NEWMIL BANCORP INC - 10-Q Quarterly Report

PART I FINANCIAL INFORMATION
		Page

Item 1.	Financial Statements:
	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003	3
	Consolidated Statements of Income for the three month and nine month periods ended September 30, 2004 and September 30, 2003	4
	Consolidated Statements of Changes in Shareholders' Equity for the nine month periods ended September 30, 2003 and September 30, 2004	5
	Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2004 and September 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	30
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	31

	September 30,			December 31,
(dollars in thousands)	2004			2003
ASSETS
Cash and due from bank	$	18,986		$	22,524
Federal funds sold		2,444			-
Total cash and cash equivalents		21,430			22,524
Securities
Available-for-sale at market		183,275			184,513
Held-to-maturity at amortized cost (fair value: $13,196 and $15,082)		12,812			14,588
Loans (net of allowance for loan losses: $5,146 and $5,198)		480,447			449,651
Bank premises and equipment, net		7,375			7,594
Accrued interest income		3,236			3,711
Intangible assets (net of accumulated amortization: $1,415 and $1,268)		8,289			8,700
Deferred tax asset, net		404			-
Bank-owned life insurance		10,817			10,480
Other assets		2,325			2,281
Total Assets	$	730,410		$	704,042

LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	66,846		$	49,813
NOW accounts		82,386			76,524
Money market		155,514			155,911
Savings and other		85,858			84,660
Certificates of deposit		195,443			191,260
Total deposits		586,047			558,168
Federal Home Loan Bank advances		63,070			70,247
Repurchase agreements		12,491			9,317
Long-term debt		9,791			9,746
Accrued interest and other liabilities		3,962			4,258
Total Liabilities		675,361			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		41,911			42,142
Retained earnings		32,010			27,844
Accumulated other comprehensive income, net		1,478			2,913
Treasury stock, at cost: 1,789,982 and, 897,277 shares		(23,345	)		(23,588	)
Total Shareholders' Equity		55,049			52,306
Total Liabilities and Shareholders' Equity	$	730,410		$	704,042

	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Interest and dividend income
Interest and fees on loans	$	6,583	$	6,483	$	19,390	$	18,608
Interest and dividends on securities		2,284		2,205		6,988		7,357
Interest on federal funds sold		14		44		31		262
Total interest and dividend income		8,881		8,732		26,409		26,227
Interest expense
Deposits		1,695		1,900		4,923		6,232
Borrowed funds		663		633		1,995		1,829
Repurchase agreements		32		25		94		82
Total interest expense		2,390		2,558		7,012		8,143
Net interest and dividend income		6,491		6,174		19,397		18,084
Provision for loan losses		-		-		-		-
Net interest and dividend income
after provision for loan losses		6,491		6,174		19,397		18,084
Non-interest income
Service charges on deposit accounts		774		683		2,204		1,889
Gains on sales of mortgage loans, net		38		127		146		241
Loan servicing fees		6		15		26		51
Other		211		200		582		579
Total non-interest income		1,029		1,025		2,958		2,760
Non-interest expense
Salaries and employee benefits		2,368		2,479		7,253		7,179
Occupancy		392		411		1,197		1,197
Equipment		334		358		1,000		1,030
Marketing		188		98		409		204
Postage and telecommunications		156		142		444		417
Printing and office supplies		92		87		306		272
Professional, collections and OREO		214		188		728		578
Service bureau		87		99		279		299
Amortization of intangibles		49		61		147		183
Other		496		447		1,464		1,353
Total non-interest expense		4,376		4,370		13,227		12,712
Income before income taxes		3,144		2,829		9,128		8,132
Income tax provision		1,000		890		2,899		2,545
Net income	$	2,144	$	1,939	$	6,229	$	5,587

Per common share
Diluted earnings	$	0.50	$	0.45	$	1.44	$	1.28
Basic earnings		0.51		0.47		1.48		1.35
Cash dividends		0.17		0.15		0.49		0.45

	Common Stock													Accumulated other comprehensive			Total shareholders
(dollars in thousands)	Shares		Amount		Paid-in capital			Retained Earnings			Treasury Stock			income			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		-		-		-			5,587			-			-			5,587
Net unrealized loss on securities available-for-sale, net of taxes		-		-		-			-			-			(2,177	)		(2,177	)
Total comprehensive income																		3,410
Cash dividends paid		-		-		-			(1,862	)		-			-			(1,862	)
Exercise of stock options		-		-		(172	)		-			521			-			349
Common stock issued		-		-		11			-			16			-			27
Tax benefit from exercise of non-qualified stock options		-		-		19			-			-			-			19
Common stock repurchased		-		-		-			-			(4,498	)		-			(4,498	)
Balances at September 30, 2003		5,990,138	$	2,995	$	42,155		$	26,518		$	(23,589	)	$	3,602		$	51,681
Balances at December 31, 2003		5,990,138	$	2,995	$	42,142		$	27,844		$	(23,588	)	$	2,913		$	52,306
Net income for period		-		-		-			6,229			-			-			6,229
Net unrealized loss on securities available-for-sale, net of taxes		-		-		-			-			-			(1,435	)		(1,435	)
Total comprehensive income																		4,794
Cash dividends paid		-		-		-			(2,063	)		-			-			(2,063	)
Exercise of stock options		-		-		(303	)		-			1,295			-			992
Acquisition of treasury stock		-		-		-			-			(1,052	)		-			(1,052	)
Common stock repurchased		-		-		72			-			-			-			72
Balances at September 30, 2004		5,990,138	$	2,995	$	41,911		$	32,010		$	(23,345	)	$	1,478		$	55,049

