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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1999
[ ] 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, New Milford, CT 06776
(Address of principal executive offices) (Zip code)
(860) 355-7600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
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
Indicated by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average bid and asked prices of such stock,
as of August 27, 1999, is $30,110,045. The number of shares of Common
Stock outstanding as of August 27, 1999, is 3,630,114.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive Proxy Statement dated September
27, 1999 for the 1999 Annual Meeting of Shareholders are incorporated by
reference into Part III (Items 10, 11, 12 and 13).
TABLE OF CONTENTS
PART I
Item 1 BUSINESS
Item 2 PROPERTIES
Item 3 LEGAL PROCEEDINGS
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Item 6 SELECTED FINANCIAL DATA
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11 EXECUTIVE COMPENSATION
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PART I
Item 1. BUSINESS
General
- -------
NewMil Bancorp, Inc., ("NewMil"), a Delaware corporation formed in 1987,
is the registered bank holding company for New Milford Savings Bank
("the Bank"), a wholly-owned subsidiary. NewMil's activity is currently
limited to the holding of the Bank's outstanding capital stock and the
Bank is NewMil's only subsidiary and its primary investment. NewMil's
net income is presently derived from the business of the Bank. Future
establishment or acquisition of subsidiaries by NewMil is possible.
Nevertheless, it is expected that the Bank will account for most of
NewMil's net income in the foreseeable future.
The Bank, which was organized in 1858, is a Connecticut chartered and
Federal Deposit Insurance Corporation ("FDIC") insured savings bank
headquartered in New Milford, Connecticut. The Bank's principal business
consists of attracting deposits from the public and using such deposits,
with other funds, to make various types of loans and investments. The
Bank offers both consumer and commercial deposit accounts, including
checking accounts, interest bearing "NOW" accounts, money market
accounts, certificates of deposit, savings accounts and Individual
Retirement Accounts. The Bank offers 24-Hour banking through automated
teller machines in ten branches.
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank sells some of the residential mortgages that it originates on a
servicing released basis. The Bank offers a broad range of mortgage and
commercial loans to the companies and small businesses of its service
area including lines of credit, term loans, Small Business
Administration ("SBA") loans, commercial real estate mortgages, and
construction and development mortgages. In addition, the Bank offers
services including money orders, travelers' checks and safe deposit
boxes. Although empowered, the Bank is not currently offering trust
services.
NewMil's results of operations are significantly affected by general
economic and competitive conditions, the real estate market, changes in
interest rates, government policies and actions of regulatory
authorities. Should the general economic climate stall, or reverse,
NewMil's operations could be negatively impacted by adverse economic
conditions.
Market Area and Competition
- ---------------------------
The Bank conducts its business through fourteen offices located in
Litchfield, Fairfield and New Haven Counties. The Bank's service area,
which has a population of approximately 300,000, enjoys a balance of
manufacturing, trade, and service employment and is home to a number of
Fortune 500 companies. Although the Bank's primary market area is
Litchfield and northern Fairfield counties, the Bank has depositors and
borrowers that live outside of these areas.
The Bank faces strong competition in attracting and retaining deposits
and in making mortgage and other loans. Its most direct competition for
deposits has historically come from other savings banks, commercial banks
and savings and loan associations located in its market area. Although
the Bank expects this continuing competition to have an effect upon the
cost of funds, it does not anticipate any substantial adverse effect on
maintaining the current deposit base. The Bank is competitive within its
market area in the various deposit products it offers to depositors. Due
to this fact, management feels they have the ability to maintain the
deposit base. The Bank does not rely upon any individual, group or
entity for a significant portion of its deposits.
The Bank's competition for real estate loans comes primarily from
mortgage banking companies, savings banks, savings and loan associations,
commercial banks, insurance companies, and other institutional lenders.
The Bank competes for loan originations primarily through the interest
rates and loan fees it charges and the efficiency and quality of services
it offers borrowers, real estate brokers and builders. Factors which
affect competition include, among others, the general availability of
funds and credit, general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
Congress passed legislation in 1994 providing for a phase-in of full
interstate branching. Connecticut law has since 1990 provided for full
interstate banking and, more recently, has adopted legislation allowing
interstate branching, subject to certain limitations. A number of out
of state institutions, almost all larger and with greater financial
resources then the Bank, have begun operations in Connecticut in recent
years. This has increased competitiveness in NewMil's market areas.
NewMil may consider expansion within or outside of Connecticut provided
appropriate opportunities and conditions exist.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest
- ----------------------------------------------------------------------
Rates and Interest Differential
- -------------------------------
For tables and discussion of the average balances, interest rates and
interest differential of NewMil for the years 1999, 1998 and 1997, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" on pages 13 through 15. For
tables and discussion of an analysis of the effect on net interest
income of volume and rate changes on NewMil for 1999 over 1998 and 1998
over 1997, see "Management's Discussion and Analysis of Financial condition
and Results of Operations - Results of Operations" on pages 15 and 16.
In this analysis, the change due to volume was calculated as the change
in average balance multiplied by the prior year's weighted average rate,
the change in rate was calculated as the change in average rate
multiplied by the prior year's average balance, and the change in
rate/volume was calculated as the change in average rate multiplied by
the change in average balance. Principal amounts of non-accruing loans
have been included in the average loan balances used to determine the
rate earned on loans. Interest income on non-accruing loans is included
in income only to the extent that cash payments have been received.
Securities
- ----------
For information concerning NewMil's securities portfolio activities see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the captions "Results of Operations" on pages 13
through 20, "Financial Condition" on pages 22 through 27 and "Note 2
- - Securities" on pages 42 through 44.
Lending Activities
- ------------------
The Bank offers a broad range of mortgage and consumer loans to the
residents of its service area including residential mortgages, home
equity credit lines and loans, installment loans and collateral loans.
The Bank also offers a broad range of mortgage and commercial loans to
the companies and small businesses of its service area including lines of
credit, term loans, SBA loans, commercial real estate mortgages, and
construction and development mortgages.
One-to-Four Family Residential Mortgage Loans: The Bank offers a variety
of fixed and adjustable rate loans, including adjustable rate loans that
have fixed rates for an initial period ranging from 1 to 10 years and
adjust annually thereafter. The Bank offers amortization periods of up
to 30 years. The Bank's adjustable rate loans generally have a limit on
the maximum rate change per interest rate adjustment of 2.0% to 3.0%, and
have limits on the total interest rate adjustments during the life of a
loan ranging from 4.0% to 6.0%, depending on the initial rate and type of
loan. The Bank's adjustable rate loans include loans whose interest rate
adjustments are based on U.S. Treasury constant maturity indices and
other indices.
The Bank's initial rates on adjustable rate mortgage loans are offered at
levels which are intended to be competitive within the Bank's service
area and which are frequently at a discount from fully indexed
contractual rates. The Bank charges origination fees ranging from no fee
to several percent, depending on the initial rate and type of loan.
Adjustable rate mortgage loans allow the Bank to maintain a degree of
rate sensitivity, though the extent of this sensitivity is limited by the
repricing intervals and caps contained in each loan type.
The Bank's residential mortgage loans are underwritten based on the
borrower's income in accordance with secondary market or investor
standards. In evaluating a potential residential mortgage borrower, the
Bank considers a number of factors, including the creditworthiness of the
borrower, the capacity of the borrower to repay the loan, an appraisal of
the property to be mortgaged and a review of the loan to value ratio.
Much of the residential mortgage loans that the Bank originates are
originated for sale to generate fee income. All such loans are sold on a
servicing released basis. The Bank has not sold loans on a servicing
retained basis since 1994.
Collateral and Installment Loans: The Bank makes collateral and
installment loans, including home equity lines of credit, home equity
loans, automobile and other personal loans. While the Bank offers fixed
rates on its consumer loans and home equity loans, its home equity lines
of credit are generally offered at or a spread over the Prime Rate. Home
equity loans and lines of credit have risks similar to those associated
with residential mortgages discussed above.
Commercial Mortgage and Multi-Family Mortgage Loans: The Bank also makes
loans collateralized by mortgages on commercial and multi-family
residential properties. Commercial and multi-family loans are offered on
an adjustable rate basis, generally with a daily repricing frequency and
with the interest adjustment tied to the Prime Rate. Loans may also be
structured with fixed rate terms ranging from 1 to 5 years.
Loans collateralized by commercial properties, including multi-family
residential properties, can involve greater credit risks than one- to
four-family residential mortgage loans. The commercial real estate
business is cyclical and subject to downturns, over-building,
fluctuations in market value and local economic conditions. Typically,
such loans are substantially larger than one- to four-family residential
mortgage loans. Because repayment is often dependent on the cash flow of
a successfully operated or managed property, repayment of such loans may
be more susceptible to adverse conditions in the real estate market or
the economy generally than is the case with residential mortgages.
Construction Loans: The Bank also makes construction loans to
individuals and professional builders for the purpose of constructing
1-to-4 family residential properties, either as a primary residence or
for investment or resale.
Commercial and Industrial Loans: The Bank offers unsecured commercial
business loans, generally adjustable-rate loans with the adjustment of
interest based on the Prime Rate plus a spread. The Bank believes it has
been conservative in its underwriting standards for this market with the
goal of obtaining quality loans for the portfolio. The Bank also offers
SBA and other Government guaranteed loans. The Bank's loan products are
targeted for, and tailored to the needs of, the local business and
professional community in the Bank's market area.
For further discussion of the composition and quality of the loan
portfolio see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the caption and "Financial
Condition - Loans" on pages 24 and 25.
For information on the reduction in interest income associated with
non-accrual loans for the year ended June 30, 1999 see "Note 4 -
Non-Performing Assets" on page 45. For discussion of the Bank's policy
for placing loans on non-accrual status refer to "Note 1 - Summary of
Significant Accounting Policies - Loans" on pages 40 and 41. For
information concerning loan portfolio composition and concentrations see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "Financial Condition" on pages 22
through 27.
Summary of Loan Loss Experience
- -------------------------------
For a discussion of the factors considered by management in determining
the provision for loan losses, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under the caption
"Results of Operations - Provision and Allowance for Loan Losses" on
pages 16 through 18.
Deposits
- --------
For a table on the average balances and rates on deposits, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Results of Operations" on pages 13 through 15.
Certificate of deposits with balances of $100,000 and greater amounted to
$14,654,000 and $16,477,000 at June 30, 1999 and 1998, respectively. The
Bank generally attracts deposits from its market area and uses those
deposits to fund lending and investment activities. The Bank has no
brokered deposits.
Return on Equity and Assets
- ---------------------------
For selected statistical information required by this item see "Selected
Financial Data" on pages 10 and 11.
Short-term Borrowings
- ---------------------
For the information required by this item see "Note 6 - Short Term
Borrowed Funds" on page 46.
Supervision and Regulation
- --------------------------
Federal Bank Holding Company Regulation: NewMil is registered under, and
is subject to, the Bank Holding Company Act of 1956, as amended. This
Act limits the types of companies which NewMil may acquire or organize
and the activities in which it or they may engage. In general, NewMil
and the Bank are prohibited from engaging in or acquiring direct or
indirect control of any corporation engaged in non-banking activities
unless such activities are so closely related to banking as to be a
proper incident thereto. In addition, NewMil must obtain the prior
approval of the Board of Governors of the Federal Reserve System to
acquire control of any bank; to acquire, with certain exceptions, more
than 5 percent of the outstanding voting stock of any other corporation;
or, to merge or consolidate with another bank holding company. As a
result of such laws and regulation, NewMil is restricted as to the types
of business activities it may conduct and the Bank is subject to
limitations on, among others, the types of loans and the amount of loans
it may make to any one borrower.
Federal Reserve System: NewMil is required by the Board of Governors of
the Federal Reserve System to maintain cash reserves against its
deposits. After exhausting all other sources of funds, NewMil may
request to borrow from the Federal Reserve. Bank holding companies
registered with the FRB are, among other things, restricted from making
direct investments in real estate. Both NewMil and the Bank are subject
to extensive supervision and regulation, which focus on, among other
things, the protection of depositors' funds.
The Federal Reserve System also regulates the national supply of bank
credit in order to influence general economic conditions. These policies
have a significant influence on overall growth and distribution of loans,
investments and deposits, and affect the interest rates charged on loans
or paid for deposits.
Fluctuations in interest rates, which may result from government fiscal
policies and the monetary policies of the Federal Reserve System, have a
strong impact on the income derived from loans and securities, and
interest paid on deposits. While NewMil and its subsidiary strive to
anticipate changes and adjust their strategies for such changes, the
level of earnings can be materially affected by economic circumstances
beyond their control.
NewMil and the Bank are subject to minimum capital requirements
established, respectively, by the FRB and the FDIC. For information on
these capital requirements and NewMil and the Bank's capital ratios see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Capital Resources" on page 30 and Note 9 to the Financial
Statements - Shareholders Equity under Capital Requirements.
Connecticut Banking Law and FDIC Regulation: The Bank is a state
chartered savings bank organized under the Banking Law of the State of
Connecticut. Deposits are insured by the FDIC and FDIC insurance
premiums are assessed on the Bank's deposit base on a semi-annual basis
at variable rates dependent upon the Bank's capital rating and other
safety and soundness considerations. The Bank is subject to regulation,
examination and supervision by the Connecticut Banking Department and the
FDIC. Both the Connecticut Banking Department and the FDIC issue
regulations and require the filing of reports describing the activities
and financial condition of the banks under their jurisdiction. Each
agency conducts periodic examinations to test safety, soundness and
compliance with various regulatory requirements and generally supervises
the operations of such banks.
Employees
- ---------
The Bank had 130 full-time and 20 part-time employees at June 30, 1999.
Management considers the Bank's relationship with its employees to be
good. The Bank's employees are not represented by any collective
bargaining groups.
Subsidiaries
- ------------
The Bank is NewMil's only subsidiary and accounts for 100% of NewMil's
income for the current fiscal year. At June 30, 1999, the Bank had three
wholly-owned subsidiaries, NMSB Mortgage Company, Asset Recovery
Management Company and New Mil Asset Company. NMSB Mortgage Company is a
passive investment company ("PIC") that holds loans collateralized by
real estate originated or purchased by the Bank. Income of the PIC and
its dividends to NewMil are exempt from the Connecticut Corporate
Business Tax. Asset Recovery Management Company and New Mil Asset
Company were both formed to hold and develop certain foreclosed real
estate.
Item 2. PROPERTIES
The Bank conducts its business at its main office, located at 19 Main
Street, New Milford, Connecticut, and through 14 branches located in
Litchfield, Fairfield and New Haven Counties. In May 1999 the Bank
closed its Winsted branch location and sold the branch deposits to
American Bank, Waterbury, Connecticut. The Bank owns its main office and
seven of its branches. The remaining six locations are leased by the
Bank. The following table sets forth certain information regarding the
Bank's branch offices, as of June 30, 1999.
Owned Lease
Date or expiration
Branch office Location opened leased date
- ------------- -------- ------ ------ -------
(a)
Kent 50 North Main St
Kent, CT 1960 Owned ----
New Fairfield Routes 37 & 39,
New Fairfield, CT 1969 Leased 1999
Brookfield Route 7,
Brookfield, CT 1964 Leased 2000
Sherman Routes 37 & 39,
Sherman, CT 1976 Leased 2000
Bridgewater (b) Routes 57 & 133,
Bridgewater, CT 1981 Owned ----
New Milford (c) 19 Main Street,
New Milford, CT 1902 Owned ----
Boardman Terrace 53 Main Street,
New Milford, CT 1977 Owned ----
New Preston (d) Routes 202 & 45,
New Preston, CT 1979 Owned ----
Morris Route 109 & 63,
Morris, CT 1981 Owned ----
Sharon Route 41,
Sharon, CT 1971 Leased 2002
Canaan Main St. & Granite Ave.
Canaan, CT 1982 Owned ----
Lanesville 291 Danbury Road,
New Milford, CT 1989 Owned ----
Southbury Grand Union Supermarket
775 Main Street South,
Southbury, CT 1997 Leased 2003
Norwalk 187 Main Street
Norwalk, CT 1997 Leased 2004
(a) Information concerning the Bank's lease payments can be found
at Note 13 on page 53.
(b) The Bank owns an additional building on this site which is
leased at an annual rent of $5,000.
(c) Main Office.
