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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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) 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [] No [X]
The number of shares of Common Stock outstanding as of June 30, 2003,
is 4,093,596.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002
Consolidated Statements of Income
for the three month and six month periods
ended June 30, 2003 and June 30, 2002
Consolidated Statements of Changes in
Shareholders' Equity for the six month
periods ended June 30, 2003 and June 30, 2002
Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 2003 and June 30, 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)
June 30, December 31,
(dollars in thousands) 2003 2002
-------- ------------
ASSETS
Cash and due from bank $ 25,894 $ 21,349
Federal funds sold 22,281 63,441
--------- ---------
Total cash and cash equivalents 48,175 84,790
Securities
Available-for-sale at market 161,509 174,569
Held-to-maturity at amortized cost
(fair value: $19,708 and $24,063) 18,873 23,092
Loans (net of allowance for loan
losses: $5,245 and $5,250) 420,248 347,215
Bank premises and equipment, net 7,469 7,076
Accrued interest income 3,594 3,545
Intangible assets (net of accumulated
amortization: $1,146 and $1,024) 8,822 8,943
Bank-owned life insurance 10,224 10,000
Other assets 2,119 2,365
-------- --------
Total Assets $681,033 $661,595
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 45,451 $ 46,750
NOW accounts 82,187 71,586
Money market 151,269 144,288
Savings and other 86,159 79,811
Certificates of deposit 201,895 206,371
Total deposits 566,961 548,806
Federal Home Loan Bank advances 40,508 45,077
Company obligated, mandatorily
redeemable securities 9,716 -
Repurchase agreements 7,609 7,392
Accrued interest and other liabilities 4,718 6,084
-------- --------
Total Liabilities 629,512 607,359
-------- --------
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 42,180 42,297
Retained earnings 25,191 22,793
Accumulated other comprehensive
income, net 4,534 5,779
Treasury stock, at cost: 1,896,542 and
1,755,447 shares (23,379) (19,628)
------- -------
Total Shareholders' Equity 51,521 54,236
------- -------
Total Liabilities and
Shareholders' Equity $681,033 $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 Six months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income
Interest and fees on loans $ 6,148 $ 5,947 $12,125 $12,203
Interest and dividends on securities 2,502 3,139 5,152 6,283
Interest on federal funds sold 106 86 218 130
------- ------- ------- -------
Total interest and dividend income 8,756 9,172 17,495 18,616
------- ------- ------- -------
Interest expense
Deposits 2,101 2,874 4,332 5,703
Borrowed funds 706 582 1,253 1,188
------- ------- ------- -------
Total interest expense 2,807 3,456 5,585 6,891
------- ------- ------- -------
Net interest and dividend income 5,949 5,716 11,910 11,725
Provision for loan losses - - - -
------- ------- ------- -------
Net interest and dividend income
after provision for loan losses 5,949 5,716 11,910 11,725
------- ------ ------- -------
Non-interest income
Service charges on deposit accounts 659 589 1,206 1,147
Gains on sales of mortgage loans, net 42 57 114 218
Loan servicing fees 17 17 36 35
Other 192 213 379 364
------- ------- ------- -------
Total non-interest income 910 876 1,735 1,764
------- ------- ------- -------
Non-interest expense
Salaries and benefits 2,355 2,163 4,700 4,422
Occupancy 387 341 786 710
Equipment 354 284 672 568
Marketing 61 134 106 292
Postage and telecommunications 142 127 275 273
Printing and office supplies 87 95 185 225
Professional, collections and OREO 217 182 390 431
Service bureau 93 90 200 184
Amortization of intangibles 61 72 122 144
Other 453 494 906 1,102
------- ------- ------- -------
Total non-interest expense 4,210 3,982 8,342 8,351
------- ------- ------- -------
Income before income taxes 2,649 2,610 5,303 5,138
Income tax provision 828 840 1,655 1,651
------- ------- ------- -------
Net income $ 1,821 $ 1,770 $ 3,648 $ 3,487
======= ======= ======= =======
Per common share
Diluted earnings $0.42 $0.38 $0.83 $0.75
Basic earnings 0.45 0.40 0.88 0.80
Cash dividends 0.15 0.125 0.30 0.250
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 - - - 3,487
Net unrealized gain on
securities available-for-sale,
net of taxes - - - -
Total comprehensive income
Cash dividends paid - - - (1,096)
Exercise of stock options - - (284) -
Common stock issued - - 3 -
Tax benefit from exercise of
non-qualified stock options - - 147 -
Common stock repurchased - - - -
--------- ------ ------- -------
Balances at
June 30, 2002 5,990,138 $2,995 $42,434 $20,496
========= ====== ======= =======
Balances at
December 31, 2002 5,990,138 $2,995 $42,297 $22,793
Net income for period - - - 3,648
Net unrealized loss on
securities available-for-sale,
net of taxes - - - -
Total comprehensive income
Cash dividends paid - - - (1,250)
Exercise of stock options - - (147) -
Common stock issued - - 11 -
Tax benefit from exercise of
non-qualified stock options - - 19 -
Common stock repurchased - - - -
--------- ------ ------- -------
Balances at
June 30, 2003 5,990,138 $2,995 $42,180 $25,191
========= ====== ======= =======
See accompanying notes to consolidated financial statements.
