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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2001
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 March
8, 2002, is $56,375,000. The number of shares of Common Stock outstanding as of
March 8, 2002, is 4,378,242.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive Proxy Statement dated March 22, 2002 for
the 2002 Annual Meeting of Shareholders are incorporated by reference into Part
III (Items 10, 11, 12 and 13).
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TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS.................................................................................. 3
Item 2. PROPERTIES................................................................................ 6
Item 3. LEGAL PROCEEDINGS......................................................................... 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 7
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................................... 8
Item 6. SELECTED FINANCIAL DATA................................................................... 8
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 11
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 33
Consolidated Balance Sheets as of December 31, 2001 and 2001,
and June 30, 2000..................................................................... 34
Consolidated Statements of Income for the year ended December 31,
2001, the six month periods ended December 31, 2000 and 1999,
and the years ended June 30, 2000, 1999 and 1998...................................... 35
Consolidated Statements of Changes in Shareholders Equity for the
three years ended June 30, 2000, the six month period ended
December 31, 2000, and the year ended December 31, 2001............................... 37
Consolidated Statements of Cash Flows for the year ended December 31,
2001, the six month periods ended December 31, 2000 and 1999,
and the years ended June 30, 2000 and 1999............................................ 38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 60
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................ 61
Item 11. EXECUTIVE COMPENSATION.................................................................... 61
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................................ 61
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 61
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K ................................................................................. 62
PART I
Item 1. BUSINESS
General
- -------
NewMil Bancorp, Inc., ("NewMil"), a Delaware corporation formed in 1987, is the
registered bank holding company for NewMil 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. For a discussion of the acquisition of Nutmeg Federal Savings & Loan,
by NewMil in November 2000, see Item 7 "Management Discussion and Analysis of
Financial Condition and Results of Operations - Business". 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,
Individual Retirement Accounts and sweep accounts. The Bank provides 24x7 access
to banking through automated teller machines in sixteen branches, through its
internet site at www.newmil.com and through bank by phone.
--------------
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 so
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. The general economic
climate over the past several years has been favorable. Should these conditions
deteriorate, NewMil's operations could be adversely impacted.
Market Area and Competition
- ---------------------------
The Bank conducts its business through eighteen full service offices and one
special needs office located in Connecticut's Litchfield, Fairfield and New
Haven Counties. The Bank's service area, which has a population of approximately
460,000, 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 and commercial banks located in its
market area. More recently, competition for deposits has developed from
non-banking companies such as brokerage houses that offer a range of deposit and
deposit-like products. 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, 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 that affect competition include, among others, the
3
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. In recent years several out of state financial
institutions, almost all larger and with greater financial resources than the
Bank, have acquired Connecticut financial institutions and begun operations in
Connecticut. This has both increased competition in NewMil's market areas and
resulted in the reduction of locally-based competition through consolidations.
NewMil may consider expansion within or outside of Connecticut provided
appropriate opportunities and conditions exist. For a discussion of the
acquisition of Nutmeg Federal Savings & Loan, by NewMil in November 2000, see
Item 7 "Management Discussion and Analysis of Financial Condition and Results of
Operations - Business".
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 re-pricing
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.
Some 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.
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 or under 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 re-pricing 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
4
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 "Financial Condition - Loans" on pages 27 and 29.
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 ("the
FRB") 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 amounts of loans it may make to any one borrower. The Financial
Modernization Act of 1999 created, among other things, a new entity the
"financial holding company". Such entities can engage in a broader range of
activities that are "financial in nature", including insurance underwriting,
securities underwriting and merchant banking. Financial holding companies can be
established relatively easily through a notice filing with the FRB, which acts
as the "umbrella regulator" for such entities. NewMil may determine to become a
financial holding company in the future.
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 the Bank 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 31 and Note 10 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
5
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 160 full-time and 23 part-time employees at December 31, 2001.
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 period. At December 31, 2001, the Bank had three
wholly-owned subsidiaries, NewMil Mortgage Company, Asset Recovery Management
Company and New Mil Asset Company. NewMil 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
liquidate certain foreclosed real estate and are presently inactive.
Item 2. PROPERTIES
The Bank conducts its business at its main office, located at 19 Main Street,
New Milford, Connecticut, and through 18 full service branches located in
Litchfield, Fairfield and New Haven Counties in addition to one limited service
branch located in Southbury, Connecticut. The Bank owns its main office and
seven of its branches. The ten other full service locations are leased by the
Bank. The following table sets forth certain information regarding the Bank's
branch offices, as of December 31, 2001.
Date Owned Lease
acquired or expiration
Branch office Location /opened leased date
- ---------------------------------------------------------------------------------------
Bethel Stony Hill Road, Bethel, CT 2000 Leased 2005
Brookfield Route 7, Brookfield, CT 1964 Leased 2005
Boardman Terrace 53 Main Street, New Milford, CT 1977 Owned --
Bridgewater (b) Routes 57 & 133, Bridgewater, CT 1981 Owned --
Canaan Main St. & Granite Avenue,
Canaan, CT 1982 Owned --
Danbury Main Street, Danbury, CT 2000 Leased 2006
Danbury North Street Shopping Center,
Danbury, CT 2000 Leased 2002
Kent 50 North Main St., Kent, CT 1960 Owned --
Lanesville 291 Danbury Road, New Milford, CT 1989 Owned --
Morris Route 109 & 63, Morris, CT 1981 Owned --
New Fairfield Routes 37 & 39, New Fairfield, CT 1969 Leased 2004
New Milford (c) 19 Main Street, New Milford, CT 1902 Owned --
New Preston (d) Routes 202 & 45, New Preston, CT 1979 Owned --
Norwalk 187 Main Street, Norwalk, CT 1997 Leased 2004
Pomperaug Woods(e) Heritage Road, Southbury, CT 2000 N/A --
Ridgefield Route 7, Ridgefield, CT 2000 Leased 2004
Sharon Route 41, Sharon, CT 1971 Leased 2002
Sherman Routes 37 & 39, Sherman, CT 1976 Leased 2004
Southbury Grand Union Supermarket
775 Main Street South,
Southbury, CT 1997 Leased 2003
(a) Information concerning the Bank's lease payments can be found at Note 14 on
page 55.
6
(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.
(e) The Bank operates a limited service office, one day a week, at this
location for the residents of Pomperaug Woods. Pomperaug Woods is an
independent life-care retirement community located in Southbury,
Connecticut.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 2001, no matter was submitted to a vote of
the shareholders of NewMil.
7
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 59 and 60. 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 32.
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. The results as of and for
the year ended December 31, 2001 and for the six month period ended December 31,
2000 reflect the acquisition of Nutmeg Federal Savings and Loan Association on
November 9, 2000.
8
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share amounts)
At or for the At or for the
years ended six months ended At or for the
December 31, December 31, years ended June 30,
2001 2000 2000 1999 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Statement of Income
Interest & dividend income $ 37,648 $ 28,879 $ 15,709 $ 12,006 $ 25,175 $ 24,456 $ 24,655
Interest expense 16,631 13,768 7,801 5,144 11,111 11,807 12,196
Net interest income 21,017 15,111 7,908 6,862 14,064 12,649 12,459
Provision (credit) for loan losses -- (391) (416) (495) (470) 100 250
Non-interest income:
Service fees & other 2,652 1,918 1,051 944 1,809 1,545 1,518
Gains on sales of loans, net 406 156 93 84 147 547 480
Losses on sales of
securities, net -- -- -- (109) (109) -- (271)
Gain on sale of non-
performing loan -- -- -- -- -- -- 778
Gains on sales of OREO -- 62 39 23 46 1,342 359
Non-interest expense 15,291 11,285 6,382 5,435 10,336 10,438 9,920
Income before income taxes 8,784 6,353 3,125 2,864 6,091 5,545 5,153
Income tax provision 3,158 2,236 1,119 960 2,076 2,264 2,164
Income before effect of
accounting change &
extraordinary item 5,626 4,117 2,006 1,904 4,015 3,281 2,989
Cumulative effect of
change in accounting
principle, net of taxes -- -- -- -- -- (162) --
Extraordinary item,
net of taxes -- -- -- -- -- (87) --
Net income 5,626 4,117 2,006 1,904 4,015 3,032 2,989
Financial Condition
Total assets $607,026 $523,578 $523,578 $341,798 $392,572 $352,117 $367,569
Loans, net 340,368 332,544 332,544 214,312 223,734 210,036 162,849
Allowance for loan losses 5,502 5,518 5,518 5,029 4,978 4,989 5,004
Securities 212,408 140,398 140,398 108,582 144,307 118,202 162,267
Deposits 476,116 437,793 437,793 299,254 319,626 300,123 293,877
Borrowings 67,540 27,500 27,500 7,500 35,750 15,000 37,500
Shareholders' equity 50,594 47,517 47,517 33,137 34,325 33,135 33,409
Non-performing assets 1,861 1,741 1,741 2,094 1,218 1,569 1,684
Per Share Data
Income before effect of
accounting change &
extraordinary item
Diluted $ 1.21 $ 1.05 $ 0.50 $ 0.50 $ 1.05 $ 0.82 $ 0.74
Basic 1.26 1.10 0.52 0.52 1.10 0.87 0.78
Net income
Diluted 1.21 1.05 0.50 0.50 1.05 0.76 0.74
Basic 1.26 1.10 0.52 0.52 1.10 0.80 0.78
Cash dividends 0.44 0.41 0.21 0.20 0.40 0.35 0.30
Book value 11.52 10.35 10.35 9.10 9.52 9.04 8.71
9
At or for the At or for the
years ended six months ended At or for the
December 31, December 31, years ended June 30,
2001 2000 2000 1999 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Statistical Data
Net interest margin 4.05% 3.94% 3.86% 4.08% 4.06% 3.64% 3.78%
Efficiency ratio 63.51 65.43 70.20 69.24 64.77 64.90 64.74
Effective tax rate 35.95 35.20 35.81 33.52 34.08 40.83 42.00
Return on average assets 1.01 1.03 0.93 1.10 1.12 0.84 0.88
Return on average
shareholders' equity 11.42 11.53 10.49 11.48 12.11 8.84 9.04
Dividend payout ratio 34.92 37.27 37.79 38.34 36.36 43.75 38.57
Allowance for loan
losses to total loans 1.59 1.63 1.63 2.29 2.18 2.32 2.98
Non-performing assets to
total assets 0.31 0.33 0.33 0.61 0.31 0.45 0.46
Tier 1 leverage capital 6.56 8.06 8.06 9.84 9.19 9.53 9.28
Total risk-based capital 12.18 12.98 12.98 18.53 16.83 19.40 21.26
Average shareholders'
equity to average assets 8.83 8.93 8.89 9.66 9.26 9.49 9.69
Weighted average equivalent
shares outstanding, diluted 4,639 3,913 4,035 3,840 3,807 3,985 4,066
Shares outstanding at end
of period (excluding
Treasury stock) 4,391 4,591 4,591 3,640 3,606 3,664 3,834
10
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 NewMil 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 eighteen
full-service offices in Connecticut's Litchfield, Fairfield and New Haven
Counties and one special needs office in New Haven County. NewMil and the Bank
were formed in 1987 and 1858, respectively.
Change in Fiscal Year End
- -------------------------
In December 2000 NewMil changed its fiscal year end to December 31 from June 30.
Previously, NewMil had changed its tax year to a calendar year basis, effective
for calendar year 1999, to take advantage of Connecticut tax legislation related
to banks and financial service companies.
Acquisition of Nutmeg Federal Savings and Loan Association
- ----------------------------------------------------------
On November 9, 2000, NewMil acquired Nutmeg Federal Savings and Loan Association
("Nutmeg") for a total purchase price of $20.3 million, in consideration for
which, NewMil paid $10.3 million in cash and issued 1.0 million shares of common
stock. Based on the terms of the agreement, Nutmeg shareholders received $8.38
per common share and $14.67 per preferred share, including a net gain (after
expenses and taxes payable) on Nutmeg's sale of certain loan servicing rights.
Nutmeg was a federally chartered savings and loan association headquartered in
Danbury, Connecticut, with $109.1 million in assets and $84.7 million in
deposits with four branch locations, including two in Danbury, one in Bethel and
one in Ridgefield, Connecticut.
Change in Name of NewMil Bank
- -----------------------------
On October 1, 2000 the Bank changed its name to NewMil Bank from New Milford
Savings Bank, projecting the image of a contemporary, full-service bank in
today's competitive banking environment. Market research had indicated that,
while the Bank was perceived as a solid community bank offering excellent
customer service, the Bank's former name did not communicate the broad range of
up-to-date products and services offered to both consumers and businesses. In
recent years the banking industry has experienced vast changes, from
deregulation and inter-state consolidation to the growth of electronic banking.
In addition, the Bank's ongoing branch expansion and the Nutmeg acquisition have
expanded the Bank's customer base well beyond the greater New Milford area.
OVERVIEW
NewMil earned net income of $5,626,000, or $1.21 per share, for 2001, compared
with net income of $4,117,000, or $1.05 per share, for 2000. Net income for 2001
includes a full year's operating results from Nutmeg, acquired in November 2000.
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 of the Years Ended December 31, 2001 and 2000
Analysis of Net Interest and Dividend Income
- --------------------------------------------
Net interest income increased $5,906,000, or 39.1%, to $21,017,000 in 2001. This
resulted from a $136.0 million increase in average earning assets and, to a
lesser extent, an 11 basis point increase in the net interest margin. The
increase in earning assets is due primarily to the Nutmeg acquisition in
November 2000, and internal growth. The net interest margin increased to 4.05%
from 3.94%. This increase was due mostly to the effects of lower market interest
rates during 2001 as compared with 2000 and to changes in deposit pricing and
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.
11
Year ended December 31, Average balance Income/expense Average yield/rate
(dollars in thousands) 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Loans(a) $344,738 $242,141 26,685 19,592 7.74% 8.09%
Mortgage backed securities(b) 94,156 88,585 6,128 5,919 6.51 6.68
Other securities(b)(c) 80,681 52,829 4,835 3,368 5.99 6.38
- --------------------------------------------------------------------------
Total earning assets 519,575 383,555 37,648 28,879 7.25 7.53
-----------------
Other assets 38,041 16,212
- ------------------------------------------------------
Total assets $557,616 $399,767
======================================================
NOW accounts $ 57,479 $ 41,796 629 474 1.09 1.13
Money market accounts 116,688 81,152 3,514 2,990 3.01 3.69
Savings & other 66,310 50,596 1,472 1,237 2.22 2.44
Certificates of deposit 179,635 135,221 9,108 7,180 5.07 5.31
- --------------------------------------------------------------------------
Total interest-bearing deposits 420,112 308,765 14,723 11,881 3.51 3.85
Borrowings 44,513 29,958 1,908 1,887 4.29 6.30
- --------------------------------------------------------------------------
Total interest-bearing funds 464,625 338,723 16,631 13,768 3.58 4.07
-----------------
Demand deposits 38,330 22,379
Other liabilities 5,410 2,962
Shareholders' equity 49,251 35,703
- ------------------------------------------------------
Total liabilities &
shareholders' equity $557,616 $399,767
======================================================
Net interest income $21,017 $15,111
=================
Spread on interest-bearing funds 3.67 3.46
Net interest margin (d) 4.05 3.94
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume and rate.
Year ended December 31, 2001 versus 2000
(in thousands) Change in interest due to
- -----------------------------------------------------------------------------
Volume Rate Volume/rate Net
- -----------------------------------------------------------------------------
Interest-earning assets:
Loans $ 8,301 $ (849) $(359) $7,093
Mortgage backed securities 372 (153) (10) 209
Other securities 1,776 (202) (107) 1,467
- -----------------------------------------------------------------------------
Total 10,449 (1,204) (476) 8,769
- -----------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 4,285 (1,061) (382) 2,842
Borrowings 917 (603) (293) 21
- -----------------------------------------------------------------------------
Total 5,202 (1,664) (675) 2,863
- -----------------------------------------------------------------------------
Net change to interest income $ 5,247 $ 460 $ 199 $5,906
=============================================================================
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 re-pricing within different future
time periods.
12
Interest Income
- ---------------
Total interest and dividend income increased $8,769,000, or 30.4%, to $37.6
million in 2001. Loan income increased $7,093,000, or 36.2%, as a result of
higher loan volume offset somewhat by a lower average yield. Average loans
increased $102.6 million, or 42.4%, to $344.7 million in 2001 as compared with
2000, due to the Nutmeg acquisition in 2000 and, to a lesser extent, internal
growth. The decrease in average loan yield, down 35 basis points, is due to
lower market interest rates in 2001 and changes in portfolio mix. Investment
income increased $1,676,000, or 18.1%, in 2001 as a result of higher average
volume, offset, in part, by lower average yields. Average securities increased
$33.4 million, or 23.6%, as a result of internal growth. The decrease in average
investment yield, down 30 basis points, was due to lower reinvestment yields
during 2001 and changes in portfolio mix.