	Nine months ended
	September 30,
(unaudited, in thousands)	2004			2003
Operating Activities
Net income	$	6,229		$	5,587
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			-
Provision for depreciation and amortization		625			711
Amortization of intangible assets		147			183
Amortization of issuance cost on long term debt		45			31
Amortization and accretion of securities premiums and (discounts), net		162			291
Gains on sales of mortgage loans, net		(146	)		(241	)
Mortgage loans originated for sale		(8,243	)		(14,736	)
Proceeds from sales of mortgage loans		8,389			14,977
Tax benefit from exercise of non-qualified stock options		72			19
Deferred income tax provision		(205	)		(221	)
Increase in BOLI cash surrender value		(299	)		(281	)
Decrease in accrued interest income		475			58
Increase in other liabilities		245			78
Decrease in other assets, net		182			103
Net cash provided by operating activities		7,678			6,559
Investing Activities
Purchases of securities available-for-sale		(11,164	)		(10,011	)
Purchases of mortgage backed securities available-for-sale		(49,871	)		(5,057	)
Proceeds from maturities and principal repayments of securities		43,411			10,221
Principal collected on mortgage-backed securities		18,302			42,606
Loan advances, net		(30,797	)		(102,487	)
Purchases of Bank premises and equipment, net		(406	)		(1,199	)
Net cash utilized by investing activities		(30,525	)		(65,927	)
Financing Activities
Net increase in deposits		27,879			9,807
Net increase in repurchase agreements		3,174			1,796
FHLB advances (repayments), net		(7,177	)		2,849
Issuance of long-term debt		-			9,700
Common Stock repurchased		(1,052	)		(4,498	)
Common Stock issued		-			27
Cash dividends paid		(2,063	)		(1,862	)
Proceeds from exercise of stock options		992			349
Net cash provided by financing activities		21,753			18,168
(Decrease) in cash and cash equivalents		(1,094	)		(41,200	)
Cash and cash equivalents, beginning of period		22,524			84,790
Cash and cash equivalents, end of period	$	21,430		$	43,590
Cash paid during period
Interest to depositors	$	4,933		$	6,254
Interest on borrowings		2,054			1,906
Income taxes paid		2,652			2,535

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 September 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.

On March 9, 2004, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 105 - Application of Accounting Principles to Loan Commitments (“SAB 105”). SAB 105 summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The SEC staff believes that in recognizing a loan commitment, entities should not consider expected future cash flows related to the associated servicing of the loan until the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with the servicing retained. The provisions of SAB 105 are applicable to all loan commitments accounted for as derivatives and entered into subsequent to Ma rch 31, 2004. 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

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. In October 2004, the FASB delayed the effective date of this statement to periods beginning after June 15, 2005. Management does not expect the impact of the adoption of this exposure draft to be materially different from the pro forma impacts 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. In May 2004, FASB Staff Position 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued which provides accounting guidance on implementing the effects of the Act. NewMil’s postretirement benefit plan does provide prescription drug benefits. NewMil is in the process of reviewing the prescription drug benefits provided under its post retirement benefit plan in order to determine if such benefits are actuarially equivalent to Medicare Part D under the Act. Therefore, NewMil has not yet adopted the provisions of FSP 106-2 and, accordingly, the APBO and net periodic postretirement benefit cost included in its financial statements do not reflect the effects of the Act on the Company’s postretirement benefits plan. The adoption of this standard is not expected to have a material impact on results of operations, financial position, or liquidity of NewMil.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue 03-1, determining the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS 115 (including individual securities and investments in mutual funds) and to investments accounted for under the cost method. The provisions of this EITF were originally effective for reporting periods beginning after June 15, 2004. However, on October 1, 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. EITF 03-1-1, deferring the effective date of paragraphs 10-20 of EITF Issue 03-1. The delay does not suspend the requirement to recognize other-than-temporary impairment as required by existing authoritative lite rature. NewMil adopted the disclosure requirements of EITF 03-1 as of 12/31/03, which were not affected by Staff Position 03-1-1. NewMil does not believe that the application of the recognition guidance in paragraphs 10-20 of EITF Issue 03-1 will have a material impact on NewMil’s consolidated financial statements.