(d) The Bank owns an additional building on this site which is
leased at an annual rent of $14,800.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against NewMil or the Bank or any
of their properties, other than ordinary routine litigation incidental to
the Company's business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matter was submitted to a vote of
the shareholders of NewMil.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
For the information required by this item see "Quarterly Financial Data
(unaudited)" on pages 57 and 58. For a discussion of NewMil's dividend
policy and restrictions on dividends see "Management Discussion and
Analysis of Financial Condition and Results of Operations" under the
caption "Dividend Restrictions" on page 30.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth NewMil's consolidated financial and other
data at the dates and for the periods indicated. This data has been
derived from NewMil's audited consolidated financial statements.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share amounts)
At or for the years ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Income
Interest and
dividend income $24,456 $24,655 $22,851 $21,837 $20,283
Interest expense 11,807 12,196 10,916 10,438 9,602
Net interest income 12,649 12,459 11,935 11,399 10,681
Provision for loan
losses 100 250 400 400 400
Non-interest income:
Securities (losses)
gains, net - (271) (9) 27 226
Gain on sale of
non-performing loan - 778 - - -
Gains on sales of OREO 1,342 359 567 388 409
Gains on sales of
loans, net 547 480 181 10 28
Service fees and other 1,545 1,518 1,347 1,218 1,167
Non-interest expense 10,438 9,920 9,133 8,853 9,761
Income before
income taxes 5,545 5,153 4,488 3,789 2,350
Income tax expense
(benefit) 2,264 2,164 1,886 1,547 (3,874)
Income before effect of
accounting change and
extraordinary item 3,281 2,989 2,602 1,547 6,224
Cumulative effect of
change in accounting
principal, net of taxes (162) - - - -
Extraordinary item,
net of taxes (87) - - - -
Net income 3,032 2,989 2,602 2,242 6,224
Financial Condition
Total assets $352,117 $367,569 $323,061 $309,363 $308,671
Loans, net 210,036 162,849 166,141 150,558 150,442
Allowance for loan
losses 4,989 5,004 5,452 4,866 5,372
Securities 118,202 162,267 119,368 125,583 127,194
Deposits 300,123 293,877 275,392 259,267 252,420
Borrowings 15,000 37,500 13,000 14,776 20,499
Shareholders' equity 33,135 33,409 31,719 31,892 32,721
Non-performing assets 1,569 1,684 3,585 6,480 8,885
Per Share Data
Income before effect of
accounting change and
extraordinary item
Diluted $0.82 $0.74 $0.63 $0.50 $1.37
Basic 0.87 0.78 0.65 0.51 1.39
Net income
Diluted 0.76 0.74 0.63 0.50 1.37
Basic 0.80 0.78 0.65 0.51 1.39
Cash dividends 0.35 0.30 0.23 0.17 0.06
Book value 9.04 8.71 8.27 7.84 7.29
At or for the years ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statistical Data
Net interest margin 3.64% 3.78% 3.98% 4.01% 3.70%
Efficiency ratio 64.90 64.74 63.67 66.90 77.28
Effective tax rate 40.83 42.00 42.02 40.83 (164.85)
Return on average assets 0.84 0.88 0.84 0.75 2.08
Return on average
shareholders' equity 8.84 9.04 8.02 6.71 23.75
Dividend payout ratio 43.80% 38.57% 35.28% 33.18% 4.32%
Allowance for loan
losses to total loans 2.32 2.98 3.18 3.13 3.45
Non-performing assets
to total assets 0.45 0.46 1.11 2.09 2.88
Tier 1 leverage capital 9.53 9.28 10.25 10.39 10.58
Total risk-based capital 19.40 21.26 19.85 20.98 21.36
Average shareholders'
equity to average
assets 9.49 9.69 10.44 11.22 8.74
Weighted average equivalent
shares outstanding,
diluted 3,985 4,066 4,143 4,487 4,554
Shares outstanding
at June 30 (excluding
Treasury stock) 3,664 3,834 3,834 4,070 4,491
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS
NewMil Bancorp, Inc. ("NewMil"), a Delaware corporation, is a bank
holding company for New Milford Savings Bank ("Bank"), a
Connecticut-chartered and Federal Deposit Insurance Corporation ("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, and conducts its business from fourteen offices
in Litchfield, Fairfield and New Haven Counties. NewMil and the Bank
were formed in 1987 and 1858, respectively.
OVERVIEW
NewMil earned net income of $3,032,000, or $.76 per share, for the year
ended June 30, 1999, compared with net income of $2,989,000, or $0.74 per
share, for fiscal year 1998. Net income for the 1999 fiscal year
included the effect of both a change in accounting principals, resulting
from the adoption of SFAS 133, and an extraordinary item, resulting from
the prepayment of Federal Home Loan Bank advances. Income before the
effect of the accounting change and extraordinary item was $3,281,000,
or $.82 per share, for the year ended June 30, 1999, compared with net
income of $2,989,000, or $0.74 per share, for fiscal year 1998.
Excluding the effect of the accounting change and extraordinary item
NewMil's income grew 9.8% in 1999, reflecting improved core earnings,
driven by higher net interest income and non-interest income, and a lower
loan loss provision, partly offset by increased operating expenses.
Similarly, earnings per share before the effect of the accounting change
and extraordinary item increased 10.8%, reflecting both the growth in net
income and share repurchase activity.
Effective October 1, 1998 NewMil adopted the provisions of SFAS 133
(Accounting for Derivative Instruments and Hedging Activities). NewMil
took advantage of the provisions of SFAS 133 by reclassifying securities
totaling $21 million from held-to-maturity to available-for-sale, and
then sold those securities. NewMil realized a loss, net of tax, of
$162,000 on the transfer and sale of these securities. This loss has
been reported separately in net income as the cumulative effect of
adopting SFAS 133. The securities were previously carried below cost as
held-to-maturity, and an unrealized loss, net of taxes, of $654,000
against these securities had been included in shareholders' equity prior
to their sale.
NewMil used the proceeds from the sale of the securities to prepay $22.5
million of Federal Home Loan Bank fixed rate advances. NewMil incurred a
prepayment fee, net of taxes, of $87,000 that has been reported in net
income as an extraordinary item for this early extinguishment of debt.
During 1999 NewMil formed a Passive Investment Company ("PIC") and
changed its tax year to a calendar year basis to take advantage of recent
changes in Connecticut tax statutes. The Connecticut statute, effective
January 1, 1999, allows NewMil to transfer loans collateralized by real
estate into the PIC. Income of the PIC and its dividends to NewMil
became exempt from the Connecticut Corporation Business Tax. Effective
January 1, 1999, NewMil's combined Federal and State effective tax rate
is 34%, compared with an effective rate of 40.27% (prior to the deferred
tax asset write-off, discussed below), for the first two quarters of the
fiscal year. The formation of the PIC required NewMil to establish a
valuation allowance against its existing deferred State tax assets that
are no longer expected to be realized in future years. Accordingly,
NewMil's income tax provision for the year ended June 30, 1999 includes a
charge of $266,000.
Over the past five years NewMil has achieved a steady improvement in core
earnings. This is attributed to a continuing strategy which includes
refining both the mix and the quality of NewMil's earning assets,
increasing non-interest income, controlling operating expenses, and
reducing non-performing assets.
The following discussion and analysis of NewMil's consolidated results of
operations should be read in conjunction with the Consolidated Financial
Statements and footnotes.
RESULTS OF OPERATIONS
Comparison Between 1999 and 1998
Analysis of Net Interest and Dividend Income
- --------------------------------------------
Net interest income increased $190,000, or 1.5%, to $12,649,000 in 1999.
This resulted from growth of $18.0 million, or 5.4%, in average earning
assets, driven by an increase in average loans of $21.8 million, or
12.8%. The net interest margin declined 14 basis points, to 3.64% from
3.78%. This decrease was due mostly to the effects of lower market
interest rates during 1999 as compared with 1998, and to changes in
balance sheet mix. The following table sets forth the components of
NewMil's net interest income and yields on average interest-earning
assets and interest-bearing funds for each of the past three years.
Year ended June 30, 1999 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans (a) $192,052 $15,426 8.03%
Mortgage backed securities 90,273 5,374 5.95
Other securities (b) 65,630 3,656 5.57
-------- -------
Total earning assets 347,955 24,456 7.03
Other assets 13,473 -------
--------
Total assets $361,428
========
NOW accounts $33,065 387 1.17
Money market accounts 68,365 2,018 2.95
Savings & other 48,383 1,234 2.55
Certificates of deposit 133,421 6,713 5.03
------- -------
Total interest-bearing deposits 283,234 10,352 3.66
Borrowings 24,432 1,455 5.96
------- -------
Total interest-bearing funds 307,666 11,807 3.84
Demand deposits 17,185 -------
Other liabilities 2,278
Shareholders' equity 34,299
--------
Total liabilities and
shareholders' equity $361,428
========
Net interest income $12,649
=======
Spread on interest-bearing funds 3.19
Net interest margin (c) 3.64
Year ended June 30, 1998 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans (a) $170,287 $15,005 8.81%
Mortgage backed securities 42,014 2,532 6.03
Other securities (b) 117,690 7,118 6.05
-------- -------
Total earning assets 329,991 24,655 7.47
Other assets 11,024 -------
--------
Total assets $341,015
========
NOW accounts $29,008 389 1.34
Money market accounts 62,687 1,921 3.06
Savings & other 40,933 1,116 2.73
Certificates of deposit 138,202 7,477 5.41
-------- -------
Total interest-bearing deposits 270,830 10,903 4.03
Borrowings 22,208 1,293 5.82
-------- -------
Total interest-bearing funds 293,038 12,196 4.16
Demand deposits 12,884 -------
Other liabilities 2,037
Shareholders' equity 33,056
Total liabilities and --------
shareholders' equity $341,015
========
Net interest income $12,459
Spread on interest-bearing funds ======= 3.31
Net interest margin (c) 3.78
Year ended June 30, 1997 Average Income/ Average
(dollars in thousands) balance expense yield/rate
------- ------- ----------
Loans (a) $163,715 $14,601 8.92%
Mortgage backed securities 16,856 1,065 6.32
Other securities (b) 118,948 7,185 6.04
-------- -------
Total earning assets 299,519 22,851 7.63
Other assets 11,409 -------
--------
Total assets $310,928
========
NOW accounts $24,414 363 1.49
Money market accounts 61,258 1,857 3.03
Savings & other 38,458 1,026 2.67
Certificates of deposit 129,010 6,953 5.39
-------- -------
Total interest-bearing deposits 253,140 10,199 4.03
Borrowings 13,059 717 5.49
-------- -------
Total interest-bearing funds 266,199 10,916 4.10
Demand deposits 10,826 -------
Other liabilities 1,452
Shareholders' equity 32,451
Total liabilities and --------
shareholders' equity $310,928
========
Net interest income $11,935
=======
Spread on interest-bearing funds 3.53
Net interest margin (c) 3.98
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal funds
sold.
(c) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume and
rate for the three years ended June 30, 1999, 1998 and 1997.
Years ended June 30, 1999 versus 1998
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $1,918 $(1,327) $(170) $ 421
Mortgage backed securities 2,908 (31) (35) 2,842
Other securities (3,149) (562) 249 (3,462)
------ ------- ----- ------
Total 1,677 (1,920) 44 (199)
------ ------- ----- ------
Interest-bearing liabilities:
Deposits 499 (1,004) (46) (551)
Borrowings 129 30 3 162
------ ------ ----- -----
Total 628 (974) (43) (389)
------ ------ ----- -----
Net change to interest income $1,049 $ (946) $ 87 $ 190
====== ====== ===== =====
Years ended June 30, 1998 versus 1997
(dollars in thousands) Change in interest due to
Volume Rate Vol/rate Net
------ ---- -------- ---
Interest-earning assets:
Loans $ 586 $ (175) $ (7) $ 404
Mortgage backed securities 1,590 (49) (74) 1,467
Other securities (76) 9 - (67)
------ ------ ----- ------
Total 2,100 (215) (81) 1,804
------ ------ ----- ------
Interest-bearing liabilities:
Deposits 713 (8) (1) 704
Borrowings 502 43 31 576
------ ------ ----- ------
Total 1,215 35 30 1,280
------ ------ ----- ------
Net change to interest income $ 885 $ (250) $(111) $ 524
====== ====== ===== ======
Net interest and dividend income represents the difference between
interest and dividends earned on loans and securities and interest paid
on deposits and borrowings. The level of net interest income is a
function of volume, rates and mix of both earning assets and
interest-bearing liabilities. Net interest income can be adversely
affected by changes in interest rate levels as determined by NewMil's
"gap" position, measured by the differences between the volume of assets
and liabilities that are subject to repricing within different future
time periods.
Interest Income
- ---------------
Total interest and dividend income decreased $199,000, or 0.8%, to $24.5
million in 1999. Loan income increased $421,000, or 2.8%, as a result
of higher loan volume offset by lower average yield. Average loans
increased $21.8 million, or 12.8%, to $192.1 million in 1999 as compared
with 1998. The decrease in average loan yield, down 78 basis points, was
mostly due to lower yields on loans originated during 1999 coupled with
the downward repricing of adjustable rate loans and changes in portfolio
mix. Most of the growth has been in residential mortgage loans that have
lower yields relative to commercial loans. Investment income decreased
$620,000, or 6.4%, in 1999 as a result of lower average volume coupled
with a slightly lower average yield. Average securities decreased $3.8
million, or 2.4%. The decrease in average investment yield, down 25
basis points, was due to lower reinvestment yields during 1999 and
changes in portfolio mix.
Interest Expense
- ----------------
Interest expense decreased $389,000, or 3.2%, to $11.8 million in 1999
primarily as a result of changes in the deposit mix offset in part by
higher average borrowings. Deposit expense decreased $551,000, or 5.1%,
as a result of a decline in deposit rates and a favorable change in
deposit mix, partially offset by interest-bearing deposit growth of $12.4
million, or 4.6%. The average cost of interest-bearing deposits declined
by 37 basis points to 3.66%. Deposit growth occurred in all deposit
categories, except higher cost certificates of deposit. NOW accounts
increased $4.1 million, or 14.0%, money market accounts increased $5.7
million, or 9.1% and savings accounts increased $7.5 million, or 18.2%,
while certificates of deposits decreased $4.8 million, or 3.5%.
Borrowings expense increased $162,000, primarily as a result of an
increase in borrowings in late 1998 to fund securities purchases.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table sets forth changes in the allowance for loan losses
and other selected statistics for each of the past five years:
Years ended June 30, 1999 1998 1997 1996 1995
(dollars in thousands) ---- ---- ---- ---- ----
Balance, beginning of
year $5,004 $5,452 $4,866 $5,372 $5,246
Provision for loan losses 100 250 400 400 400
Charge-offs:
Real estate mortgages 165 633 90 884 294
Commercial and industrial - - 23 30 -
Consumer loans 11 73 11 5 1
------ ------ ------ ------ ------
Total charge-offs 176 706 124 919 295
------ ------ ------ ------ ------
Recoveries:
Real estate mortgages 52 4 308 10 20
Commercial and industrial - - - - -
Consumer loans 9 4 2 3 1
------ ------ ------ ------ ------
Total recoveries 61 8 310 13 21
------ ------ ------ ------ ------
Net (recoveries)
charge-offs 115 698 (186) 906 274
------ ------ ------ ------ ------
Balance, end of year $4,989 $5,004 $5,452 $4,866 $5,372
====== ====== ====== ====== ======
Ratio of allowance for
loan losses:
to non-performing loans 403.6% 360.3% 175.3% 114.3% 74.5%
to total gross loans 2.3 3.0 3.2 3.1 3.4
Loan loss provision
to average loans 0.1 0.1 0.2 0.3 0.3
Ratio of net charge-offs
(recoveries) to average
loans outstanding 0.06% 0.41% (0.11%) 0.59% 0.19%
The following table sets forth the allocation of the allowance for loan
losses among the broad categories of the loan portfolio and the
percentage of loans in each category to total loans at June 30, for each
of the past five years. Although the allowance has been allocated among
loan categories for purposes of the table, it is important to recognize
that the allowance is applicable to the entire portfolio. Furthermore,
charge-offs in the future may not necessarily occur in these amounts or
proportions.
June 30, 1999 1998
---- ----
(dollars in thousands) Allowance Loans(a) Allowance Loans(a)
--------- -------- --------- --------
Real Estate Mortgages
1-4 family residential $ 959 59.75% $ 978 50.79%
5-more family residential 461 2.86 694 3.27
Commercial 1,937 17.43 2,026 20.77
Land 258 1.12 440 2.13
Home equity credit lines 195 9.04 212 12.63
------ -----
Total mortgage loans 3,810 90.20 4,350 89.59
Commercial and industrial 239 8.48 188 8.55
Installment 18 0.39 24 0.69
Collateral 0 0.93 0 1.17
Unallocated 922 - 442 -
------ ------
Total allowance $4,989 100.00 $5,004 100.00
====== ======
June 30, 1997 1996
---- ----
(dollars in thousands) Allowance Loans(a) Allowance Loans(a)
--------- -------- --------- --------
Loans(a)
Real Estate Mortgages
1-4 family residential $1,131 52.94% $1,258 57.31%
5-more family residential 906 2.80 290 2.10
Commercial 1,669 18.55 1,942 19.55
Land 683 4.85 512 6.09
Home equity credit lines 205 11.81 147 9.30
------ ------
Total mortgage loans 4,594 90.95 4,149 94.35
Commercial and industrial 184 7.24 139 3.94
Installment 34 0.66 12 0.32
Collateral 0 1.15 0 1.39
Unallocated 640 - 566 -
------ ------
Total allowance $5,452 100.00 $4,866 100.00
====== ======
June 30, 1995
----
(dollars in thousands) Allowance Loans(a)
-------------------
Real Estate Mortgages
1-4 family residential $1,466 64.26%
5-more family residential 725 2.06
Commercial 1,865 18.91
Land 781 6.20
Home equity credit lines 83 5.06
------
Total mortgage loans 4,920 96.49
Commercial and industrial 71 2.08
Installment 6 0.18
Other 0 1.25
Unallocated 375 -
------
Total allowance $5,372 100.00
======
(a) Percent of loans in each category to total loans.
NewMil provided $100,000 for loan losses in 1999, down from $250,000 in
1998 and $400,000 in 1997. The reduction in NewMil's provision over the
past three years is due principally to an ongoing improvement in loan
quality as evidenced by the steady reduction in non-performing loans over
the past five years, offset in part by loan portfolio growth. During
1999 non-performing loans decreased $153,000, or 11.1%, to $1.2 million
at June 30, 1999 and, as a result, the reserve coverage to non-performing
loans increased to 403.6%. Past due performing loans (accruing loans
30-89 days past due) also decreased in 1999 and at June 30, 1999
represented 1.3% of gross loans. The decrease in the ratio of the
allowance for loan losses to total gross loans during 1999, to 2.3% at
June 30, 1999 compared to 3.0% at June 30, 1998, is due to loan portfolio
growth of $47.2 million, or 28.1% during 1999. Loan growth has been
primarily concentrated in residential mortgage loans that have a
relatively low risk profile. NewMil remains adequately reserved both
against total loans and non-performing loans. For a discussion on loan
quality see "Asset Quality and Portfolio Risk".