Interest Expense
- ----------------
Interest expense increased $2,863,000, or 20.8%, to $16.6 million in 2001
primarily as a result of the Nutmeg acquisition, changes in deposit mix and
higher average borrowings. Deposit expense increased $2,842,000, or 23.9%, as a
result of higher deposit volume and changes in deposit mix offset, to a lesser
degree, by lower deposit rates. Average interest-bearing deposits increased
$111.3 million, or 36.1%, due to the Nutmeg acquisition in 2000 and internal
growth. NOW accounts increased $15.7 million, or 37.5%, money market accounts
increased $35.5 million, or 43.8%, savings accounts increased $15.7 million, or
31.1%, and certificates of deposits increased $44.4 million, or 32.8%. The
average cost of interest-bearing deposits decreased 34 basis points to 3.51%.
Borrowings expense increased $21,000 as a result of higher average borrowings,
up $14.6 million, offset by lower advance rates, down 201 basis points.
Provision and Allowance for Loan Losses
- ---------------------------------------
The following table sets forth changes in the allowance for loan losses and
other selected statistics:
Years ended Six months ended
December 31, December 31, Years ended June 30,
(dollars in thousands) 2001 2000 2000 1999 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Balance, beginning of period $5,518 $5,029 $4,978 $4,989 $4,989 $5,004 $5,452
Provision (recoveries)
for loan losses -- (391) (416) (495) (470) 100 250
Allowance acquired from
purchase of Nutmeg -- 584 584 -- -- -- --
Charge-offs:
Real estate mortgages 58 191 39 -- 172 165 633
Commercial & industrial 1 5 5 20 -- -- --
Consumer loans 15 8 5 2 5 11 73
- --------------------------------------------------------------------------------------------------------
Total charge-offs 74 204 49 22 177 176 706
- --------------------------------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 18 9 4 1 631 52 4
Commercial & industrial 20 487 417 554 -- -- --
Consumer loans 20 4 -- 2 5 9 4
- --------------------------------------------------------------------------------------------------------
Total recoveries 58 500 421 557 636 61 8
- --------------------------------------------------------------------------------------------------------
Net (recoveries) charge-offs 16 (296) (372) (535) (459) 115 698
- --------------------------------------------------------------------------------------------------------
Balance, end of period $5,502 $5,518 $5,518 $5,029 $4,978 $4,989 $5,004
========================================================================================================
Ratio of allowance for loan losses:
to non-performing loans 315.3% 346.8% 346.8% 267.2% 584.3% 403.6% 360.3%
to total gross loans 1.6 1.6 1.6 2.3 2.2 2.3 3.0
Loan loss provision
to average loans -- (0.1) (0.2) (0.2) (0.2) 0.1 0.1
Ratio of net (recoveries)
charge-offs to average
loans outstanding -- (0.1) (0.2) (0.2) (0.2) 0.1 0.4
13
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. 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.
December 31, 2001 December 31, 2000 June 30, 2000
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) Allowance Loans(a) Allowance Loans(a) Allowance Loans(a)
- ----------------------------------------------------------------------------------------------------
Real Estate Mortgages
Residential 1-to-4 family $ 824 52.2% $ 942 55.6% $ 666 57.2%
Residential 5-or-more family 790 4.2 477 5.8 548 1.8
Commercial 1,740 23.8 2,145 18.6 1,075 22.6
Land & land development 196 0.9 319 1.0 374 0.9
Home equity credit 576 9.4 604 7.1 474 8.8
- ----------------------------------------------------------------------------------------------------
Total mortgage loans 4,126 90.5 4,487 88.1 3,137 91.3
Commercial & industrial 796 8.6 609 10.8 928 7.6
Installment 46 0.3 42 0.6 45 0.4
Collateral & other 0 0.6 19 0.5 16 0.7
Unallocated 534 0.0 361 0.0 852 0.0
- ----------------------------------------------------------------------------------------------------
Total allowance $5,502 100.0 $5,518 100.0 $4,978 100.0
====================================================================================================
June 30, 1999 June 30, 1998 June 30, 1997
- ----------------------------------------------------------------------------------------------------
(dollars in thousands) Allowance Loans(a) Allowance Loans(a) Allowance Loans(a)
- ----------------------------------------------------------------------------------------------------
Real Estate Mortgages
Residential
1-to-4 family $ 959 59.8% $ 978 50.8% $1,131 52.9%
5-or-more family 461 2.9 694 3.3 906 2.8
Commercial 1,937 17.4 2,026 20.8 1,669 18.5
Land & land development 258 1.1 440 2.1 683 4.9
Home equity credit 195 9.0 212 12.6 205 11.8
- ---------------------------------------------------------------------------------------------------
Total mortgage loans 3,810 90.2 4,350 89.6 4,594 90.9
Commercial & industrial 239 8.5 188 8.5 184 7.2
Installment 18 0.4 24 0.7 34 0.7
Collateral 0 0.9 0 1.2 0 1.2
Unallocated 922 0.0 442 0.0 640 0.0
- ---------------------------------------------------------------------------------------------------
Total allowance $4,989 100.0 $5,004 100.0 $5,452 100.0
===================================================================================================
(a) Percent of loans in each category to total loans.
NewMil had no provision for loan losses in 2001 and a negative provision for
loan losses of $391,000 in 2000, due to a $416,000 recovery from a previously
charged off loan. In addition, $584,000 was added to the allowance in November
2000 as a result of the Nutmeg acquisition. The following table provides a
summary of loan loss provision and net charge-off data activity since 1991.
Year ended Six months ended Fiscal Fiscal
December 31, December 31, years(a) years(a)
(dollars in thousands) 2001 2000 1995-2000 1991-1994
- ----------------------------------------------------------------------------------------------------
Average loans $344,738 $262,761 $174,016 $145,103
Provision for loan losses -- (416) 1,080 16,544
(Charge-offs) recoveries, net (16) 372 (1,348) (12,659)
Ratios of (annualized):
Net charge-offs to average loans 0.00% -0.14% 0.13% 2.18%
Loan loss provision to average loans 0.00 -0.16 0.10 2.85
Loan loss provision to net charge-offs 0.00 111.83 80.12 130.69
14
(a) Fiscal years ended June 30th.
Over the past several years a favorable economic climate and prudent credit risk
management have resulted in a significant decline in net charge-offs, as
compared with the period from 1991 to 1994, during which time many of NewMil's
borrowers experienced financial difficulties. In 2001 NewMil's net charge-offs
were only $16,000, compared with a net recovery of $372,000 for the six months
ended December 31, 2000. During the preceding six fiscal years, from 1995
through 2000, net charge-offs totaled $976,000. However, net charge-offs for
fiscal years 1991 through 1994 totaled $12.7 million. The following table
provides a comparison of allowance for loan losses and non-performing assets
data for 2001 with historical data from 1994, 1991 and 1990, during which time
many of NewMil's borrowers experienced financial difficulties.
December 31, June 30,
(dollars in thousands) 2001 2000 1994 1991 1990
- ----------------------------------------------------------------------------------------------
Loans, net $340,368 $223,734 $141,775 $152,973 $160,319
Allowance for loan losses 5,502 4,978 5,246 4,006 1,361
Non-performing assets 1,741 1,218 13,685 21,824 17,341
Ratios of:
Allowance to gross loans 1.59% 2.18% 3.57% 2.55% 0.84%
Non-performing assets to net loans 0.50 0.53 9.31 13.90 10.73
Improvement in loan quality during 2001, offset in part by modest loan portfolio
growth of $7.8 million, enabled NewMil to lower its allowance for loan losses as
a percentage of total loans, and resulted in no loan loss provision for the
year. During 2001 the ratio of the allowance for loan losses to total loans
declined to 1.59% at December 31, 2001 from 1.63% at December 31, 2000 and 2.18%
at June 30, 2000. For 2001 the ratio of non-performing loans to total loans
continued to remain historically low, 0.50% at December 31, 2001, compared with
0.47% at December 31, 2000 and 0.37% at June 30, 2000. The ratio of past due
loans (including non-performing loans) to total loans declined to 0.64% at
December 31, 2001, compared with 1.14% at December 31, 2000, and 0.97% at June
30, 2000. For additional discussion on loan quality see "Asset Quality and
Portfolio Risk".
NewMil determines its allowance and provisions for loan losses based upon a
detailed evaluation of the loan portfolio through a process which considers
numerous factors, including estimated credit losses based upon internal and
external portfolio reviews, delinquency levels and trends, estimates of the
current value of underlying collateral, concentrations, portfolio volume and
mix, changes in lending policy, current economic conditions and historical loan
loss experience over a 10-to-15 year economic cycle, and examinations performed
by regulatory authorities. Determining the level of the allowance at any given
period is difficult, particularly during deteriorating or uncertain economic
periods. Management must make estimates using assumptions and information that
is often subjective and changing rapidly. The review of the loan portfolio is a
continuing event in the light of a changing economy and the dynamics of the
banking and regulatory environment. In management's judgment NewMil remains
adequately reserved both against total loans and non-performing loans at
December 31, 2001. Should the economic climate deteriorate, borrowers could
experience difficulty and the level of non-performing loans, charge-offs and
delinquencies could rise and require increased provisions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies could
require the Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination. The
Bank was examined by the FDIC in February 2001 and no additions to the allowance
were requested as a result of this examination.
At December 31, 2001, the loan portfolio had a weighted average stated maturity
of 16 years. Management projects expected losses based on NewMil's historical
experience and the economic outlook. The 1991-1994 period marked the highest
loss period and is one factor considered in setting the allowance for each loan
type and in total. Given favorable loss experience in the past seven years,
management has set the allowance at the lower end of the range of losses
experienced over the past eleven years. The allowance for loan losses is
reviewed and approved by the Bank's Board of Directors on a quarterly basis. The
allowance for loan losses is computed by segregating the portfolio into various
risk rating categories. Some loans have been further segregated and carry
specific reserve amounts. All other loans that do not have specific reserves
assigned are reserved based on a loss percentage assigned to the outstanding
balance. The percentage applied to the outstanding balance varies depending on
the
15
risk rating. In addition the Bank maintains an unallocated reserve. The
unallocated reserve was $534,000 at December 31, 2001, $361,000 at December 31,
2000 and $852,000 at June 30, 2000.
Non-Interest Income
- -------------------
Non-interest income increased $922,000 or 43.2%, in 2001, due primarily to the
Nutmeg acquisition in November 2000 and to internal growth. The principal
categories of non-interest income are as follows:
Years ended December 31, (dollars in thousands) 2001 2000 Change
- -----------------------------------------------------------------------------------
Service charges on deposit accounts $2,089 $1,465 $624 42.6%
Gains on sales of loans, net 406 156 250 160.3
Gains on sales of OREO -- 62 (62) (100.0)
Loan servicing 134 75 59 78.7
Other 429 378 51 13.5
- -----------------------------------------------------------------------------------
Total non-interest income $3,058 $2,136 $922 43.2%
===================================================================================
The increase in service charges on deposit accounts in 2001 reflects increased
transaction volume resulting from both growth in transaction deposit accounts
and accounts added with the Nutmeg purchase. The increase in gains from sales of
residential mortgage loans resulted from increased loan sales, $24.8 million in
2001 compared with $8.8 million in 2000. Loans sold into the secondary market
are generally pre-arranged on a loan-by-loan basis prior to closing and are sold
service-released. The increase in loan servicing fees in 2001 resulted from the
acquisition of a $24.1 million loan servicing portfolio with the Nutmeg
purchase, offset by portfolio run-off. At December 31, 2001 NewMil's loan
servicing portfolio totaled $33.2 million, down from $38.3 million at December
31, 2000. NewMil did not acquire any loan servicing assets during 2001.
Operating Expenses
- ------------------
Operating expenses increased $1,509,000, or 35.5%, in 2001, due primarily to the
Nutmeg acquisition in November 2000. The principal categories of operating
expenses are as follows:
Years ended December 31, (dollars in thousands) 2001 2000 Change
- -------------------------------------------------------------------------------------
Salaries $ 6,729 $ 5,287 $1,442 27.3%
Employee benefits 931 229 702 306.4
Occupancy 1,313 1,083 230 17.5
Equipment 1,185 1,208 (23) 1.9
Marketing 510 714 (204) (28.6)
Professional, collection and OREO 813 474 339 71.5
Amortization of intangible assets 654 82 572 697.6
Other operating 3,156 2,208 948 42.9
- -------------------------------------------------------------------------------------
Total operating expenses $15,291 $11,285 $4,006 35.5%
=====================================================================================
The increase in salaries in 2001 was due primarily to annual salary increases,
higher incentive compensation awards, increases in staffing and staff added with
the Nutmeg purchase. The increase in employee benefits in 2001 resulted from a
$273,000 decrease in net periodic pension income from NewMil's frozen defined
benefit pension plan (the plan), and to increased medical, 401K and other
benefits costs due to increased staffing, due primarily to the Nutmeg
acquisition. Employee benefit expense for 2000 also benefited from an $80,000
recovery from the settlement of a medical claim dispute with a third party. The
increase in occupancy expense was due to higher real estate taxes, rent,
utilities and depreciation expense associated mainly with the Nutmeg purchase.
Marketing expense decreased as a result of one-time advertising campaigns in
2000 to promote the name change of NewMil's subsidiary bank to NewMil Bank, and
the Nutmeg acquisition. The increase in professional fees was primarily
associated with increased loan collection costs, benefits consulting in 2001 and
consulting on cost control initiatives. Amortization of intangible assets for
2001 included a full year's amortization for goodwill and core deposit
intangibles arising from the Nutmeg acquisition in November 2000, compared with
only two months of amortization in 2000. Changes in other operating expenses
also result from the Nutmeg acquisition and other internally generated growth in
the Bank's assets.
16
Income Taxes
- ------------
Net income for 2001 included an income tax provision of $3,158,000, for an
effective tax rate of 35.95%, as compared with a 2000 income tax provision of
$2,236,000 for an effective tax rate of 35.2%. The effective tax rate exceeded
the 34% federal statutory rate due to the non-deductibility nature of goodwill.
For further information on income taxes see Note 8 of Notes to Consolidated
Financial Statements.
Comparison of the Six Month Periods Ended December 31, 2000 and 1999
NewMil earned net income of $2,006,000, or $0.50 per share, for the six month
period ended December 31, 2000, compared with net income of $1,904,000, or $0.50
per share, for the six month period ended December 31, 1999. Net income for the
2000 period included certain one-time expenses related to the Nutmeg
acquisition, the change in the name of the subsidiary NewMil Bank and the change
in NewMil's fiscal year-end. NewMil incurred expenses of $370,000 associated
with the Bank's name change and an advertising campaign related to both the name
change and the Nutmeg acquisition. Expenses related to the acquisition totaled
$108,000 and included the cost of converting Nutmeg data systems and certain
employee payments. These expenses were offset in part by a negative loan loss
provision of $416,000 due to the recovery of a previously charged-off loan.
Analysis of Net Interest and Dividend Income
- --------------------------------------------
Net interest income increased $1,046,000, or 15.2%, to $7,908,000 for the six
month period ended December 31, 2000. This resulted from a $73.3 million
increase in average earning assets for the period, offset in part by a 22 basis
point decrease in the net interest margin. The increase in earning assets was
due primarily to the Nutmeg acquisition in November 2000. The net interest
margin decreased to 3.86% from 4.08%, due mostly to the effects of higher market
interest rates during 2000 as compared with 1999, and to changes in deposit
pricing and 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.
Six months ended December 31, Average balance Income/expense Average yield/rate
(dollars in thousands) 2000 1999 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------
Loans(a) $262,761 $217,313 $10,833 $ 8,349 8.25% 7.68%
Mortgage backed securities (b) 88,191 86,839 2,963 2,782 6.72 6.41
Other securities(b)(c) 58,746 32,251 1,913 875 6.51 5.43
- ----------------------------------------------------------------------------
Total earning assets 409,698 336,403 15,709 12,006 7.67 7.14
-----------------
Other assets 20,600 10,733
- --------------------------------------------------------
Total assets $430,298 $347,136
========================================================
NOW accounts $43,701 $36,464 249 209 1.14 1.15
Money market accounts 91,555 72,311 1,866 1,062 4.08 2.94
Savings & other 52,137 48,827 647 595 2.48 2.44
Certificates of deposit 144,095 124,198 4,027 2,920 5.59 4.70
- ----------------------------------------------------------------------------
Total interest-bearing deposits 331,488 281,800 6,789 4,786 4.10 3.40
Borrowings 31,390 11,750 1,012 358 6.45 6.09
- ----------------------------------------------------------------------------
Total interest-bearing funds 362,878 293,550 7,801 5,144 4.30 3.51
-----------------
Demand deposits 25,360 18,720
Other liabilities 3,805 1,689
Shareholders' equity 38,255 33,177
- --------------------------------------------------------
Total liabilities &
shareholders' equity $430,298 $347,136
========================================================
Net interest income $ 7,908 $ 6,862
=================
Spread on interest-bearing funds 3.37 3.63
Net interest margin(d) 3.86 4.08
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds sold.