			Gross		Gross
	Estimated		unrealized		unrealized		Amortized
(in thousands)	fair value		gains		losses		cost
September 30, 2004
U.S. Government Agency notes
Within 1 year	$	30,298	$	251	$	-	$	30,047
After 1 but within 5 years		24,984		22		28		24,990
Corporate Bonds
Within 1 year		12,285		290		-		11,995
After 1 but within 5 years		1,045		39		-		1,006
Mortgage backed securities		104,632		1,842		251		103,041
Collateralized mortgage obligations		4,800		79		-		4,721
Total debt securities		178,044		2,523		279		175,800
FHLB capital stock and other		5,231		1		-		5,230
Total securities available-for-sale	$	183,275	$	2,524	$	279	$	181,030

			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

At September 30, 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 $30.2 million and $30.2 million, respectively, were pledged as collateral against repurchase agreements. Also, securities with a carrying value and market value of $16.7 million and $16.8 million, respectively, were pledged as collateral for Treasury, tax and loan payments as well as possible Federal Reserve discount window borrowings.

	September 30,			December 31,
(in thousands)	2004			2003
Real estate mortgages
1-to-4 family residential	$	299,892		$	282,766
5-or-more family residential		7,221			8,230
Commercial		118,299			112,673
Land & land development		3,602			2,890
Home equity credit		32,531			30,006
Commercial & industrial		21,135			15,663
Installment & other		2,178			2,213
Total loans, gross		484,858			454,441
Deferred loan origination fees, cost and purchase premium, net		735			408
Allowance for loan losses		(5,146	)		(5,198	)
Total loans, net	$	480,447		$	449,651

Impaired loans
		September 30,			December 31,
(in thousands)		2004			2003
With no valuation allowance	$	232		$	507
With valuation allowance		394			198
Total impaired loans	$	626		$	705
Valuation allowance	$	273		$	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 are 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 l oan portfolio and the recovery of a substantial portion of OREO are susceptible to changes in market conditions.


	10

	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands)		2004			2003			2004			2003
Current provision
Federal	$	1,069		$	963		$	3,104		$	2,766
State		-			-			-			-
Total		1,069			963			3,104			2,766
Deferred benefit
Federal		(69	)		(73	)		(205	)		(221
State		-			-			-			-
Total		(69	)		(73	)		(205	)		(221
Income tax provision	$	1,000		$	890		$	2,899		$	2,545

Connecticut tax legislation permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a passive investment company (“PIC”). In accordance with this legislation, in 1999 NewMil formed a PIC, NewMil Mortgage Company. NewMil's effective tax rates for the nine month periods ended September 30, 2004 and 2003 are 31.8% and 31.3%, 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.

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.

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 subordinated 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.

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, NewMil 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 NewMil accounted for its employee stock option plans under the fair value method of FAS 123. The fair value of each option grant was estimated o n the date of grant using the Roll-Geske Model for pricing American call options with dividends.

	Three months ended				Nine months ended
	September 30,				September 30,
(net income in thousands)		2004		2003		2004		2003
As reported
Net income	$	2,144	$	1,939	$	6,229	$	5,587
Earnings per share, diluted		0.50		0.45		1.44		1.28
Earnings per share, basic		0.51		0.47		1.48		1.35
Pro forma
Net income		2,056		1,909		5,969		5,496
Earnings per share, diluted		0.48		0.44		1.38		1.26
Earnings per share, basic		0.49		0.47		1.42		1.33
Stock-based employee compensation
cost, net of related taxes, included
in net income
As reported		-		-		-		-
Pro forma		88		30		260		91


	14

NOTE 11 - RETIREMENT PLANS

NewMil has retirement plans, which are described more fully in Note 8 (Retirement Plans) to the 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 September 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		(119	)		(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	$	(18	)	$	-		$	19	$	17

Nine Months Ended September 30,	Pension Plan						Other Benefits Plan
(in thousands)		2004			2003			2004		2003
Components of net periodic cost:
Service cost	$	-		$	-		$	12	$	12
Interest cost		294			303			33		27
Expected return on plan assets		(359	)		(342	)		-		-
Amortization of prior service cost		-			9			-		-
Amortization of recognized net loss		9			30			-		-
Amortization of net transition obligation		-			-			12		12
Net periodic benefit (income) cost	$	(56	)	$	-		$	57	$	51

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.

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’ bankruptci es, inflation, technological changes, changes in law and regulations, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties reported from time to time in NewMil’s filings with the Securities and Exchange Commission.

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 decl ine 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 Loan Losses” section of Management’s Discussion and Analysis.

