NEWMIL BANCORP INC - 10-Q Quarterly Report

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 June 30, 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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]

The number of shares of Common Stock outstanding as of June 30, 2004, is 4,208,306.

TABLE OF CONTENTS

		Page
	PART I FINANCIAL INFORMATION
Item 1.	Financial Statements:

	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	3

	Consolidated Statements of Income for the three month and six month periods ended June 30, 2004 and June 30, 2003	4

	Consolidated Statements of Changes in Shareholders' Equity for the six month periods ended June 30, 2004 and June 30, 2003	5

	Consolidated Statements of Cash Flows for the six month periods ended June 30, 2004 and June 30, 2003	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Control and Procedures	30

	PART II OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 2.	Changes in Securities Use of Proceeds and Issuer Purchases of Equity Securities	30

Item 3.	Defaults upon Senior Securities	31

Item 4.	Submission of matters to a vote of security holders	31

Item 5.	Other information	31

Item 6.	Exhibits and Reports on Form 8-K	31


	2

NewMil Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(unaudited)

	June 30,			December 31,
(dollars in thousands)	2004			2003

ASSETS
Cash and due from bank	$	24,093		$	22,524
Federal funds sold		5,854			-

Total cash and cash equivalents		29,947			22,524
Securities
Available-for-sale at market		179,486			184,513
Held-to-maturity at amortized cost
(fair value: $13,488 and $15,082)		13,227			14,588
Loans (net of allowance for loan losses: $5,165 and $5,198)		474,941			449,651
Bank premises and equipment, net		7,527			7,594
Accrued interest income		3,351			3,711
Intangible assets (net of accumulated amortization: $1,366 and $1,268)		8,601			8,700
Bank-owned life insurance		10,714			10,480
Other assets		2,962			2,281

Total Assets	$	730,756		$	704,042

LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	65,830		$	49,813
NOW accounts		89,011			76,524
Money market		152,723			155,911
Savings and other		88,413			84,660
Certificates of deposit		188,719			191,260

Total deposits		584,696			558,168
Federal Home Loan Bank advances		70,403			70,247
Repurchase agreements		8,932			9,317
Long-term debt		9,776			9,746
Accrued interest and other liabilities		3,764			4,258

Total Liabilities		677,571			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		41,901			42,142
Retained earnings		30,581			27,844
Accumulated other comprehensive income, net		739			2,913
Treasury stock, at cost: 1,781,832 and 1,897,277 shares		(23,031	)		(23,588	)

Total Shareholders' Equity		53,185			52,306

Total Liabilities and Shareholders' Equity	$	730,756		$	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				Six months ended
	June 30,				June 30
	2004		2003		2004		2003

Interest and dividend income
Interest and fees on loans	$	6,366	$	6,148	$	12,807	$	12,125
Interest and dividends on securities		2,321		2,502		4,704		5,152
Interest on federal funds sold		10		106		17		218

Total interest and dividend income		8,697		8,756		17,528		17,495

Interest expense
Deposits		1,606		2,101		3,228		4,332
Borrowed funds		695		706		1,394		1,253

Total interest expense		2,301		2,807		4,622		5,585

Net interest and dividend income		6,396		5,949		12,906		11,910
Provision for loan losses		-		-		-		-

Net interest and dividend income after provision for loan losses		6,396		5,949		12,906		11,910

Non-interest income
Service charges on deposit accounts		746		659		1,430		1,206
Gains on sales of mortgage loans, net		68		42		108		114
Loan servicing fees		10		17		20		36
Other		188		192		371		379

Total non-interest income		1,012		910		1,929		1,735

Non-interest expense
Salaries and benefits		2,419		2,355		4,885		4,700
Occupancy		403		387		805		786
Equipment		338		354		666		672
Marketing		100		61		221		106
Postage and telecommunications		157		142		288		275
Printing and office supplies		113		87		214		185
Professional, collections and OREO		217		217		514		390
Service bureau		98		93		192		200
Amortization of intangibles		49		61		98		122
Other		492		453		968		906

Total non-interest expense		4,386		4,210		8,851		8,342

Income before income taxes		3,022		2,649		5,984		5,303
Income tax provision		960		828		1,899		1,655

Net income	$	2,062	$	1,821	$	4,085	$	3,648

Per common share
Diluted earnings	$	0.48	$	0.42	$	0.94	$	0.83
Basic earnings		0.49		0.45		0.97		0.88
Cash dividends		0.17		0.15		0.32		0.30

See accompanying notes to consolidated financial statements.


