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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004
o
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
of incorporation or organization)
(I.R.S. Employer 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 o

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

The number of shares of Common Stock outstanding as of March 31, 2004, is 4,219,606.
 
 
  1  
 
 
 
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
 
 
 
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
3
 
 
Consolidated Statements of Income for the three month periods ended March 31, 2004 and March 31, 2003
4
Consolidated Statements of Changes in Shareholders' Equity for the three month periods ended March 31, 2004 and March 31, 2003
 
5
Consolidated Statements of Cash Flows for the three month periods ended March 31, 2004 and March 31, 2003
6
Notes to Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
25
Item 4. Control and Procedures
25
PART II Other Information
 
Item 1. Legal Proceedings
26
Item 2. Changes in Securities Use of Proceeds and Issuer Purchases of Equity Securities
26
Item 3. Defaults upon Senior Securities
26
Item 4. Submission of matters to a vote of security holders
27
Item 5. Other information
27
Item 6. Exhibits and Reports on Form 8-K
27
 
 

 
  2  
 
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
(unaudited)

 
  
March 31,
December 31,
(dollars in thousands)
  
2004
2003
ASSETS
    
 
    
 
  
Cash and due from bank
  
$
16,378
  
$
22,524
  
Federal funds sold
    
14,082
    
-
  
Total cash and cash equivalents
    
30,460
    
22,524
 
Securities
    
 
    
 
  
Available-for-sale at market
    
185,273
    
184,513
 
Held-to-maturity at amortized cost
   
 
    
 
  
(fair value: $14,315 and $15,082)
    
13,814
    
14,588
  
Loans (net of allowance for loan losses: $5,178 and $5,198)
    
452,301
    
449,651
 
Bank premises and equipment, net
    
7,531
    
7,594
  
Accrued interest income
    
3,377
    
3,711
 
Intangible assets (net of accumulated
   
 
    
 
  
amortization: $1,317 and $1,207)
    
8,650
    
8,700
 
Bank-owned life insurance
    
10,579
    
10,480
  
Other assets
    
2,385
    
2,281
 
Total Assets
  
$
714,370
  
$
704,042
  
LIABILITIES and SHAREHOLDERS' EQUITY
    
 
    
 
  
Deposits
    
 
    
 
  
Demand (non-interest bearing)
  
$
49,178
  
$
49,813
 
NOW accounts
    
78,025
    
76,524
 
Money market
    
156,872
    
155,911
 
Savings and other
    
85,073
    
84,660
  
Certificates of deposit
    
189,693
    
191,260
  
Total deposits
    
558,841
    
558,168
  
Federal Home Loan Bank advances
    
75,546
    
70,247
 
Long term debt
    
9,761
    
9,746
 
Repurchase agreements
    
11,066
    
9,317
  
Accrued interest and other liabilities
    
4,732
    
4,258
  
Total Liabilities
    
659,946
    
651,736
 
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
    
41,861
    
42,142
  
Retained earnings
    
29,236
    
27,844
 
Accumulated other comprehensive income, net
    
2,905
    
2,913
  
Treasury stock, at cost: 1,770,532 and 1,903,242 shares
    
(22,573
)
  
(23,588
)
Total Shareholders' Equity
    
54,424
    
52,306
  
Total Liabilities and Shareholders' Equity
  
$
714,370
  
$
704,042
  
See accompanying notes to consolidated financial statements.
    
 
    
 
  


 
  3  
 
 
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
 

 
  
Three months ended
March 31,
 
  
2004
2003
Interest and dividend income
    
 
    
 
  
Interest and fees on loans
  
$
6,441
  
$
5,977
  
Interest and dividends on securities
    
2,383
    
2,650
  
Interest on federal funds sold
    
7
    
112
  
Total interest and dividend income
    
8,831
    
8,739
  
Interest expense
    
 
    
 
  
Deposits
    
1,623
    
2,231
  
Borrowed funds
    
698
    
547
  
Total interest expense
    
2,321
    
2,778
  
Net interest and dividend income
    
6,510
    
5,961
  
Provision for loan losses
    
-
    
-
  
Net interest and dividend income after provision for loan losses
    
6,510
    
5,961
  
Non-interest income
    
 
    
 
  
Service charges on deposit accounts
    
684
    
547
  
Gains on sales of mortgage loans, net
    
40
    
72
  
Loan servicing fees
    
10
    
19
  
Other
    
183
    
187
  
Total non-interest income
    
917
    
825
  
Non-interest expense
    
 
    
 
  
Salaries and benefits
    
2,466
    
2,345
  
Occupancy
   
402
    
399
  
Equipment
   
328
    
318
  
Marketing
   
121
    
45
  
Postage and telecommunications
   
131
    
133
  
Printing and office supplies
   
101
    
98
  
Professional, collections and OREO
   
297
    
173
  
Service bureau
   
94
    
107
  
Amortization of intangibles
   
49
    
61
  
Other
    
476
    
453
  
Total non-interest expense
   
4,465
    
4,132
  
Income before income taxes
   
2,962
    
2,654
  
Income tax provision
   
939
    
827
  
Net income
 
$
2,023
  
$
1,827
  
Per common share
    
 
    
 
  
Diluted earnings
  
$
0.47
  
$
0.41
  
Basic earnings
    
0.48
    
0.43
  
Cash dividends
    
0.15
    
0.15
  
 
    
 
    
 
  
See accompanying notes to consolidated financial statements.
    
 
    
 
  


 
  4  
 

N     NewMil Bancorp, Inc. and Subsidiary
  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
   (unaudited)
 

 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
other
Total
 
Common Stock
Paid-in
Retained
Treasury
comprehensive
shareholders'
 
Shares
Amount
capital
earnings
stock
income
equity
(dollars in thousands)
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Balances at
 
    
 
    
 
    
 
    
 
    
 
    
 
  
December 31, 2002
5,990,138
  
$
2,995
  
$
42,297
  
$
22,793
  
$
(19,628
)
$
5,779
  
$
54,236
  
Net income for period
-
   
-
   
-
   
1,827
    
-
   
-
   
1,827
  
Net unrealized loss on
 
    
 
    
 
    
 
    
 
    
 
    
 
  
securities available-for-sale,
 
    
 
    
 
    
 
    
 
    
 
    
 
  
net of taxes-
-
   
-
   
-
   
-
   
(172
)
  
 
    
       (172
)
Total comprehensive income
 
    
 
    
 
    
 
    
 
    
 
    
     1,655
  
Cash dividends paid
-
   
-
   
-
   
(635
)
  
-
   
-
   
(635
)
Exercise of stock options
-
   
-
   
(44
)
  
-
   
102
    
-
   
58
  
Common stock issued
-
   
-
   
11
    
-
   
16
    
-
   
27
  
Tax benefit from exercise of
 
    
 
    
 
    
 
    
 
    
 
    
 
  
non-qualified stock options
-
   
-
   
19
    
-
   
-
   
-
   
19
  
Common stock repurchased
-
   
-
   
-
   
-
   
(357
)
  
-
   
(357
)
Balances at
 
    
 
    
 
    
 
    
 
    
 
    
 
  
March 31, 2003
5,990,138
  
$
2,995
  
$
42,283
  
$
23,985
  
$
(19,867
)
$
5,607
  
$
55,003
  
Balances at
 
    
 
    
 
    
 
    
 
    
 
    
 