NewMil earned net income of $2.1 million, or $0.50 cents per share (diluted), for the quarter ended September 30, 2004 as compared with $1.9 million, or $0.45 cents per share (diluted), for the quarter ended September 30, 2003. The increase was achieved through a variety of factors, the most important of which was a $47.3 million increase in average earning assets, which outpaced an 8 basis point decrease in the net interest margin to 3.84% from 3.92%. Net interest income increased $0.3 million, or 5.1% in the 2004 period. Non-interest expense increased slightly for the third quarter of 2004, primarily due to higher marketing and professi onal services expenses. Credit quality remained strong as nonperforming assets represented only 16 basis points of total assets at September 30, 2004. The return on average shareholders equity was 15.9% for the quarter.

Net interest and dividend income increased $0.3 million, or 5.1%, for the quarter ended September 30, 2004 as compared with the prior year period. The increase in net interest income resulted primarily from the growth in average earning assets offset somewhat by a decrease in the net interest margin. Average earning assets increased $47.3 million, or 7.5%, over the prior year period. Average total borrowings and deposits increased $37.1 million, or 5.9% over the prior year period. The net interest margin decreased 8 basis points to 3.84% from 3.92% over the prior period. The change in the net interest margin was due to the changes in the mix of earning assets and funding liabilities, asset and liability growth, changes in market interest rates and the impact of asset and liability re-pricing during 2004 as compared wit h 2003. The following table sets forth the components of NewMil's net interest income and yields on average interest-earning assets and interest-bearing funds.

Three months ended September 30,	Average				Income/				Average
	Balance				Expense				Yield/Rate
(dollars in thousands)		2004		2003		2004		2003		2004		2003
Loans (a)	$	482,048	$	445,582	$	6,583	$	6,483		5.46	%	5.82	%
Mortgage backed securities (b)		102,663		54,550		1,244		818		4.85		6.00
Other securities (b)(c)		91,871		129,193		1,054		1,431		4.59		4.43
Total earning assets		676,582		629,325		8,881		8,732		5.25		5.55
Other assets		47,086		55,877
Total assets	$	723,668	$	685,202

NOW accounts	$	82,620	$	80,556		61		50		0.30		0.25
Money market accounts		156,062		152,808		397		436		1.02		1.14
Savings & other		85,704		84,745		146		155		0.68		0.73
Certificates of deposit		191,253		198,324		1,091		1,259		2.28		2.54
Total interest-bearing deposits		515,639		516,433		1,695		1,900		1.32		1.47
Borrowings		87,620		65,677		695		658		3.17		4.01
Total interest-bearing funds		603,259		582,110		2,390		2,558		1.59		1.76
Demand deposits		62,161		46,195
Other liabilities		4,199		5,649
Shareholders' equity		54,049		51,248
Total liabilities &
shareholders' equity	$	723,668	$	685,202
Net interest income					$	6,491	$	6,174
Spread on interest-bearing funds						3.66		3.79
Net interest margin (d)						3.84		3.92

Total interest and dividend income increased $149,000 for the quarter ended September 30, 2004 as compared with the same period a year ago. Loan income increased $0.1 million, or 1.5%, primarily as a result of higher volumes offset somewhat by a lower yield. Average loans increased $36.5 million, or 8.2%, due to loan originations and loan purchases during the period, offset in part by loan repayments. The decrease in the average loan yield, down 36 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 residenti al mortgage loan and mortgage backed securities portfolios.

Interest expense for the quarter ended September 30, 2004 decreased $0.2 million, or 6.6%, 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 $0.2 million, or 10.8%, 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 $0.8 million. The average cost of interest-bearing deposits decreased 15 basis points to 1.32%. Interest expense on borrowings increased $37,000, or 5.6%, primarily due to higher average borrowings, amounting to $21.9 million, offset somewhat by a decline in borrowing cost, down 84 basis points to 3.17% over the period, due to a change in mix.

NewMil made no provision for loan losses during the quarters ending September 30, 2004 and 2003. During the past several years the Bank has experienced an improvement in loan quality and a decline in loan losses, which have averaged less than 1% on an annual basis, each of the past three years. 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.

As of September 30, 2004 the ratio of the allowance for loan losses to total gross loans decreased from 1.15% at September 30, 2003 and 1.14% at December 31, 2003, to 1.06% at September 30, 2004. The decline, as compared with September 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 0.25% as of September 30, 2004, compared with 0.28% as of December 31, 2003 and 0.31% as of September 30, 2003. The ratio of past due loans (including non-performing loans) to total loans also remained at a historically low level of 0.30% as of September 30, 2004 compared with 0 .76% as of December 31, 2003 and 0.92% as of September 30, 2003. During the nine month period ended September 30, 2004, non-performing loans decreased $81,000, or 6.4%, while gross loans increased by $30.7 million, or 6.8%. 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 us ing assumptions and information that are often subjective and changing rapidly. The review of the loan portfolio is a continuing event in the light of a changing economy and the dynamics of the banking and regulatory environment. In management's judgment NewMil remains adequately reserved both against total loans and non-performing loans at September 30, 2004.

