========================================================================
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 March 31, 2003
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) dentification 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ ]
The number of shares of Common Stock outstanding as of March 31, 2003,
is 4,228,506.
========================================================================
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002
Consolidated Statements of Income
for the three month periods
ended March 31, 2003 and March 31, 2002
Consolidated Statements of Changes in
Shareholders' Equity for the three month
periods ended March 31, 2003 and March 31, 2002
Consolidated Statements of Cash Flows
for the three month periods ended
March 31, 2003 and March 31, 2002
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
Item 4. Control and Procedures
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)
March 31, December 31,
(dollars in thousands) 2003 2002
- -----------------------------------------------------------------------
ASSETS
Cash and due from bank $ 22,195 $ 21,349
Federal funds sold 43,683 63,441
- -----------------------------------------------------------------------
Total cash and cash equivalents 65,878 84,790
Securities
Available-for-sale at market 176,066 174,569
Held-to-maturity at amortized cost
(fair value: $22,153 and $24,063) 21,366 23,092
Loans (net of allowance for
loan losses: $5,249 and $5,250) 389,544 347,215
Bank premises and equipment, net 7,349 7,076
Accrued interest income 3,499 3,545
Intangible assets (net of accumulated
amortization: $1,085 and $1,024) 8,882 8,943
Bank-owned life insurance 10,094 10,000
Other assets 2,485 2,365
- -----------------------------------------------------------------------
Total Assets $685,163 $661,595
- -----------------------------------------------------------------------
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 46,263 $ 46,750
NOW accounts 71,514 71,586
Money market 149,921 144,288
Savings and other 82,407 79,811
Certificates of deposit 203,375 206,371
- -----------------------------------------------------------------------
Total deposits 553,480 548,806
Federal Home Loan Bank advances 53,040 45,077
Company obligated, mandatorily
redeemable securities 9,701 --
Repurchase agreements 7,395 7,392
Accrued interest and other liabilities 6,544 6,084
- -----------------------------------------------------------------------
Total Liabilities 630,160 607,359
- -----------------------------------------------------------------------
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 42,283 42,297
Retained earnings 23,985 22,793
Accumulated other comprehensive
income, net 5,607 5,779
Treasury stock, at cost: 1,761,632
and 1,755,447 shares (19,867) (19,628)
- -----------------------------------------------------------------------
Total Shareholders' Equity 55,003 54,236
- -----------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $685,163 $661,595
=======================================================================
See accompanying notes to consolidated financial statements.
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
Three months ended
March 31,
2003 2002
- -----------------------------------------------------------------------
Interest and dividend income
Interest and fees on loans $ 5,977 $ 6,256
Interest and dividends on securities 2,650 3,144
Interest on federal funds sold 112 44
- -----------------------------------------------------------------------
Total interest and dividend income 8,739 9,444
- -----------------------------------------------------------------------
Interest expense
Deposits 2,231 2,829
Borrowed funds 547 606
- -----------------------------------------------------------------------
Total interest expense 2,778 3,435
- -----------------------------------------------------------------------
Net interest and dividend income 5,961 6,009
Provision for loan losses -- --
- -----------------------------------------------------------------------
Net interest and dividend income
after provision for loan losses 5,961 6,009
- -----------------------------------------------------------------------
Non-interest income
Service charges on deposit accounts 547 558
Gains on sales of mortgage loans, net 72 161
Loan servicing fees 19 18
Other 187 151
- -----------------------------------------------------------------------
Total non-interest income 825 888
- -----------------------------------------------------------------------
Non-interest expense
Salaries and benefits 2,345 2,259
Occupancy 399 369
Equipment 318 284
Marketing 45 158
Postage and telecommunications 133 146
Printing and office supplies 98 130
Professional, collections and OREO 173 249
Service bureau 107 94
Amortization of intangibles 61 72
Other 453 608
- -----------------------------------------------------------------------
Total non-interest expense 4,132 4,369
- -----------------------------------------------------------------------
Income before income taxes, 2,654 2,528
Income tax provision 827 811
- -----------------------------------------------------------------------
Net income $ 1,827 $ 1,717
=======================================================================
Per common share
Diluted earnings $0.41 $0.37
Basic earnings 0.43 0.39
Cash dividends 0.150 0.125
See accompanying notes to consolidated financial statements.
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, 2001 5,990,138 $2,995 $42,568 $18,105
Net income for period -- -- -- 1,717
Net unrealized loss on
securities available-for-sale,
net of taxes -- -- -- --
Total comprehensive income
Cash dividends paid -- -- -- (547)
Exercise of stock options -- -- (185) --
Common stock issued -- -- 3 --
Tax benefit from exercise of
non-qualified stock options -- -- 92 --
Common stock repurchased -- -- -- --
- -------------------------------------------------------------------------
Balances at
March 31, 2002 5,990,138 $2,995 $42,478 $19,275
=========================================================================
Balances at
December 31, 2002 5,990,138 $2,995 $42,297 $22,793
Net income for year -- -- -- 1,827
Net unrealized loss on
securities available-for-sale,
net of taxes -- -- -- --
Total comprehensive income
Cash dividends paid -- -- -- (635)
Exercise of stock options -- -- (44) --
Common stock issued -- -- 11 --
Tax benefit from exercise of
non-qualified stock options -- -- 19 --
Common stock repurchased -- -- -- --
- -------------------------------------------------------------------------
Balances at
March 31, 2003 5,990,138 $2,995 $42,283 $23,985
=========================================================================
See accompanying notes to consolidated financial statements.