(d) Net interest income divided by average interest-earning assets.
17
The following table sets forth the changes in interest due to volume and rate.
Six months ended December 31, 2000 versus 1999
(in thousands) Change in interest due to
- -----------------------------------------------------------------------
Volume Rate Volume/rate Net
- -----------------------------------------------------------------------
Interest-earning assets:
Loans $1,746 $ 610 $128 $2,484
Mortgage backed securities 43 136 2 181
Other securities 719 175 144 1,038
- -----------------------------------------------------------------------
Total 2,508 921 274 3,703
- -----------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 844 985 174 2,003
Borrowings 598 21 35 654
- -----------------------------------------------------------------------
Total 1,442 1,006 209 2,657
- -----------------------------------------------------------------------
Net change to interest income $1,066 $ (85) $ 65 $1,046
=======================================================================
Interest Income
- ---------------
Total interest and dividend income increased $3,703,000, or 30.8%, to $15.7
million for the 2000 period. Loan income increased $2,484,000, or 29.8%, as a
result of higher loan volume and a higher average yield. Average loans increased
$45.4 million, or 20.9%, to $262.8 million in 2000 as compared with 1999, due to
internal growth and the Nutmeg acquisition. The increase in average loan yield,
up 57 basis points, was due to higher market interest rates in 2000 and changes
in portfolio mix. Investment income increased $1,219,000, or 33.3%, in 2000 as a
result of higher average volume and higher average yields. Average securities
increased $27.8 million, or 23.4%. The increase in average investment yield, up
49 basis points, was due to higher reinvestment yields during 2000 and changes
in portfolio mix.
Interest Expense
- ----------------
Interest expense increased $2,657,000, or 51.7%, to $7.8 million for the 2000
period primarily as a result of the Nutmeg acquisition, changes in deposit mix,
higher average borrowings and higher market interest rates. Deposit expense
increased $2,003,000, or 41.9%, as a result of higher deposit volume, higher
deposit rates and changes in deposit mix. Average interest-bearing deposits
increased $49.7 million, or 17.6%. NOW accounts increased $7.2 million, or
19.9%, money market accounts increased $19.2 million, or 26.6%, savings accounts
increased $3.3 million, or 6.8%, and certificates of deposits increased $19.9
million, or 16.0%. The average cost of interest-bearing deposits increased 70
basis points to 4.10%. Borrowings expense increased $654,000 as a result of
higher average borrowings, up $19.6 million, and a higher cost of borrowings, up
36 basis points.
Provision and Allowance for Loan Losses
- ---------------------------------------
NewMil had negative provisions for loan losses of $416,000 and $495,000 for the
six month periods ended December 31, 2000 and 1999, respectively, due to cash
recoveries from a previously charged-off loan. Excluding these recoveries,
NewMil's provision for loan losses would have been $0 and $50,000 for the 2000
and 1999 periods, respectively. In addition, $584,000 was added to the allowance
in 2000 as a result of the Nutmeg acquisition. Over the past several years the
benefits from a steady improvement in loan quality, offset in part by effect of
modest loan portfolio growth, has enabled NewMil to reduce its provision for
loan losses. The ratio of non-performing loans to total loans has declined to
0.47% at December 31, 2000, compared with 0.37%, 0.57%, 0.83% and 1.81% at June
30, 2000, 1999, 1998 and 1997, respectively. The ratio of past due loans
(including non-performing loans) to total loans was 1.14% at December 31, 2000,
compared with 0.97% and 1.58% at June 30, 2000 and 1999, respectively. The
decrease in the ratio of the allowance for loan losses to total loans of 1.63%
at December 31, 2000 compared with 2.18% and 2.32% at June 30, 2000 and 1999,
respectively, results from both loan portfolio growth and improvements in credit
quality. During the six months ended December 31, 2000 gross loans increased by
$109.7 million, including $99.5 million acquired with Nutmeg, of which 53%
represented 1-to-4 family residential mortgage loans, 42% represented commercial
mortgage, commercial and industrial, and residential multifamily loans and 5%
represented home equity and other loan categories.
18
Non-Interest Income
- -------------------
Non-interest income increased $241,000 or 25.6%, for the six month period ended
December 31, 2000. This increase was attributable to increased revenue from
services charges, the elimination of a loss on the sale of securities and offset
by a gain from the sale of a branch in 1999. The principal categories of
non-interest income are as follows:
Six months ended December 31, (dollars in thousands) 2000 1999 Change
- ---------------------------------------------------------------------------------------
Service charges on deposit accounts $ 808 $ 672 $136 20.2%
Gains on sales of loans, net 93 84 9 10.7
Losses on sales of securities, net -- (109) 109 100.0
Gain on sale of branch -- 75 (75) (100.0)
Gains on sales of OREO 39 23 16 69.6
Loan servicing 43 34 9 26.5
Other 200 163 37 22.7
- ---------------------------------------------------------------------------------------
Total non-interest income $1,183 $ 942 $241 25.6%
=======================================================================================
The increase in service charges on deposit accounts in 2000 reflected increased
transaction volume resulting from both growth in transaction deposit accounts
and accounts added with the Nutmeg purchase. The increase in gains from sales of
residential mortgage loans resulted from loan sales of $5.3 million in 2000
compared with $4.6 million in 1999. The 1999 loss from security sales related to
the sale of three mortgage backed securities that experienced higher than
expected prepayment speeds. The Bank did not sell any securities during the 2000
period. The gain from the sale of a branch in 1999 related to the receipt of an
additional sale premium resulting from certain competitive events not occurring
within a time frame stipulated in the sale agreement for the Winsted Branch,
sold in May 1999. The increase in loan servicing fees in 2000 resulted from the
acquisition of a $24.1 million loan servicing portfolio with the Nutmeg
purchase, offset by portfolio run-off. At December 31, 2000 the Bank's loan
servicing portfolio totaled $38.3 million, up from $16.9 million at June 30,
2000.
Operating Expenses
- ------------------
Operating expenses increased $947,000, or 17.4%, for the six month period ended
December 31, 2000. The principal categories of operating expenses are as
follows:
Six months ended December 31, (dollars in thousands) 2000 1999 Change
- ---------------------------------------------------------------------------------------
Salaries $2,805 $2,396 $ 409 17.1%
Employee benefits 164 600 (436) (72.7)
Occupancy 569 473 96 20.3
Equipment 709 420 289 68.8
Marketing 527 140 387 276.4
Professional 256 212 44 20.8
Printing & office supplies 241 164 77 47.0
Postage & telecommunications 201 177 24 13.6
Collections and OREO 8 144 (136) (94.4)
Amortization of intangible assets 82 -- 82 --
Other operating 820 709 111 15.7
- ---------------------------------------------------------------------------------------
Total operating expenses $6,382 $5,435 $ 947 17.4%
=======================================================================================
The increase in salaries in 2000 was due primarily to annual salary increases,
higher incentive compensation awards, increased staffing and staff added with
the Nutmeg purchase. The decrease in employee benefits in 2000 resulted from net
periodic pension income of $283,000 from NewMil's frozen defined benefit pension
plan, $80,000 from the settlement of a medical claim dispute with a third party
and $73,000 in lower medical costs due to changing from a self-insured to a
fully-insured medical plan. NewMil measured net periodic pension cost for 1999
under the premise that the plan would be terminated sometime in fiscal 2000.
During the quarter ended December 31, 1999, NewMil made a strategic decision not
to terminate the plan and to continue the plan in a frozen status. This change
in strategy was deemed a significant event per paragraph 53 of SFAS No. 87
"Employers' Accounting
19
for Pensions" which necessitated a change in measurement assumptions. These
different measurement assumptions resulted in $283,000 of pension income in 2000
as compared with $0 in 1999. The increase in occupancy and equipment expense was
due to higher depreciation expense and equipment and building maintenance
expense associated with the Nutmeg purchase. Marketing expense increased as a
result of advertising campaigns to promote the Bank's name change and the
acquisition of Nutmeg. The increase in professional fees was principally
associated with the change in the fiscal year-end. The increase in printing and
office supplies resulted from both the Bank's name change and the Nutmeg
acquisition. The decrease in collections and OREO expense reflects the
diminished level of non-performing assets. The amortization of intangible assets
relates to the acquisition of Nutmeg, accounted for as a purchase transaction.
Changes in postage and telecommunications and other operating expenses reflect
growth in the Bank's assets and the Nutmeg acquisition.
Income Taxes
- ------------
Net income for the six month period ended December 31, 2000 included an income
tax provision of $1,119,000, for an effective tax rate of 35.8%, compared with
an income tax provision of $960,000, for an effective tax rate of 33.5%, for the
1999 period.
Comparison of the Years Ended June 30, 2000 and 1999
NewMil earned net income of $4,015,000, or $1.05 per share, for the year ended
June 30, 2000, compared with net income of $3,032,000, or $0.76 per share, for
fiscal year 1999. Net income for the 1999 fiscal year included the effect of
both a change in accounting principle, resulting from the adoption of SFAS 133,
and an extraordinary item, resulting from the prepayment of Federal Home Loan
Bank advances. Income before the effects of the accounting change and the
extraordinary item was $3,281,000, or $.82 per share, for the year ended June
30, 1999. Excluding the effect of the accounting change and extraordinary item
NewMil's income grew 22.4% in 2000, reflecting improved core earnings, driven by
higher net interest income, a negative loan loss provision and slightly lower
non-interest expense, partly offset by a decrease in non-interest income.
Similarly, earnings per share before the effect of the accounting change and
extraordinary item increased 28.0%, reflecting both the growth in net income and
share repurchase activity.
Effective October 1, 1998 NewMil adopted SFAS 133 (Accounting for Derivative
Instruments and Hedging Activities) and took advantage of its provisions by
reclassifying $21 million of securities from held-to-maturity to
available-for-sale, and then sold those securities, realizing a loss, net of
tax, of $162,000 on the transfer and sale. 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 for the early
extinguishment of debt, net of taxes, of $87,000 that has been reported in net
income as an extraordinary item.
During 1999 NewMil formed a Passive Investment Company ("PIC") and changed its
tax year to a calendar year basis to take advantage of a change in Connecticut
tax statutes. The Connecticut statute, effective January 1, 1999, allowed 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 and NewMil's combined Federal and State statutory tax rate became
34%. The formation of the PIC required NewMil to establish a valuation allowance
against its existing deferred State tax assets that were no longer expected to
be realized in future years. Accordingly, NewMil's income tax provision for the
year ended June 30, 1999 included a charge of $266,000.
Analysis of Net Interest and Dividend Income
- --------------------------------------------
Net interest income increased $1,415,000, or 11.2%, to $14,064,000 in 2000. This
resulted from a 42 basis point increase in the net interest margin and a lower
volume of interest-bearing liabilities. The net interest margin increased to
4.06% from 3.64%. This increase was due mostly to the effects of higher market
interest rates during 2000 as compared with 1999, 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.
20
Years ended June 30, Average balance Income/expense Average yield/rate
(dollars in thousands) 2000 1999 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------
Loans(a) $219,293 $192,052 $17,108 $15,426 7.80% 8.03%
Mortgage backed securities(b) 87,905 90,273 5,739 5,374 6.53 5.95
Other securities(b)(c) 39,509 65,630 2,328 3,656 5.89 5.57
- --------------------------------------------------------------------------
Total earning assets 346,707 347,955 25,175 24,456 7.26 7.03
-----------------
Other assets 11,252 13,473
- ------------------------------------------------------
Total assets $357,959 $361,428
======================================================
NOW accounts $38,158 $33,065 434 387 1.14 1.17
Money market accounts 71,478 68,365 2,186 2,018 3.06 2.95
Savings & other 48,932 48,383 1,185 1,234 2.42 2.55
Certificates of deposit 125,218 133,421 6,073 6,713 4.85 5.03
- --------------------------------------------------------------------------
Total interest-bearing deposits 283,786 283,234 9,878 10,352 3.48 3.66
Borrowings 20,084 24,432 1,233 1,455 6.14 5.96
- --------------------------------------------------------------------------
Total interest-bearing funds 303,870 307,666 11,111 11,807 3.66 3.84
-----------------
Demand deposits 19,041 17,185
Other liabilities 1,897 2,278
Shareholders' equity 33,151 34,299
- ------------------------------------------------------
Total liabilities &
shareholders' equity $357,959 $361,428
======================================================
Net interest income $14,064 $12,649
=================
Spread on interest-bearing funds 3.60 3.19
Net interest margin(d) 4.06 3.64
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds sold.
(d) Net interest income divided by average interest-earning assets.
The following table sets forth the changes in interest due to volume.
Years ended June 30, 2000 versus 1999
(in thousands) Change in interest due to
- -----------------------------------------------------------------------
Volume Rate Volume/rate Net
- -----------------------------------------------------------------------
Interest-earning assets:
Loans $2,188 $(443) $ (63) $1,682
Mortgage backed securities (141) 520 (14) 365
Other securities (1,455) 211 (84) (1,328)
- -----------------------------------------------------------------------
Total 592 288 (161) 719
- -----------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 20 (493) (1) (474)
Borrowings (259) 45 (8) (222)
- -----------------------------------------------------------------------
Total (239) (448) (9) (696)
- -----------------------------------------------------------------------
Net change to interest income $ 831 $ 736 $(152) $1,415
=======================================================================
Interest Income
- ---------------
Total interest and dividend income increased $719,000, or 2.9%, to $25.2 million
in 2000. Loan income increased $1,682,000, or 10.9%, as a result of higher loan
volume offset by lower average yield. Average loans increased $27.2 million, or
14.2%, to $219.3 million in 2000 as compared with 1999. The decrease in average
loan yield, down 23 basis points, was mostly due to the changes in portfolio
mix. Most of the growth has been in commercial and residential mortgage loans.
Investment income decreased $963,000, or 10.7%, in 2000 as a result of lower
average volume offset in part by higher average yield. Average securities
decreased $28.5 million, or 18.3%. The
21
increase in average investment yield, up 54 basis points, was due to higher
reinvestment yields during 2000 and changes in portfolio mix.
Interest Expense
- ----------------
Interest expense decreased $696,000, or 5.9%, to $11.1 million in 2000 primarily
as a result of changes in the deposit mix coupled with lower average borrowings.
Deposit expense decreased $474,000, or 4.6%, as a result of a decline in deposit
rates and a favorable change in deposit mix, partially offset by
interest-bearing deposit growth of $552,000, or 0.2%. The average cost of
interest-bearing deposits declined 18 basis points to 3.48%. Deposit growth
occurred in all deposit categories, except higher cost certificates of deposit.
NOW accounts increased $5.1 million, or 15.4%, money market accounts increased
$3.1 million, or 4.6% and savings accounts increased $549,000, or 1.1%, while
certificates of deposits decreased $8.2 million, or 6.1%. Borrowings expense
decreased $222,000, primarily as a result of a decrease in average borrowings
offset, in part, by a 18 basis point increase in average cost of borrowing.
Provision and Allowance for Loan Losses
- ---------------------------------------
NewMil had a negative provision of $470,000 for loan losses in 2000, compared
with a provision of $100,000 in 1999. The negative provision resulted from a
loan loss recovery of $545,000, related to a loan that had been charged off in
prior years, without which the provision would have been $75,000. The decline in
the provision resulted from an 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 fiscal year 2000 non-performing loans
decreased $384,000, or 31.1%, to $852,000 at June 30, 2000 and, as a result, the
reserve coverage to non-performing loans increased to 584.3% at June 30, 2000
from 403.6% at June 30, 1999. Past due performing loans (accruing loans 30-89
days past due) also decreased in 2000 and at June 30, 2000 represented 0.6% of
gross loans. The decrease in the ratio of the allowance for loan losses to total
gross loans to 2.2% at June 30, 2000 compared with 2.3% at June 30, 1999, is due
to reduction in non-performing loans offset by loan portfolio growth of $13.7
million, or 6.4% during 2000. Loan growth has been primarily concentrated in
commercial mortgage loans.
