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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

Commission file number 0-16455

NEWMIL BANCORP, INC.

(Exact name of registrant as specified in its charter)

(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  ¨

Indicate 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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes    ¨    No    x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the average bid and asked prices of such stock, as of June 30, 2002, is $64,170,000.00. The number of shares of Common Stock outstanding as of March 12, 2003, is 4,228,006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement dated March 31, 2003 for the 2003 Annual Meeting of Shareholders are incorporated by reference into Part II (Item 5) and Part III (Items 10, 11, 12 and 13).

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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 at an independent life-care retirement community, 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

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it offers borrowers, real estate brokers and builders. Factors that affect competition include, among others, the general availability of funds and credit, general and local economic conditions, current interest rate levels and volatility in the mortgage markets.

Congress passed legislation in 1994 providing for a phase-in of full interstate branching. Connecticut law has since 1990 provided for full interstate banking and, more recently, has adopted legislation allowing interstate branching, subject to certain limitations. 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

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often dependent on the cash flow of a successfully operated or managed property, repayment of such loans may be more susceptible to adverse conditions in the real estate market or the economy generally than is the case with residential mortgages.

Construction Loans: The Bank also makes construction loans to individuals and professional builders for the purpose of constructing 1-to-4 family residential properties, either as a primary residence or for investment or resale.

Commercial and Industrial Loans: The Bank offers secured 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. The Bank’s legal lending limit to any one borrower at December 31, 2002 was $6.6 million, or 15% of Tier I and Tier II capital. Generally, the Bank’s concentration to any one borrower does not exceed 50% of the Bank’s legal lending limit and the average loan size is under $500,000. Most business loans are secured by liens on business assets including inventory, receivables and or liens on real property. In addition, most loans are further secured by the personal guaranty of the owners of the business.

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 page 27 through page 30.

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” and Note 10 to the Financial Statements – Shareholders Equity under Capital Requirements.

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Connecticut Banking Law and FDIC Regulation: The Bank is a state chartered savings bank organized under the Banking Law of the State of Connecticut. Deposits are insured by the FDIC and FDIC insurance premiums are assessed on the Bank’s deposit base on a semi-annual basis at variable rates dependent upon the Bank’s capital rating and other safety and soundness considerations. The Bank is subject to regulation, examination and supervision by the Connecticut Banking Department and the FDIC. Both the Connecticut Banking Department and the FDIC issue regulations and require the filing of reports describing the activities and financial condition of the banks under their jurisdiction. Each agency conducts periodic examinations to test safety, soundness and compliance with various regulatory requirements and generally supervises the operations of such banks.

Sarbanes-Oxley Act of 2002: On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Many of the provisions became effective immediately while other provisions become effective over a period of 30 to 270 days and are subject to rulemaking by the Securities and Exchange Commission. Although NewMil anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, NewMil does not expect that such compliance will have a material impact on NewMil’s or the Banks’ results of operations or financial condition.

Employees

The Bank had 167 full-time and 20 part-time employees at December 31, 2002. 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. At December 31, 2002, 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, 2002.

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Item 3. LEGAL PROCEEDINGS

Neither NewMil nor the Bank is involved in any legal proceedings other than that which is ordinary routine litigation incidental to its business. One such case in which the Bank is the defendant is scheduled to go to trial in April, 2003. The plaintiff claims to have been deprived of an opportunity to purchase certain foreclosed real property owned by the Bank at the time, because the Bank refused to make a loan to the plaintiff to do so. The plaintiff claims damages in the several millions of dollars due to the loss of developmental opportunity. The Bank intends to defend its position vigorously as it believes that the allegations are without merit, that the claims are unsupportable by the facts, and that the claims are not well founded under the evidence or the law.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the quarter ended December 31, 2002, no matter was submitted to a vote of the shareholders of NewMil.

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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) in Note 17, “Selected Quarterly Consolidated Financial Data”. 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”. For information on NewMil’s Stock Equity Compensation Plan see page 11 of NewMil’s Proxy Statement dated March 31, 2003.

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 years ended December 31, 2002 and 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.