Accumulated Total
other comp- share-
Treasury rehensive holders'
(dollars in thousands) stock income equity
- ------------------------------------------------------------------------
Balances at
December 31, 2001 $(15,995) $ 2,921 $50,594
Net income for period -- -- 1,717
Net unrealized loss on
securities available-for-sale,
net of taxes -- (782) (782)
--------
Total comprehensive income 935
--------
Cash dividends paid -- -- (547)
Exercise of stock options 256 -- 71
Common stock issued 41 -- 44
Tax benefit from exercise of
non-qualified stock options -- -- 92
Common stock repurchased (575) -- (575)
- -------------------------------------------------------------------------
Balances at
March 31, 2002 $(16,273) $ 2,139 $50,614
=========================================================================
Balances at
December 31, 2002 $(19,628) $ 5,779 $54,236
Net income for year -- -- 1,827
Net unrealized loss on
securities available-for-sale,
net of taxes -- (172) (172)
--------
Total comprehensive income 1,655
--------
Cash dividends paid -- -- (635)
Exercise of stock options 102 -- 58
Common stock issued 16 -- 27
Tax benefit from exercise of
non-qualified stock options -- -- 19
Common stock repurchased (357) -- (357)
- -------------------------------------------------------------------------
Balances at
March 31, 2003 $(19,867) $ 5,607 $55,003
=========================================================================
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
(unaudited, in thousands) 2003 2002
- -----------------------------------------------------------------------
Operating Activities
Net income $ 1,827 $1,717
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses -- --
Provision for depreciation and
amortization 225 208
Amortization of intangible assets 61 72
Amortization of issuance cost on
Company obligated, mandatorily
redeemable securities 1 --
Amortization and accretion of securities
premiums and (discounts), net 114 213
Gains on sales of mortgage loans, net (72) (161)
Mortgage loans originated for sale (4,335) (9.421)
Proceeds from sales of mortgage loans 4,407 9,582
Tax benefit from exercise of
non-qualified stock options 19 92
Deferred income tax provision (75) (49)
Increase in BOLI cash surrender value (94) (3,899)
Decrease (increase) in accrued
interest income 36 97
Increase in other liabilities 623 187
Increase (decrease) in other assets, net (111) 946
- -----------------------------------------------------------------------
Net cash provided (used) by
operating activities 2,626 (416)
- -----------------------------------------------------------------------
Investing Activities
Purchases of securities
available-for-sale (10,011) (105)
Purchases of mortgage backed
securities available-for-sale (5,057) (15,211)
Proceeds from maturities and principal
repayments of securities 256 1,303
Principal collected on mortgage
backed securities 14,666 10,237
Loan advances, net (42,329) 8,636
Purchases of Bank premises
and equipment, net (497) (141)
- -----------------------------------------------------------------------
Net cash (used) provided by
investing activities (42,972) 4,719
- -----------------------------------------------------------------------
Financing Activities
Net increase in deposits 4,675 19,226
Net increase in repurchase agreements 3 3,699
FHLB (repayments) advances, net 7,963 (16,491)
Issuance of company obligated,
mandatorily redeemable securities 9,700 --
Common Stock repurchased (357) (575)
Proceeds from Common Stock reissued 27 44
Cash dividends paid (635) (547)
Proceeds from exercise of stock options 58 71
- -----------------------------------------------------------------------
Net cash provided by
financing activities 21,434 5,427
- -----------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (18,912) 9,730
Cash and federal funds sold,
beginning of period 84,790 26,194
- -----------------------------------------------------------------------
Cash and federal funds sold, end
of period $65,878 $35,924
=======================================================================
Cash paid during period
Interest to depositors $ 2,236 $2,822
Interest on borrowings 513 593
Income taxes paid -- 50
See accompanying notes to consolidated financial statements.
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 subsidiaries,
NewMil Bank (the "Bank") and NewMil Statutory Trust I ("Trust I").
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, 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 March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
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, 2002.