Non-Interest Income
- -------------------
Non-interest income decreased $1,541,000 or 44.9%, to $1,893,000 in 2000. The
decrease is attributable to gains on sales of OREO in 1999, a decrease in loan
sales in 2000 and security losses in 2000, offset by an increase in service
charges. The principal categories of non-interest income are as follows:
Years ended June 30, (dollars in thousands) 2000 1999 Change
- --------------------------------------------------------------------------------
Service charges on deposit accounts $1,329 $1,154 $ 175 15.2%
Gains on sales of loans, net 147 547 (400) (73.1)
Losses on sales of securities, net (109) -- (109) (100.0)
Gain on sale of branch 75 -- 75 100.0
Gains on sales of OREO 46 1,342 (1,296) (96.6)
Loan servicing 66 81 (15) (18.5)
Other 339 310 29 9.4
- --------------------------------------------------------------------------------
Total non-interest income $1,893 $3,434 $(1,541) (44.9)%
================================================================================
The increase in service charges on deposit accounts in 2000 reflects increased
transaction volume, resulting from growth in transactions accounts, coupled with
changes in the Bank's fee structure. The loss from security sales related to the
sale of three securities that experienced higher than expected prepayment
speeds. The gain from the sale of a branch in 1999 related to the receipt of an
additional sale premium resulting from certain competitive events not occurring
within a time frame stipulated in the sale agreement for the Winsted Branch,
sold in May 1999. The decrease in gains from sales of residential mortgage loans
resulted from loan sales of $7.9 million in 2000 compared with $28.0 million in
1999. The gains on sales of OREO 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. The
decrease in loan servicing fees in 2000 resulted from portfolio run-off. The
mortgage servicing portfolio totaled $16.9 million at June 30, 2000, down from
$20.2 million at June 30, 1999.
22
Operating Expenses
- ------------------
Operating expenses decreased $102,000, or 1.0%, in 2000. The principal
categories of operating expenses are as follows:
Years ended June 30, (dollars in thousands) 2000 1999 Change
- -------------------------------------------------------------------------------
Salaries $ 4,878 $ 4,766 $ 112 2.4%
Employee benefits 665 1,252 (587) (46.9)
Occupancy 986 995 (9) (0.9)
Equipment 919 779 140 18.0
Professional, collections and OREO 565 284 281 98.9
Insurance 107 88 19 21.6
Postage and telecommunications 354 421 (67) (15.9)
Marketing 327 216 111 51.4
Service bureau 214 261 (47) (18.0)
Other operating 1,321 1,376 (55) (4.0)
- -------------------------------------------------------------------------------
Total operating expenses $10,336 $10,438 $(102) (1.0)
===============================================================================
The increase in salaries in 2000 was due primarily to annual salary increases
and higher incentive compensation awards, offset by overtime, in 1999, related
to the conversion of the Bank's core data processing systems to a new in-house
system. The decrease in employee benefits resulted primarily from the
recognition of net periodic pension income, on NewMil's frozen defined benefit
pension plan, of $468,000 and from lower health benefits expenses in 2000.
NewMil measured net periodic pension cost for the first two quarters of 2000
under the premise that the plan would be terminated at sometime in fiscal 2000.
During the quarter ended December 31, 1999, NewMil made a strategic decision not
to terminate the plan and to continue the plan in a frozen status. This change
in strategy was deemed a significant event per paragraph 53 of SFAS No. 87
"Employers' Accounting for Pensions" which necessitated a change in measurement
assumptions. These different measurement assumptions resulted in $468,000 of
pension income during the year 2000 as compared to $178,000 in 1999. The
increase in occupancy and equipment expense was primarily due to higher
depreciation expense and building maintenance expense in 2000. The increase in
professional, collection and OREO expense was a result of the cost of additional
consulting work related to various corporate initiatives undertaken by the Bank
during 2000. Marketing expense increased as a result of a Cable TV advertising
campaign in 2000. All other operating expenses, including shareholder relations,
office expense and other, decreased $150,000 or 7.0% in 2000.
Income Taxes
- ------------
Net income for 2000 included an income tax provision of $2,076,000, for an
effective tax rate of 34.1%, as compared with an income tax provision of
$2,264,000, for an effective tax rate of 40.8%, for 1999.
In 1998 Connecticut tax legislation was passed which made sweeping changes to
the corporation business tax treatment of banks and financial service companies.
The new law, effective for calendar year 1999, 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.
Effective January 1, 1999, NewMil formed a PIC and changed its tax year to a
calendar year basis to take advantage of the change in Connecticut's tax
legislation. NewMil transferred qualifying mortgage loans into its PIC and
income of the PIC and its dividends to NewMil became exempt from Connecticut
Corporation Business Tax. As a result, NewMil's combined Federal and State
statutory tax rate became 34%.
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. SFAS 133 had no financial impact on the
23
results of operations for the year ended June 30, 2000 as NewMil has no
derivative financial instruments.
FINANCIAL CONDITION
Overview
- --------
During 2001 total assets grew $83.4 million, or 15.9%, to $607.0 million. Loans
and deposits grew $7.8 million and $38.3 million, respectively, while securities
and borrowings grew $72.0 million and $40.0 million, respectively.
Non-performing assets remained unchanged at $1.8 million compared with $1.7
million at December 31, 2000. Book value per share increased $1.17 to $11.52 at
December 31, 2001, after cash dividends of $0.44, representing a 34.9% payout
ratio. At December 31, 2001 tier 1 leverage and total risk-based capital ratios
were 6.56% and 12.18%, respectively, and NewMil was "well capitalized" as
defined by the Federal Reserve Board.
Securities
- ----------
During 2001 securities increased $72.0 million, or 51.3%, to $212.4 million at
December 31, 2001, due to $95.1 million in purchases and offset by portfolio
run-off. The principal categories of securities are as follows (including both
available-for-sale and held-to-maturity):
December 31, December 31, June 30,
(dollars in thousands) 2001 2000 2000
- ----------------------------------------------------------------------------
U.S. Government
Agency notes $ 21,151 $ 10,294 $ 9,822
Corporate Bonds 38,803 22,718 22,034
Municipal Bonds 11,036 10,795 10,800
Mortgage backed securities 116,792 84,832 89,851
Collateralized mortgage obligations 20,877 8,232 9,035
Federal Home Loan Bank
stock and other 3,749 3,527 2,765
- ----------------------------------------------------------------------------
Total securities $212,408 $140,398 $144,307
============================================================================
Portfolio mix changed slightly in 2001 as a result of purchases that included
$54.3 million of mortgage backed securities, $15.1 million of collateralized
mortgage obligations, $14.6 million of corporate bonds $10.7 million of Agency
notes and $0.5 million of municipal bonds and other securities. Also
contributing was portfolio run-off and changes in the fair value of securities
available for sale. At December 31, 2001 the portfolio had a projected weighted
average duration and life of 3.2 years and 4.1 years, respectively, based on
median projected prepayment speeds at current interest rates. At December 31,
2001, securities totaling $181.6 million, or 85.5%, were classified as
available-for-sale and securities totaling $30.8 million, or 14.5%, 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
December 31, 2001 Value Value Yield
- ---------------------------------------------------------------------
US Government Agency notes
After 1 but within 5 years $ 21,151 $ 21,151 5.52%
Corporate Bonds
After 1 but within 5 years 38,803 38,803 6.86
Mortgage backed securities 102,407 102,407 6.70
Collateralized mortgage obligations 15,513 15,513 5.25
Federal Home Loan Bank stock and other 3,749 3,749 5.62
- ---------------------------------------------------------------------
Total Securities Available-for-sale $181,623 $181,623 6.83
=====================================================================
24
(dollars in thousands) Carrying Market
December 31, 2000 Value Value Yield
- --------------------------------------------------------------------
US Government Agency notes
After 1 but within 5 years $ 10,294 $ 10,294 7.12%
Corporate Bonds
After 1 but within 5 years 22,718 22,718 7.51
Mortgage backed securities 65,525 65,525 6.94
Collateralized mortgage obligations 1,157 1,157 4.67
Federal Home Loan Bank stock and other 3,527 3,527 5.59
- --------------------------------------------------------------------
Total Securities Available-for-sale $103,221 $103,221 7.65
====================================================================
June 30, 2000
US Government Agency notes
After 1 but within 5 years $ 9,822 $ 9,822 7.12%
Corporate Bonds
After 1 but within 5 years 22,034 22,034 7.51
Mortgage backed securities 68,787 68,787 6.91
Collateralized mortgage obligations 1,120 1,120 5.12
Federal Home Loan Bank stock and other 2,765 2,765 5.48
- --------------------------------------------------------------------
Total Securities Available-for-sale $104,528 $104,528 7.61
====================================================================
June 30, 1999
Mortgage backed securities $ 70,106 $ 70,106 6.40%
Collateralized mortgage obligations 1,264 1,264 4.96
Federal Home Loan Bank stock and other 2,765 2,765 5.48
- --------------------------------------------------------------------
Total Securities Available-for-sale $ 74,135 $ 74,135 7.19
====================================================================
The composition, maturity distribution and weighted average yields of securities
held-to-maturity are as follows:
(dollars in thousands) Tax
Carrying Market Equivalent
December 31, 2001 Value Value Yield
- -------------------------------------------------------------------------
Municipal Bonds
After 1 but within 5 years $ 500 $ 505 6.13%
After 10 years 10,536 10,166 6.22
Mortgage backed securities 14,385 14,919 6.62
Collateralized mortgage obligations 5,364 5,497 4.47
- -------------------------------------------------------------------------
Total Securities Held-to-maturity $30,785 $31,087 6.10
=========================================================================
December 31, 2000
Municipal Bonds
After 1 but within 5 years $ 250 $ 248 5.75%
After 10 years 10,545 10,147 6.14
Mortgage backed securities 19,307 19,603 6.83
Collateralized mortgage obligations 7,075 6,855 5.58
- -------------------------------------------------------------------------
Total Securities Held-to-maturity $37,177 $36,853 6.39
=========================================================================
June 30, 2000
Municipal Bonds
After 1 but within 5 years $ 250 $ 234 5.75%
After 10 years 10,550 9,638 6.14
Mortgage backed securities 21,064 20,671 6.81
Collateralized mortgage obligations 7,915 7,462 6.08
- -------------------------------------------------------------------------
Total Securities Held-to-maturity $39,779 $38,005 6.48
=========================================================================
25
(dollars in thousands) Tax
Carrying Market Equivalent
June 30, 1999 Value Value Yield
- -------------------------------------------------------------------------
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
=========================================================================
Loans
- -----
During 2001 net loans grew $7.8 million, or 2.4%, to $340.4 million. Loan
originations and advances for portfolio totaled $133.3 million for 2001, up from
$62.2 million in the 2000 period. Loan repayments totaled $125.5 million for
2001, up from $62.2 million for the twelve month period ending December 31,
2000. Residential mortgage loans originated for sale totaled $23.5 million in
2001 compared with $8.8 million for the period ending December 31, 2000. Loans
originated for sale are sold on a servicing released basis.
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 principal categories of the loan portfolio are as follows:
December 31, June 30,
(in thousands) 2001 2000 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------
Real Estate Mortgages:
Residential
1-to-4 family $180,513 $187,755 $130,770 $128,371 $ 85,274 $ 90,885
5-or-more family 14,649 19,759 4,185 6,152 5,500 4,812
Commercial 82,422 63,089 51,633 37,456 34,878 31,850
Land & land development 2,998 3,423 1,995 2,410 3,571 8,334
Home equity credit 32,580 24,121 20,257 19,429 21,208 20,274
- -------------------------------------------------------------------------------------------
Total mortgage loans 313,162 298,147 208,840 193,818 150,431 156,155
Commercial and industrial 29,922 36,390 17,404 18,211 14,357 12,424
Installment and other 3,089 3,868 2,439 2,850 3,118 3,122
- -------------------------------------------------------------------------------------------
Total loans, gross 346,173 338,405 228,683 214,879 167,906 171,701
Deferred loan origination
fees and purchase
premium, net (303) (343) 29 146 (53) (108)
Allowance for loan losses (5,502) (5,518) (4,978) (4,989) (5,004) (5,452)
- -------------------------------------------------------------------------------------------
Total loans, net $340,368 $332,544 $223,734 $210,036 $162,849 $166,141
===========================================================================================
26
The loan portfolio's maturity distribution is as follows (non-accrual loans have
been presented in the after 5 years category):
December 31, 2001 Within Within After
(in thousands) 1 year 1-5 years 5 years Total
- -----------------------------------------------------------------------------
Real Estate Mortgages:
Residential
1-to-4 family $ 8,082 $18,487 $153,944 $180,513
5-or-more family 2,824 4,180 7,645 14,649
Commercial 17,314 30,015 35,093 82,422
Land & land development 1,452 752 794 2,998
Home equity credit 4,263 16,136 12,181 32,580
Commercial and industrial 13,140 7,419 9,363 29,922
Installment and other 536 945 1,608 3,089
- -----------------------------------------------------------------------------
Total loans, gross $47,611 $77,934 $220,628 $346,173
=============================================================================
The amount of loans due after one year that have fixed interest rates and
variable or adjustable interest rates are as follows:
December 31, 2001 Fixed Adjustable
(in thousands) interest rates interest rates
- ----------------------------------------------------------------
Real Estate Mortgages:
1-to-4 family residential $48,849 $120,845
5-or-more family residential 1,750 12,183
Commercial 31,058 45,285
Land and land development 42 2,199
Home equity credit 4,345 28,083
Commercial and industrial 6,960 20,440
Installment 1,060 --
Collateral and other 109 1,821
- ----------------------------------------------------------------
Total loans, gross $94,173 $230,856
================================================================
Non-performing assets
- ----------------------
The principal categories of non-performing assets are as follows:
December 31, June 30,
(in thousands) 2001 2000 2000 1999 1998 1997
- -------------------------------------------------------------------------------------
Non-accruing loans $ 985 $1,240 $ 621 $1,051 $ 761 $2,054
Accruing loans past due
90 days or more 760 351 231 185 628 783
Accruing restructured loans -- -- -- -- -- 274
- -------------------------------------------------------------------------------------
Total non-performing loans 1,745 1,591 852 1,236 1,389 3,111
OREO, net 116 150 366 333 295 474
- -------------------------------------------------------------------------------------
Total non-performing assets $1,861 $1,741 $1,218 $1,569 $1,684 $3,585
=====================================================================================
During 2001 non-performing assets increased $120,000 to $1,861,000 at December
31, 2001 from $1,741,000 at December 31, 2000. However non-performing assets
continue to remain historically low at only 0.31% of total assets at December
31, 2001 compared with 0.33% at December 31, 2000. The low level of
non-performing assets reflects NewMil's rigorous ongoing credit management
process and the recent favorable economic climate.
27
Changes in non-performing assets are as follows:
Year ended Six months ended Year ended
December 31, December 31, June 30,
(dollars in thousands) 2001 2000 2000
- --------------------------------------------------------------------------------------
Balance, beginning of period $1,741 $1,218 $1,569
Loans placed on non-accrual status 1,033 424 899
Non-accrual loans acquired with Nutmeg -- 416 --
Non-accrual loan payments (633) (104) (523)
Loans returned to accrual status (637) (68) (278)
Non-accrual loan charge-offs -- (49) (173)
Change in accruing loans past
due 90 or more days, net 409 120 46
OREO returned to accrual loan status (58) -- --
Payments to improve OREO 6 -- 31
Gross proceeds from OREO sales -- (255) (399)
Gains on OREO sales, net -- 39 46
- --------------------------------------------------------------------------------------
Balance, end of period $1,861 $1,741 $1,218
=====================================================================================
Percent of total assets 0.31% 0.33% 0.31%
Had non-accrual loans as of December 31, 2001, December 31, 2000 and June 30,
2000 been current in accordance with their original terms, gross interest income
of $95,000, $61,000 and $68,000, respectively, would have been recorded in net
income. The amount of interest on these loans that was included in income was
$65,000, $13,000 and $15,000, respectively, for the three periods. Accruing
loans past due 90 days or more at December 31, 2001 consist primarily of
mortgage loans 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 during the six months
ended December 31, 2000 sold $255,000 of OREO from which net gains of $39,000
were realized.
In addition to non-performing assets, at December 31, 2001 NewMil had $2,578,000
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
- -----------------------
During 2001 deposits grew $38.3 million, or 8.8%, to $476.1 million. This growth
resulted from an advertising campaign by the Bank and opportunities in NewMil's
market resulting from the sale of a large out-of-state bank, which itself had
recently acquired a local-area bank, to another large out-of-state bank as well
as the additional markets entered through the Nutmeg acquisition. NewMil has 18
full-service branch offices and one special needs office located in Fairfield,
Litchfield and New Haven Counties. Scheduled maturities of certificates of
deposit with balances in excess of $100,000 are as follows:
December 31, 2000 Within Within Over
(in thousands) Less than 3 3 - 6 6- 12 one
months months months year Total
- --------------------------------------------------------------------------
Certificates of deposit
over $100,000 $9,019 $5,909 $7,821 $5,186 $27,935
==========================================================================
28
During 2001 borrowings increased $41.2 to $73.3 million. NewMil used Federal
Home Loan Bank advances to fund a portion of the securities portfolio growth
during the year. Borrowings at December 31, 2001 consisted of Federal Home Loan
Bank advances of $67.5 million and overnight retail repurchase agreements of
$5.8 million, with terms ranging from one day to 82 months and fixed rates
ranging from 1.82% to 4.56%. Borrowings at December 31, 2000 had terms ranging
from one day to 93 months and fixed rates from 4.49% to 6.58%.