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SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except ratios and per share amounts)

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BUSINESS

NewMil, a Delaware corporation, is a bank holding company for NewMil 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 at an independent life-care retirement community in New Haven County. NewMil and the Bank were formed in 1987 and 1858, respectively.

Cautionary Statement

This Annual Report on Form 10-K contains and incorporates by reference statements relating to future results of NewMil Bancorp, Inc. that are considered “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, expectations concerning loan demand, growth and performance, simulated changes in interest rates and the adequacy of our allowance for loan losses. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within our markets, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological changes, changes in law and regulations, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties reported from time to time in our filings with the Securities and Exchange Commission.

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.

Application of Critical Accounting Policies

NewMil’s consolidated financial statements are prepared in accordance with US GAAP and follow general practices within the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

NewMil’s significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements. These policies, along with the disclosures presented in Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management

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has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable credit losses in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. Note 1 describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Provision and Allowance For Loan Losses” section of Management’s Discussion and Analysis.

OVERVIEW

2002 was an excellent year for NewMil. NewMil earned net income of $6,850,000, or $1.50 per share, for 2002, compared with net income of $5,626,000, or $1.21 per share, for 2001. This represented a 24.0% increase in earnings per share for 2002 over 2001. NewMil’s results were achieved through growth in net interest income and non-interest income, offset partially by increased non-interest expense. Net interest income increased 9.8%, as a result of a $64.3 million increase in average earning assets, offset somewhat by a 10 basis point decrease in the net interest margin. Non-interest income increased 22.5% in 2002, due primarily to the purchase of bank-owned life insurance in 2002, and to internal growth. Operating expenses increased 10.2% in 2002.

Deposits grew $72.7 million, or 15.3%, to $548.8 million during 2002, compared with 8.8% growth in 2001. At December 31, 2002 NewMil had total assets of $661.6 million, up $54.6 million since December 31, 2001. The low interest rate environment continued to fuel the local housing market and contributed to record residential mortgage originations for the year.

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, 2002 and 2001

Analysis of Net Interest and Dividend Income

Net interest income increased $2,060,000, or 9.8%, to $23,077,000 in 2002. This resulted from a $64.3 million increase in average earning assets, offset somewhat by a 10 basis point decrease in the net interest margin. The increase in earning assets is due primarily to internal growth. The net interest margin decreased to 3.95% from 4.05%. The decrease was due mostly to the effects of lower market interest rates during 2002 as compared with 2001 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.

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The following table sets forth the changes in interest due to volume and rate.

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.

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Interest Income

Total interest and dividend income decreased $1,215,000, or 3.2%, to $36.4 million in 2002. Loan income decreased $2,742,000, or 10.3%, primarily as a result of a lower average yield during the period. Average loans slightly decreased, by $0.3 million, or 0.1%, to $344.5 million, in 2002 as compared with 2001. The decrease in average loan yield, down 79 basis points, is due to lower market interest rates in 2002 and changes in portfolio mix. Investment income increased $1,527,000, or 13.9%, in 2002 as a result of higher average volume, offset, in part, by lower average yields. Average securities increased $64.6 million, or 36.9%, as a result of internal growth. The decrease in average investment yield, down 105 basis points, was due to lower reinvestment yields during 2002 and changes in portfolio mix.

Interest Expense

Interest expense decreased $3,275,000, or 19.7%, to $13.4 million in 2002 primarily as a result of lower rates paid, and changes in deposit mix, offset somewhat by higher average borrowings. Deposit expense decreased $3,674,000, or 25.0%, as a result of lower rates paid, offset somewhat by higher deposit volume and changes in deposit mix. Average interest-bearing deposits increased $54.0 million, or 12.8%, due to internal growth. Average NOW, money market, savings and certificate of deposit accounts increased $10.2 million, $19.3 million, $8.2 million and $16.3 million, respectively. The average cost of interest-bearing deposits decreased 118 basis points to 2.33%. Borrowings expense increased $399,000 as a result of higher average borrowings, up $14.1 million, offset by lower advance rates, down 36 basis points.

Provision and Allowance for Loan Losses

The following table sets forth changes in the allowance for loan losses and other selected statistics: