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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 September 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 September 30,
2003, is 4,086,896.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002
Consolidated Statements of Income
for the three month and nine month periods
ended September 30, 2003 and September 30, 2002
Consolidated Statements of Changes in
Shareholders' Equity for the nine month
periods ended September 30, 2003 and September 30, 2002
Consolidated Statements of Cash Flows
for the nine month periods ended
September 30, 2003 and September 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)
September 30, December 31,
(dollars in thousands) 2003 2002
- --------------------------------------------------------------------
ASSETS
Cash and due from bank $ 25,135 $ 21,349
Federal funds sold 18,455 63,441
- --------------------------------------------------------------------
Total cash and cash equivalents 43,590 84,790
Securities
Available-for-sale at market 139,472 174,569
Held-to-maturity at amortized cost
(fair value: $17,478 and $24,063) 16,841 23,092
Loans (net of allowancefor loan
losses: $5,224 and $5,250) 449,701 347,215
Bank premises and equipment, net 7,564 7,076
Accrued interest income 3,476 3,545
Intangible assets (net of accumulated
amortization: $1,207 and $1,024) 8,761 8,943
Bank-owned life insurance 10,318 10,000
Other assets 2,235 2,365
- --------------------------------------------------------------------
Total Assets $681,958 $661,595
====================================================================
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 44,196 $ 46,750
NOW accounts 79,677 71,586
Money market 154,588 144,288
Savings and other 84,829 79,811
Certificates of deposit 195,322 206,371
- --------------------------------------------------------------------
Total deposits 558,612 548,806
Federal Home Loan Bank advances 47,926 45,077
Company obligated, mandatorily
redeemable securities 9,731 -
Repurchase agreements 9,188 7,392
Accrued interest and other liabilities 4,820 6,084
- --------------------------------------------------------------------
Total Liabilities 630,277 607,359
- --------------------------------------------------------------------
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 42,155 42,297
Retained earnings 26,518 22,793
Accumulated other comprehensive
income, net 3,602 5,779
Treasury stock, at cost: 1,903,242
and 1,755,447 shares (23,589) (19,628)
- ---------------------------------------------------------------------
Total Shareholders' Equity 51,681 54,236
- ---------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $681,958 $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 Nine months ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------
Interest and dividend income
Interest and fees on loans $ 6,483 $ 5,906 $18,608 $18,109
Interest and dividends on
securities 2,205 3,017 7,357 9,300
Interest on federal funds sold 44 141 262 271
- ---------------------------------------------------------------------------
Total interest and
dividend income 8,732 9,064 26,227 27,680
- ---------------------------------------------------------------------------
Interest expense
Deposits 1,900 2,831 6,232 8,534
Borrowed funds 658 581 1,911 1,769
Total interest expense 2,558 3,412 8,143 10,303
- --------------------------------------------------------------------------
Net interest and dividend income 6,174 5,652 18,084 17,377
Provision for loan losses - - - -
- --------------------------------------------------------------------------
Net interest and dividend income
after provision for loan losses 6,174 5,652 18,084 17,377
Non-interest income
Service charges on deposit
accounts 683 580 1,889 1,727
Gains on sales of mortgage
loans, net 127 131 241 348
Loan servicing fees 15 14 51 48
Other 200 225 579 591
- --------------------------------------------------------------------------
Total non-interest income 1,025 950 2,760 2,714
- --------------------------------------------------------------------------
Non-interest expense
Salaries and benefits 2,479 2,255 7,179 6,677
Occupancy 411 334 1,197 1,045
Equipment 358 289 1,030 858
Marketing 98 99 204 392
Postage and telecommunications 142 131 417 404
Printing and office supplies 87 99 272 324
Professional, collections and OREO 188 168 578 599
Service bureau 99 104 299 288
Amortization of intangibles 61 72 183 215
Other 447 438 1,353 1,538
- --------------------------------------------------------------------------
Total non-interest expense 4,370 3,989 12,712 12,340
- --------------------------------------------------------------------------
Income before income taxes 2,829 2,613 8,132 7,751
Income tax provision 890 839 2,545 2,489
- --------------------------------------------------------------------------
Net income $ 1,939 $ 1,774 $ 5,587 $ 5,262
==========================================================================
Per common share
Diluted earnings $0.45 $0.39 $1.28 $1.15
Basic earnings 0.47 0.41 1.35 1.21
Cash dividends 0.150 0.125 0.45 0.375
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 Treasury
(dollars in thousands) Shares Amount capital earnings stock
- --------------------------------------------------------------------------
Balances at
December 31, 2001 5,990,138 $2,995 $42,568 $18,105 $(15,995)
Net income for period - - - 5,262 -
Net unrealized gain on
securities available-
for-sale,net of taxes - - - - -
Total comprehensive income
Cash dividends paid - - - (1,630) -