	4

NewMil Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(unaudited)
											Accumulated other
	Common Stock			Paid-in		Retained		Treasury			comprehensive			Total
(dollars in thousands)	Shares		Amount		capital		earnings		stock			income			shareholders' equity

Balances at December 31, 2002	5,990,138	$	2,995	$	42,297	$	22,793	$	(19,628	)	$	5,779		$	54,236
Net income for period	-		-		-		3,648		-			-			3,648
Net unrealized loss on securities available-for-sale, net of taxes	-		-		-		-		-			(1,245	)		(1,245	)

Total comprehensive income															2,403

Cash dividends paid	-		-		-		(1,250		-			-			(1,250	)
Exercise of stock options	-		-		(147		-		466			-			319
Common stock issued	-		-		11		-		16			-			27
Tax benefit from exercise of non-qualified stock options	-		-		19		-		-			-			19
Common stock repurchased	-		-		-		-		(4,233	)		-			(4,233	)

Balances at June 30, 2003	5,990,138	$	2,995	$	42,180	$	25,191	$	(23,379	)	$	4,534		$	51,521

Balances at December 31, 2003	5,990,138	$	2,995	$	42,142	$	27,844	$	(23,588	)	$	2,913		$	52,306
Net income for period	-		-		-		4,085		-			-			4,085
Net unrealized loss on securities
available for sale net of taxes	-		-		-		-		-			(2,174	)		(2,174	)

Total comprehensive income															1,911

Cash dividends paid	-		-		-		(1,348		-			-			(1,348	)
Exercise of stock options	-		-		(313		-		1,268			-			955
Tax benefit from exercise of non-qualified stock options	-		-		72		-		-			-			72
Common stock repurchased	-		-		-		-		(711	)		-			(711	)

Balances at June 30, 2004	5,990,138	$	2,995	$	41,901	$	30,581	$	(23,031	)	$	739		$	53,185

See accompanying notes to consolidated financial statements.


	5

NewMil Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six months ended
	June 30,
(unaudited, in thousands)	2004			2003

Operating Activities
Net income	$	4,085		$	3,648
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			-
Provision for depreciation and amortization		418			464
Amortization of intangible assets		98			122
Amortization of issuance cost on long term debt		30			16
Amortization and accretion of securities premiums and (discounts), net		147			198
Gains on sales of mortgage loans, net		(108	)		(114	)
Mortgage loans originated for sale		(6,430	)		(7,052	)
Proceeds from sales of mortgage loans		6,538			7,166
Tax benefit from exercise of non-qualified stock options		72			19
Deferred income tax provision		(135	)		(148	)
Increase in BOLI cash surrender value		(197	)		(188	)
Decrease (increase) in accrued interest income		359			(59	)
Increase (decrease) in other liabilities		45			(574	)
(Increase) decrease in other assets, net		(4	)		217

Net cash provided by operating activities		4,918			3,715

Investing Activities
Purchases of securities available-for-sale		(6,164	)		(10,011	)
Purchases of mortgage backed securities available-for-sale		(39,932	)		(5,057	)
Proceeds from maturities and principal repayments of securities		36,170			1,427
Principal collected on mortgage-backed securities		12,876			28,835
Loan advances, net		(25,290	)		(73,033	)
Purchases of Bank premises and equipment, net		(350	)		(857	)

Net cash utilized by investing activities		(22,690	)		(58,696	)

Financing Activities
Net increase in deposits		26,528			18,155
Net (decrease) increase in repurchase agreements		(385	)		217
FHLB advances (repayments), net		156			(4,569	)
Issuance of long-term debt		-			9,700
Common Stock repurchased		(711	)		(4,233	)
Proceeds from Common Stock reissued		-			27
Cash dividends paid		(1,348	)		(1,250	)
Proceeds from exercise of stock options		955			319

Net cash provided by financing activities		25,195			18,366

Increase (decrease) in cash and cash equivalents		7,423			(36,615	)
Cash and federal funds sold, beginning of period		22,524			84,790

Cash and federal funds sold, end of period	$	29,947		$	48,175

Cash paid during period
Interest to depositors	$	3,243		$	4,345
Interest on borrowings		1,365			1,264
Income taxes paid		1,702			1,735

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 and six month period ended June 30, 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 requires that mortgage loan interest rate loan commitments for loans that will be held for sale, be accounted for as derivative instruments and requires fair-value measurement of such derivatives when fair value can be determined based on observable market data. NewMil periodically enters into such commitments with customers in connection with residential mortgage loan applications. At March 31, 2004 there were no such loans, which were to be held for sale. The adoption of this staff accounting bulletin is not expected to have a material impact on results of operations, financial position, or liquidity of NewMil.


	7

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” (“FSP 106-1”), permits a one time deferral of recognition of the new Medicare provisions' impact. NewMil had elected to defer accounting for the effects of this new legislation. Accordingly, the post-retirement benefit obligations and net periodic costs reported in the accompanying financial statements do not reflect the impact of this legislation. In May 2004, FASB Staff Position 106-2, & #147;Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued which superceded FSP 106-1 and provides accounting guidance on implementing the effects of the Act. NewMil anticipates its benefit costs after 2006 will be somewhat lower as a result of the new Medicare provisions, however, does not deem the effects of the Act to be a significant event as defined in SFAS No. 106, and therefore, effects of the Act will be incorporated in the next measurement of plan assets and obligations otherwise required by SFAS No. 106. The adoption of this standard is not expected to have a material impact on results of operations, financial position, or liquidity of NewMil.