  
December 31, 2003
5,990,138
  
$
2,995
  
$
42,142
  
$
27,844
  
$
(23,588
)
$
2,913
  
$
52,306
  
Net income for period
-
   
-
   
-
   
2,023
    
-
   
-
   
2,023
  
Net unrealized loss on
 
    
 
    
 
    
 
    
 
    
 
    
 
  
securities available-for-sale,
 
    
 
    
 
    
 
    
 
    
 
    
 
  
net of taxes
-
   
-
   
-
   
-
   
-
   
(8
)
  
           (8
)
Total comprehensive income
 
    
 
    
 
    
 
    
 
    
 
    
     2,015
  
Cash dividends paid
-
   
-
   
-
   
(631
)
  
-
   
-
   
(631
)
Exercise of stock options
-
   
-
   
(341
)
  
-
   
1,225
    
-
   
884
  
Tax benefit from exercise of
 
    
 
    
 
    
 
    
 
    
 
    
 
  
non-qualified stock options
-
   
-
   
60
    
-
   
-
   
-
   
60
  
Common stock repurchased
-
   
-
   
-
   
-
   
(210
)
  
-
   
(210
)
Balances at
 
    
 
    
 
    
 
    
 
    
 
    
 
  
March 31, 2004
5,990,138
  
$
2,995
  
$
41,861
  
$
29,236
  
$
(22,573
)
$
2,905
  
$
54,424
  
See accompanying notes to consolidated financial  statements.
  
 
    
 
    
 
    
 
    
 
    
 
  

 

 
  5  
 
 
NewMil Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  
Three months ended
March 31,
(unaudited, in thousands)
  
2004
2003
Operating Activities                            
    
 
    
 
  
Net income
  
$
2,023
  
$
1,827
  
Adjustments to reconcile net income to
    
 
    
 
  
net cash provided by operating activities:
    
 
    
 
  
Provision for loan losses
    
-
   
-
 
Provision for depreciation and amortization
    
207
   
225
 
Amortization of intangible assets
    
49
    
61
  
Amortization of issuance cost on long term debt
   
15
    
1
 
Amortization and accretion of securities
   
 
    
 
  
premiums and (discounts), net
    
81
    
114
  
Gains on sales of mortgage loans, net
    
(40
)
  
(72
)
Mortgage loans originated for sale
    
(2,181
)
  
(4,335
)
Proceeds from sales of mortgage loans
    
2,221
    
4,407
  
Tax benefit from exercise of non-qualified stock options
    
60
    
19
  
Deferred income tax provision
    
(68
)
  
(75
)
Increase in BOLI cash surrender value
    
(98
)
  
(94
)
Decrease in accrued interest income
    
332
    
36
  
Increase in other liabilities
    
546
    
623
  
Increase in other assets, net
    
(103
)
  
(111
)
Net cash provided by operating activities
    
3,044
    
2,626
  
Investing Activities
    
 
    
 
  
Purchases of securities available-for-sale
    
(5,032
)
  
(10,011
)
Purchases of mortgage backed securities available-for-sale
    
(20,175
)
  
5,057
)
Proceeds from maturities and principal repayments of securities
    
19,494
    
256
  
Principal collected on mortgage-backed securities
    
5,635
    
14,666
  
Loan advances, net
    
(2,650
)
  
(42,329
)
Purchases of Bank premises and equipment, net
    
(144
)
  
(497
)
Net cash (used) provided by investing activities
    
(2,872
)
  
42,972
  
Financing Activities
    
 
    
 
  
Net increase in deposits
    
673
    
4,675
  
Net increase in repurchase agreements
    
1,749
    
3
  
FHLB advances, net
    
5,299
    
7,963
  
Issuance of long term debt
    
-
    
9,700
  
Common Stock repurchased
    
(210
)
  
(357
)
Proceeds from Common Stock reissued
    
-
    
27
  
Cash dividends paid
    
(631
)
  
(635
)
Proceeds from exercise of stock options
    
884
    
58
  
Net cash provided by financing activities
    
7,764
    
21,434
  
Increase (decrease) in cash and cash equivalents
    
7,936
    
(18,912
)
Cash and federal funds sold, beginning of period
    
22,524
    
84,790
  
Cash and federal funds sold, end of period
  
$
30,460
  
$
65,878
  
Cash paid during period
    
 
    
 
  
Interest to depositors
  
$
1,633
  
$
2,236
  
Interest on borrowings
    
67
    
513
  
Income taxes paid
    
-
    
-
  
 
    
 
    
 
  
See accompanying notes to consolidated financial statements
    
 
    
 
  

.
 
  6  
 
 
 
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"). NewMil does not consolidate its subsidiary, NewMil Statutory Trust I, as described in Note 9. Certain prior period amounts in the statement of income and balance sheets have been reclassified to conform with the current financial presentation. In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of NewMil and the statements of income and shareholder's equity and cash flows for the interim periods presented.
 
The financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.
 
Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
 
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, 2003.
The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, which provide information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.
 
Impact of New Accounting Pronouncements
 
In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments.” This staff accounting bulletin deals with loan commitments accounted for as derivative instruments and requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. NewMil periodically enters into such commitments with customers in connection with residential mortgage loan applications. At March 31, 2004 there were no loans held for sale.

In March 2004, the Financial Accounting Standards Board (“FASB”) issued an exposure draft, “Share-Based Payment: an amendment of FASB No. 123 and 95.” This proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. This proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require instead that such transactions be accounted for using a fair-value-based method. A final statement is expected to be issued during the fourth quarter of 2004 and will be effective as of January 1, 2005. Management does not expect the adoption of this exposure draft to be materially different from the pro-forma impact disclosed under SFAS No. 123.

In December 2003, the FASB revised SFAS No. 132, “Employer Disclosures about Pensions and Other Post-retirement Benefits”. This statement retains the disclosures required by the original SFAS No. 132 and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension and post-retirement plans. In addition, this statement requires interim period disclosure of the components of net periodic benefit cost and contributions if significantly different from previously reported amounts. NewMil adopted the interim disclosure provisions of this statement as of March 31, 2004 (see Note 11).

In December 2003, a bill was signed into law that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor post-retirement benefit plans that provide prescription drug coverage. FASB Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” permits deferring the recognition of the new Medicare provisions' impact due to lack of specific authoritative guidance on accounting for the federal subsidy. NewMil has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is issued. Accordingly, the post-retirement benefit obligations and net periodic costs reported in the accompanying financial statements do not reflect the impact of this legislation. The accounting guidance, when issued, could require changes to previously reported financial information. NewMil anticipates its benefit costs after 2006 will be somewhat lower as a result of the new Medicare provisions, however, the adoption of this standard is not expected to have a material impact on results of operations, financial position, or liquidity of NewMil.
 
