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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the Fiscal Year Ended December 31, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



Commission File Number: 0-28389



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CONNECTICUT BANCSHARES, INC.

(Exact
name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 06-1564613                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|923 Main Street, Manchester, Connecticut |  | 06040     
|(Address of principal executive offices) |  | (Zip Code)



Registrants
telephone number: (860) 646-1700



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Securities registered pursuant to Section 12(b) of the Act:



None.



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, par value $0.01 per share.



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ̈



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



The aggregate market value of the voting and non-voting common equity held by non-affiliates was $421,163,568 based upon the
closing price of $39.16 as quoted on the NASDAQ National Market as of the last business day of the registrants most recently completed second fiscal quarter. Solely for purposes of this calculation, directors and officers of the registrant are
deemed to be affiliates.



As of March 5, 2004, there were
11,143,133 shares of the registrants common stock outstanding.



Documents incorporated by reference: None.



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##### Table of Contents

INDEX



|         |  |                                                                                                |  |         
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                |  | Page No.
|PART I   |  |                                                                                                |  |         
|         |  |                                                                                               
|Item 1.  |  | Business                                                                                       |  | 1       
|         |  |                                                                                               
|Item 2.  |  | Properties                                                                                     |  | 37      
|         |  |                                                                                               
|Item 3.  |  | Legal Proceedings                                                                              |  | 42      
|         |  |                                                                                               
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 42      
|         |  |                                                                                               
|PART II  |  |                                                                                                |  |         
|         |  |                                                                                               
|Item 5.  |  | Market for the Registrants Common Equity and Related Stockholder Matters                      |  | 42      
|         |  |                                                                                               
|Item 6.  |  | Selected Consolidated Financial Data                                                           |  | 43      
|         |  |                                                                                               
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 46      
|         |  |                                                                                               
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 60      
|         |  |                                                                                               
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 61      
|         |  |                                                                                               
|Item 9.  |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure           |  | 61      
|         |  |                                                                                               
|Item 9A. |  | Controls and Procedures                                                                        |  | 61      
|         |  |                                                                                               
|PART III |  |                                                                                                |  |         
|         |  |                                                                                               
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 62      
|         |  |                                                                                               
|Item 11. |  | Executive Compensation                                                                         |  | 64      
|         |  |                                                                                               
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 69      
|         |  |                                                                                               
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 72      
|         |  |                                                                                               
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 73      
|         |  |                                                                                               
|PART IV  |  |                                                                                                |  |         
|         |  |                                                                                               
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 73      



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Forward Looking Statements



This Form 10-K contains forward-looking statements that are based on assumptions and describe future plans, strategies and
expectations of Connecticut Bancshares, Inc. (CTBS) and its wholly-owned subsidiary, The Savings Bank of Manchester (SBM or the Bank), and its wholly-owned subsidiaries (collectively, the Company).
These forward-looking statements are generally identified by use of the words believe, expect, intend, anticipate, estimate, project, or similar expressions. The Companys
ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, changes in interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial services in the Banks market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements
and undue reliance should not be placed on such statements. Subject to applicable laws and regulations, the Company does not undertake  and specifically disclaims any obligation  to publicly release the result of any revisions which may
be made to any forward looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.



PART I



Item 1. Business.



CTBS, a
Delaware corporation, was organized in October 1999 for the purpose of becoming the holding company for SBM upon the conversion of the Banks former parent holding company, Connecticut Bankshares, M.H.C. (M.H.C.), from a mutual to
stock form of organization (the Conversion). The Conversion was completed on March 1, 2000. In connection with the Conversion, the Company sold 10,400,000 shares of its common stock, par value $0.01 per share (Common Stock)
at a purchase price of $10.00 per share, to depositors of the Bank in a subscription offering. In addition, the Company issued an additional 832,000 shares, representing 8.00% of the shares sold in the subscription offering, to SBM Charitable
Foundation, Inc., a charitable foundation established by the Bank. The Company does not transact any material business other than through the Bank. The Company used 50% of the net proceeds from the Conversion to buy all of the common stock of the
Bank and retained the remaining 50% which was primarily invested in fixed income securities.



On August 31, 2001, the Bank acquired First Federal Savings and Loan Association of East Hartford (First Federal) for $106.26 million in cash. Immediately after the completion of the acquisition, First
Federal was merged into the Bank. The results of First Federal are included in the historical results of the Company subsequent to August 31, 2001.



On July 16, 2003, the Company announced it entered into an Agreement and Plan of Merger with The New Haven Savings Bank (NHSB). The
Companys stockholders will receive $52.00 in cash in exchange for each share of the Companys common stock held. If the transaction closes after March 31, 2004, the merger price is subject to increase based on the Companys earnings
less dividends paid from that date to the end of the month preceding the closing date of the merger. As a condition precedent to the merger, NHSB will convert from a Connecticut-chartered mutual savings bank to a Connecticut-chartered stock savings
bank and simultaneously form a holding company. The transaction is subject to the approval of the stockholders of the Company, for which a stockholder meeting has been scheduled for March 30, 2004. NHSB expects to close the transaction as soon as
practicable following the stockholders meeting.



The Bank
was founded in 1905 as a Connecticut-chartered mutual savings bank. In 1996, the Bank converted to stock form as part of the M.H.C.s mutual holding company formation. The Bank is regulated by the Connecticut Department of Banking and the
Federal Deposit Insurance Corporation. The Banks deposits are insured to the maximum allowable amount by the Bank Insurance Fund of the Federal Deposit Insurance Corporation. The Bank is a member of the Federal Home Loan Bank
(FHLB) system.



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The Bank is a traditional savings association that accepts retail deposits from the general public in the
areas surrounding its 28 full-service banking offices and uses those funds, together with funds generated from operations and borrowings, to originate residential mortgage loans, commercial loans and consumer loans, primarily home equity loans and
lines of credit. The Bank primarily holds the loans that it originates for investment. However, the Bank also sells loans, primarily fixed-rate mortgage loans, in the secondary market, while generally retaining the servicing rights. The Bank also
invests in mortgage-backed securities, debt and equity securities and other permissible investments. The Banks revenues are derived principally from the generation of interest and fees on loans originated and, to a lesser extent, interest and
dividends on investment and mortgage-backed securities. The Banks primary sources of funds are deposits, principal and interest payments on loans and investments and mortgage-backed securities and advances from the FHLB of Boston.



The Companys Internet website is www.sbmct.com. The Company
makes available free of charge on or through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Information on our website is not incorporated into this Form
10-K or our other securities filings and is not a part of them.



Market Area



The Bank is headquartered in Manchester, Connecticut in
Hartford County. The Banks primary deposit gathering and lending areas are concentrated in the communities surrounding its 28 banking offices located in Hartford, Tolland and Windham Counties.



Hartford County is located in central Connecticut approximately two hours
from both Boston and New York City and contains the city of Hartford. The region serves as the governmental and as a financial center of Connecticut. Hartford County has a diversified mix of industry groups, including insurance and financial
services, manufacturing, service, government and retail. The major employers in the area include several prominent international and national insurance and manufacturing companies, such as Aetna, Inc., The Hartford Financial Services Group, Inc.,
United Technologies Corp., Stanley Works, as well as many regional banks and the Connecticut state government.



Competition



The Bank
faces intense competition in attracting deposits and loans in its primary market area. Historically, the Banks most direct competition for deposits came from the several commercial and savings banks operating in its primary market area and, to
a lesser extent, from other financial institutions, such as brokerage firms, credit unions and insurance companies. Although these entities continue to provide a source of competition for deposits, the Bank faces increasingly significant competition
for deposits from the mutual fund industry as customers seek alternative sources of investment for their funds. The Bank must also compete for investors funds which may be used to purchase short-term money market securities and other corporate
and government securities. While the Bank faces competition for loans from the significant number of traditional financial institutions, primarily savings banks and commercial banks in its market area, its most significant competition comes from
other financial services providers, such as the mortgage companies and mortgage brokers operating in its primary market area. Additionally, the Bank faces increased competition as a result of regulatory actions and legislative changes, most notably
the enactment of the Financial Services Modernization Act of 1999. These changes have eased, and likely will continue to ease, restrictions on interstate banking and entry into the financial services market by non-depository and non-traditional
financial services providers, including insurance companies, securities brokerage and underwriting firms, and specialty financial services companies such as Internet-based providers.



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Lending Activities



General.The types of loans that the Bank may originate are limited by federal and state laws and regulations. Interest rates charged by the
Bank on loans are affected principally by the Banks current asset/liability strategy, the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by
general and economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.



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Loan Portfolio Analysis.The following table sets forth the composition of the Banks
loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.



|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|---------------------------- |  | ---------------------- | --------- | - | ---------------- | ------ | - | ------ | - | --------- | ---------------- |  | ------ | ------ |  | - | ---------------- | - |  | ------ | - |  | ---------------- | --------- | - | ------ | ------ | - | ---------------- | - | ------- | - |  | ------ | -
|                             |  | 2003                   |           |   | 2002             |        |   | 2001   |   |           | 2000             |  |        | 1999   | 
|                             |  | Amount                 |           |   | Percent of Total |        |   | Amount |   |           | Percent of Total |  |        | Amount |  |   | Percent of Total |   |  | Amount |   |  | Percent of Total |           |   | Amount |        |   | Percent of Total |  
|                             |  | (Dollars in thousands) |          
|Real estate loans:           |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|One- to four-family          |  | $                      | 981,023   |   |                  | 58.14  | % |        | $ | 907,188   |                  |  | 58.28  | %      |  | $ | 841,895          |   |  | 58.61  | % |  | $                | 586,536   |   |        | 58.22  | % |                  | $ | 544,732 |   |  | 57.40  | %
|Construction (1)             |  |                        | 73,657    |   |                  | 4.37   |   |        |   | 64,182    |                  |  | 4.12   |        |  |   | 76,551           |   |  | 5.33   |   |  |                  | 32,590    |   |        | 3.24   |   |                  |   | 40,690  |   |  | 4.29   |  
|Commercial and multi- Family |  |                        | 304,632   |   |                  | 18.05  |   |        |   | 275,818   |                  |  | 17.72  |        |  |   | 231,644          |   |  | 16.13  |   |  |                  | 162,411   |   |        | 16.12  |   |                  |   | 155,085 |   |  | 16.34  |  
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Total real estate loans      |  |                        | 1,359,312 |   |                  | 80.56  |   |        |   | 1,247,188 |                  |  | 80.12  |        |  |   | 1,150,090        |   |  | 80.07  |   |  |                  | 781,537   |   |        | 77.58  |   |                  |   | 740,507 |   |  | 78.03  |  
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Commercial loans             |  |                        | 187,905   |   |                  | 11.14  |   |        |   | 180,612   |                  |  | 11.60  |        |  |   | 166,314          |   |  | 11.58  |   |  |                  | 146,360   |   |        | 14.52  |   |                  |   | 134,637 |   |  | 14.19  |  
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Consumer loans:              |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Home equity lines of credit  |  |                        | 68,965    |   |                  | 4.09   |   |        |   | 43,958    |                  |  | 2.82   |        |  |   | 35,592           |   |  | 2.48   |   |  |                  | 27,203    |   |        | 2.70   |   |                  |   | 23,019  |   |  | 2.43   |  
|Other                        |  |                        | 71,089    |   |                  | 4.21   |   |        |   | 84,981    |                  |  | 5.46   |        |  |   | 84,375           |   |  | 5.87   |   |  |                  | 52,358    |   |        | 5.20   |   |                  |   | 50,794  |   |  | 5.35   |  
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Total consumer loans         |  |                        | 140,054   |   |                  | 8.30   |   |        |   | 128,939   |                  |  | 8.28   |        |  |   | 119,967          |   |  | 8.35   |   |  |                  | 79,561    |   |        | 7.90   |   |                  |   | 73,813  |   |  | 7.78   |  
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Total loans                  |  |                        | 1,687,271 |   |                  | 100.00 | % |        |   | 1,556,739 |                  |  | 100.00 | %      |  |   | 1,436,371        |   |  | 100.00 | % |  |                  | 1,007,458 |   |        | 100.00 | % |                  |   | 948,957 |   |  | 100.00 | %
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Allowance for loan losses    |  |                        | (16,543   | ) |                  |        |   |        |   | (16,172   | )                |  |        |        |  |   | (15,228          | ) |  |        |   |  |                  | (11,694   | ) |        |        |   |                  |   | (10,617 | ) |  |        |  
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  
|Total loans, net             |  | $                      | 1,670,728 |   |                  |        |   |        | $ | 1,540,567 |                  |  |        |        |  | $ | 1,421,143        |   |  |        |   |  | $                | 995,764   |   |        |        |   |                  | $ | 938,340 |   |  |        |  
|                             |  |                        |           |   |                  |        |   |        |   |           |                  |  |        |        |  |   |                  |   |  |        |   |  |                  |           |   |        |        |   |                  |   |         |   |  |        |  

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|(1) | Includes construction to permanent residential and commercial real estate loans.
|--- | --------------------------------------------------------------------------------



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One- to Four-Family Real Estate Loans.The Banks primary lending activity is to
originate loans secured by one- to four-family residences located in its primary market area. Of the one- to four-family loans outstanding at December 31, 2003, approximately 76.01% were fixed-rate mortgage loans and 23.99% were adjustable-rate
loans.



The Bank originates fixed-rate fully amortizing loans
with maturities ranging between 10 and 30 years. Management establishes the loan interest rates based on market conditions. The Bank offers mortgage loans that conform to Fannie Mae and Freddie Mac guidelines, as well as jumbo loans, which are
presently loans in amounts over $333,700. Fixed-rate conforming loans are generally originated to be held in the Banks portfolio. However, the Bank may sell such loans from time to time. Management periodically determines whether or not to
sell loans based on changes in prevailing market interest rates. Loans that are sold are generally sold to Freddie Mac, with the servicing rights retained.



Currently, the Bank also offers adjustable-rate mortgage loans, with an interest rate based on the one year Constant Maturity Treasury index, which is
adjusted annually at the outset of the loan or which is adjusted annually after a three or five year initial fixed period and with terms of up to 30 years. Interest rate adjustments on such loans are limited to no more than 2% during any adjustment
period and 6% over the life of the loan. Adjustable-rate loans may possess a conversion option, whereby the borrower may opt to convert the loan to a fixed interest rate after a predetermined period of time, generally within the first 60 months of
the loan term.



Adjustable-rate mortgage loans help reduce the
Banks exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs due to changed rates to be paid by borrowers. It is possible that during periods of rising interest
rates the risk of default on adjustable-rate mortgage loans may increase as a result of repricing and the increased payments required to be paid by borrowers. In addition, although adjustable-rate mortgage loans allow the Bank to adjust the
sensitivity of its asset base to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits. Because of these considerations, the Bank has no assurance that yields on
adjustable-rate mortgage loans will be sufficient to offset increases in the Banks cost of funds during periods of rising interest rates. The Bank believes these risks, which have not had a material adverse effect on the Bank to date, are
generally less than the risks associated with holding fixed-rate loans in its portfolio in a rising interest rate environment.



The Bank underwrites fixed- and variable-rate one- to four-family residential mortgage loans with loan-to-value ratios of up to 97% and 95%, respectively,
provided that a borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the secured property. The Bank also requires that fire, casualty, title, hazard insurance and, if
appropriate, flood insurance be maintained on all properties securing real estate loans made by the Bank. An independent licensed appraiser generally appraises all properties.



In an effort to provide financing for moderate income and first-time home buyers, the Bank offers FHA (Federal Housing
Authority) and CHFA (Connecticut Housing Finance Authority) loans and has its own First-Time Home Buyer loan program. These programs offer residential mortgage loans to qualified individuals. These loans are offered with adjustable- and fixed-rates
of interest and terms of up to 30 years. Such loans may be secured by one- to four-family residential property, in the case of FHA and CHFA loans, and must be secured by a single-family owner-occupied unit in the case of First-Time Home Buyer loans.
All of these loans are originated using modified underwriting guidelines. FHA loans are closed in the name of the Bank and immediately sold in the secondary market to Countrywide Mortgage Company with the loan servicing rights released. CHFA loans
are immediately assigned after closing to the Connecticut Housing Finance Authority with servicing rights retained by the Bank. Countrywide Mortgage and CHFA establish their respective rates and terms upon which such loans are offered. First-Time
Home Buyer loans are offered with a discounted interest rate (approximately 50 basis points) and usually with no application or loan origination fees. All such loans are originated in amounts of up to 97% of the lower of the propertys
appraised value or the sale price. Private mortgage insurance is required on all such loans.



The Bank also offers to its full-time employees who satisfy certain criteria and the general underwriting standards of the Bank fixed and adjustable-rate mortgage loans with reduced interest rates, which are currently
50 to 100 basis points below the rates offered to the Banks other customers. The Employee Mortgage Rate is limited to



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##### Table of Contents

the purchase, construction or refinancing of an employees owner-occupied residence. The Employee Mortgage Rate
normally ceases upon termination of employment or if the property no longer is the employees residence. Upon termination of the Employee Mortgage Rate, the interest rate reverts to the contract rate in effect at the time that the loan was
extended. All other terms and conditions contained in the original mortgage and note continue to remain in effect. As of December 31, 2003, the Bank had $17.61 million of Employee Mortgage Rate loans, or 1.04% of total loans.



Construction Loans.The Bank originates construction loans to
individuals for the construction and acquisition of personal residences. At December 31, 2003, the unadvanced portion of construction loans totaled $15.11 million.



The Banks residential construction loans generally provide for the payment of interest only during the construction
phase, which is usually twelve months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Loans can be made with a maximum loan-to-value ratio of 90%, provided that the borrower obtains private mortgage insurance
on the loan if the loan balance exceeds 80% of the appraised value or sales price, whichever is less, of the secured property. Construction loans to individuals are generally made on the same terms as the Banks one- to four-family mortgage
loans.



Before making a commitment to fund a residential
construction loan, the Bank requires an appraisal of the property by an independent licensed appraiser. The Bank also reviews and inspects each property before disbursing any funds during the term of the construction loan. Loan proceeds are
disbursed after each inspection based on the percentage-of-completion method.



The Bank also originates residential development loans primarily to finance the construction of single-family homes and subdivisions. At December 31, 2003, residential development loans totaled $40.77 million, or
2.42% of the Banks total loans. These loans are generally offered to experienced builders with whom the Bank has an established relationship. Residential development loans are typically offered with terms of up to 24 months. The maximum
loan-to-value limit applicable to these loans is 80% for contract sales and 75% for speculative properties. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by an approved appraiser of
the Bank warrants.



The Bank also makes construction loans for
commercial development projects. The projects include multi-family, apartment, industrial, retail and office buildings. These loans generally have an interest-only phase during construction and then convert to permanent financing. Disbursement of
funds are at the sole discretion of the Bank and are based on the progress of construction. The maximum loan-to-value limit applicable to these loans is 80%. At December 31, 2003, commercial construction loans totaled $8.16 million, or 0.48% of
total loans.



The Bank also originates land loans to local
contractors and developers for the purpose of improving the property, or for the purpose of holding or developing the land for sale. Such loans are secured by a lien on the property, are limited to 70% of the lower of the acquisition price or the
appraised value of the land and have a term of up to two years with a floating interest rate based on the Banks internal base rate. The Banks land loans are generally secured by property in its primary market area. The Bank requires
title insurance and, if applicable, an environmental site assessment.



Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy
of the initial estimate of the propertys value at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Bank may
be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, the Bank may be confronted with a project, when completed, having a
value which is insufficient to assure full repayment.





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Commercial and Multi-Family Real Estate Loans.The Bank originates multi-family and
commercial real estate loans that are generally secured by five or more unit apartment buildings and properties used for business purposes such as small office buildings, industrial facilities or retail facilities primarily located in the
Banks primary market area. The Banks multi-family and commercial real estate underwriting policies provide that such real estate loans may be made in amounts of up to 80% of the appraised value of the property provided such loan complies
with the Banks current loans-to-one-borrower limit, which at December 31, 2003 was $34.10 million. The Banks multi-family and commercial real estate loans are made with terms of up to 20 years and are offered with fixed interest rates as
well as interest rates that adjust periodically which are generally indexed to the Federal Home Loan Bank Advance rates with a comparable term or repricing period. In reaching its decision on whether to make a multi-family or commercial real estate
loan, the Bank considers the net operating income of the property, the borrowers expertise, credit history and profitability and the value of the underlying property. In addition, with respect to commercial real estate rental properties, the
Bank will also consider the term of the lease and the quality of the tenants. The Bank has generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.20x. Environmental surveys are generally required for commercial real estate loans. Generally, multi-family and commercial real estate loans made to corporations, partnerships and other business entities require personal
guarantees by the principals.



Loans secured by multi-family
and commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family and commercial real estate
properties often depend on the successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank tries to minimize these risks through its
underwriting standards.



Commercial Loans. The
Bank makes commercial business loans primarily in its market area to a variety of professionals, sole proprietorships and businesses. The Bank offers a variety of commercial lending products, including term loans for fixed assets and working
capital, revolving lines of credit, letters of credit, and Small Business Administration guaranteed loans. The maximum amount of a commercial business loan is limited by the Banks loans-to-one-borrower limit which at December 31, 2003, was
$34.10 million. Term loans are generally offered with initial fixed rates of interest for one to five years and with terms of up to ten years. Business lines of credit have adjustable rates of interest and are payable on demand, subject to annual
review and renewal. Business loans with variable rates of interest adjust on a daily basis and are indexed to the Banks base rate. At December 31, 2003, the Bank had $69.55 million of unadvanced commercial lines of credit.



When making commercial business loans, the Bank considers the financial
statements of the borrower, the Banks lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial business loans are generally secured
by a variety of collateral, primarily accounts receivable, inventory and equipment, and are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loan relationships are made in amounts of up to 90% of the
value of the collateral securing the loan. The Bank generally does not make unsecured commercial loans.



Unlike residential mortgage loans, which generally are made on the basis of the borrowers ability to make repayment from his or her employment or
other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrowers ability to make repayment from the cash flow of
the borrowers business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be
difficult to appraise and may fluctuate in value.



Consumer Loans.The Bank offers a variety of consumer loans, including second mortgage loans and home equity lines of credit, both of which are secured by owner-occupied one- to four-family residences. At December 31, 2003,
second mortgage loans and equity lines of credit totaled $113.06 million, or 6.70% of the Banks total loans and 80.73% of consumer loans. Additionally, at December 31, 2003, the unadvanced amounts of home equity lines of credit totaled $72.45
million. The underwriting standards employed by the Bank for second mortgage loans and equity lines of credit include a determination of the applicants credit history, an assessment of the applicants ability



7



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##### Table of Contents

to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Home
equity lines of credit have adjustable rates of interest which are indexed to the prime rate as reported in The Wall Street Journal.Interest rate adjustments on home equity lines of credit are limited to no more than a maximum of 17%.
Generally, the maximum loan-to-value ratio on home equity lines of credit is 90%. A home equity line of credit may be drawn down by the borrower for a period of 10 years from the date of the loan agreement. During this period, the borrower has the
option of paying, on a monthly basis, either principal and interest or only the interest. The borrower has to pay back the amount outstanding under the line of credit at the end of a 20-year period. The Bank offers fixed- and adjustable-rate second
mortgage loans with terms up to 20 years. The loan-to-value ratios of both fixed-rate and adjustable-rate home equity loans are generally limited to 90%.



The Bank offers fixed-rate automobile loans through local dealerships for new or used vehicles with terms of up to 72 months and loan-to-value ratios of
the lesser of the purchase price or the retail value shown in the NADA Used Car Guide. At December 31, 2003, automobile loans totaled $12.84 million, or 0.76% of the Banks total loans and 9.17% of consumer loans. For the year ended December
31, 2003, the Bank purchased $3.07 million of automobile loans from local dealerships.



Other consumer loans at December 31, 2003 amounted to $14.15 million, or 0.84% of the Banks total loans and 10.10% of consumer loans. These loans include unsecured personal loans, collateral loans, credit card
loans and education loans. Unsecured personal loans generally have a fixed-rate, a maximum borrowing limitation of $25,000 and a maximum term of five years. Collateral loans are generally secured by a passbook account, a certificate of deposit or
marketable securities.



Consumer loans entail greater risk than
do residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections depend on the borrowers continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.



Loans to One Borrower.The maximum amount that the Bank may
lend to one borrower is limited by statute. At December 31, 2003, the Banks statutory limit on loans to one borrower was $34.10 million. At that date, the Banks largest relationship was $17.32 million, which was performing according to
its terms as of December 31, 2003.



8



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##### Table of Contents

Maturity of Loan Portfolio.The following table shows the remaining contractual maturity of
the Banks total loans at December 31, 2003, excluding the effect of prepayments.



|                                    |  |                      |         |                  |   |                                        |  |            |         |          |   |         |  |   |         |  |   |          
|----------------------------------- |  | -------------------- | ------- | ---------------- | - | -------------------------------------- |  | ---------- | ------- | -------- | - | ------- |  | - | ------- |  | - | ---------
|                                    |  | At December 31, 2003
|                                    |  | One- to four- family |         | Construction (1) |   | Commercialand multi-family real estate |  | Commercial |         | Consumer |   | Total  
|                                    |  | (in thousands)      
|Amounts due in:                     |  |                      |         |                  |   |                                        |  |            |         |          |   |         |  |   |         |  |   |          
|One year or less                    |  | $                    | 125     |                  | $ | 24,015                                 |  | $          | 4,390   |          | $ | 37,982  |  | $ | 2,191   |  | $ | 68,703   
|After one year:                     |  |                      |         |                  |   |                                        |  |            |         |          |   |         |  |   |         |  |   |          
|More than one year to three years   |  |                      | 1,710   |                  |   | 18,547                                 |  |            | 4,137   |          |   | 34,038  |  |   | 9,994   |  |   | 68,426   
|More than three years to five years |  |                      | 4,715   |                  |   |                                       |  |            | 7,986   |          |   | 37,608  |  |   | 18,711  |  |   | 69,020   
|More than five years to 10 years    |  |                      | 48,889  |                  |   | 2,394                                  |  |            | 74,591  |          |   | 42,491  |  |   | 24,053  |  |   | 192,418  
|More than 10 years to 15 years      |  |                      | 350,023 |                  |   | 1,141                                  |  |            | 78,076  |          |   | 17,727  |  |   | 18,179  |  |   | 465,146  
|More 15 years                       |  |                      | 575,561 |                  |   | 27,560                                 |  |            | 135,452 |          |   | 18,059  |  |   | 66,926  |  |   | 823,558  
|                                    |  |                      |         |                  |   |                                        |  |            |         |          |   |         |  |   |         |  |   |          
|Total amounts due                   |  | $                    | 981,023 |                  | $ | 73,657                                 |  | $          | 304,632 |          | $ | 187,905 |  | $ | 140,054 |  | $ | 1,687,271
|                                    |  |                      |         |                  |   |                                        |  |            |         |          |   |         |  |   |         |  |   |          

---

|(1) | Includes construction to permanent residential and commercial real estate loans.
|--- | --------------------------------------------------------------------------------



The following table sets forth, at December 31, 2003, the dollar amount of loans contractually due after December 31, 2004
and whether such loans have fixed interest rates or adjustable interest rates. Adjustable rate loans in the table below refer to loans in which the interest rate is subject to adjustment prior to the loans final maturity dates.



|                            |  |                             |         |            |   |         |  |   |          
|--------------------------- |  | --------------------------- | ------- | ---------- | - | ------- |  | - | ---------
|                            |  | Due After December 31, 2004
|                            |  | Fixed                       |         | Adjustable |   | Total  
|                            |  | (in thousands)             
|Real estate loans:          |  |                             |         |            |   |         |  |   |          
|One- to four- family        |  | $                           | 745,943 |            | $ | 234,955 |  | $ | 980,898  
|Construction (1)            |  |                             | 18,071  |            |   | 31,571  |  |   | 49,642   
|Commercial and multi-family |  |                             | 42,815  |            |   | 257,427 |  |   | 300,242  
|                            |  |                             |         |            |   |         |  |   |          
|Total real estate loans     |  |                             | 806,829 |            |   | 523,953 |  |   | 1,330,782
|Commercial loans            |  |                             | 55,873  |            |   | 94,050  |  |   | 149,923  
|Consumer loans              |  |                             | 64,921  |            |   | 72,942  |  |   | 137,863  
|                            |  |                             |         |            |   |         |  |   |          
|Total loans                 |  | $                           | 927,623 |            | $ | 690,945 |  | $ | 1,618,568
|                            |  |                             |         |            |   |         |  |   |          

---

|(1) | Includes construction to permanent residential and commercial real estate loans.
|--- | --------------------------------------------------------------------------------



The average life of a loan is substantially less than its contractual term because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately due and payable if, among other things, the borrower sells the real property with the mortgage and the loan is not repaid. The average life of a mortgage loan tends to
increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, tends to decrease when rates on existing mortgage loans are substantially higher than current mortgage loan
market rates.



Loan Approval Procedures and Authority.The Banks lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by the Banks Board of Directors



9



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and management. The Banks policies and loan approval limits are established by management and are approved by the
Board of Directors. The Board of Directors has designated certain individuals of the Bank and certain branch managers to consider and approve loans within their designated authority.



A designated individual may approve all first and second mortgages secured by the borrowers primary residence with an
aggregate indebtedness up to $750,000. Amounts above $750,000 are presented to loan committee for approval. Amounts above $1.00 million require the approval of the Executive Committee of the Board of Directors.



All commercial loans, including commercial real estate loans, multifamily
loans, commercial construction and development loans and commercial business loans in amounts of up to $500,000 may be approved by any two of the designated individuals with the appropriate authority. All commercial loans in excess of $500,000
require the approval of the Banks loan committee; and all commercial loans where an individual loan is in excess of $1.00 million or the aggregate indebtedness exceeds $3.00 million require the approval of the Executive Committee of the Board
of Directors.



With regard to consumer loans, automobile loans
in amounts of up to $50,000 and unsecured personal loans in amounts of up to $25,000 may be approved by either one or two of the designated individuals depending on the credit score; automobile loans in excess of $50,000 and unsecured personal loans
in excess of $25,000 must be approved by the Banks loan committee. Collateral loans of up to $25,000 may be approved by any branch manager.



Loan Originations, Purchases and Sales.The Banks lending activities are conducted by its salaried and commissioned loan personnel and
through non-bank third-party correspondents. Currently, the Bank uses 16 loan originators who solicit and originate mortgage loans on behalf of the Bank. These loan originators accounted for approximately 98.80% of the adjustable-rate and fixed-rate
mortgage loans originated by the Bank in 2003. Loan originators are compensated by a commission that is based on product, mortgage type, and new or existing customer relationship. The commission currently ranges from 20 to 60 basis points of the
loan amount. All loans originated by the loan originators are underwritten in conformity with the Banks loan underwriting policies and procedures. At December 31, 2003, the Bank serviced $78.62 million of loans for others.



From time to time when market conditions are favorable, the Bank will
purchase loans, primarily secured by one- to four-family residential properties located outside of the Banks primary market area, usually in Fairfield County, Connecticut or in Massachusetts. Purchased loans are underwritten according to the
Banks own underwriting criteria and procedures and are generally purchased without the accompanying servicing rights. Amounts outstanding related to loan purchases totaled $16.26 million and $30.45 million at December 31, 2003 and 2002,
respectively.



Substantially all of the Banks
adjustable-rate mortgage loans are originated for inclusion in the Banks loan portfolio. Historically, the Bank originated fixed-rate mortgage loans for sale in the secondary market. However, since 1998 and due to the low demand for
adjustable-rate mortgage loans, the Bank has retained for its portfolio a significant portion of fixed-rate mortgage loans. Sales are generally to Freddie Mac, with servicing rights retained. Loan sale decisions are made by the Banks
management and are generally based on prevailing market interest rates and the Banks loan-to-asset ratio.