Exercise of stock options - - (403) - 605
Common stock issued - - 3 - 41
Tax benefit from exercise
of non-qualified stock
options - - 207 - -
Common stock repurchased - - - - (3,663)
- ---------------------------------------------------------------------------
Balances at
September 30, 2002 5,990,138 $2,995 $42,375 $21,737 $(19,012)
===========================================================================
Balances at
December 31, 2002 5,990,138 $2,995 $42,297 $22,793 $(19,628)
Net income for period - - - 5,587 -
Net unrealized loss on
securities available
for-sale, net of taxes - - - - -
Total comprehensive income
Cash dividends paid - - - (1,862) -
Exercise of stock options - - (172) - 521
Common stock issued - - 11 - 16
Tax benefit from exercise
of non-qualified stock
options - - 19 - -
Common stock repurchased - - - - (4,498)
- ----------------------------------------------------------------------------
Balances at
September 30, 2003 5,990,138 $2,995 $42,155 $26,518 $(23,589)
============================================================================
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Accumulated Total
other comp- share-
rehensive holders'
(dollars in thousands) income equity
- -----------------------------------------------------
Balances at
December 31, 2001 $2,921 $50,594
Net income for period - 5,262
Net unrealized gain on
securities available-for
-sale, net of taxes 2,812 2,812
Total comprehensive income 8,074
Cash dividends paid - (1,630)
Exercise of stock options - 202
Common stock issued - 44
Tax benefit from exercise of
non-qualified stock
options - 207
Common stock repurchased - (3,663)
- -----------------------------------------------------
Balances at
September 30, 2002 $5,733 $53,828
=====================================================
Balances at
December 31, 2002 $5,779 $54,236
Net income for period - 5,587
Net unrealized loss on
securities available
-for-sale,net of taxes (2,177) (2,177)
Total comprehensive income 3,410
Cash dividends paid - (1,862)
Exercise of stock options - 349
Common stock issued - 27
Tax benefit from exercise of
non-qualified stock
options - 19
Common stock repurchased - (4,498)
- ----------------------------------------------------
Balances at
September 30, 2003 $3,602 $51,681
====================================================
See accompanying notes to consolidated financial statements.
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
- -------------------------------------------------------------------------
(unaudited, in thousands) 2003 2002
Operating Activities
Net income $ 5,587 $5,262
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses - -
Provision for depreciation and amortization 711 601
Amortization of intangible assets 183 215
Amortization of issuance cost on Company
obligated, mandatorily redeemable securities 31 -
Amortization and accretion of securities
premiums and (discounts), net 291 685
Gains on sales of mortgage loans, net (241) (348)
Gains on sale of OREO - (7)
Mortgage loans originated for sale (14,736) (21,906)
Proceeds from sales of mortgage loans 14,977 22,254
Tax benefit from exercise of
non-qualified stock options 19 207
Deferred income tax provision 221 146
Increase in BOLI cash surrender value (281) -
Decrease in accrued interest income 58 174
Increase (decrease) in other liabilities 78 (762)
Increase in other assets, net (339) (5,748)
- --------------------------------------------------------------------------
Net cash provided by operating activities 6,559 773
- --------------------------------------------------------------------------
Investing Activities
Purchases of securities available-for-sale (10,011) (25,271)
Purchases of mortgage backed securities
available-for-sale (5,057) (15,211)
Proceeds from maturities and principal
repayments of securities 10,221 8,847
Principal collected on mortgage-backed
securities 42,606 28,936
Loan advances, net (102,487) (681)
Proceeds from sale of OREO - 64
Purchases of Bank premises
and equipment, net (1,199) (1,070)
- --------------------------------------------------------------------------
Net cash used by investing activities (65,927) (4,386)
- --------------------------------------------------------------------------
Financing Activities
Net increase in deposits 9,807 70,354
Net increase in repurchase agreements 1,796 4,526
FHLB advances (repayments), net 2,849 (20,442)
Issuance of company obligated, mandatorily
redeemable securities 9,700 -
Common Stock repurchased (4,498) (3,663)
Proceeds from Common Stock reissued 27 44
Cash dividends paid (1,862) (1,630)
Proceeds from exercise of stock options 349 202
- --------------------------------------------------------------------------
Net cash provided by financing activities 18,168 49,391
- --------------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (41,200) 45,778
Cash and federal funds sold, beginning of period 84,790 26,194
- --------------------------------------------------------------------------
Cash and federal funds sold, end of period $43,590 $71,972
==========================================================================
Cash paid during period
Interest to depositors $ 6,254 $ 8,545
Interest on borrowings 1,906 1,775
Income taxes paid 2,535 2,591
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 financialstatements 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 September 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. The
allowance for loan losses is a significant accounting policy and is
presented in the 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.