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 each 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 State of Connecticut’s Department of Banking in July 2004 and by the FDIC in July 2003. No additions to the allowance were requested as a result of these examinations.

The increase in non-interest income for the quarter ended September 30, 2004 as compared to the prior year period resulted primarily from an increase in retail banking fees earned due to an increase in the bank’s fee schedule and the volume of accounts serviced. 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 decrease in gains on sales of mortgage loans during the 2004 period was primarily due to lower volume originated. The Bank originated and sold $1.9 million in residential loans versus $7.7 million during the 2003 period. Loans originated for sale are pre-sold with servicing rights released on an individual basis at commitment. Loan servicing revenue decreased bec ause of loan payoffs and the decline in serviced loan outstandings since the 2003 period. Other non-interest income increased slightly due to increased fees and increased safe deposit revenue offset partially by lower commissions earned during the period.

	September 30,
(in thousands)		2004		2003		Change
Salaries and employee benefits	$	2,368	$	2,479	$	(111	)	(4.5	)%
Occupancy		392		411		(19	)	(4.6	)
Equipment		334		358		(24	)	(6.7	)
Professional, collection and OREO		214		188		26		13.8
Postage and telecommunications		156		142		14		9.9
Printing and office supplies		92		87		5		5.7
Marketing		188		98		90		91.8
Service bureau		87		99		(12	)	(12.1	)
Amortization of intangibles		49		61		(12	)	(19.7	)
Other		496		447		49		11.0
Total operating expenses	$	4,376	$	4,370	$	6		0.1	%

The net increase in operating expenses was primarily due to increases in marketing expense and professional fees for the quarter ended September 30, 2004 as compared with the prior year period. Compensation expense decreased primarily due to lower mortgage commissions, a lower bonus accrual, lower health benefits and lower pension expense (higher pension income) during the 2004 period. Occupancy expense decreased primarily due to lower utilities, building maintenance and repair expenses. Equipment expense decreased primarily due to lower depreciation on hardware and software, equipment and furniture, offset partially by increases in m aintenance costs associated with equipment repairs and service contracts. Professional, collection and OREO costs increased primarily due to higher internal and external auditing, accounting and legal costs associated with increased public company regulatory compliance requirements. Postage and telecommunications costs increased primarily due to higher mailing costs due to increases in number of accounts serviced as well as increased costs associated with direct mail marketing costs. Printing and office supplies increased due to additional forms utilized by our branch network and additional printed forms for marketing mailings during the 2004 period. The increase in marketing expense was due to advertising and marketing campaigns during the recent quarter. Service bureau expense decreased primarily due to lower costs related to third party pro viders. Amortization of intangibles expense was reduced during the 2004 period as compared with the prior year period. The increase in other expenses was primarily related to directors’ fees, ATM network and card activity and correspondent bank charges.

NewMil earned net income of $6.2 million, or $1.44 cents per share (diluted), for the nine months ended September 30, 2004 as compared with $5.6 million, or $1.28 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 partially by increased non-interest expense. Net interest income increased $1.3 million, or 7.3% in 2004 as a result of a $44.1 million increase in average earning assets and a 1 basis point increase in the net interest margin to 3.90% from 3.89% in 2003. The increase in earning assets was due to internal growth. Non-interest income increased $0.2 million, or 7.2%, primarily due to increased service charges collected on deposit accounts during the 2004 period. Non-interest expense increased $0.5 million, or 4.1% for the nine month period ending September 30, 2004, primarily due to higher compensation, marketing and professional services expenses. The return on average shareholders equity was 15.4% for the first nine months of 2004.

Net interest and dividend income increased $1.3 million, or 7.3%, for the nine-month period ending September 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 $44.1 million, or 7.1%, over the prior year period. Average total borrowings and average deposits increased $26.3 million and $12.4 million, respectively, over the prior year period. The net interest margin increased 1 basis point to 3.90% from 3.89% 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 of asset and liability re-pricing during 2004 as compared with 2003, and to changes in balance sheet mix resulting from asset and liability 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.

Nine months ended September 30,	Average				Income/				Average
	Balance				Expense				Yield/Rate
(dollars in thousands)		2004		2003		2004		2003		2004		2003
Loans (a)	$	468,384	$	408,858	$	19,390	$	18,608		5.52	%	6.07	%
Mortgage backed securities (b)		91,107		66,991		3,374		3,116		4.94		6.20
Other securities (b)(c)		104,184		143,744		3,645		4,503		4.66		4.18
Total earning assets		663,675		619,593		26,409		26,227		5.31		5.64
Other assets		48,843		55,723
Total assets	$	712,518	$	675,316