10



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##### Table of Contents

The following table presents total loans originated, sold, purchased and repaid during the periods
indicated.



|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|---------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                             |  | For the Year Ended December 31, |          
|                                                                             |  | 2003                            |           |   | 2002 |   |           | 2001 | 
|                                                                             |  | (in thousands)                  |          
|Loans at beginning of year                                                   |  | $                               | 1,556,739 |   |      | $ | 1,436,371 |      |  | $ | 1,007,458 |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Originations:                                                                |  |                                 |           |   |      |   |           |      |  |   |           |  
|Real estate:                                                                 |  |                                 |           |   |      |   |           |      |  |   |           |  
|One- to four- family                                                         |  |                                 | 348,786   |   |      |   | 287,281   |      |  |   | 226,876   |  
|Construction (1)                                                             |  |                                 | 109,705   |   |      |   | 111,845   |      |  |   | 90,364    |  
|Commercial and multi-family                                                  |  |                                 | 50,476    |   |      |   | 60,746    |      |  |   | 51,381    |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Total real estate loans                                                      |  |                                 | 508,967   |   |      |   | 459,872   |      |  |   | 368,621   |  
|Commercial                                                                   |  |                                 | 106,104   |   |      |   | 115,261   |      |  |   | 110,032   |  
|Consumer                                                                     |  |                                 | 82,717    |   |      |   | 70,408    |      |  |   | 45,818    |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Total loans originated                                                       |  |                                 | 697,788   |   |      |   | 645,541   |      |  |   | 524,471   |  
|Loans acquired from First Federal                                            |  |                                 |          |   |      |   |          |      |  |   | 279,956   |  
|Fair market adjustment for loans acquired from First Federal                 |  |                                 |          |   |      |   |          |      |  |   | 4,699     |  
|Amortization of fair market adjustment for loans acquired from First Federal |  |                                 | (769      | ) |      |   | (1,213    | )    |  |   | (497      | )
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Total loans originated and purchased                                         |  |                                 | 697,019   |   |      |   | 644,328   |      |  |   | 808,629   |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Deduct:                                                                      |  |                                 |           |   |      |   |           |      |  |   |           |  
|Principal loan repayments and prepayments                                    |  |                                 | 559,423   |   |      |   | 517,887   |      |  |   | 371,305   |  
|Loan sales                                                                   |  |                                 | 5,501     |   |      |   | 4,201     |      |  |   | 6,976     |  
|Charge-offs                                                                  |  |                                 | 1,235     |   |      |   | 1,781     |      |  |   | 1,131     |  
|Transfers to other real estate owned                                         |  |                                 | 328       |   |      |   | 91        |      |  |   | 304       |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Total deductions                                                             |  |                                 | 566,487   |   |      |   | 523,960   |      |  |   | 379,716   |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Net increase in loans                                                        |  |                                 | 130,532   |   |      |   | 120,368   |      |  |   | 428,913   |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  
|Loans at end of year                                                         |  | $                               | 1,687,271 |   |      | $ | 1,556,739 |      |  | $ | 1,436,371 |  
|                                                                             |  |                                 |           |   |      |   |           |      |  |   |           |  

---

|(1) | Includes construction to permanent residential and commercial real estate loans.
|--- | --------------------------------------------------------------------------------



Loan Commitments.The Bank issues loan commitments to prospective borrowers on the condition that certain
events occur. Commitments are made in writing on specified terms and conditions and are generally honored for up to 60 days from approval. At December 31, 2003, the Bank had loan commitments and unadvanced loans and lines of credit totaling $242.30
million.



Loan Fees.In addition to interest
earned on loans, the Bank receives income from fees derived from loan originations, loan modifications, late payments and for miscellaneous services related to its loans. Income from these activities varies from period to period depending upon the
volume and type of loans made and competitive conditions. On loans originated by third-party originators, the Bank may pay a premium to compensate an originator for loans where the borrower is paying a higher rate on the loan.



The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. As required by applicable accounting principles, loan origination fees, discount points and certain loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield
basis. At December 31, 2003, the Bank had $1.26 million of net deferred loan fees. The Bank amortized approximately $145,000 of net deferred loan fees during the year ended December 31, 2003.



11



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##### Table of Contents

Nonperforming Assets, Delinquencies and Impaired Loans.All loan payments are due on the
first day of each month. When a borrower fails to make a required loan payment, the Bank attempts to cure the deficiency by contacting the borrower and seeking the payment. A late notice is mailed on the 16thday of the month. In most cases, deficiencies are cured promptly. If a delinquency continues beyond the 30thday of the month, the account is referred to an in-house collector. The Bank generally prefers to work with borrowers to resolve problems, but the
Bank will institute foreclosure or other proceedings, as necessary, to minimize any potential loss.



On a monthly basis, management informs the Board of Directors of the amount of loans delinquent for more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property that the Bank owns. The Bank ceases accruing interest on mortgage loans when principal or interest payments are delinquent 90 days or more unless management determines that the loan principal and interest is fully
secured and in the process of collection. Once the accrual of interest on a loan is discontinued, all interest previously accrued is reversed against current period interest income once management determines that interest is uncollectable.



On January 1, 1995, the Bank adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118 Accounting by Creditors for Impairment of a Loanan amendment to SFAS No. 114. At December 31, 2003, 2002 and 2001, the Bank had
a recorded investment in impaired loans of $6.43 million, $2.89 million and $7.68 million, respectively, for which an additional allowance for loan losses of $395,000, $80,000 and $157,000, respectively, were required.



At December 31, 2003, the Banks largest nonperforming loan relationship
was a commercial business relationship with four loans totaling $4.22 million. A forbearance agreement has been executed which requires scheduled loan paydowns through June 2004. No specific allocations have been made to the allowance for loan
losses for these loans, as the estimated collateral value exceeds the principal balance.



12



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##### Table of Contents

The following table sets forth information regarding nonperforming loans and other real estate owned at
the dates indicated.



|                                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|---------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ------ | -
|                                                           |  | At December 31,        |      
|                                                           |  | 2003                   |       |   | 2002 |   |       | 2001 |  |   | 2000  |   |  | 1999 |      
|                                                           |  | (dollars in thousands) |      
|Nonperforming loans:                                       |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|One- to four- family real estate                           |  | $                      | 404   |   |      | $ | 833   |      |  | $ | 1,272 |   |  | $    | 485   |   |  | $ | 501    |  
|Commercial and multi-family real estate                    |  |                        | 778   |   |      |   | 788   |      |  |   | 2,601 |   |  |      | 3,685 |   |  |   | 10,513 |  
|Commercial (1)                                             |  |                        | 5,015 |   |      |   | 1,165 |      |  |   | 3,262 |   |  |      | 2,529 |   |  |   | 454    |  
|Consumer                                                   |  |                        | 236   |   |      |   | 108   |      |  |   | 544   |   |  |      | 222   |   |  |   | 17     |  
|                                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|Total nonperforming loans                                  |  |                        | 6,433 |   |      |   | 2,894 |      |  |   | 7,679 |   |  |      | 6,921 |   |  |   | 11,485 |  
|Other real estate owned                                    |  |                        | 112   |   |      |   |      |      |  |   | 84    |   |  |      | 125   |   |  |   | 604    |  
|                                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|Total nonperforming assets                                 |  | $                      | 6,545 |   |      | $ | 2,894 |      |  | $ | 7,763 |   |  | $    | 7,046 |   |  | $ | 12,089 |  
|                                                           |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |        |  
|                                                           |  |                        |       |   |     
|Total nonperforming loans as a percentage of total loans   |  |                        | 0.38  | % |      |   | 0.19  | %    |  |   | 0.53  | % |  |      | 0.69  | % |  |   | 1.21   | %
|Total nonperforming assets as a percentage of total assets |  |                        | 0.25  | % |      |   | 0.11  | %    |  |   | 0.32  | % |  |      | 0.50  | % |  |   | 0.98   | %

---

|(1) | Nonperforming commercial business loans increased $3.85 million from December 31, 2002 to December 31, 2003, due to four loans totaling $4.22 million to one borrower that were
placed on nonaccrual status during December 2003. A forbearance agreement has been executed which requires scheduled loan paydowns through June 2004. In January 2004, two commercial real estate loans totaling $1.59 million were placed on nonaccrual
status. One loan for $807,000 was reported as 60 days past due at December 31, 2003. The second loan for $778,000 was reported as 90 days past due and still accruing at December 31, 2003 and therefore is included in December 31, 2003 nonperforming
loans. No specific allocations have been made to the allowance for loan losses for these loans, as the estimated collateral value of all such loans exceeds the principal balance.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest income that would have been recorded for the years ended December
31, 2003, 2002 and 2001 had nonaccruing loans been current according to their original terms amounted to approximately $104.000, $136,000 and $446,000, respectively. For the years ended December 31, 2003, 2002 and 2001, interest income on impaired
loans of approximately $56,000, $111,000 and $79,000, respectively, were recognized.



The following tables set forth the delinquencies in the Banks loan portfolio as of the dates indicated. All loans noted as 90 days or more past due in the tables below were still accruing interest at December
31, 2003, 2002 and 2001, respectively.



13



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##### Table of Contents

|                                |  |                        |  |                            |                      |   |                 |            |                            |   |                 |                 |  |                            |  |   |                 |   |                            |    |  |   |       |  
|------------------------------- |  | ---------------------- |  | -------------------------- | -------------------- | - | --------------- | ---------- | -------------------------- | - | --------------- | --------------- |  | -------------------------- |  | - | --------------- | - | -------------------------- | -- |  | - | ----- | -
|                                |  | At December 31, 2003   |  |                            | At December 31, 2002 |  
|                                |  | 60-89 Days             |  |                            | 90 Days or More      |   |                 | 60-89 Days |                            |   | 90 Days or More |                
|                                |  | Number of Loans        |  | Principal Balance of Loans |                      |   | Number of Loans |            | Principal Balance of Loans |   |                 | Number of Loans |  | Principal Balance of Loans |  |   | Number of Loans |   | Principal Balance of Loans |   
|                                |  | (dollars in thousands) | 
|Real estate loans:              |  |                        |  |                            |                      |   |                 |            |                            |   |                 |                 |  |                            |  |   |                 |   |                            |    |  |   |       |  
|One- to four- family            |  | 4                      |  | $                          | 280                  |   |                 | 6          |                            | $ | 291             |                 |  | 1                          |  | $ | 72              |   |                            | 5  |  | $ | 527   |  
|Commercial and multi-family     |  | 3                      |  |                            | 1,302                |   |                 | 1          |                            |   | 778             |                 |  |                           |  |   |                |   |                            | 1  |  |   | 395   |  
|                                |  |                        |  |                            |                      |   |                 |            |                            |   |                 |                 |  |                            |  |   |                 |   |                            |    |  |   |       |  
|Total real estate loans         |  | 7                      |  |                            | 1,582                |   |                 | 7          |                            |   | 1,069           |                 |  | 1                          |  |   | 72              |   |                            | 6  |  |   | 922   |  
|Commercial loans                |  | 7                      |  |                            | 311                  |   |                 | 2          |                            |   | 42              |                 |  | 2                          |  |   | 9               |   |                            | 3  |  |   | 313   |  
|Consumer loans                  |  | 18                     |  |                            | 56                   |   |                 | 46         |                            |   | 174             |                 |  | 25                         |  |   | 153             |   |                            | 34 |  |   | 108   |  
|                                |  |                        |  |                            |                      |   |                 |            |                            |   |                 |                 |  |                            |  |   |                 |   |                            |    |  |   |       |  
|Total                           |  | 32                     |  | $                          | 1,949                |   |                 | 55         |                            | $ | 1,285           |                 |  | 28                         |  | $ | 234             |   |                            | 43 |  | $ | 1,343 |  
|                                |  |                        |  |                            |                      |   |                 |            |                            |   |                 |                 |  |                            |  |   |                 |   |                            |    |  |   |       |  
|Delinquent loans to total loans |  |                        |  |                            | 0.12                 | % |                 |            |                            |   | 0.08            | %               |  |                            |  |   | 0.02            | % |                            |    |  |   | 0.09  | %
|                                |  |                        |  |                            |                      |   |                 |            |                            |   |                 |                 |  |                            |  |   |                 |   |                            |    |  |   |       |  



|                                |  |                        |  |                          |                 |   |                |    |                          |   |       |  
|------------------------------- |  | ---------------------- |  | ------------------------ | --------------- | - | -------------- | -- | ------------------------ | - | ----- | -
|                                |  | At December 31, 2001   | 
|                                |  | 60-89 Days             |  |                          | 90 Days or More |  
|                                |  | Numberof Loans         |  | PrincipalBalance ofLoans |                 |   | Numberof Loans |    | PrincipalBalance ofLoans |  
|                                |  | (dollars in thousands) | 
|Real estate loans:              |  |                        |  |                          |                 |   |                |    |                          |   |       |  
|One- to four- family            |  | 4                      |  | $                        | 660             |   |                | 6  |                          | $ | 727   |  
|Commercial and multi- family    |  | 3                      |  |                          | 740             |   |                |   |                          |   |      |  
|                                |  |                        |  |                          |                 |   |                |    |                          |   |       |  
|Total real estate loans         |  | 7                      |  |                          | 1,400           |   |                | 6  |                          |   | 727   |  
|Commercial loans                |  | 7                      |  |                          | 783             |   |                | 7  |                          |   | 217   |  
|Consumer loans                  |  | 54                     |  |                          | 476             |   |                | 59 |                          |   | 160   |  
|                                |  |                        |  |                          |                 |   |                |    |                          |   |       |  
|Total                           |  | 68                     |  | $                        | 2,659           |   |                | 72 |                          | $ | 1,104 |  
|                                |  |                        |  |                          |                 |   |                |    |                          |   |       |  
|Delinquent loans to total loans |  |                        |  |                          | 0.19            | % |                |    |                          |   | 0.08  | %
|                                |  |                        |  |                          |                 |   |                |    |                          |   |       |  



Real Estate
Owned.Other real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned until sold. When property is acquired, it is recorded at fair value at the date of
foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition are expensed. At December 31, 2003, the Bank had $112,000 of other real estate owned consisting of one residential property.



Asset Classification.Banking regulators have adopted various
regulations and practices regarding problem assets of savings institutions. Under such regulations, federal and state examiners have authority to identify problem assets during examinations and, if appropriate, require their classification.



There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.
An asset classified as loss is



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considered uncollectable and of such little value that its continued status as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified substandard or doubtful can be included in determining an institutions regulatory capital, while specific valuation allowances for loan losses generally do not
qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated special mention. The
Bank performs an internal analysis of its loan portfolio and assets to classify such loans and assets similar to the manner in which such loans and assets are classified by the federal banking regulators. In addition, the Bank regularly analyzes the
losses inherent in its loan portfolio and its nonperforming loans in determining the appropriate level of the allowance for loan losses.



Allowance for Loan Losses.The Bank devotes significant attention to maintaining high loan quality through its underwriting standards,
active servicing of loans and aggressive management of nonperforming assets. The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable loan losses which are inherent in the loan portfolio.
Probable loan losses are estimated based on a quarterly review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent factors. In assessing risks inherent in the portfolio, management considers the
risk of loss on nonperforming and classified loans including an analysis of collateral in each situation. The Banks methodology for assessing the appropriateness of the allowance includes several key elements. Problem loans are identified and
analyzed individually to estimate specific losses including an analysis of estimated future cash flows for impaired loans. The loan portfolio is also segmented into pools of loans that are similar in type and risk characteristics (i.e., commercial,
consumer and mortgage loans). Loss factors based on the Banks historical chargeoffs are applied using the Banks historical experience and may be adjusted for significant factors that, in managements judgment, affect the
collectability of the portfolio as of the evaluation date. Additionally, the portfolio is segmented into pools based on internal risk ratings with estimated loss factors applied to each rating category. Other factors considered in determining
probable loan losses are any changes in concentrations in the portfolio, trends in loan growth, the relationship and trends in recent years of recoveries as a percentage of prior chargeoffs and peer banks loss experience.



The allowance for loan losses is increased or decreased by provisions or
credits charged to operations, which represent an estimate of losses that occurred during the period and a correction of estimates of losses recorded in prior periods. Confirmed losses, net of recoveries, are charged directly to the allowance and
the loans are written down.



The allowance for loan losses
consists of a formula allowance for various loan portfolio classifications and an amount for loans identified as impaired, if necessary. The allowance is an estimate, and ultimate losses may vary from current estimates. Changes in the estimate are
recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period.



A portion of the allowance for loan losses is not allocated to any specific segment of the loan portfolio. This unallocated reserve is maintained for two
primary reasons: there exists an inherent subjectivity and imprecision to the analytical processes employed, and the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact
the portfolio in ways currently unforeseen. Moreover, management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: market risk factors, such as the effects of economic
variability on the entire portfolio, and unique portfolio risk factors that are inherent characteristics of the Banks loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the
Banks loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry or geographic concentrations, or trends that may exacerbate
losses resulting from economic events which the Bank may not be able to fully diversify out of its portfolio.



Due to the inherent imprecise nature of the loan loss estimation process and ever changing conditions, these risk attributes may not be adequately
captured in data related to the formula-based loan loss components used to



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determine allocations in the Banks analysis of the adequacy of the allowance for loan losses. Management,
therefore, has established and maintains an unallocated allowance for loan losses. The amount of the unallocated allowance was $3.05 million at December 31, 2003 compared to $3.24 million at December 31, 2002. As a percentage of the allowance for
loan losses, the unallocated was 18.44% of the total allowance for loan losses at December 31, 2003 and 20.04% of the total allowance for loan losses at December 31, 2002.



The Bank uses three separate methods to estimate the allowance for loan losses and then uses a weighted average formula to
estimate the final allowance for loan losses. The Bank uses a portfolio segmentation method, a risk rating method, and a historical method for estimating the allowance for loan losses. The Banks weighting factors for these three methods were
45%, 45% and 10%, respectively for 2002 and 2003. The historical method-weighting factor was reduced during 2001 from 20% as it has consistently and substantially produced a lower reserve amount than the other two methods and management believes
less emphasis should be placed on this method given the economic environment at December 31, 2003.



Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance
for loan losses may be necessary, and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its
existing allowance for loan losses consistent with accounting principles generally accepted in the United States, there can be no assurance that regulators, in reviewing the Banks loan portfolio, will not request the Bank to increase its
allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be
necessary should the quality of any loans deteriorate as a result of the factors discussed above. Material increases in the allowance for loan losses will adversely affect the Banks financial condition and results of operations.



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The following table presents an analysis of the Banks allowance for loan losses at and for the
years indicated.



|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                           |  | At or For the Year Ended December 31, |       
|                                                                           |  | 2003                                  |        |   | 2002 |   |        | 2001 |  |   | 2000   |   |  | 1999 |       
|                                                                           |  | (dollars in thousands)                |       
|Allowance for loan losses, beginning of year                               |  | $                                     | 16,172 |   |      | $ | 15,228 |      |  | $ | 11,694 |   |  | $    | 10,617 |   |  | $ | 10,585 |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Acquisition of First Federal Savings and Loan Association of East Hartford |  |                                       |       |   |      |   |       |      |  |   | 2,174  |   |  |      |       |   |  |   |       |  
|Charged-off loans:                                                         |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|One- to four- family real estate                                           |  |                                       | 25     |   |      |   | 16     |      |  |   | 327    |   |  |      | 84     |   |  |   | 110    |  
|Commercial and multi-family real estate                                    |  |                                       | 40     |   |      |   |       |      |  |   | 102    |   |  |      | 14     |   |  |   | 790    |  
|Commercial                                                                 |  |                                       | 701    |   |      |   | 1,066  |      |  |   | 488    |   |  |      | 244    |   |  |   | 337    |  
|Consumer (2)                                                               |  |                                       | 469    |   |      |   | 699    |      |  |   | 214    |   |  |      | 91     |   |  |   | 123    |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charged-off loans                                                    |  |                                       | 1,235  |   |      |   | 1,781  |      |  |   | 1,131  |   |  |      | 433    |   |  |   | 1,360  |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                           |  |                                       |        |   |     
|Recoveries on loans previously charged off:                                |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|One- to four- family real estate                                           |  |                                       | 125    |   |      |   | 24     |      |  |   | 123    |   |  |      | 153    |   |  |   | 55     |  
|Commercial and multi-family real estate (1)                                |  |                                       | 37     |   |      |   | 904    |      |  |   | 82     |   |  |      | 80     |   |  |   | 98     |  
|Commercial                                                                 |  |                                       | 67     |   |      |   | 121    |      |  |   | 256    |   |  |      | 26     |   |  |   | 96     |  
|Consumer                                                                   |  |                                       | 102    |   |      |   | 176    |      |  |   | 30     |   |  |      | 51     |   |  |   | 43     |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                                           |  |                                       | 331    |   |      |   | 1,225  |      |  |   | 491    |   |  |      | 310    |   |  |   | 292    |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net loans charged-off                                                      |  |                                       | 904    |   |      |   | 556    |      |  |   | 640    |   |  |      | 123    |   |  |   | 1,068  |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Provision for loan losses                                                  |  |                                       | 1,275  |   |      |   | 1,500  |      |  |   | 2,000  |   |  |      | 1,200  |   |  |   | 1,100  |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses, end of year                                     |  | $                                     | 16,543 |   |      | $ | 16,172 |      |  | $ | 15,228 |   |  | $    | 11,694 |   |  | $ | 10,617 |  
|                                                                           |  |                                       |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                           |  |                                       |        |   |     
|Net loans charged-off to average gross loans                               |  |                                       | 0.05   | % |      |   | 0.04   | %    |  |   | 0.06   | % |  |      | 0.01   | % |  |   | 0.12   | %
|Allowance for loan losses to total loans                                   |  |                                       | 0.98   |   |      |   | 1.04   |      |  |   | 1.06   |   |  |      | 1.16   |   |  |   | 1.12   |  
|Allowance for loan losses to nonperforming loans                           |  |                                       | 257.16 |   |      |   | 558.81 |      |  |   | 198.31 |   |  |      | 168.96 |   |  |   | 92.44  |  
|Net loans charged-off to allowance for loan losses                         |  |                                       | 5.46   |   |      |   | 3.44   |      |  |   | 4.20   |   |  |      | 1.05   |   |  |   | 10.06  |  
|Recoveries to charge-offs                                                  |  |                                       | 26.80  |   |      |   | 68.78  |      |  |   | 43.41  |   |  |      | 71.59  |   |  |   | 21.47  |  

---

|(1) | During the fourth quarter of 2002, the Bank received $6.03 million to pay off its two largest nonperforming loans. The proceeds were applied to pay off the remaining balances of
$4.83 million, record recoveries of previously charged off amounts of $734,000 and record interest income not previously accrued of $468,000.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Increase in consumer loan charge-offs in 2002 and 2003 is primarily due to indirect auto loans acquired from First Federal.
|--- | ---------------------------------------------------------------------------------------------------------------------------



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The following table presents the approximate allocation of the allowance for loan losses by loan categories at the dates
indicated and the percentage of such amounts to the total allowance and to total loans. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not
indicative of future losses and does not restrict the use of any of the allowance to absorb losses in any category. The non-specific allowance previously mentioned has been allocated in proportion to the allocated allowance for purposes of this
table.



|                                |  |                        |        |                                                     |      |   |                                             |      |   |        |   |                                                     |  |     |                                             |  |     |        |  |                                                     |        |  |                                             |   |  |     |  
|------------------------------- |  | ---------------------- | ------ | --------------------------------------------------- | ---- | - | ------------------------------------------- | ---- | - | ------ | - | --------------------------------------------------- |  | --- | ------------------------------------------- |  | --- | ------ |  | --------------------------------------------------- | ------ |  | ------------------------------------------- | - |  | --- | -
|                                |  | At December 31,        |       
|                                |  | 2003                   |        |                                                     | 2002 |   |                                             | 2001 |  
|                                |  | Amount                 |        | Percent ofAllowancein EachCategoryto TotalAllowance |      |   | Percentof Loansin EachCategoryto TotalLoans |      |   | Amount |   | Percent ofAllowancein EachCategoryto TotalAllowance |  |     | Percentof Loansin EachCategoryto TotalLoans |  |     | Amount |  | Percent ofAllowancein EachCategoryto TotalAllowance |        |  | Percentof Loansin EachCategoryto TotalLoans |  
|                                |  | (dollars in thousands) |       
|Real estate                     |  | $                      | 11,790 |                                                     | 71   | % |                                             | 81   | % |        | $ | 11,000                                              |  | 68  | %                                           |  | 80  | %      |  | $                                                   | 9,450  |  | 62                                          | % |  | 80  | %
|Commercial                      |  |                        | 4,079  |                                                     | 25   |   |                                             | 11   |   |        |   | 4,288                                               |  | 27  |                                             |  | 12  |        |  |                                                     | 4,474  |  | 29                                          |   |  | 12  |  
|Consumer                        |  |                        | 674    |                                                     | 4    |   |                                             | 8    |   |        |   | 884                                                 |  | 5   |                                             |  | 8   |        |  |                                                     | 1,304  |  | 9                                           |   |  | 8   |  
|                                |  |                        |        |                                                     |      |   |                                             |      |   |        |   |                                                     |  |     |                                             |  |     |        |  |                                                     |        |  |                                             |   |  |     |  
|Total allowance for loan losses |  | $                      | 16,543 |                                                     | 100  | % |                                             | 100  | % |        | $ | 16,172                                              |  | 100 | %                                           |  | 100 | %      |  | $                                                   | 15,228 |  | 100                                         | % |  | 100 | %
|                                |  |                        |        |                                                     |      |   |                                             |      |   |        |   |                                                     |  |     |                                             |  |     |        |  |                                                     |        |  |                                             |   |  |     |  



|                                |  |                        |        |                                                     |      |   |                                             |     |   |        |   |                                                     |  |     |                                             |  |     |  
|------------------------------- |  | ---------------------- | ------ | --------------------------------------------------- | ---- | - | ------------------------------------------- | --- | - | ------ | - | --------------------------------------------------- |  | --- | ------------------------------------------- |  | --- | -
|                                |  | At December 31,        |       
|                                |  | 2000                   |        |                                                     | 1999 |  
|                                |  | Amount                 |        | Percent ofAllowancein EachCategoryto TotalAllowance |      |   | Percentof Loansin EachCategoryto TotalLoans |     |   | Amount |   | Percent ofAllowancein EachCategoryto TotalAllowance |  |     | Percentof Loansin EachCategoryto TotalLoans | 
|                                |  | (dollars in thousands) |       
|Real estate                     |  | $                      | 6,221  |                                                     | 53   | % |                                             | 78  | % |        | $ | 5,198                                               |  | 49  | %                                           |  | 78  | %
|Commercial                      |  |                        | 4,470  |                                                     | 38   |   |                                             | 14  |   |        |   | 4,473                                               |  | 42  |                                             |  | 14  |  
|Consumer                        |  |                        | 1,003  |                                                     | 9    |   |                                             | 8   |   |        |   | 946                                                 |  | 9   |                                             |  | 8   |  
|                                |  |                        |        |                                                     |      |   |                                             |     |   |        |   |                                                     |  |     |                                             |  |     |  
|Total allowance for loan losses |  | $                      | 11,694 |                                                     | 100  | % |                                             | 100 | % |        | $ | 10,617                                              |  | 100 | %                                           |  | 100 | %
|                                |  |                        |        |                                                     |      |   |                                             |     |   |        |   |                                                     |  |     |                                             |  |     |  



Investment Activities



General.Under Connecticut law, the Company
has authority to purchase a wide range of investment securities. As a result of recent changes in federal banking laws, however, financial institutions such as the Bank may not engage as principals in any activities that are not permissible for a
national bank, unless the Federal Deposit Insurance Corporation has determined that the investments would pose no significant risk to the Bank Insurance Fund and that the Bank is in compliance with applicable capital standards. In 1993, the Regional
Director of the Federal Deposit Insurance Corporation approved a request by the Bank to invest in certain listed stocks and/or registered stocks subject to certain conditions.



The Companys Board of Directors has the overall responsibility for the Companys investment portfolio, including
approval of the Companys investment policy, appointment of the Companys investment adviser and approval of the Companys investment transactions. All investment transactions are reviewed by the Board on a monthly basis. The
Companys President and/or Chief Financial Officer, or their designees are authorized to make



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investment decisions consistent with the Companys investment policy and the recommendations of the Companys
investment adviser and the Boards Investment Committee. The Investment Committee meets quarterly with the President and Chief Financial Officer in order to review and determine investment strategies.



The Companys investment policy is designed to complement the
Banks lending activities, provide an alternative source of income through interest, dividends and capital gains, diversify the Companys assets and improve liquidity while minimizing the Companys tax liability. Investment decisions
are made in accordance with the Companys investment policy and are based upon the quality of a particular investment, its inherent risks, the composition of the balance sheet, market expectations, the Banks liquidity, income and
collateral needs and how the investment fits within the Companys interest rate risk strategy. Although the Company utilizes the investment advisory services of a Boston-based investment firm, management is ultimately and completely responsible
for all investment decisions.



The Companys investment
policy divides investments into two categories, fixed income and equity portfolios. The primary objective of the fixed income portfolio is to maintain an adequate source of liquidity sufficient to meet regulatory and operating requirements, and to
safeguard against deposit outflows, reduced loan amortization and increased loan demand. The fixed income portfolio primarily includes debt issues, including mortgage-backed and asset-backed securities, as well as collateralized mortgage
obligations. Substantially all of the Companys mortgage-backed securities are issued or guaranteed by agencies of the U.S. Government. Accordingly, they carry lower credit risk than mortgage-backed securities of a private issuer. The vast
majority of the collateralized mortgage obligations are issued or guaranteed by agencies of the U.S. Government. Accordingly, they carry lower credit risk than collateralized mortgage obligations of a private issuer. Collateralized mortgage
obligations, due to their inherent structure, may carry more prepayment risk than mortgage-backed securities. Asset-backed securities are typically collateralized by the cash flow from a pool of auto loans, credit card receivables, consumer loans
and other similar obligations.



The Companys investment
policy permits the Company to be a party to financial instruments with off-balance sheet risk in the normal course of business in order to manage interest rate risk. The Companys derivative position is reviewed by the Investment Committee on a
quarterly basis. The investment policy authorizes the Company to be involved in and purchase various types of derivative transactions and products including interest rate swap, cap and floor agreements investment conduits. At December 31, 2003 and
2002, the Company was not party to any interest rate swap, cap or floor arrangements.



The marketable equity securities portfolio has the objective of producing capital appreciation through long-term investment, with safety of principal and prudent risk taking. The total market value of the marketable
equity securities portfolio, excluding FHLB stock, is limited by the investment policy to 50% of the Banks Tier 1 capital. At December 31, 2003, the marketable equity securities portfolio totaled $1.00 million, or 0.55%, of the Banks
Tier 1 capital. At December 31, 2003, the net unrealized gains associated with the marketable equity securities portfolio were $0. During the third quarter of 2003, the Company substantially liquidated its marketable equity securities portfolio.



SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities requires that investments be categorized as held to maturity, trading securities or available for sale, based on managements intent as to the ultimate disposition of each
security. SFAS No. 115 allows debt securities to be classified as held to maturity and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold those securities to maturity.
Securities that might be sold in response to changes in market interest rates, changes in the securitys prepayment risk, increases in loan demand, or other similar factors cannot be classified as held to maturity. The Company had no securities
classified as held to maturity at December 31, 2003, 2002 and 2001. Debt and equity securities held for current resale are classified as trading securities. These securities are reported at fair value, and unrealized gains and losses on the
securities would be included in earnings. The Company does not currently use or maintain a trading account. Debt and equity securities not classified as either held to maturity or trading securities are classified as available for sale. These
securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of stockholders equity.



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On a quarterly basis, the Company reviews available for sale investment securities with unrealized
depreciation for six consecutive months and other securities with unrealized depreciation on a judgmental basis to assess whether the decline in fair value is temporary or other than temporary. The Company judges whether the decline in value is from
company-specific events, industry developments, general economic conditions or other reasons. Once the estimated reasons for the decline are identified, further judgments are required as to whether those conditions are likely to reverse and, if so,
whether that reversal is likely to result in a recovery of the fair value of the investment in the near term. Unrealized losses which are not expected to reverse in the near term are charged to operations. In accordance with this policy, during the
years ended December 31, 2003 and 2002 the Company recorded other than temporary impairment charges of $359,000 and $1.49 million, respectively. The 2003 charge is for one equity security and one investment in a limited partnership. The charge for
the equity investment was computed using the closing price of the security as of the date of impairment. The equity security impaired is publicly traded. The impairment charge for the limited partnership was equal to the difference between the
carrying value of the investment and the fair value of the Companys share of the partners capital as calculated by the partnership at the date of impairment. The limited partnership is not publicly traded. The 2002 charge was computed
using the closing prices of the securities as of the date of impairment. The securities impaired during 2002 were publicly traded. There were no material unrecognized impairment losses as of December 31, 2003 and 2002.



The following table shows the Companys gross unrealized losses and fair
value, aggregated by investment category at December 31, 2003. All of the securities with gross unrealized losses have been in a continuous unrealized loss position for less than 12 months.



|                                       |  |                       |       |             |   |        
|-------------------------------------- |  | --------------------- | ----- | ----------- | - | -------
|                                       |  | GrossUnrealizedLosses |       | MarketValue
|U.S. Government and agency obligations |  | $                     | 57    |             | $ | 153,205
|Municipal obligations                  |  |                       |      |             |   | 23,919 
|Corporate securities                   |  |                       |      |             |   | 48,781 
|Mortgage-backed securities             |  |                       | 204   |             |   | 228,384
|Collateralized mortgage obligations    |  |                       | 2,567 |             |   | 197,595
|Asset-backed securities                |  |                       | 105   |             |   | 66,042 
|Common stock and mutual funds          |  |                       | 26    |             |   | 5,385  
|Other equity securities                |  |                       |      |             |   | 1,258  
|                                       |  |                       |       |             |   |        
|Total                                  |  | $                     | 2,959 |             | $ | 724,569
|                                       |  |                       |       |             |   |        



All of the
Companys debt, collateralized mortgage obligations, mortgage-backed and asset-backed securities carry market risk insofar as increases in market rates of interest may cause a decrease in their market value. They also carry prepayment risk
insofar as they may be called or repaid before maturity in times of low market interest rates, so that the Bank may have to invest the funds at a lower interest rate. The marketable equity securities portfolio also carries equity price risk in that,
if equity prices decline due to unfavorable market conditions or other factors, the Banks capital would decrease.