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
- -------------------------------------------------------------------------
September 30, 2003
U.S. Government
Agency notes
Within 1 year $ 10,234 $ 139 $ - $ 10,095
After 1 but
within 5 years 36,560 1,412 - 35,148
Corporate Bonds
Within 1 year 24,535 735 - 23,800
After 1 but
within 5 years 14,064 1,088 - 12,976
Mortgage backed
securities 44,872 2,046 9 42,835
Collateralized mortgage
obligations 5,354 91 - 5,263
- -------------------------------------------------------------------------
Total debt
securities 135,619 5,511 9 130,117
FHLB capital
stock and other 3,853 1 - 3,852
- -------------------------------------------------------------------------
Total
securities
available
-for-sale $139,472 $5,512 $ 9 $133,969
=========================================================================
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
- -------------------------------------------------------------------------
September 30, 2003
Municipal bonds
After 1 but
within 5 years $ 250 $ 5 $ - $ 255
After 5 but
within 10 years 3,382 143 - 3,525
After 10 years 6,432 123 - 6,555
Mortgage backed
securities 4,295 286 - 4,581
Collateralized mortgage
obligations 2,482 80 - 2,562
- -------------------------------------------------------------------------
Total securities
held-to-maturity $16,841 $637 $ - $17,478
=========================================================================
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 September 30, 2003 securities with a carrying value and market value
of $5.5 million and $5.7 million, respectively, were pledged as
collateral against public funds and securities with a carrying value and
market value of $17.8 million and $17.8 million, respectively, were
pledged as collateral against repurchase agreements. Also, securities
with a carrying value and market value of $2.8 million and $3.0 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:
September 30, December 31,
(in thousands) 2003 2002
- ----------------------------------------------------------------------
Real estate mortgages
1-to-4 family residential $288,364 $197,318
5-or-more family residential 8,876 9,759
Commercial 108,455 98,035
Land & land development 1,899 2,080
Home equity credit 28,961 28,562
Commercial & industrial 15,778 14,364
Installment & other 2,262 2,466
- ----------------------------------------------------------------------
Total loans, gross 454,595 352,584
Deferred loan origination fees,
cost and purchase premium, net 330 (119)
Allowance for loan losses (5,224) (5,250)
- ----------------------------------------------------------------------
Total loans, net $449,701 $347,215
======================================================================
Impaired loans
September 30, December 31,
(in thousands) 2003 2002
- ----------------------------------------------------------------------
With no valuation allowance $ 582 $ 471
With valuation allowance 260 479
- ----------------------------------------------------------------------
Total impaired loans $ 842 $ 950
- ----------------------------------------------------------------------
Valuation allowance $ 227 $ 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 September 30, are as follows:
September 30,
(in thousands) 2003 2002
- -------------------------------------------------------------------
Balance, beginning of period $5,250 $5,502
Provision for losses - -
Charge-offs (32) (187)
Recoveries 6 183
- -------------------------------------------------------------------
Balance, end of period $5,224 $5,498
===================================================================
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
September 30, December 31,
(in thousands) 2003 2002
- ---------------------------------------------------------------------
Non-accrual loans $ 380 $ 254
Accruing loans past due
90 days or more 1,023 1,281
Accruing troubled debt
restructured loans - -
- ---------------------------------------------------------------------
Total non-performing loans 1,403 1,535
Real estate acquired in
settlement of loans - -
- ---------------------------------------------------------------------
Total non-performing assets $1,403 $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 Nine months ended
September 30, September 30,
(in thousands) 2003 2002 2003 2002
- ----------------------------------------------------------------------
Basic 4,086 4,283 4,136 4,346
Effect of dilutive
stock options 207 228 218 238
- ----------------------------------------------------------------------
Diluted 4,293 4,511 4,354 4,584
======================================================================
NOTE 6 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------
Net income $1,939 $1,774 $5,587 $5,262
Net unrealized (losses)
gains on securities
during period (932) 1,082 (2,177) 2,812
- -----------------------------------------------------------------------
Comprehensive income $1,007 $2,856 $3,410 $8,074
=======================================================================
The components of other comprehensive income, and related tax
effects are as follows:
(in thousands) Before Tax Net of
tax (expense) tax
amount benefit amount
- -----------------------------------------------------------------------
Three months ended
September 30, 2003
Net unrealized losses
on securities available
-for-sale arising during
the period $(1,424) $ 484 $ (940)
Accretion of unrealized
loss on securities transferred
from available-for-sale to
held-to- maturity 12 (4) 8
- ------------------------------------------------------------------------
Net unrealized losses on
securities during period $(1,412) $ 480 $ (932)
========================================================================
Three months ended
September 30, 2002
Net unrealized gains on
securities available
-for-sale arising during
the period $ 1,635 $ (556) $ 1,079
Accretion of unrealized loss
on securities transferred
from available-for-sale
to held-to- maturity 4 (1) 3
- ------------------------------------------------------------------------
Net unrealized gains on
securities during period $ 1,639 $ (557) $ 1,082
========================================================================
Nine months ended
September 30, 2003
Net unrealized losses on
securities available
-for-sale arising during
the period $(3,320) $1,129 $(2,191)
Accretion of unrealized loss
on securities transferred
from available-for-sale
to held-to- maturity 22 (8) 14
- ------------------------------------------------------------------------
Net unrealized losses on
securities during period $(3,298) $1,121 $(2,177)
========================================================================
Nine months ended
September 30, 2002
Net unrealized gains on
securities available
