 141,211 116,271 686 836 1.94 2.88
Savings & other 75,487 66,864 302 369 1.60 2.21
Certificates of deposit 203,782 181,451 1,709 2,257 3.36 4.98
-------- -------- ------ ------
Total interest-
bearing deposits 488,308 424,822 2,831 3,633 2.32 3.42
Borrowings 56,717 46,130 581 479 4.10 4.15
-------- -------- ------ ------
Total interest-
bearing funds 545,025 470,952 3,412 4,112 2.50 3.49
------ ------
Demand deposits 43,593 40,682
Other liabilities 5,511 5,639
Shareholders' equity 53,122 49,037
-------- --------
Total liabilities &
shareholders' equity $647,251 $566,310
======== ========
Net interest income $5,652 $5,316
====== ======
Spread on interest-bearing funds 3.59 3.68
Net interest margin(d) 3.80 4.04
(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 September 30, 2002 versus 2001
(in thousands) Change in interest due to
Volume Rate Volume/rate Net
------ ---- ----------- ---
Interest-earning assets:
Loans $ (74) $ (689) $ 8 $ (755)
Mortgage backed securities 323 (153) (33) 137
Other securities 795 (337) (204) 254
------ ------ ----- ------
Total 1,044 (1,179) (229) (364)
------ ------ ----- ------
Interest-bearing liabilities:
Deposits 543 (1,170) (175) (802)
Borrowings 110 (7) (1) 102
------ ------ ----- ------
Total 653 (1,177) (176) (700)
------ ------ ----- ------
Net change to interest income $ 391 $ (2) $ (53) $ 336
====== ====== ===== ======
Interest income
- ---------------
Total interest and dividend income decreased $364,000 or 3.9%, for the
quarter ended September 30, 2002 as compared with the same period a
year ago. Loan income decreased $755,000, or 11.3%, primarily as a
result of a lower average yield. Average loans decreased $3.9 million,
or 1.1%, primarily due to higher loan repayments during the period.
The decrease in the average loan yield, down 79 basis points, was due
to lower market interest rates throughout 2002, and to changes in
portfolio mix. Investment income increased $391,000, or 14.1%, as
a result of higher average volume and lower average yields. Average
securities increased $73.2 million, or 41.5%. The decrease in average
investment yield, down 122 basis points to 5.06%, 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 September 30, 2002 decreased
$700,000, or 17.0%, 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 $802,000, or 22.1%, as a result of lower deposit rates and
changes in deposit mix. Average interest-bearing deposits increased
$63.5 million, or 14.9%. The average cost of interest-bearing deposits
decreased 110 basis points to 2.32%. Interest expense on borrowings
increased $102,000, or 21.3%, as a result of increased average
borrowings, up $10.6 million, offset in-part by a lower borrowing cost,
down 5 basis points to 4.10%.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil made no provision for loan losses during the quarters ending
September 30, 2002 and 2001. During the past several years the Bank
has experienced an improvement in loan quality and loss recoveries.
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.
September 30, December 31, September30,
(in thousands) 2002 2001 2001
---- ---- ----
Ratio of allowance for loan losses:
to non-performing loans 669.7% 315.3% 319.9%
to total gross loans 1.6 1.6 1.6
Ratio of non-performing loans
to total loans 0.2 0.5 0.5
During the nine months ended September 30, 2002 non-performing loans
declined $924,000, or 53.0%, while gross loans increased slightly, by
$1.2 million, or 0.36%. NewMil 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 September 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 by the State of
Connecticut's Department of Banking in June 2002 and no additions to
the allowance were requested as a result of these examinations.
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 and product type 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 and
product type.
Non-interest income
- -------------------
The following table details the principal categories of non-interest
income.
September 30,
(in thousands) 2002 2001 Change
---- ---- ------
Service charges on
deposit accounts $580 $535 $ 45 8.4%
Gains on sales of mortgage
loans, net 131 116 15 12.9
Gains on sale of other real
estate property owned 7 - 7 -
Loan servicing 14 30 (16) 53.3
Increase in cash surrender value
of bank-owned life insurance 127 - 127 -
Other 91 127 (36) (28.3)
---- ---- ---- -----
Total non-interest income $950 $808 $142 17.6%
==== ==== ==== =====
The increase in non-interest income for the quarter ended September 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, gains on sales of residential mortgages, a
gain on a sale of an OREO property, offset by 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 increase in the gains on
sales of residential mortgage loans resulted from higher loan sales
volume, $7.6 million in 2002 compared to $7.1 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.