LIQUIDITY
NewMil manages its liquidity position to ensure it has 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 for the twelve month period ended December 31, 2001
provided net cash flows of $702,000. During 2001 investing activities used net
cash of $77.1 million, a result of investment security purchases of $95.1
million and $7.8 million in net loan advances, while principal collected from
mortgage backed securities and other securities were $26.2 million. Financing
activities provided net cash of $74.8 million, principally from increased
deposits and borrowings. Funds provided by operating and financing activities,
together with a $1.6 million decrease in cash and overnight federal funds sold,
were used to fund investing activities.
Operating activities for the six month period ended December 31, 2000 provided
net cash flows of $2.1 million. During 2000 investing activities used net cash
of $5.7 million, principally net cash paid through the Nutmeg acquisition and
net loan advances. Financing activities provided net cash of $18.8 million,
principally from increased deposits and repurchase agreements, offset by net
borrowing repayments. Funds provided by operating activities and financing
activities were utilized to fund investing activities and a $15.2 million
increase in cash and overnight federal funds sold.
Operating activities for the six month period ended December 31, 1999 used net
cash of $0.5 million. Investing activities provided net cash of $4.8 million,
principally as a result of securities repayments, sales and maturities offset,
in part, by securities and loans purchased. Financing activities used net cash
of $9.4 million, principally due to repayment of borrowings, net deposit
withdrawals, dividends paid and treasury stock purchases. Funds provided by
investing activities, together with a $5.0 million decrease in cash and
overnight federal funds sold, were utilized to fund financing activities.
At December 31, 2001, 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 $75 million, to net
deposits and short term unsecured liabilities, was 54.5%, well in excess of
NewMil's minimum policy guideline of 15%.
At December 31, 2001, NewMil had outstanding commitments to fund new loan
originations of $30.8 million, construction mortgage commitments of $4.9 million
and unused lines of credit of $36.9 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
Market risk is the exposure to losses resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which NewMil is exposed is interest rate risk. NewMil has no
foreign currency or commodity price risk and equity price risk is considered
limited due to the fact that NewMil has minimal investments in equities and
investments in corporate bonds are in the highest credit grades.
NewMil manages interest rate risk through an Asset Liability Committee comprised
of representatives from senior management and the Board of Directors. The
objective of interest rate risk management is to achieve and maintain a high and
stable net interest margin under changing interest rate environments. NewMil
seeks to manage interest rate risk within limits approved by the Board of
Directors. NewMil monitors exposure to interest rate risk on a quarterly basis
using earnings simulation analysis and gap analysis. Earnings simulation
analysis measures
29
the amount of short-term earnings at risk under both rising and falling rate
scenarios as compared with current interest rates. Balance sheet gap analysis
identifies short-, medium- and long-term interest rate positions or exposure.
The following table sets forth NewMil's interest rate sensitivity position, or
gap position, at December 31, 2001, measured in terms of the volume of interest
rate sensitive assets and liabilities that are subject to re-pricing 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 re-pricing periods presented due to differences in their re-pricing
elasticity relative to changes in the general level of interest rates.
December 31, 2001 Within Within Non-
(dollars in thousands) Within 6 7-12 1-5 After interest-
months months years 5 years bearing Total
- ------------------------------------------------------------------------------------------------------
ASSETS
Securities $ 34,845 $ 21,583 $134,498 $16,815 $ 4,667 $212,408
Federal funds sold 4,615 -- -- -- -- 4,615
Cash & due from banks 99 -- -- -- 21,480 21,579
Loans, net 116,586 49,975 120,145 51,203 2,459 340,368
Other assets -- 5,674 -- -- 22,382 28,056
- ------------------------------------------------------------------------------------------------------
Total assets 156,145 77,232 254,643 68,018 50,988 $607,026
- ------------------------------------------------------------------------------------------------------
SOURCE OF FUNDS
Deposits
Demand (non
interest-bearing) -- -- -- -- 39,898 39,898
NOW accounts -- -- -- 63,415 -- 63,415
Money market 120,888 -- -- -- -- 120,888
Savings & other 70,001 -- -- -- -- 70,001
Certificates of deposit 96,262 48,919 36,733 -- -- 181,914
Federal Home Loan
Bank advances 27,901 4,144 35,495 -- -- 67,540
Repurchase agreements 5,783 -- -- -- -- 5,783
Other liabilities -- -- -- -- 6,993 6,993
Stockholders' equity -- -- -- -- 50,594 50,594
- ------------------------------------------------------------------------------------------------------
Total sources of funds 320,835 53,063 72,228 63,415 97,485 $607,026
- ------------------------------------------------------------------------------------------------------
Cumulative interest-rate
sensitivity gap $(164,690) $(140,521) $(41,894) $46,497 $ --
========================================================================================
Percent of total assets (27.1)% (23.1)% (6.9)% 7.7% --%
At December 31, 2001, NewMil's one year cumulative gap was -$140.5 million, or
23.1% 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's asset/liability management responds to changes in interest rates and
market conditions. The earnings simulation analysis incorporates numerous
assumptions about balance sheet changes, including growth and product mix,
prepayments, product pricing and the behavior of interest rates. NewMil's policy
is to ensure that changes in net income over a twelve month horizon under +/-200
basis point rising and falling interest rate scenarios will not decrease by 20%
or more as compared with the current interest rate scenario. However, because
current interest rates are at historically low levels, NewMil adjusted its
policy requirements for the December 31, 2001 earnings simulation analysis to
test within a +300/-50 basis point band.
During 2001 the Federal Open Market Committee of the Federal Reserve Board
lowered the overnight federal funds target rate by 4.75% to 1.75% at December
31, 2001, while the yield on the 30-year US Treasury Note remained unchanged.
Yields on other US Treasury Notes changed by varying amounts within this
0%-to-4.75% range
30
according to their maturities. At December 31, 2001 NewMil simulated earnings at
risk over a twelve month horizon by ramping the overnight federal funds target
rate by +300/-50 basis points and the yield on the 30-year US Treasury Note by
+100/-50 basis points from the current rate environment. Yields on other US
Treasury Notes and other indices have been ramped by varying amounts within
these ranges according to their maturities. NewMil's December 31, 2001 earnings
simulation analysis indicated that the estimated percentage change in net income
over the twelve month forecast horizon was within the -20% tolerance limit.
In prior periods, NewMil simulated earnings at risk over a twelve month horizon
by ramping interest rates +/-200 basis points from the current rate environment.
During those periods interest rates did not move +/-200 basis points from their
beginning period rates.
The following table shows the estimated percentage changes in net income over a
twelve month forecast horizon for the periods presented.
% Change in Net Income
Change December31, June 30,
in Rate 2001 2000 2000 1999
- ------------------------------------------------------------
+300 bp (8.2)% -- -- --
- -50 bp 1.8 -- -- --
+200 bp -- (8.9)% (8.6)% 2.9%
- -200 bp -- (6.2) (5.0) (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
NewMil's deposit base is composed of local retail deposit accounts that 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 re-pricing consistent with its interest rate
risk objectives.
CAPITAL RESOURCES
During 2001 shareholders' equity increased $3.1 million, or 6.5%, to $50.6
million, while book value per share increased 11.3% to $11.52 at December 31,
2001. The increase in shareholders' equity resulted from net income of
$5,626,000, net unrealized gains of $2.2 million on securities available for
sale, net of taxes, a $20,000 tax benefit from the exercise of non-qualified
stock options and proceeds from the exercise of stock options of $133,000,
offset, in part, by treasury stock purchases of $3,689,000 and dividend payments
of $1,968,000.
Repurchases of Common Stock
- ---------------------------
During 2001 NewMil repurchased 304,500 shares of common stock for total
consideration of $3,689,000, or $12.12 per average share, under a 229,716 share
repurchase plan announced in December 2000 and a 222,593 share repurchase plan
announced on July 18, 2001.
In December 2000 NewMil announced its intention to repurchase 229,716, or 5%, of
its outstanding shares of common stock in the open market and unsolicited
negotiated transactions, including block purchases. Additionally, in July 2001
NewMil announced its intention to repurchase 222,593, or 5%, of its outstanding
shares of common stock in the open market and unsolicited negotiated
transactions, including block purchases. The purpose of these repurchase plans
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.
Capital Requirements
- --------------------
NewMil and the Bank are subject to minimum capital requirements established,
respectively, by the Federal Reserve Board (the "FRB") and the FDIC. At December
31, 2001 NewMil's leverage capital ratio was 6.56% and its tier I and total
risk-based capital ratios were 10.93% and 12.18%, respectively. At December 31,
2001 the Bank's leverage capital, and tier I and total risk-based capital ratios
were 6.55%, 10.91% and 12.16%, respectively. At
31
December 31, 2000 the Bank's leverage capital, and tier I and total risk-based
capital ratios were 8.04%, 11.99% and 13.24%, respectively. NewMil's intangible
assets acquired pursuant to the Nutmeg purchase transaction are not recognized
for regulatory capital. 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 December 31, 2001 was $1,802,000. 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 1996, 1997,
1998 and 2000 NewMil increased its quarterly cash dividend to $0.06, $0.08,
$0.09 and $0.11, respectively. For the six month period ended December 31, 2000
total dividends of $0.21 per share were paid. For the twelve month period ended
December 31, 2001 total dividends of $0.44 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
In June 2001, the Financial Accounting Standards Board approved Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
No. 142 "Goodwill and Other Intangible Assets" ("SFAS142") which became
effective July 1, 2001 and January 1, 2002, respectively for NewMil. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Under SFAS 142, amortization of
goodwill, including goodwill recorded in past business combinations, will be
discontinued upon adoption of this standard. In addition, goodwill recorded as a
result of business combinations completed during the six-month period ending
December 31, 2001 will not be amortized. All goodwill and intangible assets will
be tested for impairment in accordance with the provisions of the Statement.
Upon adoption of SFAS 141 and 142, NewMil has determined that it will not have
to amortize approximately $82,000 each quarter for goodwill and does not
anticipate having to record any impairment charges.
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 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth in the ASSET/LIABILITY MANAGEMENT AND MARKET RISK
section included under Item 7 of this report is incorporated by reference
herein.
32
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 as of December
31, 2001, December 31, 2000 and June 30, 2000 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for
the 12-month period ended December 31, 2001, for the six-month period ended
December 31, 2000 and for the 12-month periods ended June 30, 2000 and
1999, present fairly, in all material respects, the financial position of
NewMil Bancorp, Inc. and its subsidiary at December 31, 2001, December 31,
2000 and June 30, 2000 and the results of their operations and their cash
flows for the 12-month period ended December 31, 2001, for the six-month
period ended December 31, 2000 and for the 12-month periods ended June 30,
2000 and 1999 in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards generally
accepted in the United States of America, 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 our opinion.
As discussed in Note 3 to the consolidated financial statements, NewMil
changed its method of accounting for derivative financial instruments in
1999.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
January 18, 2002
33
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
(dollars in thousands) 2001 2000 2000
- ----------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 21,579 $ 21,784 $ 12,623
Federal funds sold 4,615 6,029 --
- ----------------------------------------------------------------------------------
Total cash and cash equivalents 26,194 27,813 12,623
Securities
Available-for-sale at market 181,623 103,221 104,528
Held-to-maturity at amortized cost
(fair value: $31,087, $36,853 and $38,005) 30,785 37,177 39,779
Loans (net of allowance for loan losses: $5,502,
$5,518 and $4,978) 340,368 332,544 223,734
Other real estate owned 116 150 366
Bank premises and equipment, net 6,092 6,491 5,679
Accrued interest income 3,870 3,499 2,747
Intangible assets (net of accumulated
amortization: $737 and $82) 9,305 9,459 --
Deferred tax asset, net 619 1,135 2,000
Other assets 8,054 2,089 1,116
- ----------------------------------------------------------------------------------
Total Assets $607,026 $523,578 $392,572
==================================================================================
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 39,898 $ 37,325 $ 20,703
NOW accounts 63,415 54,785 43,950
Money market 120,888 107,131 75,465
Savings and other 70,001 65,657 48,652
Certificates of deposit 181,914 172,895 130,856
- ----------------------------------------------------------------------------------
Total deposits 476,116 437,793 319,626
Federal Home Loan Bank advances 67,540 27,500 35,750
Repurchase agreements 5,783 4,591 --
Accrued interest and other liabilities 6,993 6,177 2,871
- ----------------------------------------------------------------------------------
Total Liabilities 556,432 476,061 358,247
- ----------------------------------------------------------------------------------
Commitments and contingencies -- -- --
- ----------------------------------------------------------------------------------
Shareholders' Equity
Common stock - $.50 per share par value
Shares authorized: 20,000,000
Shares issued: 5,990,138 2,995 2,995 2,995
Paid-in capital 42,568 42,755 43,332
Retained earnings 18,105 14,447 13,199
Accumulated other comprehensive income, net 2,921 755 (1,362)
Treasury stock, at cost: 1,599,578,
1,398,963 and 2,384,113 shares (15,995) (13,435) (23,839)
- ----------------------------------------------------------------------------------
Total Shareholders' Equity 50,594 47,517 34,325
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $607,026 $523,578 $392,572
==================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
34
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Year ended Six months ended Years ended
December 31, December 31, June 30,
2001 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
Interest and dividend income (unaudited)
Interest and fees on loans $26,685 $10,833 $ 8,349 $17,108 $15,426
Interest and dividends on securities 10,778 4,775 3,564 7,915 8,235
Interest on federal funds sold 185 101 93 152 795
- ------------------------------------------------------------------------------------------------
Total interest and dividend income 37,648 15,709 12,006 25,175 24,456
- ------------------------------------------------------------------------------------------------
Interest expense
Deposits 14,723 6,789 4,786 9,878 10,352
Borrowed funds 1,908 1,012 358 1,233 1,455
- ------------------------------------------------------------------------------------------------
Total interest expense 16,631 7,801 5,144 11,111 11,807
- ------------------------------------------------------------------------------------------------
Net interest and dividend income 21,017 7,908 6,862 14,064 12,649
Provision for loan losses -- (416) (495) (470) 100
- ------------------------------------------------------------------------------------------------
Net interest and dividend income
after provision for loan losses 21,017 8,324 7,357 14,534 12,549
- ------------------------------------------------------------------------------------------------
Non-interest income
Service charges on deposit accounts 2,089 808 672 1,329 1,154
Gains on sales of mortgage loans, net 406 93 84 147 547
Gain on sale of OREO -- 39 23 46 1,342
Gain on sale of branch -- -- 75 75 --
Loss on sale of securities, net -- -- (109) (109) --
Loan servicing fees 134 43 34 66 81
Other 429 200 163 339 310
- ------------------------------------------------------------------------------------------------
Total non-interest income 3,058 1,183 942 1,893 3,434
- ------------------------------------------------------------------------------------------------
Non-interest expense
Salaries 6,729 2,805 2,396 4,878 4,766
Employee benefits 931 164 600 665 1,252
Occupancy 1,313 569 473 986 995
Equipment 1,185 709 420 919 779
Professional, collections and OREO 813 264 356 565 284
Marketing 510 527 140 327 216
Amortization of intangibles 654 82 -- -- --
Other 3,156 1,262 1,050 1,996 2,146
- ------------------------------------------------------------------------------------------------
Total non-interest expense 15,291 6,382 5,435 10,336 10,438
- ------------------------------------------------------------------------------------------------
Income before income taxes,
cumulative effect of accounting
change and extraordinary item 8,784 3,125 2,864 6,091 5,545
Income tax provision 3,158 1,119 960 2,076 2,264
- ------------------------------------------------------------------------------------------------
Income before cumulative effect
of accounting change and
extraordinary item 5,626 2,006 1,904 4,015 3,281
Cumulative effect of change in
accounting principle, net of taxes -- -- -- -- (162)
Extraordinary item, net of taxes -- -- -- -- (87)
- ------------------------------------------------------------------------------------------------