-for-sale arising during
the period $ 4,242 $ (1,442) $ 2,800
Accretion of unrealized
loss on securities transferred
from available-for-sale
to held-to-maturity 18 (6) 12
- ------------------------------------------------------------------------
Net unrealized gains on
securities during period $ 4,260 $ (1,448) $ 2,812
========================================================================
NOTE 7 - INCOME TAXES
The components of the income tax provision are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------
Current provision
Federal $963 $889 $2,766 $2,635
State - - - -
- --------------------------------------------------------------------------
Total 963 889 2,766 2,635
- --------------------------------------------------------------------------
Deferred benefit
Federal (73) (50) (221) (146)
State - - - -
- --------------------------------------------------------------------------
Total (73) (50) (221) (146)
- --------------------------------------------------------------------------
Income tax provision $890 $839 $2,545 $2,489
==========================================================================
Connecticut tax legislation permits banks to shelter certain mortgage
income from the Connecticut corporation business tax through the use of
a special purpose entity called a passive investment company ("PIC"). In
accordance with this legislation, in 1999 NewMil formed a PIC, NewMil
Mortgage Company. NewMil's effective tax rates for the nine month
periods ended September 30, 2003 and 2002 are 31.3% 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 September 30, 2003 are as
follows:
NewMil Bank
- --------------------------------------------------------
Leverage ratio 7.25% 6.59%
Tier I risk-based ratio 12.03 10.93
Total risk-based ratio 13.28 12.18
Restrictions on Subsidiary's Dividends and Payments
NewMil's ability to pay dividends is dependent on the Bank's ability to
pay dividends to NewMil. There are certain restrictions on the payment
of dividends and other payments by the Bank to NewMil. Under Connecticut
law the Bank is prohibited from declaring a cash dividend on its common
stock except from its net earnings for the current year and retained net
profits for the preceding two years. In some instances, further
restrictions on dividends may be imposed on NewMil by the Federal
Reserve Bank.
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. NewMil 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 Nine months ended
September 30, September 30,
(net income in thousands) 2003 2002 2003 2002
- -------------------------------------------------------------------------
As reported
Net income $1,939 $1,774 $5,587 $5,262
Earnings per share,
diluted 0.45 0.39 1.28 1.15
Earnings per share,
basic 0.47 0.41 1.35 1.21
Pro forma
Net income 1,909 1,744 5,496 5,111
Earnings per share,
diluted 0.44 0.39 1.26 1.12
Earnings per share,
basic 0.47 0.41 1.33 1.18
Stock-based employee
compensation cost, net
of related taxes,
included in net income
As reported - - - -
Pro forma 30 30 91 151
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.
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 September 30, 2003 and 2002
Overview
NewMil earned net income of $1.9 million, or 45 cents per share
(diluted), for the quarter ended September 30, 2003 as compared with
$1.8 million, or 39 cents per share (diluted), for the quarter ended
September 30, 2002. The increase was achieved through a variety of
factors, the most important of which was an increase in net interest
income and non-interest income offset by increased non-interest expense.
Net interest income increased $522,000, or 9% in 2003 as a result of a
$34 million increase in average earning assets and a 12 basis point
increase in the net interest margin to 3.92% from 3.80% in 2002. The
increase in earning assets is due to internal growth. Also contributing
to the increase was fee income, at $1,025,000 versus $950,000 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 represents 21 basis points of total
assets at September 30, 2003. The return on average shareholders' equity
was 15% for the third quarter.
Analysis of net interest and dividend income
Net interest and dividend income increased $522,000, or 9.2%, for the
quarter ended September 30, 2003 as compared with the prior year period.
The increase in net interest income resulted primarily from the growth
in average earning assets and by an increase in the net interest margin.
Average earning assets increased $33.7 million, or 5.7%, over the prior
year period as a result of the change in the mix of assets and deposit
growth. Average total deposits increased $30.7 million, or 5.8%, over
the prior year period. The net interest margin increased 12 basis points
to 3.92% from 3.80% over the prior period. The increase in the net
interest margin was due to the 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, offset in part by the declines in yields on earning
assets. The following table sets forth the components of NewMil's net
interest income and yields on average interest-earning assets and
interest-bearing funds.
Three months ended
September 30, Average Income/ Average
Balance Expense Yield/Rate
(dollars in
thousands) 2003 2002 2003 2002 2003 2002
- ---------------------------------------------------------------------------
Loans (a) $445,582 $346,143 $6,483 $5,906 5.82% 6.82%
Mortgage backed
securities (b) 54,550 107,533 818 1,596 6.00 5.94
Other securities
(b)(c) 129,193 141,963 1,431 1,562 4.43 4.40
- --------------------------------------------------------
Total earning
assets 629,325 595,639 8,732 9,064 5.55 6.09
--------------
Other assets 55,877 51,612
- ----------------------------------------
Total assets $685,202 $647,251
========================================
NOW accounts $ 80,556 $ 67,828 50 134 0.25 0.79
Money market
accounts 152,808 141,211 436 686 1.14 1.94
Savings & other 84,745 75,487 155 302 0.73 1.60
Certificates of
deposit 198,324 203,782 1,259 1,709 2.54 3.36
- --------------------------------------------------------
Total interest-
bearing deposits 516,433 488,308 1,900 2,831 1.47 2.32
Borrowings 65,677 56,717 658 581 4.01 4.10
- --------------------------------------------------------
Total interest-
bearing funds 582,110 545,025 2,558 3,412 1.76 2.50
-------------
Demand deposits 46,195 43,593
Other liabilities 5,649 5,511
Shareholders' equity 51,248 53,122
- ---------------------------------------
Total liabilities &
shareholders'
equity $685,202 $647,251
=======================================
Net interest income $6,174 $5,652
===============
Spread on interest-bearing funds 3.79 3.59
Net interest margin (d) 3.92 3.80
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds
sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume and
rate.