NOTE 2 - SECURITIES
Securities classified as available-for-sale (carried at fair value)
were as follows:
Gross Gross
Estimated unrealized unrealized Amortized
(in thousands) fair value gains losses cost
- ------------------------------------------------------------------------
March 31, 2003
U.S. Government Agency notes
After 1 but within 5 years $ 52,489 $ 2,106 $ -- $ 50,383
Corporate Bonds
Within 1 year 1,043 26 -- 1,017
After 1 but within 5 years 38,129 2,364 -- 35,765
Mortgage backed securities 71,944 3,871 -- 68,073
Collateralized mortgage
obligations 8,608 191 -- 8,417
- ------------------------------------------------------------------------
Total debt securities 172,213 8,558 -- 163,655
FHLB capital stock and other 3,853 1 -- 3,852
- ------------------------------------------------------------------------
Total securities
available-for-sale $176,066 $ 8,559 $ -- $167,507
========================================================================
Gross Gross
Estimated unrealized unrealized Amortized
(in thousands) fair value gains losses cost
- ------------------------------------------------------------------------
December 31, 2002
U.S. Government Agency notes
After 1 but within 5 years $ 47,672 $2,212 $ -- $ 45,460
Corporate Bonds
After 1 but within 5 years 39,175 2,391 -- 36,784
Mortgage backed securities 80,226 4,103 -- 76,123
Collateralized mortgage
obligations 3,643 116 -- 3,527
- ------------------------------------------------------------------------
Total debt securities 170,716 8,822 -- 161,894
FHLB capital stock and other 3,853 1 -- 3,852
- ------------------------------------------------------------------------
Total securities
available-for-sale $174,569 $8,823 $ -- $165,746
========================================================================
Securities classified as held-to-maturity (carried at amortized cost)
were as follows:
Gross Gross
Amortized unrealized unrealized Estimated
(in thousands) cost (a) gains losses fair value
- ------------------------------------------------------------------------
March 31, 2003
Municipal bonds
After 1 but within 5 years $ 250 $ 5 $ -- $ 255
After 5 but within 10 years 2,808 115 -- 2,923
After 10 years 7,716 105 -- 7,821
Mortgage backed securities 6,971 505 -- 7,476
Collateralized mortgage
obligations 3,621 57 -- 3,678
- ------------------------------------------------------------------------
Total securities
held-to-maturity $21,366 $ 787 $ -- $ 22,153
========================================================================
December 31, 2002
Municipal bonds
After 1 but within 5 years $ 250 $ 5 $ -- $ 255
After 10 years 10,527 212 -- 10,739
Mortgage backed securities 8,531 606 -- 9,137
Collateralized mortgage
obligations 3,784 148 -- 3,932
- ------------------------------------------------------------------------
Total securities
held-to-maturity $23,092 $971 $ -- $ 24,063
========================================================================
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
At March 31, 2003 securities with a carrying value and market value of
$6.2 million and $6.4 million, respectively, were pledged as collateral
against public funds and securities with a carrying value and market
value of $20.1 million and $20.1 million, respectively, were pledged as
collateral against repurchase agreements. Also, securities with a
carrying value and market value of $4.6 million and $4.9 million,
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:
March 31, December 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Real estate mortgages
1-to-4 family residential $240,760 $197,318
5-or-more family residential 9,172 9,759
Commercial 97,269 98,035
Land & land development 2,393 2,080
Home equity credit 28,486 28,562
Commercial & industrial 14,098 14,364
Installment & other 2,399 2,466
- -----------------------------------------------------------------------
Total loans, gross 394,577 352,584
Deferred loan origination fees
and purchase premium, net 216 (119)
Allowance for loan losses (5,249) (5,250)
- -----------------------------------------------------------------------
Total loans, net $389,544 $347,215
=======================================================================
Impaired loans
March 31, December 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------
With no valuation allowance $ 64 $ 471
With valuation allowance 569 479
- -----------------------------------------------------------------------
Total impaired loans $ 633 $ 950
- -----------------------------------------------------------------------
Valuation allowance $ 196 $ 139
NewMil's loans consist primarily of residential and commercial real
estate loans located principally in western Connecticut, NewMil's
service area. NewMil offers a broad range of loan and credit facilities
to borrowers in its service area, including residential mortgage loans,
commercial real estate loans, construction loans, working capital loans,
and a variety of consumer loans, including home equity lines of credit,
and installment and collateral loans. All residential and commercial
mortgage loans are collateralized by first or second mortgages on real
estate. The ability and willingness of borrowers to satisfy their loan
obligations is dependent in large part upon the status of the regional
economy and regional real estate market. Accordingly, the ultimate
collectability of a substantial portion of the NewMil's loan portfolio
and the recovery of a substantial portion of OREO is susceptible to
changes in market conditions.
Changes in the allowance for loan losses during the three month periods
ended March 31, are as follows:
March 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Balance, beginning of period $5,250 $5,502
Provision for losses -- --
Charge-offs (4) (22)
Recoveries 3 8
- -----------------------------------------------------------------------
Balance, end of period $5,249 $5,488
- -----------------------------------------------------------------------
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
March 31, December 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Non-accrual loans $ 436 $ 254
Accruing loans past due
90 days or more 1,002 1,281
Accruing troubled debt restructured loans -- --
- -----------------------------------------------------------------------
Total non-performing loans 1,438 1,535
Real estate acquired in settlement of loans -- --
- -----------------------------------------------------------------------
Total non-performing assets $1,438 $1,535
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
March 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Basic 4,230 4,382
Effect of dilutive stock options 220 215
- -----------------------------------------------------------------------
Diluted 4,450 4,597
- -----------------------------------------------------------------------
NOTE 6 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended
March 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Comprehensive income
Net income $1,827 $1,717
Net unrealized losses on
securities during period (172) (782)
- -----------------------------------------------------------------------
Comprehensive income $1,655 $ 935
- -----------------------------------------------------------------------
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 March 31, 2003
Net unrealized losses on securities
available-for-sale arising
during the period $(264) $ 90 $(174)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 4 (2) 2
- ------------------------------------------------------------------------
Net unrealized losses on
securities during period $(260) $ 88 $(172)
========================================================================
Three months ended March 31, 2002
Net unrealized losses on securities
available-for-sale arising
during the period $(1,194) $406 $(788)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 9 (3) 6
- ------------------------------------------------------------------------
Net unrealized losses on
securities during period $(1,185) $403 $(782)
========================================================================
NOTE 7 - INCOME TAXES
The components of the income tax provision are as follows:
Three months ended
March 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Current provision
Federal $902 $860
State -- --
- -----------------------------------------------------------------------
Total 902 860
- -----------------------------------------------------------------------
Deferred benefit
Federal (75) (49)
State -- --
- -----------------------------------------------------------------------
Total (75) (49)
- -----------------------------------------------------------------------
Income tax provision $827 $811
- -----------------------------------------------------------------------
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 three
month periods ended March 31, 2003 and 2002 are 31.2% and 32.1%,
respectively, and reflect the full impact of the Connecticut
legislation. NewMil does not expect to pay state income tax in the
foreseeable future unless there is a change in the State of Connecticut
corporate tax law.