Net income $ 5,626 $ 2,006 $ 1,904 $ 4,015 $ 3,032
================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
35
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
Year ended Six months ended Years ended
December 31, December 31, June 30,
2001 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------
(unaudited)
Diluted earnings per share
Income before cumulative effect
of accounting change and
extraordinary item $1.21 $0.50 $0.50 $1.05 $0.82
Cumulative effect of change in
accounting principle, net of taxes -- -- -- -- (0.04)
Extraordinary item, net of taxes -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------------
Net income $1.21 $0.50 $0.50 $1.05 $0.76
=======================================================================================
Basic earnings per share
Income before cumulative effect
of accounting change and
extraordinary item $1.26 $0.52 $0.52 $1.10 $0.87
Cumulative effect of change in
accounting principle, net of taxes -- -- -- -- (0.05)
Extraordinary item, net of taxes -- -- -- -- (0.02)
- ---------------------------------------------------------------------------------------
Net income $1.26 $0.52 $0.52 $1.10 $0.80
=======================================================================================
Dividends per share $0.44 $0.21 $0.20 $0.40 $0.35
=======================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
36
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Total
other comp- share-
Common Stock Paid-in Retained Treasury rehensive holders'
(dollars in thousands) Shares Amount capital earnings stock income equity
- -----------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 5,990,138 $2,995 $43,881 $ 8,933 $(21,195) $(1,205) $33,409
Net income for year -- -- -- 3,032 -- -- 3,032
Net unrealized gain on
securities available-for-sale,
net of taxes -- -- -- -- -- 73 73
-------
Total comprehensive income 3,105
-------
Cash dividends paid -- -- -- (1,328) -- -- (1,328)
Exercise of stock options -- -- (108) -- 167 -- 59
Common stock repurchased -- -- -- -- (2,110) -- (2,110)
- ----------------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 5,990,138 2,995 43,773 10,637 (23,138) (1,132) 33,135
Net income for year -- -- -- 4,015 -- -- 4,015
Net unrealized loss on
securities available-for-sale,
net of taxes -- -- -- -- -- (230) (230)
-------
Total comprehensive income 3,785
-------
Cash dividends paid -- -- -- (1,453) -- -- (1,453)
Exercise of stock options -- -- (441) -- 813 -- 372
Common stock repurchased -- -- -- -- (1,514) -- (1,514)
- ----------------------------------------------------------------------------------------------------------------
Balances at June 30, 2000 5,990,138 2,995 43,332 13,199 (23,839) (1,362) 34,325
Net income for period -- -- -- 2,006 -- -- 2,006
Net unrealized gain on
securities available-for-sale,
net of taxes -- -- -- -- -- 2,117 2,117
-------
Total comprehensive income 4,123
-------
Cash dividends paid -- -- -- (758) -- -- (758)
Exercise of stock options -- -- (124) -- 197 -- 73
Tax benefit from exercise
of non-qualified stock options -- -- 112 -- -- -- 112
Common stock issued in
consideration for
purchase acquisition -- -- (565) -- 10,550 -- 9,985
Common stock repurchased -- -- -- -- (343) -- (343)
- ----------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2000 5,990,138 2,995 42,755 14,447 (13,435) 755 47,517
Net income for year -- -- -- 5,626 -- -- 5,626
Net unrealized gain on
securities available-for-sale,
net of taxes -- -- -- -- -- 2,166 2,166
-------
Total comprehensive income 7,792
-------
Cash dividends paid -- -- -- (1,968) -- -- (1,968)
Exercise of stock options -- -- (146) -- 279 -- 133
Tax benefit from exercise of
non-qualified stock options -- -- 20 -- -- -- 20
Common stock issued -- -- (61) -- 850 -- 789
Common stock repurchased -- -- -- -- (3,689) -- (3,689)
- ----------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2001 5,990,138 $2,995 $42,568 $18,105 $(15,995) $ 2,921 $50,594
================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
37
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Six months ended Years ended
December 31, December 31, June 30,
(in thousands) 2001 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------
(unaudited)
Operating Activities
Net income $ 5,626 $ 2,006 $ 1,904 $ 4,015 $ 3,032
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses -- (416) (495) (470) 100
Provision for depreciation and amortization 895 499 368 760 695
Provision for OREO recoveries -- -- -- -- (82)
Amortization of intangible assets 654 82 -- -- --
Amortization and accretion of securities
premiums and discounts, net 128 (65) 153 155 763
Gains on sales of loans, net (406) (93) (84) (147) (547)
Gains on sales of OREO, net -- (39) (23) (46) (1,342)
Gain on sale of branch -- -- (75) (75) --
Losses on sales of securities, net -- -- 109 109 --
Cumulative effect of accounting change, net -- -- -- -- 162
Extraordinary loss on debt
extinguishment, net -- -- -- -- 87
Loans originated for sale (24,753) (5,275) (4,599) (7,377) (27,597)
Proceeds from sales of loans
originated for sale 25,159 5,368 4,683 7,524 28,144
Tax benefit from exercise of
non-qualified stock options 20 112 -- -- --
Deferred income tax (benefit) provision 428 (74) (14) (94) 496
(Increase) decrease in accrued interest income (372) (98) 30 (557) 69
Increase (decrease) in accrued
interest expense and other liabilities 816 161 (2,372) (988) 1,251
(Increase) decrease in other assets, net (7,493) (49) (39) (596) 346
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 702 2,119 (454) 2,213 5,577
- -----------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of securities available-for-sale (40,796) -- (8,536) (32,218) (10,805)
Purchases of mortgage backed securities
Available-for-sale (54,279) -- (2,034) (21,540) (15,598)
Held-to-maturity -- -- -- -- (18,198)
Proceeds from sales of securities
Available-for-sale -- -- -- -- 20,933
Proceeds from sales of mortgage
backed securities available-for-sale -- -- 8,411 8,411 --
Proceeds from maturities and
principal repayments of securities 2,838 850 1,685 2,821 33,603
Principal collected on mortgage backed securities 23,382 7,095 9,119 15,808 33,497
Loan (advances) repayments, net (7,784) (8,870) 366 (9,418) (9,053)
Loans purchased -- -- (4,164) (4,164) (38,556)
Net cash paid through purchase acquisition -- (4,268) -- -- --
Proceeds from sales of OREO -- 255 190 398 1,815
Payments to improve OREO (6) -- (28) (31) (107)
Purchases of Bank premises and equipment (496) (790) (135) (201) (979)
- -----------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (77,141) (5,728) 4,874 (40,134) (3,448)
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
38
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued:-
Year ended Six months ended Years ended
December 31, December 31, June 30,
(in thousands) 2001 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------
(unaudited)
Financing Activities
Net increase (decrease) in deposits 38,323 33,486 (866) 19,503 6,247
Net increase in repurchase agreements 1,192 4,591 -- -- --
FHLB advances (repayments), net 40,040 (18,250) (7,500) 20,750 (22,587)
Common Stock repurchased (3,689) (343) (1,038) (1,514) (2,110)
Proceeds from Common Stock reissued 789 -- 417 -- --
Cash dividends paid (1,968) (758) (730) (1,453) (1,328)
Proceeds from exercise of stock options 133 73 336 372 59
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 74,820 18,799 (9,381) 37,658 (19,719)
- ------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash
and cash equivalents (1,619) 15,190 (4,961) (263) (17,590)
Cash and federal funds sold, beginning of period 27,813 12,623 12,886 12,886 30,476
- ------------------------------------------------------------------------------------------------------------
Cash and federal funds sold, end of period $26,194 $ 27,813 $ 7,925 $12,623 $ 12,886
============================================================================================================
Cash paid during period
Interest to depositors $14,825 $ 6,668 $ 4,786 $ 9,807 $ 10,344
Interest on borrowings 1,827 1,021 394 1,203 1,562
Income taxes 3,118 970 817 1,723 2,285
Non-cash transfers
From securities held-to-maturity
to securities available-for-sale -- -- -- -- 21,509
From loans to OREO -- -- 18 354 335
Financed portion of OREO sales -- 218 113 218 --
Assets acquired and liabilities
assumed in purchase acquisition
Fair value of non-cash assets acquired -- 107,190 -- -- --
Fair value of liabilities assumed -- 99,256 -- -- --
Common stock issued -- 9,985 -- -- --
The accompanying notes are an integral part of the consolidated financial
statements.
39
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 NewMil 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 18 full-service offices and one special needs office
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
2001 financial presentation.
Change in Fiscal Year
In December 2000, NewMil changed its fiscal year from June 30 to December 31.
All references in the financial statements to the year or period ended December
31, 2000 relate to the six-months then ended.
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. In connection with the
determination of the allowance for loan, 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 judgments 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.
40
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, including impaired 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, including impaired loans, is then recognized only to the extent
that cash is received and future collection of principal is probable.
Loans, including impaired 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 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, current economic conditions
and historical loan loss experience over a 10-to-15 year economic cycle, 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, is 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 appraisals.
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.
41
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.
Intangible Assets
Intangible assets consist of core deposit intangibles and goodwill. Intangible
assets equal the excess of the purchase price over the fair value of the
tangible net assets acquired in acquisitions accounted for using the purchase
method of accounting. The core deposit intangibles are being amortized on a
declining balance method over a period of seven years from the acquisition date.
Goodwill is being amortized on a straight-line basis over a period of twenty
five years from the acquisition date. On a periodic basis, management assesses
intangible assets for impairment. If a permanent loss in value is indicated, an
impairment charge to income will be recognized.
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
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 are as follows:
Year ended Six months ended Years ended
December 31, December 31, June 30,
(in thousands) 2001 2000 1999 2000 1999
- ----------------------------------------------------------------------------------
Basic 4,467 3,890 3,656 3,635 3,793
Effect of dilutive stock options 172 145 184 172 192
- ----------------------------------------------------------------------------------
Diluted 4,639 4,035 3,840 3,807 3,985
==================================================================================
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). 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. NewMil does not have any operating segments, as defined
by SFAS 131, and therefore, has not disclosed the additional information.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board approved Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
No. 142 "Goodwill and Other Intangible Assets" ("SFAS142") which are effective
July 1, 2001 and January 1, 2002, respectively for NewMil. SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Under SFAS 142, amortization of goodwill,
including goodwill recorded in past business combinations, will be discontinued
upon adoption of this standard. In addition, goodwill recorded as a result of
business combinations completed during the six-month period ending December 31,
2001 will not be amortized. All goodwill and intangible assets will be tested
for impairment in accordance with the provisions of the Statement. Upon adoption
of SFAS 141 and 142, NewMil has determined that it will not have to amortize
approximately $82,000 each quarter for goodwill and does not anticipate having
to record any impairment charges.
NOTE 2 - BUSINESS COMBINATIONS
On November 9, 2000, NewMil acquired Nutmeg Federal Savings and Loan Association
("Nutmeg") in a tax-free stock-for-stock and cash-for-stock exchange for a total
purchase price of $20.3 million, in consideration for which NewMil paid $10.3
million in cash and issued 1.0 million shares of common stock. Nutmeg was a
federally chartered savings and loan association headquartered in Danbury,
Connecticut with $109.1 million in assets and $84.7 million in deposits with
four branch locations, including two in Danbury, one in Bethel and one in
Ridgefield, Connecticut. In connection with the acquisition, NewMil recorded
goodwill of $8.1 million and a core deposit intangible of $1.4 million.
42
NOTE 3 - SECURITIES
Securities classified as available-for-sale (carried at fair value) were as
follows:
Gross Gross
Estimated unrealized unrealized Amortized
(in thousands) fair value gains losses cost
- -----------------------------------------------------------------------------------------
December 31, 2001
U.S. Government Agency notes
After 1 but within 5 years $ 21,151 $ 606 $ -- $ 20,545
Corporate Bonds
After 1 but within 5 years 38,803 2,009 1 36,795
Mortgage backed securities 102,407 1,670 28 100,765
Collateralized mortgage obligations 15,513 260 -- 15,253
- -----------------------------------------------------------------------------------------
Total debt securities 177,874 4,545 29 173,358
Equity securities 3,749 1 -- 3,748
- -----------------------------------------------------------------------------------------
Total securities available-for-sale $181,623 $4,546 $ 29 $177,106
=========================================================================================
December 31, 2000
U.S. Government Agency notes
After 1 but within 5 years $ 10,294 $ 481 $ -- $ 9,813
Corporate Bonds
After 1 but within 5 years 22,718 488 -- 22,230
Mortgage backed securities 65,525 927 489 65,087
Collateralized mortgage obligations 1,157 -- 160 1,317
- -----------------------------------------------------------------------------------------
Total debt securities 99,694 1,896 649 98,447
Equity securities 3,527 -- -- 3,527
- -----------------------------------------------------------------------------------------
Total securities available-for-sale $103,221 $1,896 $ 649 $101,974
=========================================================================================
June 30, 2000
U.S. Government Agency notes
After 1 but within 5 years $ 9,822 $ 41 $ 11 $ 9,792
Corporate Bonds
After 1 but within 5 years 22,034 98 263 22,199
Mortgage backed securities 68,787 346 1,967 70,408
Collateralized mortgage obligations 1,120 -- 197 1,317
- -----------------------------------------------------------------------------------------
Total debt securities 101,763 485 2,438 103,716
Equity securities 2,765 -- -- 2,765
- -----------------------------------------------------------------------------------------
Total securities available-for-sale $104,528 $ 485 $2,438 $106,481
=========================================================================================
Securities classified as held-to-maturity (carried at amortized cost) were as
follows:
Gross Gross
Amortized unrealized unrealized Estimated
(in thousands) cost(a) gains losses fair value
- -----------------------------------------------------------------------------------------
December 31, 2001
Municipal bonds
After 1 but within 5 years $ 500 $ 5 $ -- $ 505
After 10 years 10,536 -- 370 10,166
Mortgage backed securities 14,385 534 -- 14,919
Collateralized mortgage obligations 5,364 133 -- 5,497
- -----------------------------------------------------------------------------------------
Total securities held-to-maturity $30,785 $672 $370 $31,087
=========================================================================================
43
Gross Gross
Amortized unrealized unrealized Estimated
(in thousands) cost(a) gains losses fair value
- -----------------------------------------------------------------------------------------
December 31, 2000
Municipal bonds
After 1 but within 5 years $ 250 $ -- $ 2 $ 248
After 10 years 10,545 -- 398 10,147
Mortgage backed securities 19,307 296 -- 19,603
Collateralized mortgage obligations 7,075 2 222 6,855
- -----------------------------------------------------------------------------------------
Total securities held-to-maturity $37,177 $298 $ 622 $36,853
=========================================================================================
June 30, 2000
Municipal bonds
After 1 but within 5 years $ 250 $ -- $ 16 $ 234
After 10 years 10,550 -- 912 9,638
Mortgage backed securities 21,064 4 397 20,671
Collateralized mortgage obligations 7,915 6 459 7,462
- -----------------------------------------------------------------------------------------
Total securities held-to-maturity $39,779 $ 10 $1,784 $38,005
=========================================================================================
(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:
Cash Realized Realized
(in thousands) proceeds gains losses
- ----------------------------------------------------------------------------------------
Year ended December 31, 2001 $ -- $-- $ --
========================================================================================
Six months ended December 31, 2000
U.S. Treasury Notes, available-for-sale $ 4,653 $-- $ --
========================================================================================
Six months ended December 31, 1999
Mortgage backed securities, available-for-sale $ 8,411 $-- $109
========================================================================================
Year ended June 30, 2000
Mortgage backed securities, available-for-sale $ 8,411 $-- $109
========================================================================================
Year ended June 30, 1999
Collateralized mortgage obligations, available-for-sale $20,933 $-- $274
========================================================================================
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.
At December 31, 2001 securities with a carrying value and market value
aggregating approximately $1,491,000 and $1,474,000, respectively, were pledged
as collateral against public funds and securities with a carrying value and
market value aggregating approximately $18,869,000 and $18,894,000,
respectively, were pledged as
44
collateral against repurchase agreements. Also, securities with a carrying value
and market value aggregating $9,100,000 and $9,430,000, respectively, were
pledged as collateral against Treasury Tax & Loan Deposits.