Three months ended
September 30, 2003 versus 2002
(in thousands) Change in interest due to
- ------------------------------------------------------------------
Volume Rate Volume/rate Net
- ------------------------------------------------------------------
Interest-earning
assets:
Loans $1,697 $ (870) $(250) $577
Mortgage backed
securities (787) 17 (8) (778)
Other securities (140) 10 (1) (131)
- -------------------------------------------------------------------
Total 770 (843) (259) (332)
- -------------------------------------------------------------------
Interest-bearing
liabilities:
Deposits 163 (1,034) (60) (931)
Borrowings 92 (13) (2) 77
- -------------------------------------------------------------------
Total 255 (1,047) (62) (854)
- -------------------------------------------------------------------
Net change to
interest income $ 515 $ 204 $(197) $522
===================================================================
Interest income
Total interest and dividend income decreased $332,000 or 3.7%, for the
quarter ended September 30, 2003 as compared with the same period a year
ago. Loan income increased $577,000, or 9.8%, primarily as a result of
higher volumes offset somewhat by a lower yield. Average loans increased
$99.4 million, or 28.7%, 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 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 third 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 $909,000 or 28.8%, 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 $65.8 million, or 26.4%.
Interest expense
Interest expense for the quarter ended September 30, 2003 decreased
$854,000, or 25.0%, 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
$931,000, or 32.9%, as a result of lower deposit rates, offset somewhat
by deposit growth, and changes in deposit mix. Average interest-bearing
deposits increased $28.1 million, or 5.8%. The average cost of
interest-bearing deposits decreased 85 basis points to 1.47%. Interest
expense on borrowings increased $77,000, or 13.3%, primarily due to a
result of higher average borrowings, up $9.0 million, offset somewhat by
a decline in borrowing cost due to a change in mix, down 9 basis points
to 4.01%.
Provision and Allowance for loan losses
NewMil made no provision for loan losses during the quarters ending
September 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 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.
September 30, December 31, September 30,
(in thousands) 2003 2002 2002
- ----------------------------------------------------------------------
Ratio of allowance for loan losses:
to non-performing loans 372.3% 342.0% 669.7%
to total gross loans 1.2 1.5 1.6
Ratio of non-performing loans
to total loans 0.3 0.4 0.2
Ratio of past-due loans
to total loans 0.9 1.0 0.5
During the nine month period ended September 30, 2003 the ratio of the
allowance for loan losses as a percentage to total gross loans declined
to 1.2% from 1.5% at December 31, 2002 and 1.6% at September 30, 2002.
The allowance for loan losses as a percentage to total loans declined
primarily due to the growth in residential one-to-four family residential
mortgages, which exhibit lower reserve requirements. For the period, the
ratio of non-performing loans to total loans continued to remain
historically low, at 0.3% for September 30, 2003, compared with 0.4% at
December 31, 2002 and 0.2% at September 30, 2002. The ratio of past due
loans (including non-performing loans) to total loans also remains low at
0.9% for September 30, 2003 compared with 1.0% at December 31, 2002 and
0.5% at September 30, 2002. During the nine month period ended September
30, 2003, non-performing loans declined $132,000, or 8.6%, while gross
loans increased by $102.5 million, or 29.1%. 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 September 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 examined by the FDIC in
July 2003 and by the State of Connecticut's Department of Banking in
June 2002. 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.
September 30,
(in thousands) 2003 2002 Change
- --------------------------------------------------------------------------
Service charges on deposit accounts $683 $580 $103 17.8%
Gains on sales of mortgage loans, net 127 131 (4) (3.1)
Gains on sale of other real estate
property owned - 7 (7) (100.0)
Loan servicing 15 14 1 7.1
Increase in cash surrender value of bank-owned
life insurance 93 127 (34) (26.8)
Other 107 91 16 17.6
Total non-interest income $1,025 $950 $ 75 7.9%
The increase in non-interest income for the quarter ended September 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. During the 2003 period the Bank originated and sold $7.7
million in residential loans versus $7.6 million during the 2002 period.
Despite the slight increase from the 2002 volume, the 2003 period was
impacted due to slightly lower pricing obtained on loan sales. 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.