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

June 30, 2004
U.S. Government Agency notes
Within 1 year	$	30,581	$	507	$	-		$	30,074
After 1 but within 5 years		19,747		-		(233	)		19,980
Corporate Bonds
Within 1 year		18,416		438		-			17,978
After 1 but within 5 years		2,108		91		-			2,017
Mortgage backed securities		98,542		1,496		(1,186	)		98,232
Collateralized mortgage obligations		4,861		53		(39	)		4,847

Total debt securities		174,255		2,585		(1,458	)		173,128
FHLB capital stock and other		5,231		1		-			5,230

Total securities available-for-sale	$	179,486	$	2,586	$	(1,458	)	$	178,358


	8

			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

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

June 30, 2004
Municipal bonds
After 1 but within 5 years	$	500	$	5	$	(4	)	$	501
After 5 but within 10 years		4,059		76		-			4,135
After 10 years		5,540		10		(16	)		5,534
Mortgage backed securities		2,788		180		-			2,968
Collateralized mortgage obligations		340		10		-			350

Total securities held-to-maturity	$	13,227	$	281	$	(20	)	$	13,488

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
(in thousands)	cost(a)		gains		losses		fair value

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 June 30, 2004 securities with a carrying value and market value of $5.5 million and $5.6 million, respectively, were pledged as collateral against public funds and securities with a carrying value and market value of $16.8 million and $16.8 million, respectively, were pledged as collateral against repurchase agreements. Also, securities with a carrying value and market value of $16.9 million and $17.0 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:

	June 30,			December 31,
(in thousands)	2004			2003

Real estate mortgages
1-to-4 family residential	$	294,706		$	282,766
5-or-more family residential		7,276			8,230
Commercial		117,058			112,673
Land & land development		5,384			2,890
Home equity credit		31,778			30,006
Commercial & industrial		21,047			15,663
Installment & other		2,268			2,213

Total loans, gross		479,517			454,441
Deferred loan origination fees, cost and purchase premium, net		589			408
Allowance for loan losses		(5,165	)		(5,198	)

Total loans, net	$	474,941		$	449,651

Impaired loans

	June 30,		December 31,
(in thousands)	2004		2003

With no valuation allowance	$	430	$	507
With valuation allowance		378		198

Total impaired loans	$	808	$	705

Valuation allowance	$	303	$	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.

Changes in the allowance for loan losses during the six month periods ended June 30, are as follows:

	June 30,
(in thousands)	2004			2003

Balance, beginning of period	$	5,198		$	5,250
Provision for losses		-			-
Charge-offs		(47	)		(8	)
Recoveries		14			3

Balance, end of period	$	5,165		$	5,245


	10

NOTE 4 - NON-PERFORMING ASSETS

The components of non-performing assets are as follows:
	June 30,		December 31,
(in thousands)	2004		2003

Non-accrual loans	$	475	$	451
Accruing loans past due 90 days or more		1,031		811
Accruing troubled debt restructured loans		-		-

Total non-performing loans		1,506		1,262
Real estate acquired in settlement of loans		-		-

Total non-performing assets	$	1,506	$	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				Six months ended
	June 30,				June 30,
(in thousands)	2004		2003		2004		2003

Basic		4,215		4,092		4,206		4,161
Effect of dilutive stock options		117		219		128		212

Diluted		4,332		4,311		4,334		4,373

NOTE 6 - COMPREHENSIVE INCOME

The components of comprehensive income are as follows:

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2004			2003			2004			2003

Comprehensive income
Net income	$	2,062		$	1,821		$	4,085		$	3,648
Net unrealized losses on securities during period		(2,166	)		(1,073	)		(2,174	)		(1,245	)

Comprehensive income	$	(104	)	$	748		$	1,911		$	2,403


	11

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 June 30, 2004
Net unrealized losses on securities
available-for-sale arising during the period	$	(3,286	)	$	1,117		$	(2,169	)
Accretion of unrealized loss on securities transferred from
available-for-sale to held-to-maturity		4			(1	)		3

Net unrealized losses on
securities during period	$	(3,282	)	$	1,116		$	(2,166	)

(in thousands)	Before			Tax			Net of
	tax			(expense)			tax
	amount			benefit			amount

Three months ended June 30, 2003
Net unrealized losses on securities
available-for-sale arising during the period	$	(1,632	)	$	555		$	(1,077	)
Accretion of unrealized loss on securities transferred from
available-for-sale to held-to-maturity		6			(2	)		4

Net unrealized losses on
securities during period	$	(1,626	)	$	553		$	(1,073	)

(in thousands)	Before			Tax			Net of
	tax			(expense)			tax
	amount			benefit			amount

Six months ended June 30, 2004
Net unrealized losses on securities
available-for-sale arising during the period	$	(3,300	)	$	1,121		$	(2,179	)
Accretion of unrealized loss on securities transferred from
available-for-sale to held-to-maturity		7			(2	)		5

Net unrealized losses on
securities during period	$	(3,293	)	$	1,119		$	(2,174	)

(in thousands)	Before			Tax			Net of
	tax			(expense)			tax
	amount			benefit			amount

Six months ended June 30, 2003
Net unrealized losses on securities
available-for-sale arising during the period	$	(1,896	)	$	645		$	(1,251	)
Accretion of unrealized loss on securities transferred from
available-for-sale to held-to-maturity		10			(4	)		6

Net unrealized losses on
securities during period	$	(1,886	)	$	641		$	(1,245	)