September 30,
(in thousands) 2002 2001 Change
---- ---- ------
Salaries and benefits $2,255 $1,917 $338 17.6%
Occupancy 334 320 14 4.4
Equipment 289 317 (28) (8.8)
Professional, collection & OREO 168 175 (7) (4.0)
Postage and telecommunications 131 135 (4) (3.0)
Printing and office supplies 99 111 (12) (10.8)
Marketing 99 102 (3) (2.9)
Service bureau 104 112 (8) (7.1)
Amortization of intangibles 72 163 (91) (55.8)
Other 438 474 (36) (7.6)
------ ------ ---- ----
Total operating expenses $3,989 $3,826 $163 4.3%
====== ====== ==== ====
The increase in compensation expense for the quarter ended September 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 building maintenance, cleaning and utilities
costs of our facilities. The decrease in equipment expense is primarily
due to lower depreciation expense. There was a slight decrease in
postage and telecommunications costs due to implementing certain
telecommunications network changes as well as the general timing of
various direct mailing campaigns during the 2002 and 2001 periods. The
minimal decrease in printing and office supplies reflects a reduction
in usage. The slight decline in marketing costs resulted from decreased
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 the bank's management of controlling expenses
during the period.
Income taxes
- ------------
Net income for the quarter included an income tax provision of $839,000
representing a 32.1% effective rate, as compared with a provision of
$822,000 a year ago, representing a 35.8% 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 nine month periods ended September 30, 2002 and 2001
Overview
- --------
NewMil earned net income of $5,262,000, or $1.15 cents per share
(diluted), for the nine months ended September 30, 2002 as compared
with $4,249,000, or 91 cents per share (diluted), for the nine months
ended September 30, 2001.
Analysis of net interest and dividend income
- --------------------------------------------
Net interest and dividend income increased $2,110,000, or 13.8%, for
the nine months ended September 30, 2002 as compared with the prior
year period. This increase resulted from a $70.6 million increase in
average earning assets. The net interest margin during the period
remained flat at 4.01% when compared to the prior year period. The
increase in earning assets is due to internal growth. The net interest
margin remained stable at 4.01% due 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.
Nine months ended September 30,
Average Income/ Average
Balance Expense Yield/Rate
(dollars in thousands) 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Loans(a) $342,284 $343,616 $18,109 $20,321 7.05% 7.89%
Mortgage backed
securities (b) 114,028 85,246 5,195 4,250 6.07 6.65
Other securities (b)(c) 121,353 78,165 4,376 3,566 4.81 6.08
-------- -------- ------- -------
Total earning assets 577,665 507,027 27,680 28,137 6.39 7.40
------- -------
Other assets 49,071 37,337
-------- --------
Total assets $626,736 $544,364
======== ========
NOW accounts $ 67,023 $ 56,722 460 480 0.92 1.13
Money market accounts 134,108 116,156 2,075 2,880 2.06 3.31
Savings & other 73,699 65,594 937 1,161 1.70 2.36
Certificates of deposit 192,081 178,079 5,062 7,084 3.51 5.30
-------- -------- ------- -------
Total interest-
bearing deposits 466,911 416,551 8,534 11,605 2.44 3.72
Borrowings 59,840 36,402 1,769 1,265 3.94 4.63
-------- -------- ------- -------
Total interest-
bearing funds 526,751 452,953 10,303 12,870 2.61 3.79
------- -------
Demand deposits 41,583 37,635
Other liabilities 6,236 5,371
Shareholders' equity 52,166 48,405
-------- --------
Total liabilities &
shareholders' equity $626,736 $544,364
======== ========
Net interest income $17,377 $15,267
======= =======
Spread on interest-bearing funds 3.78 3.61
Net interest margin(d) 4.01 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.
Nine months ended September 30, 2002 versus 2001
(in thousands) Change in interest due to
Volume Rate Volume/rate Net
------ ---- ----------- ---
Interest-earning assets:
Loans $ (79) $(2,142) $ 9 $(2,212)
Mortgage backed securities 1,435 (367) (123) 945
Other securities 1,971 (747) (414) 810
------ ------- ---- -------
Total 3,327 (3,256) (528) (457)
------ ------- ---- -------
Interest-bearing liabilities:
Deposits 1,403 (3,992) (482) (3,071)
Borrowings 814 (189) (121) 504
------ ------- ---- -------
Total 2,217 (4,181) (603) (2,567)
------ ------- ---- -------
Net change to interest income $1,110 $ 925 $ 75 $ 2,110
====== ======= ==== =======
Interest income
- ---------------
Total interest and dividend income decreased $457,000 or 1.6%, for the
nine months ended September 30, 2002 as compared with the same period a
year ago. Loan income decreased $2.2 million, or 10.9%, primarily as a
result of a lower average yield. Average loans decreased slightly by
$1.3 million. The decrease in the average loan yield, down 84 basis
points, was due to lower market interest rates throughout 2002, and to
changes in portfolio mix. Loan income for the nine months ended
September 30, 2002 included $192,000 of interest recaptured from a
former non-performing loan. Investment income increased $1.8 million,
or 22.5%, as a result of higher average volume and lower average yields.