September 30,
(in thousands) 2003 2002 Change
- ---------------------------------------------------------------------------
Salaries and benefits $2,479 $2,255 $224 9.9%
Occupancy 411 334 77 23.1
Equipment 358 289 69 23.9
Professional, collection and OREO 188 168 20 11.9
Postage and telecommunications 142 131 11 8.4
Printing and office supplies 87 99 (12) (12.1)
Marketing 98 99 (1) (1.0)
Service bureau 99 104 (5) (4.8)
Amortization of intangibles 61 72 (11) (15.3)
Other 447 438 9 2.1
- ---------------------------------------------------------------------------
Total operating expenses $4,370 $3,989 $381 9.6%
The increase in operating expenses was primarily due to an increase in
compensation expense for the quarter ended September 30, 2003 as compared
with the prior year period. The increase in compensation was due
primarily to higher bonus accrual costs, higher salaries and mortgage
commissions paid and the absence of a pension benefit during the 2003
period, offset somewhat by an increase in deferred loan origination
compensation expense, due to increased loan origination activity. The
increase in occupancy expense results primarily from increases in rental
expense, building maintenance costs and utilities 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 was primarily due to
higher depreciation expense on computer equipment, furniture, mechanical
equipment, and higher maintenance contracts expenses. The increase in
professional, collection and OREO expenses was primarily due to
additional consulting and professional services in the areas of financial
administration, deposit operations and information technology, offset
somewhat by lower loan collection costs during the 2003 period. The
increase in postage and telecommunications expense 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.
Income taxes
Net income for the quarter included an income tax provision of $890,000
representing a 31.5% effective rate, as compared with a provision of
$839,000 a year ago, representing a 32.1% effective rate. The effective
tax rate was less than the 34% federal statutory rate due to tax-exempt
income and other related matters.
RESULTS OF OPERATIONS
For the nine month periods ended September 30, 2003 and 2002
Overview
NewMil earned net income of $5.6 million, or $1.28 per share (diluted),
for the nine month period ended September 30, 2003 as compared with
$5.3 million, or $1.15 per share (diluted), for the nine month period
ended September 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 $41.9 million, partially offset in part by a decrease in the
net interest margin to 3.89% from 4.01% in 2002. The increase in earning
assets was due to internal growth. Also contributing to the increase was
an increase of $46,000, or 1.7% of non-interest income for the first nine
months of 2003, primarily due to higher customer service fees and
commissions. The return on average shareholders' equity was 14.2% for
the first nine months of 2003.
Analysis of net interest and dividend income
Net interest and dividend income increased by $707,000, or 4.1%, for the
nine month period ended September 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 $41.9 million, or
7.3%, over the prior year period. Average total interest bearing deposits
increased $42.5 million, or 9.1%, over the prior year period. The net
interest margin decreased 12 basis points to 3.89% from 4.01% over the
prior 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, 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.
Nine months ended
September 30, Average Income/ Average
Balance Expense Yield/Rate
(dollars in thousands) 2003 2002 2003 2002 2003 2002
- -------------------------------------------------------------------------
Loans (a) $408,858 $342,284 $18,608 $18,109 6.07% 7.05%
Mortgage backed
securities (b) 66,991 114,028 3,116 5,195 6.20 6.07
Other securities (b)(c) 143,744 121,353 4,503 4,376 4.18 4.81
- -------------------------------------------------------------------
Total earning assets 619,593 577,665 26,227 27,680 5.64 6.39
----------------
Other assets 55,723 49,071
- -------------------------------------------------
Total assets $675,316 $626,736
NOW accounts $ 75,261 $ 67,023 156 460 0.28 0.92
Money market accounts 149,400 134,108 1,434 2,075 1.28 2.06
Savings & other 83,040 73,699 561 937 0.90 1.70
Certificates of deposit 201,683 192,081 4,081 5,062 2.70 3.51
- -------------------------------------------------------------------
Total interest-bearing
deposits 509,384 466,911 6,232 8,534 1.63 2.44
Borrowings 63,130 59,840 1,911 1,769 4.04 3.94
- -------------------------------------------------------------------
Total interest-bearing
funds 572,514 526,751 8,143 10,303 1.90 2.61
----------------
Demand deposits 43,372 41,583
Other liabilities 6,966 6,236
Shareholders' equity 52,464 52,166
Total liabilities &
shareholders' equity $675,316 $626,736
- ---------------------------------------------------
Net interest income $18,084 $17,377
-----------------
Spread on interest-bearing funds 3.74 3.78
Net interest margin (d) 3.89 4.01
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds
sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume and
rate.
Nine months ended September 30, 2003 versus 2002
(in thousands) Change in interest due to
- --------------------------------------------------------------------------
Volume Rate Volume/rate Net
- --------------------------------------------------------------------------
Interest-earning assets:
Loans $ 3,522 $(2,531) $(492) $ 499
Mortgage backed securities (2,143) 108 (45) (2,080)
Other securities 808 (574) (106) 128
- --------------------------------------------------------------------------
Total 2,187 (2,997) (643) (1,453)
Interest-bearing liabilities:
Deposits 777 (2,822) (257) (2,302)
Borrowings 98 42 2 142
- --------------------------------------------------------------------------
Total 875 (2,780) (255) (2,160)
Net change to interest income $ 1,312 $ (217) $(388) $ 707
==========================================================================
Interest income
Total interest and dividend income decreased $1.5 million, or 5.3%, for
the nine months ended September 30, 2003 as compared with the same period
a year ago. Loan income increased $499,000, or 2.8%, primarily as a
result of an increase in average loans offset somewhat by lower average
yields. Average loans increased $66.6 million, or 19.4%, 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 98 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 nine 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 $2.0 million, or 20.4%, 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
$24.6 million, or 10.5%. The decrease in average investment yield, down
60 basis points to 4.82%, 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 nine months ended September 30, 2003 decreased
$2.2 million, or 21.0%, 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 $2.3 million, or 27.0%, as a result of lower deposit rates,
offset partially by deposit growth, and changes in deposit mix. Average
interest-bearing deposits increased $42.5 million, or 9.1%. The
average cost of interest-bearing deposits decreased 81 basis points
to 1.63%. Interest expense on borrowings increased $142,000, or
8.0%, primarily as a result of a higher borrowing cost, up 10 basis
points to 4.04%. 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 nine months ending
September 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 September 30, 2003 and 2002" above.