20



---

##### Table of Contents

The following table presents the amortized cost and fair value of the Companys available for sale
securities, by type of security, at the dates indicated.



|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|-------------------------------------- |  | --------------- | ------- | ---------- | - | ------------- |  | ---------- | ------- | ------------- | - | ---------- |  | - | ------- |  | - | -------
|                                       |  | At December 31,
|                                       |  | 2003            |         | 2002       |   | 2001         
|                                       |  | AmortizedCost   |         | Fair Value |   | AmortizedCost |  | Fair Value |         | AmortizedCost |   | Fair Value
|                                       |  | (in thousands) 
|Debt securities:                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Asset-backed securities                |  | $               | 65,041  |            | $ | 66,042        |  | $          | 91,370  |               | $ | 93,676     |  | $ | 23,907  |  | $ | 25,208 
|U.S. Government and agency obligations |  |                 | 149,252 |            |   | 153,205       |  |            | 156,466 |               |   | 164,580    |  |   | 180,106 |  |   | 183,813
|Municipal obligations                  |  |                 | 22,650  |            |   | 23,919        |  |            | 23,357  |               |   | 23,978     |  |   | 23,717  |  |   | 23,194 
|Corporate securities                   |  |                 | 47,009  |            |   | 48,781        |  |            | 63,209  |               |   | 66,143     |  |   | 53,138  |  |   | 55,420 
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total                                  |  |                 | 283,952 |            |   | 291,947       |  |            | 334,402 |               |   | 348,377    |  |   | 280,868 |  |   | 287,635
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|                                       |  |                 |         |            |   |              
|Equity securities:                     |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Marketable equity securities           |  |                 | 1,000   |            |   | 1,000         |  |            | 17,427  |               |   | 21,753     |  |   | 26,349  |  |   | 37,670 
|Debt mutual funds                      |  |                 | 4,411   |            |   | 4,385         |  |            | 9,249   |               |   | 9,267      |  |   | 23,872  |  |   | 23,886 
|Other equity securities                |  |                 | 1,258   |            |   | 1,258         |  |            | 1,388   |               |   | 1,388      |  |   | 992     |  |   | 992    
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total                                  |  |                 | 6,669   |            |   | 6,643         |  |            | 28,064  |               |   | 32,408     |  |   | 51,213  |  |   | 62,548 
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total debt and equity securities       |  |                 | 290,621 |            |   | 298,590       |  |            | 362,466 |               |   | 380,785    |  |   | 332,081 |  |   | 350,183
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|                                       |  |                 |         |            |   |              
|Mortgage-backed securities:            |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Mortgage-backed securities             |  |                 | 226,126 |            |   | 228,384       |  |            | 205,569 |               |   | 210,409    |  |   | 147,901 |  |   | 149,750
|Collateralized mortgage obligations    |  |                 | 198,441 |            |   | 197,595       |  |            | 247,236 |               |   | 250,428    |  |   | 257,581 |  |   | 258,601
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total mortgage-backed securities       |  |                 | 424,567 |            |   | 425,979       |  |            | 452,805 |               |   | 460,837    |  |   | 405,482 |  |   | 408,351
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total investment securities            |  | $               | 715,188 |            | $ | 724,569       |  | $          | 815,271 |               | $ | 841,622    |  | $ | 737,563 |  | $ | 758,534
|                                       |  |                 |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        



At December 31, 2003,
the Company did not own any debt, equity or mortgage-backed securities of a single issuer, other than securities guaranteed by the U.S. Government or its agencies, which had an aggregate book value in excess of 10% of the Companys capital at
that date.



21



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##### Table of Contents

The following presents the activity in the available for sale investment securities and mortgage-backed
securities portfolios for the periods indicated.



|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                           |  | For the Year Ended December 31, |         
|                                                                           |  | 2003                            |          |   | 2002 |   |          | 2001 | 
|                                                                           |  | (in thousands)                  |         
|Mortgage-backed and asset-backed securities (1):                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|Mortgage-backed and asset-backed securities, beginning of year             |  | $                               | 554,513  |   |      | $ | 433,559  |      |  | $ | 114,039 |  
|Purchases:                                                                 |  |                                 |          |   |      |   |          |      |  |   |         |  
|Asset-backed securities                                                    |  |                                 |         |   |      |   | 104,427  |      |  |   |        |  
|Mortgage-backed securities                                                 |  |                                 | 119,976  |   |      |   | 117,599  |      |  |   | 17,403  |  
|Collateralized mortgage obligations                                        |  |                                 | 150,458  |   |      |   | 61,385   |      |  |   |        |  
|Sales:                                                                     |  |                                 |          |   |      |   |          |      |  |   |         |  
|Collateralized mortgage obligations                                        |  |                                 | (18,582  | ) |      |   | (15      | )    |  |   | (75,033 | )
|Asset-backed securities                                                    |  |                                 | (15,013  | ) |      |   | (34,592  | )    |  |   | (2,149  | )
|Repayments and prepayments                                                 |  |                                 | (284,733 | ) |      |   | (129,803 | )    |  |   | (91,129 | )
|Asset-backed securities called prior to maturity                           |  |                                 | (1,000   | ) |      |   |         |      |  |   | (3,014  | )
|Mortgage-backed and asset-backed securities acquired from First Federal    |  |                                 |         |   |      |   |         |      |  |   | 472,923 |  
|Increase (decrease) in net premium                                         |  |                                 | (5,673   | ) |      |   | (4,215   | )    |  |   | (1,408  | )
|Change in unrealized net gain on securities                                |  |                                 | (7,925   | ) |      |   | 6,168    |      |  |   | 1,927   |  
|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|Net increase in mortgage-backed and asset-backed securities                |  |                                 | (62,492  | ) |      |   | 120,954  |      |  |   | 319,520 |  
|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|Mortgage-backed and asset-backed securities, end of year                   |  |                                 | 492,021  |   |      |   | 554,513  |      |  |   | 433,559 |  
|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|Investment securities (1):                                                 |  |                                 |          |   |      |   |          |      |  |   |         |  
|Investment securities, beginning of year                                   |  |                                 | 287,109  |   |      |   | 324,975  |      |  |   | 194,042 |  
|Purchases                                                                  |  |                                 | 114,933  |   |      |   | 134,234  |      |  |   | 88,197  |  
|Sales                                                                      |  |                                 | (57,187  | ) |      |   | (142,405 | )    |  |   | (67,387 | )
|Maturities and calls                                                       |  |                                 | (101,816 | ) |      |   | (26,151  | )    |  |   | (24,468 | )
|Other than temporary impairment of investment securities                   |  |                                 | (359     | ) |      |   | (1,493   | )    |  |   | (4,076  | )
|Investment securities acquired from First Federal                          |  |                                 |         |   |      |   |         |      |  |   | 139,570 |  
|(Decrease) increase in net premium                                         |  |                                 | (1,086   | ) |      |   | (1,263   | )    |  |   | 304     |  
|Change in unrealized net gain on securities                                |  |                                 | (9,046   | ) |      |   | (788     | )    |  |   | (1,207  | )
|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|Net (decrease) increase in investment securities                           |  |                                 | (54,561  | ) |      |   | (37,866  | )    |  |   | 130,933 |  
|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|Investment securities, end of year                                         |  |                                 | 232,548  |   |      |   | 287,109  |      |  |   | 324,975 |  
|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  
|Total mortgage-backed, asset-backed and investment securities, end of year |  | $                               | 724,569  |   |      | $ | 841,622  |      |  | $ | 758,534 |  
|                                                                           |  |                                 |          |   |      |   |          |      |  |   |         |  

---

|(1) | Available for sale securities are presented at market value. For purposes of this schedule, collateralized mortgage obligations are included in mortgage-backed securities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



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##### Table of Contents

The following table presents certain information regarding the carrying value, weighted average coupon
yields and maturities of the Companys debt securities at December 31, 2003.



|                                       |  |                        |        |                      |                                  |   |               |                                   |                      |  |                     |               |  |                      |        |  |               |   |                      |   |         |               |      |                       |  |   |         |  |      |  
|-------------------------------------- |  | ---------------------- | ------ | -------------------- | -------------------------------- | - | ------------- | --------------------------------- | -------------------- |  | ------------------- | ------------- |  | -------------------- | ------ |  | ------------- | - | -------------------- | - | ------- | ------------- | ---- | --------------------- |  | - | ------- |  | ---- | -
|                                       |  | One Year or Less       |        |                      | More than One Year to Five Years |   |               | More than Five Years to Ten Years |                      |  | More than Ten Years |               |  | Total                |       
|                                       |  | CarryingValue          |        | WeightedAverageYield |                                  |   | CarryingValue |                                   | WeightedAverageYield |  |                     | CarryingValue |  | WeightedAverageYield |        |  | CarryingValue |   | WeightedAverageYield |   |         | CarryingValue |      | Weighted AverageYield | 
|                                       |  | (dollars in thousands) |       
|Available for sale securities:         |  |                        |        |                      |                                  |   |               |                                   |                      |  |                     |               |  |                      |        |  |               |   |                      |   |         |               |      |                       |  |   |         |  |      |  
|U.S. Government and agency obligations |  | $                      | 34,215 |                      | 4.37                             | % |               | $                                 | 110,628              |  | 3.33                | %             |  | $                    | 8,362  |  | 5.87          | % |                      | $ |        |               |     | %                     |  | $ | 153,205 |  | 3.70 | %
|Municipal obligations                  |  |                        |       |                      |                                 |   |               |                                   |                     |  |                    |               |  |                      | 554    |  | 5.06          |   |                      |   | 23,365  |               | 5.66 |                       |  |   | 23,919  |  | 5.65 |  
|Corporate securities                   |  |                        | 13,239 |                      | 5.66                             |   |               |                                   | 33,340               |  | 6.86                |               |  |                      | 2,202  |  | 6.00          |   |                      |   |        |               |     |                       |  |   | 48,781  |  | 6.50 |  
|Mortgage-backed securities             |  |                        |       |                      |                                 |   |               |                                   | 76,880               |  | 4.27                |               |  |                      | 33,799 |  | 4.74          |   |                      |   | 117,705 |               | 5.67 |                       |  |   | 228,384 |  | 5.06 |  
|Collateralized mortgage obligations    |  |                        |       |                      |                                 |   |               |                                   | 12,628               |  | 7.14                |               |  |                      | 10,896 |  | 6.06          |   |                      |   | 174,071 |               | 4.41 |                       |  |   | 197,595 |  | 4.68 |  
|Asset-backed securities                |  |                        |       |                      |                                 |   |               |                                   | 50,475               |  | 5.37                |               |  |                      | 15,567 |  | 4.61          |   |                      |   |        |               |     |                       |  |   | 66,042  |  | 5.19 |  
|                                       |  |                        |        |                      |                                  |   |               |                                   |                      |  |                     |               |  |                      |        |  |               |   |                      |   |         |               |      |                       |  |   |         |  |      |  
|Total debt securities at fair value    |  | $                      | 47,454 |                      | 4.73                             | % |               | $                                 | 283,951              |  | 4.53                | %             |  | $                    | 71,380 |  | 5.09          | % |                      | $ | 315,141 |               | 4.97 | %                     |  | $ | 717,926 |  | 4.79 | %
|                                       |  |                        |        |                      |                                  |   |               |                                   |                      |  |                     |               |  |                      |        |  |               |   |                      |   |         |               |      |                       |  |   |         |  |      |  



Cash Surrender
Value of Life Insurance.In 2001, the Bank purchased $20.00 million of Bank Owned Life Insurance (BOLI). The Bank purchased these policies for the purpose of protecting itself against the cost/loss due to the death of key
employees and to offset the Banks future obligations to its employees under various retirement and benefit plans. On August 31, 2001, the Bank acquired $20.36 million of BOLI as a result of the acquisition of First Federal. The total value of
BOLI at December 31, 2003 was $46.15 million. The Bank recorded income from BOLI of $2.35 million and $2.41 million for the years 2003 and 2002, respectively.



Deposit Activities and Other Sources of Funds



General.Deposits are the major external source of funds for the Banks lending and other investment activities. In addition, the Bank
also generates funds internally from loan principal repayments and prepayments and maturing investment securities. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market conditions. The Bank may use borrowings from the FHLB of Boston to compensate for reductions in the availability of funds from other sources.



Deposit Accounts.Substantially all of the Banks
depositors reside in Connecticut. The Bank offers a wide variety of deposit accounts with a range of interest rates and terms. The Banks deposit accounts consist of interest-bearing checking, noninterest-bearing checking, regular savings,
money market savings and certificates of deposit. The maturities of the Banks certificate of deposit accounts range from seven days to five years. In addition, the Bank offers retirement accounts, including IRAs and Keogh accounts and
simplified employee pension plan accounts. The Bank also offers commercial business products to small businesses operating within its primary market area. Deposit account terms vary with the principal differences being the minimum balance deposit,
early withdrawal penalties, limits on the number of transactions and the interest rate. The Bank reviews its deposit mix and pricing on a weekly basis.



23



---

##### Table of Contents

The Bank believes it offers competitive interest rates on its deposit products. The Bank determines the
rates paid based on a number of factors, including rates paid by competitors, the Banks need for funds and cost of funds, borrowing costs and movements of market interest rates. While certificate accounts in excess of $100,000 are accepted by
the Bank, and may receive preferential rates, the Bank does not actively seek such deposits as they are more difficult to retain than core deposits. The Bank does not utilize brokers to obtain deposits and at December 31, 2003, had no brokered
deposits.



Upon the completion of the Conversion, the Bank
established a special liquidation account for the benefit of eligible account holders and in an amount equal to the equity of the Bank less any subordinated debt approved as bona fide capital of the Bank, as of the date of its latest
statement of condition contained in the final prospectus used in connection with the Conversion. The date was September 30, 1999, and the amount established was $117.6 million. The liquidation account, which totaled $36.44 million and $42.58 million
at December 31, 2003 and 2002, respectively, is reduced annually by an amount proportionate to the decrease in eligible deposit accounts. Eligible account holders continuing to maintain deposit accounts at the Bank are entitled, on a complete
liquidation of the Bank after the Conversion, to an interest in the liquidation account prior to any payment to the stockholders of the Bank. The Banks retained earnings are substantially restricted with respect to payment of dividends to
stockholders due to the liquidation account. The liquidation account will terminate on the tenth anniversary of the consummation date of the Conversion.



The following table presents the deposit activity of the Bank for the periods indicated.



|                                             |  |                                 |           |   |      |   |           |      |  |   |          
|-------------------------------------------- |  | ------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                             |  | For the Year Ended December 31,
|                                             |  | 2003                            |           |   | 2002 |   |           | 2001
|                                             |  | (in thousands)                 
|Beginning balance                            |  | $                               | 1,595,979 |   |      | $ | 1,590,938 |      |  | $ | 933,370  
|                                             |  |                                 |          
|Increase (decrease) before interest credited |  |                                 | (12,761   | ) |      |   | (29,253   | )    |  |   | 620,980  
|Interest credited                            |  |                                 | 23,074    |   |      |   | 34,294    |      |  |   | 36,588   
|                                             |  |                                 |           |   |      |   |           |      |  |   |          
|Net increase                                 |  |                                 | 10,313    |   |      |   | 5,041     |      |  |   | 657,568  
|                                             |  |                                 |           |   |      |   |           |      |  |   |          
|                                             |  |                                 |          
|Ending balance                               |  | $                               | 1,606,292 |   |      | $ | 1,595,979 |      |  | $ | 1,590,938
|                                             |  |                                 |           |   |      |   |           |      |  |   |          



At December 31, 2003,
the Bank had $80.40 million in certificate of deposit accounts in amounts of $100,000 or more maturing as follows:



|                                |  |                |        |                     |      |  
|------------------------------- |  | -------------- | ------ | ------------------- | ---- | -
|Maturity Period                 |  | Amount         |        | WeightedAverageRate |     
|                                |  | (in thousands) |        |                     |     
|Three months or less            |  | $              | 13,689 |                     | 1.72 | %
|Over 3 months through 6 months  |  |                | 12,806 |                     | 1.71 |  
|Over 6 months through 12 months |  |                | 16,342 |                     | 2.40 |  
|Over 12 months                  |  |                | 37,561 |                     | 4.67 |  
|                                |  |                |        |                     |      |  
|Total                           |  | $              | 80,398 |                     | 3.24 | %
|                                |  |                |        |                     |      |  





24



---

##### Table of Contents

The following table presents information concerning average balances and weighted average interest rates
for the periods indicated.



|                         |  |                                 |           |                                |       |   |                     |      |   |                |   |                                |  |       |                     |  |      |                |  |                                |           |  |                     |   |  |      |  
|------------------------ |  | ------------------------------- | --------- | ------------------------------ | ----- | - | ------------------- | ---- | - | -------------- | - | ------------------------------ |  | ----- | ------------------- |  | ---- | -------------- |  | ------------------------------ | --------- |  | ------------------- | - |  | ---- | -
|                         |  | For the Year Ended December 31, |          
|                         |  | 2003                            |           |                                | 2002  |   |                     | 2001 |  
|                         |  | AverageBalance                  |           | Percentof TotalAverageDeposits |       |   | WeightedAverageRate |      |   | AverageBalance |   | Percentof TotalAverageDeposits |  |       | WeightedAverageRate |  |      | AverageBalance |  | Percentof TotalAverageDeposits |           |  | WeightedAverageRate |  
|                         |  | (dollars in thousands)          |          
|Savings accounts         |  | $                               | 399,049   |                                | 25.1  | % |                     | 0.42 | % |                | $ | 381,540                        |  | 24.0  | %                   |  | 1.05 | %              |  | $                              | 268,162   |  | 23.2                | % |  | 1.80 | %
|Money market accounts    |  |                                 | 216,181   |                                | 13.6  |   |                     | 1.05 |   |                |   | 192,872                        |  | 12.1  |                     |  | 1.93 |                |  |                                | 113,883   |  | 9.9                 |   |  | 3.15 |  
|NOW accounts             |  |                                 | 227,479   |                                | 14.3  |   |                     | 0.31 |   |                |   | 211,276                        |  | 13.3  |                     |  | 0.53 |                |  |                                | 150,693   |  | 13.0                |   |  | 0.70 |  
|Certificates of deposits |  |                                 | 608,668   |                                | 38.3  |   |                     | 2.98 |   |                |   | 686,683                        |  | 43.2  |                     |  | 3.71 |                |  |                                | 542,888   |  | 47.0                |   |  | 4.99 |  
|Demand deposits          |  |                                 | 137,581   |                                | 8.7   |   |                     |     |   |                |   | 118,078                        |  | 7.4   |                     |  |     |                |  |                                | 80,142    |  | 6.9                 |   |  |     |  
|                         |  |                                 |           |                                |       |   |                     |      |   |                |   |                                |  |       |                     |  |      |                |  |                                |           |  |                     |   |  |      |  
|Total                    |  | $                               | 1,588,958 |                                | 100.0 | % |                     | 1.43 | % |                | $ | 1,590,449                      |  | 100.0 | %                   |  | 2.16 | %              |  | $                              | 1,155,768 |  | 100.0               | % |  | 3.15 | %
|                         |  |                                 |           |                                |       |   |                     |      |   |                |   |                                |  |       |                     |  |      |                |  |                                |           |  |                     |   |  |      |  



Certificates of
Deposit by Rates and Maturities.The following table presents by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at December
31, 2003.



|           |  |                                        |         |                       |   |                  |  |                |        |      |   |        |  |      |         |  |   |         |  |   |        
|---------- |  | -------------------------------------- | ------- | --------------------- | - | ---------------- |  | -------------- | ------ | ---- | - | ------ |  | ---- | ------- |  | - | ------- |  | - | -------
|           |  | Period Maturity from December 31, 2003 |         | Total at December 31,
|           |  | Less thanOne Year                      |         | One toTwoYears        |   | Two toThreeYears |  | OverThreeYears |        | 2003 |   | 2002   |  | 2001
|           |  | (in thousands)                        
|0.00-2.00% |  | $                                      | 286,385 |                       | $ | 20,564           |  | $              | 2,808  |      | $ | 119    |  | $    | 309,876 |  | $ | 173,706 |  | $ | 8,569  
|2.01-4.00% |  |                                        | 54,573  |                       |   | 14,337           |  |                | 110    |      |   | 47,408 |  |      | 116,428 |  |   | 209,540 |  |   | 241,805
|4.01-5.00% |  |                                        | 15,434  |                       |   | 953              |  |                | 16,214 |      |   | 46,013 |  |      | 78,614  |  |   | 117,343 |  |   | 199,390
|5.01-6.00% |  |                                        | 8,347   |                       |   | 3,433            |  |                | 21,511 |      |   | 459    |  |      | 33,750  |  |   | 86,930  |  |   | 142,390
|6.01-7.00% |  |                                        | 9,028   |                       |   | 32,966           |  |                | 2,564  |      |   | 58     |  |      | 44,616  |  |   | 55,675  |  |   | 144,791
|7.01-8.00% |  |                                        |        |                       |   | 7                |  |                |       |      |   |       |  |      | 7       |  |   | 7       |  |   | 6      
|           |  |                                        |         |                       |   |                  |  |                |        |      |   |        |  |      |         |  |   |         |  |   |        
|Total      |  | $                                      | 373,767 |                       | $ | 72,260           |  | $              | 43,207 |      | $ | 94,057 |  | $    | 583,291 |  | $ | 643,201 |  | $ | 736,951
|           |  |                                        |         |                       |   |                  |  |                |        |      |   |        |  |      |         |  |   |         |  |   |        



Borrowings. The Bank may use advances from the FHLB of Boston to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Boston functions as a central reserve bank providing credit for
savings banks and certain other member financial institutions. As a member of the FHLB of Boston, the Bank is required to own capital stock in the FHLB of Boston and is authorized to apply for advances on the security of the capital stock and
certain of its mortgage loans and other assets, principally securities that are obligations of, or guaranteed by, the U.S. Government or its agencies, provided certain creditworthiness standards have been met. Advances are made under several
different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of
collateral pledged to secure the credit. At





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December 31, 2003, the Bank had the ability to borrow a total of approximately $736.45 million from the FHLB of Boston.
Of the total maximum borrowing capacity, the Bank had $540.73 million outstanding as of December 31, 2003. In accordance with generally accepted accounting principles, the Bank recorded the FHLB advances acquired from First Federal at the-then
market value on the date of acquisition. The bank recorded an adjustment of $9.47 million to record the advances at market value. The Bank is amortizing this premium on a level yield basis over the remaining lives of the advances. The unamortized
premium at December 31, 2003 was $2.60 million.



Federal
banking laws and regulations prohibit a bank from paying interest on commercial checking accounts. However, the Bank offers to its commercial customers a transactional repurchase agreement, a form of non-deposit borrowing by the Bank, that is
designed as a mechanism to offer business customers the functional equivalent of a commercial checking account that pays interest. This account, overseen by an outside agent, is not a FDIC-insured deposit account, but is backed by a security
interest in U.S. Government and agency securities at a ratio of 1.10 to 1.00 or higher. At December 31, 2003, the Bank had such accounts with balances aggregating $122.08 million backed by a security interest of $178.26 million, or a ratio of 1.46
to 1.00.



The following table presents certain information
regarding the Banks FHLB advances and short-term borrowed funds at the dates or for the periods indicated.



|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                               |  | At or For the Year Ended December 31, |        
|                                                               |  | 2003                                  |         |   | 2002 |   |         | 2001 | 
|                                                               |  | (dollars in thousands)                |        
|Average balance outstanding:                                   |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  | $                                     | 555,223 |   |      | $ | 477,042 |      |  | $ | 235,440 |  
|Short-term borrowed funds                                      |  |                                       | 119,385 |   |      |   | 116,318 |      |  |   | 110,823 |  
|Maximum amount outstanding at any month-end during the period: |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 571,825 |   |      |   | 562,901 |      |  |   | 457,033 |  
|Short-term borrowed funds                                      |  |                                       | 125,357 |   |      |   | 124,315 |      |  |   | 125,866 |  
|Balance outstanding at end of period:                          |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 540,735 |   |      |   | 528,889 |      |  |   | 457,033 |  
|Short-term borrowed funds                                      |  |                                       | 123,049 |   |      |   | 121,052 |      |  |   | 117,180 |  
|Weighted average interest rate during the period:              |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 4.35    | % |      |   | 4.92    | %    |  |   | 5.20    | %
|Short-term borrowed funds                                      |  |                                       | 0.66    |   |      |   | 1.41    |      |  |   | 2.60    |  
|Weighted average interest rate at end of period:               |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 4.26    |   |      |   | 4.65    |      |  |   | 5.01    |  
|Short-term borrowed funds                                      |  |                                       | 0.64    |   |      |   | 0.90    |      |  |   | 1.77    |  



Subsidiary Activities



The following are descriptions of the Banks wholly
owned subsidiaries, which are indirectly owned by the Company.



SBM, Ltd.SBM, Ltd., a Connecticut corporation, was organized to acquire, hold and dispose of real estate acquired through foreclosure. At December 31, 2003, SBM, Ltd. held no properties and had no assets.



923 Main, Inc.923 Main, a Connecticut corporation, was incorporated
for the purpose of maintaining an ownership interest in a third party registered broker-dealer, Infinex Financial Group (Infinex). Infinex maintains an office at the Bank and offers to customers a complete range of nondeposit investment
products, including mutual



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funds, debt, equity and government securities, retirement accounts, insurance products and fixed and variable annuities.
The Bank receives a portion of the commissions generated by Infinex from sales to customers. For the years ended December 31, 2003 and 2002, the Bank received fees of $1.51 million and $1.64 million, respectively, through its relationship with
Infinex.



Savings Bank of Manchester Mortgage Company, Inc.SBM Mortgage, a Connecticut corporation, was established to service and hold loans secured by real property. SBM Mortgage was established and is managed to qualify as a passive investment company for Connecticut income tax purposes.
Income earned by a qualifying passive investment company is exempt from Connecticut income tax. Accordingly, no state income taxes were provided since December 31, 1998.



SBM Charitable Foundation, Inc.



During 2000, the Bank funded and formed SBM Charitable Foundation, Inc. (the New Foundation), a not-for-profit organization in connection with
the conversion. This foundation, which is not a subsidiary of the Bank, provides grants to not-for-profit organizations and municipalities within the communities that the Bank serves. The New Foundation was funded with a contribution of 832,000
common shares, with a cost basis and fair market value of $8.32 million at the date of contribution and transfer, or an amount equal to 8% of the common stock sold in the Conversion. In 1998, the Bank contributed marketable equity securities with a
fair market value of $700,000 and $3.0 million, respectively, at the date of contribution and transfer to the Savings Bank of Manchester Foundation, Inc. (the Old Foundation), also a not-for-profit organization. In 2001, the Old
Foundation was merged into the New Foundation, with the New Foundation being the surviving entity. At December 31, 2003, the New Foundation had assets of approximately $41.54 million, consisting primarily of common stock of the Company.



The New Foundation will remain independent from NHSB after the closing of
the merger between NHSB and SBM. The New Foundation will continue to provide grants to not-for-profit organizations and municipalities within the communities in Central and Eastern Connecticut.



REGULATION AND SUPERVISION



General



As a savings bank chartered by the State of Connecticut, the Bank is extensively regulated under state law by the
Connecticut Banking Commissioner (Commissioner) with respect to many aspects of its banking activities. In addition, as a bank whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC) through the Bank
Insurance Fund (BIF), the Bank must pay deposit insurance assessments and is examined and supervised by the FDIC. These laws and regulations have been established primarily for the protection of depositors, customers and borrowers of the
Bank, not its stockholders.



The Company is also required to
file reports with, and otherwise comply with the rules and regulations of, the Office of Thrift Supervision (OTS), the Commissioner, and the Securities and Exchange Commission (SEC) under the federal securities laws. The
following discussion of the laws and regulations material to the operations of the Company and the Bank is a summary and is qualified in its entirety by reference to such laws and regulations.



The Bank and the Company, as a savings and loan holding company, are
extensively regulated and supervised. Regulations, which affect the Bank on a daily basis, may be changed at any time and the interpretation of the relevant law and regulations also may change because of new interpretations by the authorities who
interpret those laws and regulations. Any change in the regulatory structure or the applicable statutes or regulations, whether by the Commissioner, the State of Connecticut, the OTS, the FDIC or the U.S. Congress, could have a material impact on
the Company and the Bank.



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Connecticut Banking Laws and Supervision



The Commissioner regulates the Banks internal organization as well as its deposit, lending and investment activities.
The approval of the Commissioner is required for, among other things, the establishment of branch offices and business combination transactions. The Commissioner conducts periodic examinations of the Bank. The FDIC also regulates many of the areas
regulated by the Commissioner, and federal law may limit some of the authority provided to the Bank by Connecticut law.



Lending Activities. Connecticut banking laws grant banks broad lending authority. With certain limited exceptions, however, total secured
and unsecured loans made to any one obligor under this statutory authority may not exceed 10% and 15%, respectively, of the Banks equity capital and reserves for loan and lease losses.



A savings bank may pay cash dividends out of its net profits. For purposes of
this restriction, net profits represents the remainder of all earnings from current operations. Further, the total amount of all dividends declared by a savings bank in any calendar year may not exceed the sum of the Banks net
profits for the year in question combined with its retained net profits from the preceding two calendar years. Additionally, earnings appropriated to reserves for loan losses and deducted for federal income tax purposes are not available for cash
dividends without the payment of taxes at then-current income tax rates on the amount used. Federal law also prevents an institution from paying dividends or making other capital distributions that, if by doing so, would cause it to become
undercapitalized. The FDIC may limit a savings banks ability to pay dividends. No dividends may be paid to the Banks stockholders if such dividends would reduce stockholders equity below the amount of the liquidation
account required by the Connecticut conversion regulations.



Branching Activities. Any Connecticut-chartered bank meeting certain statutory requirements may, with the Commissioners approval, establish and operate branches in any town or towns within the state and establish mobile
branches.



Investment Activities. Connecticut law
requires the board of directors of each Connecticut bank to adopt annually an investment policy to govern the types of investments the bank makes, and to periodically review a banks adherence to its investment policy. The investment policy
must establish standards for the making of prudent investments and procedures for divesting investments no longer deemed consistent with a banks investment policy. In recent years, Connecticut law has expanded bank investment activities.



Connecticut banks may invest in debt securities and debt
mutual funds without regard to any other liability to the Connecticut bank of the maker or issuer of the debt securities and debt mutual funds, if the debt securities and debt mutual funds are rated in the three highest rating categories or
otherwise deemed to be a prudent investment, and so long as the total amount of debt securities and debt mutual funds of any one issuer will not exceed 25% of the Banks total equity capital and reserves for loan and lease losses and the total
amount of all its investments in debt securities and debt mutual funds will not exceed 25% of its assets. In addition, a Connecticut bank may invest in certain government and agency obligations according to the same standards as debt securities and
debt mutual funds except without any percentage limitation.



Similarly, Connecticut banks may invest in equity securities and equity mutual funds without regard to any other liability to the Connecticut bank of the issuer of equity securities and equity mutual funds, so long as the total amount of
equity securities and equity mutual funds of any one issuer does not exceed 25% of the banks total equity capital and reserves for loan and lease losses and the total amount of the banks investment in all equity securities and equity
mutual funds does not exceed 25% of its assets.



Powers. In recent years, Connecticut law has expanded banks powers. Connecticut law permits Connecticut banks to sell insurance and fixed- and variable-rate annuities if licensed to do so by the Connecticut Insurance
Commissioner. Connecticut law authorizes a new form of Connecticut bank known as an uninsured bank. An uninsured bank has the same powers as insured banks except that it does not accept retail deposits and is not required to insure deposits with the
FDIC. With the prior approval of the Commissioner, Connecticut banks are also authorized to engage in a broad range of activities related to the business of banking, or that are financial in nature or that are permitted under the Bank Holding
Company Act (BHCA) or the Home Owners Loan Act (HOLA), both



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federal statutes, or the regulations promulgated as a result of these statutes. Connecticut banks are also authorized to
engage in any activity permitted for a national bank or a federal savings association upon filing notice with the Commissioner unless the Commissioner disapproves the activity.



Assessments. Connecticut banks may be required to pay annual assessments to the Connecticut Department of
Banking to fund the Departments operations. The general assessments are paid pro-rata based upon a banks asset size. The assessments paid by the Bank for the years ended December 31, 2003 and 2002 were $46,000 and $74,000, respectively.



Enforcement. Under Connecticut law, the
Commissioner has extensive enforcement authority over Connecticut banks and, under certain circumstances, affiliated parties, insiders, and agents. The Commissioners enforcement authority includes cease and desist orders, fines, receivership,
conservatorship, removal of officers and directors, emergency closures, dissolution and liquidation.



Federal Regulations



Capital Requirements. Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (state non-member banks), such as the Bank, are required to comply with
minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization, rated composite 1 under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all other institutions, the minimum leverage capital
ratio is not less than 4%. Tier 1 capital is the sum of common stockholders equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for
certain servicing rights and credit card relationships) and certain other specified items.



The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets
is referred to as the Banks risk-based capital ratio. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels
of capital being required for the categories perceived as representing greater risk. For example, under the FDICs risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a 0% risk weight,
loans secured by one- to four-family residential properties generally have a 50% risk weight, and commercial loans have a risk weighting of 100%.



State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier 1
capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital
instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institutions Tier 1 capital. Banks that engage in specified levels of trading activities are
subject to adjustments in their risk based capital calculation to ensure the maintenance of sufficient capital to support market risk.