 
  7   
 
 
 
NOTE 2 - SECURITIES
 
Securities classified as available-for-sale (carried at fair value) were as follows:

 
  
 
Gross
Gross
 
 
  
Estimated
unrealized
unrealized
Amortized
(in thousands)
  
fair value
gains
losses
cost
March 31, 2004
    
 
    
 
    
 
    
 
  
U.S. Government Agency notes
    
 
    
 
    
 
    
 
  
Within 1 year
  
$
30,866
  
$
752
  
$
-
 
$
30,114
  
After 1 but within 5 years
    
25,329
    
362
    
-
   
24,967
  
Corporate Bonds
    
 
    
 
    
 
    
 
  
Within 1 year
    
21,163
    
483
    
-
   
20,680
  
After 1 but within 5 years
    
8,525
    
521
    
-
   
8,004
  
Mortgage backed securities
    
87,401
    
2,138
    
(76
)
  
85,339
  
Collateralized mortgage obligations
    
7,890
    
237
    
(5
)
  
7,658
  
Total debt securities
    
181,174
    
4,493
    
(81
)
  
176,762
  
FHLB capital stock and other
    
4,099
    
1
    
-
   
4,098
  
Total securities available-for-sale
  
$
185,273
  
$
4,494
  
$
(81
)
$
180,860
  
 
    
 
    
 
    
 
    
 
  

 
 
  
 
Gross
Gross
 
 
  
Estimated
unrealized
unrealized
Amortized
(in thousands)
  
fair value
gains
losses
cost
December 31, 2003
    
 
    
 
    
 
    
 
  
U.S. Government Agency notes
    
 
    
 
    
 
    
 
  
Within 1 year
  
$
20,431
  
$
421 $ -
    
 
  
$
20,010
  
After 1 but within 5 years
    
40,928
    
798
    
-
   
40,130
  
Corporate Bonds
    
 
    
 
    
 
    
 
  
Within 1 year
    
25,321
    
548 -
    
 
    
24,773
  
After 1 but within 5 years
    
11,789
    
787
    
-
   
11,002
  
Mortgage backed securities
    
72,117
    
1,905
    
(183
)
  
70,395
  
Collateralized mortgage obligations
    
9,871
    
151
    
-
   
9,720
  
Total debt securities
    
180,457
    
4,610
    
(183
)
  
176,030
  
FHLB capital stock and other
    
4,056
    
1
    
-
   
4,055
  
Total securities available-for-sale
  
$
184,513
  
$
4,611
  
$
(183
)
$
180,085
  
 
    
 
    
 
    
 
    
 
  
 
 
 
  8   
 
 

Securities classified as held-to-maturity (carried at amortized cost) were as follows:

 
  
 
Gross
Gross
 
 
  
Amortized
unrealized
unrealized
Estimated
(in thousands)
  
cost(a)
gains
losses
fair value
March 31, 2004
    
 
    
 
    
 
    
 
  
Municipal bonds
    
 
    
 
    
 
    
 
  
After 1 but within 5 years
 
$
500
  
$
5
  
$
-
 
$
505
  
After 5 but within 10 years
   
4,059
    
150
    
-
   
4,209
  
After 10 years
    
5,544
    
101
    
-
   
5,645
  
Mortgage backed securities
    
3,190
    
230
    
-
   
3,420
  
Collateralized mortgage obligations
    
521
    
15
    
-
   
536
  
Total securities held-to-maturity
  
$
13,814
  
$
501
  
$
-
 
$
14,315
  
 
    
 
    
 
    
 
    
 
  
           
Gross 
    
Gross 
        
 
    
Amortized
    
unrealized
    
unrealized
    
Estimated
  
     
cost(a) 
    
gains 
    
losses 
    
fair value 
  
(in thousands)
    
 
    
 
    
 
    
 
  
December 31, 2003
    
 
    
 
    
 
    
 
  
Municipal bonds
    
 
    
 
    
 
    
 
  
After 1 but within 5 years
 
$
500
  
$
5
  
$
-
 
$
505
  
After 5 but within 10 years
    
3,856
    
124
    
-
   
3,980
  
After 10 years
    
5,955
    
99
    
-
   
6,054
  
Mortgage backed securities
    
3,612
    
251
    
-
   
3,863
  
Collateralized mortgage obligations
    
665
    
15
    
-
   
680
  
Total securities held-to-maturity
  
$
14,588
  
$
494
  
$
-
 
$
15,082
  
 
(a) Securities transferred from available-for-sale are carried at estimated fair value as of the transfer date and adjusted for subsequent amortization.

At March 31, 2004 securities with a carrying value and market value of $5.5 million and $5.7 million, respectively, were pledged as collateral against public funds and securities with a carrying value and market value of $17.3 million and $17.3 million, respectively, were pledged as collateral against repurchase agreements. Also, securities with a carrying value and market value of $17.3 million and $17.5 million, respectively, were pledged as collateral for Treasury, tax and loan payments as well as possible Federal Reserve discount window borrowings.


 
  9  
 

NOTE 3 - LOANS
 
The composition of the loan portfolio is as follows:

 
  
March 31,
December 31,
(in thousands)
  
        2004
   2003
Real estate mortgages
    
 
    
 
  
1-to-4 family residential
  
$
278,035
  
$
282,766
  
5-or-more family residential
    
7,947
    
8,230
  
Commercial
   
114,092
    
112,673
  
Land & land development
    
5,605
    
2,890
  
Home equity credit
    
31,193
    
30,006
  
Commercial & industrial
    
18,028
    
15,663
  
Installment & other
    
2,236
    
2,213
  
Total loans, gross
    
457,136
    
454,441
  
Deferred loan origination fees, cost and purchase premium, net
    
343
    
408
  
Allowance for loan losses
    
(5,178
)
  
(5,198
)
Total loans, net
  
$
452,301
  
$
449,651
  
 
Impaired loans
              
 
    
March 31, 
    
December 31, 
  
(in thousands)
    
2004
    
2003
  
With no valuation allowance
  
$
545
  
$
507
  
With valuation allowance
    
184
    
198
  
Total impaired loans
  
$
729
  
$
705
  
Valuation allowance
  
$
184
  
$
198
  

NewMil's loans consist primarily of residential and commercial real estate loans located principally in western Connecticut, NewMil's service area. NewMil offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, and a variety of consumer loans, including home equity lines of credit, and installment and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent in large part upon the status of the regional economy and regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the NewMil's loan portfolio and the recovery of a substanti al portion of OREO is susceptible to changes in market conditions.
 
 
 
   10  
 
 
 
Changes in the allowance for loan losses during the three month periods ended March 31, are as follows:

 
  
March 31,
(in thousands)
  
2004
2003
Balance, beginning of period
  
$
5,198
  
$
5,250
  
Provision for losses
    
-
   
-
 
Charge-offs
    
(29
)
  
(4
)
Recoveries
    
9
    
3
  
Balance, end of period
  
$
5,178
  
$
5,249
  

 
NOTE 4 - NON-PERFORMING ASSETS
 
The components of non-performing assets are as follows:


 
  
March 31,
December 31,
(in thousands)
  
2004
2003
Non-accrual loans
  
$
479
  
$
451
  
Accruing loans past due 90 days or more
    
1,039
    
811
  
Accruing troubled debt restructured loans
    
-
   
-
  
Total non-performing loans
    
1,518
    
1,262
  
Real estate acquired in settlement of loans
    
-
    
-
 
Total non-performing assets
  
$
1,518
  
$
1,262
  
 

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
 
  
March 31,
(in thousands)
 
2004
2003
Basic
    
4,197
    
4,230
  
Effect of dilutive stock options
    
137
    
220
  
Diluted
    
4,334
    
4,450
  
 
 
 
   11  
 
 
 
NOTE 6 - COMPREHENSIVE INCOME
 
The components of comprehensive income are as follows:

 
  
Three months ended
 
  
March 31,
(in thousands)
  
2004
2003
Comprehensive income
    
 
    
 
  
Net income
  
$
2,023
  
$
1,827
  
Net unrealized losses on securities during period
    
(8
)
  
(172
)
Comprehensive income
  
$
2,015
  
$
1,655
  
 
 
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 March 31, 2004
    
 
    