Non-interest income
The following table details the principal categories of non-interest
income.
September 30,
(in thousands) 2003 2002 Change
- ------------------------------------------------------------------------
Service charges on deposit accounts $1,889 $1,727 $ 162 9.4%
Gains on sales of mortgage loans, net 241 348 (107) (30.7)
Gains on sale of other real estate
property owned - 7 (7) (100.0)
Loan servicing 51 48 3 6.3
Increase in cash surrender value of
bank-owned life insurance 281 336 (55) (16.4)
Other 298 248 50 20.2
- ------------------------------------------------------------------------
Total non-interest income $2,760 $2,714 $ 46 1.7%
========================================================================
The increase in non-interest income for the nine months ended September
30, 2003 as compared to the prior year period resulted primarily from an
increase in service fees on deposits accounts, a reflection of the growth
in deposit accounts from the prior period. Also contributing was other
income due to higher commissions earned during the period. These
increases were offset in part by 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 $14.7
million in residential loans versus $21.6 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. 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.
September 30,
(in thousands) 2003 2002 Change
- ------------------------------------------------------------------------
Salaries and benefits $ 7,179 $ 6,677 $ 502 7.5%
Occupancy 1,197 1,045 152 14.5
Equipment 1,030 858 172 20.0
Professional, collection and OREO 578 599 (21) (3.5)
Postage and telecommunications 417 404 13 3.2
Printing and office supplies 272 324 (52) (16.0)
Marketing 204 392 (188) (48.0)
Service bureau 299 288 11 3.8
Amortization of intangibles 183 215 (32) (14.9)
Other 1,353 1,538 (185) (12.0)
- ------------------------------------------------------------------------
Total operating expenses $12,712 $12,340 $ 372 3.0%
========================================================================
The increase in compensation expense for the nine months ended September
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, the absence of a pension benefit during the 2003
period and by higher bonuses accrued, offset by an increase in deferred
loan origination compensation expense, due to increased loan origination
activity. The increase in occupancy expense resulted primarily from
higher rent, building maintenance, and utilities costs, plus the addition
of a new branch office in Southbury, Connecticut, and additional
renovated office space at NewMil's headquarters. The increase in
quipment expense was 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
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 a reduction in forms
usage by the branch network. The decline in marketing costs resulted from
decreased advertising activities during the first nine months of 2003.
The decrease in other operating expenses for the current nine-month
period results from cost control management.
Income taxes
Net income for the nine months ended included an income tax provision of
$2,545,000 representing a 31.3% effective rate, as compared with a
provision of $2,489,000 a year ago, representing a 32.1% effective rate.
The effective tax rate was less than the 34% federal statutory rate due
to tax-exempt income and other related matters.
FINANCIAL CONDITION
Overview
During the nine month period ended September 30, 2003 total assets grew
$20.4 million, or 3.1%, to $682.0 million. This increase was due to
deposit growth of $9.8 million, or 1.8%, the issuance of $10 million
in Trust Preferred Securities and net Federal Home Loan Bank advances
amounting to $2.8 million. During the period net loans increased
$102.5 million, or 29.5%, while securities and federal funds sold
decreased $41.3 million and $45.0 million, respectively. Non-performing
assets declined to $1.4 million, or 0.21% of total assets at
September 30, 2003.
Securities
During the nine month period ended September 30, 2003 securities decreased
$41.3 million, to $156.3 million, due to repayments of mortgage-backed
securities and other securities of $52.8 million, offset by securities
purchases of $15.1 million and a decrease in unrealized securities
holding gains. Overnight federal funds sold decreased $45.0 million to
$18.5 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 September 30,
2003, the portfolio had a projected weighted average duration and life
of 2.4 years and 3.0 years, respectively, based on median projected
prepayment speeds at current interest rates. At September 30, 2003,
securities totaling $139.5 million, or 89.2%, were classified as
available-for-sale and securities totaling $16.8 million, or 10.8%,
were classified as held-to-maturity.
Loans
During the nine month period ended September 30, 2003 net loans increased
$102.5 million, or 29.5%. Loan originations, advances and loan purchases
totaled $229.1 million, while loan repayments were $126.6 million.