The Bank 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, historical loan loss
experience, current economic conditions and examinations performed by
regulatory authorities. Determining the level of the allowance at any
given period is difficult, particularly during deteriorating or uncertain
economic periods. Management must make estimates using assumptions and
information which is often subjective and changing rapidly. The review
of the loan portfolio is a continuing event in the light of a changing
economy and the dynamics of the banking and regulatory environment. In
management's judgement the allowance for loan losses at June 30, 1999, is
adequate. Should the economic climate deteriorate, borrowers could
experience difficulty and the level of non-performing loans, charge-offs
and delinquencies could rise and require increased provisions. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies could require the Bank to recognize additions to
the allowance based on their judgements of information available to them
at the time of their examination. The Bank was examined by the FDIC, in
August 1998 and no additions to the allowance were requested as a result
of this examination.
Non-Interest Income
- -------------------
Non-interest income increased $570,000 or 19.9%, to $3,434,000 in 1999.
This increase is attributable to gains on sales of OREO in 1999 and
security losses in 1998, offset by a gain on the sale of a non-performing
loan in 1998. The principal categories of non-interest income are as
follows:
Years ended June 30, 1999 1998 Change
---- ---- ------
(in thousands)
Service charges on
deposit accounts $1,154 $1,122 $ 32 2.9%
Gains on sales of
loans, net 547 480 67 14.0
Securities (losses)
gains, net - (271) 271 100.0
Gains on sales of OREO 1,342 359 983 273.8
Gain on sale of
non-performing loan - 778 (778) (100.0)
Loan servicing 81 101 (20) (19.8)
Other 310 295 15 5.1
------ ------ ---- ----
Total non-interest income $3,434 $2,864 $570 19.9%
====== ====== ==== ====
The increase in service charges on deposit accounts in 1999 reflects
increased transaction volume, resulting from growth in demand deposit and
NOW accounts and increased debit card transactions volume. The increase
in gains from sales of residential mortgage loans resulted from loan
sales of $28.0 million in 1999 compared with $25.8 million in 1998.
Secondary market loan sales are generally pre-arranged on a loan by loan
basis prior to origination and loans are sold service-released.
The net securities losses in 1998 were realized on securities sales of
$44.2 million and included a loss of $103,000 from the sale of a
collateralized mortgage obligation ("CMO") that was classified as
held-to-maturity. In October 1997 NewMil engaged a financial securities
consultant to analyze this CMO. Based on this review NewMil determined
that it was highly probable that NewMil would likely receive
substantially less than the contractual interest on this CMO and that the
CMO could experience a significant decline in market value. NewMil
concluded that these and other changes in circumstances surrounding this
CMO were isolated, non-recurring, and highly unusual, and could not have
been reasonably anticipated. The significant increase in OREO gains in
1999 resulted from the sale of two OREO properties and the sale of the
Bank's interest in a partnership formed several years ago to develop an
OREO property into a residential subdivision. In 1998 NewMil realized a
gain of $778,000 from the sale of its largest remaining non-performing
loan. The gain resulted from the sale of the loan to a buyer whose
intended use of the property added significant value which was not
anticipated. The decrease in loan servicing fees in 1999 resulted from
run-off in the mortgage servicing portfolio, which at June 30, 1999
totaled $20.2 million, down from $24.8 million at June 30, 1998. The
Bank has sold its mortgage loans on a servicing released basis since 1994.
Operating Expenses
- ------------------
Operating expenses increased $518,000, or 5.2%, in 1999. The principal
categories of operating expenses are as follows:
Years ended June 30, 1999 1998 Change
(in thousands) ---- ---- ------
Salaries $4,766 $4,216 $550 13.1%
Employee benefits 1,252 1,183 69 5.8
Occupancy 995 1,018 (23) (2.3)
Equipment 779 922 (143) (15.5)
Professional, collection
and OREO expense 284 315 (31) (9.8)
Insurance 88 92 (4) (4.4)
Postage and telecommunications 421 424 (3) (0.7)
Marketing 216 235 (19) (8.1)
Service bureau 261 221 40 18.1
Other operating 1,376 1,294 82 6.3
Total operating expenses $10,438 $9,920 $518 5.2%
======= ====== ==== ====
The increase in salaries in 1999 was due primarily to annual salary
increases, overtime related to the conversion of the Bank's core data
processing systems to a new in-house system, higher loan origination and
sales commissions, and higher incentive compensation awards. Employee
benefits expense increased as a result of taxes and other benefits
related to the increase in salaries, and due to increased medical claims
from the Bank's partially self insured plan. These increases were
partially offset by net income related to the Bank's curtailed pension
plan. The decrease in occupancy and equipment expense is primarily due
to reduced building maintenance expense in 1999 and the write-off, in
1998, of obsolete computer equipment and related prepaid maintenance in
preparation for the conversion of the Bank's core data processing systems
to a new client server system. All other operating expenses, including
marketing, shareholder relations, office expense and other, increased
$100,000 or 4.6% in 1999. This increase is attributed principally to
increased lending activity, various marketing promotions and other
changes in operating activities.
Income Taxes
- ------------
Net income for 1999 included an income tax provision of $2,264,000, for
an effective tax rate of 40.8%, as compared with an income tax provision
of $2,164,000, for an effective tax rate of 42.0%, for 1998.
On May 19, 1998 Connecticut legislation was passed which made sweeping
changes to the corporation business tax treatment of banks and financial
service companies. The new law permits banks to shelter certain mortgage
income from the Connecticut corporation business tax through the use of a
new special purpose entity called a "passive investment company" (PIC).
In general, the PIC can earn mortgage interest income, and pay dividends
to its parent company, free from the Connecticut corporation business
tax. The legislation was effective for income years commencing on or
after January 1, 1999.
NewMil formed a PIC and changed its tax year to a calendar year basis to
take advantage of the Connecticut statute. Effective January 1, 1999
NewMil transferred mortgages into the PIC and income of the PIC and its
dividends to NewMil became exempt from the Connecticut Corporation
Business Tax. Effective January 1, 1999, NewMil's combined Federal and
State effective tax rate became 34%, compared with an effective rate,
during the first two quarters of the fiscal year, of 40.27% (prior to the
deferred tax asset write-off, discussed below). The formation of the PIC
has required NewMil to establish a valuation allowance against its
existing deferred State tax assets that are no longer expected to be
realized in future years. The provision for the year ended June 30, 1999
included a one-time charge of $266,000 related to the formation of the
PIC, as discussed above.
For further information on income taxes see Note 7 of Notes to
Consolidated Financial Statements.
Effect of Change in Accounting Principle and Extraordinary Item
- ---------------------------------------------------------------
Effective October 1, 1998 NewMil adopted the provisions of SFAS 133,
reclassified securities totaling $21 million from held-to-maturity to
available-for-sale, and then sold those securities. NewMil realized a
loss, net of tax, of $162,000 on the transfer and sale of these
securities. This loss has been reported separately in net income as the
cumulative effect of adopting SFAS 133.
NewMil used the proceeds from the sale of the securities to prepay $22.5
million of Federal Home Loan Bank fixed rate advances. NewMil incurred a
prepayment fee, net of taxes, of $87,000 that has been reported in net
income as an extraordinary item.
Comparison between 1998 and 1997
Overview
- --------
NewMil earned net income of $2,989,000 or $0.74 per share, for the year
ended June 30, 1998, compared with net income of $2,602,000, or $0.63 per
share, for fiscal year 1997. Net income grew 14.9% in 1998, reflecting
significantly improved core earnings, driven by higher net interest
income and non-interest income, and a lower provision for loan losses,
offset in part by increased operating expenses. Earnings per share
increased 17.5%, reflecting both the growth in net income and share
repurchase activity.
Analysis of Net Interest Income
- -------------------------------
Net interest income increased $524,000, or 4.4%, to $12,459,000 in 1998.
This resulted from growth of $30.5 million, or 10.2%, in average earning
assets, driven by an increase in average investments of $23.9 million, or
17.6% coupled with an increase in average loans of $6.6 million, or 4.0%.
The net interest margin decreased by 20 basis points, to 3.78% from
3.98%.
Interest Income
- ---------------
Total interest and dividend income increased $1,804,000, or 7.9%, to
$24.7 million in 1998. Loan income increased $404,000, or 2.8%, as a
result of higher volume offset by slightly lower average yield. Average
loans grew $6.6 million, or 4.0%, to $170.3 million in 1998 as compared
with 1997. The decrease in the average loan yield, down 11 basis points,
resulted primarily from lower yields on new loans originated during 1998.
Investment income increased $1,400,000, or 17.0%, in 1998 as a result of
higher average volume, offset in part by a slightly lower average yield.
Average securities increased $23.9 million, or 17.6%, while average
federal funds balances remained fairly constant. The decrease in average
yield, down 3 basis points, resulted from in changes in portfolio mix and
lower reinvestment yields.
Interest Expense
- ----------------
Interest expense increased $1,208,000, or 11.7%, to $12.2 million in 1998
primarily as a result of deposit growth and higher average borrowings.
Deposit expense increased $704,000, or 6.9%, as a result of an increase
of $17.7 million, or 7.0%, in average interest-bearing deposits. The
average cost of interest-bearing deposits remained unchanged at 4.03%.
Deposit growth was realized in all deposit categories with the greatest
concentration in certificates of deposit, which increased $9.2 million,
and NOW accounts which increased $4.6 million. Interest expense on
borrowings increased $576,000 primarily as a result of additional
borrowings in 1998, including term advances at higher rates, to fund
securities purchases.
Non-Interest Income
- -------------------
Non-interest income increased $778,000, or 37.3%, to $2,864,000 in 1998.
The principal categories of non-interest income are as follows:
Years ended June 30, 1998 1997 Change
(in thousands) ==== ==== ======
Service charges on
deposit accounts $1,122 $ 975 $147 15.1%
Gains on sales of
loans, net 480 181 299 165.2
Loan servicing 101 111 (10) (9.0)
Securities (losses)
gains, net (271) (9) (262) 2,911.1
Gains on sales of
OREO Properties, net 359 567 (208) (36.7)
Gains on sale of
non-performing loans 778 - 778 100.0
Other 295 261 34 13.0
------ ------ ---- -----
Total non-interest income $2,864 $2,086 $778 37.3%
====== ====== ==== =====
The increase in service charges on deposit accounts in 1998 reflected
increased transaction volume, resulting from growth in demand deposit and
NOW accounts, fees from the Generation Gold Family Club introduced in
1998, and increased debit card transactions volume. The increase in
gains from sales of residential mortgage loans resulted from loan sales
of $25.8 million in 1998 compared with $9.6 million in 1997. The
decrease in loan servicing fees in 1998 resulted from a decrease in the
mortgage servicing portfolio, which at June 30, 1998 totaled $24.8
million, down from $28.8 million at June 30, 1997. Net securities losses
in 1998 and 1997 were realized on security sales of $44.2 million and
$23.3 million, respectively. In 1998 NewMil realized a gain of $778,000
from the sale of its largest remaining non-performing loan. The gain
resulted from the sale of the loan to a buyer whose intended use of the
property added significant value which was not anticipated. Gains on
sales of OREO decreased as a result of less OREO and fewer sales. In
1998 and 1997 OREO proceeds from OREO sales were $1.3 million and $3.3
million, respectively.
Operating Expenses
- ------------------
Operating expenses increased $787,000, or 8.6%, in 1998. In 1998 NewMil
opened branch offices in Southbury and Norwalk, Connecticut, in July and
October 1997, respectively. These offices added approximately $422,000
to operating expenses, principally compensation, occupancy and equipment
expense. Other increases in 1998 included the write-off of obsolete
equipment and prepaid maintenance in preparation for the conversion of
the Bank's core data processing system to a new in-house system. These
increases were offset in part by a significant reduction in professional
and legal expense. The principal categories of operating expenses are as
follows:
Years ended June 30, 1998 1997 Change
(in thousands) ---- ---- ------
Salaries $4,216 $3,909 $ 307 7.9%
Employee benefits 1,183 1,076 107 9.9
Occupancy 1,018 840 178 21.2
Equipment 922 683 239 35.0
Professional, collection
and OREO expense 315 699 (384) (54.9)
Insurance 92 78 14 18.0
Postage and telecommunications 424 348 76 21.8
Marketing 235 209 26 12.4
Service bureau 221 198 23 11.6
Other operating 1,294 1,093 201 18.4
Total operating expenses $9,920 $9,133 $ 787 8.6%
====== ====== ===== ====
The increase in salaries in 1998 was due primarily to the two new
branches and annual salary increases. Employee benefits expense
increased as a result of additional health, taxes and other benefits
related to the increased staffing levels and increased medical claims
from the Bank's partially self insured plan. These increases were partly
offset by net income related to the Bank's pension plan. The increase in
occupancy expense was primarily related to the two new branches.
Equipment expense for 1998 included $213,000 to write-off obsolete
computer equipment and prepaid maintenance related to the Bank's legacy
computer system. The Bank converted its core data processing system to a
new client server system in November 1998. Professional, collection and
OREO expense, which includes expenditures related to audit, accounting,
legal, appraisal, property tax, insurance, other workout related expenses
together with the negative provision for OREO losses, decreased $384,000
as a result, primarily, of a recovery of legal expenses related to a
securities arbitration claim that was settled in 1998. The increase in
insurance expense resulted from both increased FDIC insurance premiums
related to deposit growth and increase in premiums relating to the new
branches. All other operating expenses, including marketing, shareholder
relations, office expense and other, increased $326,000 or 17.6% in 1998
due principally to increased lending activity, new branch locations,
marketing promotions and other changes in operating activities.
Income Taxes
- ------------
Net income for 1998 included an income tax provision of $2,164,000, for
an effective tax rate of 42.0%, as compared with an income tax provision
of $1,886,000, with a similar effective tax rate of 42.0%, for 1997.
FINANCIAL CONDITION
During 1999 total assets declined $15.5 million, or 4.2%, to $352.1
million at June 30, 1999. This was due to a sale of securities and
repayment of borrowings with the proceeds. Net loans increased by $47.2
million, or 29.0%, to $210.0 million at June 30, 1999, while securities
decreased $44.1 million, or 27.2%, and federal funds sold decreased $22.0
million, or 87.4%. On the liability side, deposits grew $6.2 million, or
2.1%, while borrowings decreased $22.5 million, to $15.0 million at June
30, 1999. Non-performing assets decreased $115,000, or 6.8%, to $1.6
million, and represent only 0.45% of assets at June 30, 1999. Book value
per share increased 3.8% to $9.04 at June 30, 1999, after cash dividends
of $0.35, representing a 43.8% payout ratio. At June 30, 1999 tier 1
leverage and total risk-based capital ratios were 9.53% and 19.40%,
respectively, and NewMil was "well capitalized" as defined by the Federal
Reserve Board.
Securities
- ----------
During 1999 securities declined $44.1 million, or 27.2%, to $118.2
million at June 30, 1999, while federal funds sold decreased $22.0
million, to $3.6 million. These reductions were used to fund loan growth
and repay borrowings during 1999. The principal categories of securities
are as follows (including both available-for-sale and held-to-maturity):
June 30, (in thousands) 1999 1998 1997
---- ---- ----
U.S. Treasury notes $ - 0.0% $ 18,330 11.3% $ 24,297 20.3%
U.S. Government
Agency notes - 0.0 993 0.6 8,463 7.1
Municipal Bonds 10,558 8.9 - 0.0 - 0.0
Mortgage backed
securities 92,996 78.7 94,602 58.3 15,130 12.7
Collateralized mortgage
obligations 11,883 10.1 45,817 28.2 69,931 58.6
Equity securities 2,765 2.3 2,525 1.6 1,547 1.3
-------- -------- --------
Total securities $118,202 100.0 $162,267 100.0 $119,368 100.0
======== ======== ========
The change in portfolio mix in 1999 resulted from portfolio run-off and
the sale of certain collateralized mortgage obligations ("CMOs"), offset
by new purchases of mortgage backed securities ("MBS") and municipal
bonds.
NewMil took advantage of the one-time opportunity to reclassify
securities from held-to-maturity to available-for-sale permitted with the
adoption of SFAS 133 to restructure its securities portfolio. On
adopting SFAS 133 effective October 1, 1998, NewMil reclassified certain
securities totaling $21 million from held-to-maturity to
available-for-sale, and then sold those securities. These securities
consisted of floating rate CMOs that repriced off the Eleventh District
Cost of Funds index. At September 30, 1998 these securities had been
carried in the held-to-maturity category at $1,091,000 below cost, with a
related unrealized loss, net of taxes, in shareholders equity. The
unrealized loss was generated as a result of having transferred them from
available-for-sale to held-to-maturity at which time they were
transferred at their current market value, which was significantly below
their amortized cost. The unrealized loss, at the date of transfer, was
frozen and amortized as the related investments paid down. NewMil sold
the securities during the quarter ended December 31, 1998 and realized a
loss of only $274,000. This loss has been reported separately in net
income, net of taxes, as the cumulative effect of adopting SFAS 133.
NewMil's securities portfolio consists of MBSs', CMOs', bank qualified
municipal bonds and Federal Home Loan Bank stock. At June 30, 1999,
90.0% of the portfolio consisted of fixed rate securities, principally
MBS and to a lesser extent, CMOs and municipal bonds. At June 30, 1999
total fixed rate securities had a projected weighted average duration and
life of 3.8 years and 4.9 years, respectively, based on median projected
prepayment speeds at current interest rates. At June 30, 1999 7.7% of
the portfolio consisted of floating rate CMOs and MBSs, which generally
reprice monthly based on pre-determined spreads to underlying index,
subject to life-time caps and floors. The floating rate securities had a
projected weighted average duration and life of 0.1 years and 3.1 years,
respectively, based on median projected prepayment speeds at current
interest rates. Floating rate MBSs are tied to the Eleventh District
Cost of Funds index, while the floating rate CMOs are tied to several
Treasury indices. The remaining 2.3% of the portfolio at June 30, 1999,
was represented primarily by Federal Home Loan Bank stock.