	12

NOTE 7 – INCOME TAXES

The components of the income tax provision are as follows:

	Three months ended						Six months ended
	June 30,						June 30,
(in thousands)	2004			2003			2004			2003

Current provision
Federal	$	1,027		$	901		$	2,034		$	1,803
State		-			-			-			-

Total		1,027			901			2,034			1,803

Deferred benefit
Federal		(67	)		(73	)		(135	)		(148	)
State		-			-			-			-

Total		(67	)		(73	)		(135	)		(148	)

Income tax provision	$	960		$	828		$	1,899		$	1,655

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 six month periods ended June 30, 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 June 30, 2004 are as follows:

	NewMil			Bank

Leverage ratio		7.61	%		7.31	%
Tier I risk-based ratio		12.56			12.07
Total risk-based ratio		13.77			13.28

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 – LONG TERM DEBT

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”.


	13

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.

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				Six months ended
	June 30,				June 30,
(net income in thousands)	2004		2003		2004		2003

As reported
Net income	$	2,062	$	1,821	$	4,085	$	3,648
Earnings per share, diluted		0.48		0.42		0.94		0.83
Earnings per share, basic		0.49		0.45		0.97		0.88
Pro forma
Net income		1,965		1,791		3,913		3,587
Earnings per share, diluted		0.45		0.42		0.90		0.82
Earnings per share, basic		0.47		0.44		0.93		0.86
Stock-based employee compensation
cost, net of related taxes, included in net income
As reported		-		-		-		-
Pro forma		97		30		172		61

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:


	14

Three Months Ended June 30	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

Six Months Ended June 30	Pension Plan						Other Benefits Plan
(in thousands)	2004			2003			2004		2003

Components of net periodic cost:
Service cost	$	-		$	-		$	8	$	8
Interest cost		196			202			22		18
Expected return on plan assets		(240	)		(228	)		-		-
Amortization of prior service cost		-			6			-		-
Amortization of recognized net loss		6			20			-		-
Amortization of net transition obligation		-			-			8		8

Net periodic benefit (income) cost	$	(38	)	$	-		$	38	$	34


	15

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.

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.


	16

RESULTS OF OPERATIONS

For the three month periods ended June 30, 2004 and 2003

Overview

NewMil earned net income of $2.1 million, or $0.48 cents per share (diluted), for the quarter ended June 30, 2004 as compared with $1.8 million, or $0.42 cents per share (diluted), for the quarter ended June 30, 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 $0.4 million, or 7.5% in 2004 as a result of a $41.0 million increase in average earning assets and a 4 basis point increase in the net interest margin to 3.85% from 3.81% in 2003. The increase in earning assets is due to internal growth. Non-interest income increased $0.1 million to $1.0 million in the quarter e nded June 30, 2004, when compared to $0.9 million in the prior year quarter. The increase was primarily attributable to increased fees collected from deposit accounts and an increase in loan sale gains from residential real estate loans. Non-interest expense increased $0.1 million, or 4.2% for the second 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 June 30, 2004. The return on average shareholders equity was 15.3% for the quarter.

Analysis of net interest and dividend income

Net interest and dividend income increased $0.4 million, or 7.5%, for the quarter ended June 30, 2004 as compared with the prior year period. The increase in net interest income resulted primarily from the growth in average earning assets and to a lesser degree an increase in the net interest margin. Average earning assets increased $41.0 million, or 6.6%, over the prior year period as a result of the change in the mix of assets and deposits as well as additional borrowings. Average total borrowings and deposits increased $22.7 million while average deposit levels decreased $1.4 million, over the prior year period. The net interest margin increased 4 basis points to 3.85% from 3.81% 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 20 04 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.


	17

Three months ended June 30,	Average				Income/				Average
	Balance				Expense				Yield/Rate
(dollars in thousands)	2004		2003		2004		2003		2004			2003

Loans (a)	$	468,621	$	405,313	$	6,366	$	6,148		5.43	%		6.07	%
Mortgage backed securities (b)		91,213		68,480		928		1,075		4.07			6.28
Other securities (b)(c)		105,249		150,276		1,403		1,533		5.33			4.08

Total earning assets		665,083		624,069		8,697		8,756		5.23			5.61

Other assets		48,185		56,532

Total assets	$	713,268	$	680,601

NOW accounts	$	80,567	$	76,937		50		55		0.25			0.29
Money market accounts		155,367		149,320		389		492		1.00			1.32
Savings & other		87,233		84,870		144		198		0.66			0.93
Certificates of deposit		188,652		202,096		1,023		1,356		2.17			2.68

Total interest-bearing deposits		511,819		513,223		1,606		2,101		1.26			1.64
Borrowings		89,745		66,998		695		706		3.10			4.22

Total interest-bearing funds		601,564		580,221		2,301		2,807		1.53			1.94

Demand deposits		53,972		41,299
Other liabilities		3,835		7,266
Shareholders' equity		53,897		51,815

Total liabilities & shareholders' equity	$	713,268	$	680,601

Net interest income					$	6,396	$	5,949

Spread on interest bearing funds										3.70			3.67
Net interest margin (d)										3.85			3.81

(a) Includes non-accrual loans.