NOTE 4 - LOANS
The composition of the loan portfolio is as follows:
December 31, June 30,
(in thousands) 2001 2000 2000
- -----------------------------------------------------------------------------------------
Real estate mortgages
1-to-4 family residential $180,513 $187,755 $130,770
5-or-more family residential 14,649 19,759 4,185
Commercial 78,091 63,089 51,633
Land & land development 2,997 3,423 1,995
Home equity credit 32,580 24,121 20,257
Commercial & industrial 34,254 36,390 17,404
Installment & other 3,089 3,868 2,439
- -----------------------------------------------------------------------------------------
Total loans, gross 346,173 338,405 228,683
Deferred loan origination fees & purchase premium, net (303) (343) 29
Allowance for loan losses (5,502) (5,518) (4,978)
- -----------------------------------------------------------------------------------------
Total loans, net $340,368 $332,544 $223,734
=========================================================================================
Impaired loans (in thousands)
With no valuation allowance $ 77 $ 224 $ 2
With valuation allowance 696 500 502
Total impaired loans 773 724 504
Valuation allowance 100 238 234
Commitments to lend additional
amounts to impaired borrowers -- -- --
Average impaired loans 749 626 864
Amount of impaired loans based on:
Discounted cash flows -- -- --
Collateral values 673 724 504
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 are as follows:
Year ended Six months ended Years ended
December 31, December 31, June 30,
(in thousands) 2001 2000 2000 1999
- -----------------------------------------------------------------------------------------------
Balance, beginning of period $5,518 $4,978 $4,989 $5,004
Provision for losses -- (416) (470) 100
Allowance acquired from purchase of Nutmeg -- 584 -- --
Charge-offs (74) (49) (177) (176)
Recoveries 58 421 636 61
- -----------------------------------------------------------------------------------------------
Balance, end of period $5,502 $5,518 $4,978 $4,989
===============================================================================================
45
NOTE 5 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
December 31, June 30,
(in thousands) 2001 2000 2000
- --------------------------------------------------------------------------------
Non-accrual loans $ 985 $1,240 $ 621
Accruing loans past due 90 days or more 760 351 231
Accruing troubled debt restructured loans -- -- --
- --------------------------------------------------------------------------------
Total non-performing loans 1,745 1,591 852
Real estate acquired in settlement of loans 116 150 366
- --------------------------------------------------------------------------------
Total non-performing assets $1,861 $1,741 $1,218
================================================================================
The reductions in interest income associated with non-accrual loans are as
follows:
Year ended Six months ended Years ended
December 31, December 31, June 30,
(in thousands) 2001 2000 2000 1999
- ------------------------------------------------------------------------------------------
Income in accordance with original terms $95 $61 $68 $98
Income recognized 65 13 15 59
- ------------------------------------------------------------------------------------------
Reduction in interest income $30 $48 $53 $39
==========================================================================================
NOTE 6 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
December 31, June 30,
(in thousands) 2001 2000 2000
- -------------------------------------------------------------------------------
Land $ 1,140 $ 1,140 $ 1,140
Buildings and improvements 6,030 6,447 6,170
Equipment 4,565 3,849 3,103
Leasehold improvements 596 596 403
- -------------------------------------------------------------------------------
Total cost 12,331 12,032 10,816
Accumulated depreciation and amortization (6,239) (5,541) (5,137)
- -------------------------------------------------------------------------------
Bank premises and equipment, net $ 6,092 $ 6,491 $ 5,679
===============================================================================
46
NOTE 7 - BORROWINGS
Fixed rate advances from the Federal Home Loan Bank of Boston are as follows:
December 31, June 30,
(in thousands) 2001 2000 2000
- --------------------------------------------------------------------------------
7.42% due July 1, 2000 $ -- $ -- $ 3,250
6.56% due July 5, 2000 -- -- 3,500
6.57% due July 12, 2000 -- -- 1,500
6.55% due July 19, 2000 -- -- 7,000
6.60% due July 26, 2000 -- -- 8,000
6.13% due August 16, 2000 -- -- 5,000
6.57% due January 3, 2001 -- 4,500 --
6.50% due January 17, 2001 -- 10,000 --
6.58% due January 24, 2001 -- 4,500 --
5.91% due March 5, 2001 -- 7,500 7,500
1.963% due January 2, 2002 2,205 -- --
2.18% due January 3, 2002 7,000 -- --
1.82% due January 9, 2002 5,000 -- --
1.87% due January 16, 2002 5,000 -- --
1.87% due January 23, 2002 5,622 -- --
4.35% due June, 20, 2003 10,000 -- --
4.56% due August 10, 2006 (a) 9,549 -- --
4.49% due August 31, 2006 (a) 9,549 -- --
4.39% due September 11, 2006 (a) 12,615 -- --
4.49% due October 6, 2008 (b) 1,000 1,000 --
- --------------------------------------------------------------------------------
Total $67,540 $27,500 $35,750
================================================================================
(a) Five year amortizing advances
(b) Advance is callable quarterly
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 December 31, 2001.
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.
NewMil enters into repurchase agreements directly with its customers. These
agreements are offered as an overnight or short-term investments to NewMil's
customers. Information concerning short-term borrowings represented by
securities sold under agreements to repurchase is presented as follows:
December 31, June 30,
(dollars in thousands) 2001 2000 2000
- --------------------------------------------------------------------------
Repurchase agreements $ 5,783 $ 4,591 $--
Book value of collateral
US Government Agency notes 18,869 20,344 --
Market value of collateral 18,894 20,489 --
Weighted average rate 2.25% 5.82% --
Weighted average maturity 1 day 1 day --
47
NOTE 8 - 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:
Year ended Six months ended Years ended
December 31, December 31, June 30,
(in thousands) 2001 2000 2000 1999
- --------------------------------------------------------------------------------
Current provision
Federal $2,730 $1,193 $2,170 $1,498
State -- -- -- 270
- --------------------------------------------------------------------------------
Total 2,730 1,193 2,170 1,768
- --------------------------------------------------------------------------------
Deferred (benefit) provision
Federal 428 (74) (94) 93
State -- -- -- 403
- --------------------------------------------------------------------------------
Total 428 (74) (94) 496
- --------------------------------------------------------------------------------
Income tax provision $3,158 $1,119 $2,076 $2,264
================================================================================
The following is a reconciliation of the expected federal statutory tax to the
income tax provision:
Year ended Six months ended Years ended
December 31, December 31, June 30,
2001 2000 2000 1999
- ----------------------------------------------------------------------------------------
Income tax at statutory federal tax rate 34.0% 34.0% 34.0% 34.0%
Connecticut Corporation tax,
net of federal tax benefit 0.0 0.0 0.0 8.4
Goodwill 1.0 0.9 -- --
Other 1.0 0.9 0.1 (1.6)
- ----------------------------------------------------------------------------------------
Effective income tax rates 36.0% 35.8% 34.1% 40.8%
========================================================================================
48
The components of NewMil's net deferred tax asset are as follows:
December 31, December 31, June 30,
2001 2000 2000
(in thousands) Federal State Federal State Federal State
- --------------------------------------------------------------------------------------------------
Deferred tax assets
Unrealized losses on securities
available-for-sale and
transferred to held-to-maturity $ -- $ -- $ -- $ -- $ 702 $ 155
Net operating losses -- 1,897 -- 1,356 -- --
Capital loss carryforwards -- -- -- -- -- --
Bad debt expense, book 1,871 413 1,876 414 1,692 373
Post retirement benefits 411 91 419 92 119 26
Deferred income -- -- -- -- 93 20
Other 120 80 212 60 203 45
- --------------------------------------------------------------------------------------------------
Total deferred tax assets 2,402 2,481 2,507 1,922 2,809 619
- --------------------------------------------------------------------------------------------------
Deferred tax liabilities
Unrealized gains on securities
available-for-sale and
transferred to held-to-maturity 1,505 -- 388 -- -- --
Prepaid Pension 431 95 258 57 152 33
Bad debt expense, tax 800 177 683 151 621 137
Other 552 122 42 6 36 6
- --------------------------------------------------------------------------------------------------
Total deferred tax liabilities 3,288 394 1,371 214 809 176
- --------------------------------------------------------------------------------------------------
Net deferred tax asset (886) 2,087 1,136 1,708 2,000 443
Valuation reserve -- (2,087) -- (1,708) -- (443)
- --------------------------------------------------------------------------------------------------
Net deferred tax (liability) asset $ (886) $ -- $1,136 $ -- $2,000 $ --
==================================================================================================
The allocation of deferred tax expense involving items charged to income and
items charged directly to shareholders' equity and items charged to goodwill are
as follows:
December 31, December 31, June 30,
2001 2000 2000
(in thousands) Federal State Federal State Federal State
- --------------------------------------------------------------------------------------------------
Deferred tax expense (benefit) allocated to:
Shareholders' equity $1,117 $-- $1,090 $-- $(118) $--
Goodwill 477 -- (152) -- -- --
Income 428 -- (74) -- (94) --
- --------------------------------------------------------------------------------------------------
Total deferred tax expense (benefit) $2,022 $-- $ 864 $-- $(212) $--
==================================================================================================
NewMil will only recognize a deferred tax asset when, based upon available
evidence, realization is more likely than not.
At December 31, 2001 and 2000, a valuation allowance was established for the
entire amount of the state deferred tax assets as a result of Connecticut
legislation that permits banks to shelter certain mortgage income from the
Connecticut corporation business tax through the use of a special purpose entity
called a "passive investment company". In accordance with this legislation, in
1999 NewMil formed a PIC, NewMil Mortgage Company. No tax benefit is expected to
be realized on the reversal of the state deferred tax assets.
NOTE 9 - RETIREMENT PLANS
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 was as follows:
49
December 31, December 31, June 30,
(in thousands) 2001 2000 2000
- -----------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation, beginning of year $5,394 $4,241 $6,240
Service cost -- -- --
Interest cost 428 205 330
Impact of assumption change 654 (280) (1,960)
Experience loss (gain) 84 1,347 (141)
Plan participants' contributions -- -- --
Actuarial gain -- -- --
Benefits paid (252) (119) (228)
- -----------------------------------------------------------------------------------
Benefit obligation, end of year 6,308 5,394 4,241
- -----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets,
beginning of year 9,588 9,791 8,623
Actual (loss) return on plan assets (1,937) (84) 1,396
Employer contribution -- -- --
Plan participant's contribution -- -- --
Benefits paid (252) (119) (228)
- -----------------------------------------------------------------------------------
Fair value of plan assets, end of year 7,399 9,588 9,791
- -----------------------------------------------------------------------------------
Funded status 1,090 4,194 5,550
Unrecognized prior service cost -- -- --
Unrecognized net actuarial loss (gain) 176 (3,435) (5,104)
Unrecognized transition (asset) -- -- --
- -----------------------------------------------------------------------------------
Prepaid benefit cost $1,266 $ 759 $ 446
===================================================================================
Year ended Six months ended Years ended
December 31, December 31, June 30,
(dollars in thousands) 2001 2000 2000 1999
- --------------------------------------------------------------------------------------
Weighted-average assumptions:
Discount rate 7.0% 8.0% 7.5% 6.0%
Expected return on plan assets 8.5 8.5 8.5 6.0
Components of net periodic cost:
Interest cost $ 428 $ 205 $ 330 $ 359
Expected return on plan assets (799) (409) (623) (462)
Recognized net gain (137) (109) (175) (75)
- --------------------------------------------------------------------------------------
Net pension income $(508) $(313) $(468) $(178)
======================================================================================
For the first half of the fiscal year ended June 30, 2000 NewMil measured net
periodic pension cost under the premise that the plan would be terminated during
2000. During the quarter ended December 31, 1999, NewMil made a strategic
decision not to terminate the plan and to continue the plan in a frozen status.
This change in strategy was deemed a significant event per paragraph 53 of SFAS
No. 87 "Employers' Accounting for Pensions" which necessitated a change in
measurement assumptions.
No contributions were made to the Pension Plan in 2001, 2000 or 1999.
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 $10,500 per year in 2001. Effective January 1, 2000, NewMil amended
the 401(k) Savings Retirement Plan in order to adopt the provisions of the IRS
safe harbor rules. For the period from July 1, 1999 to December 31, 1999 NewMil
contributed amounts equal to 50% of annual employee contributions up to 6% of
participants' compensation. Since January 1, 2000, NewMil contributes amounts
equal to 100% of annual employee contributions up to 3% of participants'
compensation and 50% of the next 2% of annual employee contributions of
participants' compensation. Since the amendment to the Plan, employees are fully
vested in NewMil's contributions. NewMil contributed $161,000 to the Plan in
2001, $59,000 and $41,000 for the six month periods ended December 31, 2000 and
1999, respectively, and $100,000 and $79,000 for the years ended June 30, 2000
and 1999, respectively. The plan allows for NewMil to make non-contributory
profit sharing contributions. No profit sharing contributions were made during
2001, 2000 or 1999.
50
NewMil provides post-retirement health benefits for eligible 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 certain
eligible 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 was $33,000 for 2001,
$30,000 and $30,000 for the six month periods ended December 31, 2000 and 1999,
respectively, and $67,000 and $60,000 the years ended June 30, 2000 and 1999,
respectively. As of December 31, 2000, NewMil's post-retirement liability was
$368,000.
NOTE 10 - 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 December 31, 2001, 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". The Bank's actual regulatory capital position and minimum capital
requirements as defined "For Capital Adequacy Purposes" and "To Be Well
Capitalized Under Prompt Corrective Action Provisions" are as follows:
December 31, 2001 December 31, 2000 June 30, 2000
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------
Actual Capital Position
Tier 1 leverage $38,296 6.55% $37,201 8.04% $35,146 9.05%
Tier 1 risk-based 38,296 10.91 37,201 11.99 35,146 15.76
Total risk-based 42,698 12.16 41,101 13.24 37,961 17.02
Minimum Requirement For
Capital Adequacy
Tier 1 leverage 23,388 4.00 18,517 4.00 15,533 4.00
Tier 1 risk-based 14,042 4.00 12,416 4.00 8,922 4.00
Total risk-based 28,084 8.00 24,831 8.00 17,843 8.00
Minimum Requirement To
Be Well Capitalized
Tier 1 leverage 29,235 5.00 23,146 5.00 19,416 5.00
Tier 1 risk-based 21,063 6.00 18,623 6.00 13,382 6.00
Total risk-based 35,105 10.00 31,039 10.00 22,304 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 December 31, 2001 was $1,802,000. In some instances further
restrictions on dividends may be imposed on NewMil by the FRB.
Repurchases of Common Stock
- ---------------------------
During 2001 NewMil repurchased 304,500 shares of common stock for total
consideration of $3,689,000, or
51
$12.12 per average share, under a 229,716 share repurchase plan announced in
December 2000 and a 222,593 share repurchase plan announced on July 18, 2001.
In December 2000 NewMil announced its intention to repurchase 229,716, or 5%, of
its outstanding shares of common stock in the open market and unsolicited
negotiated transactions, including block purchases. Also in July 2001 NewMil
announced its intention to repurchase 222,593, or 5%, of its outstanding shares
of common stock in the open market and unsolicited negotiated transactions,
including block purchases. The purpose of these repurchase plans 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.
NOTE 11 - COMPREHENSIVE INCOME
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 only component of other comprehensive income is net unrealized gain
(loss) on securities. The components of comprehensive income are as follows:
Year ended Six months ended Years ended
December 31, December 31, June 30,
(in thousands) 2001 2000 2000 1999
- --------------------------------------------------------------------------------
Net income $5,626 $2,006 $4,015 $3,032
Net unrealized gains (losses)
on securities during period 2,166 2,117 (230) 73
- --------------------------------------------------------------------------------
Comprehensive income $7,792 $4,123 $3,785 $3,105
================================================================================
The components of other comprehensive income, and related tax effects are as
follows:
Tax
Before tax (expense) Net of tax
(in thousands) amount benefit amount
- --------------------------------------------------------------------------------------
Year ended December 31, 2001
Net unrealized gains on securities
available-for-sale during year $3,270 $(1,112) $2,158
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity 12 (4) 8
- --------------------------------------------------------------------------------------
Net unrealized gains on securities during year $3,282 $(1,116) $2,166
======================================================================================
Six months ended December 31, 2000
Net unrealized gains on securities
available-for-sale during period $3,199 $(1,088) $2,111
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity 9 (3) 6
- --------------------------------------------------------------------------------------
Net unrealized gains on securities during period $3,208 $(1,091) $2,117
======================================================================================
Year ended June 30, 2000
Net unrealized losses on securities
available-for-sale during year $ (501) $ 170 $ (331)
Reclassification adjustment for
realized loss included in net income 109 (37) 72
Accretion of unrealized loss on
securities transferred from
available-for-sale to held-to-maturity 44 (15) 29
- --------------------------------------------------------------------------------------
Net unrealized losses on securities during year $ (348) $ 118 $ (230)
======================================================================================
52
Tax
Before tax (expense) Net of tax
(in thousands) amount benefit amount
- ------------------------------------------------------------------------------------
Year ended June 30, 1999
Net unrealized losses on securities
available-for-sale during year $(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 3) 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 year $ 292 $(219) $ 73
====================================================================================
NOTE 12 - 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 Six months ended Year ended
December 31, December 31, June 30,
(in thousands) 2001 2001 2000
- ----------------------------------------------------------------------------------
Balance, beginning of period $1,482 $ 582 $ 520
Advances 1,280 160 210
Related parties added during period -- 757 --
Repayments (615) (17) (148)
- ----------------------------------------------------------------------------------
Balance, end of period $2,147 $1,482 $ 582
==================================================================================
NOTE 13 - STOCK OPTIONS
NewMil's 1986 Stock Option and Incentive Plan ("Employee 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. During the last three years there were no SARs granted
to any employee under the employee Plan by the Salary and Benefits Committee of
the Board. The Employee 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, except for 75,000 options
that were issued under an Employment Agreement and became fully vested in March
1995, 1996 and 1997 in three equal traunches of 25,000 each.
