10-Q 1 nm10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number 0-16455 NEWMIL BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 06-1186389 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 19 Main Street, P.O. Box 600, New Milford, CT 06776 (Address of principal executive offices) (Zip code) (860) 355-7600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of Common Stock outstanding as of September 30, 2002, is 4,262,241. NewMil Bancorp, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS (unaudited) September 30, December 31, (dollars in thousands) 2002 2001 ---- ---- ASSETS Cash and due from bank $ 27,322 $ 21,579 Federal funds sold 44,650 4,615 -------- -------- Total cash and cash equivalents 71,972 26,194 Securities Available-for-sale at market 193,457 181,623 Held-to-maturity at amortized cost (fair value: $26,332 and $31,087) 25,224 30,785 Loans (net of allowance for loan losses: $5,498 and $5,502) 341,616 340,368 Other real estate owned 116 116 Bank premises and equipment, net 6,560 6,092 Accrued interest income 3,682 3,870 Intangible assets (net of accumulated amortization: $952 and $737) 9,090 9,305 Deferred tax asset, net - 619 Other assets 12,220 8,054 -------- -------- Total Assets $663,937 $607,026 ======== ======== LIABILITIES and SHAREHOLDERS' EQUITY Deposits Demand (non-interest bearing) $ 48,013 $ 39,898 NOW accounts 72,564 63,415 Money market 143,145 120,888 Savings and other 75,522 70,001 Certificates of deposit 207,226 181,914 -------- -------- Total deposits 546,470 476,116 Federal Home Loan Bank advances 47,098 67,540 Repurchase agreements 10,309 5,783 Accrued interest and other liabilities 6,232 6,993 -------- -------- Total Liabilities 610,109 556,432 -------- -------- Commitments and contingencies - - -------- -------- Shareholders' Equity Common stock - $.50 per share par value Authorized: 20,000,000 Shares issued: 5,990,138 2,995 2,995 Paid-in capital 42,375 42,568 Retained earnings 21,737 18,105 Accumulated other comprehensive income, net 5,733 2,921 Treasury stock, at cost: 1,732,897 and 1,599,578 shares (19,012) (15,995) -------- -------- Total Shareholders' Equity 53,828 50,594 -------- -------- Total Liabilities and Shareholders' Equity $663,937 $607,026 ======== ======== NewMil Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) (unaudited) Three months ended Nine months ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- Interest and dividend income Interest and fees on loans $5,906 $6,661 $18,109 $20,321 Interest and dividends on securities 3,017 2,723 9,300 7,652 Interest on federal funds sold 141 44 271 164 ------ ------ ------- ------- Total interest and dividend income 9,064 9,428 27,680 28,137 ------ ------ ------- ------- Interest expense Deposits 2,831 3,633 8,534 11,605 Borrowed funds 581 479 1,769 1,265 ------ ------ ------- ------- Total interest expense 3,412 4,112 10,303 12,870 ------ ------ ------- ------- Net interest and dividend income 5,652 5,316 17,377 15,267 Provision for loan losses - - - - ------ ------ ------- ------- Net interest and dividend income after provision for loan losses 5,652 5,316 17,377 15,267 ------ ------ ------- ------- Non-interest income Service charges on deposit accounts 580 535 1,727 1,534 Gains on sales of mortgage loans, net 131 116 348 306 Loan servicing fees 14 30 48 109 Other 225 127 591 332 ------ ------ ------- ------- Total non-interest income 950 808 2,714 2,281 ------ ------ ------- ------- Non-interest expense Salaries & benefits 2,255 1,917 6,677 5,425 Occupancy 334 320 1,045 964 Equipment 289 317 858 978 Marketing 99 102 392 293 Postage & telecommunications 131 135 404 401 Printing and office supplies 99 111 324 322 Professional, collections and OREO 168 175 599 502 Service bureau 104 112 288 285 Amortization of intangibles 72 163 215 489 Other 438 474 1,538 1,262 ------ ------ ------- ------- Total non-interest expense 3,989 3,826 12,340 10,921 ------ ------ ------- ------- Income before income taxes, 2,613 2,298 7,751 6,627 Income tax provision 839 822 2,489 2,378 ------ ------ ------- ------- Net income $1,774 $1,476 $ 5,262 $ 4,249 ====== ====== ======= ======= Per common share Diluted earnings $0.39 $0.32 $1.15 $0.91 Basic earnings 0.41 0.33 1.21 0.95 Cash dividends 0.125 0.110 0.375 0.330 NewMil Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) Common Stock Paid-in Retained (dollars in thousands) Shares Amount capital earnings ------ ------ ------- -------- Balances at December 31, 2000 5,990,138 $2,995 $42,755 $14,447 Net income for period - - - 4,249 Net unrealized gain on securities available-for-sale, net of taxes - - - - Total comprehensive income Cash dividends paid - - - (1,483) Exercise of stock options - - (146) - Common stock issued - - (61) - Tax benefit from exercise of non-qualified stock options - - 20 - Common stock repurchased - - - - --------- ------ ------- ------- Balances at September 30, 2001 5,990,138 $2,995 $42,568 $17,213 ========= ====== ======= ======= Balances at December 31, 2001 5,990,138 $2,995 $42,568 $18,105 Net income for year - - - 5,262 Net unrealized gain on securities available-for-sale, net of taxes - - - - Total comprehensive income Cash dividends paid - - - (1,630) Exercise of stock options - - (403) - Tax benefit from exercise of non-qualified stock options - - 207 - Common stock issued - - 3 - Common stock repurchased - - - - --------- ------ ------- ------- Balances at September 30, 2002 5,990,138 $2,995 $42,375 $21,737 ========= ====== ======= ======= NewMil Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Cont'd) (unaudited) Accumulated Total Treasury other comprehensive shareholders' (dollars in thousands) stock income equity ----- ------ ------ Balances at December 31, 2000 $(13,435) $ 755 $47,517 Net income for period - - 4,249 Net unrealized gain on securities available- for-sale, net of taxes - 3,286 3,286 ------- Total comprehensive income 7,535 ------- Cash dividends paid - - (1,483) Exercise of stock options 280 - 134 Common stock issued 850 - 789 Tax benefit from exercise of non-qualified stock options - - 20 Common stock repurchased (3,320) - (3,320) -------- ------- ------- Balances at September 30, 2001 $(15,625) $ 4,041 $51,192 ======== ======= ======= Balances at December 31, 2001 $(15,995) $ 2,921 $50,594 Net income for year - - 5,262 Net unrealized gain on securities available- for-sale, net of taxes - 2,812 2,812 ------- Total comprehensive income 8,074 ------- Cash dividends paid - - (1,630) Exercise of stock options 605 - 202 Tax benefit from exercise of non-qualified stock options - - 207 Common stock issued 41 - 44 Common stock repurchased (3,663) - (3,663) -------- ------- ------- Balances at September 