(b) Average balances of investments are based on historical cost.

(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 June 30,	2004 versus 2003
(in thousands)	Change in interest due to

	Volume			Rate			Net

Interest-earning assets:
Loans	$	900		$	(682	)	$	218
Mortgage backed securities		296			(444	)		(148	)
Other securities		(348	)		219			(129	)

Total		848			(907	)		(59	)

Interest-bearing liabilities:
Deposits		(59	)		(436	)		(495	)
Borrowings		204			(215	)		(11	)

Total		145			(651	)		(506	)

Net change to interest income	$	703		$	(256	)	$	447

Interest income

Total interest and dividend income decreased $59,000, for the quarter ended June 30, 2004 as compared with the same period a year ago. Loan income increased $0.2 million, or 3.5%, primarily as a result of higher volumes offset somewhat by a lower yield. Average loans increased $63.3 million, or 15.6%, due to increased loan originations and loan purchases during the period, offset in part by loan repayments.


	18

The decrease in the average loan yield, down 64 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 and in 2004, 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.

Investment income decreased $0.3 million, or 10.6%, as a result of lower average volume and by somewhat lower yields as a result in the change in mix of the portfolio over the prior year period. Average securities decreased $22.3 million, or 10.2%.

Interest expense

Interest expense for the quarter ended June 30, 2004 decreased $0.5 million, or 18.0%, as compared with the prior year period as a result of a significant decline in the average cost of funds, offset in part primarily by higher level of average borrowings. Deposit expense decreased $0.5 million, or 23.6%, as a result of lower deposit rates and by a slight decline in average deposit levels, and changes in deposit mix. Average interest-bearing deposits decreased $1.4 million. The average cost of interest-bearing deposits decreased 38 basis points to 1.26%. Interest expense on borrowings decreased $11,000, or 1.6%, primarily due to a decline in borrowing cost due to a change in mix, down 112 basis points to 3.10%, offset somewhat by higher average borrowings, up $22.7 million, during the period.

Provision and Allowance for loan losses

NewMil made no provision for loan losses during the quarters ending June 30, 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.

	June 30,			December 31,			June 30,
(in thousands)	2004			2003			2003

Ratio of allowance for loan losses:
to non-performing loans		342.96	%		411.89	%		391.71	%
to total gross loans		1.08			1.14			1.23
Ratio of non-performing loans
to total loans		0.31			0.28			0.31
Ratio of past-due loans
to total loans		0.44			0.76			0.94

As of June 30, 2004 the ratio of the allowance for loan losses as a percentage to total gross loans decreased to 1.08%, from 1.14% at December 31, 2003 and was down from 1.23% for June 30, 2003. The decline, as compared with June 30, 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 0.31% as of June 30, 2004, compared with 0.28% as of December 31, 2003 and 0.31% as of June 30, 2003. The ratio of past due loans (including non-performing loans) to total loans also remains at historically low levels at 0.44% as of June 30, 2004 compared with 0.76% as of December 31, 2003 and 0.94% as of June 30, 2003. Du ring the six month period ended June 30, 2004, non-performing loans increased $0.2 million, or 19.3%, while gross loans increased by $25.3 million, or 5.6%. For additional 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, 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 June 30, 2004.


	19

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.

	June 30,
(in thousands)	2004		2003		Change

Service charges on deposit accounts	$	746	$	659	$	87		13.2	%
Gains on sales of mortgage loans, net		68		42		26		61.9
Loan servicing		10		17		(7	)	(41.2	)
Increase in cash surrender value of bank-owned life insurance		99		94		5		5.3
Other		89		98		(9	)	(9.2	)

Total non-interest income	$	1,012	$	910	$	102		11.2	%

The increase in non-interest income for the quarter ended June 30, 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 increase in gains on sales of mortgage loans during the 2004 period was primarily due to higher volume originated. The Bank originated and sold $4.1 million in residential loans versus $2.7 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 i n 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.

	June 30,
(in thousands)	2004		2003		Change

Salaries and benefits	$	2,419	$	2,355	$	64		2.7	%
Occupancy		403		387		16		4.1
Equipment		338		354		(16	)	(4.5	)
Professional, collection and OREO		217		217		-		-
Postage and telecommunications		157		142		15		10.6
Printing and office supplies		113		87		26		29.9
Marketing		100		61		39		63.9
Service bureau		98		93		5		5.4
Amortization of intangibles		49		61		(12	)	(19.7	)
Other		492		453		39		8.6

Total operating expenses	$	4,386	$	4,210	$	176		4.2	%

The increase in operating expenses was primarily due to an increase in compensation expense for the quarter ended June 30, 2004 as compared with the prior year period. The increase in compensation was due primarily to higher year over year salaries increases and additional temporary services required. The increase in occupancy expense was primarily due to higher insurance, utilities, and additional maintenance expenses. Postage and telecommunications expense increased due to higher costs associated with privacy mailings and an increase in statement mailings to deposit customers. Printing and office supplies expense increased primarily due to additional printed material related to our market ing campaigns during the 2004 period. Marketing expense increased during the period due to various advertising campaigns introducing new checking and loan services to customers. Service bureau expenditures increased primarily due to higher costs related to check item research. Other expenses increased in various categories primarily related to appraisal expenses, correspondent bank charges and additional franchise taxes. Providing a benefit during 2004 is the reduction in the amortization of intangibles expense when compared to the prior period. Also during the period was a decrease in equipment expense primarily due to a decrease in the depreciation expense related to computer hardware and software and to a lesser degree lower depreciation on furniture and fixtures.