TABLE CONTINUED
Accumulated
other Total
Treasury comprehensive shareholders'
(dollars in thousands) stock income equity
-------- ------------- -------------
Balances at
December 31, 2001 $(15,995) $2,921 $50,594
Net income for period - - 3,487
Net unrealized gain on
securities available-for-sale,
net of taxes - 1,730 1,730
Total comprehensive income 5,217
Cash dividends paid - - (1,096)
Exercise of stock options 407 - 123
Common stock issued 41 - 44
Tax benefit from exercise of
non-qualified stock options - - 147
Common stock repurchased (1,742) - (1,742)
--------- ------ -------
Balances at
June 30, 2002 $(17,289) $4,651 $53,287
========= ====== =======
Balances at
December 31, 2002 $(19,628) $5,779 $54,236
Net income for period - - 3,648
Net unrealized loss on
securities available-for-sale,
net of taxes - (1,245) (1,245)
Total comprehensive income 2,403
Cash dividends paid - - (1,250)
Exercise of stock options 466 - 319
Common stock issued 16 - 27
Tax benefit from exercise of
non-qualified stock options - - 19
Common stock repurchased (4,233) - (4,233)
--------- ------ -------
Balances at
June 30, 2003 $(23,379) $4,534 $51,521
========= ====== =======
See accompanying notes to consolidated financial statements.
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30,
(unaudited, in thousands) 2003 2002
---- ----
Operating Activities
Net income $3,648 $3,487
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses - -
Provision for depreciation and amortization 464 407
Amortization of intangible assets 122 144
Amortization of issuance cost on Company
obligated, mandatorily redeemable securities 16 -
Amortization and accretion of securities
premiums and (discounts), net 198 437
Gains on sales of mortgage loans, net (114) (218)
Mortgage loans originated for sale (7,052) (14,261)
Proceeds from sales of mortgage loans 7,166 14,479
Tax benefit from exercise of non-qualified
stock options 19 147
Deferred income tax (benefit) provision (148) (96)
Increase in BOLI cash surrender value (188) (4,060)
(Increase) decrease in accrued interest income (59) (157)
(Decrease) increase in other liabilities (574) 2,315
Decrease (increase) in other assets, net 217 (75)
Net cash provided by operating activities 3,715 2,549
Investing Activities
Purchases of securities available-for-sale (10,011) (20,270)
Purchases of mortgage backed securities
available-for-sale (5,057) (15,211)
Proceeds from maturities and principal
repayments of securities 1,427 4,054
Principal collected on mortgage-backed
securities 28,835 18,096
Loan advances, net (73,033) (1,427)
Purchases of Bank premises and
equipment, net (857) (448)
Net cash used by investing activities (58,696) (15,206)
Financing Activities
Net increase in deposits 18,155 55,309
Net increase in repurchase agreements 217 797
FHLB (repayments) advances, net (4,569) (18,450)
Issuance of company obligated, mandatorily
redeemable securities 9,700 -
Common Stock repurchased (4,233) (1,742)
Proceeds from Common Stock reissued 27 44
Cash dividends paid (1,250) (1,096)
Proceeds from exercise of stock options 319 123
Net cash provided by financing activities 18,366 34,985
(Decrease) increase in cash and cash
equivalents (36,615) 22,328
Cash and federal funds sold, beginning
of period 84,790 26,194
Cash and federal funds sold, end of period $48,175 $48,522
Cash paid during period
Interest to depositors $4,345 $5,690
Interest on borrowings 1,264 1,197
Income taxes paid 1,735 1,650
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 June 30, 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
---------- ---------- ---------- ---------
June 30, 2003
U.S. Government
Agency notes
Within 1 year $ 10,350 $ 208 $ - $ 10,142
After 1 but within
5 years 41,936 1,765 - 40,171
Corporate Bonds
Within 1 year 17,383 598 - 16,785
After 1 but within
5 years 21,628 1,634 - 19,994
Mortgage backed
securities 57,959 2,605 - 55,354
Collateralized
mortgage
obligations 8,400 116 - 8,284
-------- ------ ------- --------
Total debt
securities 157,656 6,926 - 150,730
FHLB capital
stock and other 3,853 1 - 3,852
-------- ------ ------- --------
Total securities
available-for-sale $161,509 $6,927 $ - $154,582
======== ====== ======= ========
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
--------- --------- ---------- ----------
June 30, 2003
Municipal bonds
After 1 but within 5 years $ 250 $ 5 $ - $ 255
After 5 but within 10 years 3,082 168 - 3,250
After 10 years 6,735 207 - 6,942
Mortgage backed securities 5,540 371 - 5,911
Collateralized mortgage
obligations 3,266 84 - 3,350
------- ------ ------ -------
Total securities
held-to-maturity $18,873 $835 $ - $19,708
======= ====== ====== =======
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 June 30, 2003 securities with a carrying value and market value of
$5.5 million and $5.8 million, respectively, were pledged as
collateral against public funds and securities with a carrying value
and market value of $18.8 million and $18.8 million, respectively,
were pledged as collateral against repurchase agreements. Also,
securities with a carrying value and market value of $3.6 million
and $3.9 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:
June 30, December 31,
(in thousands) 2003 2002
---- ----
Real estate mortgages
1-to-4 family residential $266,722 $ 197,318
5-or-more family residential 9,126 9,759
Commercial 101,783 98,035
Land & land development 1,862 2,080