NOW accounts	$	79,335	$	75,261		157		156		0.26		0.28
Money market accounts		155,924		149,400		1,177		1,434		1.01		1.28
Savings & other		85,424		83,040		428		561		0.67		0.90
Certificates of deposit		190,035		201,683		3,161		4,081		2.22		2.70
Total interest-bearing deposits		510,718		509,384		4,923		6,232		1.29		1.63
Borrowings		89,406		63,130		2,089		1,911		3.12		4.04
Total interest-bearing funds		600,124		572,514		7,012		8,143		1.56		1.90
Demand deposits		54,439		43,372
Other liabilities		4,181		6,966
Shareholders' equity		53,774		52,464
Total liabilities &
shareholders' equity	$	712,518	$	675,316
Net interest income					$	19,397	$	18,084
Spread on interest-bearing funds						3.75		3.74
Net interest margin (d)						3.90		3.89

Nine months ended September 30,	2004 versus 2003
(in thousands)	Change in interest due to
	Volume			Rate			Net
Interest-earning assets:
Loans	$	2,558		$	(1,776	)	$	782
Mortgage backed securities		976			(718	)		258
Other securities		(1,342	)		484			(858	)
Total		2,192			(2,010	)		182
Interest-bearing liabilities:
Deposits		16			(1,325	)		(1,309	)
Borrowings		678			(500	)		178
Total		694			(1,825	)		(1,131	)
Net change to interest income	$	1,498		$	(185	)	$	1,313

Total interest and dividend income increased $0.2 million, to $26.4 million, for the nine months period ended September 30, 2004 as compared with the same period a year ago. Loan income increased $0.8 million, or 4.2%, primarily as a result of higher volumes offset somewhat by a lower yield. Average loans increased $59.5 million, or 14.6%, due to loan originations and loan purchases during the period, offset in part by loan repayments. The decrease in the average loan yield, down 55 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 increa sed repayments in its residential mortgage loan and mortgage backed securities portfolios.

Interest expense for the nine months period ended September 30, 2004 decreased $1.1 million, or 13.9%, 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 $1.3 million, or 21.0%, primarily as a result of lower deposit rates, slightly offset somewhat by deposit growth, and changes in deposit mix. Average interest-bearing deposits increased $1.3 million. The average cost of interest-bearing deposits decreased 34 basis points to 1.29%. Interest expense on borrowings increased $0.2 million, or 9.3%, primarily due to a result of higher average borrowings, up $26.3 million, offset somewhat by a decline in borrowing cost, down 92 basis points to 3.12%, due to a change in mix.

NewMil made no provision for loan losses during the first nine months ended September 30, 2004 and 2003. During the past several years the Bank has experienced an improvement in loan quality and a decline in loan losses, which have averaged less than 1% on an annual basis, each of the past three years. 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 September 30, 2004 and 2003” above.

	September 30,
(in thousands)		2004		2003		Change
Service charges on deposit accounts	$	2,204	$	1,889	$	315		16.7	%
Gains on sales of mortgage loans, net		146		241		(95	)	(39.4	)
Loan servicing		26		51		(25	)	(49.0	)
Increase in cash surrender value of bank-owned
life insurance		299		281		18		6.4
Other		283		298		(15	)	(5.0	)
Total non-interest income	$	2,958	$	2,760	$	198		7.2	%

The increase in non-interest income for the nine-month period ended September 30, 2004 as compared to the prior year period resulted primarily from an increase in retail banking fees earned due to an increase in the banks fee schedule and the volume of accounts serviced. 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 $8.2 million in residential loans versus $14.7 million during the 2003 period. Loans originated for sale are pre-sold with servicing rights released on an individual basis at commitment. Loan servicing revenue decrea sed because of loan payoffs and the decline in serviced loan outstandings since the 2003 period. Other non-interest income declined due to lower fees earned related to the handling of the issuances of official checks and money orders during the period.

	September 30,
(in thousands)		2004		2003		Change
Salaries and employee benefits	$	7,253	$	7,179	$	74		1.0	%
Occupancy		1,197		1,197		-		-
Equipment		1,000		1,030		(30	)	(2.9	)
Professional, collection and OREO		728		578		150		26.0
Postage and telecommunications		444		417		27		6.5
Printing and office supplies		306		272		34		12.5
Marketing		409		204		205		100.5
Service bureau		279		299		(20	)	(6.7	)
Amortization of intangibles		147		183		(36	)	(19.7	)
Other		1,464		1,353		111		8.2
Total operating expenses	$	13,227	$	12,712	$	515		4.1	%