Consequently, the ratio of loans to assets increased to 65.9% at
September 30, 2003, compared with 52.5% at December 31, 2002 and 51.5% a
year ago at September 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 $14.7 million of residential mortgage loans during the
period. Major loan classifications are as follows:
September 30, December 31,
(in thousands) 2003 2002
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Real Estate Mortgages:
Residential
1-to-4 family $288,364 $197,318
5-or-more family 8,876 9,759
Commercial 108,455 98,035
Land & land development 1,899 2,080
Home equity credit 28,961 28,562
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Total mortgage loans 436,555 335,754
Commercial and industrial 15,778 14,364
Installment and other 2,262 2,466
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Total loans, gross 454,595 352,584
Deferred loan origination
fees and purchase
premium, net 330 (119)
Allowance for loan losses (5,224) (5,250)
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Total loans, net $449,701 $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:
September 30, December 31,
(in thousands) 2003 2002
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Non-accruing loans $ 380 $ 254
Accruing loans past due
90 days or more 1,023 1,281
Accruing restructured loans - -
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Total non-performing loans 1,403 1,535
OREO, net - -
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Total non-performing assets $1,403 $1,535
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Percent of total assets 0.21% 0.23%
During the nine month period ended September 30, 2003 non-performing
assets declined $132,000 to $1.4 million. Non-performing assets
continue to remain historically low at only 0.21% of total assets at
September 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 September 30, 2003 NewMil had
$939,000 of performing classified loans that are considered potential
problem loans. Although not impaired, performing classified loans, in
the opinion of management, exhibit a higher than normal degree of risk
and warrant monitoring due to various considerations, including (i) the
degree of documentation supporting the borrower's current financial
position, (ii) potential weaknesses in the borrowers' ability to service
the loan, (iii) possible collateral value deficiency, and (iv) other risk
factors such as geographic location, industry focus and negatively
trending financial results. These deficiencies create some uncertainty,
but not serious doubt, as to the borrowers' ability to comply with the
loan repayment terms in the future. Management believes that reserves
for these loans are adequate.
NewMil pursues the resolution of all non-performing assets through
restructurings, credit enhancements or collections. When collection
procedures do not bring a loan into performing or restructured status,
NewMil generally initiates action to foreclose the property or to
acquire it by deed in lieu of foreclosure. NewMil actively markets
all OREO property.
Deposits and Borrowings
During the period deposits grew $9.8 million, or 1.8%, to $558.6
million and Federal Home Loan Bank advances increased $2.8 million,
or 6.3%, primarily due to new advances to fund a portion of its
residential mortgage loan growth, offset by normal amortization payments
and maturing advances.
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. NewMil 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 nine month period ended September 30, 2003
provided net cash of $6.6 million. Investing activities utilized net
cash of $65.9 million, principally for securities purchases and net loan
advances, offset in part by security repayments and maturities.
Financing activities provided net cash of $18.2 million, principally,
$11.6 million from an increase in deposits and repurchase agreements
and $9.7 million from the issuance of Trust Preferred Securities and a
$2.8 million net increase in FHLB advances, offset primarily by cash
dividends paid and treasury stock purchases.
At September 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
$153 million, to net deposits and short term unsecured liabilities, was
57.2%, well in excess of NewMil's minimum guideline of 15%.
At September 30, 2003, NewMil had outstanding commitments to fund new
loan originations of $23.1 million, construction mortgage commitments
of $9.1 million and unused lines of credit of $40.6 million. These
commitments will be met in the normal course of business. NewMil
believes that its liquidity sources will continue to provide funding
sufficient to support operating activities, loan originations and
commitments, and deposit withdrawals.
CAPITAL RESOURCES
During the period ended September 30, 2003 shareholders' equity decreased
$2.6 million to $51.7 million and book value per share decreased $0.12 to
$12.65. Reducing shareholders' equity were treasury stock purchases of
$4.5 million, dividend payments of $1.9 million and other comprehensive
income of $2.2 million (a net decrease in the unrealized holding gains
on securities available-for-sale, net of taxes). Increasing shareholders'
equity were net income of $5.6 million, or $1.28 per share (diluted),
common stock issued of $27,000, stock option exercise proceeds of
$349,000 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 September 30, 2003 NewMil's Tier 1 Leverage Capital
ratio was 7.25% and its Tier 1 and Total Risk-Based Capital ratios
were 12.03% and 13.28%, respectively. At September 30, 2003 the Bank's
Tier 1 Leverage Capital ratio was 6.59% and its Tier 1 and Total
Risk-Based Capital ratios were 10.93% and 12.18%, respectively. NewMil
and the Bank are categorized as "well capitalized". A well capitalized
institution, which is the highest capital category for an institution as
defined by the Prompt Corrective regulations issued by the FDIC and the
FRB, is one which maintains a Total Risk-Based ratio of 10% or above, a
Tier I Risk-Based ratio of 6% or above and a Leverage ratio of 5% or
above, and is not subject to any written order, written agreement,
capital directive, or prompt corrective action directive to meet and
maintain a specific capital level.
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 October 22, 2003,
announcing earnings for the quarter ended September 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.
November 5, 2003 by /s/ Francis J. Wiatr
Francis J. Wiatr,
Chairman, President and CEO
November 5, 2003 by /s/ B. Ian McMahon
B. Ian McMahon,
Chief Financial Officer