The Federal Deposit Insurance Corporation Improvement Act (the FDICIA) required each federal banking agency to revise its risk-based capital
standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of
loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a banks capital and economic value to changes in
interest rate risk in assessing a banks capital adequacy.



As a savings and loan holding company regulated by the OTS, the Company is not, under current law, subject to any separate regulatory capital requirements.



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Standards for Safety and Soundness.As required by statute, the federal banking
agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies
use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate
risk exposure, asset growth, asset quality, earnings and compensation, and fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require
the institution to submit to the agency an acceptable plan to achieve compliance with the standard.



Investment Activities



Since the enactment of the FDICIA, all state-chartered FDIC insured banks, including savings banks, have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks,
notwithstanding state law. The FDICIA and the FDIC permit exceptions to these limitations. For example, state chartered banks, such as the Bank, may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks
listed on a national securities exchange or the NASDAQ National Market and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. In addition, the FDIC is authorized to permit such institutions to
engage in state authorized activities or investments that do not meet this standard (other than non-subsidiary equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments
do not pose a significant risk to the BIF. The FDIC has adopted revisions to its regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Bank received grandfathered authority from the
FDIC in March 1993 to invest in listed stocks and/or registered shares. The maximum permissible investment is 100% of Tier 1 capital, as specified by the FDICs regulations, or the maximum amount permitted by Connecticut law, whichever is less.
Such grandfathered authority may be terminated upon the FDICs determination that such investments pose a safety and soundness risk to the Bank or if the Bank converts its charter or undergoes a change in control. As of December 31, 2003, the
Bank had $1.00 million of securities which were held under such grandfathering authority. The Gramm-Leach-Bliley Act of 1999 (the GLB Act) specifies that a nonmember bank may control a subsidiary that engages in activities as principal
that would only be permitted for a national bank to conduct in a financial subsidiary if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.



Interstate Branching



Beginning June 1, 1997, the Interstate Banking Act (the IBA) permitted the responsible federal banking agencies
to approve merger transactions between banks located in different states, regardless of whether the merger would be prohibited under the law of the two states. The IBA also permitted a state to opt in to the provisions of the IBA before
June 1, 1997, and permitted a state to opt out of the provisions of the IBA by adopting appropriate legislation before that date. In 1995, Connecticut affirmatively opted-in  to the provisions of the IBA. Accordingly,
beginning June 1, 1997, the IBA permitted a bank, such as the Bank, to acquire branches in a state other than Connecticut unless the other state had opted out of the IBA. The IBA also authorizes de novo branching into another state if the
host state enacts a law expressly permitting out of state banks to establish such branches within its borders.



Prompt Corrective Regulatory Action



Federal law requires, among other things, that federal bank regulatory authorities take prompt corrective action with respect to banks that do not meet minimum capital requirements. For these purposes, the
law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.



The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is



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deemed to be well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater. An institution is adequately capitalized if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater,
and generally a leverage ratio of 4% or greater. An institution is undercapitalized if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage ratio of less than
4%. An institution is deemed to be significantly undercapitalized if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is
considered to be critically undercapitalized if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. As of December 31, 2003, the Bank was a well capitalized
institution.



Undercapitalized banks must adhere to
growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A banks compliance with such plan is required to be guaranteed by any company that controls the undercapitalized
institution in an amount equal to the lesser of 5% of the institutions total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an undercapitalized bank fails to submit
an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized banks must comply with one or more of a number of additional restrictions, including but not limited to an order by
the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on
deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalized institutions are subject to additional measures including, subject to a narrow exception, the appointment
of a receiver or conservator within 270 days after it obtains such status.



Transactions with Affiliates



Under current
federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (the FRA). In a holding company context, at a minimum, the parent holding company of a savings
bank and any companies which are controlled by such parent holding company are affiliates of the savings bank. Generally, Section 23A limits the extent to which the savings bank or its subsidiaries may engage in covered transactions with
any one affiliate to 10% of such savings banks capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to 20% of capital stock and surplus. The term covered transaction includes,
among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees,
acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.



Further, Section 22(h) of the FRA restricts an institution with respect to loans to directors, executive officers, and principal stockholders (insiders). Under Section 22(h), loans to insiders and their related interests may not
exceed, together with all other outstanding loans to such persons and affiliated entities, the institutions total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors.
Further, under Section 22(h), loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential
loans made under a benefit or compensation program that is widely available to the Banks employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive
officers.



Enforcement



The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in
response to violations of laws and regulations and unsafe or unsound practices.



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The FDIC has authority under Federal law to appoint a conservator or receiver for an insured bank under
limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was critically undercapitalized on average during the calendar quarter beginning
270 days after the date on which the institution became critically undercapitalized. The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the
institutions financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or
unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institutions capital with no reasonable prospect of replenishment without federal assistance.



Insurance of Deposit Accounts



The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the institutions financial condition consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institutions primary federal regulator and information which the FDIC determines to be relevant
to the institutions financial condition and the risk posed to the deposit insurance funds. An institutions assessment rate depends on the capital category and supervisory category to which it is assigned. Assessment rates for insurance
fund deposits currently range from 0 basis points for the strongest institution to 27 basis points for the weakest. BIF members are also required to assist in the repayment of bonds issued by the Financing Corporation in the late 1980s to
recapitalize the Federal Savings and Loan Insurance Corporation. For 2003, the total FDIC assessment was $258,000. The FDIC is authorized to raise the assessment rates. The FDIC has exercised this authority several times in the past and may raise
insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank.



The FDIC may terminate insurance of deposits if it finds that the institution is in an unsafe or unsound condition to continue operations, has engaged in
unsafe or unsound practices, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit
insurance.



Federal Reserve System



The FRB regulations require depository institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of
transaction accounts aggregating $45.4 million or less (which may be adjusted by the FRB) the reserve requirement is 3%; and for amounts greater than $45.4 million, 10% (which may be adjusted by the FRB between 8% and 14%), against that portion of
total transaction accounts in excess of $45.4 million. The first $6.6 million of otherwise reservable balances (which may be adjusted by the FRB) are exempted from the reserve requirements. The Bank is in compliance with these requirements.



Federal Home Loan Bank System



The Bank is a member of the FHLB System, which consists of 12 regional
Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB of Boston, is required to acquire and hold shares of capital stock in the FHLB of Boston in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB of Boston, whichever is greater. The Bank was in
compliance with this requirement with an investment in FHLB of Boston stock at December 31, 2003 of $27.04 million. At December 31, 2003, the Bank had $540.73 million in FHLB of Boston advances.



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The Federal Home Loan Banks are required to provide funds for certain purposes including the resolution
of insolvent thrifts in the late 1980s and to contributing funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks
imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB of Boston advances increased, the Banks net interest income would likely also be reduced. Recent legislation has changed the
structure of the Federal Home Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. For the years ended
December 31, 2003 and 2002, cash dividends from the FHLB of Boston to the Bank amounted to approximately $936,000 and $1.13 million, respectively. Further, there can be no assurance that the impact of recent or future legislation on the Federal Home
Loan Banks also will not cause a decrease in the value of the FHLB stock held by the Bank.



Holding Company Regulation



Federal law allows a state savings bank that qualifies as a Qualified Thrift Lender, discussed below, to elect to be treated as a savings association for purposes of the savings and loan holding company provisions of the HOLA.
Such election allows its holding company to be regulated as a savings and loan holding company by the OTS rather than as a bank holding company by the FRB. The Bank has made such election, and the Company is a nondiversified savings and loan holding
company within the meaning of the HOLA. The Company is registered with the OTS and has adhered to the OTSs regulations and reporting requirements. In addition, the OTS may examine and supervise the Company, and the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Additionally, the Bank is required to notify the OTS at least 30 days before declaring any dividend to the Company. By regulation, the OTS may restrict or prohibit the Bank from paying dividends.



The Company is a unitary savings and loan holding company under federal law
because the Bank is its only insured subsidiary. Formerly, a unitary savings and loan holding company was not restricted as to the types of business activities in which it could engage, provided that its subsidiary savings association continued to
be a qualified thrift lender. The GLB Act, however, restricts unitary savings and loan holding companies not existing or applied for before May 4, 1999 to activities permissible for a financial holding company as defined under the legislation,
including insurance and securities activities, and those permitted for a multiple savings and loan holding company as described below. The Company is subject to these activities restrictions. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries
primarily to activities permissible for bank holding companies under Section 4(c)(8) of the BHCA, provided the prior approval of the OTS is obtained, to activities permitted for financial holding companies and to other activities authorized by OTS
regulation. Multiple savings and loan holding companies are generally prohibited from acquiring or retaining more than 5% of a non-subsidiary company engaged in activities other than those permitted by the HOLA or those permitted for financial
holding companies.



The HOLA prohibits a savings and loan
holding company from, directly or indirectly, acquiring more than 5% of the voting stock of another savings association or savings and loan holding company or from acquiring such an institution or company by merger, consolidation or purchase of its
assets, without prior written approval of the OTS. In evaluating applications by holding companies to acquire savings associations, the OTS considers the financial and managerial resources and future prospects of the Company and the institution
involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.



The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in
more than one state, except: (1) interstate supervisory acquisitions by savings and loan holding companies; and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically
permit such acquisitions.



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To be regulated as a savings and loan holding company by the OTS (rather than as a bank holding company
by the FRB), the Bank must qualify as a Qualified Thrift Lender (QTL). To qualify as a QTL, the Bank must maintain compliance with the test for a domestic building and loan association, as defined in the Internal Revenue
Code, or with a QTL Test. Under the QTL Test, a savings institution is required to maintain at least 65% of its portfolio assets (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles, including
goodwill; and (3) the value of property used to conduct business) in certain qualified thrift investments (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least 9
months out of each 12 month period. As of December 31, 2003 the Bank maintained in excess of 84% of its portfolio assets in qualified thrift investments. The Bank also met the QTL test in each of the last 12 months and, therefore, met the QTL Test.



Acquisition of the Company.Under the Federal
Change in Bank Control Act (the CIBCA), a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Companys outstanding voting stock, unless the OTS
has found that the acquisition will not result in a change of control of the Company. Under the CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial
resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.



Connecticut Holding Company Regulations. Under Connecticut banking law, no person may acquire beneficial
ownership of more than 10% of any class of voting securities of a Connecticut-chartered bank, or any holding company of such a bank, without prior notification of, and lack of disapproval by, the Commissioner. Similar restrictions apply to any
person who holds in excess of 10% of any such class and desires to increase its holdings to 25% or more of such class. The Commissioner will evaluate the effect of the acquisition on the financial condition of the bank or bank holding company. The
Commissioner will also disapprove the acquisition if the bank or holding company to be acquired has been in existence for less than five years, unless the Commissioner waives this requirement, or if the acquisition would result in the acquirer
controlling 30% or more of the total amount of deposits in insured depository institutions in Connecticut.



Federal Securities Laws



Upon the completion of the Conversion in March 2000, the Companys common stock became registered with the SEC under the Exchange Act. The Company is subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.



The registration
under the Securities Act of shares of the common stock issued in the Conversion did not cover the resale of such shares. Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. The
resale restrictions of Rule 144 under the Securities Act govern shares purchased by an affiliate of the Company. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who
complies with the other conditions of Rule 144 (including those that require the affiliates sale to be aggregated with those of other persons) would be able to sell in the public market, without registration, a number of shares not to exceed,
in any three-month period, the greater of (1) 1% of the outstanding shares of the Company or (2) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to
permit affiliates to have their shares registered for sale under the Securities Act under specific circumstances.



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FEDERAL AND STATE TAXATION OF INCOME



Federal Income Taxation



General. The Company and the Bank report their income on a calendar year basis using the accrual method of accounting. The federal income
tax laws apply to the Company and the Bank in the same manner as to other corporations with some exceptions, including particularly the Banks reserve for bad debts discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The Banks federal income tax returns have been either audited or closed under the statute of limitations through tax year
1999. For its 2003 tax year, the Banks maximum federal income tax rate was 35%.



Bad Debt Reserves.For fiscal years beginning before December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986, as
amended, were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally
secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method.



Federal legislation enacted in 1996 repealed the reserve method of accounting
for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $19.0 million of
the Banks accumulated bad debt reserves would not be recaptured into taxable income unless the Bank makes a non-dividend distribution to the Company as described below.



Distributions.If the Bank makes non-dividend distributions to the Company, they will be
considered to have been made from the Banks unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the non-dividend distributions, and then from the Banks
supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in the Banks taxable income. Non-dividend distributions
include distributions in excess of the Banks current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends
paid out of the Banks current or accumulated earnings and profits will not be so included in the Banks taxable income.



The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Therefore, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for
federal income tax purposes, assuming a 35% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.



Connecticut Taxation



The Company and its subsidiaries are subject to the Connecticut corporation business tax. The Company and its subsidiaries
are eligible to file a combined Connecticut corporation business tax return and will pay the regular corporation business tax (income tax).



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The Connecticut corporation business tax is based on the federal taxable income before net operating loss
and special deductions of the Company and its subsidiaries and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for 2000 and
thereafter) to arrive at Connecticut income tax.



In May 1998,
the State of Connecticut enacted legislation permitting the formation of passive investment companies (PICs) by financial institutions. This legislation exempts qualifying PICs from the Connecticut corporation business tax and excludes
dividends paid from a PIC from the taxable income of the parent financial institution. The Company established a PIC in January 1999 and eliminated its state income tax expense effective December 31, 1998 through December 31, 2003.



36



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Item 2. Properties.



Properties



The Company and the Bank currently conduct their business
through their main office located in Manchester, Connecticut, and 27 other full-service banking offices. The Company and the Bank believe that their facilities are adequate to meet their present and immediately foreseeable needs.



|                                                                       |  |                         |   |  |                               |     |  |                               
|---------------------------------------------------------------------- |  | ----------------------- | - |  | ----------------------------- | --- |  | ------------------------------
|Location                                                               |  | Leased,Licensedor Owned |   |  | OriginalYearLeased orAcquired |     |  | Date ofLease/LicenseExpiration
|Main Branch and Executive Office: 923 Main Street Manchester, CT 06040 |  | Owned                   |   |  | 1932                          |     |  |                              
|Branch Offices: 285 East Center Street Manchester, CT 06040            |  | Leased                  |   |  | 1956                          |     |  | 2006                          
|220 North Main Street Manchester, CT 06040                             |  | Leased                  |   |  | 1970                          |     |  | 2005                          
|344 West Middle Turnpike Manchester, CT 06040                          |  | Owned                   |   |  | 2001                          | (2) |  |                              
|214 Spencer Street Manchester, CT 06040                                |  | Leased                  |   |  | 2001                          | (2) |  | 2015                          
|1065 Main Street East Hartford, CT 06108                               |  | Leased                  |   |  | 2001                          | (2) |  | 2010                          
|950 Silver Lane East Hartford, CT 06108                                |  | Leased                  |   |  | 2001                          | (2) |  | 2011                          
|955 Sullivan Avenue South Windsor, CT 06074                            |  | (1                      | ) |  | 1965                          |     |  | 2010                          
|481 Buckland Road South Windsor, CT 06074                              |  | Leased                  |   |  | 2001                          | (2) |  | 2011                          



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|                                                   |  |                         |   |  |                               |     |  |                               
|-------------------------------------------------- |  | ----------------------- | - |  | ----------------------------- | --- |  | ------------------------------
|Location                                           |  | Leased,Licensedor Owned |   |  | OriginalYearLeased orAcquired |     |  | Date ofLease/LicenseExpiration
|Eastford Center, County Road Eastford, CT 06242    |  | Leased                  |   |  | 1985                          |     |  | 2004                          
|122A Prospect Hill Road East Windsor, CT 06088     |  | Leased                  |   |  | 1985                          |     |  | 2004                          
|6 Storrs Road Mansfield, CT 06250                  |  | Leased                  |   |  | 1986                          |     |  | 2005                          
|200 Merrow Road Tolland, CT 06084                  |  | Leased                  |   |  | 1989                          |     |  | 2004                          
|1320 Manchester Road Glastonbury, CT 06033         |  | (1                      | ) |  | 1987                          |     |  | 2007                          
|2510 Main Street Glastonbury, CT 06033             |  | Owned                   |   |  | 2001                          | (2) |  |                              
|902 Main Street South Glastonbury, CT 06073        |  | Leased                  |   |  | 2001                          | (2) |  | 2005                          
|435 Hartford Turnpike Vernon, CT 06066             |  | Leased                  |   |  | 1988                          |     |  | 2008                          
|35 Talcottville Road Vernon, CT 06066              |  | Leased                  |   |  | 2001                          | (2) |  | 2007                          
|1078 N. Main Street Dayville (Killingly), CT 06241 |  | Leased                  |   |  | 1990                          |     |  | 2005                          





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##### Table of Contents

|                                                                  |  |                         |  |                               |     |  |                               
|----------------------------------------------------------------- |  | ----------------------- |  | ----------------------------- | --- |  | ------------------------------
|Location                                                          |  | Leased,Licensedor Owned |  | OriginalYearLeased orAcquired |     |  | Date ofLease/LicenseExpiration
|Route 66 Columbia, CT 06237                                       |  | Owned                   |  | 1991                          |     |  |                              
|1671 Boston Turnpike Coventry, CT 06238                           |  | Leased                  |  | 1993                          |     |  | 2008                          
|Route 31 & Stonehouse Road Coventry, CT 06238                     |  | Leased                  |  | 2001                          | (2) |  | 2004                          
|596 Middle Turnpike Storrs, CT 06268                              |  | Owned                   |  | 1995                          |     |  |                              
|49 Hazard Avenue Enfield, CT 06082                                |  | Leased                  |  | 1995                          |     |  | 2007                          
|2133 Poquonock Avenue Windsor, CT 06095                           |  | Leased                  |  | 1996                          |     |  | 2006                          
|38 Wells Road Wethersfield, CT 06109                              |  | Leased                  |  | 1996                          |     |  | 2008                          
|55 South Main Street West Hartford, CT 06107                      |  | Leased                  |  | 1997                          |     |  | 2006                          
|175 West Road Ellington, CT 06029                                 |  | Leased                  |  | 2001                          | (2) |  | 2007                          
|Drive/Walk in facility: Annex - Maple Street Manchester, CT 06040 |  | Owned                   |  | 2001                          | (2) |  |                              



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##### Table of Contents

|                                              |  |                         |     |  |                               |     |  |                                |  
|--------------------------------------------- |  | ----------------------- | --- |  | ----------------------------- | --- |  | ------------------------------ | -
|Location                                      |  | Leased,Licensedor Owned |     |  | OriginalYearLeased orAcquired |     |  | Date ofLease/LicenseExpiration |  
|ATM Facilities:                               |  |                         |     |  |                               |     |  |                                |  
|Rt.6 Andover, CT 06232                        |  | Leased                  |     |  | 1974                          |     |  | 2004                           |  
|700 Burnside Ave. East Hartford, CT 06108     |  | Leased                  |     |  | 1966                          |     |  | 2004                           |  
|1 Main Street East Hartford, CT 06118         |  | Leased                  |     |  | 1975                          |     |  | 2005                           |  
|60 Bidwell Street Manchester, CT 06040        |  | Licensed                | (4) |  | 1990                          |     |  | (4                             | )
|Buckland Hills Mall Manchester, CT 06040      |  | Leased                  |     |  | 1992                          |     |  | 2004                           |  
|469 Hartford Rd Manchester, CT 06040          |  | Leased                  |     |  | 1970                          |     |  | 2006                           |  
|71 Haynes Street Manchester, CT 06040         |  | Licensed                | (4) |  | 1989                          |     |  | (4                             | )
|317 Highland Street Manchester, CT 06040      |  | Leased                  |     |  | 2001                          | (2) |  | 2004                           |  
|241 West Middle Turnpike Manchester, CT 06040 |  | (1                      | )   |  | 1983                          |     |  | 2013                           |  
|62 Buckland Street Manchester, CT 06040       |  | Leased                  |     |  | 1990                          |     |  | 2004                           |  



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|                                                        |  |                         |     |  |                               |   |  |                                |  
|------------------------------------------------------- |  | ----------------------- | --- |  | ----------------------------- | - |  | ------------------------------ | -
|Location                                                |  | Leased,Licensedor Owned |     |  | OriginalYearLeased orAcquired |   |  | Date ofLease/LicenseExpiration |  
|31 Union Street Rockville, CT 06066                     |  | Licensed                | (4) |  | 1995                          |   |  | (4                             | )
|Route 195 Storrs, CT 06268                              |  | Leased                  |     |  | 2002                          |   |  | 2007                           |  
|Administrative Offices:                                 |  |                         |     |  |                               |   |  |                                |  
|469 Hartford Road Manchester, CT 06040                  |  | Leased                  |     |  | 1970                          |   |  | 2006                           |  
|50-56 Cottage Street Manchester, CT 06040               |  | Owned                   |     |  | 1986                          |   |  |                               |  
|935 Main Street Manchester, CT 06040                    |  | Owned                   |     |  | (3                            | ) |  |                               |  
|935 Main Street Units B102 & B102A Manchester, CT 06040 |  | Leased                  |     |  | 1997                          |   |  | 2006                           |  
|945 Main Street Unit 305 Manchester, CT 06040           |  | Owned                   |     |  | 1997                          |   |  |                               |  
|945 Main Street Unit 309 Manchester, CT 06040           |  | Owned                   |     |  | 1998                          |   |  |                               |  
|903 Main Street Manchester, CT 06040                    |  | Owned                   |     |  | 2001                          |   |  |                               |  
|35-43 Oak Street Manchester, CT 06040                   |  | Owned                   |     |  | 1995                          |   |  |                               |  
|681 Main Street Plantsville, CT 06479                   |  | Leased                  |     |  | 1997                          |   |  | 2004                           |  

---

|(1) | The Bank owns the building and leases the land and only owns the building as long as the lease is in effect.
|--- | ------------------------------------------------------------------------------------------------------------

|(2) | The Bank acquired these properties on August 31, 2001 from First Federal.
|--- | -------------------------------------------------------------------------

|(3) | The Bank owns seventeen commercial condominiums, which were all acquired at various times between 1990 and 2000 and are used for administrative offices.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The Bank maintains a license to possess the property. Generally, the holder of a license has less property rights than the possessor of a leasehold interest. The license has no
expiration date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Personnel



As of December 31, 2003, the Bank had 424 full-time employees and 100 part-time employees, none of whom is represented by a collective bargaining unit.
The Bank believes its relationship with its employees is good.



Item 3. Legal Proceedings.



Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of
real property loans and other issues incident to the Banks business. The Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company.



Item 4. Submission of Matters to a Vote of Security Holders.



None.



PART II



Item 5. Market for the Registrants Common Equity and Related Stockholder Matters.



The Companys Common Stock has been traded on the NASDAQ National Market under the symbol SBMC since the Companys initial public
offering closed on March 1, 2000 and the Common Stock began trading on March 2, 2000. The initial offering price was $10.00 per share. The following table sets forth the high and low closing prices (such prices reflect interdealer prices, without
retail markup, markdown or commissions and may not necessarily represent actual transactions) of the Common Stock from January 1, 2002 to December 31, 2003, as reported by NASDAQ and any dividends that the Company paid in the respective period.



|                   |  |                   |      |      |   |       |  |   |      
|------------------ |  | ----------------- | ---- | ---- | - | ----- |  | - | -----
|Quarter ended      |  | Cash DividendPaid |      | High |   | Low  
|March 31, 2002     |  | $                 | 0.13 |      | $ | 28.94 |  | $ | 25.50
|June 30, 2002      |  |                   | 0.13 |      |   | 33.64 |  |   | 27.80
|September 30, 2002 |  |                   | 0.14 |      |   | 37.70 |  |   | 28.40
|December 31, 2002  |  |                   | 0.16 |      |   | 40.80 |  |   | 33.90
|                   |  |                   |     
|March 31, 2003     |  | $                 | 0.18 |      | $ | 43.83 |  | $ | 38.45
|June 30, 2003      |  |                   | 0.18 |      |   | 44.00 |  |   | 37.56
|September 30, 2003 |  |                   | 0.18 |      |   | 51.30 |  |   | 40.61
|December 31, 2003  |  |                   | 0.18 |      |   | 51.79 |  |   | 51.50



As of March 5, 2004, the Company had
approximately 3,899 stockholders of record.



Declarations of
dividends by the Board of Directors, if any, will depend upon a number of factors, investment opportunities available to the Company, capital requirements, regulatory limitations, the Companys financial condition and results of operations, tax
considerations and general economic conditions. No assurances can be given, however, that any dividends will continue to be paid.



The Companys ability to declare dividends is subject to the requirements of Delaware law, which generally limits dividends to an amount equal to the
excess of the net assets of the Company (the amount by which total assets exceed total liabilities) over its statutory capital or, if there is no excess, to its net profits for the current and/or immediately preceding fiscal year.



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##### Table of Contents

Item 6. Selected Consolidated Financial Data.



The Company has derived the following selected consolidated financial and other data in part from the consolidated financial statements and notes appearing elsewhere in this Form 10-K. The Company acquired First
Federal on August 31, 2001. First Federals results are included in the amounts below for periods after August 31, 2001 which significantly affects the comparability of period to period results.



|                                      |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|------------------------------------- |  | --------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                      |  | At December 31,
|                                      |  | 2003            |           | 2002 |   | 2001      |  | 2000 |           | 1999
|                                      |  | (in thousands) 
|Selected Consolidated Financial Data: |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total assets                          |  | $               | 2,587,806 |      | $ | 2,547,542 |  | $    | 2,446,424 |      | $ | 1,403,311 |  | $ | 1,227,798
|Cash and cash equivalents             |  |                 | 49,108    |      |   | 25,264    |  |      | 122,624   |      |   | 64,797    |  |   | 26,678   
|Loans, net (2)                        |  |                 | 1,670,728 |      |   | 1,540,567 |  |      | 1,421,143 |      |   | 995,764   |  |   | 938,340  
|Securities held to maturity:          |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|Mortgage-backed securities            |  |                 |          |      |   |          |  |      |          |      |   |          |  |   | 25,474   
|Other investment securities           |  |                 |          |      |   |          |  |      |          |      |   |          |  |   | 20,586   
|                                      |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total securities held to maturity     |  |                 |          |      |   |          |  |      |          |      |   |          |  |   | 46,060   
|                                      |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|Securities available for sale:        |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|Mortgage-backed securities            |  |                 | 228,384   |      |   | 210,409   |  |      | 149,750   |      |   | 80,223    |  |   | 16,204   
|Collateralized mortgage obligations   |  |                 | 197,595   |      |   | 250,428   |  |      | 258,601   |      |   |          |  |   |         
|U.S. Government and agency            |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|obligations                           |  |                 | 153,205   |      |   | 164,580   |  |      | 183,813   |      |   | 85,254    |  |   | 81,328   
|Common stock and mutual funds (3)     |  |                 | 5,385     |      |   | 31,020    |  |      | 61,556    |      |   | 49,144    |  |   | 50,545   
|Other securities                      |  |                 | 140,000   |      |   | 185,185   |  |      | 104,814   |      |   | 93,460    |  |   | 33,777   
|                                      |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total securities available for sale   |  |                 | 724,569   |      |   | 841,622   |  |      | 758,534   |      |   | 308,081   |  |   | 181,854  
|                                      |  |                 |           |      |   |           |  |      |           |      |   |           |  |   |          
|Deposits                              |  |                 | 1,606,292 |      |   | 1,595,979 |  |      | 1,590,938 |      |   | 933,370   |  |   | 906,591  
|Short-term borrowed funds             |  |                 | 123,049   |      |   | 121,052   |  |      | 117,180   |      |   | 106,493   |  |   | 95,814   
|Advances from Federal Home Loan Bank  |  |                 | 543,335   |      |   | 533,890   |  |      | 465,355   |      |   | 100,000   |  |   | 84,000   
|Stockholders equity                  |  |                 | 263,833   |      |   | 251,560   |  |      | 235,374   |      |   | 232,539   |  |   | 123,223  
|Premises and equipment, net           |  |                 | 15,480    |      |   | 17,793    |  |      | 19,348    |      |   | 13,197    |  |   | 14,436   
|Nonperforming assets (1) (4)          |  |                 | 6,545     |      |   | 2,894     |  |      | 7,763     |      |   | 7,046     |  |   | 12,089   





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|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|-------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | --- |  | - | ------
|                                                         |  | For the Year Ended December 31,      
|                                                         |  | 2003                                  |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999
|                                                         |  | (in thousands, except per share data)
|Selected Operating Data:                                 |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|                                                         |  |                                       |         |   |     
|Total interest and dividend income                       |  | $                                     | 128,810 |   |      | $ | 140,566 |      |  | $ | 115,387 |   |  | $    | 95,092 |     |  | $ | 78,834
|Total interest expense                                   |  |                                       | 48,108  |   |      |   | 59,908  |      |  |   | 51,932  |   |  |      | 43,842 |     |  |   | 37,374
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Net interest income                                      |  |                                       | 80,702  |   |      |   | 80,658  |      |  |   | 63,455  |   |  |      | 51,250 |     |  |   | 41,460
|Provision for loan losses                                |  |                                       | 1,275   |   |      |   | 1,500   |      |  |   | 2,000   |   |  |      | 1,200  |     |  |   | 1,100 
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Net interest income after provision for loan losses      |  |                                       | 79,427  |   |      |   | 79,158  |      |  |   | 61,455  |   |  |      | 50,050 |     |  |   | 40,360
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Noninterest income:                                      |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Gains on sales of securities, net                        |  |                                       | 5,666   |   |      |   | 2,703   |      |  |   | 481     |   |  |      | 445    |     |  |   | 1,372 
|Other than temporary impairment of investment securities |  |                                       | (359    | ) |      |   | (1,493  | )    |  |   | (4,076  | ) |  |      |       |     |  |   |      
|Increase in cash surrender value of life insurance       |  |                                       | 2,347   |   |      |   | 2,407   |      |  |   | 1,032   |   |  |      |       |     |  |   |      
|Service charges and fees                                 |  |                                       | 15,422  |   |      |   | 12,902  |      |  |   | 9,556   |   |  |      | 7,649  |     |  |   | 5,866 
|Other                                                    |  |                                       | 2,226   |   |      |   | 2,507   |      |  |   | 2,004   |   |  |      | 2,175  |     |  |   | 2,168 
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Total noninterest income                                 |  |                                       | 25,302  |   |      |   | 19,026  |      |  |   | 8,997   |   |  |      | 10,269 |     |  |   | 9,406 
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Noninterest expense (7)                                  |  |                                       | 62,831  |   |      |   | 59,609  |      |  |   | 51,313  |   |  |      | 49,277 |     |  |   | 36,586
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Income before provision for income taxes                 |  |                                       | 41,898  |   |      |   | 38,575  |      |  |   | 19,139  |   |  |      | 11,042 |     |  |   | 13,180
|Provision for income taxes                               |  |                                       | 14,468  |   |      |   | 12,626  |      |  |   | 6,375   |   |  |      | 3,659  |     |  |   | 4,426 
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Net income                                               |  | $                                     | 27,430  |   |      | $ | 25,949  |      |  | $ | 12,764  |   |  | $    | 7,383  |     |  | $ | 8,754 
|                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |  |      |        |     |  |   |       
|Diluted earnings per share (5)                           |  | $                                     | 2.54    |   |      | $ | 2.40    |      |  | $ | 1.19    |   |  | $    | 0.59   | (6) |  |   | n/a   
|Cash dividends declared per share (5)                    |  | $                                     | 0.72    |   |      | $ | 0.43    |      |  | $ | 0.42    |   |  | $    |       |     |  |   | n/a   
|Cash dividends paid per share (5)                        |  | $                                     | 0.72    |   |      | $ | 0.56    |      |  | $ | 0.29    |   |  | $    |       |     |  |   | n/a   



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|                                                                                                  |  |                                       |   |  |        |   |  |        |   |  |        |   |  |        |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                                                                                  |  | At or For the Year Ended December 31, |  
|                                                                                                  |  | 2003                                  |   |  | 2002   |   |  | 2001   |   |  | 2000   |   |  | 1999   |  
|Selected Operating Ratios and Other Data (8):                                                     |  |                                       |   |  |        |   |  |        |   |  |        |   |  |        |  
|Performance Ratios:                                                                               |  |                                       |   |  |        |   |  |        |   |  |        |   |  |        |  
|Average yield on interest-earning assets                                                          |  | 5.35                                  | % |  | 6.05   | % |  | 6.89   | % |  | 7.39   | % |  | 7.22   | %
|Average rate paid on interest-bearing liabilities                                                 |  | 2.24                                  |   |  | 2.88   |   |  | 3.63   |   |  | 4.11   |   |  | 3.81   |  
|Average interest rate spread (9)                                                                  |  | 3.11                                  |   |  | 3.17   |   |  | 3.26   |   |  | 3.28   |   |  | 3.41   |  
|Net interest margin (10) (11)                                                                     |  | 3.36                                  |   |  | 3.49   |   |  | 3.81   |   |  | 4.00   |   |  | 3.82   |  
|Interest-earning assets to interest- bearing liabilities                                          |  | 112.85                                |   |  | 112.28 |   |  | 117.73 |   |  | 121.03 |   |  | 111.92 |  
|Net interest income after provision for loan losses to noninterest expense                        |  | 126.41                                |   |  | 132.80 |   |  | 119.76 |   |  | 101.57 |   |  | 110.32 |  
|Noninterest expense as a percentage of average assets                                             |  | 2.45                                  |   |  | 2.41   |   |  | 2.91   |   |  | 3.65   |   |  | 3.18   |  
|Return on average assets                                                                          |  | 1.07                                  |   |  | 1.05   |   |  | 0.72   |   |  | 0.55   |   |  | 0.76   |  
|Return on average equity                                                                          |  | 10.72                                 |   |  | 10.43  |   |  | 5.50   |   |  | 3.59   |   |  | 7.53   |  
|Ratio of average equity to average assets                                                         |  | 9.99                                  |   |  | 10.06  |   |  | 13.19  |   |  | 15.24  |   |  | 10.11  |  
|Dividend payout ratio (12)                                                                        |  | 27.00                                 |   |  | 17.28  |   |  | 36.96  |   |  |       |   |  |       |  
|                                                                                                  |  |                                       |   |  |       
|Regulatory Capital Ratios:                                                                        |  |                                       |   |  |        |   |  |        |   |  |        |   |  |        |  
|Leverage capital ratio                                                                            |  | 7.19                                  |   |  | 7.57   |   |  | 6.63   |   |  | 12.82  |   |  | 9.10   |  
|Total risk-based capital ratio (2)                                                                |  | 12.04                                 |   |  | 12.78  |   |  | 10.85  |   |  | 19.63  |   |  | 13.96  |  
|                                                                                                  |  |                                       |   |  |       
|Asset Quality Ratios (2):                                                                         |  |                                       |   |  |        |   |  |        |   |  |        |   |  |        |  
|Nonperforming loans as a percentage of total loans (13)                                           |  | 0.38                                  |   |  | 0.19   |   |  | 0.53   |   |  | 0.69   |   |  | 1.21   |  
|Nonperforming assets as a percentage of total assets (1)                                          |  | 0.25                                  |   |  | 0.11   |   |  | 0.32   |   |  | 0.50   |   |  | 0.98   |  
|Allowance for loan losses as a percentage of total loans                                          |  | 0.98                                  |   |  | 1.04   |   |  | 1.06   |   |  | 1.16   |   |  | 1.12   |  
|Allowance for loan losses as a percentage of nonperforming loans and troubled debt restructurings |  | 257.16                                |   |  | 558.81 |   |  | 198.31 |   |  | 168.96 |   |  | 92.44  |  
|Net loans charged-off to average interest-earning loans                                           |  | 0.05                                  |   |  | 0.04   |   |  | 0.06   |   |  | 0.01   |   |  | 0.12   |  
|                                                                                                  |  |                                       |   |  |       
|Full service offices at end of period                                                             |  | 28                                    |   |  | 28     |   |  | 28     |   |  | 23     |   |  | 23     |  





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---

|(1) | Nonperforming assets consist of nonperforming loans, troubled debt restructurings, and other real estate owned.
|--- | ---------------------------------------------------------------------------------------------------------------

|(2) | Loans are stated at their principal amounts outstanding, net of deferred loan fees.
|--- | -----------------------------------------------------------------------------------

|(3) | During 2003, the Bank sold substantially all of its common stock portfolio.
|--- | ---------------------------------------------------------------------------

|(4) | In December 2003, a $4.22 million commercial loan relationship was placed on nonaccrual status. A forbearance agreement has been executed which requires scheduled loan paydowns
through June 2004. In January 2004, two commercial real estate loans totaling $1.59 million were placed on nonaccrual status. One loan for $807,000 was reported as 60 days past due at December 31, 2003. The second loan for $778,000 was reported as
90 days past due and still accruing at December 31, 2003 and therefore is included in December 31, 2003 nonperforming loans. The estimated collateral value of all such loans exceeds the outstanding principal balance of the loans.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Earnings per share and cash dividends declared and paid per share are not applicable for periods prior to the Conversion.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(6) | This figure is for the ten month period from March 1, 2000 through December 31, 2000 due to the Conversion.
|--- | -----------------------------------------------------------------------------------------------------------

|(7) | 2003 amount includes $4.11 million of expenses related to the merger with NHSB.
|--- | -------------------------------------------------------------------------------

|(8) | Asset quality and total risk-based capital ratios are end of period ratios. Except for end of period ratios, all ratios are based on average daily balances during the indicated
periods.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Net interest margin represents net interest income as a percentage of average interest-earning assets.
|---- | ------------------------------------------------------------------------------------------------------

|(11) | Fully taxable-equivalent yields are calculated assuming a 35% federal income tax rate.
|---- | --------------------------------------------------------------------------------------

|(12) | Dividend payout ratio is calculated using date of dividend declaration. During 2002, the Company changed its dividend declaration date to the first month following a quarter-end. If
the 2002 ratio were to include the dividend declared January 21, 2003 the ratio for 2002 to would be 24.47%.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Nonperforming loans include loans on nonaccrual status, loans 90 days past due and still accruing interest and troubled debt restructurings.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.