Home equity credit 28,255 28,562
Commercial & industrial 15,118 14,364
Installment & other 2,471 2,466
-------- --------
Total loans, gross 425,337 352,584
Deferred loan origination fees,
cost and purchase premium, net 156 (119)
Allowance for loan losses (5,245) (5,250)
-------- --------
Total loans, net $420,248 $347,215
======== ========
Impaired loans
June 30, December 31,
(in thousands) 2003 2002
---- ----
With no valuation allowance $ 294 $ 471
With valuation allowance 379 479
----- -----
Total impaired loans $ 673 $ 950
----- -----
Valuation allowance $ 144 $ 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 six
month periods ended June 30, are as follows:
June 30,
(in thousands) 2003 2002
---- ----
Balance, beginning of period $5,250 $5,502
Provision for losses - -
Charge-offs (8) (176)
Recoveries 3 181
------ ------
Balance, end of period $5,245 $5,507
====== ======
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
June 30, December 31,
(in thousands) 2003 2002
---- ----
Non-accrual loans $ 445 $ 254
Accruing loans past due
90 days or more 894 1,281
Accruing troubled debt
restructured loans - -
------ ------
Total non-performing loans 1,339 1,535
Real estate acquired
in settlement of loans - -
------ ------
Total non-performing assets $1,339 $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 Six months ended
June 30, June 30,
(in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Basic 4,092 4,373 4,161 4,378
Effect of dilutive
stock options 219 248 212 251
----- ----- ----- -----
Diluted 4,311 4,621 4,373 4,629
===== ===== ===== =====
NOTE 6 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Net income $1,821 $1,770 $3,648 $3,487
Net unrealized
(losses) gains on
securities during
period (1,073) 2,512 (1,245) 1,730
------ ------ ------ ------
Comprehensive income $ 748 $4,282 $2,403 $5,217
====== ====== ====== ======
The components of other comprehensive income,
and related tax effects are as follows:
(in thousands) Before Tax Net of
tax (expense) tax
amount benefit amount
------ ------- ------
Three months ended June 30, 2003
Net unrealized losses on securities
available-for-sale arising
during the period $(1,632) $ 555 $(1,077)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 6 (2) 4
------- ------- -------
Net unrealized losses on
securities during period $(1,626) $ 553 $(1,073)
======= ======= =======
Three months ended June 30, 2002
Net unrealized gains on securities
available-for-sale arising
during the period $ 3,801 $(1,292) $ 2,509
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 5 (2) 3
------- ------- -------
Net unrealized gains on
securities during period $ 3,806 $(1,294) $ 2,512
======= ======= =======
Six months ended June 30, 2003
Net unrealized losses on securities
available-for-sale arising
during the period $(1,896) $ 645 $(1,251)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 10 (4) 6
------- ------- -------
Net unrealized losses on
securities during period $(1,886) $ 641 $(1,245)
======= ======= =======
Six months ended June 30, 2002
Net unrealized gains on securities
available-for-sale arising
during the period $ 2,608 $ (887) $ 1,721
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 13 (4) 9
------- ------- -------
Net unrealized gains on
securities during period $ 2,621 $ (891) $ 1,730
======= ======= =======
NOTE 7 - INCOME TAXES
The components of the income tax provision are as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Current provision
Federal $901 $888 $1,803 $1,747
State - - - -
---- ---- ------ ------
Total 901 888 1,803 1,747
---- ---- ------ ------
Deferred benefit
Federal (73) (48) (148) (96)
State - - - -
---- ---- ------ ------
Total (73) (48) (148) (96)
---- ---- ------ ------
Income tax provision $828 $840 $1,655 $1,651
==== ==== ====== ======
Connecticut tax legislation permits banks to shelter
certain mortgage income from the Connecticut corporation
business tax through the use of a special purpose entity
called a passive investment company ("PIC"). In
accordance with this legislation, in 1999 NewMil formed
a PIC, NewMil Mortgage Company. NewMil's effective tax
rates for the six month periods ended June 30, 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 June 30, 2003 are
as follows:
NewMil Bank
------ ----
Leverage ratio 7.13% 6.31%
Tier I risk-based ratio 12.11 10.71
Total risk-based ratio 13.36 11.97
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.
NOTE 10 - STOCK BASED COMPENSATION
Newmil has stock-option plans which are described
more fully in Note 13 (Stock Options) to Financial
Statements in the Company's 2002 Form 10-K. As
permitted by Financial Accounting Standards Board
(FASB) Statement No. 123 (FAS 123), Accounting for
Stock-Based Compensation, the Company uses the
intrinsic value method of Accounting Principles
Board Opinion 25, Accounting for Stock Issued to
Employees, to account for its stock-based employee
compensation plans. As required by FASB Statement
No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure, an amendment to FASB
Statement 123, pro forma net income and earnings
per common share information is provided, as if
the Company accounted for its employee stock option
plans under the fair value method of FAS 123. The
fair value of each option grant was estimated on
the date of grant using the Roll-Geske Model for
pricing American call options with dividends.