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
March 31, 2003 are as follows:
NewMil Bank
- ----------------------------------------------------------------------
Leverage ratio 7.71% 6.19%
Tier I risk-based ratio 13.04 10.46xx
Total risk-based ratio 14.30 11.71xx
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.
NOTE 9 - ISSUANCE OF TRUST PREFERRED SECURITIES
During March 2003, NewMil formed a subsidiary, NewMil Statutory Trust I,
a trust formed under the laws of the state of Delaware, and issued $10
million of fixed/adjustable rate Trust Preferred Securities through a
pooled trust-preferred securities offering. FTN Financial Capital
Markets and Keefe Bruyette and Woods, Inc. acted as placement agents in
the pooled offering. NewMil owns all of the common securities of the
Trust and the Trust has no independent assets or operations, and exists
for the sole purpose of issuing trust preferred securities and investing
the proceeds in an equivalent amount of junior subordinated debentures
issued by NewMil. The junior subordinated debentures, which are the sole
assets of the trust, are unsecured obligations of NewMil and generally
are subordinate and junior in right of payment to all present and future
senior and subordinated indebtedness and certain other financial
obligations of NewMil.
The Trust Preferred Securities have an original term of 30 years and
bear a fixed coupon of 6.40% for the first five years, and thereafter,
a floating-rate coupon that will reset quarterly at three-month LIBOR
plus 3.15%. Interest on the securities is payable quarterly. NewMil may
redeem the trust-preferred securities, in whole or in part, on or after
March 26, 2008, or earlier under certain conditions. The subordinated
debentures bear the same terms and conditions as the trust preferred
securities. The company paid $300,000 in connection with the issuance
of the Trust Preferred Securities and this amount is being amortized
over the estimated life of the underlying securities. The net proceeds
qualify as Tier I capital for regulatory purposes.
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, 2002.
NewMil makes forward-looking statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations that are
subject to risks and uncertainties. These forward-looking statements
include: statements of goals, intentions, and expectations; estimates
of risks and future costs and benefits; assessments of probable loan
and lease losses and market risk; and statements of the ability to
achieve financial and other goals. These forward-looking statements
are subject to significant uncertainties because they are based
upon or are affected by management's estimates and projections of
future interest rates and other economic conditions; future laws
and regulations; and a varietyb of other matters which, by their
nature, are subject to significant uncertainties. Because of these
uncertainties, NewMil's actual future results may differ materially
from those indicated. In addition, NewMil's past results of
operations do not necessarily indicate its future results.
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 nineteen 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.
Application of Critical Accounting Policies
- -------------------------------------------
NewMil's consolidated financial statements are prepared in accordance
with US GAAP and follow general practices within the banking industry
in which it operates. Application of these principles requires management
to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements. These estimates, assumptions and
judgments are based on information available as of the date of the
financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and
judgments and as such have a greater possibility of producing results
that could be materially different than originally reported. Estimates,
assumptions and judgments are necessary when assets and liabilities are
required to be recorded at fair value, when a decline in the value of an
asset not carried at fair value warrants an impairment write-down or
valuation reserve to be established, or when an asset or liability needs
to be recorded contingent upon a future event.
NewMil's significant accounting policies are presented in the Notes to
Consolidated Financial Statements. These policies, along with the
disclosures presented in Notes to Consolidated Financial Statements and
in Management's Discussion and Analysis, provide information on how
significant assets are valued in the financial statements and how those
values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions
and estimates underlying those amounts, management has identified the
determination of the allowance for loan losses to be the accounting
area that requires the most subjective judgments, and as such could be
most subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of
probable credit losses in the loan portfolio. Determining the amount
of the allowance for loan losses is considered a critical accounting
estimate because it requires significant judgment and the use of
estimates related to the amount and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogeneous
loans based on historical loss experience, and consideration of current
economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest
asset type on the balance sheet. A discussion of the factors driving
changes in the amount of the allowance for loan losses is included in
the "Provision and Allowance For Loan Losses" section of Management's
Discussion and Analysis. For more information about the methodology
used in the determination of the allowance for loan losses, refer to
Note 1 to the Consolidated Financial Statements in our 2002 Form 10-K.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 2003 and 2002
Overview
- --------
NewMil earned net income of $1.8 million, or 41 cents per share
(diluted), for the quarter ended March 31, 2003 as compared with
$1.7 million, or 37 cents per share (diluted), for the quarter ended
March 31, 2002. The increase was due to a variety of factors, the
most important of which was an increase in average interest earning
assets of $45.6 million, offset in part by a decrease in the net
interest margin to 3.94% from 4.30% in 2002. The increase in earning
assets was due to internal growth. Non-interest expense decreased
$237,000, or 5.4%, for the first quarter of 2003, primarily due to
lower marketing, professional fees, and other operating expenses,
offset by increased compensation costs during the period. The return
on average shareholders' equity was 13.4% for the first quarter of 2003.