Income taxes

Net income for the quarter included an income tax provision of $960,000 representing a 31.8% effective rate, as compared with a provision of $828,000 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.

RESULTS OF OPERATIONS

For the six month periods ended June 30, 2004 and 2003

Overview

NewMil earned net income of $4.1 million, or $0.94 cents per share (diluted), for the six months ended June 30, 2004 as compared with $3.6 million, or $0.83 cents per share (diluted), for the same period a year ago. 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 $1.0 million, or 8.4% in 2004 as a result of a $41.9 million increase in average earning assets and a 5 basis point increase in the net interest margin to 3.93% from 3.88% in 2003. The increase in earning assets is due to internal growth. Non-interest income increased $0.2 million, or 11.1%, primarily due to increa sed service charges collected on deposit accounts during the 2004 period. Non-interest expense increased $0.5 million, or 6.1% for the six months period ending June 30, 2004, primarily due to higher compensation, marketing and professional services expenses. The return on average shareholders equity was 15.2% for the first six months of 2004.


	21

Analysis of net interest and dividend income

Net interest and dividend income increased $1.0 million, or 8.4%, for the first six-month period ending June 30, 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 $41.9 million, or 6.8%, 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 $28.5 million and $2.2 million, respectively, over the prior year period. The net interest margin increased 5 basis points to 3.93% from 3.88% 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.

Six months ended June 30,	Average				Income/				Average
	Balance				Expense				Yield/Rate
(dollars in thousands)	2004		2003		2004		2003		2004			2003

Loans (a)	$	460,951	$	390,192	$	12,807	$	12,125		5.56	%		6.21	%
Mortgage backed securities (b)		69,839		73,313		1,820		2,296		5.21			6.26
Other securities (b)(c)		125,805		151,143		2,901		3,074		4.61			4.07

Total earning assets		656,595		614,648		17,528		17,495		5.34			5.69

Other assets		49,727		55,643

Total assets	$	706,322	$	670,291

NOW accounts	$	77,435	$	72,570		96		105		0.25			0.29
Money market accounts		155,940		147,668		780		998		1.00			1.35
Savings & other		85,196		82,173		282		407		0.66			0.99
Certificates of deposit		189,444		203,391		2,070		2,822		2.19			2.78

Total interest-bearing deposits		508,015		505,802		3,228		4,332		1.27			1.71
Borrowings		90,322		61,835		1,394		1,253		3.09			4.05

Total interest-bearing funds		598,337		567,637		4,622		5,585		1.54			1.97

Demand deposits		50,154		41,937
Other liabilities		4,192		7,632
Shareholders' equity		53,639		53,083

Total liabilities & shareholders' equity	$	706,322	$	670,289

Net interest income					$	12,906	$	11,910

Spread on interest-bearing funds										3.80			3.72
Net interest margin (d)										3.93			3.88

(a) Includes non-accrual loans.

(b) Average balances of investments are based on historical cost.

(d) Net interest income divided by average interest-earning assets.


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

Six months ended June 30,	2004 versus 2003
(in thousands)	Change in interest due to

	Volume			Rate			Net

Interest-earning assets:
Loans	$	1,241		$	(559	)	$	682
Mortgage backed securities		(105	)		(372	)		(477	)
Other securities		3			(175	)		(172	)

Total		1,139			(1,106	)		33

Interest-bearing liabilities:
Deposits		19			(1,123	)		(1,104	)
Borrowings		487			(346	)		141

Total		506			(1,469	)		(963	)

Net change to interest income	$	633		$	363		$	996

Interest income

Total interest and dividend income increased $33,000, to $17.5 million, for the six months period ended June 30, 2004 as compared with the same period a year ago. Loan income increased $0.7 million, or 5.6%, primarily as a result of higher volumes offset somewhat by a lower yield. Average loans increased $70.8 million, or 18.1%, 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 65 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 and 2004 the Bank increased its originations and purchases of residential mortgage loans to offset the effect of increased repayments in its residential mortgage lo an and mortgage backed securities portfolios.

Investment income decreased $0.6 million, or 12.1%, 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 $28.8 million, or 12.8%.

Interest expense

Interest expense for the six months period ended June 30, 2004 decreased $1.0 million, or 17.2%, 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 $1.1 million, or 25.5%, as a result of lower deposit rates, offset somewhat by deposit growth, and changes in deposit mix. Average interest-bearing deposits increased $2.2 million. The average cost of interest-bearing deposits decreased 44 basis points to 1.27%. Interest expense on borrowings increased $0.1 million, or 11.3%, primarily due to a result of higher average borrowings, up $28.5 million, offset somewhat by a decline in borrowing cost due to a change in mix, down 96 basis points to 3.09%.