Three months ended Six months ended
June 30, June 30,
(in thousands) 2003 2002 2003 2002
---- ---- ---- ----
As reported
Net income $1,821 $1,770 $3,648 $3,487
Earnings per
share, diluted 0.42 0.38 0.83 0.75
Earnings per
share, basic 0.45 0.40 0.88 0.80
Pro forma
Net income 1,821 1,710 3,526 3,427
Earnings per
share, diluted 0.42 0.37 0.81 0.74
Earnings per
share, basic 0.45 0.39 0.85 0.78
Stock-based employee compensation
cost, net of related taxes, included
in net income
As reported - - - -
Pro forma - 60 122 60
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
variety 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 the 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 June 30, 2003 and 2002
Overview
- --------
NewMil earned net income of $1.82 million, or 42
cents per share (diluted), for the quarter ended
June 30, 2003 as compared with $1.77 million, or
38 cents per share (diluted), for the quarter
ended June 30, 2002. The increase was achieved
through a variety of factors, the most important
of which was an increase in average earning assets
of $47 million, partially offset by a 15 basis point
decrease in the net interest margin to 3.81% from
3.96% in 2002. The increase in earning assets
was due to internal growth. Also contributing
to the increase was fee income, at $910,000
versus $876,000 for the prior year quarter and
a lower effective tax rate for the current period.
Credit quality remains strong as evidenced by
the low level of nonperforming assets, which only
represent 20 basis points of total assets at
June 30, 2003. The return on average shareholders'
equity was 14% for the second quarter.
Analysis of net interest and dividend income
- --------------------------------------------
Net interest and dividend income increased $233,000,
or 4.1%, for the quarter ended June 30, 2003 as
compared with the prior year period. The increase
in net interest income resulted primarily from
the growth in average earning assets offset by
a decrease in the net interest margin. Average
earning assets increased $46.7 million, or 8.1%,
over the prior year period. Average total deposits
increased $42.8 million, or 8.4%, over the prior
year period. The net interest margin decreased
15 basis points to 3.81% from 3.96% 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 June 30, Average Income/
Balance Expense
(dollars in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Loans (a) $405,313 $341,702 $6,148 $5,947
Mortgage backed securities (b) 68,480 116,611 1,075 1,773
Other securities (b)(c) 150,276 119,105 1,533 1,452
-------- -------- ------ ------
Total earning assets 624,069 577,418 8,756 9,172
------ ------
Other assets 56,532 49,825
-------- --------
Total assets $680,601 $627,243
======== ========
NOW accounts $ 76,937 $ 70,542 55 173
Money market accounts 149,320 134,855 492 739
Savings & other 84,870 74,850 198 327
Certificates of deposit 202,096 189,194 1,356 1,635
-------- -------- ------ ------
Total interest-bearing
deposits 513,223 469,441 2,101 2,874
Borrowings 66,998 57,216 706 582
-------- -------- ------ ------
Total interest-bearing funds 580,221 526,657 2,807 3,456
------ ------
Demand deposits 41,299 42,266
Other liabilities 7,266 6,204
Shareholders' equity 51,815 52,116
-------- --------
Total liabilities &
shareholders' equity $680,601 $627,243
======== ========
Net interest income $5,949 $5,716
Spread on interest-bearing funds
Net interest margin (d)
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds sold.
(d) Net interest income divided by average interest-earning assets.
TABLE CONTINUED
Three months ended June 30, Average
Yield/Rate
(dollars in thousands) 2003 2002
---- ----
Loans (a) 6.07% 6.96%
Mortgage backed securities (b) 6.28 6.08
Other securities (b)(c) 4.08 4.88
Total earning assets 5.61 6.35
Other assets
Total assets
NOW accounts 0.29 0.98
Money market accounts 1.32 2.19
Savings & other 0.93 1.75
Certificates of deposit 2.68 3.46
Total interest-bearing deposits 1.64 2.45
Borrowings 4.22 4.07
Total interest-bearing funds 1.94 2.63
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities &
shareholders' equity
Net interest income
Spread on interest-bearing funds 3.67 3.72
Net interest margin (d) 3.81 3.96
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume and rate.
Three months ended June 30, 2003 versus 2002
(in thousands) Change in interest due to
Volume Rate Volume/rate Net
------ ---- ----------- ---
Interest-earning assets:
Loans $1,107 $(764) $(142) $201
Mortgage backed securities (731) 59 (26) (698)
Other securities 380 (238) (61) 81
------ ----- ----- ----
Total 756 (943) (229) (416)
------ ----- ----- ----
Interest-bearing liabilities:
Deposits 268 (952) (89) (773)
Borrowings 100 21 3 124
------ ----- ----- ----
Total 368 (931) (86) (649)
------ ----- ----- ----
Net change to interest income $ 388 $ (12) $(143) $233
====== ===== ===== ====
Interest income
- ---------------
Total interest and dividend income decreased $416,000 or 4.5%, for the
quarter ended June 30, 2003 as compared with the same period a year ago.