Analysis of net interest and dividend income
- --------------------------------------------
Net interest and dividend income decreased by $48,000, or 0.80%, for
the quarter ended March 31, 2003 as compared with the prior year
period. The slight decrease in net interest income resulted primarily
from a decrease in the net interest margin, offset by increased income
resulting from the growth in average earning assets. Average earning
assets increased $45.6 million, or 8.1%, over the prior year period.
Average total deposits increased $59.6 million, or 12.4%, over the prior
year period. The net interest margin decreased 36 basis points to 3.94%
from 4.30% over the period. The decline in the net interest margin was
due to declines in yields on earning assets, resulting from lower market
interest rates, off-set in part by a decline in the cost of
interest-bearing deposits, and the impact on asset/liability re-pricing
during 2003 as compared with 2002, and to changes in balance sheet mix
resulting from 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 March 31, Average Income/ Average
Balance Expense Yield/Rate
(dollars in thousands) 2003 2002 2003 2002 2003 2002
- -------------------------------------------------------------------------
Loans(a) $374,903 $338,929 $5,977 $6,256 6.38% 7.38%
Mortgage backed
securities (b) 78,201 118,056 1,223 1,825 6.26 6.18
Other securities (b)(c) 152,016 102,557 1,539 1,363 4.05 5.31
- ---------------------------------------------------------
Total earning assets 605,120 559,542 8,739 9,444 5.78 6.75
-------------
Other assets 54,747 45,711
- ------------------------------------------
Total assets $659,867 $605,253
- ------------------------------------------
NOW accounts $ 68,155 $ 62,644 50 153 0.29 0.98
Money market accounts 145,997 126,091 506 650 1.39 2.06
Savings & other 79,447 70,707 209 308 1.05 1.74
Certificates of deposit 204,700 183,038 1,466 1,718 2.87 3.75
- ---------------------------------------------------------
Total interest-
bearing deposits 498,299 442,480 2,231 2,829 1.79 2.56
Borrowings 56,616 65,684 547 606 3.87 3.69
- ---------------------------------------------------------
Total interest-
bearing funds 554,915 508,164 2,778 3,435 2.00 2.70
Demand deposits 42,582 38,836
Other liabilities 8,005 7,014
Shareholders' equity 54,365 51,239
- ------------------------------------------
Total liabilities &
shareholders' equity $659,867 $605,253
- ------------------------------------------
Net interest income $5,961 $6,009
--------------
Spread on interest-bearing funds 3.78 4.05
Net interest margin(d) 3.94 4.30
(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 March 31, 2003 versus 2002
(in thousands) Change in interest due to
- -----------------------------------------------------------------------
Volume Rate Volume/rate Net
- -----------------------------------------------------------------------
Interest-earning assets:
Loans $ 664 $ (853) $ (90) $ (279)
Mortgage backed securities (616) 23 (8) (601)
Other securities 658 (326) (157) 175
- -----------------------------------------------------------------------
Total 706 (1,156) (255) (705)
- -----------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 357 (848) (107) (598)
Borrowings (84) 29 (4) (59)
- -----------------------------------------------------------------------
Total 273 (819) (111) (657)
- -----------------------------------------------------------------------
Net change to interest income $ 433 $ (337) $ (144) $ (48)
=======================================================================
Interest income
- ---------------
Total interest and dividend income decreased $705,000 or 7.5%, for
the quarter ended March 31, 2003 as compared with the same period a
year ago. Loan income decreased $279,000, or 4.5%, primarily as a
result of a lower average yield. Average loans increased
$36.0 million, or 10.6%, due to increased loan originations and loan
purchases during the period, offset in-part by higher loan repayments.
The decrease in the average loan yield, down 100 basis points, was
caused by lower interest rates in 2003 and their effect on loan
re-pricing and loan re-financing activity, and to a change in portfolio
mix resulting from growth in residential mortgage loans. Towards the end
of 2002 and through the first quarter of 2003 the Bank increased its
originations and purchases of residential mortgage loans to offset the
effect of increased repayments in its residential mortgage loan and
mortgage backed securities portfolios. Investment income decreased
$426,000, or 13.4%, as a result of lower average yields, offset in-part
by slightly higher average volume over the prior year period. The slight
increase in yield on mortgage-backed securities was caused by prepayment
acceleration and faster accretion of purchase discounts. Average
securities increased $9.6 million, or 4.4%. The decrease in average
investment yield, down 98 basis points to 4.80%, was due to lower market
rates on new securities added during 2002 and 2003, increased pre-payment
speeds on mortgage backed securities and to changes in portfolio mix.