30, 2002 $(19,012) $ 5,733 $53,828 ======== ======= ======= NewMil Bancorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine months ended September 30, (in thousands) 2002 2001 ---- ---- Operating Activities Net income $ 5,262 $ 4,249 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses - - Provision for depreciation and amortization 601 722 Amortization of intangible assets 215 489 Amortization and accretion of securities premiums and (discounts), net 685 (25) Gains on sales of loans, net (348) (306) Gains on sale of OREO, net (7) - Loans originated for sale (21,906) (17,777) Proceeds from sales of loans 22,254 18,083 Tax benefit from exercise of non-qualified stock options 207 20 Deferred income tax provision 146 125 Decrease (increase) in accrued interest income 174 (384) Decrease in other liabilities (762) (587) Increase in other assets, net (5,748) (690) Net cash provided by operating activities 773 3,919 ------- ------- Investing Activities Purchases of securities available-for-sale (25,271) (30,100) Purchases of mortgage backed securities available-for-sale (15,211) (54,279) Proceeds from maturities and principal repayments of securities 8,847 1,816 Principal collected on mortgage backed securities 28,936 14,846 Loan advances, net (681) (11,988) Proceeds from sale of OREO 64 - Purchases of Bank premises and equipment, net (1,070) (331) ------- ------- Net cash used by investing activities (4,386) (80,036) ------- ------- Financing Activities Net increase in deposits 70,354 29,998 Net increase in repurchase agreements 4,526 2,390 FHLB (repayments) advances, net (20,442) 40,500 Common Stock repurchased (3,663) (3,320) Proceeds from Common Stock reissued 44 789 Cash dividends paid (1,630) (1,483) Proceeds from exercise of stock options 202 134 ------- ------- Net cash provided by financing activities 49,391 69,008 ------- ------- Increase (decrease) in cash and cash equivalents 45,778 (7,109) Cash and federal funds sold, beginning of period 26,194 27,813 ------- ------- Cash and federal funds sold, end of period $71,972 $20,704 ======= ======= Cash paid during period Interest to depositors $ 8,545 $11,681 Interest on borrowings 1,775 1,297 Income taxes paid 2,591 1,890 Non-cash transfers From Loans to OREO 57 - From OREO to Loans - 59 NEWMIL BANCORP, INC. and SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1 - BASIS OF PRESENTATION The interim consolidated financial statements of NewMil Bancorp, Inc. ("NewMil") include those of NewMil and its wholly-owned subsidiary, NewMil Bank (the "Bank"). Certain prior period amounts in the statement of income and balance sheets have been reclassified to conform with the current financial presentation. In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of NewMil and the statements of income and shareholder's equity and cash flows for the interim periods presented. The financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties. Certain financial information which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the three month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in NewMil's Annual Report for the period ended December 31, 2001. NOTE 2 - SECURITIES Securities classified available-for-sale (carried at fair value) were as follows: Gross Gross Estimated unrealized unrealized Amortized (in thousands) fair value gains losses cost ---------- ----- ------ ---- September 30, 2002 U.S. Government Agency notes After 1 but within 5 years $ 47,698 $ 2,167 $ - $ 45,531 Corporate Bonds After 1 but within 5 years 39,193 2,413 7 36,787 Mortgage backed securities 95,083 4,087 - 90,996 Collateralized mortgage obligations 7,630 98 - 7,532 -------- ------- ----- -------- Total debt securities 189,604 8,765 7 180,846 FHLB capital stock and other 3,853 1 - 3,852 -------- ------- ----- -------- Total securities available-for-sale $193,457 $ 8,766 $ 7 $184,698 ======== ======= ===== ======== 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 FHLB capital stock and other 3,749 1 - 3,748 -------- ------ ----- -------- Total securities available-for-sale $181,623 $4,546 $ 29 $177,106 ======== ====== ===== ======== Securities classified as held-to-maturity (carried at amortized cost) were as follows: Gross Gross Estimated unrealized unrealized Amortized (in thousands) fair value gains losses cost ---------- ----- ------ ---- September 30, 2002 Municipal bonds After 1 but within 5 years $ 500 $ 5 $ - $ 505 After 10 years 10,529 297 - 10,826 Mortgage backed securities 10,196 641 - 10,837 Collateralized mortgage obligations 3,999 165 - 4,164 ------- ------ ------ ------- Total securities held-to-maturity $25,224 $1,108 $ - $26,332 ======= ====== ====== ======= 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 ======= ====== ====== ======= (a) Securities transferred from available-for-sale are carried at estimated fair value as of the transfer date and adjusted for subsequent amortization. At September 30, 2002 securities with a carrying value and market value of $2,423,000 and $2,489,000, respectively, were pledged as collateral against public funds and securities with a carrying value and market value of $17,380,000 and $17,385,000, respectively, were pledged as collateral against repurchase agreements. Also, securities with a carrying value and market value of $6,694,000 and $7,119,000, respectively, were pledged as collateral for Treasury, tax and loan payments as well as possible Federal Reserve discount window borrowings. NOTE 3 - LOANS The composition of the loan portfolio is as follows: September 30, December 31, (in thousands) 2002 2001 ---- ---- Real estate mortgages 1-to-4 family residential $193,817 $180,513 5-or-more family residential 12,030 14,649 Commercial 79,863 78,091 Land & land development 1,821 2,997 Home equity credit 25,454 32,580 Commercial & industrial 31,652 34,254 Installment & other 2,688 3,089 -------- -------- Total loans, gross 347,325 346,173 Deferred loan origination fees, net (211) (303) Allowance for loan losses (5,498) (5,502) -------- -------- Total loans, net $341,616 $340,368 ======== ======== Impaired loans September 30, December 31, (in thousands) 2002 2001 ---- ---- With no valuation allowance $ 68 $ 77 With valuation allowance 123 696 ----- ----- Total impaired loans $ 191 $ 773 ----- ----- Valuation allowance $ 123 $ 100 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 loans 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, 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 NewMil's loan portfolio and the recovery of a substantial portion of OREO is susceptible to changes in market conditions. Changes in the allowance for loan losses during the nine month periods ended September 30, are