Loan income increased $201,000, or 3.4%, primarily as a result of higher
volumes offset somewhat by a lower yield. Average loans increased $63.6
million, or 18.6%, due to increased loan originations and loan purchases
during the period, offset in part by loan repayments. The decrease in
the average loan yield, down 89 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 second 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
$617,000, or 19.1%, as a result of lower average volume as well as lower
yields over the prior year period. The increase in yield on
mortgage-backed securities was caused by higher accretion of purchase
discounts because of prepayment acceleration. Average securities
decreased $17.0 million, or 7.2%. The decrease in average yield on
other securities, down 80 basis points to 4.08%, was due to lower
market rates on new securities added during 2002 and 2003, increased
pre-payment speeds on CMOs and to changes in portfolio mix.
Interest expense
- ----------------
Interest expense for the quarter ended June 30, 2003 decreased
$649,000, or 18.8%, as compared with the prior year period as
a result of a significant decline in the average cost of funds,
offset in part by deposit growth and higher borrowings. Deposit
expense decreased $773,000, or 26.9%, as a result of lower deposit
rates, offset by deposit growth, and changes in deposit mix.
Average interest-bearing deposits increased $43.8 million, or 9.3%.
The average cost of interest-bearing deposits decreased 81 basis
points to 1.64%. Interest expense on borrowings increased $124,000,
or 21.3%, as a result of higher average borrowings, up $9.8 million,
as well as a higher borrowing cost due to a change in mix, up 15
basis points to 3.87%.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil made no provision for loan losses during the quarters ending
June 30, 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.
June 30, December 31, June 30,
(in thousands) 2003 2002 2002
---- ---- ----
Ratio of allowance for loan losses:
to non-performing loans 391.71% 342.02% 484.77%
to total gross loans 1.23 1.49 1.59
Ratio of non-performing loans
to total loans 0.31 0.44 0.33
Ratio of past-due loans
to total loans 0.94 0.99 0.45
During the six month period ended June 30, 2003 the ratio of the
allowance for loan losses as a percentage to total gross loans
declined to 1.23% from 1.49% at December 31, 2002 and 1.59% at
June 30, 2002. For the period the ratio of non-performing loans
to total loans continued to remain historically low, at 0.31%
for June 30, 2003, compared with 0.44% at December 31, 2002 and
0.33% at June 30, 2002. The ratio of past due loans (including
non-performing loans) to total loans was 0.94% at June 30, 2003
compared with 0.99% at December 31, 2002 and 0.45% at June 30,
2002. During the six month period ended June 30, 2003
non-performing loans declined $196,000, or 12.8%, while gross
loans increased by $73.0 million, or 20.7%. 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 June 30, 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.
June 30,
(in thousands) 2003 2002 Change
---- ---- ------
Service charges on deposit accounts $659 $589 $ 70 11.9%
Gains on sales of mortgage loans, net 42 57 (15) (26.3)
Loan servicing 17 17 - -
Increase in cash surrender value of
bank-owned life insurance 94 124 (30) (24.2)
Other 98 89 9 10.1
---- ---- ---- ----
Total non-interest income $910 $876 $ 34 3.9%
==== ==== ==== ===
The increase in non-interest income for the quarter ended June 30, 2003
as compared to the prior year period resulted primarily from an
increase in retail banking fees and commissions earned. During the
period the Bank decided to retain most of its loan originations for
portfolio, resulting in decline in the volume of sales of residential
mortgages and related gains. During the 2003 period the Bank originated
and sold $2.7 million in residential loans versus $4.5 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. The decline, when compared to the prior
year period, in the increase in cash surrender value of bank-owned
life insurance was due to lower interest rates on the underlying
insurance assets.
Operating expenses
The following table details the principal categories of operating expenses.
June 30,
(in thousands) 2003 2002 Change
---- ---- ------
Salaries and benefits $2,355 $2,163 $192 8.9%
Occupancy 387 341 46 13.5
Equipment 354 284 70 24.6
Professional, collection and OREO 217 182 35 19.2
Postage and telecommunications 142 127 15 11.8
Printing and office supplies 87 95 (8) (8.4)
Marketing 61 134 (73) (54.5)
Service bureau 93 90 3 3.3
Amortization of intangibles 61 72 (11) (15.3)
Other 453 494 (41) (8.3)
====== ====== ===== ===
Total operating expenses $4,210 $3,982 $ 228 5.7%
====== ====== ===== ===
The increase in operating expenses was primarily due to an
increase in compensation expense for the quarter ended June 30,
2003 as compared with the prior year period. The increase in
compensation was due primarily to higher salaries and mortgage
commissions paid, a higher bonus accrued, and increased pension
expense (no pension income during the 2003 period), offset
somewhat by higher salary expenses deferred related to FASB 91.
The increase in occupancy expense results primarily from
increases in rental expense, utilities and building depreciation
costs during the 2003 period, partially related to the opening
of a new branch office in Southbury, Connecticut, and additional
renovated office space at NewMil's headquarters. The increase
in equipment expense is primarily due to higher depreciation
expense on computer equipment, furniture, mechanical equipment,
as well as higher maintenance contracts. The increase in
professional, collection and OREO expenses is primarily due to
an increase in corporate legal matters handled during the period
as well as consulting related to branch strategies and human
resources. The increase in postage and telecommunications costs
was due to additional costs associated with enhancing the
telecommunications network. The decrease in printing and office
supplies reflects primarily a reduction in forms usage by the
branch system. The decrease in marketing expense resulted from
decreased advertising activity 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
$828,000 representing a 31.2% effective rate, as compared with
a provision of $840,000 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.
RESULTS OF OPERATIONS
For the six month periods ended June 30, 2003 and 2002
Overview
- --------
NewMil earned net income of $3.6 million, or 83 cents per share
(diluted), for the six month period ended June 30, 2003 as
compared with $3.5 million, or 75 cents per share (diluted),
for the six month period ended June 30, 2002. The increase
was due to a variety of factors, the most important of which
was an increase in average interest earning assets of $46.1
million, partially offset in part by a decrease in the net
interest margin to 3.88% from 4.12% in 2002. The increase
in earning assets was due to internal growth. Non-interest
expense decreased slightly, $9,000, or 0.1%, for the first
six months of 2003, primarily due to lower marketing,
professional fees, collections and OREO costs, and other
operating expenses, offset by increased compensation,
occupancy and equipment costs during the period. The return
on average shareholders' equity was 13.7% for the first six
months of 2003.
Analysis of net interest and dividend income
- --------------------------------------------
Net interest and dividend income increased by $185,000, or
1.6%, for the six month period ended June 30, 2003 as
compared with the prior year period. The increase in net
interest income resulted primarily from growth in average
earning assets offset partially by a decrease in the net
interest margin. Average earning assets increased $46.1
million, or 8.1%, over the prior year period. Average total
interest bearing deposits increased $49.8 million, or 10.9%,
over the prior year period. The net interest margin decreased
24 basis points to 3.88% from 4.12% 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, 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.
Six months ended June 30, Average Income/
Balance Expense
(dollars in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Loans (a) $390,192 $340,323 $12,125 $12,203
Mortgage backed securities (b) 73,313 117,329 2,296 3,599
Other securities (b)(c) 151,143 110,877 3,074 2,814
-------- -------- ------- -------
Total earning assets 614,648 568,529 17,495 18,616
------- -------
Other assets 55,643 47,780
-------- --------
Total assets $670,291 $616,309
======== ========
NOW accounts $ 72,570 $ 66,615 105 326
Money market accounts 147,668 130,497 998 1,389
Savings & other 82,173 72,790 407 634
Certificates of deposit 203,391 186,133 2,822 3,354
-------- -------- ------- -------
Total interest-bearing
deposits 505,802 456,035 4,332 5,703
Borrowings 61,835 61,427 1,253 1,188
-------- -------- ------- -------
Total interest-bearing
funds 567,637 517,462 5,585 6,891
------- -------
Demand deposits 41,937 40,561
Other liabilities 7,632 6,606
Shareholders' equity 53,083 51,680
-------- --------
Total liabilities &
shareholders' equity $670,289 $616,309
======== ========
Net interest income $11,910 $11,725
Spread on interest-bearing funds
Net interest margin (d)
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds sold.
(d) Net interest income divided by average interest-earning assets.
TABLE CONTINUED
Six months ended June 30, Average
Yield/Rate
(dollars in thousands) 2003 2002
---- ----
Loans (a) 6.21% 7.17%
Mortgage backed securities (b) 6.26 6.13
Other securities (b)(c) 4.07 5.08
Total earning assets 5.69 6.55
Other assets
Total assets
NOW accounts 0.29 0.98
Money market accounts 1.35 2.13
Savings & other 0.99 1.74
Certificates of deposit 2.78 3.60
Total interest-bearing deposits 1.71 2.50
Borrowings 4.05 3.87
Total interest-bearing funds 1.97 2.66
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities &
shareholders' equity
Net interest income
Spread on interest-bearing funds 3.72 3.89
Net interest margin (d) 3.88 4.12
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal
funds sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume
and rate.
Six months ended June 30, 2003 versus 2002
(in thousands) Change in interest due to
Volume Rate Volume/rate Net
------ ---- ----------- ---
Interest-earning assets:
Loans $1,788 $(1,628) $(238) $ (78)
Mortgage backed securities (1,350) 76 (29) (1,303)
Other securities 1,022 (559) (203) 260
------ ------- ----- ------
Total 1,460 (2,111) (470) (1,121)
------ ------- ----- ------
Interest-bearing liabilities:
Deposits 622 (1,797) (196) (1,371)
Borrowings 8 57 - 65
------ ------- ----- ------
Total 630 (1,740) (196) (1,306)
------ ------- ----- ------
Net change to interest income $ 830 $ (371) $(274) $ 185
====== ======= ===== ======
Interest income
- ---------------
Total interest and dividend income decreased $1.1 million, or 6.0%,
for the six months ended June 30, 2003 as compared with the same
period a year ago. Loan income decreased $78,000, or 0.6%,
primarily as a result of a lower average yield. Average loans
increased $49.9 million, or 14.7%, due to increased loan
originations and loan purchases during the period, offset in
part by increased loan repayments. The decrease in the average
loan yield, down 96 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 six months 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 $1.0 million, or 16.3%, as a result of lower average
yields and by lower average volume and the portfolio mix of over
the prior year period. The increase in yield on mortgage-backed
securities was caused by the effect of prepayment acceleration
and the faster accretion of purchase discounts. Average securities
decreased $3.8 million, or 1.6%. The decrease in average investment
yield, down 70 basis points to 4.77%, 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 six months ended June 30, 2003 decreased
$1.3 million, or 19.0%, as compared with the prior year period as
a result of a significant decline in the average cost of funds,
offset slightly by higher average deposit and borrowings growth.