 
    
 
  
Net unrealized losses on securities
   
 
    
 
    
 
  
available-for-sale arising during the period
  
$
(14
)
$
4
  
$
(10
)
Accretion of unrealized loss on securities transferred from
    
 
    
 
    
 
  
available-for-sale to held-to-maturity
    
3
    
(1
)
  
2
  
Net unrealized losses on
    
 
    
 
    
 
  
securities during period
  
$
(11
)
$
3
  
$
(8
)
(in thousands)
    
Before

 

 
Tax

 

 
Net of
  
 
    
tax 
    
(expense)
  
tax
  
 
    
amount 
    
benefit
    
amount
  
Three months ended March 31, 2003
    
 
    
 
    
 
  
Net unrealized losses on securities
   
 
    
 
    
 
  
available-for-sale arising during the period
  
$
(264
)
$
90
  
$
(174
)
Accretion of unrealized loss on securities transferred from
    
 
    
 
    
 
  
available-for-sale to held-to-maturity
    
4
    
(2
)
  
2
  
Net unrealized losses on
    
 
    
 
    
 
  
securities during period
  
$
(260
)
$
88
  
$
(172
)
 
 
 
   12  
 
 
 
NOTE 7 – INCOME TAXES
 
The components of the income tax provision are as follows:

 
  
Three months ended
 
  
March 31,
(in thousands)
  
2004
2003
Current provision
    
 
    
 
  
Federal
    
1,007
  
$
902
  
State
    
-
    
-
  
Total
    
1,007
    
902
  
Deferred benefit
   
 
    
 
  
Federal
    
(68
)
  
(75
)
State
    
-
    
-
  
Total
    
(68
)
  
(75
)
Income tax provision
  
$
939
  
$
827
  
 
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 three month periods ended March 31, 2004 and 2003 are 31.7% and 31.2%, respectively, and reflect the full impact of the Connecticut legislation. NewMil does not expect to pay state income tax in the foreseeable future unless there is a change in the State of Connecticut corporate tax law.
 
NOTE 8 - SHAREHOLDERS' EQUITY
 
Capital Requirements
 
NewMil and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The Bank was classified at its most recent notification as "well capitalized". NewMil and the Bank's regulatory capital ratios at March 31, 2004 are as follows:


 
  
      NewMil
Bank
Leverage ratio
    
  7.61
%
  
  7.11
%
Tier I risk-based ratio
    
12.55

 

 
11.72
  
Total risk-based ratio
    
13.78

 

 
12.95
  

Restrictions on Subsidiary's Dividends and Payments
 
NewMil's ability to pay dividends is dependent on the Bank's ability to pay dividends to NewMil. There are certain restrictions on the payment of dividends and other payments by the Bank to NewMil. Under Connecticut law the Bank is prohibited from declaring a cash dividend on its common stock except from its net earnings for the current year and retained net profits for the preceding two years. In some instances, further restrictions on dividends may be imposed on NewMil by the Federal Reserve Bank.
 
NOTE 9 – ISSUANCE OF TRUST PREFERRED SECURITIES
 
During March 2003, NewMil formed a subsidiary, NewMil Statutory Trust I, a trust formed under the laws of the state of Delaware, and issued $10 million of fixed/adjustable rate Trust Preferred Securities through a pooled trust-preferred securities offering. FTN Financial Capital Markets and Keefe Bruyette and Woods, Inc. acted as placement agents in the pooled offering. NewMil owns all of the common securities of the Trust and the Trust has no independent assets or operations, and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of junior subordinated debentures issued by NewMil. The junior subordinated debentures, which are the sole assets of the trust, are unsecured obligations of NewMil and generally are subordinate and junior in right of payment to all present and future senior and subordina ted indebtedness and certain other financial obligations of NewMil. NewMil does not consolidate the trust, pursuant to FIN 46R, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51”.
 
The Trust Preferred Securities have an original term of 30 years and bear a fixed coupon of 6.40% for the first five years, and thereafter, a floating-rate coupon that will reset quarterly at three-month LIBOR plus 3.15%. Interest on the securities is payable quarterly. NewMil may redeem the trust-preferred securities, in whole or in part, on or after March 26, 2008, or earlier under certain conditions. The subordinated debentures bear the same terms and conditions as the trust preferred securities. NewMil paid $300,000 in connection with the issuance of the Trust Preferred Securities and this amount is being amortized over the estimated life of the underlying securities. The net proceeds qualify as Tier I capital for regulatory purposes.
 
 
 
   13  
 
 
 
NOTE 10 - STOCK BASED COMPENSATION
 
NewMil has stock-option plans, which are described more fully in Note 13 (Stock Options) to Financial Statements in the Company's 2003 Form 10-K. As permitted by Financial Accounting Standards Board (FASB) Statement No. 123 (FAS 123), Accounting for Stock-Based Compensation, the Company uses the intrinsic value method of Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, to account for its stock-based employee compensation plans. As required by FASB Statement No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure, an amendment to FASB Statement 123, pro forma net income and earnings per common share information is provided, as if the Company accounted for its employee stock option plans under the fair value method of FAS 123.
The fair value of each option grant was estimated on the date of grant using the Roll-Geske Model for pricing American call options with dividends.

 
  
Three months ended
 
  
March 31,
(net income in thousands)
  
2004
2003
As reported
    
 
    
 
  
Net income
  
$
2,023
  
$
1,827
  
Earnings per share, diluted
    
0.47
    
0.41
  
Earnings per share, basic
    
0.48
    
0.43
  
Pro forma
    
 
    
 
  
Net income
    
1,948
    
1,797
  
Earnings per share, diluted
    
0.45
    
0.40
  
Earnings per share, basic
    
0.46
    
0.42
  
Stock-based employee compensation
    
 
    
 
  
cost, net of related taxes, included
    
 
    
 
  
in net income
    
 
    
 
  
As reported
    
-
   
-
 
Pro forma
    
75
    
30
  

 
NOTE 11 – RETIREMENT PLANS
 
NewMil has retirement plans, which are described more fully in Note 8 (Retirement Plans) to Financial Statements in the Company's 2003 Form 10-K. NewMil has a non-contributory defined benefit pension plan (the "Pension Plan") covering all eligible employees. NewMil also provides post-retirement health care and life insurance benefits (the “Other Benefits Plan”) for eligible current retirees and eligible employees. The following are components of net periodic (benefits) cost:
 
Three Months Ended
  
 
 
 
 
 
  
Pension Plan
Other Benefits Plan
(in thousands)
  
2004
2003
2004
2003
Components of net periodic cost:
    
 
    
 
    
 
    
 
  
Service cost
  
$
-
  
$
-
  
$
4
  
$
4
  
Interest cost
   
98
    
101
    
11
    
9
  
Expected return on plan assets
    
(120
)
  
(114
)
  
-
    
-
  
Amortization of prior service cost
    
-
    
3
    
-
    
-
  
Amortization of recognized net loss
    
3
    
10
    
-
    
-
  
Amortization of net transition obligation
    
-
    
-
    
4
    
4
  
Net periodic benefit (income) cost
  
$
(19
)
$
-
  
$
19
  
$
17
  

 
  14  
 
 
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, 2003.
 