The increase in operating expenses was primarily due to an increase in marketing, compensation, professional, collection and OREO and expenses for the first nine months of 2004 as compared with the prior year period. The increase in compensation was due primarily to a decrease in deferred loan origination compensation expense during the 2004 period due to decreased loan origination activity when compared to the 2003 period. Another contributing factor were higher 401k expenses. Offsetting these expense increases were lower health, pension expense (higher pension income) and lower payroll taxes. 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 and additional legal loan collection costs incurred during 2004 and higher professional fees related to audit and accounting expenses. Marketing expense during the period increased primarily due to various advertising campaigns introducing new checking and loan services and deposit marketing campaigns to customers. Postage and telecommunications expense increased due to higher costs associated with privacy mailings and an increase in statement mailings to deposit customers as well as increased costs associated with direct mail marketing costs. Printing and office supplies expense increased primarily due to additional printed material related to our marketing campaigns during the 2004 period and additional forms utilized by our branch network. Other expenses increased in various categories primarily related to ATM card activity, franchise taxes, contribution expenses and correspondent bank charges. Offsetting these increases were decreases in equipment, service bureau costs and the amortization of intangibles. Equipment expense decreased primarily due to a lower depreciation on hardware and software, equipment and furniture, offset partially by increases in maintenance costs associated with equipment repairs and service contracts paid. Service bureau expenditures also decreased primarily due to lower costs related to check item research. &n bsp;

For the nine-month period ended September 30, 2004 total assets grew $26.4 million, or 3.7%, to $730.4 million. The increase resulted from a $30.8 million increase in net loans and a $2.4 million increase in federal funds sold. Securities and due from banks decreased by $3.0 million and by $3.5 million, respectively. On the liability side, deposits and retail repurchase agreements increased by $27.9 million and $3.2 million, respectively, while Federal Home Loan Bank advances decreased $7.2 million. Non-performing assets continue to remain very low, measured as a percentage of total assets. As of September 30, 2004 non-performing assets were $1.2 million, or 0.16% of total assets, compared with $1.3 million, or 0.18% of total assets at December 31, 2003.

For the nine-month period ended September 30, 2004 securities decreased $3.0 million to $196.1 million. Securities purchases of $61.0 million during the period were offset by repayments of mortgage-backed securities and other securities of $61.7 million and a decrease in unrealized securities holding gains. Securities purchases for the period included $49.9 million of fixed and adjustable rate mortgage-backed securities, $10.0 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 September 30, 2004, the portfolio had a projected weighted average duration and life of 3.2 years and 3.6 years, respectively, based on median projected prepayment speeds at current interest rates. At September 30, 2004, securities totaling $183.3 million, or 93.5%, were classified as available-for-sale and securities totaling $12.8 million, or 6.5%, were classified as held-to-maturity.

During the nine-month period ended September 30, 2004 net loans increased $30.8 million, or 6.8%. Loan originations, advances and loan purchases totaled $135.1 million, while loan repayments were $104.3 million. The ratio of loans to assets increased slightly during the quarter to 65.8% at September 30, 2004, compared with 63.9% at December 31, 2003, and unchanged from 65.9% a year ago at September 30, 2003. Towards the end of 2003 and through the first half 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 $8.2 million of residential mortgage loans during the nine-month period ending September 30, 2 004. Major loan classifications are as follows:

	September 30,			December 31,
(in thousands)		2004			2003
Real Estate Mortgages:
Residential
1-to-4 family	$	299,892		$	282,766
5-or-more family		7,221			8,230
Commercial		118,299			112,673
Land & land development		3,602			2,890
Home equity credit		32,531			30,006
Total mortgage loans		461,545			436,565
Commercial and industrial		21,135			15,663
Installment and other		2,178			2,213
Total loans, gross		484,858			454,441
Deferred loan origination
fees and purchase
premium, net		735			408
Allowance for loan losses		(5,146	)		(5,198	)
Total loans, net	$	480,447		$	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.

In addition to non-performing assets, at September 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 adequate.


	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.

NewMil manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. NewMil's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and Federal Home Loan Bank advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities.

Operating activities for the nine-month period ended September 30, 2004 provided net cash of $7.7 million. Investing activities utilized net cash of $30.4 million, principally for securities purchases and net loan advances, offset in part by security repayments and maturities. Financing activities provided net cash of $21.8 million, principally, $31.1 million from an increase in deposits and repurchase agreements, as well as $1.0 million as a result of net proceeds from stock option exercises, offset by a $7.2 from a net decrease in FHLB advances, and by cash dividends paid and treasury stock purchases.

During the period ended September 30, 2004 shareholders' equity increased $2.7 million to $55.0 million and book value per share increased $0.33 to $13.11. Adding to shareholders' equity were net income of $6.2 million, or $1.44 per share (diluted), stock option exercise proceeds of $1.0 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 $1.1 million, dividend payments of $2.1 million and other comprehensive income of $1.4 million (a net decrease in the unrealized holding gains on securities available-for-sale, net of taxes).

NewMil and the Bank are subject to minimum capital requirements established, respectively, by the Federal Reserve Board (the "FRB") and the FDIC. At September 30, 2004 NewMil's Tier 1 Leverage Capital ratio was 7.70% and its Tier 1 and Total Risk-Based Capital ratios were 12.98% and 14.19%, respectively. At September 30, 2004 the Bank's Tier 1 Leverage Capital ratio was 7.48% and its Tier 1 and Total Risk-Based Capital ratios were 12.61% and 13.82%, 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% o r above, and is not subject to any written order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level.

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.