At June 30, 1999, securities totaling $74.1 million, or 62.7%, were
classified as available-for-sale and securities totaling $44.1 million,
or 37.3%, were classified as held-to-maturity.
The composition, maturity distribution and weighted average yields of
securities available-for-sale are as follows:
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1999(a) ----- ----- -----
Mortgage backed securities $70,106 $70,106 6.40
Collateralized mortgage obligations 1,264 1,264 4.96
Equity securities 2,765 2,765 5.48
Total Securities Available-for-sale $74,135 $74,135 7.19
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1998(a) ----- ----- -----
U.S. Treasury and Government
U.S Treasury Obligation
Within 1 year $ 18,330 $ 18,330 6.32%
Agency Obligations
After 5 but within 10 years 993 993 6.17
Mortgage backed securities 87,796 87,796 6.55
Collateralized mortgage obligations 2,447 2,447 4.45
Equity securities 2,525 2,525 6.00
-------- --------
Total Securities Available-for-sale $112,091 $112,091 6.45
======== ========
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1997(a) ----- ----- -----
U.S. Treasury and Government
U.S Treasury Obligation
Within 1 year $ 6,013 $ 6,013 6.06%
After 1 but within 5 years 18,285 18,285 6.13
Agency Obligations
After 1 but within 5 years 7,499 7,499 6.26
After 5 but within 10 years 964 964 6.17
Mortgage backed securities 6,514 6,514 6.75
Collateralized mortgage obligations 8,727 8,727 5.89
Equity securities 1,547 1,547 6.21
------- -------
Total Securities Available-for-sale $49,549 $49,549 6.31
======= =======
The composition, maturity distribution and weighted average yields of
securities held-to-maturity are as follows:
(dollars in thousands) Carrying Market
Value Value Yield
June 30, 1999 ----- ----- -----
Municipal Bonds
After 10 years $10,558 $ 9,692 6.14%
Mortgage backed securities 22,890 22,927 6.67
Collateralized mortgage obligations 10,619 10,292 5.88
------- -------
Total Securities Held-to-maturity $44,067 $42,911 6.14
======= =======
June 30, 1998
Mortgage backed securities $ 6,806 $ 6,905 6.59%
Collateralized mortgage obligations 43,370 43,006 6.08
------- -------
Total Securities Held-to-maturity $50,176 $49,911 6.14
======= =======
June 30, 1997
Mortgage backed securities $ 8,615 $ 8,606 6.49%
Collateralized mortgage obligations 61,204 59,722 5.97
------- -------
Total Securities Held-to-maturity $69,819 $68,328 6.03
======= =======
Loans
- -----
During 1999 net loans grew $47.2 million, or 29.0%, to $210.0 million at
June 30, 1999. Loan originations and advances for portfolio, including
$38.6 million of residential mortgage loans purchased, totaled $92.4
million for 1999, up 58.5% from $58.3 million in 1998. Loan repayments
totaled $83.4 million for 1999, up from $61.6 million in 1998. The
increase in loan repayments was due primarily to refinancings of
residential mortgage loans caused by the low interest rate environment,
and, to a lesser extent, related home equity lines of credit refinancing.
Residential mortgage loans originated for sale increased by $2.2 million
to $28.0 million, compared with $25.8 million in 1999. Loans originated
for sale are sold on a servicing released basis.
The principal categories of the loan portfolio are as follows:
June 30, (in thousands) 1999 1998
---- ----
Real estate mortgages
One-four family residential $128,371 59.8% $ 85,274 50.8%
Five or more family residential 6,152 2.9 5,500 3.3
Commercial 37,456 17.4 34,878 20.8
Land and land development 2,410 1.1 3,571 2.1
Commercial and industrial 18,211 8.5 14,357 8.6
Home equity lines of credit 19,429 9.0 21,208 12.6
Installment and other 2,850 1.3 3,118 1.8
-------- -------
Total loans, gross $214,879 100.0 $167,90 100.0
======== =======
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 extensively 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 residential mortgage
product line. The department also offers home equity loans and lines of
credit and consumer installment loans.
The following table sets forth information on the composition of NewMil's
loan portfolio by loan type for each of the past five years:
June 30, (in thousands) 1999 1998 1997
Real Estate Mortgages: ---- ---- ----
Residential
1-4 family $128,371 $ 85,274 $ 90,885
5-more family 6,152 5,500 4,812
Commercial 37,456 34,878 31,850
Land 2,410 3,571 8,334
Home equity credit 19,429 21,208 20,274
-------- -------- --------
Total mortgage loans 193,818 150,431 156,155
Commercial and industrial 18,211 14,357 12,424
Installment 950 1,161 1,140
Collateral and other 1,900 1,957 1,982
-------- -------- --------
Total loans, gross 214,879 167,906 171,701
Deferred loan origination
fees and purchase
premium, net 146 (53) (108)
Allowance for loan
losses (4,989) (5,004) (5,452)
-------- -------- --------
Total loans, net $210,036 $162,849 $166,141
======== ======== ========
June 30, (in thousands) 1996 1995
Real Estate Mortgages: ---- ----
Residential
1-4 family $ 89,159 $ 98,766
5-more family 3,262 3,171
Commercial 30,408 29,068
Land 9,472 12,067
Home equity credit 14,474 7,785
-------- --------
Total mortgage loans 146,775 150,857
Commercial and industrial 6,130 3,201
Installment 502 284
Collateral and other 2,156 1,903
-------- --------
Total loans, gross 155,563 156,245
Deferred loan origination
fees and purchase premium, net (139) (431)
Allowance for loan losses (4,866) (5,372)
-------- --------
Total loans, net $150,558 $150,442
======== ========
The following tables reflect NewMil's loan portfolio maturity
distribution as of June 30, 1999 (non-accrual loans have been presented
in the after 5 years category):
June 30, 1999 Within After
(in thousands) Within 1-5 5
1 year years years Total
Real Estate Mortgages: ------ ----- ----- -----
Residential
1-4 family $17,023 $42,094 $69,254 $128,371
5-more family 980 2,372 2,800 6,152
Commercial 9,503 18,229 9,724 37,456
Land 1,369 843 198 2,410
Home equity credit lines 7,420 10,743 1,266 19,429
Commercial and industrial 5,484 8,254 4,473 18,211
Installment 420 470 60 950
Collateral and other 1,900 - - 1,900
------- ------- ------- --------
Total loans, gross $44,099 $83,005 $87,775 $214,879
======= ======= ======= ========
The following table shows as of June 30, 1999 the amount of loans due
after one year that have fixed interest rates and variable or adjustable
interest rates:
June 30, (in thousands) Fixed Adjustable
interest interest
rates rates
Real Estate Mortgages: ----- -----
1-4 family residential $ 26,188 $ 85,160
5-more family residential 221 4,951
Commercial 455 27,498
Land - 1,041
Home equity credit lines - 12,009
Commercial and industrial 2,954 9,773
Installment 469 61
Collateral and other - -
------- --------
Total loans, gross $30,287 $140,493
======= ========
Non-performing assets
- ---------------------
The following table sets forth non-performing assets for each of the last
five years:
June 30, (in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Non-accruing loans $1,051 $ 761 $2,054 $3,809 $7,175
Accruing loans past due
90 days or more 185 628 783 166 34
Accruing restructured
loans - - 274 281 -
------ ------ ------ ------ ------
Total non-performing loans 1,236 1,389 3,111 4,256 7,209
OREO, net 333 295 474 2,224 1,676
------ ------ ------ ------ ------
Total non-performing assets $1,569 $1,684 $3,585 $6,480 $8,885
====== ====== ====== ====== ======
During 1999 non-performing assets decreased $115,000, or 6.8%, to $1.6
million at June 30, 1999, and represented only 0.45% of total assets.
The low level of non-performing assets reflects NewMil's rigorous ongoing
credit management process and favorable economic climate. The following
table summarizes changes in non-performing assets during the past two
years.
Years ended June 30, (in thousands) 1999 1998
---- ----
Balance, beginning of year $ 1,684 $ 3,585
Loans placed on non-accrual status 920 1,360
Non-accrual loan payments (150) (366)
Loans returned to accrual status (3) (408)
Proceeds from non-accrual loan sales - (1,835)
Gain on non-accrual loan sale - 778
Non-accrual loan charge-offs (156) (620)
Change in accruing loans past
due 90 or more days, net (442) (155)
Change in accruing loans
restructured, net - (274)
Payments to improve OREO 107 498
Decrease in OREO valuation reserve 82 55
Gross proceeds from OREO sales (1,815) (1,293)
Gains on OREO sales, net 1,342 359
------- -------
Balance, end of year $ 1,569 $ 1,684
======= =======
Percent of total assets 0.45% 0.46%
The following table details the composition of non-performing assets as
of the periods presented.
Non-Performing Assets Accruing Other Total
(dollars in Non- loans past Restruc- real non-
thousands) accrual due 90 or tured estate performing
loans more days loans owned assets
----- --------- ----- ----- ------
June 30, 1999
Real estate:
Residential $ 196 $ 185 $ - $ 333 $ 714
Commercial 452 - - - 452
Land and land
development 403 - - - 403
Installment and
Other - - - - -
Valuation reserve - - - - -
------ ----- ---- ----- ------
Totals $1,051 $ 185 $ - $ 333 $1,569
====== ===== ==== ===== ======
June 30, 1998
Real estate:
Residential $ 189 $ 593 $ - $ 106 $ 888
Commercial 157 35 - 36 228
Land and land
development 414 - - 235 649
Installment and
Other 1 - - - 1
Valuation reserve - - - (82) (82)
------ ----- ---- ----- ------
Totals $ 761 $ 628 $ - $ 295 $1,684
====== ===== ==== ===== ======
Had non-accrual loans as of June 30, 1999 and 1998, been current in
accordance with their original terms, gross interest income of $98,000
and $77,000 would have been recorded in net income for 1999 and 1998,
respectively. The amount of interest on these loans that was included in
income was $59,000 and $58,000 in 1999 and 1998, respectively. Accruing
loans past due 90 days or more at June 30, 1999 consist of four
residential mortgage loans, all of which are in the process of collection
and where the collection of accrued interest is probable. 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 and in 1999 sold
$1.8 million of OREO from which net gains of $1.3 million were realized.
In addition to non-performing assets, at June 30, 1999 NewMil had
$8,238,000 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.
Deposits and borrowings
- -----------------------
Deposits grew $6.2 million, or 2.1%, during 1999 to $300.1 million.
Savings, Money Market and NOW accounts grew $14.7 million, or 10.5% and
demand deposits grew $4.1 million, or 28.3%, while certificates of
deposit decreased $12.6 million, or 9.1%. In May 1999 the Bank closed
its Winsted Office and sold the $4.9 million branch deposits. The Bank
received a $175,000 deposit premium which offset the branch closing
expenses. NewMil has 14 branch offices located in Fairfield, Litchfield
and New Haven Counties.
The following table shows the scheduled maturities of certificates of
deposit with balances in excess of $100,000:
June 30, 1999 (in thousands) Less Within Within Over
than 3 3 - 6 6- 12 one
months months months year Total
------ ------ ------ ---- -----
Certificates of deposit
over $100,000 $4,663 $2,853 $4,599 $2,539 $14,654
====== ====== ====== ====== =======
During 1999 NewMil sold certain securities and used the proceeds to
reduce borrowings by $22.5 million to $15.0 million. Borrowings at June
30, 1999 consisted of Federal Home Loan Bank advances with terms ranging
from twenty to forty-four months and fixed rates ranging from 5.91% to
6.02%. The borrowings are being used to match fund certain securities.
Borrowings at June 30, 1998 had terms of twelve to sixty months and rates
between 5.68% and 6.02%.
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, new loan originations, securities
purchases and other operating cash outflows. The 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 in 1999 provided net cash flows of $5.6 million, up
from $3.6 million in 1998. During 1999 investing activities used net
cash of $3.4 million, principally for loan advances and purchases and net
security purchases. Financing activities used net cash of $19.7 million,
principally to repay borrowings, pay shareholder dividends and purchase
treasury stock, offset by increased net deposits. Funds provided by
operating activities coupled with $17.6 million decreased cash and cash
equivalents, due primarily a decrease in federal funds sold, were
utilized to fund investing and financing activities.
Operating activities in 1998 provided net cash flows of $3.6 million, up
from $3.3 million in 1997. During 1998 investing activities used net
cash of $39.2 million, principally for net security purchases. Financing
activities provided net cash of $41.4 million, principally from increased
deposits and borrowings, offset in part by dividends paid to shareholders
and treasury stock purchases. Funds provided by operating and financing
activities were utilized to fund investing activities and to increase
cash and cash equivalents by $5.8 million.
At June 30, 1999, NewMil's liquidity ratio, as represented by cash,
short-term available-for-sale securities, marketable assets, the ability
to borrow against held-to-maturity securities and loans through unused
FHLB and other short term borrowing capacity, of approximately $176.2
million, to net deposits and short term unsecured liabilities, was 62.0%,
well in excess of NewMil's minimum guideline of 15%.
At June 30, 1999, NewMil had outstanding commitments to fund new loan
originations of $6.1 million, construction mortgage commitments of $2.7
million and unused lines of credit of $23.9 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.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
NewMil manages interest rate risk through an Asset Liability Committee
comprised of senior management. The committee monitors exposure to
interest rate risk on a quarterly basis using both a traditional gap
analysis and simulation analysis. Traditional gap analysis identifies
short and long term interest rate positions or exposure. Simulation
analysis measures the amount of short term earnings at risk under both
rising and falling rate scenarios.
NewMil manages interest rate risk with the objective of maintaining a
high and stable net interest margin under changing interest rate
environments. Interest rate risk is measured using gap analysis, to
identify short- medium- and long-term interest rate risk positions, and
simulation analysis, to measure the amount of short-term earnings at risk
under rising and falling interest rate scenarios. NewMil seeks to manage
interest rate risk within limits approved by the Board of Directors.
The following table sets forth NewMil's interest rate sensitivity
position, or gap position, at June 30, 1999, measured in terms of the
volume of interest rate sensitive assets and liabilities that are subject
to repricing in future time periods. For the purposes of this analysis,
money market and savings deposits have been presented in the within 6
month category and NOW account deposits have been presented in the after
5 year category, although the interest rate elasticity of money market,
savings and NOW deposits cannot be tied to any one time category.
Non-accrual loans and overdrafts have been presented in the
non-interest-bearing category. Significant variations may exist in the
degree of interest rate sensitivity between individual asset and
liability types within the repricing periods presented due to differences
in their repricing elasticity relative to changes in the general level of
interest rates.
June 30, 1999 Within Within Non-
(in thousands) Within 6 7-12 1-5 After interest-
months months years 5 years bearing Total
------ ------ ----- ------- ------- -----
ASSETS
Securities $ 26,261 $11,539 $49,616 $32,262 $(1,476) $118,202
Federal funds sold 3,167 - - - - 3,167
Due from banks 99 - - - 9,620 9,719
Loans 77,556 28,618 65,058 38,113 5,680 215,025
Other assets - - - - 6,004 6,004
------- ------ ------- ------ ------ --------
Total assets 107,083 40,157 114,674 70,375 19,828 $352,117
------- ------ ------- ------ ------ ========
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) - - - - 18,622 18,622
NOW accounts - - - 34,660 - 34,660
Money market 71,252 - - - - 71,252
Savings and other 49,443 - - - - 49,443
Certificates of
deposit 63,862 38,403 23,844 37 - 126,146
Federal Home Loan
Bank advances - - 15,000 - - 15,000
Other liabilities - - - - 3,859 3,859
Stockholders'
equity - - - - 33,135 33,135
------- ------ ------ ------ ------ --------
Total sources
of funds 184,557 38,403 38,844 34,697 55,616 $352,117
------- ------ ------ ------ ------ ========
Cumulative
interest-rate
sensitivity
gap $(77,474)$(75,720)$ 110 $35,788 $ -
======== ======== ======= ======= =======
Percent of
total assets (22.0)% (21.5)% 0.0% 10.2% - %
At June 30, 1999, its one year cumulative gap was -$75.7 million, or
21.5% of assets. A liability sensitive gap implies that NewMil's net
interest margin could be adversely affected by a sudden increase in
interest rates.
NewMil simulates earnings at risk over a twelve month horizon by ramping
interest rates +/-100 and +/-200 basis points from the current rate
environment. During the year ended June 30, 1999 interest rates did not
move +/-100 basis points from their current rates. NewMil's
asset/liability management responds to changes in interest rates and
market conditions. The simulation analysis incorporates numerous
assumptions about balance sheet changes, including growth and product
mix, product pricing and the behavior of interest rates. NewMil's policy
is to ensure that the change in net income over the twelve month horizon
within the +/-200 basis point band will not decrease by 20% or more. The
following table indicates that the estimated percentage change in net
income over the next twelve month forecast, for June 30, 1999 and 1998,
horizon is within NewMil's tolerance limit.