Interest expense
- ----------------
Interest expense for the quarter ended March 31, 2003 decreased $657,000,
or 19.1%, as compared with the prior year period as a result of a
significant decline in the average cost of funds, and lower average
borrowings, offset in part by deposit growth. Deposit expense decreased
$598,000, or 21.1%, as a result of lower deposit rates, offset by deposit
growth, and changes in deposit mix. Average interest-bearing deposits
increased $55.8 million, or 12.6%. The average cost of interest-bearing
deposits decreased 77 basis points to 1.79%. Interest expense on
borrowings decreased $59,000, or 9.7%, as a result of lower average
borrowings, down $9.1 million, offset in-part by a higher borrowing cost,
up 18 basis points to 3.87%.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil made no provision for loan losses during the quarters ending
March 31, 2003 and 2002. During the past several years the Bank has
experienced an improvement in loan quality and a decline in loan losses.
These factors, offset by modest loan portfolio growth, have enabled the
Bank to lower its allowance for loan losses as a percentage of total loans,
and resulted in no provision for loan losses for the period. The following
table sets forth key ratios for the periods presented.
March 31, December 31, March 31,
(in thousands) 2003 2002 2002
- ------------------------------------------------------------------------
Ratio of allowance for loan losses:
to non-performing loans 365.02% 342.02% 396.53%
to total gross loans 1.33 1.49 1.63
Ratio of non-performing loans
to total loans 0.36 0.44 0.41
Ratio of past-due loans
to total loans 0.77 0.99 0.88
During the three month period ended March 31, 2003 the ratio of the
allowance for loan losses as a percentage to total gross loans declined
to 1.33% from 1.49% at December 31, 2002 and 1.63% at March 31, 2002.
For the period the ratio of non-performing loans to total loans
continued to remain historically low, at 0.36% March 31, 2003, compared
with 0.44% at December 31, 2002 and 0.41% at March 31, 2002. The ratio
of past due loans (including non-performing loans) to total loans
declined to 0.77% at March 31, 2003 compared with 0.99% at December 31,
2002 and 0.88% at March 31, 2002. During the three month period ended
March 31, 2003 non-performing loans declined $97,000, or 6.3%, while
gross loans increased by $42.3 million, or 12.0%. For additional
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, and
therefore management takes a relatively long view of loan loss asset
quality measures. Management must make estimates using assumptions and
information that are 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 March 31, 2003.
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.
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 segregating the portfolio into various risk
rating and product 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 loan's risk rating and
product category, as well as present and prospective economic
conditions, which have or may adversely affect the financial capacity
and/or collateral values supporting the loan.
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 last 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.
Non-interest income
- -------------------
The following table details the principal categories of
non-interest income.
March 31,
(in thousands) 2003 2002 Change
- -----------------------------------------------------------------------
Service charges on deposit accounts $547 $558 $ (11) (2.0)%
Gains on sales of mortgage loans, net 72 161 (89) (55.3)
Loan servicing 19 18 1 5.6
Increase in cash surrender value of bank-owned
life insurance 94 86 8 9.3
Other 93 65 28 43.1
- -----------------------------------------------------------------------
Total non-interest income $825 $888 $ (63) (7.1)%
The decrease in non-interest income for the quarter ended March 31, 2003
as compared to the prior year period resulted primarily from a decline
in the volume of sales of residential mortgages, because the Bank decided
to retain more loans for portfolio. During the 2003 period the Bank
originated and sold $4.3 million in residential loans versus $7.6 million
during the 2002 period. 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. Also negatively impacting the
period was a slight decline in retail banking service fees. Benefiting
somewhat during the period were a slight increase in cash surrender value
of bank-owned life insurance and other increases in commissions earned.
Operating expenses
- ------------------
The following table details the principal categories of
operating expenses.
March 31,
(in thousands) 2003 2002 Change
- ---------------------------------------------------------------------
Salaries and benefits $2,345 $2,259 $ 86 3.8%
Occupancy 399 369 30 8.1
Equipment 318 284 34 12.0
Professional, collection
and OREO 173 249 (76) (30.5)
Postage and
telecommunications 133 146 (13) (8.9)
Printing and office supplies 98 130 (32) (24.5)
Marketing 45 158 (113) (71.5)
Service bureau 107 94 13 13.8
Amortization of intangibles 61 72 (11) (15.3)
Other 453 608 (155) (25.5)
- ---------------------------------------------------------------------
Total operating expenses $4,132 $4,369 $ (237) (5.4)%
=====================================================================
The increase in compensation expense for the quarter ended March 31,
2003 as compared with the prior year period was due primarily to higher
mortgage commissions paid and related payroll taxes, and pension expense
(no pension income during the 2003 period) and, to year-over-year salary
increases, offset somewhat by lower bonuses accrued and by higher salary
expenses deferred related to FASB 91. The increase in occupancy expense
results primarily from higher building maintenance, cleaning and
utilities costs of our facilities in addition to the commencement of a
new branch facility located in Southbury, Connecticut. The increase in
equipment expense is primarily due to higher depreciation and maintenance
expense on our equipment. The decrease in postage and telecommunications
costs was due to lower postage costs associated with year-end tax
reporting, as a result of software improvements, as well as fewer direct
mailing campaigns and statement inserts during the 2003 period. The
decrease in printing and office supplies reflects a reduction in forms
usage by the branch network, offset somewhat by an increase in office
supplies primarily to outfit the new Southbury branch facility. The
decline in marketing costs resulted from decreased advertising activities
during the current quarter. The decrease in other operating expense for
the current period results from cost control management.