Provision and Allowance for loan losses

NewMil made no provision for loan losses during the first six months ending June 30, 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. For a detailed discussion of the Bank’s allowance for loan losses refer to “Results of Operations- For the three months ended June 30, 2004 and 2003” above.


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Non-interest income

The following table details the principal categories of non-interest income.

	June 30,
(in thousands)	2004		2003		Change

Service charges on deposit accounts	$	1,430	$	1,206	$	224		18.6	%
Gains on sales of mortgage loans, net		108		114		(6	)	(5.3	)
Loan servicing		20		36		(16	)	(44.4	)
Increase in cash surrender value of bank-owned life insurance		197		188		9		4.8
Other		174		191		(17	)	(8.9	)

Total non-interest income	$	1,929	$	1,735	$	194		11.2	%

The increase in non-interest income for the six-month period ended June 30, 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 $6.4 million in residential loans versus $7.1 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 act ivity in the servicing loan portfolio since the 2003 period. Other non-interest income declined due to lower commissions earned during the period.

Operating expenses

The following table details the principal categories of operating expenses.

	June 30,
(in thousands)	2004		2003		Change

Salaries and benefits	$	4,885	$	4,700	$	185		3.9	%
Occupancy		805		786		19		2.4
Equipment		666		672		(6	)	(0.9	)
Professional, collection and OREO		514		390		124		31.8
Postage and telecommunications		288		275		13		4.7
Printing and office supplies		214		185		29		15.7
Marketing		221		106		115		108.5
Service bureau		192		200		(8	)	(4.0	)
Amortization of intangibles		98		122		(24	)	(19.7	)
Other		968		906		62		6.8

Total operating expenses	$	8,851	$	8,342	$	509		6.1	%

The increase in operating expenses was primarily due to an increase in compensation, professional, collection and OREO and marketing expenses for the first six months of 2004 as compared with the prior year period. The increase in compensation was due primarily to higher salaries, higher bonus accrual costs, higher 401k expenses, as well as a decrease in deferred loan origination compensation expense, due to decreased loan origination activity when compared to the 2003 period. Offsetting these expense increases were lower health, pension expense (lower pension income) and lower mortgage commissions during the 2004 period. The increase in occupancy expense was attributable to the open ing of the Southbury Main Street Branch facility March 31, 2003, where the facilities expense during the 2004 period


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incurred a six-month period of occupancy costs. The increase in professional, collection and OREO expenses was primarily due to additional consulting in the areas of financial administration, deposit operations and information technology, and to a lesser extent additional legal corporate matters incurred during 2004 and higher professional fees related to audit and accounting expenses. Postage and telecommunications expense increased due to higher costs associated with privacy mailings and an increase in statement mailings to deposit customers. Printing and office supplies expense increased primarily due to additional printed material related to our marketing campaigns during the 2004 period. Marketing expen se 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, franchise taxes and contribution expenses. Also providing a benefit during the 2004 is the reduction in the amortization of intangibles expense when compared to the prior period. Service bureau expenditures also decreased primarily due to lower costs related to check item research.

Income taxes

Net income for the six months ended June 30, 2004 included an income tax provision of $1.9 million, representing a 31.7% effective rate, as compared with a provision of $1,655,000 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 six-month period ended June 30, 2004 total assets grew $26.7 million, or 3.8%, to $731 million. The increase resulted from a $5.9 million increase in federal funds sold and $25.3 million increase in net loans and a $7.4 million increase in cash and due from banks. Securities decreased by $6.4 million. On the liability side, deposits and Federal Home Loan Bank advances increased by $26.5 million, $156,000, respectively, while retail repurchase agreements decreased $385,000 during the six-month period. Non-performing assets continue to remain very low, measured as a percentage of total assets. For the quarter non-performing assets increased $0.2 million to $1.5 million, or 0.21% of total assets as of June 30, 2004.

Securities & Overnight Fed Funds Sold

For the six-month period ended June 30, 2004 securities decreased $6.4 million to $192.7 million. Securities purchases of $46.1 million during the period were offset by repayments of mortgage-backed securities and other securities of $49.0 million and a decrease in unrealized securities holding gains. Securities purchases for the period included $39.9 million of fixed and adjustable rate mortgage-backed securities, $5.0 million of fixed rate Agency notes and $1.2 million of other investments.

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 June 30, 2004, the portfolio had a projected weighted average duration and life of 3.1 years and 3.5 years, respectively, based on median projected prepayment speeds at current interest rates. At June 30, 2004, securities totaling $179.5 million, or 93%, were classified as available-for-sale and securities totaling $13.2 million, or 7%, were classified as held-to-maturity.

Loans

During the six-month period ended June 30, 2004 net loans increased $25.3 million, or 5.6%. Loan originations, advances and loan purchases totaled $94.0 million, while loan repayments were $68.7 million. The ratio of loans to assets increased slightly during the quarter to 65.0% at June 30, 2004, compared with 63.9% at December 31, 2003, though up from 61.7% a year ago at June 30, 2003. Towards the end of 2003 and through the second quarter of 2004 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 $6.4 million of residential mortgage loans during the six-month period ending June 30, 2004. Major loan classifications are as follows:


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	June 30,			December 31,
(in thousands)	2004			2003

Real Estate Mortgages:
Residential
1-to-4 family	$	294,706		$	282,766
5-or-more family		7,276			8,230
Commercial		117,058			112,673
Land & land development		5,384			2,890
Home equity credit		31,778			30,006

Total mortgage loans		456,202			436,565
Commercial and industrial		21,047			15,663
Installment and other		2,268			2,213

Total loans, gross		479,517			454,441
Deferred loan origination fees and purchase premium, net		589			408
Allowance for loan losses		(5,165	)		(5,198	)

Total loans, net	$	474,941		$	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.