Change % Change in
in Rate Net Income
1999 1998
+100 bp 2.0% 9.0%
-100 bp -6.0% -9.0%
+200 bp 2.9% -
-200 bp -9.5% -
Due to the numerous assumptions in the simulation analysis, actual
results will differ from estimated results. Factors other than changes
in interest rates could also impact net income. A significant factor in
determining NewMil's ability to maintain its net interest margin in a
changing interest rate environment is its ability to manage its core
deposit rates. Essentially all of NewMil's deposit base is composed of
local retail deposit accounts which tend to be somewhat less sensitive to
moderate interest fluctuations than other funding sources and, therefore,
provide a reasonably stable and cost-effective source of funds. The
entry of new competitors into NewMil's market area may pressure NewMil to
change its loan and deposit pricing which may negatively affect NewMil's
net interest margin. NewMil structures its loan and securities
portfolios to provide for portfolio repricing consistent with its
interest rate risk objectives.
CAPITAL RESOURCES
During 1999 shareholders' equity decreased $274,000, or 0.8%, to $33.1
million, while book value per share increased 3.8% to $9.04 at June 30,
1999. The decrease in shareholders' equity resulted from treasury stock
purchases of $2,110,000 and dividend payments of $1,328,000, offset by
earnings of $3,032,000, a $73,000 decrease in the adjustment to
shareholders equity for net unrealized holding losses on securities and
$59,000 from the exercise of stock options.
In July 1996 NewMil announced its intention to repurchase up to 10% of
its outstanding common stock in the open market and unsolicited
negotiated transactions, including block purchases. In April and July
1999 NewMil announced its intention to buy additional shares of 100,000
and 50,000, respectively, under the same conditions. The purpose of the
repurchase plan is to offset the future dilution from shares issued upon
the exercise of stock options under NewMil's stock option plans, and for
general corporate purposes. During 1999 NewMil repurchased 184,500
shares, or 4.5%, of its outstanding shares of common stock. As of June
30, 1999 NewMil had repurchased 406,989 shares of its outstanding common
stock, under the July 1996 plan, and 71,811 shares of its outstanding
common stock, under the April 1999 plan. This represents 94.4% of the
total planned repurchases with total consideration of $5,012,000 being
paid.
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, 1999 NewMil's leverage capital ratio was 9.53% and
its tier I and total risk-based capital ratios were 18.13% and 19.40%,
respectively. At June 30, 1999 the Bank's leverage capital ratio was
9.40% and its tier I and total risk-based capital ratios were 18.46% and
19.73%, 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
Action 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.
Dividend Restrictions
- ---------------------
NewMil's ability to pay dividends to its shareholders is dependent on
the Bank's ability to pay dividends to NewMil. There are certain
restrictions on the payment of dividends by the Bank to NewMil. Under
Connecticut law a bank is prohibited from declaring a cash dividend on
its common stock except from its net profit for the current year and
retained net profits for the preceding two years. Consequently, the
maximum amount of dividends payable by the Bank to NewMil at June 30,
1999 is $1,064,000. In some instances, further restrictions on
dividends may be imposed on NewMil by the FRB.
In October 1994 NewMil resumed dividend payments with the payment of a
$0.02 quarterly cash dividend, following a four year lapse. In October
1995, 1996, 1997 and 1998 NewMil increased its quarterly cash dividend
to $0.05, $0.06, $0.08 and $0.09, respectively. In July 1999 NewMil
increased its quarterly dividend to $0.10. For 1999 total dividends of
$0.35 per share were paid.
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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
There were no new accounting pronouncements which are expected to impact
NewMil at this time.
YEAR 2000
Year 2000 Action Plan
In early 1997 NewMil developed its Year 2000 Action Plan (Plan) to
ensure that its operating systems, and those of its outside vendors and
suppliers, will function correctly in the year 2000 and beyond. During
1999 NewMil became compliant with its Year 2000 Plan. The Plan is
managed by the Year 2000 Committee, comprised of representatives from
each operational area of the Bank. The Plan has five phases: (1)
awareness; (2) assessment; (3) renovation; (4) validation; and, (5)
implementation.
The awareness phase included development of the Plan, conducting
awareness meetings and communicating with all NewMil employees,
attending Year 2000 seminars and attending a user group meeting for the
Bank's legacy system vendor. The awareness phase was completed during 1997.
The assessment phase included the development of an inventory of all
date sensitive systems, including in-house systems and those of the Bank's
outside vendors and suppliers, a risk assessment of each element, and
specific methodology to correct non-compliant systems. As of June 30, 1999
the assessment phase was completed for all items.
High criticality ratings were assigned to several systems, including the
Bank's legacy computer systems, that had the potential to substantially
impact the Bank's operation should they prove to be non-compliant.
The renovation phase addresses the bringing of systems into compliance,
systems replacements and retirements. As of June 30, 1999 the
renovation phase was completed for all items.
The validation phase addresses systems testing by the Bank and its
outside vendors and suppliers alike. The Bank converted its in-house
computer system in November 1998 from a legacy computer system to a
client server relational database system. The Bank's new client server
system has been certified Year 2000 compliant by the supplying vendor
and the Bank verified compliance in early 1999. Several third party
interfaces were scheduled for testing in early 1999 as well. All
systems testing has been completed as of June 30, 1999.
The implementation phase addresses the roll out of Year 2000 compliant
systems during 1998 and 1999. As of June 30, 1999 the implementation
phase was completed for all items.
In addition, contingency plans have been developed for all systems with
high criticality ratings. Testing of these contingency plans is
proceeding according to plan and is expected to be completed by
September 1999.
NewMil has completed an evaluation of its loan portfolio to identify
credit risk arising from the potential failure of a borrower's operating
or other systems as a consequence of the Year 2000. NewMil conducted
mailings of a Year 2000 Questionnaire to all of its commercial borrowers
and completed Year 2000 Risk to Bank assessment ratings for all
commercial borrowers in early 1999.
Federal banking agencies are conducting supervisory reviews of all
financial institutions Year 2000 readiness. In February 1998 the FDIC
completed an assessment of the Bank's Year 2000 planning efforts. In
September 1998 the FDIC conducted a supervisory review of the Bank's
Year 2000 conversion effort. In March 1999 the FDIC and State of
Connecticut completed their Year 2000 Readiness Phase II Assessment of the
Bank.
Costs
The cost of Year 2000 compliance is expected to be minimal because the
Bank converted its in-house data processing system to a new system which
has been certified to be Year 2000 compliant. This cost has been
capitalized and is being depreciated over the fixed assets useful lives.
Based on current information, management believes that specific costs
related to NewMil's Year 2000 systems issues will not have a material
impact on the operations, cash flows or financial condition of NewMil.
Risks
Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of
third-party vendors and borrowers, NewMil is unable to determine at this
time whether the consequences of Year 2000 failures, if any, will have a
material impact on NewMil's results of operations, liquidity or
financial condition. However, based on NewMil's high level of readiness
and the readiness reported by all significant third party vendors,
NewMil does not expect any significant disruption of service. The Year
2000 Action Plan is expected to significantly reduce NewMil's level of
uncertainty about the Year 2000 problem and, in particular, about the
Year 2000 readiness of its material vendors, suppliers and commercial
borrowers. NewMil believes that, with the implementation of the new client
server system and the completion of the Plan as scheduled, the possibility
of significant interruptions of normal operations will be minimized.
IMPACT OF INFLATION AND CHANGING PRICES
NewMil's financial statements have been prepared in terms of historical
dollars, without considering changes in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the
effect of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of
goods and services. Notwithstanding this, inflation can directly affect
the value of loan collateral, in particular real estate. Sharp decreases
in real estate prices have, in past years, resulted in significant loan
losses and losses on real estate acquired. Inflation, or disinflation,
could significantly affect NewMil's earnings in future periods.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Shareholders of NewMil Bancorp, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in shareholders'
equity, and cash flows present fairly, in all material respects, the
financial position of NewMil Bancorp, Inc. and its subsidiary at June 30,
1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of NewMil's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, NewMil
changed its method of accounting for derivative financial instruments in
1999.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
July 20, 1999
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30,
1999 1998
---- ----
ASSETS
Cash and due from banks $ 9,719 $ 5,342
Federal funds sold 3,167 25,134
-------- --------
Total cash and cash equivalents 12,886 30,476
Securities
Available-for-sale at market 74,135 112,091
Held-to-maturity at amortized
cost (fair value: $42,911 and $49,911) 44,067 50,176
Loans (net of allowance for loan losses:
$4,989 and $5,004) 210,036 162,849
Other real estate owned (net of valuation
reserve: $0 and $82) 333 295
Bank premises and equipment, net 6,238 6,124
Accrued interest income 2,190 2,259
Deferred tax asset, net 1,788 2,503
Other assets 444 796
-------- --------
Total Assets $352,117 $367,569
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 18,622 $ 14,520
NOW accounts 34,660 30,202
Money market 71,252 65,257
Savings and other 49,443 45,180
Certificates of deposit 126,146 138,718
-------- --------
Total deposits 300,123 293,877
Federal Home Loan Bank advances 15,000 37,500
Accrued interest and other liabilities 3,859 2,783
-------- --------
Total Liabilities 318,982 334,160
-------- --------
Commitments and contingencies - -
-------- --------
Shareholders' Equity
Common stock - $.50 per share par value
Shares authorized: 20,000,000
Shares issued: 5,990,138 and 5,990,138 2,995 2,995
Paid-in capital 43,773 43,881
Retained earnings 10,637 8,933
Accumulated other comprehensive income, net (1,132) (1,205)
Treasury stock, at cost: 2,325,924 and
2,155,824 shares (23,138) (21,195)
-------- -------
Total Shareholders' Equity 33,135 33,409
-------- -------
Total Liabilities and Shareholders' Equity $352,117 $367,569
======== ========
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Years ended June 30,
1999 1998 1997
---- ---- ----
Interest and dividend income
Interest and fees on loans $15,426 $15,005 $14,601
Interest and dividends on securities 8,235 8,886 7,531
Interest on federal funds sold 795 764 719
------- ------- -------
Total interest and dividend income 24,456 24,655 22,851
------- ------- -------
Interest expense
Deposits 10,352 10,903 10,199
Borrowed funds 1,455 1,293 717
------- ------- -------
Total interest expense 11,807 12,196 10,916
------- ------- -------
Net interest and dividend income 12,649 12,459 11,935
Provision for loan losses 100 250 400
------- ------- -------
Net interest and dividend income
after provision for loan losses 12,549 12,209 11,535
------- ------- -------
Non-interest income
Service charges on deposit accounts 1,154 1,122 975
Gain on sale of OREO properties 1,342 359 567
Gain on sale of non-performing loan - 778 -
Gains on sales of mortgage loans, net 547 480 181
Loan servicing fees 81 101 111
Securities losses, net - (271) (9)
Other 310 295 261
------- ------- -------
Total non-interest income 3,434 2,864 2,086
------- ------- -------
Non-interest expense
Salaries 4,766 4,216 3,909
Employee benefits 1,252 1,183 1,076
Occupancy 995 1,018 840
Equipment 779 922 683
Professional, collections
and OREO 284 315 699
Marketing 216 235 209
Insurance 88 92 78
Other 2,058 1,939 1,639
------- ------- -------
Total non-interest expense 10,438 9,920 9,133
------- ------- -------
Income before income taxes, cumulative
effect of accounting change
and extraordinary item 5,545 5,153 4,488
Income tax provision 2,264 2,164 1,886
------- ------- -------
Income before cumulative effect
of accounting change
and extraordinary item 3,281 2,989 2,602
------- ------- -------
Cumulative effect of change in
accounting principle, net of taxes (162) - -
Extraordinary item, net of taxes (87) - -
------- ------- -------
Net income $ 3,032 $ 2,989 $ 2,602
======= ======= =======
Diluted earnings per share $0.76 $0.74 $0.63
===== ===== =====
Basic earnings per share $0.80 $0.78 $0.65
===== ===== =====
Dividends per share $0.35 $0.30 $0.23
===== ===== =====
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Common Stock Paid-in Retained
Shares Amount capital earnings
------ ------ ------- --------
Balances at
June 30, 1996 5,987,388 $2,994 $44,189 $5,413
Net income for year - - - 2,602
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (918)
Proceeds from
exercise of
stock options 750 - 3 -
Acquisition of
treasury stock - - - -
--------- ------- -------- -------
Balances at
June 30, 1997 5,988,138 2,994 44,192 7,097
Net income for year - - - 2,989
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - -
Total comprehensive
income
Cash dividends paid - - - (1,153)
Proceeds from
exercise of
stock options:
Issuance of
new shares 2,000 1 12 -
Issuance of
treasury stock - - (312) -
Proceeds from
issuance of
treasury stock - - (11) -
Acquisition of
treasury stock - - - -
--------- ------ ------ -------
Balances at
June 30, 1998 5,990,138 $2,995 43,881 $ 8,933
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Common Stock Paid-in Retained
Shares Amount capital earnings
------ ------ ------- --------
Balances at
June 30, 1998 5,990,138 $2,995 $43,881 $8,933
Net income for year - - - 3,032
Change in net
unrealized gains
(losses) on
securities,
net of taxes - - - -
Total comprehensive
income
3,105
Cash dividends paid - - - (1,328)
Proceeds from
exercise of
stock options:
Issuance of
treasury stock - - (108) -
Acquisition
of treasury stock - - - -
--------- ------ ------- -------
Balances at
June 30, 1999 5,990,138 $2,995 $43,773 $10,637
========= ====== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Accumulated
other
comprehensive
income
Unrealized Total
Treasury gains shareholders
stock (losses) equity
----- -------- ------
Balances at
June 30, 1996 $(18,938) $ (1,766) $31,892
Net income for year - - 2,602
Change in net
unrealized gains
(losses) on
securities,
net of taxes - 277 277
------
Total comprehensive
income 2,879
------
Cash dividends paid - - (918)
Proceeds from
exercise of
stock options - - 3
Acquisition of
treasury stock (2,137) - (2,137)
-------- ------- -------
Balances at
June 30, 1997 (21,075) (1,490) 31,719
Net income for year - - 2,989
Change in net
unrealized gains
(losses) on
securities,
net of taxes - 284 284
------
Total comprehensive
income 3,273
------
Cash dividends paid - - (1,153)
Proceeds from
exercise of
stock options:
Issuance of
new shares - - 13
Issuance of
treasury stock 584 - 272
Proceeds from
issuance of
treasury stock 61 - 50
Acquisition of
treasury stock (765) - (765)
------- ------- -------
Balances at
June 30, 1998 $(21,195) $(1,205) $33,409
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(dollars in thousands)
Accumulated
other
comprehensive
income
Unrealized Total
Treasury gains shareholders
stock (losses) equity
----- -------- ------
Balances at
June 30, 1998 $(21,195) $ (1,205) $33,409
Net income for year - - 3,032
Change in net
unrealized gains
(losses) on
securities,
net of taxes - 73 73
------
Total comprehensive
income 3,105
------
Cash dividends paid - - (1,328)
Proceeds from
exercise of
stock options:
Issuance of
treasury stock 167 - 59
Acquisition
of treasury stock (2,110) - (2,110)
-------- ------- -------
Balances at
June 30, 1999 $(23,138) $(1,132) $33,135
======== ======= =======
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended June 30,
1999 1998 1997
---- ---- ----
Operating Activities
Net income $ 3,032 $ 2,989 $ 2,602
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 100 250 400
Provision for OREO recoveries (82) (55) -
Provision for depreciation and
amortization 695 626 587
Deferred income tax provision 495 763 972
Amortization and accretion of
securities premiums and
discounts, net 763 185 58
Securities losses, net - 271 9
Cumulative effect of
accounting change, net 162 - -
Extraordinary loss on debt
extinguishment, net 87 - -
Loans originated for sale (27,597) (25,331) (9,420)
Proceeds from loans originated
for sale 28,144 25,812 9,601
Realized gains on loan sales, net (547) (1,258) (181)
Realized gains on OREO sales, net (1,342) (359) (567)
Decrease (increase) in accrued
interest income 69 (245) (150)
Increase (decrease) in accrued interest
expense and other liabilities 1,251 (166) (405)
Decrease (increase) in other
assets, net 347 141 (226)
------ ------ ------
Net cash provided by
operating activities 5,577 3,623 3,280
------ ------ ------
Investing Activities
Proceeds from sales of securities
available-for-sale 20,933 35,877 22,903
Proceeds from sale of security
held-to-maturity - 7,325 -
Proceeds from maturities and principal
repayments of securities 33,603 44,152 5,721
Purchases of securities:
held-to-maturity (240) - -
available-for-sale (10,565) (50,071) (25,691)
Proceeds from sales of mortgage backed
securities available-for-sale - 1,042 348
Purchases of mortgage backed securities:
held-to-maturity (18,198) - -
available-for-sale (15,598) (93,403) -
Principal collected on mortgage backed
securities 33,497 12,196 3,327
Loan (advances) repayments, net (9,053) 2,427 (15,216)
Purchase of loans (38,556) (644) -
Proceeds from sale of non-performing loan - 1,835 -
Proceeds from sales of OREO 1,815 1,294 2,001
Payments to improve OREO (107) (498) (450)
Purchases of Bank premises and equipment (979) (709) (410)
------- ------- -------
Net cash used by
investing activities (3,448) (39,177) (7,467)
------- ------- -------
Financing Activities
Net increase in deposits 6,247 18,485 16,053
Net repayments of
repurchase agreements - - (9,776)
FHLB (repayments) advances, net (22,587) 24,500 8,000
Treasury stock purchased (2,110) (765) (2,137)
Proceeds from Treasury Stock reissued - 50 -
Cash dividends paid (1,328) (1,153) (918)
Proceeds from exercise of stock options 59 285 3
------- ------- ------
Net cash (used) provided by
financing activities (19,719) 41,402 11,225
------- ------ ------
(Decrease) increase in cash and
cash equivalents (17,590) 5,848 7,038
Cash and federal funds sold, beginning
of year 30,476 24,628 17,590
------- ------- -------
Cash and federal funds sold, end of year $12,886 $30,476 $24,628
======= ======= =======
Cash paid during year
Interest to depositors $10,344 $ 10,904 $10,271
Interest on borrowings 1,562 1,151 693
Income taxes 2,285 1,115 965
Non-cash transfers
From securities held-to-maturity to
securities available-for-sale 21,509 - -
From loans to OREO 335 202 545
Financed portion of OREO sales - 378 1,311
NewMil Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NewMil Bancorp, Inc. ("NewMil") is the bank holding company for New
Milford Savings Bank (the "Bank"), a State chartered savings bank.