Income taxes
- ------------
Net income for the quarter included an income tax provision of $827,000
representing a 31.2% effective rate, as compared with a provision of
$811,000 a year ago, representing a 32.1% effective rate. The effective
tax rate was less than the 34% federal statutory rate due to an increase
in tax exempt income and other related matters.
FINANCIAL CONDITION
Overview
- --------
During the three month period ended March 31, 2003 total assets grew
$23.6 million, or 3.6%, to $685.2 million. This increase was due to
deposit growth of $4.7 million, or 0.9%, the issuance of $10 million in
Trust Preferred Securities and a net increase of $8.0 million, or 17.7%,
in Federal Home Loan Bank advances. During the period net loans
increased $42.3 million, or 12.2%, while securities decreased $229,000,
and overnight federal funds sold decreased $19.8 million. Non-performing
assets declined to $1.4 million, or 0.21% of total assets at March 31,
2003.
Securities
- ----------
During the period ended March 31, 2003 securities decreased $229,000,
to $197.4 million and overnight federal funds sold decreased $19.8
million to $43.7 million. Securities purchases for the period included
$5.0 million of fixed rate Agency notes, $5.1 million of fixed rate
mortgage-backed securities and $5.0 million of fixed rate collateralized
mortgage obligations.
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 March 31, 2003, the portfolio had a projected
weighted average duration and life of 2.0 years and 2.3 years,
respectively, based on median projected prepayment speeds at current
interest rates. At March 31, 2003, securities totaling $176.1 million,
or 89.2%, were classified as available-for-sale and securities totaling
$21.4 million, or 10.8%, were classified as held-to-maturity.
Loans
- -----
During the period ended March 31, 2003 net loans increased $42.3
million, or 12.2%. Loan originations, advances and loan purchases
totaled $87.5 million, while loan repayments were $45.2 million.
Towards the end of 2002 and through the first quarter of 2003 the Bank
increased its originations and purchases of residential mortgage loans
to offset the effect of increased repayments in its residential mortgage
loan and mortgage backed securities portfolios. In addition, NewMil
originated and sold in the secondary market $4.3 million of residential
mortgage loans during the period. Major loan classifications are
as follows:
March 31, December 31,
(in thousands) 2003 2002
- ---------------------------------------------------------------------
Real Estate Mortgages:
Residential
1-to-4 family $240,760 $197,318
5-or-more family 9,172 9,759
Commercial 97,269 98,035
Land & land development 2,393 2,080
Home equity credit 28,486 28,562
- ---------------------------------------------------------------------
Total mortgage loans 378,080 335,754
Commercial and industrial 14,098 14,364
Installment and other 2,399 2,466
- ---------------------------------------------------------------------
Total loans, gross 394,577 352,584
Deferred loan origination
fees and purchase
premium, net 216 (119)
Allowance for loan losses (5,249) (5,250)
- ---------------------------------------------------------------------
Total loans, net $389,544 $347,215
=====================================================================
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 and earn gains from sales of such
loans. 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:
March 31, December 31,
(in thousands) 2003 2002
- --------------------------------------------------------------------
Non-accruing loans $ 436 $ 254
Accruing loans past due
90 days or more 1,002 1,281
Accruing restructured loans - -
- --------------------------------------------------------------------
Total non-performing loans 1,438 1,535
OREO, net - -
- --------------------------------------------------------------------
Total non-performing assets $1,438 $1,535
====================================================================
Percent of total assets 0.21% 0.23%
During the three-month period ended March 31, 2003 non-performing
assets declined $97,000 to $1.4 million. Non-performing assets
continue to remain historically low at only 0.21% of total assets at
March 31, 2003, compared with 0.23% at December 31, 2002. The low
level of non-performing assets reflects NewMil's rigorous ongoing
credit management process and prudent credit policy.
In addition to non-performing assets, at March 31, 2003 NewMil had
$1.5 million 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.
Deposits and Borrowings
- -----------------------
During the period deposits grew $4.7 million, or 0.9%, to $553.5 million
and Federal Home Loan Bank advances increased $8.0 million, or 17.7%,
as the Bank borrowed $10 million to fund a portion of its residential
mortgage loan growth.
During March 2003, NewMil formed a subsidiary, NewMil Statutory Trust I,
a trust formed under the laws of the state of Delaware, and issued
$10 million of fixed/adjustable rate Trust Preferred Securities through a
pooled trust-preferred securities offering. FTN Financial Capital Markets
and Keefe Bruyette and Woods, Inc. acted as placement agents in the pooled
offering. NewMil owns all of the common securities of the Trust and the
Trust has no independent assets or operations, and exists for the sole
purpose of issuing trust preferred securities and investing the proceeds
in an equivalent amount of junior subordinated debentures issued by
NewMil. The junior subordinated debentures, which are the sole assets of
the trust, are unsecured obligations of NewMil and generally are
subordinate and junior in right of payment to all present and future
senior and subordinated indebtedness and certain other financial
obligations of NewMil.
The Trust Preferred Securities have an original term of 30 years and
bear a fixed coupon of 6.40% for the first five years, and thereafter,
a floating-rate coupon that will reset quarterly at three-month LIBOR
plus 3.15%. Interest on the securities is payable quarterly. NewMil
may redeem the trust-preferred securities, in whole or in part, on or
after March 26, 2008, or earlier under certain conditions. The
subordinated debentures bear the same terms and conditions as the trust
preferred securities. The company paid $300,000 in connection with the
issuance of the Trust Preferred Securities and this amount is being
amortized over the estimated life of the underlying securities. The net
proceeds qualify as Tier I capital for regulatory purposes.