as follows: September 30, (in thousands) 2002 2001 ---- ---- Balance, beginning of period $5,502 $5,518 Provision for losses - - Charge-offs (187) (71) Recoveries 183 49 ------ ------ Balance, end of period $5,498 $5,496 ====== ====== NOTE 4 - NON-PERFORMING ASSETS The components of non-performing assets are as follows: September 30, December 31, (in thousands) 2002 2001 ---- ---- Non-accrual loans $ 285 $ 985 Accruing loans past due 90 days or more 536 760 Accruing troubled debt restructured loans - - ----- ------ Total non-performing loans 821 1,745 Real estate acquired in settlement of loans 116 116 ----- ------ Total non-performing assets $ 937 $1,861 ===== ====== Other real estate owned (OREO) includes collateral acquired through foreclosure, forgiveness of debt or otherwise in lieu of debt. NOTE 5 - EARNINGS PER SHARE Basic earnings per share is computed using the weighted-average number of common shares outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share except the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Shares used in the computations are as follows: Three months ended Nine months ended September 30, September 30, (in thousands) 2002 2001 2002 2001 ---- ---- ---- ---- Basic 4,283 4,460 4,346 4,490 Effect of dilutive stock options 228 185 238 164 ----- ----- ----- ----- Diluted 4,511 4,645 4,584 4,654 ===== ===== ===== ===== NOTE 6 - COMPREHENSIVE INCOME The components of comprehensive income are as follows: Three months ended Nine months ended September 30, September 30, (in thousands) 2002 2001 2002 2001 ---- ---- ---- ---- Comprehensive income Net income $1,774 $1,476 $5,262 $4,249 Net unrealized gains on securities during period 1,082 2,673 2,812 3,286 ------ ------ ------ ------ Comprehensive income $2,856 $4,149 $8,074 $7,535 ====== ====== ====== ====== The components of other comprehensive income, and related tax effects are as follows: (in thousands) Before Tax Net of tax (expense) tax amount benefit amount ------ ------- ------ Three months ended September 30, 2002 Net unrealized gains on securities available-for-sale arising during the period $1,635 $ (556) $1,079 Accretion of unrealized loss on securities transferred from available-for-sale to held-to-maturity 4 (1) 3 ------ ------ ------ Net unrealized gains on securities during period $1,639 $ (557) $1,082 ====== ====== ====== Three months ended September 30, 2001 Net unrealized losses on securities available-for-sale arising during the period $4,046 $(1,377) $2,669 Accretion of unrealized loss on securities transferred from available-for-sale to held-to-maturity 5 (1) 4 ------ ------- ------ Net unrealized gains on securities during period $4,051 $(1,378) $2,673 ====== ======= ====== Nine months ended September 30, 2002 Net unrealized gains on securities available-for-sale arising during the period $4,242 $(1,442) $2,800 Accretion of unrealized loss on securities transferred from available-for-sale to held-to-maturity 18 (6) 12 ------ ------- ------ Net unrealized gains on securities during period $4,260 $(1,448) $2,812 ====== ======= ====== Nine months ended September 30, 2001 Net unrealized gains on securities available-for-sale arising during the period $4,972 $(1,691) $3,281 Accretion of unrealized loss on securities transferred from available-for-sale to held-to-maturity 8 (3) 5 ------ ------- ------ Net unrealized gains on securities during period $4,980 $(1,694) $3,286 ====== ======= ====== NOTE 7 - INCOME TAXES The components of the income tax provision are as follows: Three months ended Nine months ended September 30, September 30, (in thousands) 2002 2001 2002 2001 ---- ---- ---- ---- Current provision Federal $ 889 $ 781 $2,635 $2,253 State - - - - ----- ----- ------ ------ Total 889 781 2,635 2,253 ----- ----- ------ ------ Deferred provision Federal (50) 41 (146) 125 State - - - - ----- ----- ------ ------ Total (50) 41 (146) 125 ----- ----- ------ ------ Income tax provision $ 839 $ 822 $2,489 $2,378 ===== ===== ====== ====== Connecticut tax legislation permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a passive investment company ("PIC"). In accordance with this legislation, in 1999 NewMil formed a PIC, NewMil Mortgage Company. NewMil's effective tax rates for the nine month periods ended September 30, 2002 and 2001 are 32.1% and 35.9%, respectively, and reflect the full impact of the Connecticut legislation. NOTE 8 - SHAREHOLDERS' EQUITY Capital Requirements -------------------- NewMil and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The Bank was classified at its most recent notification as "well capitalized". NewMil and the Bank's regulatory capital ratios at September 30, 2002 are as follows: NewMil Bank ------ ---- Leverage ratio 6.11% 6.12% Tier I risk-based ratio 10.92 10.93 Total risk-based ratio 12.17 12.18 Restrictions on Subsidiary's Dividends and Payments --------------------------------------------------- NewMil's ability to pay dividends is dependent on the Bank's ability to pay dividends to NewMil. There are certain restrictions on the payment of dividends and other payments by the Bank to NewMil. Under Connecticut law the Bank is prohibited from declaring a cash dividend on its common stock except from its net earnings for the current year and retained net profits for the preceding two years. In some instances, further restrictions on dividends may be imposed on NewMil by the Federal Reserve Bank. NewMil Bancorp, Inc. and Subsidiary MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations of NewMil and its subsidiary should be read in conjunction with NewMil's Annual Report on Form 10-K for the period ended December 31, 2001. BUSINESS NewMil Bancorp, Inc. ("NewMil"), a Delaware corporation, is a bank holding company for NewMil Bank ("Bank"), a Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC") insured savings bank headquartered in New Milford, Connecticut. NewMil's principal business consists of the business of the Bank. The Bank is engaged in customary banking activities, including general deposit taking and lending activities to both retail and commercial markets, and conducts its business from 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. 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. Resultant goodwill was $8.1 million and core deposit intangible for the transaction was $1.4 million. Amortization on the goodwill has ceased and the core deposit intangible asset is continuing to be amortized over 10 years. 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. RESULTS OF OPERATIONS For the three month periods ended September 30, 2002 and 2001 Overview -------- NewMil earned net income of $1,774,000, or 39 cents per share (diluted), for the quarter ended September 30, 2002 as compared with $1,476,000, or 32 cents per share (diluted), for the quarter ended September 30, 2001. Analysis of net interest and dividend income -------------------------------------------- Net interest and dividend income increased $336,000, or 6.3%, for the quarter ended September 30, 2002 as compared with the prior year period. This increase resulted primarily from a favorable change in volume. Average earning assets have increased $69.3 million due to internal growth. The change in interest due to rate is due mostly to a significant decrease in the cost of interest-bearing deposits resulting from lower market interest rates, off-set by lower yielding earning assets, the impact on asset/liability re-pricing during 2002 as compared with 2001, and to changes in balance sheet mix. The net interest margin decreased 24 basis points to 3.80% from 4.04% over the period, primarily due to changes in balance sheet mix resulting from the asset growth. The following table sets forth the components of NewMil's net interest income and yields on average interest-earning assets and interest-bearing funds. Three months ended September 30, Average Income/ Average Balance Expense Yield/Rate (dollars in thousands) 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- Loans(a) $346,143 $350,032 $5,906 $6,661 6.82% 7.61% Mortgage backed securities (b) 107,533 88,026 1,596 1,459 5.94 6.63 Other securities (b)(c) 141,963 88,280 1,562 1,308 4.40 5.93 -------- -------- ------ ------ Total earning assets 595,639 526,338 9,064 9,428 6.09 7.17 ------ ------ Other assets 51,612 39,972 -------- -------- Total assets $647,251 $566,310 ======== ======== NOW accounts $ 67,828 $ 60,236 134 171 0.79 1.14 Money market accounts 141,211 116,271 686 836 1.94 2.88 Savings & other 75,487 66,864 302 369 1.60 2.21 Certificates of deposit 203,782 181,451 1,709 2,257 3.36 4.98 -------- -------- ------ ------ Total interest- bearing deposits 488,308 424,822 2,831 3,633 2.32 3.42 Borrowings 56,717 46,130 581 479 4.10 4.15 -------- -------- ------ ------ Total interest- bearing funds 545,025 470,952 3,412 4,112 2.50 3.49 ------ ------ Demand deposits 43,593 40,682 Other liabilities 5,511 5,639 Shareholders' equity 53,122 49,037 -------- -------- Total liabilities & shareholders' equity $647,251 $566,310 ======== ======== Net interest income $5,652 $5,316 ====== ====== Spread on interest-bearing funds 3.59 3.68 Net interest margin(d) 3.80 4.04 (a) Includes non-accrual loans. (b) Average balances of investments are based on historical cost. (c) Includes interest-bearing deposits in other banks and federal funds sold. (d) Net interest income divided by average interest-earning assets. The following table sets forth the changes in interest due to volume and rate. Three months ended September 30, 2002 versus 2001 (in thousands) Change in interest due to Volume Rate Volume/rate Net ------ ---- ----------- --- Interest-earning assets: Loans $ (74) $ (689) $ 8 $ (755) Mortgage backed securities 323 (153) (33) 137 Other securities 795 (337) (204) 254 ------ ------ ----- ------ Total 1,044 (1,179) (229) (364) ------ ------ ----- ------ Interest-bearing liabilities: Deposits 543 (1,170) (175) (802) Borrowings 110 (7) (1) 102 ------ ------ ----- ------ Total 653 (1,177) (176) (700) ------ ------ ----- ------ Net change to interest income $ 391 $ (2) $ (53) $ 336 ====== ====== ===== ====== Interest income --------------- Total interest and dividend income decreased $364,000 or 3.9%, for the quarter ended September 30, 2002 as compared with the same period a year ago. Loan income decreased $755,000, or 11.3%, primarily as a result of a lower average yield. Average loans decreased $3.9 million, or 1.1%, primarily due to higher loan repayments during the period. The decrease in the average loan yield, down 79 basis points, was due to lower market interest rates throughout 2002, and to changes in portfolio mix. Investment income increased $391,000, or 14.1%, as a result of higher average volume and lower average yields. Average securities increased $73.2 million, or 41.5%. The decrease in average investment yield, down 122 basis points to 5.06%, was due to lower market rates on new securities added during 2002, and to changes in portfolio mix. Interest expense ---------------- Interest expense for the quarter ended September 30, 2002 decreased $700,000, or 17.0%, as compared with the same period a year ago as a result of a significant decline in the cost of funds, offset in part by deposit growth and higher average borrowings. Deposit expense decreased $802,000, or 22.1%, as a result of lower deposit rates and changes in deposit mix. Average interest-bearing deposits increased $63.5 million, or 14.9%. The average cost of interest-bearing deposits decreased 110 basis points to 2.32%. Interest expense on borrowings increased $102,000, or 21.3%, as a result of increased average borrowings, up $10.6 million, offset in-part by a lower borrowing cost, down 5 basis points to 4.10%. Provision and Allowance for loan losses --------------------------------------- NewMil made no provision for loan losses during the quarters ending September 30, 2002 and 2001. During the past several years the Bank has experienced an improvement in loan quality and loss recoveries. These factors have enabled the Bank to reduce its provision for loan losses to zero while maintaining reserve adequacy. The following table sets forth key ratios for the periods presented. September 30, December 31, September30, (in thousands) 2002 2001 2001 ---- ---- ---- Ratio of allowance for loan losses: to non-performing loans 669.7% 315.3% 319.9% to total gross loans 1.6 1.6 1.6 Ratio of non-performing loans to total loans 0.2 0.5 0.5 During the nine months ended September 30, 2002 non-performing loans declined $924,000, or 53.0%, while gross loans increased slightly, by $1.2 million, or 0.36%. NewMil remains adequately reserved both against total loans and non-performing loans. For a discussion on loan quality see "Non-Performing Assets". NewMil determines its allowance and provisions for loan losses based upon a detailed evaluation of the loan portfolio through a process which considers numerous factors, including estimated credit losses based upon internal and external portfolio reviews, delinquency levels and trends, estimates of the current value of underlying collateral, concentrations, portfolio volume and mix, changes in lending policy, current economic conditions and historical loan loss experience over a 10-to-15 year economic cycle, and examinations performed by regulatory authorities. Determining the level of the allowance at any given period is difficult, particularly during deteriorating or uncertain economic periods. 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 September 30, 2002. 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 by the State of Connecticut's Department of Banking in June 2002 and no additions to the allowance were requested as a result of these examinations. 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 taking the portfolio and segregating it into various risk rating and product type 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 risk rating and product type. Non-interest income ------------------- The following table details the principal categories of non-interest income. September 30, (in thousands) 2002 2001 Change ---- ---- ------ Service charges on deposit accounts $580 $535 $ 45 8.4% Gains on sales of mortgage loans, net 131 116 15 12.9 Gains on sale of other real estate property owned 7 - 7 - Loan servicing 14 30 (16) 53.3 Increase in cash surrender value of bank-owned life insurance 127 - 127 - Other 91 127 (36) (28.3) ---- ---- ---- ----- Total non-interest income $950 $808 $142 17.6% ==== ==== ==== ===== The increase in non-interest income for the quarter ended September 30, 2002 as compared to the prior year period resulted primarily from growth in service fees and the increase in the cash surrender value of bank-owned life insurance, gains on sales of residential mortgages, a gain on a sale of an OREO property, offset by lower loan servicing fees and lower other income. The increase in service fees is due to the growth in the number of deposit accounts serviced during the 2002 period as compared with the 2001 period. The Bank purchased bank-owned life insurance in December 2001 and March 2002. The increase in the gains on sales of residential mortgage loans resulted from higher loan sales volume, $7.6 million in 2002 compared to $7.1 million in 2001. Secondary market loan sales are generally pre-arranged on a loan-by-loan basis prior to origination and loans are sold with servicing rights released. The decrease in loan servicing fees resulted from run-off in the loan servicing portfolio. Operating expenses ------------------ The following table details the principal categories of operating expenses. September 30, (in thousands) 2002 2001 Change ---- ---- ------ Salaries and benefits $2,255 $1,917 $338 17.6% Occupancy 334 320 14 4.4 Equipment 289 317 (28) (8.8) Professional, collection & OREO 168 175 (7) (4.0) Postage and telecommunications 131 135 (4) (3.0) Printing and office supplies 99 111 (12) (10.8) Marketing 99 102 (3) (2.9) Service bureau 104 112 (8) (7.1) Amortization of intangibles 72 163 (91) (55.8) Other 438 474 (36) (7.6) ------ ------ ---- ---- Total operating expenses $3,989 $3,826 $163 4.3% ====== ====== ==== ==== The increase in compensation expense for the quarter ended September 30, 2002 as compared with the prior year period was due primarily to year-over-year salary increases, additional employees, higher accrued bonuses, increased supplemental retirement plan expense and a decrease in the pension plan benefit. The increase in occupancy expense results primarily from higher building maintenance, cleaning and utilities costs of our facilities. The decrease in equipment expense is primarily due to lower depreciation expense. There was a slight decrease in postage and telecommunications costs due to implementing certain telecommunications network changes as well as the general timing of various direct mailing campaigns during the 2002 and 2001 periods. The minimal decrease in printing and office supplies reflects a reduction in usage. The slight decline in marketing costs resulted from decreased advertising activities during the current quarter. The decline in the amortization of intangible assets in the 2002 period resulted from the discontinuance of goodwill amortization as a result of the adoption of SFAS 142 effective January 1, 2002. Changes in other operating expense also reflect the bank's management of controlling expenses during the period. Income taxes ------------ Net income for the quarter included an income tax provision of $839,000 representing a 32.1% effective rate, as compared with a provision of $822,000 a year ago, representing a 35.8% effective rate. The difference between NewMil's effective tax rate and the corporate tax rate of 34% is attributable to the amortization of intangibles during the 2002 and 2001 periods and other book/tax differences. RESULTS OF OPERATIONS For the nine month periods ended September 30, 2002 and 2001 Overview -------- NewMil earned net income of $5,262,000, or $1.15 cents per share (diluted), for the nine months ended September 30, 2002 as compared with $4,249,000, or 91 cents per share (diluted), for the nine months ended September 30, 2001. Analysis of net interest and dividend income -------------------------------------------- Net interest and dividend income increased $2,110,000, or 13.8%, for the nine months ended September 30, 2002 as compared with the prior year period. This increase resulted from a $70.6 million increase in average earning assets. The net interest margin during the period remained flat at 4.01% when compared to the prior year period. The increase in earning assets is due to internal growth. The net interest margin remained stable at 4.01% due to a significant decrease in the cost of funds, resulting from lower market interest rates, steepening in the yield curve and its impact on asset/liability repricing during 2002 as compared with 2001 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. Nine months ended September 30, Average Income/ Average Balance Expense Yield/Rate (dollars in thousands) 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- Loans(a) $342,284 $343,616 $18,109 $20,321 7.05% 7.89% Mortgage backed securities (b) 114,028 85,246 5,195 4,250 6.07 6.65 Other securities (b)(c) 121,353 78,165 4,376 3,566 4.81 6.08 -------- -------- ------- ------- Total earning assets 577,665 507,027 27,680 28,137 6.39 7.40 ------- ------- Other assets 49,071 37,337 -------- -------- Total assets $626,736 $544,364 ======== ======== NOW accounts $ 67,023 $ 56,722 460 480 0.92 1.13 Money market accounts 134,108 116,156 2,075 2,880 2.06 3.31 Savings & other 73,699 65,594 937 1,161 1.70 2.36 Certificates of deposit 192,081 178,079 5,062 7,084 3.51 5.30 -------- -------- ------- ------- Total interest- bearing deposits 466,911 416,551 8,534 11,605 2.44 3.72 Borrowings 59,840 36,402 1,769 1,265 3.94 4.63 -------- -------- ------- ------- Total interest- bearing funds 526,751 452,953 10,303 12,870 2.61 3.79 ------- ------- Demand deposits 41,583 37,635 Other liabilities 6,236 5,371 Shareholders' equity 52,166 48,405 -------- -------- Total liabilities & shareholders' equity $626,736 $544,364 ======== ======== Net interest income $17,377 $15,267 ======= ======= Spread on interest-bearing funds 3.78 3.61 Net interest margin(d) 4.01 4.01 (a) Includes non-accrual loans. (b) Average balances of investments are based on historical cost. (c) Includes interest-bearing deposits in other banks and federal funds sold. (d) Net interest income divided by average interest-earning assets. The following table sets forth the changes in interest due to volume and rate. Nine months ended September 30, 2002 versus 2001 (in thousands) Change in interest due to Volume Rate Volume/rate Net ------ ---- ----------- --- Interest-earning assets: Loans $ (79) $(2,142) $ 9 $(2,212) Mortgage backed securities 1,435 (367) (123) 945 Other securities 1,971 (747) (414) 810 ------ ------- ---- ------- Total 3,327 (3,256) (528) (457) ------ ------- ---- ------- Interest-bearing liabilities: Deposits 1,403 (3,992) (482) (3,071) Borrowings 814 (189) (121) 504 ------ ------- ---- ------- Total 2,217 (4,181) (603) (2,567) ------ ------- ---- ------- Net change to interest income $1,110 $ 925 $ 75 $ 2,110 ====== ======= ==== ======= Interest income --------------- Total interest and dividend income decreased $457,000 or 1.6%, for the nine months ended September 30, 2002 as compared with the same period a year ago. Loan income decreased $2.2 million, or 10.9%, primarily as a result of a lower average yield. Average loans decreased slightly by $1.3 million. The decrease in the average loan yield, down 84 basis points, was due to lower market interest rates throughout 2002, and to changes in portfolio mix. Loan income for the nine months ended September 30, 2002 included $192,000 of interest recaptured from a former non-performing loan. Investment income increased $1.8 million, or 22.5%, as a result of higher average volume and lower average yields. Average securities increased $72.0 million, or 44.0%. The decrease in average investment yield, down 96 basis points to 5.42%, was due to lower market rates on new securities added during 2002, and to changes in portfolio mix. Interest expense ---------------- Interest expense for the nine month period ended September 30, 2002 decreased $2.6 million, or 19.9%, as compared with the same period a year ago as a result of a significant decline in the cost of funds, offset in part by deposit growth and higher average borrowings. Deposit expense decreased $3.1 million, or 26.5%, as a result of lower deposit rates and changes in deposit mix. Average interest-bearing deposits increased $50.4 million, or 12.1%. The average cost of interest-bearing deposits decreased 128 basis points to 2.44%. Interest expense on borrowings increased $504,000, or 39.8%, as a result of increased average borrowings, up $23.4 million, offset in-part by a lower borrowing cost, down 69 basis points. Provision and Allowance for loan losses --------------------------------------- NewMil made no provision for loan losses during the nine months ending September 30, 2002 and 2001. During the past several years the Bank has experienced an improvement in loan quality. These factors have enabled the Bank to reduce its provision for loan losses to zero while maintaining reserve adequacy. For a detailed discussion of the Bank's allowance for loan losses refer to "Results of Operations - For the three month periods ended September 30, 2002 and 2001" above. Non-interest income ------------------- The following table details the principal categories of non-interest income. September 30, (in thousands) 2002 2001 Change ---- ---- ------ Service charges on deposit accounts $1,727 $1,534 $193 8.4% Gains on sales of mortgage loans, net 348 306 42 13.7 Gains on sale of other real estate property owned 7 - 7 - Loan servicing 48 109 (61) (56.0) Increase in cash surrender value of bank-owned life insurance 336 - 336 - Other 248 332 (84) (25.3) ------ ------ ---- ----- Total non-interest income $2,714 $2,281 $433 19.0% ====== ====== ==== ===== The increase in non-interest income for the nine month period ended September 30, 2002 as compared to the prior year period results primarily from growth in service fee income, the increase in the cash surrender value of bank-owned life insurance, increased gains on sales of residential mortgage loans and the gain from the sale of an other real estate property owned. The increase in service charges on deposit accounts is due to growth in the number of deposit accounts serviced during the 2002 period as compared to the 2001 period. The Bank purchased bank-owned life insurance in December 2001 and March 2002. The increase in the gains on sales of residential mortgage loans resulted from higher loan sales volume, $21.9 million in 2002 compared to $17.8 million in 2001. Secondary market loan sales are generally pre-arranged on a loan-by-loan basis prior to origination and loans are sold with servicing rights released. The decrease in loan servicing fees resulted from run-off in the loan servicing portfolio. Other fees declined primarily due to lower commissions earned on issuances of official checks and money orders during the period. Operating expenses ------------------ The following table details the principal categories of operating expenses. September 30, (in thousands) 2002 2001 Change ---- ---- ------ Salaries & benefits $ 6,677 $ 5,425 $1,252 23.1% Occupancy 1,045 964 81 8.4 Equipment 858 978 (120) (12.3) Professional, collections and OREO 599 502 97 19.3 Postage and telecommunications 404 401 3 0.8 Printing and office supplies 324 322 2 0.6 Marketing 392 293 99 33.8 Service bureau 288 285 3 1.1 Amortization of intangibles 215 489 (274) (56.0) Other 1,538 1,262 276 21.9 ------- ------- ------ ---- Total operating expenses $12,340 $10,921 $1,419 13.0% ======= ======= ====== ==== The increase in compensation expense for the nine month periods ended September 30, 2002 as compared with the prior year period was due primarily to year-over-year salary increases and accrued bonus increases, increased supplemental retirement plan expense and a decrease in the pension plan benefit. The increase in occupancy expense results primarily from higher property taxes, maintenance, building cleaning, repairs and depreciation expenses. The decrease in equipment expense is primarily due to lower equipment and software maintenance costs and lower depreciation expenses on computer equipment and software. The increase in professional, collection and OREO costs during the period is primarily due to additional consulting for information systems, higher audit fees and additional corporate legal fees. The increase in postage