NewMil's activity is currently limited to the holding of the Bank's
outstanding capital stock and the Bank is the Company's only subsidiary
and its primary investment. The Bank is a Connecticut chartered and
Federal Deposit Insurance Corporation (the "FDIC") insured savings bank
headquartered in New Milford, Connecticut. The Bank's principal business
consists of attracting deposits from the public and using such deposits,
with other funds, to make various types of loans and investments. The
Bank conducts its business through 14 offices located in Litchfield,
Fairfield and New Haven Counties. The accompanying consolidated
financial statements have been prepared in conformity with generally
accepted accounting principles. The following is a summary of
significant accounting policies:
Principles of Consolidation
The consolidated financial statements include those of NewMil and its
subsidiary after elimination of all intercompany accounts and
transactions. Certain reclassifications have been made to prior years'
amounts to conform with the 1999 financial presentation.
Basis of Financial Statement Presentation
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 statement of condition, and revenues and expenses for the period.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses
and the valuation of OREO in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowance for loan losses and valuation of OREO, management obtains
independent appraisals for significant properties.
NewMil's loans are generally collateralized by real estate located
principally in Connecticut. In addition, substantially all OREO is
located in Connecticut. Accordingly, the collectability of a substantial
portion of the Company's loan portfolio and OREO through foreclosure is
particularly susceptible to changes in market conditions.
While management uses available information to recognize losses on loans
and OREO, future additions to the allowance or write-downs of OREO may be
necessary based on changes in economic conditions, particularly in
Connecticut. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review NewMil's allowance
for loan losses and valuation of OREO. Such agencies may require NewMil
to recognize additions to the allowance or write-downs based on their
judgements of information available to them at the time of their
examination.
Securities
Securities that may be sold as part of NewMil's asset/liability or
liquidity management or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar
factors, are classified as available-for-sale and carried at their fair
market value. Unrealized holding gains and losses on such securities are
reported net of related taxes, if applicable, as a separate component of
shareholders' equity. Securities that NewMil has the ability and
positive intent to hold to maturity are classified as held-to-maturity
and carried at amortized cost. Realized gains and losses on the sales of
all securities are reported in earnings and computed using the specific
identification cost basis. Securities that NewMil has transferred from
available-for-sale to held-to-maturity are carried at the fair value at
the time of transfer, adjusted for subsequent amortization or accretion
and net of applicable taxes.
Loans
Loans are reported at their principal outstanding balance net of
charge-offs, deferred loan origination fees and costs, and unamortized
premiums or discounts on purchased loans. Loan origination and
commitment fees and certain direct origination costs are deferred and
recognized over the life of the related loan as an adjustment of yield,
or taken into income when the related loan is sold.
Mortgage loans held-for-sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor
yield requirements calculated on the aggregate loan basis. Changes in
the carrying value are reported in earnings as gains and losses on
mortgage loans. Realized gains and losses on sales of mortgage loans are
reported in earnings when the proceeds are received from investors.
The accrual of interest on loans is generally discontinued when principal
or interest is past due by 90 days or more, or earlier when, in the
opinion of management, full collection of principal or interest is
unlikely unless such loans are well collateralized and in the process of
collection. When a loan is placed on non-accrual status, interest
previously accrued but not collected is charged against current income.
Income on such loans is then recognized only to the extent that cash is
received and future collection of principal is probable.
Loans are restored to accrual status when principal and interest payments
are brought current and future payments are reasonably assured, following
a sustained period of repayment performance by the borrower in accordance
with the loan's contractual terms.
Troubled debt restructurings ("TDR") are renegotiated loans for which
concessions, such as the reduction of interest rates, deferral of
interest or principal payments, or partial forgiveness of principal and
interest, have been granted due to a deterioration in a borrower's
financial condition. Interest to be paid on a deferred or contingent
basis is reported in earnings only as collected.
Allowance for Loan Losses
NewMil periodically reviews the allowance for loan losses in order to
maintain the allowance at a level sufficient to absorb probable credit
losses. NewMil's review is 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, historical loan loss experience, current economic
conditions and examinations performed by regulatory authorities. The
allowance for loan losses is increased through charges to earnings in the
form of a provision for loan losses. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is
charged against the allowance and subsequent recoveries, if any, are
credited to the allowance. While NewMil uses available information to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in regional economic conditions and related
factors.
NewMil measures impaired loans based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral, less estimated selling costs, if the
loan is collateral dependent and foreclosure is probable. NewMil
recognizes impairment by creating a valuation allowance. A loan is
impaired when, based on current information, it is probable that NewMil
will be unable to collect all amounts due according to the contractual
terms of the loan.
Smaller-balance homogeneous loans consisting of residential mortgages and
consumer loans are evaluated for collectability by NewMil based on
historical loss experience rather than on an individual loan-by-loan
basis. Impaired loans are primarily commercial mortgages, collateralized
by real estate.
Other Real Estate Owned
Real estate acquired through foreclosure, forgiveness of debt and in lieu
of debt, are stated at the lower of cost (principally loan amount) or
fair value minus estimated selling expenses. When a loan is reclassified
as real estate acquired any excess of the loan balance over its fair
value less estimated selling costs is charged against the allowance for
loan losses. Costs relating to the subsequent development or improvement
of a property are capitalized, to the extent realizable. Holding costs
and any subsequent provisions to reduce the carrying value of a property
to fair value minus estimated selling expenses are charged to earnings
and classified as real estate acquired expense. Fair value is determined
by current appraisal for collateral dependent loans.
Income Taxes
Deferred income taxes are provided for differences arising in the timing
of income and expenses for financial reporting and for income tax
purposes using the asset/liability method of accounting for income taxes.
Deferred income taxes and tax benefits are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. NewMil provides deferred taxes for the estimated future tax
effects attributable to temporary differences and carryforwards when
realization is assured beyond a reasonable doubt.
Bank Premises and Equipment
Bank premises, furniture and equipment are carried at cost, less
accumulated depreciation and amortization computed on the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized on the straight-line basis over the shorter of
the estimated useful lives of the improvements or the term of the related
leases.
Statement of Cash Flows
For the purpose of the Consolidated Statements of Cash Flows, cash and
cash equivalents include cash and due from banks, interest-bearing
deposits at other financial institutions and overnight federal funds
sold.
Computation of Earnings per Share
Effective December 31, 1997, NewMil adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS"). It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures. This statement was effective
for financial statements issued for periods ending after December 15,
1997 and has been applied for all periods presented.
Basic earnings per share is computed using the weighted-average 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. The shares used in the computations for
the three years ended June 30, were as follows:
(in thousands) 1999 1998 1997
---- ---- ----
Basic 3,793 3,845 3,978
Effect of dilutive stock options 192 221 165
----- ----- -----
Diluted 3,985 4,066 4,143
===== ===== =====
Segments of an Enterprise and Related Information
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 requires public companies to report
financial and descriptive information about operating segments in annual
financial statements and requires selected information about operating
segments to be reported in interim financial reports issued to
shareholders. Operating segment financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and allocation of resources. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997 and
requires presentation of comparative information for prior periods
presented. NewMil does not have any operating segments, as defined by
SFAS 131, and therefore, has not disclosed the additional information.
NOTE 2 - SECURITIES
Securities classified as available-for-sale (carried at fair value) were
as follows:
Estimated Gross Gross
(dollars in thousands) fair unrealized unrealized Amortized
value gains losses cost
----- ----- ------ ----
June 30, 1999
Mortgage backed securities $70,106 $ - $ 1,438 $71,544
Collateralized mortgage
obligations 1,264 - 121 1,385
------- ------- ------- -------
Total debt securities 71,370 - 1,559 72,929
Equity securities 2,765 - - 2,765
------- ------- ------- -------
Total securities
available-for-sale $74,135 $ - $ 1,559 $75,694
======= ======= ======= =======
Estimated Gross Gross
(dollars in thousands) fair unrealized unrealized Amortized
value gains losses cost
----- ----- ------ ----
June 30, 1998
U.S. Treasury and Government
Agency obligations:
Within 1 year $ 18,330 $ 98 $ - $
18,232
After 5 and within 10 years 993 - 7 1,000
Mortgage backed securities 87,796 46 390 88,140
Collateralized mortgage
obligations 2,447 - 163 2,610
-------- ------ ------ --------
Total debt securities 109,566 144 560 109,982
Equity securities 2,525 - - 2,525
-------- ------ ------ --------
Total securities
available-for-sale $112,091 $ 144 $ 560 $112,507
======== ====== ====== ========
Securities classified as held-to-maturity (carried at amortized cost)
were as follows:
(dollars in thousands) Gross Gross Estimated
Amortized unrealized unrealized fair
cost(a) gains losses value
------- ----- ------ -----
June 30, 1999
Municipal bonds
After 10 years $10,558 $ - $ 866 $ 9,692
Mortgage backed securities 22,890 37 - 22,927
Collateralized mortgage
obligations 10,619 51 378 10,292
------- ---- ------ -------
Total securities
held-to-maturity $44,067 $ 88 $1,244 $42,911
======= ==== ====== =======
June 30, 1998
Mortgage backed securities $ 6,806 $ 99 $ - $ 6,905
Collateralized mortgage
obligations 43,370 438 802 43,006
------- ---- ---- -------
Total securities
held-to-maturity $50,176 $537 $802 $49,911
======= ==== ==== =======
(a) Securities transferred from available-for-sale are carried at
estimated fair value as of the transfer date and adjusted for
subsequent amortization.
Cash proceeds and realized gains and losses from sales of securities were
as follows:
(dollars in thousands) Cash Realized Realized
proceeds gains losses
-------- ----- ------
Year ended June 30, 1999
Collateralized mortgage obligations $20,933 $ - $ 274
======= ===== =====
Year ended June 30, 1998
US Government Agency securities
Available-for-sale $30,009 $ 10 $ -
Mortgage backed securities
Available-for-sale 1,042 64 -
Collateralized mortgage obligations
Available-for-sale 5,868 - 242
Held-to-maturity 7,325 - 103
------- ----- ----
Total $44,244 $ 74 $345
======= ===== ====
Year ended June 30, 1997
US Treasury securities
Available-for-sale $10,222 $ 2 $ 1
Mortgage backed securities
Available-for-sale 348 17 -
Collateralized mortgage obligations
Available-for-sale 12,681 3 30
------- ---- ----
Total $23,251 $ 22 $ 31
======= ==== ====
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 was modified by SFAS 137 to make the standard
effective for all fiscal years beginning after June 15, 2000 (July 1,
2000 for NewMil). SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair
value of derivative instruments are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, the type of
hedge transaction. NewMil does not presently have any derivative or
hedging instruments. NewMil has not had any derivative or hedging
instruments in the past three years.
In 1999 NewMil adopted the provisions of SFAS 133 and under this
provision reclassified securities totaling $21 million from
held-to-maturity to available-for-sale, and then sold those securities.
NewMil realized a loss, net of taxes, of $162,000 on the transfer and
sale of these securities. This loss has been reported separately in net
income as the cumulative effect of adopting SFAS 133. In past years
these securities had experienced significant market price volatility.
NewMil sold these securities to reduce it's exposure to market risk.
At September 30, 1998 these securities were carried in the
held-to-maturity category at $1,091,000 below cost, with a related
unrealized loss, net of taxes, in shareholders equity. The unrealized
loss was generated as a result of having transferred them from
available-for-sale to held-to-maturity at which time they were
transferred at their then current market value, which was significantly
below their amortized cost. The unrealized loss, at the date of
transfer, was frozen and amortized as the related investments paid down.
During 1998 NewMil sold a collateralized mortgage obligation ("CMO") with
an amortized cost of $7,428,000 which was classified as held-to-maturity
and realized a loss of $103,000. NewMil had engaged a financial
securities consultant to analyze this CMO. Based on this review NewMil
determined that it was highly probable that NewMil would likely receive
substantially less than the contractual interest on this CMO and that the
CMO could experience a significant decline in market value. NewMil
concluded that these and other changes in circumstances surrounding this
CMO were isolated, non-recurring, and highly unusual, and could not have
been reasonably anticipated.
At June 30, 1999 securities with a carrying value and market value
aggregating approximately $786,000 and $746,000, respectively, were
pledged as collateral against public funds.
NOTE 3 - LOANS
The composition of the loan portfolio was as follows:
June 30, (in thousands) 1999 1998
---- ----
Real estate mortgages
One-four family residential $128,371 $ 85,274
Five or more family residential 6,152 5,500
Commercial 37,456 34,878
Land loans 2,410 3,571
Commercial and industrial 18,211 14,357
Home equity lines of credit 19,429 21,208
Installment and other 2,850 3,118
-------- --------
Total loans, gross 214,879 167,906
Deferred loan origination fees and
purchase premium, net 146 (53)
Allowance for loan losses (4,989) (5,004)
-------- --------
Total loans, net $210,036 $162,849
======== ========
Impaired loans at June 30 (in thousands)
With no valuation allowance $ 453 $ 464
With valuation allowance 300 -
----- -----
Total impaired loans 753 464
----- -----
Valuation allowance 173 -
Commitments to lend additional
amounts to impaired borrowers - -
Average impaired loans 627 1,034
Amount of impaired loans based on:
Discounted cash flows - -
Collateral values 753 464
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 were as follows:
Year ended June 30, (in thousands) 1999 1998 1997
Balance at beginning of year $5,004 $5,452 $4,866
Provision for losses 100 250 400
Charge-offs (176) (706) (124)
Recoveries 61 8 310
------ ------ ------
Balance at end of year $4,989 $5,004 $5,452
====== ====== ======
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
June 30, (in thousands) 1999 1998
---- ----
Non-accrual loans $1,051 $ 761
Accruing loans past due
90 days or more 185 628
Accruing troubled debt
restructured loans - -
------ ------
Total non-performing loans 1,236 1,389
------ ------
Real estate acquired in
settlement of loans 333 377
Valuation reserve - (82)
------ ------
Total other real estate owned, net 333 295
------ ------
Total non-performing assets $1,569 $1,684
====== ======
The reductions in interest income associated with non-accrual loans were
as follows:
Year ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
Income in accordance with
original terms $ 98 $ 77 $228
Income recognized 59 58 44
---- ---- ----
Reduction in interest income $ 39 $ 19 $184
==== ==== ====
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of NewMil's premises and equipment were as follows:
June 30, (in thousands) 1999 1998
---- ----
Land $ 1,140 $ 1,140
Buildings and improvements 6,156 6,155
Equipment 3,112 2,216
Leasehold improvements 459 674
------- -------
Total cost 10,867 10,185
Accumulated depreciation
and amortization (4,629) (4,061)
------- -------
Bank premises and equipment, net $ 6,238 $ 6,124
======= =======
NOTE 6 - BORROWINGS
NewMil's borrowings consist of advances from the Federal Home Loan Bank
of Boston and repurchase agreements with major brokerage firms that are
primary dealers in government securities. Advances from the Federal Home
Loan Bank of Boston at June 30, were as follows:
(in thousands) 1999 1998 1997
---- ---- ----
5.58% due July 2, 1997 $ - $ - $2,000
5.57% due July 9, 1997 - - 2,000
5.57% due July 18, 1997 - - 2,000
5.57% due July 23, 1997 - - 2,000
5.68% due March 3, 1999 - 12,500 -
5.80% due March 3, 2000 - 10,000 -
5.91% due March 5, 2001 7,500 7,500 -
6.02% due March 4, 2002 5,000 5,000 -
6.00% due March 3, 2003 2,500 2,500 -
------- ------- ------
Total $15,000 $37,500 $8,000
======= ======= ======
The following is an analysis of repurchase agreements:
(dollars in thousands) 1999 1998 1997
---- ---- ----
Repurchase agreements
Borrowings at June 30
maturing 30 days or less $ - $ - $5,000
Average borrowings during year - 493 6,713
Maximum month-end borrowings - 5,000 14,776
Accrued interest expense at June 30 - - 21
Weighted average rate at June 30 - % - % 5.64%
Weighted average rate during year - 5.71 5.47
Amount at risk by broker:
Salomon Brothers $ - $ - $2,629
Collateral at June 30
Carrying amount - - 7,606
Market value - - 7,585
Accrued interest income - - 44
NewMil has a pre-approved line of credit of up to 2% of total assets with
the Federal Home Loan Bank of Boston ("FHLBB") under the FHLBB's IDEAL
Way Line of Credit Program. These advances are one-day variable rate
loans with automatic rollover. Under an agreement with the FHLBB NewMil
is required to maintain qualified collateral, as defined in the FHLBB's
Statement of Credit Policy, free and clear of liens, pledges and
encumbrances, as collateral for the advances and the pre-approved line of
credit. NewMil maintains qualified collateral in excess of the amount
required to support the outstanding advances and the pre-approved line of
credit at June 30, 1999.
During 1999 NewMil used the proceeds from the sale of securities to
prepay $22.5 million of Federal Home Loan Bank fixed rate advances.
NewMil incurred a gross prepayment fee of $147,000. The effect on the
net income of this prepayment fee was $87,000, net of taxes, and has been
reported in net income as an extraordinary item for this early
extinguishment of debt.