Deposit expense decreased $1.4 million, or 24.0%, as a result of
lower deposit rates, offset partially by deposit growth, and
changes in deposit mix. Average interest-bearing deposits increased
$49.8 million, or 10.9%. The average cost of interest-bearing
deposits decreased 79 basis points to 1.71%. Interest expense
on borrowings increased $65,000, or 5.5%, primarily as a result
of a higher borrowing cost, up 18 basis points to 4.05%. The
increase in cost and slight increase in average borrowings was
a result of NewMil forming a subsidiary on March 26, 2003.
NewMil Statutory Trust I is a trust formed under the laws of
the state of Delaware, which issued $10 million of fixed/adjustable
rate Trust Preferred Securities through a pooled trust-preferred
securities offering. 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%.
Provision and Allowance for loan losses
- ---------------------------------------
NewMil made no provision for loan losses during the six months
ending June 30, 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. For a detailed
discussion of the Bank's allowance for loan losses refer to
"Results of Operations- For the three month periods ended June
30, 2003 and 2002" above.
Non-interest income
- -------------------
The following table details the principal categories of
non-interest income.
June 30,
(in thousands) 2003 2002 Change
---- ---- ------
Service charges on deposit
accounts $1,206 $1,147 $ 59 5.1%
Gains on sales of mortgage
loans, net 114 218 (104) (47.7)
Loan servicing 36 35 1 2.9
Increase in cash surrender
value of bank-owned life
insurance 188 210 (22) (10.5)
Other 191 154 37 24.0
------ ------ ---- ----
Total non-interest income $1,735 $1,764 $(29) (1.6)%
====== ====== ==== ====
The decrease in non-interest income for the six months ended June
30, 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 $7.1 million
in residential loans versus $14.3 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. The decline, when compared to the
prior year period, in the increase in cash surrender value of
bank-owned life insurance was due to lower interest rates on
the underlying insurance assets. Benefiting somewhat during
the period was an increase in retail banking service fees and
other increases in commissions earned.
Operating expenses
- ------------------
The following table details the principal categories of operating
expenses.
June 30,
(in thousands) 2003 2002 Change
---- ---- ------
Salaries and benefits $4,700 $4,422 $ 278 6.3%
Occupancy 786 710 76 10.7
Equipment 672 568 104 18.3
Professional, collection
and OREO 390 431 (41) (9.5)
Postage and telecommunications 275 273 2 0.7
Printing and office supplies 185 225 (40) (17.8)
Marketing 106 292 (186) (63.7)
Service bureau 200 184 16 8.7
Amortization of intangibles 122 144 (22) (15.3)
Other 906 1,102 (196) (17.8)
------ ------ ----- -----
Total operating expenses $8,342 $8,351 $ (9) (0.1)%
====== ====== ===== =====
The increase in compensation expense for the six months ended
June 30, 2003 as compared with the prior year period was due
primarily to higher mortgage commissions paid, year-over-year
salary increases and related payroll taxes, and pension expense
(no pension income during the 2003 period) and by higher bonuses
accrued, offset by higher salary expenses deferred as
origination costs, related to loan growth. The increase in
occupancy expense results primarily from higher rent, building
maintenance, and utilities costs of our facilities plus the
addition of a new branch office in Southbury, Connecticut.
The increase in equipment expense is primarily due to higher
depreciation and maintenance expense on equipment.
Professional, collection and OREO decreased primarily due to
lower collections costs 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 first six months
of 2003. The decrease in other operating expenses for the
current six month period results from cost control management.
Income taxes
- ------------
Net income for the six months ended included an income tax
provision of $1,655,000 representing a 31.2% effective rate,
as compared with a provision of $1,651,000 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 six-month period ended June 30, 2003 total assets grew
$19.4 million, or 2.9%, to $681.0 million. This increase was
due to deposit growth of $18.2 million, or 3.3%, the issuance
of $10 million in Trust Preferred Securities, offset by net
repayments of Federal Home Loan Bank advances amounting to
$4.5 million. During the period net loans increased $73.0
million, or 21.0%, while securities decreased $17.3 million,
and overnight federal funds sold decreased $41.2 million.
Non-performing assets declined to $1.3 million, or 0.20%
of total assets at June 30, 2003.
Securities
- ----------
During the six-month period ended June 30, 2003 securities
decreased $17.3 million, to $180.4 million, due to
repayments of mortgage-backed securities and other securities
of $30.3 million, offset by securities purchases of $15.1
million and a decrease in unrealized securities holding gains.