The following discussion should be read in conjunction with Selected Financial Dataand the Consolidated Financial Statements and
related Notes appearing elsewhere in this form 10-K.



General



The Company has only one subsidiary, The Savings Bank of
Manchester. The Banks results of operations depend primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense on its
interest-bearing liabilities, such as deposits and borrowings. The Bank also generates noninterest income primarily from fees charged on customers accounts and fees earned on activities such as investment services provided through a third
party registered broker-dealer. Gains on sales of securities are another source of noninterest income. The Banks noninterest expenses primarily consist of employee compensation and benefits, occupancy expense, advertising and other operating
expenses. The Banks results of operations are also affected by general economic and competitive conditions, notably changes in market interest rates, government policies and regulations. The Bank exceeded all of its regulatory capital
requirements at December 31, 2003.



Acquisition of First Federal



On August 31, 2001, the Company completed its acquisition
of First Federal in a transaction accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of First Federal are reflected in the Companys consolidated balance sheets at December 31, 2003 and December 31,
2002, and the results of operations of First Federal since August 31, 2001 are included in the consolidated statements of operations for the years ended December 31, 2003, December 31, 2002 and December 31, 2001, as required by the purchase method
of accounting.



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Pending Merger with The New Haven Savings Bank



On July 16, 2003, the Company announced it entered into an Agreement and Plan of Merger with The New Haven Savings Bank. The
Companys stockholders will receive $52.00 in cash in exchange for each share of the Companys common stock held. If the transaction closes after March 31, 2004, the merger price is subject to increase based on the Companys earnings
less dividends paid from that date to the end of the month preceding the closing date of the merger. As a condition precedent to the merger, NHSB will convert from a Connecticut-chartered mutual savings bank to a Connecticut-chartered stock savings
bank and simultaneously form a holding company. The transaction is subject to the approval of the stockholders of the Company, for which a stockholder meeting has been scheduled for March 30, 2004. NHSB expects to close the transaction as soon as
practicable following the stockholders meeting.



Significant
Accounting Policies



Note 1 of the Notes to Consolidated
Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the Companys consolidated financial statements. The following is a brief discussion of the more significant critical
accounting policies and methods used by the Company in preparation of financial statements.



General.The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. The most significant estimates
and assumptions relate to determining the allowance for loan losses, other than temporary impairment of securities, income taxes, impairments of intangible assets and pension and other postretirement benefits. Actual amounts could differ
significantly from these estimates. Senior management has discussed the development and selection of these accounting estimates and the related disclosures with the audit committee of the Companys Board of Directors.



Allowance for Loan Losses.The Bank devotes significant
attention to maintaining high loan quality through its underwriting standards, active servicing of loans and aggressive management of nonperforming assets. The allowance for loan losses is maintained at a level estimated by management to provide
adequately for probable loan losses which are inherent in the loan portfolio. Probable loan losses are estimated based on a quarterly review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent
factors. In assessing risks inherent in the portfolio, management considers the risk of loss on nonperforming and classified loans including an analysis of collateral in each situation. The Banks methodology for assessing the appropriateness
of the allowance for loan losses includes several key elements. Problem loans are identified and analyzed individually to detect specific losses including an analysis of estimated cash flows for impaired loans. The loan portfolio is also segmented
into pools of loans that are similar in type and risk characteristics (i.e., commercial, consumer and mortgage loans). Loss factors based on the Banks historical chargeoffs are applied using the Banks historical experience and may be
adjusted for significant factors that, in managements judgment, affect the collectability of the portfolio as of the evaluation date. Additionally, the portfolio is segmented into pools based on internal risk ratings with estimated loss
factors applied to each rating category. Other factors considered in determining probable loan losses are any changes in concentrations in the portfolio, trends in loan growth, the relationship and trends in recent years of recoveries as a
percentage of prior chargeoffs and peer banks loss experience. Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be
necessary, and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its existing allowance for loan
losses consistent with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Banks loan portfolio, will not request the Bank to increase its allowance for loan
losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above. Material increases in the allowance for loan losses will adversely affect the Banks financial condition and results of operations.



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Other than Temporary Impairment of Securities.On a quarterly basis, the Company reviews
available for sale investment securities with unrealized depreciation for six consecutive months and other securities with unrealized depreciation on a judgmental basis to assess whether the decline in fair value is temporary or other than
temporary. The Company judges whether the decline in value is from company-specific events, industry developments, general economic conditions or other reasons. Once the estimated reasons for the decline are identified, further judgments are
required as to whether those conditions are likely to reverse and, if so, whether that reversal is likely to result in a recovery of the fair value of the investment in the near term. Unrealized losses which are not expected to reverse in the near
term are charged to operations.



Income Taxes.The Company has not provided for Connecticut state income taxes since December 31, 1998 since it has a passive investment company (PIC) as permitted by Connecticut law. The Company believes it complies with the state PIC requirements and
that no state taxes are due from December 31, 1998 through December 31, 2003.



Impairment of Intangibles.The Company periodically evaluates intangible assets for potential impairment indicators and reviews goodwill for impairment at least on an annual basis. The Companys
judgements regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of acquired operations. Future events or changes in the fair value of the Companys common stock could cause
the Company to conclude that impairment indicators exist and that intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on the Companys consolidated financial condition and results of operations.
See Note 1 to the consolidated financial statements for further discussion.



Pension and other Postretirement Employee Benefits.The determination of the Companys obligation and expense for pension and other postretirement benefits is dependent on the Companys
selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 14 to the consolidated financial statements and in Liquidity and Capital Resources below, and include, among others, the discount
rate, expected long-term rate of return on plan assets and rates of increase in compensation and healthcare costs. In accordance with accounting principles generally accepted in the United States, actual results that differ from the Companys
assumptions are accumulated and amortized over future periods and therefore, generally affect the Companys recognized expense and recorded obligation in such future periods. While the Company believes that the assumptions are appropriate,
significant differences in actual experience or significant changes in assumptions may materially affect pension and other postretirement obligations and the Companys future expense.



Comparison of Financial Condition at December 31, 2003 and 2002



Total assets increased $40.27 million, or 1.58%, to $2.59 billion at
December 31, 2003 as compared to $2.55 billion at December 31, 2002. The increase was primarily due to a $130.16 million increase in net loans and a $23.85 million increase in cash and cash equivalents partially offset by a $117.05
million decrease in securities. The increase in loans was primarily due to real estate loans, as one- to four-family mortgages increased $73.83 million and construction, commercial and multi-family mortgages increased $38.29 million. The increase in
cash and cash equivalents was primarily due to an increase in deposits in late December 2003. The decrease in securities was mainly due to managements strategy of funding loan growth through the proceeds from payoffs and sales of securities
rather than through additional FHLB advances. The growth in assets was primarily funded by an increase in deposits of $10.31 million and an increase in advances from FHLB of $9.45 million. Stockholders equity increased $12.27 million,
primarily due to net income for the period and the exercise of stock options inclusive of tax benefits, partially offset by the purchase of treasury stock, the declaration of dividends and a reduction in accumulated other comprehensive income.



Deposits totaled $1.61 billion at December 31, 2003, an
increase of $10.31 million, or 0.65%, compared to $1.60 billion at December 31, 2002. The deposit growth reflects an increase in nonmaturity deposits partially offset by a decrease in certificates of deposit. Nonmaturity deposits (savings, money
market, NOW and demand deposit accounts) increased $70.22 million, while certificates of deposits decreased $59.91 million. The Bank shifted its



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marketing focus starting in 2002 to obtain nonmaturity deposit accounts to take advantage of their lower cost of funds
when compared to certificates of deposits. In addition, the Bank continues to market a short-term commercial transactional repurchase agreement (repo) account to commercial businesses. These repo accounts increased $2.00 million, or
1.65%, during 2003. Advances from Federal Home Loan Bank increased $9.45 million, or 1.77%, from $533.89 million in 2002, to $543.34 million at December 31, 2003. These funds were primarily used to fund real estate loan growth.



Nonperforming assets totaled $6.55 million at December 31, 2003 compared to
$2.89 million at December 31, 2002, representing a increase of $3.66 million, or 126.64%. Nonperforming commercial business loans increased $3.85 million, due to four loans totaling $4.22 million to one borrower that were placed on nonaccrual status
during December 2003. A forbearance agreement has been executed which requires scheduled loan paydowns through June 2004. In January 2004, two commercial real estate loans totaling $1.59 million were placed on nonaccrual status. One loan for
$807,000 was reported as 60 days past due at December 31, 2003. The second loan for $778,000 was reported as 90 days past due at December 31, 2003 and therefore is included in December 31, 2003 nonperforming loans. No specific allocations have been
made to the allowance for loan losses for these loans as the estimated collateral value of all such loans exceeds the principal balance of the loans. Nonperforming loans as a percentage of gross loans increased to 0.38% at December 31, 2003 from
0.19% at December 31, 2002. Nonperforming assets as a percentage of total assets increased to 0.25% at December 31, 2003 from 0.11% at December 31, 2002. Other real estate owned increased $112,000, or 100.00%, to $112,000 as the Bank owns one
residential foreclosed property as of December 31, 2003.



Total
capital increased $12.27 million, or 4.88%, to $263.83 million at December 31, 2003 compared to $251.56 million at December 31, 2002. The increase was primarily due to net income for the period and the exercise of stock options inclusive of tax
benefits, partially offset by the purchase of treasury stock, the declaration of dividends and a reduction in accumulated other comprehensive income.



Comparison of Operating Results for the Years Ended December 31, 2003 and 2002



Net Income.Net income for the year ended December 31, 2003
was $27.43 million compared to net income of $25.95 million for the prior year, an increase of $1.48 million, or 5.70%. Earnings per diluted share for the year ended December 31, 2003 were $2.54 based on 10.81 million weighted average shares
outstanding, compared to earnings per diluted share for the prior year of $2.40 based on 10.79 million weighted average shares outstanding. During the year ended December 31, 2003, the Company recorded $5.67 million of net gains from securities
transactions and a charge of $359,000 for other than temporary impairment of investment securities. During the year ended December 31, 2002, the Company recorded $2.70 million of net gains from securities transactions and a charge of $1.49 million
for other than temporary impairment of investment securities. The Company also incurred $4.11 million of in expenses related to the merger with NHSB during 2003.



Net Interest Income.Net interest income increased $44,000, or 0.05%, to $80.70 million for 2003 from $80.66
million for 2002. The increase was primarily due to a lower cost of funds on interest-bearing liabilities and a higher volume of loans partially offset by lower yields on loans and investments.



Interest and dividend income decreased $11.76 million, or 8.37%, to $128.81
million for 2003 from $140.57 million for 2002. The average yield on interest earning assets decreased 70 basis points from 6.05% in 2002 to 5.35% in 2003, primarily due to a decrease in market interest rates. Interest income on loans decreased
$3.37 million, or 3.34%, to $97.61 million for 2003 compared to $100.98 million for 2002. The decrease was primarily due to a 79 basis point decrease in the average yield on loans primarily due to a lower interest rate environment, partially offset
by a $146.02 million increase in the average balance of loans outstanding. The increase in the average balance of loans was primarily in residential and commercial real estate loans. Interest and dividend income from investment securities and other
interest-bearing assets decreased $8.39 million, or 21.19%, to $31.20 million for 2003 compared to $39.59 million for 2002. The decrease in interest and dividend income from investment securities and other interest-bearing assets was due to a
decrease in investment securities yields and average balances. Investment and other interest-bearing asset yields decreased 70 basis points in 2003 as compared to 2002 due to a decrease in market



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interest rates. Average balances of investment securities and other interest-bearing assets decreased $65.28 million, or
7.85%, to $765.93 million for the year ended December 31, 2003. The decrease in securities was mainly due to managements strategy of funding loan growth through proceeds from payoffs and sales of securities rather than through additional FHLB
advances.



Interest expense decreased $11.80 million, or
19.70%, to $48.11 million for 2003 from $59.91 million for 2002. Interest expense on deposits and escrow decreased $11.46 million primarily due to lower rates of 75 basis points and lower average balance of $17.14 million. The lower average balances
were primarily due to the maturity of certificates of deposit, and the lower rates were due to a decrease in market interest rates. Interest expense on short-term borrowed funds represented by commercial transactional repurchase agreements decreased
primarily due lower rates of 75 basis points. Interest expense on FHLB advances increased $520,000 primarily due to higher average balances of $75.19 million, partially offset by lower rates of 57 basis points. The average cost of funds for the
Company decreased 64 basis points from 2.88% in 2002 to 2.24% in 2003, mainly due to lower market interest rates.



Provision for Loan Losses.The provision for loan losses was $1.28 million for 2003 compared to $1.50 million for 2002. The allowance for
loan losses was 0.98% of total loans and 257.16% of nonperforming loans at December 31, 2003 compared to 1.04% and 558.81%, respectively, at December 31, 2002. The decrease in provision is due to an improved economic outlook during 2003 and entering
into 2004. The reduction in the allowance for loan losses to nonperforming loans ratio was due to the placement on nonaccrual status of four loans totaling $4.22 million to one borrower in December 2003. A forbearance agreement has been executed
which requires scheduled loan paydowns through June 2004. No specific allocations have been made to the allowance for loan losses for these loans as the estimated collateral value exceeds the principal balance of the loans.



Noninterest Income.Noninterest income increased
$6.27 million or 32.95% to $25.30 million for 2003 as compared to $19.03 million for 2002. The increase in noninterest income was primarily due to increases in gains from sales of securities and service charges and fees. Gains on sales of securities
increased $2.97 million from the prior year. During the third quarter of 2003, the Company substantially liquidated its marketable equity securities portfolio. Service charges and fees increased $2.52 million as compared to the prior year primarily
due to increases in checking account, merchant services and commercial real estate loan prepayment fees. Checking account fees increased $1.73 million primarily due to increases in uncollected and nonsufficient funds fees. Merchant services fees
increased $513,000 as the Bank continues to grow its merchant portfolio. Commercial mortgage real estate loan prepayment fees increased $349,000 as commercial mortgage borrowers refinanced into lower interest rate loans.



Noninterest Expense.Noninterest expense increased $3.22
million, or 5.40%, to $62.83 million for 2003 from $59.61 million for 2002. The increase in noninterest expense for 2003 was primarily due to merger-related expenses and higher salaries and employee benefits partially offset by lower amortization of
other intangible assets, fees and services, marketing and furniture and equipment expenses.



The Company incurred $4.11 million in expenses related to the pending merger with NHSB during 2003. These expenses included professional fees and other merger-related fees. Salaries increased $236,000, or 1.15%,
mainly due to employee salary and bonus increases partially offset by higher deferral of costs related to the origination of residential real estate loans. Employee benefits increased $3.66 million, or 31.85%, from $11.49 million for the year ended
December 31, 2002 to $15.15 million for the year ended December 31, 2003. The increase was due to an increase in pension expense of $1.20 million, increased restricted stock expense of $981,000, increased ESOP expense of $747,000 due to a higher
average stock price and an increase in cost of nonqualified benefit plans of $474,000.



Amortization of other intangible assets decreased $2.35 million, or 59.80%, during 2003. In conjunction with the 2001 acquisition of First Federal, the Bank recorded an intangible asset for noncompete agreements with
former First Federal executives. The agreements were amortized over their twelve-month term through the third quarter of 2002.The reduction in amortization is solely due to the full amortization of the noncompete agreements. Fees and services
decreased $925,000 from $7.19 million for 2002 to $6.27 million for 2003. The decrease in fees and services was primarily due to a decrease in information technology and investment consulting. Marketing expenses decreased $561,000 as the bank
reduced its image advertising. Furniture and equipment expenses decreased primarily to lower depreciation as certain assets became fully depreciated in late 2002.



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Provision for Income Taxes.The provision for income taxes increased $1.84 million, or
14.57%, to $14.47 million for 2003 from $12.63 million for 2002. The effective tax rates were 34.53% for 2003 and 32.73% for 2002. The Bank increased its provision for income taxes in the fourth quarter of 2003 due to the nondeductibility of certain
expenses.



Comparison of Operating Results for the Years Ended December 31,
2002 and 2001



Net Income.Net income for
the year ended December 31, 2002 was $25.95 million compared to net income of $12.76 million for the prior year, an increase of $13.19 million, or 103.37%. Earnings per diluted share for the year ended December 31, 2002 were $2.40 based on 10.79
million weighted average shares outstanding, compared to earnings per diluted share for the prior year of $1.19 based on 10.70 million weighted average shares outstanding. During the year ended December 31, 2002, the Company recorded $2.70 million
($1.76 million, net of tax) of net gains from securities transactions and a charge of $1.49 million ($969,000, net of tax) for other than temporary impairment of investment securities. During the year ended December 31, 2001, the Company recorded
$481,000 ($313,000, net of tax) of net gains from securities transactions and a charge of $4.08 million ($2.65 million, net of tax) for other than temporary impairment of investment securities. In addition, during the third quarter of 2001 the
Company recorded $1.42 million of director and employee retirement expenses and $872,000 of relocation and branch closing costs resulting from the 2001 acquisition of First Federal.



Net Interest Income.Net interest income increased $17.20 million, or 27.10%, to $80.66 million for 2002 from
$63.46 million for 2001. The increase was primarily a result of higher interest income from an increase in the level of average interest earning assets, partially offset by lower yields. The increase in interest income was partially offset by higher
interest expense resulting from an increase in the level of average interest bearing liabilities, partially offset by lower rates. The higher levels of average interest earning assets and average interest bearing liabilities was primarily due to the
acquisition of First Federal in August 2001. Lower asset yields and lower deposit and borrowing rates were primarily caused by a lower overall interest rate environment in 2002 as compared to 2001.



Interest and dividend income increased $25.18 million, or 21.82%, to $140.57
million for 2002 from $115.39 million for 2001. The average yield on interest earning assets decreased 84 basis points from 6.89% in 2001 to 6.05% in 2002, primarily due to a decrease in market interest rates. Interest income on loans increased
$14.62 million, or 16.93%, to $100.98 million for 2002 compared to $86.36 million for 2001. The increase was primarily due to a $345.67 million increase in the average balance of loans outstanding, partially offset by a 74 basis point decrease in
the average yield on loans primarily due to a lower interest rate environment. The increase in the average balance of loans was due to the First Federal acquisition and post-acquisition loan growth. Total gross loans increased by $120.37 million, or
8.38%, from December 31, 2001 to December 31, 2002 and by $175.00 million, or 12.67%, from September 30, 2001, the first quarter-end after the acquisition, to December 31, 2002. Most of the loan growth during these periods was related to loans
secured by residential and commercial real estate. Interest and dividend income from investment securities and other interest-bearing assets increased $10.56 million, or 36.38%, to $39.59 million for 2002 compared to $29.03 million for 2001. The
increase in interest and dividend income from investment securities and other interest-bearing assets was due to an increase in the average balance of $309.81 million, or 59.42%, to $831.21 million for the year ended December 31, 2002, primarily due
to the First Federal acquisition. Investment and other interest-bearing asset yields decreased 81 basis points in 2002 as compared to 2001 due to a decrease in market interest rates.



Interest expense increased $7.98 million, or 15.37%, to $59.91 million for 2002 from $51.93 million for 2001. The increase
reflects an increase in expense on advances from FHLB of $11.56 million, partially offset by a decrease in expense on deposits and escrow of $2.34 million and a decrease in expense for short-term borrowed funds of $1.24 million. Interest expense on
advances from FHLB increased primarily due to increased average volume of $248.20 million, partially offset by lower rates of 28 basis points. Interest expense on deposits and escrow decreased primarily due to lower rates of 108 basis points
partially offset by higher average volume of $399.42 million. The



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higher volumes were primarily due to the First Federal acquisition, and the lower rates were due to a decrease in market
interest rates. Interest expense on short-term borrowed funds represented by commercial transactional repurchase agreements decreased primarily due lower rates of 119 basis points. The average cost of funds for the Company decreased 75 basis points
from 3.63% in 2001 to 2.88% in 2002, mainly due to lower market interest rates.



Provision for Loan Losses.The provision for loan losses was $1.50 million for 2002 compared to $2.00 million for 2001. The allowance for loan losses was 1.04% of total loans and 558.81% of nonperforming
loans at December 31, 2002 compared to 1.06% and 198.31%, respectively, at December 31, 2001. The decrease in provision is due to an additional provision of $500,000 recorded in the third quarter of 2001 related to First Federal and a recovery of
$700,000 recorded in the fourth quarter of 2002 in connection with the repayment of the Banks largest nonperforming loan. Management increased the loan loss provision for the third quarter of 2001 to increase the reserve for First Federal
loans to the amounts recorded by the Bank on comparable loans.



Noninterest Income.Noninterest income increased $10.03 million or 111.44% to $19.03 million for 2002 as compared to $9.00 million for 2001. The increase in noninterest income was primarily due to increases in service charges
and fees, gains from sales of securities, income from cash surrender value life insurance, income from brokerage commissions and a decrease in other than temporary impairment of investment securities. Service charges and fee income increased $3.34
million, or 34.94%, from $9.56 million in 2001 to $12.90 million in 2002. Service charges on checking accounts and ATM fees increased $1.24 million over the prior year primarily due to the First Federal acquisition. Merchant service fees increased
$859,000 over the prior year as transaction levels at the Banks merchants increased.



Loan related fees increased $698,000 over the prior year mainly due to commercial mortgage prepayment penalties, late charges and reduced amortization of mortgage servicing rights. For each commercial mortgage loan
originated, the Bank typically will include a prepayment clause that would require the borrower to pay a prepayment fee if the borrower repays the loan prior to maturity. Depending on the original term of the loan, these clauses typically range from
5 to 10 years from the date of origination. During 2002, primarily in the fourth quarter, commercial mortgages totaling $18.66 million were prepaid by the borrower. In all cases, the Bank granted new loans with market interest rates and terms
including additional prepayment provisions. These refinancings decreased the rate on these mortgages from 8.08% to 6.21%, or a decrease of 187 basis points. Fees of $325,000 were collected and recorded as income in relation to these loan repayments.
Management believes that if the Bank had chosen not to modify these interest rates, the majority of the borrowers would have paid the prepayment penalty and left the Bank. Debit and credit card fees increased $452,000 year primarily due to the First
Federal acquisition.



Gains on sales of securities increased
$2.22 million over the prior year mainly due to sales of equity securities. Income from cash surrender value life insurance and brokerage commissions increased primarily due to the First Federal acquisition and the related increase in life
insurance.



On a quarterly basis, the Company reviews available
for sale investment securities with unrealized depreciation for six consecutive months and other securities with unrealized depreciation on a judgmental basis to assess whether the decline in fair value is temporary or other than temporary. The
Company judges whether the decline in value is from company-specific events, industry developments, general economic conditions or other reasons. Once the estimated reasons for the decline are identified, further judgments are required as to whether
those conditions are likely to reverse and, if so, whether that reversal is likely to result in a recovery of the fair value of the investment in the near term. In accordance with this policy, for the year ended December 31, 2002 and 2001 the
Company recorded other than temporary impairment charges of $1.49 million and $4.08 million, respectively. The charges were computed using the closing price of the securities as of the respective impairment date. All of the securities impaired are
publicly traded. There were no material unrecognized impairment losses as of December 31, 2002 and 2001.



Noninterest Expense.Noninterest expense increased $8.30 million, or 16.18%, to $59.61 million for 2002 from $51.31 million for 2001. The
increase in noninterest expense for 2002 was primarily due to higher salaries, employee benefits, fees and services, amortization of other intangible assets, occupancy and furniture and equipment expenses.



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Partially offsetting these increases was the 2001 charges pertaining to director and employee retirement expenses and
relocation and branch closing costs. The primary reason for increases in noninterest expense was the acquisition of First Federal. Salaries increased $2.25 million, or 12.36%, from $18.20 million at December 31, 2001 to $20.45 million at December
31, 2002, mainly due to the addition of 108 full time equivalent employees due to the First Federal acquisition. Employee benefits increased $2.87 million, or 33.29%, from $8.62 million for the year ended December 31, 2001 to $11.49 million for the
year ended December 31, 2002. The increase was due to an increase in pension expense of $795,000 primarily due to the First Federal acquisition, increased ESOP expense of $498,000 due to a higher average stock price, increased payroll taxes of
$376,000 due primarily to more employees, an increase in cost of nonqualified benefit plans of $321,000, an increase in health insurance costs of $296,000 and an increase in restricted stock expense of $215,000 primarily due to the 2002 Equity
Compensation Plan.



Fees and services increased $1.47 million
from $5.72 million for 2001 to $7.19 million for 2002. Within fees and services, several areas had increased costs. Consulting fees increased $376,000 primarily due to the hiring of outside information systems consultants. Programming and software
licensing fees increased $307,000 as the Bank continues to upgrade its software programs. Debit card expenses increased $207,000 as more debit card transactions were processed. Investment consulting fees increased $192,000 as the Banks
portfolio grew due to the acquisition of First Federal. Director fees increased $142,000 primarily due to the addition of two former First Federal directors to the Bank Board and one former First Federal director to the Holding Company Board, as
well as more committee meetings.



Amortization of other
intangible assets increased $1.95 million, or 98.48%, during 2002. Due to the acquisition of First Federal, the Company recorded other intangible assets for noncompete agreements with former First Federal executives and a core deposit intangible.
The noncompete agreement intangible amortized four months during 2001 and eight months in 2002, as it was amortized on a straight-line basis over its term of twelve months. The core deposit intangible amortized four months in 2001 and twelve months
in 2002, as it is being amortized on a straight line basis over its estimated life of eight years.



Occupancy expenses increased $555,000 and furniture and equipment expenses increased $512,000 primarily due to the acquisition of First Federal. During
the third quarter of 2001, the Company recorded noninterest expenses totaling $2.29 million that are nonrecurring in nature including director and employee retirement expenses of $1.42 million and $872,000 of relocation and branch closing costs. The
Bank offered an early retirement package to certain employees resulting in a charge of $547,000. CTBS granted stock options and restricted stock to the former Chairman of the Board, incurring $541,000 of expense. CTBS also accelerated the vesting of
previously granted stock options and restricted stock to a director who retired on December 31, 2001. The charge incurred with the vesting acceleration was $331,000. The Bank recorded $872,000 of relocation and branch closing costs primarily due to
the closing of five SBM branches that were no longer necessary due to overlap of market areas caused by the acquisition of First Federal.



Provision for Income Taxes.The provision for income taxes increased $6.25 million, or 97.96%, to $12.63 million for 2002 from $6.38 million
for 2001. The effective tax rates were 32.73% for 2002 and 33.31% for 2001. The slight decrease in effective rate is primarily due to certain tax-advantaged assets acquired from First Federal, including municipal bonds and bank owned life insurance.
The increase in tax expense is due to an increase in taxable income.



Average balances, Interest and Average Yields/Costs



The following table presents certain information for the years indicated regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the years indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for
the years presented. Average balances were derived from average daily balances. The yields and rates include fees which are considered adjustments to yields.