NOTE 7 - INCOME TAXES
NewMil provides deferred taxes for the estimated future tax effects
attributable to temporary differences and carryforwards when realization
is more likely than not. The components of the income tax provision were
as follows:
(in thousands)
Year ended June 30, 1999 1998 1997
---- ---- ----
Current provision (benefit)
Federal $1,498 $ 888 $ 896
State 270 513 (26)
------ ------ ------
Total 1,768 1,401 870
------ ------ ------
Deferred provision
Federal 93 690 641
State 403 73 375
------ ------ ------
Total 496 763 1,016
------ ------ ------
Income tax provision $2,264 $2,164 $1,886
====== ====== ======
The following is a reconciliation of the expected federal statutory tax
to the income tax provision:
Year ended June 30, 1999 1998 1997
---- ---- ----
Income tax at statutory
federal tax rate 34.0% 34.0% 34.0%
Connecticut Corporation tax,
net of federal tax benefit 8.4 7.5 5.1
Other (1.6) 0.5 2.9
----- ----- -----
Effective income tax rates 40.8 42.0 42.0
===== ===== =====
The components of NewMil's net deferred tax asset were as follows:
(in thousands)
June 30, 1999 Federal State
------- -----
Deferred tax assets
Unrealized losses on securities
available-for-sale and transferred
to held-to-maturity $ 584 $ 146
Capital loss carryforwards 143 35
Bad debt expense, book 1,552 424
Accrued pension expense 22 6
Deferred income 66 18
Other 261 44
------ -----
Total deferred tax assets 2,628 673
------ -----
Deferred tax liabilities
Bad debt expense, tax 564 154
Deferred income 133 34
------ -----
Total deferred tax liabilities 697 188
------ -----
Net deferred tax asset 1,931 485
Valuation reserve (143) (485)
------ -----
Net deferred tax asset $1,788 $ -
====== =====
June 30, 1998 Federal State
------- -----
Deferred tax assets
Unrealized losses on securities
available-for-sale and transferred
to held-to-maturity $ 612 $ 191
Capital loss carryforwards 143 35
Bad debt expense, book 1,540 475
Losses on real estate acquired 45 14
Accrued pension expense 151 47
Deferred income 50 15
Other 162 50
------ ------
Total deferred tax assets 2,703 827
------ ------
Deferred tax liabilities
Bad debt expense, tax 638 197
Deferred income 13 1
------ ------
Total deferred tax liabilities 651 198
------ ------
Net deferred tax asset 2,052 629
Valuation reserve (143) (35)
------ ------
Net deferred tax asset $1,909 $ 594
====== ======
The allocation of deferred tax expense involving items charged to current
year income and items charged directly to shareholders' equity for the
years ended June 30, are as follows:
(in thousands) Federal State
------- -----
June 30, 1999
Deferred tax expense allocated to:
Shareholders' equity $ 28 $ 191
Income 93 403
----- -----
Total deferred tax expense $ 121 $ 594
===== =====
June 30, 1998
Deferred tax expense allocated to:
Shareholders' equity $ 122 $ 68
Income 690 73
----- -----
Total deferred tax expense $ 812 $ 141
===== =====
NewMil will only recognize a deferred tax asset when, based upon
available evidence, realization is more likely than not. At June 30,
1999, NewMil recorded a valuation reserve of $143,000 and $485,000
against federal and state deferred tax assets, respectively, representing
capital loss carryforwards which NewMil does not expect to utilize.
On May 19, 1998 Connecticut legislation was passed which made sweeping
changes to the corporation business tax treatment of banks and financial
service companies. The new law permits banks to shelter certain mortgage
income from the Connecticut corporation business tax through the use of a
new special purpose entity called a "passive investment company" (PIC).
In general, the PIC can earn mortgage interest income, and pay dividends
to its parent company, free from the Connecticut corporation business
tax. The legislation was effective for income years commencing on or
after January 1, 1999.
NewMil formed a PIC, NMSB Mortgage Company, and changed its tax year to a
calendar year basis to take advantage of the Connecticut statute.
Effective January 1, 1999 NewMil transferred mortgages into the PIC and
income of the PIC and its dividends to NewMil became exempt from the
Connecticut Corporation Business Tax. Effective January 1, 1999,
NewMil's combined Federal and State effective tax rate became 34%,
compared with an effective rate, during the first two quarters of the
fiscal year, of 40.27% (prior to the deferred tax asset write-off,
discussed below). The formation of the PIC required NewMil to establish
a valuation allowance against its existing deferred State tax assets that
are no longer expected to be realized in future years. Accordingly,
NewMil's income tax provision for the year ended June 30, 1999 includes a
charge of $266,000.
NOTE 8 - RETIREMENT PLANS
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosure about Pensions and
Other Postretirement Benefits". SFAS 132 standardizes the disclosure
requirements for pension and other postretirement benefits by requiring
additional information to facilitate financial analysis and eliminate
certain disclosures that are considered no longer useful. SFAS 132
supersedes the disclosure requirements of SFAS Nos. 87, 88 and 106. This
Statement is effective for fiscal years beginning after December 15,
1997. Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not readily
available. NewMil adopted SFAS 132 as of July 1, 1998.
NewMil has a non-contributory defined benefit pension plan (the "Pension
Plan") covering all eligible employees. Since September 1, 1993 benefit
accruals have been suspended under the Pension Plan for all employees.
The accrued benefits are primarily based on compensation and length of
service. Pension Plan assets consist principally of cash, money market
funds, bonds and equity securities. The funded status of the Pension
Plan at March 31 was as follows:
March 31, (in thousands) 1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at
beginning of year $5,875 $5,337
Service cost - -
Interest cost 359 314
Plan participants' contributions - -
Actuarial gain 221 430
Benefits paid (215) (206)
------ ------
Benefit obligation at
end of year 6,240 5,875
------ ------
Change in plan assets:
Fair value of plan assets at
beginning of year 7,821 6,145
Actual return on plan assets 1,017 1,882
Employer contribution - -
Plan participant's contribution - -
Benefits paid (215) (206)
------ ------
Fair value of plan assets at
end of year 8,623 7,821
------ ------
Funded status 2,383 1,946
Unrecognized prior service cost - -
Unrecognized net actuarial (gain) loss (2,405) (2,147)
Unrecognized transition (asset)
obligation - -
------- -------
Accrued benefit cost $ (22) $ (201)
======= =======
Year ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
Weighted-average assumptions:
Discount rate 6.0% 6.0% 6.0%
Expected return on plan assets 6.0% 6.0% 6.0%
Components of net periodic cost:
Interest cost $ 359 $ 314 $ 295
Expected return on plan assets (462) (362) (332)
Recognized net (gain) loss (75) (32) (27)
Net amortization and deferral - - -
------ ----- -----
Net pension income $ (178) $ (80) $ (64)
====== ===== =====
No contributions were made to the Pension Plan in 1999, 1998 or 1997.
NewMil has a supplemental pension plan which provides retirement benefits
to a key employee who is not included in the Pension Plan.
NewMil has a 401(k) Savings Retirement Plan covering all eligible
employees. Participants may contribute up to 15% of their compensation,
subject to a maximum of $10,000 per year in 1999. NewMil contributes
amounts equal to 50% of annual employee contributions up to 6% of
participants' compensation. Employees are fully vested in NewMil's
contributions after five years of service. NewMil contributed $79,196,
$74,875 and $61,972 to the Plan in 1999, 1998 and 1997, respectively.
This plan allows for NewMil to make non-contributory profit sharing
contributions. No profit sharing contributions were made in 1999, 1998
or 1997.
NewMil provides post-retirement health benefits for current retirees and
eligible employees. Post-retirement life insurance benefits are provided
for employees that were eligible for retirement as of October 1, 1993 and
current retirees. The cost of post-retirement health care benefits is
shared by NewMil and the retiree, and benefits are based on deductible
and coinsurance provisions. The post-retirement life insurance benefits
are non-contributory, and benefits are based on a percentage of the base
pay at retirement. Effective October 1, 1993 NewMil suspended certain
post-retirement benefits and introduced a co-pay provision for new
employees hired on or after October 1, 1993. NewMil does not
advance-fund its post-retirement health care and life insurance benefit
plan. Post-retirement expense for 1999, 1998 and 1997 was $60,000,
$50,000 and $60,000, respectively.
NOTE 9 - SHAREHOLDERS' EQUITY
Capital Requirements
- --------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional and discretionary actions by the regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined) to average
assets (as defined) and total and Tier 1 capital (as defined) to
risk-weighted assets (as defined). Management believes, as of June 30,
1999, that the Bank meets all capital adequacy requirements to which it
is subject.
The Bank was classified, as of its most recent notification, as "well
capitalized". At June 30, 1999, the Bank's actual regulatory capital
position as compared to both the capital position as defined "For Capital
Adequacy Purposes" and "To Be Well Capitalized Under Prompt Corrective
Action Provisions" is as follows:
For Capital
(dollars in thousands) Actual Adequacy Purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
As of June 30, 1999
Tier one leverage $34,268 9.53% > $14,381 > 4.00%
- -
Tier one risk-based 34,268 18.13 > 7,319 > 4.00
- -
Total risk-based 36,662 19.40 > 14,639 > 8.00
- -
As of June 30, 1998
Tier one leverage 34,463 9.24 > 14,917 > 4.00
- -
Tier one risk-based 34,463 20.48 > 6,731 > 4.00
- -
Total risk-based 36,602 21.75 > 13,463 > 8.00
- -
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
------ -----
As of June 30, 1999
Tier one leverage > $17,977 > 5.00%
- -
Tier one risk-based > 10,979 > 6.00
- -
Total risk-based > 18,298 > 10.00
- -
As of June 30, 1998
Tier one leverage > 18,648 > 5.00
- -
Tier one risk-based > 10,097 > 6.00
- -
Total risk-based > 16,829 > 10.00
- -
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 profit for the current year and retained net
profits for the preceding two years. Consequently, the maximum amount of
dividends payable by the Bank to NewMil at June 30, 1999 is $1,064,000.
In some instances, further restrictions on dividends may be imposed on
NewMil by the FRB.
In July 1996 NewMil announced its intention to repurchase up to 10% of
its outstanding common stock in the open market and unsolicited
negotiated transactions, including block purchases. In April and July
1999 NewMil announced its intention to buy additional shares of 100,000
and 50,000, respectively, under the same conditions. The purpose of the
repurchase plan is to offset the future dilution from shares issued upon
the exercise of stock options under NewMil's stock option plans, and for
general corporate purposes. During 1999 NewMil repurchased 184,500
shares, or 4.5%, of its outstanding shares of common stock. As of June
30, 1999 NewMil had repurchased 406,989 shares of its outstanding common
stock, under the July 1996 plan, and 71,811 shares of its outstanding
common stock, under the April 1999 plan. This represents 94.4% of the
total planned repurchases with total consideration of $5,012,000 being
paid.
NOTE 10 - COMPREHENSIVE INCOME
Effective July 1, 1998, NewMil adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income includes
net income and any changes in equity from non-owner sources that are not
recorded in the income statement (such as changes in net unrealized gains
(losses) on securities). The purpose of reporting comprehensive income
is to report a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
NewMil's one source of other comprehensive income is the net unrealized
gain (loss) on securities.
The components of comprehensive income are as follows:
Years ended
June 30,
(in thousands) 1999 1998 1997
---- ---- ----
Comprehensive income
Net income $3,032 $2,989 $2,602
Net unrealized gains on securities
during period 73 284 277
------ ------ ------
Comprehensive income $3,105 $3,273 $2,879
====== ====== ======
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
------ ------- ------
Year ended June 30, 1999
Net unrealized losses on securities
available-for-sale arising
during the period $(1,417) $ 524 $(893)
Reclassification adjustment for
realized loss included in net income 274 (112) 162
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity
and subsequently sold (Note 2) 1,030 (412) 618
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 405 (150) 255
Impact of change in effective
tax rate - (69) (69)
-------- ---- ----
Net unrealized gains on
securities during period $ 292 $(219) $ 73
======= ===== ====
Year ended June 30, 1998
Net unrealized gains on securities
available-for-sale arising
during the period $386 $(154) $232
Reclassification adjustment for
realized loss included in net income (271) 108 (163)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 358 (143) 215
---- ----- ----
Net unrealized gains on
securities during period $473 $(189) $284
==== ===== ====
Year ended June 30, 1997
Net unrealized gains on securities
available-for-sale arising
during the period $329 $(131) $198
Reclassification adjustment for
realized loss included in net income (9) 3 (6)
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-
maturity 142 (57) 85
---- ----- ----
Net unrealized gains on
securities during period $462 $(185) $277
==== ===== ====
NOTE 11 - RELATED PARTY TRANSACTIONS
In the normal course of business the Bank has granted loans to executive
officers, directors, principal shareholders and associates of the
foregoing persons considered to be related parties. Changes in loans to
executive officers, directors and their related associates are as follows
(there are no loans to principal shareholders):
Year ended June 30, (in thousands) 1999 1998
---- ----
Balance, beginning of year $ 615 $ 583
Advances 160 70
Repayments (219) (76)
Change in related party status (Note 1) - 38
----- -----
Balance, end of year $ 556 $ 615
===== =====
Note 1. Adjustment to exclude loans outstanding to persons who are no
longer considered related parties, as well as to add loans previously
outstanding to persons who became related parties during the year.
NOTE 12 - STOCK OPTIONS
NewMil's 1986 Stock Option and Incentive Plan ("1986 Plan") authorizes
the granting of both incentive and non-incentive options and stock
appreciation rights (SARs) to officers and other key employees by the
Salary and Benefits Committee of the Board. The 1986 Plan provides for
the granting of options to purchase shares of Common Stock for terms of
up to 10 years at an exercise price not less than 85% of the fair market
value of NewMil's stock on the date of the grant. The options are fully
vested at the time of the grant. Changes in outstanding stock option and
SARS were as follows:
Number of Weighted average
options exercise price
------- --------------
June 30, 1996 (Note 1) 378,620 $4.968
Granted -
Exercised (750) 3.833
Lapsed (Note 1) (8,334) 10.945
-------
June 30, 1997 369,536 4.835
Granted -
Exercised (52,701) 5.362
Lapsed (1,084) 6.726
-------
June 30, 1998 315,751 4.953
Granted 25,000 12.438
Exercised (14,400) 5.362
Lapsed -
-------
June 30, 1999 326,351 5.562
=======
Note 1. Includes 8,000 options with SARs.
All stock options outstanding as of June 30, 1999 were exercisable. As
of June 30, 1999 options to purchase 76,548 shares of Common Stock were
available to be granted under the 1986 Stock Option and Incentive Plan.
NewMil's 1992 Stock Option Plan for Outside Directors ("1992 Plan")
provides for automatic grants of options to non-employee directors who
were participants on the effective date of the plan and were reelected as
non-employee directors. At the annual meeting in 1995 the plan was
amended so that all non-employee directors would be granted 2,000 options
at June 30th of each subsequent year. The 1992 Plan provides for the
granting of options to purchase shares of Common Stock for terms of up to
10 years at an exercise price of not less than the fair market value
(average of the bid and ask price) of NewMil's stock on the date of the
grant. The options are fully vested at the time of the grant. Changes
in outstanding stock options were as follows:
Number of Weighted average
Options exercise price
------- --------------
June 30, 1996 84,000 $4.000
Granted 12,000 11.188
Lapsed - -
-------
June 30, 1997 96,000 4.898
Granted 17,000 12.783
Lapsed - -
-------
June 30, 1998 113,000 6.085
Granted 14,000 11.031
Lapsed - -
-------
June 30, 1999 127,000 5.414
=======
All stock options outstanding as of June 30, 1999 were exercisable. As
of June 30, 1999 options to purchase 3,000 shares of Common Stock were
available to be granted under the 1992 Stock Option Plan for Outside
Directors.
The following table summarizes information about NewMil's Employee and
Director Stock Option Plans, as of June 30, 1999:
Number of Weighted
options average Weighted
Range of outstanding remaining average
exercise and contractual exercise
price exercisable life price
------- ----------- ---- -----
$ 3.00 - $ 5.99 244,550 4.0 $ 3.74
6.00 - 8.99 140,801 6.1 6.57
9.00 - 11.99 26,000 9.1 11.10
12.00 - 12.84 42,000 9.0 12.58
------- ----- ------
453,351 5.42 $ 5.86
======= ===== ======
Effective July 1, 1996 NewMil adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123).
As permitted by SFAS 123 NewMil has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its Plans. Accordingly, no
compensation expense has been recognized for options granted under its
Plans. Had compensation cost for the NewMil's Plans been determined
based on the fair value at the grant dates for awards under the Plans
consistent with the method of SFAS 123, NewMil's net income and diluted
earnings per share would have been reduced to the proforma amounts
indicated below.
Net income Earnings per
Year ended June 30, (in thousands) share, diluted
-------------- --------------
1999
As reported $3,032 $0.76
Pro forma 2,918 0.73
1998
As reported $2,989 $0.74
Pro forma 2,938 0.72
1997
As reported $2,602 $0.63
Pro forma 2,567 0.62
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, with the following weighted average assumptions used for
grants:
1999 1998 1997
---- ---- ----
Dividend yield 2.35% 1.54% 1.61%
Expected volatility 28.59 30.00 30.00
Risk-free interest rate 5.89 5.37 6.49
Expected lives, years 10 10 10
Fair value of options
granted during year $4.43 $5.06 $4.90
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are various commitments and
contingent liabilities outstanding pertaining to the purchase and sale of
securities and the granting of loans and lines of credit which are not
reflected in the accompanying financial statements. At June 30, 1999
NewMil had commitments under outstanding construction mortgages of
$2,697,000, unused lines of credit of $23,879,000 and outstanding
commitments to fund loans of $6,104,000. At June 30, 1998 NewMil had
commitments under outstanding construction mortgages of $1,501,000,
unused lines of credit of $19,268,000 and outstanding commitments to fund
loans of $7,254,000. NewMil does not anticipate any material losses as a
result of these transactions. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. NewMil's exposure to
credit loss in the event of non-performance by the other party to the
commitment is represented by the contractual amount of the instrument.