BUSINESS
 
NewMil Bancorp, Inc. ("NewMil"), a Delaware corporation, is a bank holding company for NewMil Bank ("Bank"), a Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC") insured savings bank headquartered in New Milford, Connecticut. NewMil's principal business consists of the business of the Bank. The Bank is engaged in customary banking activities, including general deposit taking and lending activities to both retail and commercial markets, and conducts its business from nineteen full-service offices in Connecticut's Litchfield, Fairfield and New Haven Counties and one special needs office in New Haven County. NewMil and the Bank were formed in 1987 and 1858, respectively.
 
Cautionary Statement
 
This Quarterly Report on Form 10-Q contains and incorporates by reference statements relating to future results of NewMil 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 the 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 NewMil’s markets, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, technological changes, change s 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 NewMil’s filings with the Securities and Exchange Commission.
 
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 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.
 
 
  15  
 
 
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 Lo an Losses” section of Management’s Discussion and Analysis.
 
RESULTS OF OPERATIONS
 
For the three month periods ended March 31, 2004 and 2003
 
Overview
 
NewMil earned net income of $2.0 million, or 47 cents per share (diluted), for the quarter ended March 31, 2004 as compared with $1.8 million, or 41 cents per share (diluted), for the quarter ended March 31, 2003. The increase was achieved through a variety of factors, the most important of which was an increase in net interest income and non-interest income offset by increased non-interest expense. Net interest income increased $0.5 million, or 9.2% in 2004 as a result of a $44.1 million increase in average earning assets and a 7 basis point increase in the net interest margin to 4.01% from 3.94% in 2003. The increase in earning assets is due to internal growth. Non-interest expense increased $0.3 mi llion, or 8.1% for the first quarter of 2004, primarily due to higher compensation, marketing and professional services expenses. Credit quality remains strong as evidenced by nonperforming assets at 21 basis points of total assets at March 31, 2004. The return on average shareholders equity was 15.2% for the quarter.
 
Analysis of net interest and dividend income
 
Net interest and dividend income increased $549,000, or 9.2%, for the quarter ended March 31, 2004 as compared with the prior year period. The increase in net interest income resulted primarily from the growth in average earning assets and by an increase in the net interest margin. Average earning assets increased $44.1 million, or 7.3%, over the prior year period as a result of the change in the mix of assets, deposit growth and additional borrowings. Average total borrowings and deposits increased $34.3 million and $6.4 million, respectively, over the prior year period. The net interest margin increased 7 basis points to 4.01% from 3.94% over the prior period. The increase in the net interest margin was due to the decline in the cost of interest-bearing deposits, and the impact on asset/liability re-pricing during 2004 as compared with 2003, and to changes in balance sheet mix resulting from asset growth, offset in part by the declines in yields on earning assets. The following table sets forth the components of NewMil's net interest income and yields on average interest-earning assets and interest-bearing funds.
 
 
  16  
 

Three months ended March 31,
 
  
Average
Income/
Average
 
  
Balance
Expense
Yield/Rate
(dollars in thousands)
  
2004
2003
2004
2003
2004
2003
Loans (a)
  
$
454,333
  
$
374,903
  
$
6,441
  
$
5,977
    
5.67
%
  
6.38
%
Mortgage backed securities (b)
    
79,315
    
78,201
    
891
    
1,223
    
4.49
    
6.26
 
Other securities (b)(c)
    
115,570
    
152,016
    
1,499
    
1,539
    
5.19
    
4.05
  
            
Total earning assets
    
649,218
    
605,120
    
    8,831
      8,739
    
5.44
    
5.78
 
Other assets
   
51,281
    
54,747
    
 
    
 
    
 
    
 
  
                        
Total assets
  
$
700,499
  
$
659,867
    
 
    
 
    
 
    
 
  
                        
NOW accounts
  
$
74,782
  
$
68,155
    
46
    
50
    
0.25
    
0.29
  
Money market accounts
    
156,344
    
145,997
    
392
    
506
    
1.00
    
1.39
  
Savings & other
    
83,331
    
79,447
    
138
    
209
   
0.66
    
1.05
  
Certificates of deposit
   
190,187
    
204,700
    
1,047
    
1,466
    
2.20
    
2.87
  
            
Total interest-bearing deposits
    
504,644
    
498,299
    
1,623
    
2,231
   
1.29
    
1.79
  
Borrowings
    
90,871
    
56,616
    
698
    
547
    
3.07
    
3.87
  
            
Total interest-bearing funds
    
595,515
    
554,915
    
    2,321
    
    2,778
    
1.56
    
2.00
  
Demand deposits
    
47,100
    
42,582
    
 
    
 
    
 
    
 
  
Other liabilities
    
4,511
    
8,005
    
 
    
 
    
 
    
 
  
Shareholders' equity
    
53,373
    
54,365
    
 
    
 
    
 
    
 
  
                        
Total liabilities & shareholders' equity
  
$
700,499
  
$
659,867
    
 
    
 
    
 
    
 
  
                        
Net interest income
    
 
    
 
  
$
       6,510

 
$
         5,961
    
 
    
 
  
Spread on interest-bearing funds
    
 
    
 
    
 
    
 
    
3.88
    
3.78
  
Net interest margin (d)
    
 
    
 
    
 
    
 
    
4.01
    
3.94
  
 
    
 
    
 
    
 
    
 
    
 
    
 
  
(a) Includes non-accrual loans.
(b) Average balances of investments are based on historical cost.
(c) Includes interest-bearing deposits in other banks and federal funds sold.
(d) Net interest income divided by average interest-earning assets.
 
 
 
   17  
 
 
 
The following table sets forth the changes in interest due to volume and rate.
 
Three months ended March 31,
  
2004 versus 2003
(in thousands)
  
Change in interest due to
 
  
Volume
Rate
Net
Interest-earning assets:
    
 
    
 
    
 
  
Loans
  
$
1,174
  
$
(710
)
$
464
  
Mortgage backed securities
    
17
    
(349
)
  
(332
)
Other securities
    
(134
)
  
94
    
(40
)
Total
    
1,057
    
(965
)
  
92
  
Interest-bearing liabilities:
    
 
    
 
    
 
  
Deposits
    
(50
)
  
(558
)
  
(608
)
Borrowings
    
280
    
(129
)
  
151
  
 
Total
    
230
    
(687
)
  
(457
)
 
Net change to interest income
  
$
827
  
$
(278
)
$
549
  
  

 
  18  
 

Interest income
 
Total interest and dividend income increased $92,000 or 1.1%, for the quarter ended March 31, 2004 as compared with the same period a year ago. Loan income increased $464,000, or 7.8%, primarily as a result of higher volumes offset somewhat by a lower yield. Average loans increased $79.4 million, or 21.2%, due to increased loan originations and loan purchases during the period, offset in part by loan repayments. The decrease in the average loan yield, down 71 basis points, was caused by lower interest rates in 2004 and their effect on loan re-pricing and loan re-financing activity, and to a change in portfolio mix resulting from growth in residential mortgage loans. During 2003 the Bank increased its originations and purchases of residential mortgage loans to offset the effect of increased repayments in its residential mortgage loan and mortgage backed securitie s portfolios.
 
Investment income decreased $372,000 or 13.5%, as a result of lower average volume offset partially by somewhat higher yields as a result in the change in mix of the portfolio over the prior year period. Average securities decreased $35.3 million, or 15.3%.
 