Non-performing assets

The composition of non-performing assets is as follows:

	June 30,			December 31,
(in thousands)	2004			2003

Non-accruing loans	$	475		$	451
Accruing loans past due
90 days or more		1,031			811
Accruing restructured loans		-			-

Total non-performing loans		1,506			1,262
OREO, net		-			-

Total non-performing assets	$	1,506		$	1,262

Percent of total assets		0.21	%		0.18	%

During the six-month period ended June 30, 2004 non-performing assets increased $244,000, to $1.5 million. Non-performing assets continue to remain historically low at only 0.21% of total assets at June 30, 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 June 30, 2004 NewMil had $1.2 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 adequa te.


	26

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 grew $26.5 million to $584.7 million, Federal Home Loan Bank advances increased slightly by $156,000, while retail repurchase agreements decreased slightly by $385,000 to $8.9 million.

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 six-month period ended June 30, 2004 provided net cash of $4.9 million. Investing activities utilized net cash of $22.7 million, principally for securities purchases and net loan advances, offset in part by security repayments and maturities. Financing activities provided net cash of $25.2 million, principally, $26.1 million from an increase in deposits and repurchase agreements and $156,000 from a net increase in FHLB advances, as well as $1.0 million as a result of proceeds from stock option exercises, offset primarily by cash dividends paid and treasury stock purchases.

At June 30, 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 $304 million, to net deposits and short term unsecured liabilities, was 49.5%, well in excess of NewMil's minimum guideline of 15%.

At June 30, 2004, NewMil had outstanding commitments to fund new loan originations of $32.8 million, construction mortgage commitments of $13.3 million and unused lines of credit of $45.0 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.


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CAPITAL RESOURCES

During the period ended June 30, 2004 shareholders' equity increased $0.9 million to $53.2 million and book value per share decreased $0.14 to $12.64. Increasing shareholders' equity were net income of $4.1 million, or $0.48 per share (diluted), stock option exercise proceeds of $955 million and a tax benefit from the exercise of non-qualified stock options of $72,000. Primarily reducing shareholders’ equity were treasury stock purchases of $0.7 million, dividend payments of $1.3 million and other comprehensive income of $2.2 million (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 June 30, 2004 NewMil's Tier 1 Leverage Capital ratio was 7.61% and its Tier 1 and Total Risk-Based Capital ratios were 12.56% and 13.77%, respectively. At June 30, 2004 the Bank's Tier 1 Leverage Capital ratio was 7.31% and its Tier 1 and Total Risk-Based Capital ratios were 12.07% and 13.28%, 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, writ ten 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 requires that mortgage loan interest rate loan commitments for loans that will be held for sale, be accounted for as derivative instruments and requires fair-value measurement of such derivatives when fair value can be determined based on observable market data. NewMil periodically enters into such commitments with customers in connection with residential mortgage loan applications. At March 31, 2004 there were no such loans which were to be held for sale. The adoption of this staff accounting bulletin is not expected to have a material impact on results of operations, financial position, or liquidity of NewMil.


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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 draf t to be materially different from the pro-forma impact disclosed under SFAS No. 123.

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” (“FSP 106-1”), permits a one time deferral of recognition of the new Medicare provisions' impact. NewMil had elected to defer accounting for the effects of this new legislation. Accordingly, the post-retirement benefit obligations and net periodic costs reported in the accompanying financial statements do not reflect the impact of this legislation. In May 2004, FASB Staff Position 106-2, 7;Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued which superceded FSP 106-1 and provides accounting guidance on implementing the effects of the Act. NewMil anticipates its benefit costs after 2006 will be somewhat lower as a result of the new Medicare provisions, however, does not deem the effects of the Act to be a significant event as defined in SFAS No. 106, and therefore, effects of the Act will be incorporated in the next measurement of plan assets and obligations otherwise required by SFAS No. 106. The adoption of this standard is not expected to have a material impact on results of operations, financial position, or liquidity 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 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.


	29

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.

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 ISSUER 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
April 2004		3,000		28.84
May 2004		8,000		28.88
June 2004		6,500		28.27

Total number of shares purchased during period as part of a publicly announced repurchase program		25,000		$ 28.27

Maximum remaining shares available to e purchased under the announced plan		111,116


	30

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

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	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

(b)	Current Reports on Form 8-K.
		·Current Report on Form 8-K, dated July 21, 2004, announcing earnings for the quarter ended June 30, 2004.


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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.



August 2, 2004	by /s/ Francis J. Wiatr
	Francis J. Wiatr,
	Chairman, President and CEO



August 2, 2004	by /s/ B. Ian McMahon
	B. Ian McMahon,
	Chief Financial Officer


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