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|                                        |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|--------------------------------------- |  | ------------------------------- | --------- | -------- | ---- | ----------------- |  | ---- | -------------- |  | -------- | --------- | ----------------- | - | ------- | -------------- | ---- | -------- |  | ----------------- | --------- |  | - | ------- |  | ---- | -
|                                        |  | For the Year Ended December 31, |          
|                                        |  | 2003                            |           |          | 2002 |                   |  | 2001 |               
|                                        |  | AverageBalance                  |           | Interest |      | AverageYield/Rate |  |      | AverageBalance |  | Interest |           | AverageYield/Rate |   |         | AverageBalance |      | Interest |  | AverageYield/Rate |          
|                                        |  | (dollars in thousands)          |          
|Interest-earning assets:                |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Loans (1) (6) (7):                      |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Real estate                             |  | $                               | 1,329,787 |          | $    | 79,083            |  | 5.95 | %              |  | $        | 1,211,503 |                   | $ | 81,317  |                | 6.71 | %        |  | $                 | 914,824   |  | $ | 66,802  |  | 7.30 | %
|Consumer                                |  |                                 | 136,516   |          |      | 7,487             |  | 5.48 |                |  |          | 121,522   |                   |   | 8,052   |                | 6.63 |          |  |                   | 95,133    |  |   | 7,228   |  | 7.60 |  
|Commercial (5)                          |  |                                 | 186,607   |          |      | 11,081            |  | 5.94 |                |  |          | 173,860   |                   |   | 11,653  |                | 6.70 |          |  |                   | 151,267   |  |   | 12,391  |  | 8.19 |  
|                                        |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Total loans (5)                         |  |                                 | 1,652,910 |          |      | 97,651            |  | 5.91 |                |  |          | 1,506,885 |                   |   | 101,022 |                | 6.70 |          |  |                   | 1,161,224 |  |   | 86,421  |  | 7.44 |  
|                                        |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Mortgage-backed securities (2)          |  |                                 | 197,961   |          |      | 8,524             |  | 4.31 |                |  |          | 131,189   |                   |   | 7,860   |                | 5.99 |          |  |                   | 104,200   |  |   | 6,792   |  | 6.52 |  
|Collateralized mortgage obligations (2) |  |                                 | 218,682   |          |      | 8,591             |  | 3.93 |                |  |          | 224,268   |                   |   | 11,633  |                | 5.19 |          |  |                   | 115,979   |  |   | 6,111   |  | 5.27 |  
|Investment securities (2)(5):           |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|U.S. Government and agency obligations  |  |                                 | 101,524   |          |      | 5,034             |  | 4.96 |                |  |          | 164,452   |                   |   | 7,434   |                | 4.52 |          |  |                   | 95,861    |  |   | 5,509   |  | 5.75 |  
|Municpal obligations                    |  |                                 | 23,071    |          |      | 1,653             |  | 7.16 |                |  |          | 23,606    |                   |   | 1,684   |                | 7.13 |          |  |                   | 9,899     |  |   | 703     |  | 7.10 |  
|Corporate securities                    |  |                                 | 54,360    |          |      | 2,832             |  | 5.21 |                |  |          | 58,430    |                   |   | 3,591   |                | 6.15 |          |  |                   | 51,638    |  |   | 3,848   |  | 7.45 |  
|Common stock and mutual funds           |  |                                 | 18,700    |          |      | 620               |  | 3.32 |                |  |          | 34,789    |                   |   | 1,400   |                | 4.02 |          |  |                   | 39,301    |  |   | 1,464   |  | 3.73 |  
|Other equity securities                 |  |                                 | 1,332     |          |      | 7                 |  | 0.53 |                |  |          | 1,092     |                   |   | 8       |                | 0.73 |          |  |                   | 701       |  |   | 3       |  | 0.43 |  
|Asset-backed securities                 |  |                                 | 71,169    |          |      | 3,148             |  | 4.42 |                |  |          | 102,553   |                   |   | 4,610   |                | 4.50 |          |  |                   | 27,104    |  |   | 1,986   |  | 7.33 |  
|Other interest-bearing assets:          |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Federal Home Loan Bank stock            |  |                                 | 30,691    |          |      | 936               |  | 3.05 |                |  |          | 30,783    |                   |   | 1,135   |                | 3.69 |          |  |                   | 15,227    |  |   | 824     |  | 5.41 |  
|Federal funds sold                      |  |                                 | 48,439    |          |      | 505               |  | 1.04 |                |  |          | 60,050    |                   |   | 1,037   |                | 1.73 |          |  |                   | 61,492    |  |   | 2,300   |  | 3.74 |  
|                                        |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Total interest-earning assets (5)       |  |                                 | 2,418,839 |          | $    | 129,501           |  | 5.35 | %              |  |          | 2,338,097 |                   | $ | 141,414 |                | 6.05 | %        |  |                   | 1,682,626 |  | $ | 115,961 |  | 6.89 | %
|                                        |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Noninterest-earning assets assets       |  |                                 | 141,541   |          |      |                   |  |      |                |  |          | 134,865   |                   |   |         |                |      |          |  |                   | 77,981    |  |   |         |  |      |  
|                                        |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  
|Total assets                            |  | $                               | 2,560,380 |          |      |                   |  |      |                |  | $        | 2,472,962 |                   |   |         |                |      |          |  | $                 | 1,760,607 |  |   |         |  |      |  
|                                        |  |                                 |           |          |      |                   |  |      |                |  |          |           |                   |   |         |                |      |          |  |                   |           |  |   |         |  |      |  



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|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|---------------------------------------------------------------- |  | ------------------------------- | --------- | -------- | ---- | ----------------- |  | ------ | -------------- |  | -------- | --------- | ----------------- | - | ------ | -------------- | ------ | -------- |  | ----------------- | --------- |  | - | ------ |  | ------ | -
|                                                                 |  | For the Year Ended December 31, |          
|                                                                 |  | 2003                            |           |          | 2002 |                   |  | 2001   |               
|                                                                 |  | AverageBalance                  |           | Interest |      | AverageYield/Rate |  |        | AverageBalance |  | Interest |           | AverageYield/Rate |   |        | AverageBalance |        | Interest |  | AverageYield/Rate |          
|                                                                 |  | (dollars in thousands)          |          
|Interest-bearing liabilities:                                    |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Deposits:                                                        |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|NOW accounts                                                     |  | $                               | 227,479   |          | $    | 695               |  | 0.31   | %              |  | $        | 211,276   |                   | $ | 1,115  |                | 0.53   | %        |  | $                 | 150,693   |  | $ | 1,055  |  | 0.70   | %
|Savings and money market accounts                                |  |                                 | 615,230   |          |      | 3,938             |  | 0.64   |                |  |          | 574,412   |                   |   | 7,720  |                | 1.34   |          |  |                   | 382,045   |  |   | 8,420  |  | 2.20   |  
|Certificates of deposit                                          |  |                                 | 608,668   |          |      | 18,160            |  | 2.98   |                |  |          | 686,683   |                   |   | 25,459 |                | 3.71   |          |  |                   | 542,888   |  |   | 27,113 |  | 4.99   |  
|Escrow deposits                                                  |  |                                 | 13,859    |          |      | 209               |  | 1.51   |                |  |          | 10,013    |                   |   | 167    |                | 1.67   |          |  |                   | 7,332     |  |   | 211    |  | 2.88   |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Total interest-bearing deposits                                  |  |                                 | 1,465,236 |          |      | 23,002            |  | 1.57   |                |  |          | 1,482,384 |                   |   | 34,461 |                | 2.32   |          |  |                   | 1,082,958 |  |   | 36,799 |  | 3.40   |  
|Short-term borrowed funds                                        |  |                                 | 119,385   |          |      | 783               |  | 0.66   |                |  |          | 116,318   |                   |   | 1,644  |                | 1.41   |          |  |                   | 110,823   |  |   | 2,882  |  | 2.60   |  
|Advances from Federal Home Loan Bank                             |  |                                 | 558,833   |          |      | 24,323            |  | 4.35   |                |  |          | 483,641   |                   |   | 23,803 |                | 4.92   |          |  |                   | 235,440   |  |   | 12,251 |  | 5.20   |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Total interest-bearing liabilities                               |  |                                 | 2,143,454 |          | $    | 48,108            |  | 2.24   | %              |  |          | 2,082,343 |                   | $ | 59,908 |                | 2.88   | %        |  |                   | 1,429,221 |  | $ | 51,932 |  | 3.63   | %
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Noninterest-bearing liabilities                                  |  |                                 | 161,066   |          |      |                   |  |        |                |  |          | 141,729   |                   |   |        |                |        |          |  |                   | 99,224    |  |   |        |  |        |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Total liabilities                                                |  |                                 | 2,304,520 |          |      |                   |  |        |                |  |          | 2,224,072 |                   |   |        |                |        |          |  |                   | 1,528,445 |  |   |        |  |        |  
|Stockholders equity                                             |  |                                 | 255,860   |          |      |                   |  |        |                |  |          | 248,890   |                   |   |        |                |        |          |  |                   | 232,162   |  |   |        |  |        |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Total liabilities and stockholders equity                       |  | $                               | 2,560,380 |          |      |                   |  |        |                |  | $        | 2,472,962 |                   |   |        |                |        |          |  | $                 | 1,760,607 |  |   |        |  |        |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Net interest-earning assets                                      |  | $                               | 275,385   |          |      |                   |  |        |                |  | $        | 255,754   |                   |   |        |                |        |          |  | $                 | 253,405   |  |   |        |  |        |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Net interest income (5)                                          |  |                                 |           |          | $    | 81,393            |  |        |                |  |          |           |                   | $ | 81,506 |                |        |          |  |                   |           |  | $ | 64,029 |  |        |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Interest rate spread (3)(5)                                      |  |                                 |           |          |      |                   |  | 3.11   | %              |  |          |           |                   |   |        |                | 3.17   | %        |  |                   |           |  |   |        |  | 3.26   | %
|Net interest margin (4)(5)                                       |  |                                 |           |          |      |                   |  | 3.36   | %              |  |          |           |                   |   |        |                | 3.49   | %        |  |                   |           |  |   |        |  | 3.81   | %
|Ratio of interest-earning assets to interest-bearing liabilities |  |                                 |           |          |      |                   |  | 112.85 | %              |  |          |           |                   |   |        |                | 112.28 | %        |  |                   |           |  |   |        |  | 117.73 | %
|Taxable-equivalent adjustments                                   |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Loans                                                            |  |                                 |           |          | $    | 42                |  |        |                |  |          |           |                   | $ | 44     |                |        |          |  |                   |           |  | $ | 62     |  |        |  
|Investment securities                                            |  |                                 |           |          |      | 649               |  |        |                |  |          |           |                   |   | 804    |                |        |          |  |                   |           |  |   | 512    |  |        |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  
|Total                                                            |  |                                 |           |          | $    | 691               |  |        |                |  |          |           |                   | $ | 848    |                |        |          |  |                   |           |  | $ | 574    |  |        |  
|                                                                 |  |                                 |           |          |      |                   |  |        |                |  |          |           |                   |   |        |                |        |          |  |                   |           |  |   |        |  |        |  

---

|(1) | Balances are net of undisbursed proceeds of construction loans in process and include nonperforming loans.
|--- | ----------------------------------------------------------------------------------------------------------

|(2) | Yields are calculated on amortized cost and exclude the impact of unrealized gains and losses on available for sale securities.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Net interest margin represents fully taxable-equivalent net interest income as a percentage of average interest-earning assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(5) | Fully taxable-equivalent yields are calculated assuming a 35% federal income tax rate.
|--- | --------------------------------------------------------------------------------------

|(6) | Interest on nonperforming loans has been included only to the extent reflected in the Consolidated Statements of Income.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(7) | Includes amortization of net deferred loan fees (net of costs) of $145,000, $110,000 and $157,000 in 2003, 2002 and 2001, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



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Rate/Volume Analysis



The following table presents the effects of changing rates and volumes on the interest income and interest expense of the Bank on a fully taxable
equivalent basis. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For
purposes of this table, changes attributable to changes in both rate and volume, which cannot be segregated, are shown in the rate/vol column.



|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | -------------------------- | ------- | - | -------------------------- | - | ------ | -------- |  | - | ------ | - |  | ---- | ------- | - | ------ | - | -------- | - |  | --- | ------ |  | - | ------ | - |  | - | ------ | -
|                                                        |  | 2003 Compared to 2002      |         |   | 2002 Compared to 2001      |  
|                                                        |  | Increase (Decrease) Due to |         |   | Increase (Decrease) Due to |  
|                                                        |  | (in thousands)             |        
|                                                        |  | Rate                       |         |   | Volume                     |   |        | Rate/Vol |  |   | Net    |   |  | Rate |         |   | Volume |   | Rate/Vol |   |  | Net |       
|Interest-earning assets:                                |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Loans:                                                  |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Real estate                                             |  | $                          | (9,268  | ) |                            | $ | 7,939  |          |  | $ | (905   | ) |  | $    | (2,234  | ) |        | $ | (5,398   | ) |  | $   | 21,664 |  | $ | (1,751 | ) |  | $ | 14,515 |  
|Consumer                                                |  |                            | (1,387  | ) |                            |   | 993    |          |  |   | (171   | ) |  |      | (565    | ) |        |   | (925     | ) |  |     | 2,005  |  |   | (256   | ) |  |   | 824    |  
|Commercial                                              |  |                            | (1,329  | ) |                            |   | 854    |          |  |   | (97    | ) |  |      | (572    | ) |        |   | (2,252   | ) |  |     | 1,851  |  |   | (337   | ) |  |   | (738   | )
|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Total loans                                             |  |                            | (11,984 | ) |                            |   | 9,786  |          |  |   | (1,173 | ) |  |      | (3,371  | ) |        |   | (8,575   | ) |  |     | 25,520 |  |   | (2,344 | ) |  |   | 14,601 |  
|Mortgage-backed securities                              |  |                            | (2,211  | ) |                            |   | 4,001  |          |  |   | (1,126 | ) |  |      | 664     |   |        |   | (549     | ) |  |     | 1,759  |  |   | (142   | ) |  |   | 1,068  |  
|Collateralized mortgage obligations                     |  |                            | (2,823  | ) |                            |   | (290   | )        |  |   | 71     |   |  |      | (3,042  | ) |        |   | (95      | ) |  |     | 5,706  |  |   | (89    | ) |  |   | 5,522  |  
|Investment securities and other interest-earning assets |  |                            | (750    | ) |                            |   | (5,393 | )        |  |   | (21    | ) |  |      | (6,164  | ) |        |   | (3,996   | ) |  |     | 11,571 |  |   | (3,313 | ) |  |   | 4,262  |  
|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Total interest-earning assets                           |  |                            | (17,768 | ) |                            |   | 8,104  |          |  |   | (2,249 | ) |  |      | (11,913 | ) |        |   | (13,215  | ) |  |     | 44,556 |  |   | (5,888 | ) |  |   | 25,453 |  
|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Interest-bearing liabilities:                           |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Deposits:                                               |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|NOW accounts                                            |  |                            | (470    | ) |                            |   | 86     |          |  |   | (36    | ) |  |      | (420    | ) |        |   | (260     | ) |  |     | 424    |  |   | (104   | ) |  |   | 60     |  
|Savings and money market accounts                       |  |                            | (4,043  | ) |                            |   | 549    |          |  |   | (288   | ) |  |      | (3,782  | ) |        |   | (3,285   | ) |  |     | 4,240  |  |   | (1,655 | ) |  |   | (700   | )
|Certificates of deposit                                 |  |                            | (4,971  | ) |                            |   | (2,892 | )        |  |   | 564    |   |  |      | (7,299  | ) |        |   | (6,985   | ) |  |     | 7,181  |  |   | (1,850 | ) |  |   | (1,654 | )
|Escrow deposits                                         |  |                            | (16     | ) |                            |   | 64     |          |  |   | (6     | ) |  |      | 42      |   |        |   | (89      | ) |  |     | 77     |  |   | (32    | ) |  |   | (44    | )
|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Total deposits                                          |  |                            | (9,500  | ) |                            |   | (2,193 | )        |  |   | 234    |   |  |      | (11,459 | ) |        |   | (10,619  | ) |  |     | 11,922 |  |   | (3,641 | ) |  |   | (2,338 | )
|Short-term borrowed funds                               |  |                            | (881    | ) |                            |   | 43     |          |  |   | (23    | ) |  |      | (861    | ) |        |   | (1,316   | ) |  |     | 143    |  |   | (65    | ) |  |   | (1,238 | )
|Advances from Federal Home Loan Bank                    |  |                            | (2,753  | ) |                            |   | 3,701  |          |  |   | (428   | ) |  |      | 520     |   |        |   | (664     | ) |  |     | 12,915 |  |   | (699   | ) |  |   | 11,552 |  
|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|Total interest-bearing liabilities                      |  |                            | (13,134 | ) |                            |   | 1,551  |          |  |   | (217   | ) |  |      | (11,800 | ) |        |   | (12,599  | ) |  |     | 24,980 |  |   | (4,405 | ) |  |   | 7,976  |  
|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  
|(Decrease) increase in net interest income              |  | $                          | (4,634  | ) |                            | $ | 6,553  |          |  | $ | (2,032 | ) |  | $    | (113    | ) |        | $ | (616     | ) |  | $   | 19,576 |  | $ | (1,483 | ) |  | $ | 17,477 |  
|                                                        |  |                            |         |   |                            |   |        |          |  |   |        |   |  |      |         |   |        |   |          |   |  |     |        |  |   |        |   |  |   |        |  



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Liquidity and Capital Resources



Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company further
defines liquidity as the ability to respond to the needs of depositors and borrowers as well as maintaining the flexibility to take advantage of investment opportunities. Primary sources of funds consist of deposit inflows, loan repayments,
maturities, paydowns, and sales of collateralized mortgage obligations, investment and mortgage-backed securities and advances from the FHLB of Boston. While maturities and scheduled amortization of loans and securities are predictable sources of
funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.



The Banks primary investing activities are: (1) originating residential one-to four-family mortgage loans and, to a lesser extent, commercial
business and real estate loans, multi-family loans, single-family construction loans, home equity loans and lines of credit and consumer loans and (2) investing in mortgage-backed securities, collateralized mortgage obligations, asset-backed
securities, U.S. Government and agency obligations, corporate equity securities and debt obligations. These activities are funded primarily by principal and interest payments on loans, maturities of securities, deposit growth and FHLB of Boston
advances. During the years ended December 31, 2003 and 2002, the Banks loan originations and purchases, net of repayments totaled $138.03 million and $125.68 million, respectively. During the years ended December 31, 2003 and 2002, the Bank
purchased securities classified as available for sale of $385.37 million and $417.65 million, respectively. The Bank experienced a net increase in total deposits of $10.63 million and $7.08 million for the years ended December 31, 2003 and 2002,
respectively, primarily as a result of retail and commercial programs designed to attract deposits. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Bank and its local competitors and
other factors. Proceeds from sales of loans totaled $5.70 million, maturities, calls and sales of securities totaled $199.26 million, principal payments on mortgage-backed securities and collateralized mortgage obligations totaled $284.73 million
and net FHLB advances were $11.85 million respectively, for the year ended December 31, 2003. Proceeds from sales of loans, maturities totaled $4.41 million, calls and sales of securities totaled $205.87 million, principal payments on
mortgage-backed securities and collateralized mortgage obligations totaled $129.80 million and net FHLB advances were $71.86 million respectively, for the year ended December 31, 2002. The Bank closely monitors its liquidity position on a daily
basis. If the Bank should require funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances and through repurchase agreement borrowing facilities.



Certificates of deposit that are scheduled to mature in one year or less from
December 31, 2003 totaled $373.77 million. The Bank relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. Occasionally, the Bank will also offer special competitive promotions to
its customers to increase retention and promote deposit growth. Based upon the Banks historical experience with deposit retention, management believes that, although it is not possible to predict future terms and conditions upon renewal, a
significant portion of such deposits will remain with the Bank.



The Bank has a non-contributory defined benefit pension plan (the Pension Plan) covering substantially all employees. The benefits are based on years of service and average compensation as defined in the Pension Plan. The
Companys policy is to contribute annually the amount necessary to satisfy the requirements of the Employee Retirement Income Security Act of 1974.



Pension expense for the Pension Plan was $2.87 million and $1.67 million for the years ended December 31, 2003 and 2002, respectively, and is calculated
based upon a number of actuarial assumptions, including an expected long-term rate of return on our Pension Plan assets of 8.50% each year. In developing the expected long-term rate of return assumption, the Bank evaluated input from its actuaries,
including their review of asset class return expectations as well as long-term inflation assumptions. The Bank anticipates that its investment managers will continue to generate long-term returns of at least 8.50%. The Bank regularly reviews its
asset allocation and periodically rebalances the Banks investments when considered appropriate. The Bank continues to believe that 8.50% is a reasonable long-term rate of return on the Pension Plan assets. The pension plan assets had an
investment return of 17.22% for the year ended December 31, 2003. The Bank will continue to evaluate its actuarial assumptions, including the expected rate of return, at least annually, and will adjust as necessary.



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The Bank bases its determination of pension expense or income on a market-related valuation of assets
which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a four-year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected
return calculated using the market-related value of assets and the actual return based on the market-related value of assets. Since the market-related value of assets recognizes gains or losses over a four-year period, the future value of assets
will be impacted as previously deferred gains or losses are recorded.



The discount rate that the Bank utilizes for determining future pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rate determined on
this basis has decreased from 6.50% at December 31, 2002 to 6.00% at December 31, 2003. Based on an expected rate of return on its Pension Plan assets of 8.50%, a discount rate of 6.00% and various other assumptions, the Bank estimates that its
pension expense/(income) for the Pension Plan will approximate $1.98 million, $20,000 and ($82,000) in 2004, 2005 and 2006, respectively. These estimates assume that the Pension Plans benefit accruals are frozen March 1, 2004 due to the
pending merger with NHSB. Future actual pension expense will depend on future investment performance, changes in future discount rates, the actual effective date of any plan freeze and various other factors related to the populations participating
in the Banks Pension Plan.



Lowering the expected
long-term rate of return on the Banks Pension Plan assets by 0.50% (from 8.50% to 8.00%) would have increased the Banks pension expense for 2003 by approximately $151,000. Lowering the discount rate and the salary increase assumptions by
0.50% would have increased the Banks pension expense for 2003 by approximately $149,000.



The value of the Banks Pension Plan assets has increased from $25.97 million at December 31, 2002 to $29.90 million at December 31, 2003. Declining discount rates, benefit accruals and interest on the benefit
obligations have further increased the underfunded status of the Banks Pension Plan, net of benefit obligations, from $19.01 million at December 31, 2002 to $24.23 million at December 31, 2003. Due to the recent reductions in the funded status
of the Banks Pension Plan, the Bank believes that, based on its actuarial assumptions, the Bank will be required to continue to make cash contributions to its Pension Plan.



During 2003, the Bank contributed $2.16 million to the Pension Plan which was the minimum required for the 2002 plan year.
During 2004, the Bank expects to contribute $3.00 million to the Pension Plan which is the minimum required for the 2003 plan year. In the absence of significant changes, it is estimated that the minimum required contribution for the 2004 plan year
would be $2.13 million, including an estimated additional funding charge of $1.75 million. The estimated increase in the minimum required contribution takes into account the phase-in of investment losses experienced by the Pension Plan, and assumes
that the Pension Plans benefit accruals are frozen by June 30, 2004 due to the pending merger with NHSB.



The Bank also has supplemental retirement agreements with certain officers and outside directors. The benefit obligation as of December 31, 2003 is $10.45
million and is unfunded.



The Bank must satisfy various
regulatory capital requirements administered by the federal banking agencies including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2003, the Bank exceeded all of its regulatory capital requirements with a leverage capital level of $180.85 million, or 7.19% of average quarterly
assets, which is above the required level of $100.68 million, or 4.00%, and total risk-based capital of $197.39 million, or 12.04% of risk weighted assets, which is above the required level of $131.19 million, or 8.00%. The Bank is considered
well capitalized under regulatory guidelines.



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Off Balance Sheet Arrangements and Contractual Obligations



The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit of approximately $242.30 million and $270.53 million as of December 31, 2003 and 2002, respectively, and
standby letters of credit of approximately $7.07 million and $4.78 million as of December 31, 2003 and 2002, respectively. Management of the Bank anticipates that it will have sufficient funds available to meet its current loan commitments.



These consolidated financial instruments involve, to varying
degrees, elements of credit and interest rate risk. The Banks exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments as it does for existing loans. Management believes that the Bank controls the credit risk of these financial instruments through credit approvals, lending limits, monitoring procedures and the receipt
of collateral when deemed necessary.



Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bank management evaluates each customers credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of credit, is based on managements credit evaluation of the customer. Collateral held varies but may include income producing commercial properties, accounts receivable,
inventory and property, plant and equipment.



Standby letters
of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in existing loan facilities to
customers. The Bank holds real estate and marketable securities as collateral supporting those commitments for which collateral is deemed necessary.



As of December 31, 2003, the Companys contractual obligations by payment due period were (in thousands):



|                              |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|----------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------- |  | - | -------
|Contractual Obligations       |  | 2004 |         | 2005 |   | 2006    |  | 2007 |        | 2008 |   | Thereafter |  | Total
|FHLB advances                 |  | $    | 192,000 |      | $ | 116,000 |  | $    | 57,000 |      | $ | 18,000     |  | $     | 53,056 |  | $ | 104,679 |  | $ | 540,735
|Operating leases              |  |      | 1,247   |      |   | 1,017   |  |      | 798    |      |   | 566        |  |       | 384    |  |   | 991     |  |   | 5,003  
|                              |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|Total contractual obligations |  | $    | 193,247 |      | $ | 117,017 |  | $    | 57,798 |      | $ | 18,566     |  | $     | 53,440 |  | $ | 105,670 |  | $ | 545,738
|                              |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        



Impact of Inflation and Changing
Prices



The consolidated financial statements and related
data presented in this Form 10-K have been prepared in conformity with accounting principles generally accepted in the United States, which require the measurement of financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more
significant impact on the Banks performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation.



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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.



The Banks most significant form of market risk is interest rate risk. The principal objectives of the Banks interest rate risk management are
to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given its business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the
risk consistent with its established policies. The Bank has an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets quarterly and reports trends and interest rate risk
position to the Executive Committee of the Board of Directors and the Board of Directors. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank. The Bank manages interest rate
risk by:



| | (1) | maintaining a high quality securities portfolio that provides adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market
interest rates, the overall maturity and duration of which is monitored in relation to the repricing of its loan portfolio;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | promoting lower cost liability accounts such as demand deposits and business repurchase accounts; and
| | --- | -----------------------------------------------------------------------------------------------------



| | (3) | using advances from the FHLB to better structure maturities of its interest rate sensitive liabilities.
| | --- | -------------------------------------------------------------------------------------------------------



The Banks investment policy authorizes it to be a party to financial instruments with off-balance sheet risk in the
normal course of business to reduce its exposure to fluctuations in interest rates. All counter-parties must be pre-approved by the Banks Executive Committee and reported to its Investment Committee. At December 31, 2003 the Bank had no
derivative instruments.



Quantitative Aspects of Market Risk



The Company analyzes its interest rate sensitivity position to manage the
risk associated with interest rate movements through the use of balance sheet simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive. An
asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.



The Companys goal is to manage asset and liability positions so as to moderate the effects of interest rate fluctuations on net interest income.
Balance sheet simulations are completed quarterly and presented to the Banks Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The
numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee on a quarterly basis. Changes to these assumptions can significantly effect the results of the balance sheet simulation. The simulation incorporates
assumptions regarding potential delays in the repricing of certain assets and liabilities when market rates change and changes in spreads between different market rates. The simulation analysis incorporates managements current assessment of
the risk that pricing margins will change adversely over time due to competition or other factors.



Simulation analysis is only an estimate of the Companys interest rate risk exposure at a particular point in time. The Company continually reviews
the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.



The table below sets forth an approximation of the Companys exposure as a percentage of estimated net interest income for the next twelve and
twenty-four month periods using balance sheet simulation. The simulation uses projected repricing of assets and liabilities at December 31, 2003 on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments.
Prepayment rates can have a significant impact on the Companys balance sheet simulation. Because of the large percentage of loans, collateralized mortgage obligations and mortgage-backed securities held by the Company, rising or falling
interest rates have a significant impact on the prepayment speeds of the Companys earning assets, which in turn effect the Companys rate sensitivity position. When open-market interest rates rise, prepayments tend to slow. When
open-market interest rates fall, prepayments tend to rise. The Companys asset sensitivity would be reduced if prepayments slow, and vice versa. While the Bank



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believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate
actual future mortgage-backed security, collateralized mortgage obligation and loan repayment activity.



|                                  |  |                                                         |    |  |           |   
|--------------------------------- |  | ------------------------------------------------------- | -- |  | --------- | --
|                                  |  | Percentage Change in Estimated Net Interest Income Over |   
|                                  |  | 12 months                                               |    |  | 24 months |   
|200 basis point increase in rates |  | (3.09                                                   | )% |  | (3.15     | )%
|100 basis point decrease in rates |  | 0.27                                                    | %  |  | (1.12     | )%



Prior to the June 30,
2003 quarter, the Banks ALCO policy stated that the Bank has established acceptable levels of interest rate risk as follows:



Projected Net Interest Income over the next twelve months will not be reduced by more than 10% given a change in interest rates of 200 basis points
(+ or -) over a one year horizon. This limit will be re-evaluated on a periodic basis (not less than annually) and may be modified, as appropriate.



Management believes that under the current rate environment, a change of interest rates downward of 200 basis points is a highly remote interest rate
scenario. Therefore during the second quarter of 2003, Management modified the limit and a 100 basis point decrease in interest rates will be used for policy purposes rather than a 200 basis point decrease. This limit will be re-evaluated
periodically and may be modified as appropriate.



The two
hundred basis point and one hundred basis point change in rates in the above table is assumed to occur evenly over the next twelve months. Based on the scenario above, net income would be adversely affected (within the Banks internal
guidelines) in both the twelve and twenty-four month periods in a rising rate environment. In a declining rate environment net income would be positively affected over the next twelve months and adversely affected over a twenty-four month period.
For each percentage point change in net interest income, the effect on net income would be $509,000, assuming a 35% tax rate.



Item 8. Financial Statements and Supplementary Data.



For a listing of consolidated financial statements which are included in this document, see page F-1.



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.



None.



Item 9A. Controls and Procedures.



The Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end
of the period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the
Companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Companys internal
control over financial reporting occurred during the year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART III



Item 10. Directors and Executive Officers of the Registrant.



Directors



Unless
otherwise stated, each individual has held his or her current occupation for the last five years. The age indicated in each individuals biography is as of December 31, 2003. Unless otherwise noted, the indicated period for service as a
director includes service as a director of the Bank. There are no family relationships among the directors except that Mr. Toomeys niece is married to Mr. Devanney.



A. Paul Berté is a self-employed attorney in Manchester, Connecticut. Mr. Berté is 62 years old and has
been a director since 1993.



John D. LaBelle, Jr. is a
principal with the law firm of LaBelle, LaBelle, Naab & Horvath, P.C., Manchester, Connecticut. Mr. LaBelle is 54 years old and has been a director since 1991.



Jon L. Norris is the co-owner and operator of Independent Insurance Center, Inc., a full-service insurance agency in
which he is also a principal financial partner. Mr. Norris also operates the Norris Corp. Insurance Agency. Mr. Norris is 62 years old and has been a director since 1996.



Laurence P. Rubinow has served as Chairman of the Board of the Bank and the Company since 2000. He is the President
and Chief Executive Officer of the law firm of Woodhouse, Rubinow & Macht, P.C., located in Manchester, Connecticut. Mr. Rubinow is the son of Eleanor S. Rubinow, a Director Emeritus of the Bank. Mr. Rubinow is 59 years old and has been a
director since 1996.



Gregory S. Wolff has been, since
April 2001, a managing member of Wolff-Zackin Financial LLC, a business and wealth management firm located in Vernon, Connecticut. From 1985 to April 2001, Mr. Wolff was chief executive officer of Wolff-Zackin & Associates Inc., an insurance
agency. Mr. Wolff is 52 years old and has been a director since 1997.



Richard P. Meduskihas served as the President and Chief Executive Officer of the Company since its formation in 1999. From 1988 to October 2001, Mr. Meduski was President and Treasurer of the Bank. Since October 2001, Mr. Meduski
has served as Chief Executive Officer and Treasurer of the Bank. Mr. Meduski is 58 years old and has been a director since 1983.



John G. Sommers is the President of Allied Printing Services, Inc., a commercial printing company, located in Manchester, Connecticut. Mr. Sommers
is 48 years old and has been a director since 1993.



Thomas
E. Toomey is President of T.E. Toomey Construction. Prior to being President of T.E. Toomey Construction, Mr. Toomey was the Executive Vice President of Marketing Specialists, Inc., a marketing firm. Until 1997, he was the President of Toomey
DeLong Food Brokers, a wholesale grocer, which no longer operates. Mr. Toomey is 70 years old and has been a director since 1981.



Timothy J. Moynihan is the former President of the Metro Hartford Chamber of Commerce and former director of First Federal Savings and Loan
Association of East Hartford, Connecticut, which was acquired by the Company in August 2001. Mr. Moynihan is 62 years old and has been a director of the Company only since 2001.



Timothy J. Devanney is the President of Highland Park Market of Manchester, Inc. and Highland Park Market of
Glastonbury, Inc. and a Member of Highland Park Market of Farmington L.L.C., all of which are retail grocery businesses. Mr. Devanney is 51 years old and has been a director since 1999.



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Sheila B. Flanagan is a retired attorney and acted as a consultant between 1996 and 1999. Before
1996, she served as in-house counsel to the Massachusetts Mutual Life Insurance Company. Ms. Flanagan serves as Executive Director of SBM Charitable Foundation, Inc. Ms. Flanagan is 63 years old and has been a director since 1987.



Eric A. Marzialihas served as the President of United Abrasives, Inc.
and SAIT Overseas Trading and Technical Corp., and Vice President of United Abrasives Canada, Inc., all related entities, which manufacture abrasive products, since 1982. Mr. Marziali is 45 years old and has been a director since 1999.



William D. ONeill is an Adjunct Professor at the College of
Engineering at the University of Rhode Island. Before he became an Adjunct Professor, Mr. ONeill was a consultant to Fuss & ONeill Inc. and served as its President until June 1999. Fuss & ONeill is a civil and environmental
engineering firm with headquarters in Manchester, Connecticut and offices in Massachusetts, Rhode Island and Vermont. Mr. ONeill is 65 years old and has been a director since 1998.