Interest expense
 
Interest expense for the quarter ended March 31, 2004 decreased $457,000, or 16.5%, as compared with the prior year period as a result of a significant decline in the average cost of funds, offset in part by deposit growth and higher borrowings. Deposit expense decreased $608,000, or 27.3%, as a result of lower deposit rates, offset somewhat by deposit growth, and changes in deposit mix. Average interest-bearing deposits increased $6.3 million, or 1.3%. The average cost of interest-bearing deposits decreased 50 basis points to 1.29%. Interest expense on borrowings increased $151,000, or 27.6%, primarily due to a result of higher average borrowings, up $34.3 million, offset somewhat by a decline in borrowing cost due to a change in mix, down 80 basis points to 3.07%.
 
Provision and Allowance for loan losses
 
NewMil made no provision for loan losses during the quarters ending March 31, 2004 and 2003. During the past several years the Bank has experienced an improvement in loan quality and a decline in loan losses. These factors, offset by loan portfolio growth, have enabled the Bank to lower its allowance for loan losses as a percentage of total loans, and resulted in no provision for loan losses for the period. The following table sets forth key ratios for the periods presented.
 
 
  
March 31,
December 31,
March 31,
(in thousands)
  
2004
2003
2003
 
Ratio of allowance for loan losses:
    
 
    
 
    
 
  
to non-performing loans
    
341.17
%
  
411.9
%
  
365.02
%
to total gross loans
    
1.1
    
1.1
    
1.3
 
Ratio of non-performing loans
   
 
    
 
    
 
  
to total loans
    
0.33
    
0.28
    
0.36
  
Ratio of past-due loans
   
 
    
 
    
 
  
to total loans
    
0.74
    
0.76
    
0.77
  
 
    
 
    
 
    
 
  

As of March 31, 2004 the ratio of the allowance for loan losses as a percentage to total gross loans remained unchanged from December 31, 2003 and was down somewhat from 1.3% for March 31, 2003. The decline, as compared with March 31, 2003, was primarily due to the growth in residential one-to-four family residential mortgages, which exhibit lower reserve requirements. The ratio of non-performing loans to total loans continued to remain historically low, at 0.33% as of March 31, 2004, compared with 0.28% as of December 31, 2003 and 0.36% as of March 31, 2003. The ratio of past due loans (including non-performing loans) to total loans also remains low at 0.74% as of March 31, 2004 compared with 0.76% as of December 31, 2003 and 0.77% as of March 31, 2003. During the three mon th period ended March 31, 2004, non-performing loans increased $256,000, or 20.3%, while gross loans increased by $2.6 million, or 0.6%. For additional discussion on loan quality see "Non-Performing Assets".
 
 
  19  
 

NewMil determines its allowance and provisions for loan losses based upon a detailed evaluation of the loan portfolio through a process which considers numerous factors, including estimated credit losses based upon internal and external portfolio reviews, delinquency levels and trends, estimates of the current value of underlying collateral, concentrations, portfolio volume and mix, changes in lending policy, current economic conditions and historical loan loss experience over a 10-to-15 year economic cycle, and examinations performed by regulatory authorities. Determining the level of the allowance at any given period is difficult, particularly during deteriorating or uncertain economic periods, and therefore management takes a relatively long view of loan loss asset quality measures. Management must make estimates using assumptions and information that are oft en 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 March 31, 2004.
 
Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise and require increased provisions.
 
The allowance for loan losses is reviewed and approved by the Bank's Board of Directors on a quarterly basis. The allowance for loan losses is computed by segregating the portfolio into various risk rating and product categories. Some loans have been further segregated and carry specific reserve amounts. All other loans that do not have specific reserves assigned are reserved based on a loss percentage assigned to the outstanding balance. The percentage applied to the outstanding balance varies depending on the loan’s risk rating and product category, as well as present and prospective economic conditions, which have or may adversely affect the financial capacity and/or collateral values supporting the loan.
 
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies could require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. The Bank was examined by the FDIC in July 2003 and by the State of Connecticut’s Department of Banking in June 2002. No additions to the allowance were requested as a result of these examinations.
 
Non-interest income
 
The following table details the principal categories of non-interest income.
 
 
  
March 31,
 
 
(in thousands)
  
2004
2003
Change
Service charges on deposit accounts
    $
684
  
$
 547    $
137
    
25.0
  %
Gains on sales of mortgage loans, net
    
40
    
72
    
(32
)
  
(44.4
)
Loan servicing
    
10
    
19
    
(9
)
  
(47.4
)
Increase in cash surrender value of bank-owned life insurance
    
98
    
94
    
4
    
4.3
  
Other
   
85
    
93
    
(8
)
  
(8.6
)
  
Total non-interest income
  
$
917
  
$
825
  
$
92
    
11.2
%
    

The increase in non-interest income for the quarter ended March 31, 2004 as compared to the prior year period resulted primarily from an increase in retail banking fees earned. The increase in the cash surrender value of bank-owned life insurance, when compared to the prior year period, was due to the higher level of the underlying insurance assets over the 2003 period. The decline in gains on sales of mortgage loans during the 2004 period was primarily due to lower volume originated. The Bank originated and sold $2.2 million in residential loans versus $4.3 million during the 2003 period. Secondary market loan sales are generally pre-arranged on a loan-by-loan basis prior to origination and loans are sold with servicing rights released. Loan servicing revenue decreased primarily due to the decline in loan outstandings related to payoffs and refinancing activity in the servicing loan portfolio since the 2003 period. Other non-interest income declined due to lower commissions earned during the period.
 
 
  20  
 

Operating expenses
 
The following table details the principal categories of operating expenses.
 
 
  
March 31,
 
(in thousands)
  
2004
2003
Change
Salaries and benefits
  
$
 2,466  
$
 2,345  
$
 121     5.2
%
Occupancy
    
402
  
399
    
3
    
0.8
  
Equipment
    
328
    
318
    
10
    
3.1
  
Professional, collection and OREO
    
297
    
173
    
124
    
71.7
  
Postage and telecommunications
    
131
    
133
    
(2
)
  
(1.5
)
Printing and office supplies
    
101
    
98
    
3
    
3.1
  
Marketing
    
121
    
45
    
76
    
168.9
  
Service bureau
    
94
    
107
    
(13
)
  
(12.1
)
Amortization of intangibles
    
49
    
61
    
(12
)
  
(19.7
)
Other
   
476
    
453
    
23
    
5.1
  
    
Total operating expenses
  
$
4,465
  
$
4,132
  
$
333
    
8.1
%
    
 
The increase in operating expenses was primarily due to an increase in compensation expense for the quarter ended March 31, 2004 as compared with the prior year period.  The increase in compensation was due primarily to higher bonus accrual costs, higher salaries, as well as decrease in deferred loan origination compensation expense, due to decrease loan origination activity.  The increase in equipment expense was primarily due to higher equipment and computer maintenance contracts expenses offset partially by lower depreciation expense on computer hardware and software. The increase in professional, collection and OREO expenses was primarily due to additional consulting and professional services in the areas of financial administration, deposit operations and information technology, offset somewhat by lower loan collection costs during the 2004 period. M arketing expense during the period increased primarily due to various advertising campaigns introducing new checking and loan services to customers. Other expenses increased in various categories primarily related to ATM card activity, meals and travel expenditures and expenses related to credit report requests. Service bureau expenditures decreased primarily due to lower costs related to check item research. Also providing a benefit during the 2004 is the reduction in the amortization of intangibles expense when compared to the prior period.
 
Income taxes
 
Net income for the quarter included an income tax provision of $939,000 representing a 31.7% effective rate, as compared with a provision of $827,000 a year ago, representing a 31.2% effective rate. The effective tax rate was less than the 34% federal statutory rate due to tax-exempt income and other related matters.
 