and telecommunications is due to the higher number of deposit accounts serviced and increased postage costs. The increase in printing and office supplies is also due primarily to the higher number of deposit accounts serviced throughout our branch network. Marketing expense increased primarily as a result of increased advertising activities during the current period. Service bureau expense has increased as a result of growth in the number of deposit accounts since the prior year period. The decrease in the amortization of intangible assets in the 2002 period relates to the discontinuance of goodwill amortization as a result of the adoption of SFAS 142 effective January 1, 2002. Changes in other operating expense also reflect the increased costs associated with the internal growth of NewMil. Income taxes ------------ Net income for the nine month period included an income tax provision of $2,489,000, representing a 32.1% effective rate, as compared with a provision of $2,378,000 a year ago, representing a 35.9% effective rate. The difference between NewMil's effective tax rate and the corporate tax rate of 34% is attributable to the amortization of intangibles during the 2002 and 2001 periods and other book/tax differences. FINANCIAL CONDITION During the nine month period ended September 30, 2002 total assets grew $56.9 million, or 9.4%, to $636.9 million. This increase was due to deposit growth of $70.4 million, or 14.8%, offset by a decrease in borrowings of $15.9 million, or 21.7%. During the period securities increased $6.3 million, or 3.0%, and overnight federal funds sold increased $40.0 million, while net loans increased $1.2 million, or 0.4%. Non-performing assets declined to $937,000, or 0.14% of total assets at September 30, 2002. Securities ---------- During the period ended September 30, 2002 securities increased $6.3 million, or 3.0%, to $218.7 million and overnight federal funds sold increased $40.0 million to $44.7 million. During the period NewMil purchased $15.2 million of fixed rate mortgage backed securities and $25.2 million of fixed rate agency securities. NewMil's securities portfolio consists of US Government Agency notes, mortgage backed securities (MBS), corporate bonds, bank qualified municipal bonds, collateralized mortgage obligations (CMOs) and Federal Home Loan Bank stock. At September 30, 2002, the portfolio had a projected weighted average duration and life of 3.0 years and 3.9 years, respectively, based on median projected prepayment speeds at current interest rates. At September 30, 2002, securities totaling $193.5 million, or 88.5%, were classified as available-for-sale and securities totaling $25.2 million, or 11.5%, were classified as held-to-maturity. Loans ----- During the period ended September 30, 2002 net loans increased $1.2 million, or 0.4%. Loan originations and advances totaled $111.9 million, while loan repayments were $111.2 million. In addition, NewMil originated and sold in the secondary market $21.9 million of residential mortgage loans during the period. Major loan classifications are as follows: September 30, December 31, (in thousands) 2002 2001 ---- ---- Real Estate Mortgages: Residential 1-to-4 family $193,817 $180,513 5-or-more family 12,030 14,649 Commercial 79,863 82,422 Land & land development 1,821 2,998 Home equity credit 25,454 32,580 -------- -------- Total mortgage loans 312,985 313,162 Commercial and industrial 31,652 29,922 Installment and other 2,688 3,089 -------- -------- Total loans, gross 347,325 346,173 Deferred loan origination fees and purchase premium, net (211) (303) Allowance for loan losses (5,498) (5,502) -------- -------- Total loans, net $341,616 $340,368 ======== ======== The Commercial Lending department specializes in lending to small and mid-size companies and professional practices and provides short-term and long-term financing, construction loans, commercial mortgages and property improvement loans. The department also works with several government-assisted lending programs. The Residential Mortgage Department, in addition to traditional portfolio lending, originates loans for sale to the secondary market on a service-released basis, which enables the Bank to offer a very comprehensive mortgage product line. The department also offers home equity loans and lines of credit and consumer installment loans. Non-performing assets The composition of non-performing assets is as follows: September 30, December 31, (in thousands) 2002 2001 ---- ---- Non-accruing loans $285 $ 985 Accruing loans past due 90 days or more 536 760 Accruing restructured loans - - ---- ------ Total non-performing loans 821 1,745 OREO, net 116 116 ---- ------ Total non-performing assets $937 $1,861 ==== ====== In addition to non-performing assets, at September 30, 2002 NewMil had $1,531,000 of performing classified loans that are considered potential problem loans. Although not impaired, performing classified loans, in the opinion of management, exhibit a higher than normal degree of risk and warrant monitoring due to various considerations, including (i) the degree of documentation supporting the borrower's current financial position, (ii) potential weaknesses in the borrowers' ability to service the loan, (iii) possible collateral value deficiency, and (iv) other risk factors such as geographic location, industry focus and negatively trending financial results. These deficiencies create some uncertainty, but not serious doubt, as to the borrowers' ability to comply with the loan repayment terms in the future. Management believes that reserves for these loans are adequate. NewMil pursues the resolution of all non-performing assets through restructurings, credit enhancements or collections. When collection procedures do not bring a loan into performing or restructured status, NewMil generally initiates action to foreclose the property or to acquire it by deed in lieu of foreclosure. NewMil actively markets all OREO property. LIQUIDITY NewMil manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. NewMil's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and Federal Home Loan Bank advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. Operating activities for the nine-month period ended September 30, 2002 provided net cash of $773,000. Investing activities utilized net cash of $4.4 million, principally for securities purchases, offset in part by security repayments and maturities, and to a lesser degree net loan advances. Financing activities provided net cash of $49.4 million, principally from increases in deposits and repurchase agreements, offset in part by FHLB repayments, cash dividends paid and treasury stock purchases. At