Executive Officers Who Are Not Directors



Douglas K. Anderson joined the Bank in 1987 and served full-time as Executive Vice President until 1995, at which time he changed his employment
status to part-time in order to become President and Chief Executive Officer of Open Solutions, Inc., a computer software provider, located in Glastonbury, Connecticut and the Banks primary computer software provider. In 1999, Mr. Anderson
resigned as President and Chief Executive Officer of Open Solutions, Inc. and returned to full-time employment with the Bank. Mr. Anderson is now a director and the President of the Bank, Executive Vice President of the Company and a director of
Open Solutions, Inc. Mr. Anderson is 53 years of age.



Charles L. Pikejoined the Bank in 1983 and serves as the First Executive Vice President and Senior Loan Officer. Mr. Pike is also a director of the Bank and First Executive Vice President of the Company. Mr. Pike is 60 years of age.



Roger A. Somerville joined the Bank in 1984 as a
commercial loan officer. He has been Senior Vice President of Commercial Lending since 1988. Mr. Somerville is 59 years of age.



Michael J. Hartl has been Senior Vice President of the Company since April 2000, and was appointed Chief Financial Officer of the Bank and the
Company in November 2000. Prior to joining the Company in 2000, Mr. Hartl was Executive Vice President and Chief Financial Officer of Norwich Financial Corp. Mr. Hartl is 62 years of age.



Audit Committee



The board of directors has a separately designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended. The audit committee, consisting of Mr. Norris (Chairman), Mr. Berté, Mr. Devanney, Mrs. Flanagan and Mr. Moynihan, meets periodically with independent auditors and management to review accounting, auditing, internal
control structure and financial reporting matters. This committee met eight times during the year ended December 31, 2003. Each member of the audit committee is independent in accordance with the listing standards of the NASDAQ Stock Market.
The board of directors has determined that Mr. Berté is an audit committee financial expert under the rules of the Securities and Exchange Commission. The audit committee acts under a written charter adopted by the board of directors.



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Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Companys executive officers and directors, and persons who own more than 10% of any registered class of the Companys equity securities, to file reports of beneficial securities ownership and changes in beneficial securities ownership
with the SEC. Executive officers, directors and greater than 10% stockholders are required by regulation to furnish the Company with copies of all Section 16(a) reports they file.



Based solely on its review of the copies of the reports it has received and written representations provided to the Company
from the individuals required to file the reports, the Company believes that during the year ended 2003, each of its executive officers and directors has complied with applicable reporting requirements for transactions in Company common stock,
except for one late Form 4 report filed by each of Messrs. Orenstein, Martin, Anderson, Pike, Meduski, Hartl and Somerville for 157, 471, 1,383, 1,383, 2,453, 408 and 251 shares sold, respectively, and one late Form 4 report filed by Mr. Toomey for
2,000 shares gifted due to administrative error.



Code of Ethics and
Business Conduct



The Company has adopted a Code of Ethics
that is designed to ensure that the Companys principal executive officer, principal financial officer and principal accounting officer or controller meet the highest standards of ethical conduct. The Code of Ethics requires that the
Companys principal executive officer, principal financial officer and principal accounting officer or controller avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner
and otherwise act with integrity and in the Companys best interest. Under the terms of the Code, the Companys principal executive officer, principal financial officer and principal accounting officer or controller are required to report
any possible violation of the Code.



A copy of the Code of
Ethics will be furnished without charge to any person upon written request to Carole L. Yungk, Corporate Secretary, Connecticut Bancshares, Inc., 923 Main Street, Manchester, Connecticut 06040.



Item 11. Executive Compensation



Directors Compensation



Fees. Non-employee directors of the Bank each receive an annual retainer of $15,000, $750 for each board meeting attended and $200 for each committee meeting attended. In addition, the Chairman of the Audit Committee receives
an annual retainer of $7,500 and the Chairman of the Compensation Committee receives an annual retainer of $2,500. Non-employee directors of the Company receive an annual retainer of $15,000. The Chairman of the Board of the Company receives as sole
compensation an annual retainer of $105,000.



Directors Consultation Plan. The Bank maintains a post-retirement consultation program for incumbent non-employee directors to ensure the continued availability of its retired directors as consultants to management
because of their significant knowledge of and involvement in the Banks operations. A director who retires at age 70 with at least 10 years of service receives an annual benefit equal to 50% of the average cash board compensation (retainers and
meeting fees) received by the director over the three years preceding retirement. The benefit increases by 5% for each additional year of service with a maximum benefit equal to 100% of final average board compensation payable after 20 years of
service. The benefit is payable until the earlier to occur of the tenth anniversary of the directors retirement or the directors death. A director with at least 10 years of service may elect to retire before age 70 but after age 65 with
a corresponding reduction in the benefit equal to 5% for each year the directors age is less than age 70. The plan provides that each married retired director is guaranteed at least five annual payments. If a retired director dies before the
receipt of at least five annual payments, any remaining payments will be made to the retired directors surviving spouse to ensure that a minimum of five payments are made. The plan also provides that the surviving spouse of an active director
with at least 10 years of service who dies before age 65 receives a benefit payable for five years equal to 50% of the benefit the director would have been eligible to receive had the director attained age 70 before his death, and that the surviving
spouse of an active director with at least 10 years of service who dies after attaining age 65 receives a benefit payable for five years equal to 100% of what that director would have received. In the event of a change in control (as defined in the
plan), each incumbent director will be deemed retired for purposes of the plan and will receive a lump sum benefit equal to the present value of the normal retirement benefit with each director assumed to have at least 10 years of service.



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Executive Compensation



Summary Compensation Table. The following information is furnished for the chief executive officer and the four other highest paid
executive officers of the Bank who received salary and bonus of $100,000 or more during the year ended December 31, 2003.



|                                                                   |  |              |  |        |                       |           |   |                       |  |   |                                     |        |                                   |           |  |   |                      
|------------------------------------------------------------------ |  | ------------ |  | ------ | --------------------- | --------- | - | --------------------- |  | - | ----------------------------------- | ------ | --------------------------------- | --------- |  | - | ---------------------
|Name and Position                                                  |  | Year         |  | Salary |                       | Bonus (2) |   | RestrictedStockAwards |  |   | SecuritiesUnderlyingOptions/SARs(#) |        | All OtherCompensation(5)(6)(7)(8)
|Richard P. Meduski Chief Executive Officer and Treasurer           |  | 200320022001 |  | $      | 456,500445,000350,000 |           | $ | 239,700245,000195,000 |  | $ | 1,462,5001,931,106                 | (3)(4) |                                   | 150,000 |  | $ | 133,317188,676110,913
|Douglas K. Anderson President                                      |  | 200320022001 |  | $      | 225,000218,000192,600 |           | $ | 101,300105,00086,700  |  | $ | 825,000938,287                     | (3)(4) |                                   | 75,000  |  | $ | 65,69985,36735,807   
|Charles L. Pike First Executive Vice President                     |  | 200320022001 |  | $      | 253,000246,999232,447 |           | $ | 113,900118,00083,700  |  | $ | 825,0001,184,279                   | (3)(4) |                                   | 75,000  |  | $ | 78,45898,29941,925   
|Roger A. Somerville Senior Vice President                          |  | 200320022001 |  | $      | 160,300157,000147,459 |           | $ | 60,20062,00033,300    |  | $ | 150,000573,944                     | (3)(4) |                                   | 15,000  |  | $ | 39,57934,85223,812   
|Michael J. Hartl Senior Vice President and Chief Financial Officer |  | 200320022001 |  | $      | 163,300160,000147,700 |           | $ | 91,95063,00053,250    |  | $ | 243,75036,500                      | (3)(4) |                                   | 20,000  |  | $ | 41,01636,14324,455   

---

|(1) | Does not include the aggregate amount of perquisites and other personal benefits, which was less than 10% of The total annual salary and bonus reported.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents board awarded discretionary cash bonus.
|--- | --------------------------------------------------

|(3) | Includes stock awards of 39,000, 22,000, 22,000, 4,000, and 6,500 shares granted to Messrs. Meduski, Anderson, Pike, Somerville and Hartl, respectively, under the Connecticut
Bancshares, Inc. 2002 Equity Compensation Plan. The dollar amounts set forth in the table represent the market value on the date of the grant. The awards began vesting in five equal annual installments on October 21, 2003, the first anniversary of
the effective date of the awards. When shares become vested and are distributed, the recipients will also receive an amount equal to the accumulated cash and stock dividends (if any) with respect thereto, plus earnings thereon. All awards vest
immediately upon termination of employment due to death, disability, or following a change in control. The vesting of awards may also be accelerated upon retirement. As of December 31, 2003, the market value of the stock awards held by Messrs.
Meduski, Anderson, Pike, Somerville and Hartl was $1,608,048, $907,104, $907,104, $164,928 and $0, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes stock awards of 105,814, 51,413, 64,892, 31,449, and 2,000 shares granted to Messrs. Meduski, Anderson, Pike, Somerville and Hartl, respectively, under the Connecticut
Bancshares, Inc. 2000 Stock-Based Incentive Plan. The dollar amounts set forth in the table represent the market value on the date of the grant. The
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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awards began vesting in five equal annual installments on January 2, 2002, the first anniversary of the
effective date of the awards. Dividends (if any) paid on shares subject to restricted stock awards are distributed to recipients when the dividends are paid. All awards vest immediately upon termination of employment due to death, disability, or
following a change in control. The vesting of awards may also be accelerated upon retirement. As of December 31, 2003, the market value of the stock awards held by Messrs. Meduski, Anderson, Pike, Somerville and Hartl was $2,181,431, $1,059,869,
$1,337,772, $648,322 and $0, respectively.

|(5) | For 2003, consists of employer contributions to the Banks 401(k) plan of $6,000, $6,000, $6,000, $6,000 and $6,000 and ESOP allocations with a market value of $30,522,
$30,522, $30,522, $30,522 and $30,522, for Messrs. Meduski, Anderson, Pike, Somerville, and Hartl respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | For 2003, includes employer contributions of $9,780, $3,890, $8,490, $3,057 and $4,494 to Messrs. Meduski, Anderson, Pike, Somerville and Hartl, respectively, pursuant to the
Banks supplemental income agreements. These payments are made to pay premiums on split-dollar life insurance policies the Bank purchased on the lives of Messrs. Meduski, Anderson, Pike, Somerville and Hartl in connection with the supplemental
income agreements. Upon the death of Messrs. Meduski, Anderson, Pike, Somerville and Hartl, the Bank expects to retain proceeds from the insurance policies sufficient to cover all prior contributions made to the supplemental income agreements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | For 2003, includes employer contributions of $7,694, $3,899 and $5,130 credited under the Banks 401(k) supplemental executive retirement plan for Messrs. Meduski, Anderson and
Pike, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | For 2003, includes employer contributions of $79,321, $21,658 and $28,316 credited under the Banks ESOP supplemental executive retirement plan for Messrs. Meduski, Anderson
and Pike, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment
Agreements. The Bank and the Company maintain three-year employment agreements with Messrs. Meduski, Anderson, Pike and Somerville.Under the employment agreements, the current salary levels for Messrs. Meduski, Anderson, Pike and
Somerville are $465,630, $229,500, $258,060 and $163,506, respectively. On the anniversary of the commencement date of the employment agreements, the term of the employment agreements may be extended for an additional year at the discretion of the
Board of Directors. The agreements are terminable by the employers at any time, by each executive if he is assigned duties inconsistent with his initial position, duties, responsibilities and status, or upon the occurrence of certain events
specified by applicable regulations. If any executives employment is terminated without cause or upon the executives voluntary termination following the occurrence of an event described in the preceding sentence, the Bank or the Company
would be required to honor the terms of the agreement through the expiration of the current term, including payment of current cash compensation and continuation of employee benefits.



The employment agreements also provide for a severance payment and other benefits in the event of involuntary termination of
employment in connection with any change in control of the Bank or the Company. A severance payment also will be provided on a similar basis in connection with a voluntary termination of employment where, after a change in control, an executive is
assigned duties inconsistent with his position, duties, responsibilities and status immediately before such change in control.



Even though both the Bank and the Company employment agreements provide for a severance payment if a change in control occurs, the executive would only be
entitled to receive a severance payment under one agreement. The executive would also be entitled to receive an additional tax indemnification payment if payments under the employment agreements or any other payments triggered liability under the
Internal Revenue Code (the Code) as an excise tax constituting excess parachute payments. Under applicable law, the excise tax is triggered by change in control-related payments which equal or exceed three times the
executives average annual compensation over the five years preceding the change in control. The excise tax equals 20% of the amount of the payment in excess of one times the executives average compensation over the preceding five-year
period.



Payments to the executive under the Banks
employment agreement are guaranteed by the Company if payments or benefits are not paid by the Bank. Payment under the Companys employment agreement will be made by the Company. The employment agreements also provide that the Bank and the
Company will indemnify the executive to the fullest extent legally allowable.



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The employment agreements restrict each executive from competing against the Company or the Bank for a
period of one year from the date of termination of the agreement if the executive is terminated without cause, except if such termination occurs after a change in control.



Termination and Release Agreements.Pursuant to the Companys merger with The New Haven Savings Bank,
Messrs. Meduski, Anderson, Pike and Somerville entered into Termination and Release Agreements with the Company, the Bank and The New Haven Savings Bank, dated July 15, 2003 which will provide benefits to the executives in lieu of any rights and
payments under their Bank and Company employment agreements and supplemental retirement arrangements. The termination agreements provide that if Messrs. Meduski, Anderson, Pike and Somerville are employed as of the effective date of the merger, they
will receive cash payments of $3,256,234, $1,367,156, $1,711,943 and $1,035,497, respectively, as consideration for the termination of (1) their employment agreements with the Bank and the Company, (2) participation by Messrs. Meduski, Anderson and
Pike in the Banks supplemental executive retirement plan, and (3) supplemental retirement benefit agreements between Messrs. Meduski and Pike and the Bank. The executives and their dependents also will receive 36 months of continued life,
health, dental and disability (i.e., health and welfare) benefit coverage, less the executives premium share, or a cash payment equal to the present value of such coverage.



Under the Termination and Release Agreements, the executives also agreed to take the following actions between July 15, 2003
and December 31, 2003: (1) exercise all vested non-qualified stock options, including those that vest prior to December 31, 2003, under the Connecticut Bancshares 2000 Stock-Based Incentive Plan, and, for Mr. Somerville, the additional exercise of
non-qualified stock options granted under the Connecticut Bancshares 2002 Equity Compensation Plan; and (2) exercise all vested incentive stock options granted under the 2000 Stock-Based Incentive Plan, and, for Mr. Somerville, those granted under
the 2002 Equity Compensation Plan, and their subsequent sale in a manner that will constitute a disqualifying disposition under Section 421(b) of the Internal Revenue Code. Messrs. Meduski, Anderson, and Pike also agreed to refrain from exercising
any stock options granted to them under the 2002 Equity Compensation Plan. Mr. Somerville further agreed to the accelerated vesting, as of December 31, 2003, of his restricted stock award granted under the 2000 Stock-Based Incentive Plan that would
otherwise vest as of January 2, 2004, and to accept payment of his cash bonus for 2003, otherwise scheduled for payment in 2004, as of December 31, 2003.



Payments to the executives under the Termination and Release Agreements are subject to their compliance with Section 280G of the Internal Revenue Code. If
these payments constitute excess parachute payments under Section 280G, they will be reduced to an amount that is one dollar less than the executives maximum payment amount under Section 280G; i.e., the Section 280G Limit.



The executives further agreed, with respect to the definition
of annual compensation under their employment agreements, and as applicable, benefits payable under their supplemental executive retirement plan or supplemental retirement benefit agreements, to exclude from their 2003 annual compensation, amounts
related to: (1) the grant or vesting of restricted stock awards after October 1, 2003; (2) the grant, vesting or exercise of stock options; (3) income resulting from the disqualifying disposition of incentive stock options; (4) cash bonus payments;
and (5) other mutually agreed upon severance payments.



Lastly,
under the Termination and Release Agreements, the parties agreed to release each other from their remaining obligations under the employment agreements and, as applicable, the supplemental executive retirement plan and supplemental retirement
benefit agreements.



Pension Plan. The Bank
maintains a non-contributory pension plan for its employees. Generally, employees of the Bank begin participation in the pension plan once they reach age 21 and complete 1,000 hours of service in a consecutive 12-month period. A participant in the
pension plan becomes vested in his or her accrued benefit under the pension plan upon the earlier of the: (i) attainment of the normal retirement age (as described in the pension plan) while employed at the Bank; or (ii) completion of
five vesting years with the Bank. Participants are credited with vesting years for each plan year in which they complete at least 1,000 hours of service.



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A participants accrued benefit under the pension plan is determined by multiplying 2% of the
participants annual compensation (defined as average annual compensation for the three consecutive calendar years that produce the highest average) by the number of years of service the participant has with the Bank up to thirty (30). However,
pension benefits are reduced 1/15th for each of the first five years and 1/30th for each of the next five years, by which benefit commencement precedes normal retirement. Pension benefits are payable in equal monthly installments for life, or for
married persons as a joint survivor annuity over the lives of the participant and spouse. If a participant dies while employed by the Bank, a death benefit will be payable to either his or her spouse or estate, or named beneficiary, equal to the
entire amount of the participants accrued benefit in the plan. If a participant is terminated from employment with a vested benefit and dies before starting to receive payments, the benefit will be payable on his or her behalf. Married
participants in the pension plan may elect, with spousal consent where required by law, to receive their pension benefits in the form of a 50%, 75% or 100% joint and survivor annuity or a life only payment option.



The following table indicates the annual retirement benefits that would be
payable under the pension plan and the related supplemental executive retirement plan (see below) upon retirement at age 65 to a participant electing to receive his or her pension benefit in the standard form of benefit, assuming various specified
levels of plan compensation and various specified years of credited service. Under the Code, maximum annual benefits under the pension plan were limited to $160,000 and annual compensation for calculation purposes was limited to $200,000 for the
2003 calendar year.



|                            |   |                  |        |  |    |         |    |   |         |  |     |         |  |   |         |  |   |        
|--------------------------- | - | ---------------- | ------ |  | -- | ------- | -- | - | ------- |  | --- | ------- |  | - | ------- |  | - | -------
|Average Annual Compensation |   | Years of Service
|                            | 5 |                  | 10     |  | 15 |         | 20 |   | 25      |  | 30+
|$125,000                    |   | $                | 12,500 |  | $  | 25,000  |    | $ | 37,500  |  | $   | 50,000  |  | $ | 62,500  |  | $ | 75,000 
|150,000                     |   |                  | 15,000 |  |    | 30,000  |    |   | 45,000  |  |     | 60,000  |  |   | 75,000  |  |   | 90,000 
|175,000                     |   |                  | 17,500 |  |    | 35,000  |    |   | 52,500  |  |     | 70,000  |  |   | 87,500  |  |   | 105,000
|200,000                     |   |                  | 20,000 |  |    | 40,000  |    |   | 60,000  |  |     | 80,000  |  |   | 100,000 |  |   | 120,000
|250,000                     |   |                  | 25,000 |  |    | 50,000  |    |   | 75,000  |  |     | 100,000 |  |   | 125,000 |  |   | 150,000
|300,000                     |   |                  | 30,000 |  |    | 60,000  |    |   | 90,000  |  |     | 120,000 |  |   | 150,000 |  |   | 180,000
|350,000                     |   |                  | 35,000 |  |    | 70,000  |    |   | 105,000 |  |     | 140,000 |  |   | 175,000 |  |   | 210,000
|400,000                     |   |                  | 40,000 |  |    | 80,000  |    |   | 120,000 |  |     | 160,000 |  |   | 200,000 |  |   | 240,000
|450,000                     |   |                  | 45,000 |  |    | 90,000  |    |   | 135,000 |  |     | 180,000 |  |   | 225,000 |  |   | 270,000
|500,000                     |   |                  | 50,000 |  |    | 100,000 |    |   | 150,000 |  |     | 200,000 |  |   | 250,000 |  |   | 300,000
|550,000                     |   |                  | 55,000 |  |    | 110,000 |    |   | 165,000 |  |     | 220,000 |  |   | 275,000 |  |   | 330,000
|600,000                     |   |                  | 60,000 |  |    | 120,000 |    |   | 180,000 |  |     | 240,000 |  |   | 300,000 |  |   | 360,000
|650,000                     |   |                  | 65,000 |  |    | 130,000 |    |   | 195,000 |  |     | 260,000 |  |   | 325,000 |  |   | 390,000
|675,000                     |   |                  | 67,500 |  |    | 135,000 |    |   | 202,500 |  |     | 270,000 |  |   | 337,500 |  |   | 405,000



The pension plan
benefits listed in the table above are not reduced for Social Security benefits or any other offset amount. As of January 1, 2004, Messrs. Meduski, Pike, Anderson, Somerville and Hartl had 20, 20, 17, 19 and 3 years of service with the Bank,
respectively, for purposes of the pension plan.



Supplemental Executive Retirement Plan. The Bank maintains individual supplemental executive retirement agreements with Messrs. Meduski and Pike to provide them with benefits that cannot be provided under the Banks
tax-qualified defined benefit pension plan (as described above) due to certain Code limitations. These agreements were amended in 2002 to exclude stock-option related income from the benefit calculation and to limit the supplemental benefits
available to each executive based on the benefits they would receive if they retire at a specified age (Mr. Meduski, 60; and Mr. Pike, 62) without regard to their actual age at retirement. However, these modifications do not apply in the event the
executives retire after a change in control (as defined in the plan). In addition, the Bank maintains a separate supplemental executive retirement plan through which Mr. Anderson is eligible to receive an excess benefit similar to those
provided to Messrs. Meduski and Pike under their individual



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agreements. Mr. Meduski has also been designated as a participant under a separate provision of the supplemental
executive retirement plan which provides him with a retirement benefit equal to 60% of his final average cash compensation for the three consecutive years which produce the highest average, reduced by the benefits payable to him under the pension
plan and his individual supplemental retirement agreement. The benefits available under these arrangements are reflected in the pension plan table based on their current years of service and levels of compensation.



The Banks supplemental executive retirement plan also provides Messrs.
Meduski, Pike and Anderson with a supplemental retirement benefit determined by reference to the participants average annual benefits under the Banks 401(k) plan, ESOP and a related ESOP excess benefit provision of the supplemental plan.
With respect to the ESOP portion of the supplemental executive retirement plan, at retirement, the plan provides that a participant is entitled to receive a supplemental benefit equal to the average annual benefits the participant would have
received with respect to the ESOP (including excess benefits) had the participant remained employed through the repayment of any ESOP loan outstanding as of his retirement, reduced by benefits actually accrued under the ESOP (including excess
benefits) through the date of retirement. In the event of a change in control of the Company or the Bank (as defined in the plan), these benefits would be available to the participant on the same basis as if the participant had retired on the
effective date of the change in control.



Fiscal Year-End Option Values



The following table provides certain information with
respect to the number of shares of Company common stock represented by outstanding options held by the individuals named below as of December 31, 2003. Also reported are the values for in-the-money options, which represent the positive
spread between the exercise price and the year-end stock price.



|                    |  |                           |             |               |               |                                                                            |             |                                                                        |               |  |   |         |  |   |          
|------------------- |  | ------------------------- | ----------- | ------------- | ------------- | -------------------------------------------------------------------------- | ----------- | ---------------------------------------------------------------------- | ------------- |  | - | ------- |  | - | ---------
|Name                |  | SharesAcquiredOn Exercise |             | ValueRealized |               | Number of SecuritiesUnderlying UnexercisedOptions at Fiscal Year - End (#) |             | Value of Unexercised In-the-Money Options at Fiscal Year - End ($) (1)
|                    |  |                           | Exercisable |               | Unexercisable |                                                                            | Exercisable |                                                                        | Unexercisable
|Richard P. Meduski  |  | 134,784                   |             | $             | 4,529,416     |                                                                            | 30,000      |                                                                        | 209,856       |  | $ | 421,200 |  | $ | 4,732,266
|Charles L. Pike     |  | 67,392                    |             |               | 2,226,939     |                                                                            | 15,000      |                                                                        | 104,928       |  | $ | 210,600 |  | $ | 2,366,133
|Douglas K. Anderson |  | 53,914                    |             |               | 1,812,401     |                                                                            | 15,000      |                                                                        | 95,942        |  | $ | 210,600 |  | $ | 2,061,373
|Roger A. Somerville |  | 18,000                    |             |               | 546,717       |                                                                            |            |                                                                        | 22,000        |  | $ |        |  | $ | 507,630  
|Michael J. Hartl    |  | 10,000                    |             |               | 223,680       |                                                                            |            |                                                                        | 20,000        |  | $ |        |  | $ | 399,340  

---

|(1) | Value of unexercised in-the-money stock options equals the market value of shares covered by in-the-money options on December 31, 2003 less the option exercise price. Options are
in-the-money if the market value of shares covered by the options is greater than the exercise price.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



The following table sets forth the information about Company common stock that may be issued upon exercise of options and rights under all of the
Companys equity compensation plans as of December 31, 2003, including the 2000 Stock-Based Incentive Plan and the 2002 Equity Compensation Plan. The Companys stockholders have approved both of these plans.



69



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|                                                           |  |                                                                                             |  |                                                                          |       |                                                                                                                                                 |       
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------
|                                                           |  | (a)                                                                                         |  | (b)                                                                      |       | (c)                                                                                                                                            
|Plan Category                                              |  | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights |  | Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of SecuritiesRemaining Available for Future IssuanceUnder Equity Compen- sation Plans
(Exclud- ing Securities Re- flected in Column (a))
|Equity compensation plans approved by security holders     |  | 1,311,182                                                                                   |  | $                                                                        | 28.04 |                                                                                                                                                 | 53,524
|                                                           |  |                                                                                             | 
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                          |      |                                                                                                                                                 |      
|                                                           |  |                                                                                             |  |                                                                          |       |                                                                                                                                                 |       
|Total                                                      |  | 1,311,182                                                                                   |  | $                                                                        | 28.04 |                                                                                                                                                 | 53,524
|                                                           |  |                                                                                             |  |                                                                          |       |                                                                                                                                                 |       



The following table
provides information as of March 5, 2004, about the persons known by Connecticut Bancshares to be the beneficial owners of more than 5% of Connecticut Bancshares outstanding common stock. A person may be considered to own any shares of common
stock over which the person has, directly or indirectly, sole or shared voting or investment power.



|                                                                                                              |  |                       |     |  |                                     |  
|------------------------------------------------------------------------------------------------------------- |  | --------------------- | --- |  | ----------------------------------- | -
|Name and Address                                                                                              |  | Number ofShares Owned |     |  | Percent of Common Stock Outstanding |  
|The Savings Bank of Manchester Employee Stock Ownership Plan 923 Main Street Manchester, CT 06040             |  | 893,393               | (1) |  | 8.02                                | %
|Private Capital Management, L.P. Bruce S. Sherman Gregg J. Powers 8889 Pelican Bay Boulevard Naples, FL 34108 |  | 945,930               | (2) |  | 7.76                                | %
|SBM Charitable Foundation, Inc. 923 Main Street Manchester, CT 06040                                          |  | 748,000               | (3) |  | 6.71                                | %

---

|(1) | Under the terms of the ESOP, the ESOP trustee will vote shares allocated to participants accounts in the manner directed by the participants. As of March 5, 2004, 234,449
shares had been allocated under the ESOP
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



70



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and 658,944 shares remain unallocated. The ESOP trustee, subject to its fiduciary responsibilities, will
vote unallocated shares and allocated shares for which no timely voting instructions are received in the same proportion as shares for which the trustee has received timely voting instructions from participants.

|(2) | Based on information disclosed in a schedule 13G filed with the Securities and Exchange Commission on February 13, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(3) | SBM Charitable Foundation, Inc. was established and funded in connection with the Savings Bank of Manchester conversion to the stock holding company form of organization on March 1,
2000. The terms of the gift instrument require that all shares of common stock held by the SBM Charitable Foundation, Inc. must be voted in the same ratio as all other shares of Connecticut Bancshares common stock on all proposals considered
by stockholders of Connecticut Bancshares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
following table provides information as of March 5, 2004 about the shares of Connecticut Bancshares common stock that may be considered to be beneficially owned by each director and executive officer and by all directors and executive officers of
Connecticut Bancshares as a group. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investment power. Unless otherwise indicated, each of the named
individuals has sole voting and investment power with respect to the shares shown.



|                                                             |  |                                   |        |  |                                                                       |  |                                      |  
|------------------------------------------------------------ |  | --------------------------------- | ------ |  | --------------------------------------------------------------------- |  | ------------------------------------ | -
|Name                                                         |  | Number ofShares Owned(1)(2)(3)(4) |        |  | Number ofShares That MayBe AcquiredWithin 60 DaysBy ExercisingOptions |  | Percent ofCommon StockOutstanding(5) |  
|Douglas K. Anderson                                          |  | 47,756                            | (6)(7) |  | 15,000                                                                |  | *                                    |  
|A. Paul Berté                                                |  | 20,748                            |        |  | 16,933                                                                |  | *                                    |  
|Timothy J. Devanney                                          |  | 18,499                            | (8)    |  | 19,741                                                                |  | *                                    |  
|Sheila B. Flanagan                                           |  | 29,849                            | (9)    |  | 19,741                                                                |  | *                                    |  
|Michael J. Hartl                                             |  | 8,618                             |        |  | 1,000                                                                 |  | *                                    |  
|John D. LaBelle, Jr.                                         |  | 20,849                            | (10)   |  | 19,741                                                                |  | *                                    |  
|Eric A. Marziali                                             |  | 45,465                            |        |  | 14,125                                                                |  | *                                    |  
|Richard P. Meduski                                           |  | 117,283                           | (11)   |  | 30,000                                                                |  | 1.32                                 | %
|Timothy J. Moynihan                                          |  | 6,616                             | (12)   |  | 2,893                                                                 |  | *                                    |  
|Jon L. Norris                                                |  | 20,961                            | (13)   |  | 15,529                                                                |  | *                                    |  
|William D. ONeill                                           |  | 39,849                            |        |  | 19,741                                                                |  | *                                    |  
|Charles L. Pike                                              |  | 54,571                            |        |  | 15,000                                                                |  | *                                    |  
|Laurence P. Rubinow                                          |  | 33,949                            | (14)   |  | 18,741                                                                |  | *                                    |  
|Roger A. Somerville                                          |  | 22,330                            |        |  |                                                                      |  | *                                    |  
|John G. Sommers                                              |  | 39,849                            | (15)   |  | 19,741                                                                |  | *                                    |  
|Thomas E. Toomey                                             |  | 20,355                            | (16)   |  | 14,125                                                                |  | *                                    |  
|Gregory S. Wolff                                             |  | 38,593                            | (17)   |  | 8,509                                                                 |  | *                                    |  
|All Directors and Executive Officers as a Group (21 persons) |  | 627,406                           |        |  | 257,846                                                               |  | 7.76                                 | %

---

|* | Less than 1.0% of shares outstanding.
|- | -------------------------------------

|(1) | Includes shares of unvested restricted stock awarded as follows: each of Messrs. Berté, Devanney, LaBelle, Marziali, Norris, ONeill, Rubinow, Sommers, Toomey and Wolff
and Ms. Flanagan, 7,384; Mr. Meduski,
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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73,525 shares; Mr. Moynihan, 2,892 shares; Mr. Pike, 43,556 shares; Mr. Anderson, 38,164 shares; and Mr.
Somerville, 15,779 shares. Each participant has voting but not investment power as to shares of unvested restricted stock.

|(2) | Includes shares held in trust by The Savings Bank of Manchester Savings Plan as to which each individual has investment and voting power as follows: Mr. Meduski, 26,073 shares; Mr.
Pike, 40 shares; Mr. Anderson, 61 shares; Mr. Somerville, 69 shares; and Mr. Hartl, 1,412 shares.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes shares held in a separate trust in which Guarantee Trust Company serves as a trustee as follows: Ms. Flanagan, 7,000 shares; Mr. LaBelle, 1,500 shares; and Mr. Toomey,
2,137 shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes shares allocated to the account of individuals under the ESOP as of February 9, 2004 as to which each individual has voting but not investment power as follows: Mr.
Meduski, 2,172 shares; Mr. Anderson, 2,172 shares; Mr. Pike, 2,172 shares; Mr. Somerville, 2,170 shares; and Mr. Hartl, 1,440 shares.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Based on 11,143,133 shares of Company common stock outstanding and entitled to vote as of February 9, 2004, plus the number of shares that may be acquired through the exercise of
stock options exercisable within 60 days of February 9, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 100 shares held by Mr. Andersons spouse.
|--- | --------------------------------------------------

|(7) | Includes 305 shares held in trust by The Savings Bank of Manchester Supplemental Executive Retirement Plan as to which Mr. Anderson has voting power.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Includes 450 shares held by Mr. Devanneys children, 200 shares held by Mr. Devanney as custodian for his children under the Connecticut UGMA, and 2,000 shares represents Mr.
Devanneys beneficial interest of shares owned by Highland Park Market of Glastonbury, Inc. and by Highland Park Market, Inc.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Includes 8,000 shares held by Ms. Flanagans spouses individual retirement account.
|--- | ------------------------------------------------------------------------------------

|(10) | Includes 1,000 shares held by Mr. LaBelles spouse, 1,500 shares held by Mr. LaBelles spouse as custodian for their children and 1,000 shares held in a separate trust
through the LaBelle, LaBelle, Naab & Horvath, P.C. Profit Sharing Plan.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Includes 1,090 shares held by Mr. Meduskis spouse.
|---- | ---------------------------------------------------

|(12) | Includes 3,000 shares held by Mr. Moynihans individual retirement account.
|---- | ---------------------------------------------------------------------------

|(13) | Includes 2,500 shares held by Mr. Norris spouse.
|---- | -------------------------------------------------

|(14) | Includes 5,600 shares held by Mr. Rubinows spouse.
|---- | ---------------------------------------------------

|(15) | Includes 10,000 shares representing Mr. Sommers beneficial interest in shares owned by Allied Printing Services, Inc.
|---- | ----------------------------------------------------------------------------------------------------------------------

|(16) | Includes 1,000 shares held by Mr. Toomeys spouse and includes 4,616 shares held by Mr. Toomeys individual retirement account.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(17) | Includes 13,002 shares held by Mr. Wolffs individual retirement account.
|---- | -------------------------------------------------------------------------



Item 13. Certain Relationships and Related Party Transactions.