FINANCIAL CONDITION
 
Overview
 
For the three-month period ended March 31, 2004 total assets grew $10.3 million, or 1.5%, to $714.4 million. The increase resulted from a $14.1 million increase in federal funds sold and $2.7 million increase in net loans, offset by a $6.1 million decline in cash and due from banks. Securities were unchanged. On the liability side deposits, retail repurchase agreements and Federal Home Loan Bank advances increased by $0.7 million, $1.7 million, and $5.3 million, respectively. Non-performing assets continue to remain very low, measured as a percentage of total assets. For the quarter non-performing assets increased $0.3 million to $1.5 million, or 0.21% of total assets as of March 31, 2004.
 
Securities & Overnight Fed Funds Sold
 
For the three month period ended March 31, 2004 securities remained substantially unchanged at $199.1 million. Securities purchases of $25.2 million during the period were offset by repayments of mortgage-backed securities and other securities of $25.1 million and a decrease in unrealized securities holding gains. Securities purchases for the period included $20.2 million of fixed and adjustable rate mortgage-backed securities and $5.0 million of fixed rate Agency notes.
 
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 March 31, 2004, the portfolio had a projected weighted average duration and life of 2.8 years and 3.3 years, respectively, based on median projected prepayment speeds at current interest rates. At March 31, 2004, securities totaling $185.3 million, or 93.1%, were classified as available-for-sale and securities totaling $13.8 million, or 6.9%, were classified as held-to-maturity.
 
 
  21  
 
 
Loans
 
During the three month period ended March 31, 2004 net loans increased $2.7 million, or 0.6%. Loan originations, advances and loan purchases totaled $29.9 million, while loan repayments were $27.3 million. The ratio of loans to assets decreased slightly during the quarter to 63.3% at March 31, 2004, compared with 63.9% at December 31, 2003, though up from 56.9% a year ago at March 31, 2003. Towards the end of 2002 and through the second quarter of 2003 the Bank increased its originations and purchases of residential mortgage loans to offset the effect of increased repayments in its residential mortgage loan and mortgage backed securities portfolios. In addition, NewMil originated and sold in the secondary market $2.2 million of residential mortgage loans during the three month period ending March 31, 2004. Major loan classifications are as follows:
 
 
  
March 31,
December 31,
(in thousands)
  
2004
2003
  
Real Estate Mortgages:
    
 
    
 
  
Residential
    
 
    
 
  
1-to-4 family
  
$
278,035
  
$
282,766
  
5-or-more family
    
7,947
    
8,230
  
Commercial
    
114,092
    
112,673
  
Land & land development
    
5,605
    
2,890
  
Home equity credit
    
31,193
    
30,006
  
  
Total mortgage loans
    
436,872
    
436,565
  
Commercial and industrial
    
18,028
    
15,663
  
Installment and other
    
2,236
    
2,213
  
  
Total loans, gross
    
457,136
    
454,441
  
Deferred loan origination fees and purchase premium, net
    
343
    
408
  
Allowance for loan losses
    
(5,178
)
  
(5,198
)
  
Total loans, net
  
$
452,301
  
$
449,651
  
  

The Commercial Lending department specializes in lending to small and mid-size companies and professional practices and provides short-term and long-term financing, construction loans, commercial mortgages and property improvement loans. The department also works with several government-assisted lending programs. The Residential Mortgage Department, in addition to traditional portfolio lending, originates loans for sale to the secondary market on a service-released basis, which enables the Bank to offer a very comprehensive mortgage product line and earn gains from sales of such loans. The department also offers home equity loans and lines of credit and consumer installment loans.
 
 
  22  
 
 
Non-performing assets
 
The composition of non-performing assets is as follows:


 
  
March 31,
December 31,
(in thousands)
  
2004
2003
  
Non-accruing loans
  
$
479
  
$
451
  
Accruing loans past due
    
 
    
 
  
90 days or more
    
1,039
    
811
  
Accruing restructured loans
    
-
   
-
 
  
Total non-performing loans
    
1,518
    
1,262
  
OREO, net
    
-
   
-
 
  
Total non-performing assets
  
$
1,518
  
$
1,262
  
  
Percent of total assets
    
0.21
%
  
0.18
%

During the three month period ended March 31, 2004 non-performing assets increased $256,000 to $1.5 million. Non-performing assets continue to remain historically low at only 0.21% of total assets at March 31, 2004, compared with 0.18% at December 31, 2003. The low level of non-performing assets reflects NewMil's rigorous ongoing credit management process and prudent credit policy.
 
In addition to non-performing assets, at March 31, 2004 NewMil had $1.3 million 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 adequ ate.
 
NewMil pursues the resolution of all non-performing assets through restructurings, credit enhancements or collections. When collection procedures do not bring a loan into performing or restructured status, NewMil generally initiates action to foreclose the property or to acquire it by deed in lieu of foreclosure. NewMil actively markets all OREO property.
 
Deposits and Borrowings
 
During the period deposits and retail repurchase agreements grew $0.7 million and $1.7 million, respectively, to $558.8 million and $11.1 million, respectively, and Federal Home Loan Bank advances increased $5.3 million.
 
During March 2003, NewMil formed a subsidiary, NewMil Statutory Trust I, a trust formed under the laws of the state of Delaware, and issued $10 million of fixed/adjustable rate Trust Preferred Securities through a pooled trust-preferred securities offering. FTN Financial Capital Markets and Keefe Bruyette and Woods, Inc. acted as placement agents in the pooled offering. NewMil owns all of the common securities of the Trust and the Trust has no independent assets or operations, and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of junior subordinated debentures issued by NewMil. The junior subordinated debentures, which are the sole assets of the trust, are unsecured obligations of NewMil and generally are subordinate and junior in right of payment to all present and future senior and subordina ted indebtedness and certain other financial obligations of NewMil.
 
The Trust Preferred Securities have an original term of 30 years and bear a fixed coupon of 6.40% for the first five years, and thereafter, a floating-rate coupon that will reset quarterly at three-month LIBOR plus 3.15%. Interest on the securities is payable quarterly. NewMil may redeem the trust-preferred securities, in whole or in part, on or after March 26, 2008, or earlier under certain conditions. The subordinated debentures bear the same terms and conditions as the trust preferred securities. NewMil paid $300,000 in connection with the issuance of the Trust Preferred Securities and this amount is being amortized over the estimated life of the underlying securities. The net proceeds qualify as Tier I capital for regulatory purposes.

 
  23  
 
 
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 three-month period ended March 31, 2004 provided net cash of $3.0 million. Investing activities utilized net cash of $2.9 million, principally for securities purchases and net loan advances, offset in part by security repayments and maturities. Financing activities provided net cash of $7.8 million, principally, $2.4 million from an increase in deposits and repurchase agreements and $5.3 million from a net increase in FHLB advances, offset primarily by cash dividends paid and treasury stock purchases.
 
At March 31, 2004, 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 $292 million, to net deposits and short term unsecured liabilities, was 49.3%, well in excess of NewMil's minimum guideline of 15%.
 
At March 31, 2004, NewMil had outstanding commitments to fund new loan originations of $43.2 million, construction mortgage commitments of $13.0 million and unused lines of credit of $45.4 million. These commitments can 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 March 31, 2004 shareholders' equity increased $2.1 million to $54.4 million and book value per share increased $0.12 to $12.90. Increasing shareholders' equity were net income of $2.0 million, or $0.47 per share (diluted), stock option exercise proceeds of $0.9 million and a tax benefit from the exercise of non-qualified stock options of $60,000. Primarily reducing shareholders’ equity were treasury stock purchases of $0.2 million, dividend payments of $0.6 million and other comprehensive income of $8,000 (a net decrease in the unrealized holding gains on securities available-for-sale, net of taxes).
 