On March 9, 2004, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 105 - Application of Accounting Principles to Loan Commitments (“SAB 105”). SAB 105 summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The SEC staff believes that in recognizing a loan commitment, entities should not consider expected future cash flows related to the associated servicing of the loan until the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with the servicing retained. The provisions of SAB 105 are applicable to all loan commitments accounted for as derivatives and entered into subsequent to Ma rch 31, 2004. NewMil had no such interest rate loan commitments at March 31, 2004, because NewMil pre-arranges the sale of loans originated for sale at commitment. 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.


	28

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. In October 20 04, the FASB delayed the effective date of this statement to periods beginning after June 15, 2005. Management does not expect the impact of the adoption of this exposure draft to be materially different from the pro forma impacts 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. In May 2004, FASB Staff Position 106-2, “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’s postretirement benefit plan does provide prescription drug benefits. NewMil is in the process of reviewing the prescription drug benefit s provided under its postretirement benefit plan in order to determine if such benefits are actuarially equivalent to Medicare Part D under the Act. Therefore, NewMil has not yet adopted the provisions of FAS 106-2 and, accordingly, the APBO and net periodic postretirement benefit cost included in its financial statements do not reflect the effects of the Act on the Company’s postretirement benefits plan. The adoption of this standard is not expected to have a material impact on results of operations, financial position, or liquidity of NewMil.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue 03-1, determining the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS 115 (including individual securities and investments in mutual funds) and to investments accounted for under the cost method. The provisions of this EITF were originally effective for reporting periods beginning after June 15, 2004. However, on October 1, 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. EITF 03-1-1, deferring the effective date of paragraphs 10-20 of EITF Issue 03-1. The delay does not suspend the requirement to recognize other-than-temporary impairment as required by existing authoritative literat ure. NewMil adopted the disclosure requirements of EITF 03-1 as of 12/31/03, which were not affected by Staff Position 03-1-1. NewMil does not believe that the application of the recognition guidance in paragraphs 10-20 of EITF Issue 03-1 will have a material impact on the NewMil’s consolidated financial statements.

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 sign ificantly changed from December 31, 2003. For 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.

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.

(a)	Exhibits
	10.20	Amended and Restated Change in Control Agreement between NewMil Bancorp and B. Ian McMahon
	10.24	Change in Control Agreement between NewMil Bancorp and Robert Granata
	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 Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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)

	September 30,
(in thousands)		2004			2003
Balance, beginning of period	$	5,198		$	5,250
Provision for losses		-			-
Charge-offs		(78	)		(32	)
Recoveries		26			6
Balance, end of period	$	5,146		$	5,224

	September 30,		December 31,
(in thousands)	2004		2003
Non-accrual loans	$	441	$	451
Accruing loans past due 90 days or more		740		811
Accruing troubled debt restructured loans		-		-
Total non-performing loans		1,181		1,262
Real estate acquired in settlement of loans		-		-
Total non-performing assets	$	1,181	$	1,262

(in thousands)	Before		Tax			Net of
	tax		(expense)			tax
	amount		benefit			amount
Three months ended September 30, 2004
Net unrealized gains on securities
available-for-sale arising during the period	$	1,117	$	(380	)	$	737
Accretion of unrealized loss on securities transferred from
available-for-sale to held-to-maturity		3		(1	)		2
Net unrealized gains on
securities during period	$	1,120	$	(381	)	$	739

(in thousands)	Before			Tax			Net of
	tax			(expense)			tax
	amount			benefit			amount
Three months ended September 30, 2003
Net unrealized losses on securities
available-for-sale arising during the period	$	(1,424	)	$	484		$	(940	)
Accretion of unrealized loss on securities transferred from
available-for-sale to held-to-maturity		12			(4	)		8
Net unrealized losses on
securities during period	$	(1,412	)	$	480		$	(932	)

	NewMil			Bank
Leverage ratio		7.70	%		7.48	%
Tier I risk-based ratio		12.98			12.61
Total risk-based ratio		14.19			13.82

Three months ended September 30,	2004 versus 2003
(in thousands)	Change in interest due to
	Volume			Rate			Net
Interest-earning assets:
Loans	$	512		$	(412	)	$	100
Mortgage backed securities		608			(182	)		426
Other securities		(436	)		59			(377	)
Total		684			(535	)		149
Interest-bearing liabilities:
Deposits		(32	)		(173	)		(205	)
Borrowings		192			(155	)		37
Total		160			(328	)		(168	)
Net change to interest income	$	524		$	(207	)	$	317

PART II.	OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS

	Total # Shares		Average
		Purchased		Price
July 2004		1,900		29.21
August 2004		4,000		27.87
September 2004		6,000		29.07
Total number of shares purchased during
period as part of a publicly announced
repurchase program		11,900	$	28.69
Maximum remaining shares available to
be purchased under the announced plan		99,216

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

NEWMIL BANCORP, INC.



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



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