The exposure to credit loss is limited by evaluating the customer's
credit worthiness on a case-by-case basis and by obtaining collateral if
deemed necessary. Collateral held generally includes residential and
commercial properties. NewMil generally requires an initial loan to
value ratio of no greater than 80% when real estate collateralizes a loan
commitment.
NewMil and its subsidiaries are defendants in proceedings arising out of,
and incidental to, activities conducted in the normal course of business.
In the opinion of management, resolutions of these matters will not have
a material effect on NewMil's financial condition, results of operations
or cash flows.
NewMil leases facilities under operating leases which expire at various
dates through 2004. The leases have varying renewal options, generally
require a fixed annual rent, and provide that real estate taxes,
insurance, and maintenance are to be paid by NewMil. Rent expense
totaled $253,234, $232,240 and $167,041 for 1999, 1998 and 1997,
respectively. Future minimum lease payments at June 30, 1999 are as
follows:
2000 $250,425
2001 224,386
2002 211,953
2003 153,609
2004 150,276
After 2004 96,238
----------
$1,086,887
==========
NOTE 14 - ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires NewMil to
disclose fair value information for certain of its financial instruments,
including loans, securities, deposits, borrowings and other such
instruments. Quoted market prices are not available for a significant
portion of NewMil's financial instruments and, as a result, the fair
values presented may not be indicative of net realizable or liquidation
values. Fair values are estimates derived using present value or other
valuation techniques and are based on judgements regarding future
expected loss experience, current economic conditions, risk
characteristics, and other factors. In addition, fair value estimates
are based on market conditions and information about the financial
instrument at a specific point in time. Fair value estimates are based
on existing on- and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial
instruments. Such items include mortgage servicing, core deposit
intangibles and other customer relationships, premises and equipment,
foreclosed real estate and income taxes. In addition, the tax
ramifications relating to the realization of the unrealized gains and
losses may have a significant effect on fair value estimates and have not
been considered in the estimates.
The following is a summary of the methodologies and assumptions used to
estimate the fair value of NewMil's financial instruments pursuant to
SFAS 107.
Cash, cash equivalents and other: The fair value of cash and due from
banks, deposits with banks, federal funds sold, accrued interest
receivable, securities sold under repurchase agreements and accrued
interest payable, is considered to approximate the book value due to
their short-term nature and negligible credit losses.
Securities: Fair value of securities available-for-sale and
held-for-sale were determined by secondary market and independent broker
quotations.
Loans: Fair values for residential mortgage and consumer installment
loans were estimated by discounting cash flows, adjusted for prepayments.
The discount rates used for residential mortgages were secondary market
yields for residential mortgage loans, net of servicing and adjusted for
risk. The discount rates used for consumer installment loans were
current rates offered by NewMil. Fair values for commercial loans were
estimated by assessing credit risk and interest rate risk. Such loans
were valued by discounting estimated future cash flows at a rate that
incorporates both interest and credit risk.
Deposit liabilities: The fair value for demand, savings and certain
money market deposits is equal to the amount payable on demand at the
balance sheet date which is equal to the carrying value. The fair value
of certificates of deposit was estimated by discounting cash flows using
rates currently offered by NewMil for deposits of similar remaining
maturities.
Borrowings: The fair value for borrowings was estimated by discounting
cash flows using rates currently offered by lenders for borrowings of
similar remaining maturities.
The carrying values and estimated fair values of NewMil's financial
instruments are as follows:
June 30, 1999 1998
-------------------- -------------------
(dollars in thousands) Estimated Estimated
Carrying fair Carrying fair
value value value value
----- ----- ----- -----
Financial Assets
Cash and due from banks $ 9,719 $ 9,719 $ 5,342 $ 5,342
Federal funds sold 3,167 3,167 25,134 25,134
Securities available for sale 74,135 74,135 112,091 112,091
Securities held to maturity 44,067 42,911 50,176 49,911
Loans 214,879 212,488 167,906 169,692
Allowance for loan losses (4,989) - (5,004) -
Deferred loan origination
fees and purchase premium, net 146 - (53) -
------- ------- ------- -------
Loans, net 210,036 212,488 162,849 169,692
Accrued interest receivable 2,190 2,190 2,259 2,259
Financial Liabilities
Deposits
Demand (non-interest bearing)$ 18,622 $ 18,622 $ 14,520 $ 14,520
NOW accounts 34,660 34,660 30,202 30,202
Money market 71,252 71,252 65,257 65,257
Savings and other 49,443 49,443 45,180 45,180
Certificates of deposit 126,146 126,971 138,718 139,385
------- ------- ------- -------
Total deposits 300,123 300,948 293,877 294,544
FHLB advances 15,000 14,855 37,500 37,988
Accrued interest payable 133 133 233 233
NOTE 15 - NEWMIL BANCORP, INC. (parent company only) FINANCIAL INFORMATION
The unconsolidated balance sheets of NewMil Bancorp, Inc. at June 30, and
its statements of income and cash flows for each of the years ended June
30, are presented as follows:
Balance Sheets
June 30, (in thousands) 1999 1998
---- ----
Assets
Due from bank $ 329 $ 75
Investment in New Milford
Savings Bank 32,171 32,454
Other assets 673 891
------- -------
Total Assets $33,173 $33,420
======= =======
Liabilities and Shareholders'
Equity
Liabilities $ 38 $ 11
Shareholders' equity 33,135 33,409
------- -------
Total Liabilities and
Shareholders' Equity $33,173 $33,420
======= =======
Statements of Income
Years ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
Fee income $ 100 $ - $ -
Dividends from subsidiary 3,682 1,155 2,919
Expenses 175 163 166
------ ------ ------
Income before taxes and
undistributed net income
of subsidiary 3,607 992 2,753
Income tax benefit - - -
------ ------ ------
Income before equity in
undistributed net income
of subsidiary 3,607 992 2,753
Equity in undistributed
(equity distributed in
excess of) net income
of subsidiary (575) 1,997 (151)
------ ------ ------
Net income $3,032 $2,989 $2,602
====== ====== ======
Statements of Cash Flows
Years ended June 30, (in thousands) 1999 1998 1997
---- ---- ----
Net income $ 3,032 $ 2,989 $ 2,602
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
(equity distributed in
excess of) net income
of subsidiary 575 (1,997) 151
Other 26 (26) 34
------- ------- -------
Net cash provided by
operating activities 3,633 966 2,787
------- ------- -------
Financing Activities:
Cash dividends paid (1,328) (1,153) (918)
Proceeds from Treasury Stock issued - 50 -
Treasury stock purchased (2,110) (765) (2,137)
Proceeds from exercise of
stock options 59 285 3
------- ------- -------
Net cash used by
financing activities (3,379) (1,583) (3,052)
------- ------- -------
(Decrease) increase in cash
and cash equivalents 254 (617) (265)
Cash and cash equivalents,
beginning of year 75 692 957
------- ------- -------
Cash and cash equivalents,
end of year $ 329 $ 75 $ 692
======= ======= =======
NOTE 16 - QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for 1999 and 1998 is as follows (in thousands
except ratios and per share amounts):
Year ended June 30, 1999
June 30, Mar 31, Dec 31, Sept 30,
-------- ------- ------- --------
Statement of Income
Interest and dividend
income $5,867 $5,944 $6,148 $6,497
Interest expense 2,664 2,716 3,112 3,315
Net interest income 3,203 3,228 3,036 3,182
Provision for loan losses 25 25 25 25
Non-interest income:
Securities gains (losses), net - - - -
Gains on sales of
loans, net 96 161 152 138
Service fees and other 382 360 394 409
Gain on sale of OREO - 478 754 110
Gain on sale of
non-performing loan - - - -
Non-interest expense 2,241 2,856 2,869 2,472
Income before income taxes 1,415 1,346 1,442 1,342
Income tax provision 388 466 870 540
Income before effect of accounting
change and extraordinary item 1,027 880 572 802
Effect of change in accounting
principal, net of taxes - - (162) -
Extraordinary item, net of taxes - - (87) -
Net income 1,027 880 323 802
Financial Condition
Total assets $352,117 $358,279 $357,764 $369,777
Loans, net 210,036 206,165 189,862 169,668
Allowance for loan losses 4,989 5,100 5,068 5,005
Securities 118,202 116,484 135,923 167,005
Deposits 300,123 305,188 305,381 295,323
Borrowings 15,000 15,000 15,000 37,500
Shareholders' equity 33,135 34,542 34,856 34,574
Non-performing assets 1,569 1,792 1,672 2,781
Per Share Data
Earnings, diluted $0.27 $0.22 $0.21 $0.20
Cash dividends 0.09 0.09 0.08 0.08
Book value 9.04 9.15 9.09 9.04
Market price: (a)
High 11.750 13.000 14.000 13.500
Low 9.500 11.000 11.000 10.000
Statistical Data
Net interest margin 3.77% 3.80% 3.45% 3.54%
Efficiency ratio 60.88 67.57 66.17 63.34
Return on average assets 1.16 0.99 0.35 0.87
Return on average
shareholders' equity 12.16 10.15 3.72 9.43
Weighted average equivalent
shares outstanding,
diluted 3,874 3,998 4,030 4,031
Statement of Income
Interest and dividend
income $6,442 $6,352 $5,969 $5,892
Interest expense 3,311 3,194 2,865 2,826
Net interest income 3,131 3,158 3,104 3,066
Provision for loan losses 50 50 50 100
Non-interest income:
Securities gains (losses), net - 10 (258) (23)
Gains on sales of
loans, net 244 89 82 65
Service fees and other 406 361 380 371
Gain on sale of
non-performing loan 778 - - -
Non-interest expense 3,072 2,275 2,042 2,172
Income before income taxes 1,437 1,293 1,216 1,207
Income tax provision 604 543 511 506
Net income 833 750 705 701
Financial Condition
Total assets $367,569 $370,276 $355,526 $317,407
Loans, net 162,849 169,206 165,684 164,561
Allowance for loan losses 5,004 4,998 5,546 5,544
Securities 162,267 181,527 166,343 121,888
Deposits 293,877 289,335 285,516 278,328
Borrowings 37,500 44,500 34,000 4,000
Shareholders' equity 33,409 32,989 33,143 32,295
Non-performing assets 1,684 2,321 3,212 4,325
Per Share Data
Earnings, diluted $0.21 $0.18 $0.17 $0.17
Cash dividends 0.08 0.08 0.08 0.06
Book value 8.71 8.59 8.54 8.42
Market price: (a)
High 14.625 14.000 14.500 14.250
Low 12.750 12.500 12.188 10.875
Statistical Data
Net interest margin 3.52% 3.67% 3.95% 3.97%
Efficiency ratio 67.38 62.88 61.73 62.43
Return on average assets 0.91 0.85 0.87 0.88
Return on average
shareholders' equity 9.94 8.98 8.56 8.67
Weighted average equivalent
shares outstanding,
diluted 4,053 4,065 4,061 4,067
NewMil Bancorp, Inc.'s Common Stock, par value $.50 per share ("Common
Stock") trades on the Nasdaq National Market tier of The Nasdaq Stock
Market under the symbol: NMSB. As of August 27, 1999, there were 1,535
shareholders of record of the Company's Common Stock.
(a) The above market prices reflect interdealer prices, without retail
markup, markdown or commissions, and may not necessarily represent actual
transactions.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosures
between NewMil and its independent accountants for which a Form 8-K was
required to be filed during the two most recent fiscal years or for the
period from June 30, 1999 to the date hereof.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears on pages 5 through 7 of
NewMil's Proxy Statement dated September 27, 1999 for the 1999 Annual
Meeting of Shareholders, under the captions "Nominees for Election for a
Three Year Term" and "Directors Continuing in Office". Such information
is incorporated herein by reference and made a part hereof.
Item 11. EXECUTIVE COMPENSATION
The information required by this item appears on pages 7 through 14 of
NewMil's Proxy Statement dated September 27, 1999 for the 1999 Annual
Meeting of Shareholders, under the captions: "Executive Compensation";
"Employee Benefit Plans"; "Report of the Board on Executive
Compensation"; and "Performance Graph". Such information is incorporated
herein by reference and made a part hereof.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears on pages 5 through 7 of
NewMil's Proxy Statement dated September 27, 1999 for the 1999 Annual
Meeting of Shareholders, under the caption "Nominees for Election for a
Three Year Term" and "Directors Continuing in Office". Such information
is incorporated herein by reference and made a part hereof.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears on page 14 of NewMil's
Proxy Statement dated September 27, 1999 for the 1999 Annual Meeting of
Shareholders, under the caption "Transactions with Management and
Others". Such information is incorporated herein by reference and made a
part hereof.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report
and appear on the pages indicated.
Financial Statements
--------------------
None.
(b) Reports on Form 8-K
-------------------
None.
(c) Exhibits
--------
The following documents are filed as Exhibit to this Form 10-K,
as required by Item 601 of Regulation S-K.
Exhibit No. Description
3.1 Certificate of Incorporation of NewMil (incorporated by
reference to Exhibit 3.1 to NewMil's Registration
Statement on Form S-4 (No. 33-10693) filed on December 9,
1986)
3.1.1 Amendment to Certificate of Incorporation of NewMil
increasing authorized shares of common stock from
6,000,000 to 20,000,000 (incorporated by reference to the
Registrant's 1994 Proxy Statement dated September 23,
1994, page A-1).
3.2 Bylaws of NewMil (incorporated by reference to
Exhibit 3.2 to NewMil's Registration Statement on
Form S-4 (No. 33-10693) filed on December 9, 1986)
4.1 Instruments Defining Rights of Security Holders (Included
in Exhibits 3.1 and 3.2)
10.1 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement on Form S-4
(No. 33-10693) filed on December 9, 1986)
10.2 The New Milford Savings Bank 1986 Stock Option and
Incentive Plan Incentive Stock Option Agreement and
Non-Qualified Stock Option Agreement (incorporated by
reference to the Registrant's 1988 Form 10-K).
10.3 1992 Stock Option Plan For Outside Directors of NewMil
Bancorp, Inc. (incorporated by reference to the
Registrant's 1992 Proxy Statement dated September 22,
1992, pages 17 through 20).
10.5 Rights Agreement between NewMil Bancorp, Inc. and American
Stock Transfer and Trust Company as Rights Agent dated as
of July 19, 1994 concerning NewMil Bancorp's shareholder
rights plan of same date (incorporated by reference to
the Registrant's 1994 Form 10-K).
10.6 The NewMil Bancorp, Inc. Amended and Restated 1986 Stock
Option and Incentive Plan (incorporated by reference to
the Registrant's 1995 Proxy Statement dated September 20,
1995, pages A-1 to A-11).
10.7 Employment agreement between New Milford Savings Bank and
its President and CEO, Francis J. Wiatr, as of March 31,
1994 (incorporated by reference to the Registrant's 1995
Form 10-K).
10.8 Dividend reinvestment plan for NewMil Bancorp's
shareholders (incorporated by reference to the
Registrant's 1996 Form 10-K).
10.9 Change in control agreements between New Milford Savings
Bank and management (Messrs. Grant, McMahon and Shannon;
Ms. Farrell)(incorporated by reference to the Registrant's
1996 Form 10-K).
10.10 The Amended and Restated 1992 Stock Option Plan for
Outside Directors of NewMil Bancorp, Inc. (incorporated
by reference to the Registrant's 1995 Proxy Statement
dated September 20, 1995, pages B-1 to B-4).
10.12 The Amended 1986 Stock Option and Incentive Plan
(extending term until 2005 and increasing shares to
525,000), approved by shareholders October 1997.
10.13 First and Second Amendments to Employment Agreement of
Francis J. Wiatr, as of August 1998.
10.14 Amendment to Bylaws of NewMil.
11.1 Statement regarding Computation of Net Income Per Common
Share.
23.0 Consent of PricewaterhouseCoopers LLP.
20.1 Proxy Statement dated September 27, 1999 for the Annual
Meeting of Shareholders, of NewMil Bancorp, Inc.
21.1 Subsidiaries of the Registrant.
(d) Financial Statement Schedules
-----------------------------
No financial statement schedules are required to be filed as
Exhibits pursuant to Item 14(d).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 16, 1999
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on the dates
indicated below.
/s/ Willis H. Barton, Jr.
Willis H. Barton, Jr.
Director
September 16, 1999
/s/ Herbert E. Bullock
Herbert E. Bullock
Director
September 16, 1999
/s/ Joseph Carlson II
Joseph Carlson II
Director
September 16, 1999
/s/ Laurie G. Gonthier
Laurie G. Gonthier
Director
September 16, 1999
/s/ Dr. John V. Haxo
Dr. John V. Haxo
Director
September 16, 1999
/s/ Robert J. McCarthy
Robert J. McCarthy
Director
September 16, 1999
/s/ Betty F. Pacocha
Betty F Pacocha
Director and Secretary
September 16, 1999
/s/ Suzanne L. Powers
Suzanne L. Powers
Director
September 16, 1999
/s/ Francis J. Wiatr
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
September 16, 1999
/s/ Mary C. Williams
Mary C. Williams
Director
September 16, 1999
/s/ B. Ian McMahon
B. Ian McMahon
Chief Financial Officer
and Chief Accounting Officer
September 16, 1999