Average securities increased $72.0 million, or 44.0%. The decrease in
average investment yield, down 96 basis points to 5.42%, was due to
lower market rates on new securities added during 2002, and to changes
in portfolio mix.
Interest expense
- ----------------
Interest expense for the nine month period ended September 30, 2002
decreased $2.6 million, or 19.9%, 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 $3.1 million, or 26.5%, as a result of lower deposit
rates and changes in deposit mix. Average interest-bearing deposits
increased $50.4 million, or 12.1%. The average cost of interest-bearing
deposits decreased 128 basis points to 2.44%. Interest expense on
borrowings increased $504,000, or 39.8%, as a result of increased
average borrowings, up $23.4 million, offset in-part by a lower
borrowing cost, down 69 basis points.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil made no provision for loan losses during the nine months ending
September 30, 2002 and 2001. During the past several years the Bank
has experienced 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 September 30, 2002 and 2001" above.
Non-interest income
- -------------------
The following table details the principal categories of non-interest
income.
September 30,
(in thousands) 2002 2001 Change
---- ---- ------
Service charges on
deposit accounts $1,727 $1,534 $193 8.4%
Gains on sales of mortgage
loans, net 348 306 42 13.7
Gains on sale of other real
estate property owned 7 - 7 -
Loan servicing 48 109 (61) (56.0)
Increase in cash surrender value
of bank-owned life insurance 336 - 336 -
Other 248 332 (84) (25.3)
------ ------ ---- -----
Total non-interest income $2,714 $2,281 $433 19.0%
====== ====== ==== =====
The increase in non-interest income for the nine month period ended
September 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, increased gains on
sales of residential mortgage loans and the gain from the sale of an
other real estate property owned. 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. The
Bank purchased bank-owned life insurance in December 2001 and March
2002. The increase in the gains on sales of residential mortgage loans
resulted from higher loan sales volume, $21.9 million in 2002 compared
to $17.8 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.
September 30,
(in thousands) 2002 2001 Change
---- ---- ------
Salaries & benefits $ 6,677 $ 5,425 $1,252 23.1%
Occupancy 1,045 964 81 8.4
Equipment 858 978 (120) (12.3)
Professional, collections and OREO 599 502 97 19.3
Postage and telecommunications 404 401 3 0.8
Printing and office supplies 324 322 2 0.6
Marketing 392 293 99 33.8
Service bureau 288 285 3 1.1
Amortization of intangibles 215 489 (274) (56.0)
Other 1,538 1,262 276 21.9
------- ------- ------ ----
Total operating expenses $12,340 $10,921 $1,419 13.0%
======= ======= ====== ====
The increase in compensation expense for the nine month periods ended
September 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, building
cleaning, repairs and depreciation expenses. 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 costs
during the period is primarily due to additional consulting for
information systems, higher audit fees and additional corporate legal
fees. 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.
Income taxes
- ------------
Net income for the nine month period included an income tax provision
of $2,489,000, representing a 32.1% effective rate, as compared with a
provision of $2,378,000 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 nine month period ended September 30, 2002 total assets grew
$56.9 million, or 9.4%, to $636.9 million. This increase was due to
deposit growth of $70.4 million, or 14.8%, offset by a decrease in
borrowings of $15.9 million, or 21.7%. During the period securities
increased $6.3 million, or 3.0%, and overnight federal funds sold
increased $40.0 million, while net loans increased $1.2 million, or
0.4%. Non-performing assets declined to $937,000, or 0.14% of total
assets at September 30, 2002.