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 three-month period ended March 31, 2003
provided net cash of $2.6 million. Investing activities utilized net
cash of $43.0 million, principally for securities purchases and net
loan advances, offset in part by security repayments and maturities.
Financing activities provided net cash of $21.4 million, principally
from $9.7 million from the issuance of Trust Preferred Securities,
$8.0 million from net FHLB advances and $4.7 million from an increase
in deposits, offset by cash dividends paid and treasury stock purchases.
Operating activities for the three-month period ended March 31, 2002
utilized net cash of $416,000. Investing activities provided net cash
of $4,719,000, principally from securities repayments and maturities and
net loan repayments, offset, in part, by securities purchases. Financing
activities provided net cash of $5,427,000, principally from increases in
deposits and repurchase agreements, offset in part by FHLB repayments,
cash dividends paid and treasury stock purchases.
At March 31, 2003, 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
$118 million, to net deposits and short term unsecured liabilities, was
61.2%, well in excess of NewMil's minimum guideline of 15%.
At March 31, 2003, NewMil had outstanding commitments to fund new loan
originations of $49.3 million, construction mortgage commitments of
$9.1 million and unused lines of credit of $39.0 million. These
commitments will be met in the normal course of business. NewMil
believes that its liquidity sources will continue to provide funding
sufficient to support operating activities, loan originations and
commitments, and deposit withdrawals.
CAPITAL RESOURCES
During the period ended March 31, 2003 shareholders' equity increased
$767,000 to $55.0 million and book value per share increased $0.24 to
$13.01. Positively impacting shareholders' equity was net income of
$1.8 million, or $0.41 per share (diluted), common stock issued of
$27,000, stock option exercise proceeds of $58,000 and a tax benefit
from the exercise of non-qualified stock options of $19,000. Offsetting
these increases in shareholder's equity were treasury stock purchases
amounting to $357,000, dividend payments of $635,000 and other
comprehensive (loss) income of $172,000 (a net decrease in the unrealized
gains (losses) on securities available-for-sale, net of taxes).
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 March 31, 2003 NewMil's tier 1 leverage capital ratio
was 7.71% and its tier 1 and total risk-based capital ratios were 13.04%
and 14.30%, respectively. At March 31, 2003 the Bank's tier 1 leverage
capital ratio was 6.19% and its tier 1 and total risk-based capital
ratios were 10.46% and 11.71%, 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
whichmaintains 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.
During March 2003, NewMil raised $9.7 million from the issuance of
$10 million of Trust Preferred Securities, net of issuance costs.
NewMil expects to utilize the net proceeds from the offering for
general corporate purposes, including providing capital to its
subsidiary, NewMil Bank, and to repurchase currently issued and
outstanding common stock. The net proceeds qualify as Tier I Core
capital for regulatory purposes.
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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
NewMil maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in NewMil's reports
filed with, or furnished to, the SEC, pursuant to the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that
such information is accumulated and communicated to NewMil's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure
based on the definition of "disclosure controls and procedures" in
Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934.
Within 90 days prior to the date of this report, NewMil carried out
an evaluation, under the supervision and with the participation of
the NewMil's management, including NewMil's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of the NewMil's disclosure controls and procedures. Based
on the foregoing evaluation, NewMil's Chief Executive Officer and
Chief Financial Officer concluded that the NewMil's disclosure
controls and procedures were effective.
Changes in Internal Controls
- ----------------------------
There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent
to the date we carried out our evaluation.
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
The annual shareholder's meeting was held on April 30, 2003. The
following matters were considered and voted on, as certified by
the election officer at the annual meeting:
Votes Votes Votes
For Against Withheld
- ---------------------------------------------------------------------
Director Election
Herbert E. Bullock, for 3 year term 3,350,592 - -
Director Election
Kevin L. Dumas, for 3 year term 3,350,657 - -
Director Election
John J. Otto, for 3 year term 3,350,665 - -
Director Election
Francis J. Wiatr, for 3 year term 3,350,465 - -
Ratification of PricewaterhouseCoopers, LLP
As auditors 3,561,032 8,571 9,255
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of earnings per share.
99.2 Chief Executive Officer Certification Pursuant
to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Chief Financial Officer Certification Pursuant
to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.4 Chief Executive Officer Certification Pursuant
to 17 CFR 240.13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.5 Chief Financial Officer Certification Pursuant to
17 CFR 240.13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K.
* A current report of Form 8-K date March 26, 2003
attaching the press release issued on March 26, 2003
announcing the company has raised $10 million with the
issuance of trust preferred securities by a newly
established affiliate, NewMil Statutory Trust I.
* Current Report on Form 8-K, dated April 16, 2002,
announcing earnings for the quarter ended March 31, 2002
and a new share repurchase program.
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.
May 9, 2003 By /s/ Francis J. Wiatr
--------------------------------
Francis J. Wiatr,
Chairman, President and CEO
May 9, 2003 By /s/ B. Ian McMahon
--------------------------------
B. Ian McMahon,
Chief Financial Officer