NewMil's 1992 Stock Option Plan for Outside Directors ("Director Plan") provides
for automatic grants of 2,000 options each January 1st to each non-employee
director. The Director 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 six months after
the time of the grant. Changes in outstanding stock option and SARS are as
follows:
53
Employee Plan Director Plan
- --------------------------------------------------------------------------------
Weighted Weighted
average average
Number exercise Number exercise
of options price of options price
- --------------------------------------------------------------------------------
June 30, 1998 315,751 $ 4.953 113,000 $ 6.085
Granted 25,000 12.438 14,000 11.031
Exercised (14,400) 5.362 -- --
Lapsed -- -- -- --
- --------------------------------------------------------------------------------
June 30, 1999 326,351 5.562 127,000 5.414
Granted 54,500 10.926 3,000 10.938
Exercised (66,001) 5.465 (4,000) 3.000
Lapsed (1,500) 7.375 -- --
- --------------------------------------------------------------------------------
June 30, 2000 313,350 6.507 126,000 6.848
Granted -- -- 17,000 9.969
Exercised (17,000) 4.320 -- --
Lapsed -- -- -- --
- --------------------------------------------------------------------------------
December 31, 2000 296,350 6.633 143,000 7.219
Granted 15,000 11.531 20,000 10.594
Exercised (20,700) 5.684 (5,000) 3.000
Lapsed (500) 6.959 -- --
- --------------------------------------------------------------------------------
December 31, 2001 290,150 6.959 158,000 7.779
================================================================================
Options exercisable at
December 31, 2001 290,150 158,000
================================================================================
Options available under plan 99,048 23,000
================================================================================
The following table summarizes information about NewMil's Employee and Director
stock option plans, as of December 31, 2001:
Weighted
average Weighted
Number of options remaining average
Range of ------------------------- contractual exercise
exercise price Outstanding Exercisable life price
- -----------------------------------------------------------------------------
$ 3.00 - $ 5.99 177,650 177,650 1.7 $ 3.75
6.00 - 8.99 101,000 101,000 4.1 6.64
9.00 - 11.99 127,500 127,500 8.0 10.85
12.00 - 12.84 42,000 42,000 6.5 12.58
- -----------------------------------------------------------------------------
448,150 448,150 4.5 $ 7.25
=============================================================================
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. 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.
54
Year ended Six months ended Years ended
December 31, December 31, June 30,
(net income in thousands) 2001 2000 2000 1999
- ----------------------------------------------------------------------------------------------
Net income
As reported $5,626 $2,006 $4,015 $3,032
Pro forma 5,519 1,962 3,808 2,918
Earnings per share, diluted
As reported 1.21 0.50 1.05 0.76
Pro forma 1.19 0.49 1.00 0.73
Dividend yield 4.27% 4.21% 3.64% 2.35%
Expected volatility 37.00 40.00 38.00 28.59
Risk-free interest rate 5.05 5.68 6.03 5.89
Expected lives, years 10 10 8 10
Fair value of options granted during year $ 3.83 $ 3.94 $ 4.38 $ 4.43
NOTE 14 - 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. NewMil's loan commitments are as follows:
December 31, June 30,
(in thousands) 2001 2000 2000
- --------------------------------------------------------------------------------
Unused lines of credit $36,891 $32,030 $24,813
Construction mortgages 4,902 5,796 4,154
Loan commitments 30,796 4,385 5,338
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 that 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 $432,000, for 2001, $149,000 and
$118,000 for the six months period ending December 31, 2000 and 1999,
respectively and $243,000 and $253,000 for the years ended June 30, 2000 and
1999, respectively. Future minimum lease payments at December 31, 2001 are as
follows:
2002 $ 464,486
2003 411,984
2004 377,203
2005 186,880
2006 110,927
After 2006 216,667
- ------------------------------------------
$1,768,147
==========================================
55
NOTE 15 - 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 judgments 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, 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 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:
56
(in thousands) December 31, 2001 December 31, 2000 June 30, 2000
- -----------------------------------------------------------------------------------------------------
Estimated Estimated Estimated
Carrying fair Carrying fair Carrying fair
value value value value value value
- -----------------------------------------------------------------------------------------------------
Financial Assets
Cash and due from banks $ 21,579 $ 21,579 $ 21,784 $ 21,784 $ 12,623 $ 12,623
Federal funds sold 4,615 4,615 6,029 6,029 -- --
Securities available-for-sale 181,623 181,623 103,221 103,221 104,528 104,528
Securities held-to-maturity 30,785 31,087 37,177 36,853 39,779 38,005
Loans 346,173 347,045 338,406 341,989 228,683 223,768
Allowance for loan losses (5,502) -- (5,518) -- (4,978) --
Deferred loan origination fees
and purchase premium, net (303) -- (343) -- 29 --
- ----------------------------------------------------------------------------------------------------
Loans, net 340,368 347,045 332,544 341,989 223,734 223,768
Accrued interest receivable 3,870 3,870 3,499 3,499 2,747 2,747
Financial Liabilities
Deposits
Demand (non-interest bearing) $ 39,898 $ 39,898 $ 37,325 $ 37,325 $ 20,703 $ 20,703
NOW accounts 63,415 63,415 54,785 54,785 43,950 43,950
Money market 120,888 120,888 107,131 107,131 75,465 75,465
Savings and other 70,001 70,001 65,657 65,657 48,652 48,652
Certificates of deposit 181,914 183,964 172,895 172,934 130,856 131,040
- ----------------------------------------------------------------------------------------------------
Total deposits 476,116 478,166 437,793 437,832 319,626 319,810
FHLB advances 67,540 68,168 27,500 27,512 35,750 35,703
Repurchase agreements 5,783 5,783 4,591 4,591 -- --
Accrued interest payable 355 355 334 334 234 234
57
NOTE 16 - NEWMIL BANCORP, INC. (parent company only) FINANCIAL INFORMATION
The unconsolidated balance sheets and statements of income and cash flows of
NewMil Bancorp, Inc. are presented as follows:
Balance Sheets December 31, June 30,
(in thousands) 2001 2000 2000
- ------------------------------------------------------------------------------
Assets
Due from bank $ 162 $ 255 $ 497
Investment in NewMil Bank 52,026 47,753 33,081
Other assets 2 2 815
- ------------------------------------------------------------------------------
Total Assets $52,190 $48,010 $34,393
==============================================================================
Liabilities and Shareholders' Equity
Liabilities $ 1,596 $ 493 $ 68
Shareholders' equity 50,594 47,517 34,325
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $52,190 $48,010 $34,393
==============================================================================
Year ended Six months ended Years ended
Statements of Income December 31, December 31, June 30,
(in thousands) 2001 2000 2000 1999
- -----------------------------------------------------------------------------------------------
Fee income $ -- $ -- $ -- $ 100
Dividends from subsidiary 5,468 759 2,904 3,682
Expenses 186 119 148 175
- -----------------------------------------------------------------------------------------------
Income before taxes and undistributed
net income of subsidiary 5,282 640 2,756 3,607
Income tax benefit -- -- -- --
- -----------------------------------------------------------------------------------------------
Income before equity in undistributed
net income of subsidiary 5,282 640 2,756 3,607
Equity in undistributed (equity distributed
in excess of) net income of subsidiary 344 1,366 1,259 (575)
- -----------------------------------------------------------------------------------------------
Net income $5,626 $2,006 $4,015 $3,032
===============================================================================================
Year ended Six months ended Years ended
Statements of Cash Flows December 31, December 31, June 30,
(in thousands) 2001 2000 2000 1999
- ------------------------------------------------------------------------------------------------------
Net income $ 5,626 $ 2,006 $ 4,015 $ 3,032
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed (equity distributed
in excess of) net income of subsidiary (344) (1,366) (1,259) 575
Other (19) 146 7 26
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,263 786 2,763 3,633
- ------------------------------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid (1,968) (758) (1,453) (1,328)
Proceeds from Common Stock reissued 168 -- -- --
Common Stock repurchased (3,689) (343) (1,514) (2,110)
Proceeds from exercise of stock options 133 73 372 59
- ------------------------------------------------------------------------------------------------------
Net cash used by financing activities (5,356) (1,028) (2,595) (3,379)
- ------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (93) (242) 168 254
Cash and cash equivalents, beginning of period 255 497 329 75
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 162 $ 255 $ 497 $ 329
======================================================================================================
58
NOTE 17 - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
Selected quarterly consolidated financial data for the years ended December 31,
2001 and 2000 is as follows (in thousands except ratios and per share amounts):
Year ended December 31, 2001
March 31, June 30, Sept 30, Dec 31,
- -----------------------------------------------------------------------------------
Statement of Income
Interest and dividend income $ 9,349 $ 9,360 $ 9,428 $ 9,511
Interest expense 4,501 4,257 4,112 3,761
Net interest income 4,848 5,103 5,316 5,750
Provision for loan losses -- -- -- --
Non-interest income:
Gains on sales of loans, net 41 131 116 100
Gain on sale of OREO -- -- -- --
Service fees and other 643 658 692 677
Non-interest expense 3,430 3,665 3,826 4,369
Income before income taxes 2,102 2,227 2,298 2,158
Income tax provision 757 799 822 781
Net income 1,345 1,428 1,476 1,377
Financial Condition
Total assets $535,821 $567,725 $600,197 $607,026
Loans, net 334,432 344,119 344,590 340,368
Allowance for loan losses 5,454 5,476 5,496 5,502
Securities 151,382 164,330 213,119 212,408
Deposits 460,282 470,058 467,790 476,116
Borrowings 19,556 43,513 74,982 73,323
Shareholders' equity 48,333 48,552 51,192 50,594
Non-performing assets 1,536 1,735 1,810 1,861
Per Share Data
Earnings, diluted $ 0.29 $ 0.31 $ 0.32 $ 0.30
Cash dividends 0.11 0.11 0.11 0.11
Book value 10.73 10.81 11.59 11.52
Market price: (a)
High 13.313 11.250 11.875 11.250
Low 10.000 9.844 10.000 9.625
Statistical Data
Net interest margin 3.99% 4.01% 4.04% 4.13%
Efficiency ratio 62.00 62.20 62.48 66.94
Return on average assets 1.04 1.05 1.04 0.92
Return on average shareholders' equity 11.25 11.82 12.04 10.64
Weighted average equivalent
shares outstanding, diluted 4,707 4,643 4,645 4,591
(a) The above market prices reflect interdealer prices, without retail markup,
markdown or commissions, and may not necessarily represent actual
transactions.
59
Selected Quarterly Consolidated Financial Data (unaudited) continued:
Year ended December 31, 2000
March 31, June 30, Sept 30, Dec 31,
- -----------------------------------------------------------------------------------
Statement of Income
Interest and dividend income $ 6,304 $ 6,865 $ 7,149 $ 8,560
Interest expense 2,761 3,206 3,541 4,260
Net interest income 3,543 3,659 3,608 4,300
Provision for loan losses -- 25 -- (416)
Non-interest income:
Gains on sales of loans, net 30 33 48 45
Gain on sale of OREO -- 23 39 --
Service fees and other 411 454 476 576
Non-interest expense 2,408 2,493 2,613 3,770
Income before income taxes 1,576 1,651 1,558 1,567
Income tax provision 553 563 518 601
Net income 1,023 1,088 1,040 966
Financial Condition
Total assets $383,719 $392,572 $406,774 $523,578
Loans, net 216,055 223,734 229,050 332,544
Allowance for loan losses 4,983 4,978 4,982 5,518
Securities 139,919 144,307 141,553 140,398
Deposits 307,021 319,626 331,083 437,793
Borrowings 34,800 35,750 33,245 27,500
Shareholders' equity 33,305 34,325 35,877 47,517
Non-performing assets 1,569 1,218 928 1,741
Per Share Data
Earnings, diluted $ 0.27 $ 0.29 $ 0.28 $ 0.22
Cash dividends 0.10 0.10 0.10 0.11
Book value 9.23 9.52 9.95 10.35
Market price: (a)
High 13.313 11.250 11.875 11.250
Low 10.000 9.844 10.000 9.625
Statistical Data
Net interest margin 4.11% 3.96% 3.82% 3.90%
Efficiency ratio 60.44 59.80 62.65 76.61
Return on average assets 1.15 1.14 1.06 0.83
Return on average shareholders' equity 12.40 13.09 11.97 9.25
Weighted average equivalent
shares outstanding, diluted 3,792 3,756 3,761 4,310
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: NMIL. As of March 8, 2002, there were 1,549 shareholders of record of
NewMil'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 year ended December 31, 2001 or for the period from December
31, 2001 to the date hereof.
60
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 March 22, 2002 for the 2002 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. In addition, the following information is
provided.
Additional Executive Officers
- -----------------------------
Position with
Name Age NewMil Bank Officer Since
- ------------------- --- --------------------- -------------
John A. Baker 53 Senior Vice President 1998
Thomas W. Grant III 65 Senior Vice President 1994
William D. Starbuck 55 Senior Vice President 1992
Item 11. EXECUTIVE COMPENSATION
The information required by this item appears on pages 8 through 14 of NewMil's
Proxy Statement dated March 22, 2002 for the 2002 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 March 22, 2002 for the 2002 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 March 22, 2002 for the 2002 Annual Meeting of Shareholders,
under the caption "Transactions with Management and Others". Such information is
incorporated herein by reference and made a part hereof.
61
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.
3.1.1 Amendment to Certificate of Incorporation of NewMil increasing authorized shares of
common stock from 6,000,000 to 20,000,000.
3.2 Bylaws of NewMil.
4.1 Instruments Defining Rights of Security Holders (Included in Exhibits 3.1 and 3.2)
10.1 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.
10.2 Employment agreement with its President and CEO, Francis J. Wiatr, dated January 23, 2002.
10.3 Dividend reinvestment plan for NewMil Bancorp's shareholders (incorporated by reference to
the Registrant's 1996 Form 10-K).
10.4 Change in control agreements between NewMil Bank and management (Messrs. Grant, McMahon
and Shannon; Ms. Farrell) (incorporated by reference to the Registrant's 1996 Form 10-K).
10.5 The Second Amended and Restated 1986 Stock Option and Incentive Plan for Officers and
Key Employees (incorporated by reference to the Registrant's S-8 POS dates
January 25, 2001).
10.6 The Third Amended and Restated 1992 Stock Option Plan for Outside Directors of NewMil
Bancorp, Inc. (incorporated by reference to the Registrant's S-8 POS dates January 25,
2001).
10.7 Employment agreement between NewMil Bank and Senior Vice President, William D. Starbuck
dated as of November 10, 2000.
62
10.8 Form of Director Group Term Carve-Out Split Dollar Life Insurance Agreement.
10.9 Form of Executive Officer Group Term Carve-Out Split Dollar Life Insurance Agreement.
10.10 Salary Continuation and Split Dollar Agreement with Francis J. Wiatr.
11.1 Statement regarding Computation of Net Income Per Common Share.
21.1 Subsidiaries of the Registrant.
23.0 Consent of PricewaterhouseCoopers LLP.
99.1 Proxy Statement dated March 22, 2002 for the 2002 Annual Meeting of Shareholders, of NewMil
Bancorp, Inc. (incorporated by reference to the Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders' scheduled for April 26, 2002).
(d) Financial Statement Schedules
-----------------------------
No financial statement schedules are required to be filed as Exhibits
pursuant to Item 14(d).
63
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
March 20, 2002
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/ Herbert E. Bullock
- ----------------------
Herbert E. Bullock
Director
March 20, 2002
/s/ Joseph Carlson II
- ---------------------
Joseph Carlson II
Director
March 20, 2002
/s/ Kevin L. Dumas
- ------------------
Kevin L. Dumas
Director
March 20, 2002
/s/ Paul N. Jaber
- -----------------
Paul N. Jaber
Director
March 20, 2002
/s/ Laurie G. Gonthier
- ----------------------
Laurie G. Gonthier
Director
March 20, 2002
/s/ Robert J. McCarthy
- ----------------------
Robert J. McCarthy
Director
March 20, 2002
/s/ John J. Otto
- ----------------
John J. Otto
Director
March 20, 2002
/s/ Betty F. Pacocha
- --------------------
Betty F. Pacocha
Director and Secretary
March 20, 2002
/s/ Suzanne L. Powers
- ---------------------
Suzanne L. Powers
Director
March 20, 2002
/s/ Anthony M. Rizzo, Sr.
- -------------------------
Anthony M. Rizzo, Sr.
Director
March 20, 2002
/s/ Francis J. Wiatr
- --------------------
Francis J. Wiatr
Chairman of the Board, President
and Chief Executive Officer
March 20, 2002
/s/ Mary C. Williams
- --------------------
Mary C. Williams
Director
March 20, 2002
/s/ B. Ian McMahon
- ------------------
B. Ian McMahon
Chief Financial Officer
and Chief Accounting Officer
March 20, 2002
64