September 30, 2002, NewMil's liquidity ratio, as represented by cash, short term available-for-sale securities, marketable assets and the ability to borrow against held-to-maturity securities and loans through unused FHLB and other short term borrowing capacity, of approximately $91.3 million, to net deposits and short term unsecured liabilities, was 62.0%, well in excess of NewMil's minimum guideline of 15%. At September 30, 2002, NewMil had outstanding commitments to fund new loan originations of $33.2 million, construction mortgage commitments of $5.0 million and unused lines of credit of $34.1 million. These commitments will be met in the normal course of business. NewMil believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals. CAPITAL RESOURCES During the period ended September 30, 2002 shareholders' equity increased $3.2 million to $53.8 million and book value per share increased $1.11 to $12.63. Positively impacting shareholders' equity was net income of $5,262,000, or $1.15 per share (diluted), other comprehensive income of $2,812,000 (net increase in the unrealized gains on securities available-for-sale, net of taxes), common stock issued of $44,000, stock option exercise proceeds of $202,000 and a tax benefit from the exercise of non-qualified stock options of $207,000. Offsetting these increases in shareholder's equity were treasury stock purchases amounting to $3,663,000 and dividend payments of $1,630,000. Capital requirements -------------------- NewMil and the Bank are subject to minimum capital requirements established, respectively, by the Federal Reserve Board (the "FRB") and the FDIC. At September 30, 2002 NewMil's tier 1 leverage capital ratio was 6.11% and its tier 1 and total risk-based capital ratios were 10.92% and 12.17%, respectively. At September 30, 2002 the Bank's tier 1 leverage capital ratio was 6.12% and its tier 1 and total risk-based capital ratios were 10.93% and 12.18%, respectively. NewMil and the Bank are categorized as "well capitalized". A well capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective regulations issued by the FDIC and the FRB, is one which maintains a total risk-based ratio of 10% or above, a Tier I risk-based ratio of 6% or above and a leverage ratio of 5% or above, and is not subject to any written order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level. Dividends --------- NewMil's ability to pay dividends is dependent on the Bank's ability to pay dividends to NewMil. There are certain restrictions on the payment of dividends and other payments by the Bank to NewMil. Under Connecticut law the Bank is prohibited from declaring a cash dividend on its common stock except from its net earnings for the current calendar year and retained net profits for the preceding two years. In some instances, further restrictions on dividends may be imposed on NewMil by the Federal Reserve Bank. NewMil believes that the payment of cash dividends to its shareholders is appropriate, provided that such payment considers NewMil's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of NewMil or the Bank. The continued payment of cash dividends by NewMil will be dependent on NewMil's future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of NewMil. Item 3. QUANTITATIVE and QUALITATIVE DISCLOSURE of MARKET RISK Market risk is the exposure to losses resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which NewMil is exposed is interest rate risk. NewMil has no foreign currency or commodity price risk and equity price risk is considered limited due to the fact that NewMil has minimal investments in equities and investments in corporate bonds are in the highest credit grades. NewMil manages interest rate risk through an Asset Liability Committee comprised of representatives from senior management and the Board of Directors. The objective of interest rate risk management is to achieve and maintain a high and stable net interest margin under changing interest rate environments. NewMil seeks to manage interest rate risk within limits approved by the Board of Directors. NewMil monitors exposure to interest rate risk on a quarterly basis using earnings simulation analysis and gap analysis. Earnings simulation analysis measures the amount of short-term earnings at risk under both rising and falling rate scenarios as compared with current interest rates. Balance sheet gap analysis identifies short-, medium- and long-term interest rate positions or exposure. NewMil's interest rate risk has not significantly changed from the prior year. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS There are no material legal proceedings pending against NewMil or the Bank or any of their properties, other than ordinary routine litigation incidental to NewMil's business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11.1 Computation of earnings per share. 99.1 Sarbanes-Oxley Certification by Francis J. Wiatr, Chairman, President and CEO. 99.2 Sarbanes-Oxley Certification by B. Ian McMahon, Chief Financial Officer. (b) Report on Form 8-K. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWMIL BANCORP, INC. November 7, 2002 By: /s/Francis J. Wiatr ------------------------------ Francis J. Wiatr, Its: Chairman, President and CEO November 7, 2002 By: /s/B. Ian McMahon -------------------------- B. Ian McMahon, Its: Chief Financial Officer Certification ------------- I, Francis J. Wiatr, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NewMil Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entitles, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to records, process, summarizes and report financial data and have identified for the registrants' auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not materials, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. NEWMIL BANCORP, INC. Date: November 7, 2002 By: /s/Francis J. Wiatr ------------------------------ Francis J. Wiatr, Its: Chairman, President and CEO Certification ------------- I, B. Ian McMahon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of NewMil Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entitles, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to records, process, summarizes and report financial data and have identified for the registrants' auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not materials, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. NEWMIL BANCORP, INC. Date: November 7, 2002 By: /s/B. Ian McMahon ------------------------- B. Ian McMahon, Its: Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWMIL BANCORP, INC. November 7, 2002 By: /s/Francis J. Wiatr ------------------------------ Francis J. Wiatr, Its: Chairman, President and CEO