Securities
- ----------
During the period ended September 30, 2002 securities increased $6.3
million, or 3.0%, to $218.7 million and overnight federal funds sold
increased $40.0 million to $44.7 million. During the period NewMil
purchased $15.2 million of fixed rate mortgage backed securities
and $25.2 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 stock. At September 30, 2002, the portfolio had a
projected weighted average duration and life of 3.0 years and 3.9 years,
respectively, based on median projected prepayment speeds at current
interest rates. At September 30, 2002, securities totaling $193.5
million, or 88.5%, were classified as available-for-sale and securities
totaling $25.2 million, or 11.5%, were classified as held-to-maturity.
Loans
- -----
During the period ended September 30, 2002 net loans increased $1.2
million, or 0.4%. Loan originations and advances totaled $111.9
million, while loan repayments were $111.2 million. In addition,
NewMil originated and sold in the secondary market $21.9 million of
residential mortgage loans during the period. Major loan
classifications are as follows:
September 30, December 31,
(in thousands) 2002 2001
---- ----
Real Estate Mortgages:
Residential
1-to-4 family $193,817 $180,513
5-or-more family 12,030 14,649
Commercial 79,863 82,422
Land & land development 1,821 2,998
Home equity credit 25,454 32,580
-------- --------
Total mortgage loans 312,985 313,162
Commercial and industrial 31,652 29,922
Installment and other 2,688 3,089
-------- --------
Total loans, gross 347,325 346,173
Deferred loan origination
fees and purchase
premium, net (211) (303)
Allowance for loan losses (5,498) (5,502)
-------- --------
Total loans, net $341,616 $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:
September 30, December 31,
(in thousands) 2002 2001
---- ----
Non-accruing loans $285 $ 985
Accruing loans past due
90 days or more 536 760
Accruing restructured loans - -
---- ------
Total non-performing loans 821 1,745
OREO, net 116 116
---- ------
Total non-performing assets $937 $1,861
==== ======
In addition to non-performing assets, at September 30, 2002 NewMil had
$1,531,000 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 nine-month period ended September 30, 2002
provided net cash of $773,000. Investing activities utilized net cash
of $4.4 million, 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 $49.4 million,
principally from increases in deposits and repurchase agreements, offset
in part by FHLB repayments, cash dividends paid and treasury stock
purchases.
At September 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
$91.3 million, to net deposits and short term unsecured liabilities,
was 62.0%, well in excess of NewMil's minimum guideline of 15%. At
September 30, 2002, NewMil had outstanding commitments to fund new loan
originations of $33.2 million, construction mortgage commitments of $5.0
million and unused lines of credit of $34.1 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 September 30, 2002 shareholders' equity
increased $3.2 million to $53.8 million and book value per share
increased $1.11 to $12.63. Positively impacting shareholders' equity
was net income of $5,262,000, or $1.15 per share (diluted), other
comprehensive income of $2,812,000 (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 $202,000 and a tax
benefit from the exercise of non-qualified stock options of $207,000.
Offsetting these increases in shareholder's equity were treasury stock
purchases amounting to $3,663,000 and dividend payments of $1,630,000.
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 September 30, 2002 NewMil's tier 1 leverage
capital ratio was 6.11% and its tier 1 and total risk-based capital
ratios were 10.92% and 12.17%, respectively. At September 30, 2002
the Bank's tier 1 leverage capital ratio was 6.12% and its tier 1 and
total risk-based capital ratios were 10.93% and 12.18%, 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
11.1 Computation of earnings per share.
99.1 Sarbanes-Oxley Certification by Francis J. Wiatr,
Chairman, President and CEO.
99.2 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.
November 7, 2002 By: /s/Francis J. Wiatr
------------------------------
Francis J. Wiatr,
Its: Chairman, President and CEO
November 7, 2002 By: /s/B. Ian McMahon
--------------------------
B. Ian McMahon,
Its: Chief Financial Officer
Certification
-------------
I, Francis J. Wiatr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NewMil
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to records, process, summarizes and report financial data and have
identified for the registrants' auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not materials, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
NEWMIL BANCORP, INC.
Date: November 7, 2002 By: /s/Francis J. Wiatr
------------------------------
Francis J. Wiatr,
Its: Chairman, President and CEO
Certification
-------------
I, B. Ian McMahon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NewMil
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entitles, particularly during the period in which this quarterly report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to records, process, summarizes and report financial data and have
identified for the registrants' auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not materials, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
NEWMIL BANCORP, INC.
Date: November 7, 2002 By: /s/B. Ian McMahon
-------------------------
B. Ian McMahon,
Its: Chief Financial Officer
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.
November 7, 2002 By: /s/Francis J. Wiatr
------------------------------
Francis J. Wiatr,
Its: Chairman, President and CEO