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 March 31, 2004 NewMil's Tier 1 Leverage Capital ratio was 7.61% and its Tier 1 and Total Risk-Based Capital ratios were 12.55% and 13.78%, respectively. At March 31, 2004 the Bank's Tier 1 Leverage Capital ratio was 7.11% and its Tier 1 and Total Risk-Based Capital ratios were 11.72% and 12.95%, 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, wr itten agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level.
 
During March 2003, NewMil raised $9.7 million from the issuance of $10 million of Trust Preferred Securities, net of issuance costs. NewMil expects to utilize the net proceeds from the offering for general corporate purposes, including providing capital to its subsidiary, NewMil Bank, and to repurchase currently issued and outstanding common stock. The net proceeds qualify as Tier I Core capital for regulatory purposes.
 
Dividends
 
NewMil's ability to pay dividends is dependent on the Bank's ability to pay dividends to NewMil. There are certain restrictions on the payment of dividends and other payments by the Bank to NewMil. Under Connecticut law the Bank is prohibited from declaring a cash dividend on its common stock except from its net earnings for the current calendar year and retained net profits for the preceding two years. In some instances, further restrictions on dividends may be imposed on NewMil by the Federal Reserve Bank.
 
NewMil believes that the payment of cash dividends to its shareholders is appropriate, provided that such payment considers NewMil's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of NewMil or the Bank. The continued payment of cash dividends by NewMil will be dependent on NewMil's future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of NewMil.
 
Impact of New Accounting Pronouncements
 
In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments.” This staff accounting bulletin deals with loan commitments accounted for as derivative instruments and requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. NewMil periodically enters into such commitments with customers in connection with residential mortgage loan applications. At March 31, 2004 there were no loans held for sale.

In March 2004, the Financial Accounting Standards Board (“FASB”) issued an exposure draft, “Share-Based Payment: an amendment of FASB No. 123 and 95.” This proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. This proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally would require instead that such transactions be accounted for using a fair-value-based method. A final statement is expected to be issued during the fourth quarter of 2004 and will be effective as of January 1, 2005. Management does not expect the adoption of this exposure draft to be materially different from the pro-forma impact disclosed under SFAS No. 123.

In December 2003, the FASB revised SFAS No. 132, “Employer Disclosures about Pensions and Other Post-retirement Benefits”. This statement retains the disclosures required by the original SFAS No. 132 and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension and post-retirement plans. In addition, this statement requires interim period disclosure of the components of net periodic benefit cost and contributions if significantly different from previously reported amounts. NewMil adopted the interim disclosure provisions of this statement as of March 31, 2004 (see Note 11).

In December 2003, a bill was signed into law that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor post-retirement benefit plans that provide prescription drug coverage. FASB Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” permits deferring the recognition of the new Medicare provisions' impact due to lack of specific authoritative guidance on accounting for the federal subsidy. NewMil has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is issued. Accordingly, the post-retirement benefit obligations and net periodic costs reported in the accompanying financial statements do not reflect the impact of this legislation. The accounting guidance, when issued, could require changes to previously reported financial information. NewMil anticipates its benefit costs after 2006 will be somewhat lower as a result of the new Medicare provisions, however, the adoption of this standard is not expected to have a material impact on results of operations, financial position, or liquidity of NewMil.
 
 
  24  
 

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 December 31, 2003. Fo r additional information, refer to “Asset/Liability Management and Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in NewMil's 2003 Annual Report.

Item 4.       Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
NewMil maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in NewMil’s reports filed with, or furnished to, the SEC, pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to NewMil’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  
 
Within 90 days prior to the date of this report, NewMil carried out an evaluation, under the supervision and with the participation of the NewMil’s management, including NewMil’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the NewMil’s disclosure controls and procedures. Based on the foregoing evaluation, NewMil’s Chief Executive Officer and Chief Financial Officer concluded that the NewMil’s disclosure controls and procedures were effective.

Changes in Internal Controls
 
There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date we carried out our evaluation.

 
  25  
 
 
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 2.       CHANGES IN SECURITIES USE OF PROCEEDS AND ISSUERS PURCHASES OF EQUITY SECURITIES
 
(a) –(d) None
(e)
 
 
  
Total # Shares
Average
 
  
Purchased
Price
  
January 2004
    
-
  
$
-
  
February 2004
    
2,000
    
28.25
  
March 2004
    
5,500
    
27.86
  
  
Total number of shares purchased during
    
 
    
 
  
period as part of a publicly announced repurchase program
    
7,500
  
$
27.96
  
  
 
Maximum remaining shares available to be purchased under the announced plan
    
126,616
        
  

On April 23, 2003, NewMil announced its intention to repurchase 203,690, or 5%, of its outstanding shares of common stock in the open market and unsolicited negotiated transactions, including block purchases. The purpose of NewMil’s repurchase plan is to offset the future dilution from shares issued upon the exercise of stock options under NewMil's stock option plans, and for general corporate purposes.
 
Item 3.       DEFAULTS UPON SENIOR SECURITIES
 
   None
 
 
  26  
 

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

The annual shareholder’s meeting was held on April 28, 2004. The following matters were considered and voted on, as certified by the election officer at the annual meeting:


 
Votes For
Votes Against
Votes Withheld
 
 
 
 
Director Election
 
 
 
Laurie G. Gonthier, for 3 year term
3,324,443
-
-
 
 
 
 
Director Election
 
 
 
Paul N. Jaber, for 3 year term
3,630,857
-
-
 
 
 
 
Director Election
 
 
 
Robert J. McCarthy, for 3 year term
3,580,667
-
-
 
 
 
 
Director Election
 
 
 
Suzanne L. Powers, for 3 year term
3,520,034
-
-
 
 
 
 
Amendments to the Corporation’s 1986
 
 
 
Stock Option and Incentive Plan
 
 
 
for Key Officers and Employees
2,083,479
419,720
29,237
 
 
 
 
Amendments to the Corporation’s 1992
 
 
 
Stock Option Plan for
 
 
 
Outside Directors
2,040,304
463,903
28,228
 
 
 
 
Ratification of
 
 
 
PricewaterhouseCoopers, LLP
 
 
 
As auditors
3,584,308
51,375
15,482
 
 
 
 

Item 5.       OTHER INFORMATION
   None
 
Item 6.       EXHIBITS AND REPORTS ON FORM 8-K
 
(a)   Exhibits

10.24      Change in Control Agreement between NewMil Bancorp and Roberta Reed
10.25      Change in Control Agreement between NewMil Bancorp and William Starbuck
11.1        Statement regarding Computation of Net Income Per Common Share.
31.1        Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2        Chief Financial Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1        Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2        Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  
(b)   Current Reports on Form 8-K.
·Current Report on Form 8-K, dated April 21, 2004, announcing earnings for the quarter ended March 31, 2004.
 
 
 
  27   
 
 
 
 
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.



May 4, 2004       by /s/ Francis J. Wiatr
           Francis J. Wiatr,
           Chairman, President and CEO



May 4, 2004       by /s/ B. Ian McMahon
           B. Ian McMahon,
           Chief Financial Officer




  28