Overnight federal funds sold decreased $41.2 million to $22.3
million. Due to the recent unattractiveness of new securities
yields at historically low levels, NewMil choose to replace a
portion of its securities portfolio run-off and some of its
fed funds position with new residential mortgage loans.
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 June 30, 2003,
the portfolio had a projected weighted average duration and
life of 2.6 years and 3.2 years, respectively, based on median
projected prepayment speeds at current interest rates. At June
30, 2003, securities totaling $161.5 million, or 89.5%, were
classified as available-for-sale and securities totaling $18.9
million, or 10.5%, were classified as held-to-maturity.
Loans
- -----
During the six-month period ended June 30, 2003 net loans
increased $73.0 million, or 21.0%. Loan originations, advances
and loan purchases totaled $153.8 million, while loan repayments
were $80.5 million. Consequently, the ratio of loans to assets
increased to 61.71% at June 30, 2003, compared with 52.48% at
December 31, 2002 and 52.60% a year ago at June 30, 2002.
Towards the end of 2002 and through the second 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 $7.1 million of residential mortgage loans
during the period. Major loan classifications are as follows:
June 30, December 31,
(in thousands) 2003 2002
---- ----
Real Estate Mortgages:
Residential
1-to-4 family $266,722 $197,318
5-or-more family 9,126 9,759
Commercial 101,783 98,035
Land & land development 1,862 2,080
Home equity credit 28,255 28,562
-------- --------
Total mortgage loans 407,748 335,754
Commercial and industrial 15,118 14,364
Installment and other 2,471 2,466
-------- --------
Total loans, gross 425,337 352,584
Deferred loan origination
fees and purchase
premium, net 156 (119)
Allowance for loan losses (5,245) (5,250)
-------- --------
Total loans, net $420,248 $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:
June 30, December 31,
(in thousands) 2003 2002
---- ----
Non-accruing loans $ 445 $ 254
Accruing loans past due
90 days or more 894 1,281
Accruing restructured loans - -
------ ------
Total non-performing loans 1,339 1,535
OREO, net - -
------ ------
Total non-performing assets $1,339 $1,535
====== ======
Percent of total assets 0.20% 0.23%
During the six-month period ended June 30, 2003 non-performing
assets declined $196,000 to $1.3 million. Non-performing assets
continue to remain historically low at only 0.20% of total assets
at June 30, 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 June 30, 2003 NewMil
had $1.1 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 $18.2 million, or 3.3%,
to $567.0 million and Federal Home Loan Bank advances
decreased $4.6 million, or 10.1%, primarily due to normal
amortization payments and maturing advances offset partially
by new advances amounting to $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
June 30, 2003 provided net cash of $3.7 million.
Investing activities utilized net cash of $58.7
million, principally for securities purchases and net
loan advances, offset in part by security repayments
and maturities. Financing activities provided net
cash of $18.4 million, principally, $15.4 million from
an increase in deposits and repurchase agreements and
$9.7 million from the issuance of Trust Preferred
Securities, offset by a $4.5 million net decrease
in FHLB advances, cash dividends paid and treasury
stock purchases.
At June 30, 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 $147 million, to net deposits and short
term unsecured liabilities, was 60.3%, well in excess
of NewMil's minimum guideline of 15%.
At June 30, 2003, NewMil had outstanding commitments to
fund new loan originations of $75.7 million, construction
mortgage commitments of $11.4 million and unused lines of
credit of $36.5 million. These commitments will be met
in the normal course of business. NewMil believes that
its liquidity sources will continue to provide funding
sufficient to support operating activities, loan
originations and commitments, and deposit withdrawals.
CAPITAL RESOURCES
During the period ended June 30, 2003 shareholders' equity
decreased $2.7 million to $51.5 million and book value per
share decreased $0.18 to $12.59. Reducing shareholders'
equity were treasury stock purchases of $4.2 million,
dividend payments of $1.3 million and other comprehensive
(loss) income of $1.2 million (a net decrease in the
unrealized holding gains (losses) on securities
available-for-sale, net of taxes). Increasing shareholders'
equity were net income of $3.6 million, or $0.83 per share
(diluted), common stock issued of $27,000, stock option
exercise proceeds of $319,000 and a tax benefit from the
exercise of non-qualified stock options of $19,000.
Capital requirements
- --------------------
NewMil and the Bank are subject to minimum capital requirements
established, respectively, by the Federal Reserve Board
(the "FRB") and the FDIC. At June 30, 2003 NewMil's Tier
1 Leverage Capital ratio was 7.13% and its Tier 1 and
Total Risk-Based Capital ratios were 12.11% and 13.36%,
respectively. At June 30, 2003 the Bank's Tier 1 Leverage
Capital ratio was 6.31% and its Tier 1 and Total Risk-Based
Capital ratios were 10.72% and 11.97%, 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.
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
None
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.
* Current Report on Form 8-K, dated
July 16, 2003, announcing earnings
for the quarter ended June 30, 2003.
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.
August 11, 2003 By: /s/ Francis J. Wiatr
-----------------------
Francis J. Wiatr,
Chairman, President and CEO
August 11, 2003 By: /s/ B. Ian McMahon
----------------------
B. Ian McMahon,
Chief Financial Officer