Loans and Extensions of Credit.Federal regulations require that all loans or extensions of credit to executive officers and
directors must generally be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, unless the loan or extension of credit is made under a benefit
program generally available to all other employees and does not give preference to any insider over any other employee, and must not involve more than the normal risk of repayment or present other unfavorable features. In addition, loans made to a
director or executive officer in an amount that, when aggregated with the amount of all other loans to the person and his or her related interests, are in excess of the greater of $25,000 or 5% of the Banks capital and surplus, up to a maximum
of $500,000, must be approved in advance by a majority of the disinterested members of the Board of Directors.



The Bank offers full-time employees of the Bank who satisfy certain criteria and the general underwriting standards of the Bank, mortgage loans with
interest rates which may be up to 1% below the rates offered to the Banks other customers (the Employee Mortgage Rate Program or EMR). The EMR is limited to the purchase, construction or refinance of an employees
owner-occupied primary residence. The EMR normally ceases upon termination of employment or if the property is no longer the employees primary residence. Upon termination of the EMR, the interest rate reverts to the contract rate in effect at
the time that the loan was extended. All other terms and conditions contained in the original mortgage and note continue to remain in effect. With the exception of EMR loans, the Banks policy provides that all loans made by the Bank to its
executive officers and directors be made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve
more than the normal risk of



72



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collectability or present other unfavorable features. The aggregate amount of loans by the Bank to its executive officers
and directors was approximately $7.64 million at December 31, 2003, all of which were performing according to their original terms.



Other Transactions. Mr. Anderson, the Banks President and the Companys Executive Vice President, is a director and a significant
stockholder of Open Solutions, Inc., the Banks computer software provider. For the year ended December 31, 2003, the Bank paid fees of approximately $375,775 to Open Solutions, Inc.



The Bank uses the services of the law firms of LaBelle, LaBelle, Naab & Horvath, P.C. and Woodhouse, Rubinow &
Macht, P.C. Messrs. LaBelle and Rubinow, directors of the Company and the Bank, are partners of each of their respective firms. Both law firms are used for a variety of legal work in the ordinary course of the Banks business. Payments by the
Bank to Mr. LaBelles law firm totaled $1,654 for the year ended December 31, 2003. Payments by the Bank to Mr. Rubinows law firm totaled $18,949 for the year ended December 31, 2003.



The Company uses Allied Printing Services, Inc. for various printing
services. Mr. Sommers, a director of the Company and the Bank, is the President of Allied Printing Services, Inc. Total payments by the Company to Allied Printing Services, Inc. totaled $761,075 for the year ended December 31, 2003.



Item 14. Principal Accountant Fees and Services.



Audit Fees



The following table sets forth the
fees billed to the Company for the fiscal years ended December 31, 2003 and 2002 by Deloitte & Touche LLP.



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2003 |         | 2002
|Audit fees         |  | $    | 201,300 |      | $ | 131,875
|Audit related fees |  |      | 47,600  |      |   | 98,700 
|Tax fees (1)       |  |      | 111,000 |      |   | 26,400 
|All other fees (2) |  |      | 250,000 |      |   |       

---

|(1) | Consists of tax filing and tax-related compliance and other advisory services.
|--- | ------------------------------------------------------------------------------

|(2) | Includes fees for services related to the acquisition by New Haven Savings Bank.
|--- | --------------------------------------------------------------------------------



Pre-Approval Policies and Procedures



The Audit Committee of the Company has not established any policies or procedures regarding the rendering of audit or non-audit services by the
Companys independent auditors.



PART IV



Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.



(a)(1) Financial Statements



The following consolidated financial statements of Connecticut Bancshares, Inc. and subsidiaries are filed as part of this document under Item 8:



| | - | Independent Auditors Report
| | - | ----------------------------

| | - | Report of Independent Public Accountants
| | - | ----------------------------------------

| | - | Consolidated Statements of Condition at December 31, 2003 and 2002
| | - | ------------------------------------------------------------------

| | - | Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
| | - | ------------------------------------------------------------------------------------------



73



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| | - | Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2003, 2002 and 2001
| | - | ---------------------------------------------------------------------------------------------------------------

| | - | Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
| | - | ------------------------------------------------------------------------------------------

| | - | Notes to Consolidated Financial Statements
| | - | ------------------------------------------



|(2) | Financial Statement Schedules
|--- | -----------------------------



Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.



|(b) | Reports on Form 8-K filed during the last quarter of 2003
|--- | ---------------------------------------------------------



On October 28, 2003, the Company furnished a Form 8-K to announce its financial results for the quarter ended September 30, 2003.



|(c) | Exhibits Required by Securities and Exchange Commission Regulation S-K
|--- | ----------------------------------------------------------------------



|              |  |                                                                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  |                                                                                                                                                                                                                                    
|2.1           |  | Amended Provisional Plan of Conversion for Connecticut Bankshares, M.H.C. and The Savings Bank of Manchester (including the Amended and Restated Stock Articles of Incorporation and Bylaws of The
Savings Bank of Manchester). (1)
|              | 
|2.2           |  | Agreement and Plan of Merger by and among The New Haven Savings Bank and Connecticut Bancshares, Inc. and The Savings Bank of Manchester dated July 15, 2003.(2)                                                                   
|              | 
|3.1           |  | Certificate of Incorporation of Connecticut Bancshares, Inc. (1)                                                                                                                                                                   
|              | 
|3.2           |  | Second Amended and Restated Bylaws of Connecticut Bancshares, Inc. (3)                                                                                                                                                             
|              | 
|4.0           |  | Draft Stock Certificate of Connecticut Bancshares, Inc. (1)                                                                                                                                                                        
|              | 
|10.1          |  | Connecticut Bancshares, Inc. 2000 Stock-Based Incentive Plan (4)                                                                                                                                                                   
|              | 
|10.2          |  | Employment Agreement between The Savings Bank of Manchester and Richard P. Meduski (5)                                                                                                                                             
|              | 
|10.3          |  | Employment Agreement between The Savings Bank of Manchester and Charles L. Pike (5)                                                                                                                                                
|              | 
|10.4          |  | Employment Agreement between The Savings Bank of Manchester and Douglas K. Anderson (5)                                                                                                                                            
|              | 
|10.5          |  | Employment Agreement between The Savings Bank of Manchester and Roger A. Somerville (5)                                                                                                                                            
|              | 
|10.6          |  | Change-In-Control Agreement between The Savings Bank of Manchester and Michael J. Hartl (6)                                                                                                                                        
|              | 
|10.7          |  | Employment Agreement between Connecticut Bancshares, Inc. and Richard P. Meduski (5)                                                                                                                                               
|              | 
|10.8          |  | Employment Agreement between Connecticut Bancshares, Inc. and Charles L. Pike (5)                                                                                                                                                  
|              | 
|10.9          |  | Employment Agreement between Connecticut Bancshares, Inc. and Douglas K. Anderson (5)                                                                                                                                              
|              | 
|10.10         |  | Employment Agreement between Connecticut Bancshares, Inc. and Roger A. Somerville (5)                                                                                                                                              
|              | 
|10.11         |  | Connecticut Bancshares, Inc. 2002 Equity Compensation Plan (7)                                                                                                                                                                     
|              | 
|10.12         |  | Termination and Release Agreement by and among Richard P. Meduski, Connecticut Bancshares, Inc., The Savings Bank of Manchester and The New Haven Savings Bank (filed herewith)                                                    
|              | 
|10.13         |  | Termination and Release Agreement by and among Charles L. Pike, Connecticut Bancshares, Inc., The Savings Bank of Manchester and The New Haven Savings Bank (filed herewith)                                                       
|              | 
|10.14         |  | Termination and Release Agreement by and among Douglas K. Anderson, Connecticut Bancshares, Inc., The Savings Bank of Manchester and The New Haven Savings Bank (filed herewith)                                                   
|              | 
|10.15         |  | Termination and Release Agreement by and among Roger A. Somerville, Connecticut Bancshares, Inc., The Savings Bank of Manchester and The New Haven Savings Bank (filed herewith)                                                   
|              | 
|10.16         |  | Termination and Release Agreement by and among Michael J. Hartl, Connecticut Bancshares, Inc., The Savings Bank of Manchester and The New Haven Savings Bank (filed herewith)                                                      
|              | 
|11.0          |  | Statement re: Computation of Per Share Earnings (included on page F-9 of the Consolidated Financial Statements and accompanying notes)                                                                                             
|              | 
|21.0          |  | Subsidiaries Information Incorporated Herein By Reference to Part 1  Subsidiaries of the Registrant                                                                                                                               
|              | 
|23.0          |  | Consent of Independent Auditor (filed herewith)                                                                                                                                                                                    



74



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|     |  |                                                                        
|---- |  | -----------------------------------------------------------------------
|     | 
|31.1 |  | Certification Pursuant to Rule 13a  14(a)/15d  14(a) (filed herewith)
|     | 
|31.2 |  | Certification Pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith)    
|     | 
|32.0 |  | Certification Pursuant to 18 U.S.C. Section 1350 (filed herewith)      

---

|(1) | Incorporated by reference into this document from the Exhibits filed with the Registration Statement on Form S-1 and any amendments thereto, Registration No. 333-90865.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference into this document from the Current Report on Form 8-K filed July 18, 2003.
|--- | -----------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference into this document from the Quarterly Report on Form 10-Q dated March 31, 2001 and filed with the Securities and Exchange Commission on May 4, 2001.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference into this document from the Registrants Proxy Statement dated August 18, 2000 and filed August 18, 2000.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference into this document from the 1999 Annual Report on Form 10-K filed March 30, 2000.
|--- | -----------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference into this document from the 2001 Annual Report on Form 10-K filed March 29, 2002.
|--- | -----------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference into this document from the Registrants Proxy Statement dated April 9, 2002 and filed April 9, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------



75



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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.



|                             |  |                                      
|---------------------------- |  | -------------------------------------
|Connecticut Bancshares, Inc.
|                             | 
|By:                          |  | /s/ Richard P. Meduski               
|                             |  | Richard P. Meduski                   
|                             |  | President and Chief Executive Officer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                             |  |                                                                                                |  |               
|-------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Name                                         |  | Title                                                                                          |  | Date          
|/s/ Richard P. MeduskiRichard P. Meduski     |  | President, Chief Executive Officer and Director (principal executive officer)                  |  | March 12, 2004
|                                             | 
|                                             | 
|                                             |  |                                                                                               
|/s/ Michael J. HartlMichael J. Hartl         |  | Senior Vice President and Chief Financial Officer (principal accounting and financial officer) |  | March 12, 2004
|                                             | 
|                                             | 
|                                             | 
|                                             |  |                                                                                               
|/s/ Laurence P. RubinowLaurence P. Rubinow   |  | Director and Chairman of the Board                                                             |  | March 12, 2004
|                                             | 
|                                             |  |                                                                                               
|/s/ A. Paul BertéA. Paul Berté               |  | Director                                                                                       |  | March 12, 2004
|                                             | 
|                                             |  |                                                                                               
|/s/ Timothy J. DevanneyTimothy J. Devanney   |  | Director                                                                                       |  | March 12, 2004
|                                             | 
|                                             |  |                                                                                               
|/s/ Sheila B. FlanaganSheila B. Flanagan     |  | Director                                                                                       |  | March 12, 2004
|                                             | 
|                                             |  |                                                                                               
|/s/ John D. LaBelle, Jr.John D. LaBelle, Jr. |  | Director                                                                                       |  | March 12, 2004
|                                             | 
|                                             |  |                                                                                               
|/s/ Eric A. MarzialiEric A. Marziali         |  | Director                                                                                       |  | March 12, 2004
|                                             | 



76



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|                                           |  |          |  |               
|------------------------------------------ |  | -------- |  | --------------
|                                           |  |         
|/s/ Timothy J. MoynihanTimothy J. Moynihan |  | Director |  | March 12, 2004
|                                           |  |         
|/s/ Jon L. NorrisJon L. Norris             |  | Director |  | March 12, 2004
|                                           | 
|                                           |  |         
|/s/ William D. ONeillWilliam D. ONeill   |  | Director |  | March 12, 2004
|                                           | 
|                                           |  |         
|/s/ John G. SommersJohn G. Sommers         |  | Director |  | March 12, 2004
|                                           | 
|                                           |  |         
|/s/ Thomas E. ToomeyThomas E. Toomey       |  | Director |  | March 12, 2004
|                                           | 
|                                           |  |         
|Gregory S. Wolff                           |  | Director |  |               
|                                           | 





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CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY



Index



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|                                                                                                                | 
|Independent Auditors Report                                                                                    |  | F-2 
|                                                                                                                | 
|Report of Independent Public Accountants                                                                        |  | F-3 
|                                                                                                                | 
|Consolidated Statements of Condition As of December 31, 2003 and 2002                                           |  | F-4 
|                                                                                                                | 
|Consolidated Statements of Operations For the Years Ended December 31, 2003, 2002 and 2001                      |  | F-5 
|                                                                                                                | 
|Consolidated Statements of Changes in Stockholders Equity For the Years Ended December 31, 2003, 2002 and 2001 |  | F-6 
|                                                                                                                | 
|Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001                      |  | F-7 
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | F-8 



F-1



---

##### Table of Contents

Independent Auditors Report



Board of Directors

Connecticut Bancshares, Inc.

Manchester, Connecticut



We have audited the accompanying consolidated statements of condition of Connecticut Bancshares, Inc. (a Connecticut stock bank holding company) and its subsidiary, The
Savings Bank of Manchester (collectively, the Company), as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Connecticut
Bancshares, Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those statements in their report dated January 16, 2002.



We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our
opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Connecticut Bancshares, Inc. and subsidiary as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



/S/    DELOITTE & TOUCHE LLP



Deloitte & Touche LLP

Hartford, Connecticut

February 27, 2004





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##### Table of Contents

COPY



Report of Independent Public Accountants



To the
Board of Directors of

Connecticut Bancshares, Inc.:



We have audited the accompanying consolidated statements of condition of Connecticut Bancshares, Inc. (a Connecticut stock bank holding company) and its subsidiary, The
Savings Bank of Manchester (collectively, the Bank), as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders equity and cash flows for each of the three years in the period ended
December 31, 2001. These consolidated financial statements are the responsibility of the Banks management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.



In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Connecticut Bancshares, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.



Arthur Andersen LLP



Hartford, Connecticut

January 16, 2002



Readers of these consolidated
financial statements should be aware that this report is a copy of a previously issued Arthur Andersen LLP report and that this report has not been reissued by Arthur Andersen LLP. Furthermore, this report has not been updated since January 16,
2002.





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##### Table of Contents

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Condition

As of December 31, 2003 and 2002

(Dollars in thousands)



|                                                                                                                                                 |  |      |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                 |  | 2003 |           |   | 2002 |  
|ASSETS                                                                                                                                           |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|Cash and cash equivalents                                                                                                                        |  | $    | 49,108    |   |      | $ | 25,264    |  
|Securities available for sale, at fair value                                                                                                     |  |      | 724,569   |   |      |   | 841,622   |  
|Loans, net                                                                                                                                       |  |      | 1,670,728 |   |      |   | 1,540,567 |  
|Federal Home Loan Bank Stock, at cost                                                                                                            |  |      | 27,037    |   |      |   | 30,783    |  
|Premises and equipment, net                                                                                                                      |  |      | 15,480    |   |      |   | 17,793    |  
|Accrued interest receivable                                                                                                                      |  |      | 10,413    |   |      |   | 12,613    |  
|Other real estate owned                                                                                                                          |  |      | 112       |   |      |   |          |  
|Cash surrender value of life insurance                                                                                                           |  |      | 46,150    |   |      |   | 43,803    |  
|Current and deferred income taxes                                                                                                                |  |      | 12,976    |   |      |   | 58        |  
|Goodwill                                                                                                                                         |  |      | 19,488    |   |      |   | 19,488    |  
|Other intangible assets                                                                                                                          |  |      | 7,760     |   |      |   | 9,598     |  
|Other assets                                                                                                                                     |  |      | 3,985     |   |      |   | 5,953     |  
|                                                                                                                                                 |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|Total assets                                                                                                                                     |  | $    | 2,587,806 |   |      | $ | 2,547,542 |  
|                                                                                                                                                 |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                             |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|Deposits                                                                                                                                         |  | $    | 1,606,292 |   |      | $ | 1,595,979 |  
|Short-term borrowed funds                                                                                                                        |  |      | 123,049   |   |      |   | 121,052   |  
|Mortgagors escrow accounts                                                                                                                      |  |      | 19,665    |   |      |   | 15,097    |  
|Advances from Federal Home Loan Bank                                                                                                             |  |      | 543,335   |   |      |   | 533,890   |  
|Accrued benefits and other liabilities                                                                                                           |  |      | 31,632    |   |      |   | 29,964    |  
|                                                                                                                                                 |  |      |           |   |      |   |           |  
|Total liabilities                                                                                                                                |  |      | 2,323,973 |   |      |   | 2,295,982 |  
|                                                                                                                                                 |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|Commitments and contingencies                                                                                                                    |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|Stockholders equity:                                                                                                                            |  |      |           |   |      |   |           |  
|Common stock ($.01 par value; 45,000,000 authorized shares; 11,693,574 and 11,270,968 shares issued at December 31, 2003 and 2002,
respectively) |  |      | 117       |   |      |   | 113       |  
|Additional paid-in capital                                                                                                                       |  |      | 126,632   |   |      |   | 110,345   |  
|Retained earnings                                                                                                                                |  |      | 169,577   |   |      |   | 149,554   |  
|ESOP unearned compensation                                                                                                                       |  |      | (6,824    | ) |      |   | (7,444    | )
|Restricted stock unearned compensation                                                                                                           |  |      | (6,636    | ) |      |   | (10,880   | )
|Treasury stock, at cost (558,641 and 165,422 shares at December 31, 2003 and 2002, respectively)                                                 |  |      | (21,744   | ) |      |   | (5,522    | )
|Accumulated other comprehensive income                                                                                                           |  |      | 2,711     |   |      |   | 15,394    |  
|                                                                                                                                                 |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|Total stockholders equity                                                                                                                       |  |      | 263,833   |   |      |   | 251,560   |  
|                                                                                                                                                 |  |      |           |   |      |   |           |  
|                                                                                                                                                 |  |     
|Total liabilities and stockholders equity                                                                                                       |  | $    | 2,587,806 |   |      | $ | 2,547,542 |  
|                                                                                                                                                 |  |      |           |   |      |   |           |  



See notes to consolidated financial
statements.



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##### Table of Contents

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Operations

For the Years Ended December 31, 2003, 2002 and 2001

(Dollars in thousands, except for per share data)



|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                  |  | 2003 |            |   | 2002 |   |            | 2001 | 
|Interest and dividend income:                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Interest income on loans                                          |  | $    | 97,609     |   |      | $ | 100,978    |      |  | $ | 86,359     |  
|Interest and dividends on investment securities                   |  |      | 31,201     |   |      |   | 39,588     |      |  |   | 29,028     |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest and dividend income                                |  |      | 128,810    |   |      |   | 140,566    |      |  |   | 115,387    |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Interest expense:                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Interest on deposits and escrow                                   |  |      | 23,002     |   |      |   | 34,461     |      |  |   | 36,799     |  
|Interest on short-term borrowed funds                             |  |      | 783        |   |      |   | 1,644      |      |  |   | 2,882      |  
|Interest on advances from Federal Home Loan Bank                  |  |      | 24,323     |   |      |   | 23,803     |      |  |   | 12,251     |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest expense                                            |  |      | 48,108     |   |      |   | 59,908     |      |  |   | 51,932     |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net interest income                                               |  |      | 80,702     |   |      |   | 80,658     |      |  |   | 63,455     |  
|Provision for loan losses                                         |  |      | 1,275      |   |      |   | 1,500      |      |  |   | 2,000      |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net interest income after provision for loan losses               |  |      | 79,427     |   |      |   | 79,158     |      |  |   | 61,455     |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Noninterest income:                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Service charges and fees                                          |  |      | 15,422     |   |      |   | 12,902     |      |  |   | 9,556      |  
|Increase in cash surrender value of life insurance                |  |      | 2,347      |   |      |   | 2,407      |      |  |   | 1,032      |  
|Brokerage commission income                                       |  |      | 1,511      |   |      |   | 1,643      |      |  |   | 1,150      |  
|Gains on sales of securities, net                                 |  |      | 5,666      |   |      |   | 2,703      |      |  |   | 481        |  
|Other than temporary impairment of investment securities (Note 7) |  |      | (359       | ) |      |   | (1,493     | )    |  |   | (4,076     | )
|Gains on mortgage loan sales, net                                 |  |      | 197        |   |      |   | 203        |      |  |   | 346        |  
|Other                                                             |  |      | 518        |   |      |   | 661        |      |  |   | 508        |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest income                                          |  |      | 25,302     |   |      |   | 19,026     |      |  |   | 8,997      |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Noninterest expense:                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Salaries                                                          |  |      | 20,688     |   |      |   | 20,452     |      |  |   | 18,196     |  
|Employee benefits                                                 |  |      | 15,153     |   |      |   | 11,493     |      |  |   | 8,623      |  
|Fees and services                                                 |  |      | 6,266      |   |      |   | 7,191      |      |  |   | 5,721      |  
|Occupancy, net                                                    |  |      | 3,944      |   |      |   | 3,956      |      |  |   | 3,401      |  
|Furniture and equipment                                           |  |      | 3,308      |   |      |   | 3,852      |      |  |   | 3,340      |  
|Amortization of other intangible assets                           |  |      | 1,575      |   |      |   | 3,928      |      |  |   | 1,983      |  
|Marketing                                                         |  |      | 1,481      |   |      |   | 2,042      |      |  |   | 1,719      |  
|Foreclosed real estate expense                                    |  |      | 115        |   |      |   | 243        |      |  |   | 137        |  
|Net gains on sales of repossessed assets                          |  |      | (59        | ) |      |   | (13        | )    |  |   | (74        | )
|Director and employee retirement expenses (Notes 3 and 12)        |  |      |           |   |      |   |           |      |  |   | 1,419      |  
|Relocation and branch closing costs (Note 13)                     |  |      |           |   |      |   |           |      |  |   | 872        |  
|Merger expenses (Note 1)                                          |  |      | 4,111      |   |      |   |           |      |  |   |           |  
|Other operating expenses                                          |  |      | 6,249      |   |      |   | 6,465      |      |  |   | 5,976      |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest expense                                         |  |      | 62,831     |   |      |   | 59,609     |      |  |   | 51,313     |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Income before provision for income taxes                          |  |      | 41,898     |   |      |   | 38,575     |      |  |   | 19,139     |  
|Provision for income taxes                                        |  |      | 14,468     |   |      |   | 12,626     |      |  |   | 6,375      |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                        |  | $    | 27,430     |   |      | $ | 25,949     |      |  | $ | 12,764     |  
|                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Earnings per share (Note 1):                                      |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                             |  | $    | 2.76       |   |      | $ | 2.57       |      |  | $ | 1.26       |  
|Diluted                                                           |  | $    | 2.54       |   |      | $ | 2.40       |      |  | $ | 1.19       |  
|Weighted average shares outstanding:                              |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                             |  |      | 9,927,804  |   |      |   | 10,102,444 |      |  |   | 10,108,483 |  
|Diluted                                                           |  |      | 10,810,286 |   |      |   | 10,794,497 |      |  |   | 10,695,366 |  



See notes to consolidated financial
statements.



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##### Table of Contents

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Changes in Stockholders Equity

For the Years Ended December 31, 2003, 2002 and 2001

(Dollars in thousands)



|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------ | - |  | ------------------------- | --- | - | ----------------- | - | ------- | ------------------------- |  | - | ------------------------------------- | - |  | -------------- | ------ | - | ------------------------------------- | - | ------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Common Stock |   |  | AdditionalPaid-In Capital |     |   | Retained Earnings |   |         | ESOPUnearnedCompen-sation |  |   | RestrictedStockUnearned Compen-sation |   |  | Treasury Stock |        |   | AccumulatedOther Comprehensive Income |   |         | Total | 
|                                                                         |  | Shares       |   |  | Amount                    |     |   |                   |   |         |                           |  |  
|BALANCE, January 1, 2001                                                 |  | 11,232,000   |   |  | $                         | 112 |   |                   | $ | 108,257 |                           |  | $ | 119,691                               |   |  | $              | (8,685 | ) |                                       | $ |        |       |  | $ |        |   |  | $ | 13,164  |   |  | $ | 232,539 |  
|Granting of restricted stock awards                                      |  | 460,512      |   |  |                           | 5   |   |                   |   | 8,470   |                           |  |   |                                      |   |  |                |       |   |                                       |   | (8,199  | )     |  |   |        |   |  |   |        |   |  |   | 276     |  
|Funding of trustee repurchases of restricted stock                       |  | (460,512     | ) |  |                           | (5  | ) |                   |   | (9,615  | )                         |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | (9,620  | )
|Change in ESOP unearned compensation                                     |  |             |   |  |                           |    |   |                   |   | 748     |                           |  |   |                                      |   |  |                | 620    |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 1,368   |  
|Change in restricted stock unearned compensation                         |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   | 1,630   |       |  |   |        |   |  |   |        |   |  |   | 1,630   |  
|Granting of stock options to former Chairman of the Board                |  |             |   |  |                           |    |   |                   |   | 266     |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 266     |  
|Accelerated vesting of restricted stock                                  |  |             |   |  |                           |    |   |                   |   | 40      |                           |  |   |                                      |   |  |                |       |   |                                       |   | 174     |       |  |   |        |   |  |   |        |   |  |   | 214     |  
|Exercise of stock options                                                |  | 3,608        |   |  |                           |    |   |                   |   | 64      |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 64      |  
|Accelerated vesting of stock options                                     |  |             |   |  |                           |    |   |                   |   | 124     |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 124     |  
|Dividends declared ($0.42 per share)                                     |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | (4,718                                | ) |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | (4,718  | )
|Comprehensive income:                                                    |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Net income                                                               |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | 12,764                                |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 12,764  |  
|Change in unrealized gain on securities available for sale, net of taxes |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | 467     |   |  |   | 467     |  
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                               |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | 12,764                                |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | 467     |   |  |   | 13,231  |  
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|BALANCE, December 31, 2001                                               |  | 11,235,608   |   |  |                           | 112 |   |                   |   | 108,354 |                           |  |   | 127,737                               |   |  |                | (8,065 | ) |                                       |   | (6,395  | )     |  |   |        |   |  |   | 13,631  |   |  |   | 235,374 |  
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Granting of restricted stock awards                                      |  | 168,750      |   |  |                           | 2   |   |                   |   | 6,328   |                           |  |   |                                      |   |  |                |       |   |                                       |   | (6,328  | )     |  |   |        |   |  |   |        |   |  |   | 2       |  
|Funding of trustee repurchases of restricted stock                       |  | (168,750     | ) |  |                           | (2  | ) |                   |   | (6,702  | )                         |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | (6,704  | )
|Change in ESOP unearned compensation                                     |  |             |   |  |                           |    |   |                   |   | 1,342   |                           |  |   |                                      |   |  |                | 621    |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 1,963   |  
|Exercise of stock options, including tax benefits                        |  | 35,360       |   |  |                           | 1   |   |                   |   | 772     |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 773     |  
|Accelerated vesting of stock options                                     |  |             |   |  |                           |    |   |                   |   | 7       |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 7       |  
|Tax benefits from vesting of restricted stock awards                     |  |             |   |  |                           |    |   |                   |   | 244     |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 244     |  
|Dividends declared ($0.43 per share)                                     |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | (4,484                                | ) |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | (4,484  | )
|Treasury stock purchased                                                 |  | (165,422     | ) |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   | (5,522  | ) |  |   |        |   |  |   | (5,522  | )
|Change in restricted stock unearned compensation                         |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   | 1,843   |       |  |   |        |   |  |   |        |   |  |   | 1,843   |  
|Other                                                                    |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | 352                                   |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 352     |  
|Comprehensive income:                                                    |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Net income                                                               |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | 25,949                                |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 25,949  |  
|Change in unrealized gain on securities available for sale, net of taxes |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | 3,497   |   |  |   | 3,497   |  
|Additional minimum pension liability, net of taxes                       |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | (1,734  | ) |  |   | (1,734  | )
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                               |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | 25,949                                |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | 1,763   |   |  |   | 27,712  |  
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|BALANCE, December 31, 2002                                               |  | 11,105,546   |   |  |                           | 113 |   |                   |   | 110,345 |                           |  |   | 149,554                               |   |  |                | (7,444 | ) |                                       |   | (10,880 | )     |  |   | (5,522  | ) |  |   | 15,394  |   |  |   | 251,560 |  
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Change in ESOP unearned compensation                                     |  |             |   |  |                           |    |   |                   |   | 2,132   |                           |  |   |                                      |   |  |                | 620    |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 2,752   |  
|Exercise of stock options, including tax benefits                        |  | 422,606      |   |  |                           | 4   |   |                   |   | 12,736  |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 12,740  |  
|Accelerated vesting of restricted stock awards                           |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   | 1,419   |       |  |   |        |   |  |   |        |   |  |   | 1,419   |  
|Tax benefits from vesting of restricted stock awards                     |  |             |   |  |                           |    |   |                   |   | 1,419   |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 1,419   |  
|Dividends declared ($0.72 per share)                                     |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | (7,407                                | ) |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | (7,407  | )
|Treasury stock purchased                                                 |  | (393,219     | ) |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   | (16,222 | ) |  |   |        |   |  |   | (16,222 | )
|Change in restricted stock unearned compensation                         |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   | 2,825   |       |  |   |        |   |  |   |        |   |  |   | 2,825   |  
|Comprehensive income:                                                    |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Net income                                                               |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | 27,430                                |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   |        |   |  |   | 27,430  |  
|Change in unrealized gain on securities available for sale, net of taxes |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | (11,031 | ) |  |   | (11,031 | )
|Additional minimum pension liability, net of taxes                       |  |             |   |  |                           |    |   |                   |   |        |                           |  |   |                                      |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | (1,652  | ) |  |   | (1,652  | )
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                               |  |             |   |  |                           |    |   |                   |   |        |                           |  |   | 27,430                                |   |  |                |       |   |                                       |   |        |       |  |   |        |   |  |   | (12,683 | ) |  |   | 14,747  |  
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  
|BALANCE, December 31, 2003                                               |  | 11,134,933   |   |  | $                         | 117 |   |                   | $ | 126,632 |                           |  | $ | 169,577                               |   |  | $              | (6,824 | ) |                                       | $ | (6,636  | )     |  | $ | (21,744 | ) |  | $ | 2,711   |   |  | $ | 263,833 |  
|                                                                         |  |              |   |  |                           |     |   |                   |   |         |                           |  |   |                                       |   |  |                |        |   |                                       |   |         |       |  |   |         |   |  |   |         |   |  |   |         |  



See notes to consolidated financial
statements.



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CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Cash Flows

For the Years Ended December 31, 2003, 2002 and 2001

(In thousands)



|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                                                                  |  | 2003 |          |   | 2002 |   |          | 2001 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Net income                                                                                                                                        |  | $    | 27,430   |   |      | $ | 25,949   |      |  | $ | 12,764   |  
|Adjustments to reconcile net income to net cash provided by operating activities, excluding effects of acquisition:                               |  |      |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                                                                                         |  |      | 1,275    |   |      |   | 1,500    |      |  |   | 2,000    |  
|Depreciation                                                                                                                                      |  |      | 2,812    |   |      |   | 3,172    |      |  |   | 2,651    |  
|Amortization/accretion -                                                                                                                          |  |      |          |   |      |   |          |      |  |   |          |  
|Other intangible assets                                                                                                                           |  |      | 1,575    |   |      |   | 3,928    |      |  |   | 1,983    |  
|Premium on bonds                                                                                                                                  |  |      | 6,759    |   |      |   | 5,478    |      |  |   | 1,139    |  
|Amortization/accretion of fair market adjustment from First Federal Savings and Loan Association of East Hartford (First Federal)
acquisition - |  |      |          |   |      |   |          |      |  |   |          |  
|Loans                                                                                                                                             |  |      | 769      |   |      |   | 1,213    |      |  |   | 497      |  
|Time deposits                                                                                                                                     |  |      | (321     | ) |      |   | (2,040   | )    |  |   | (1,323   | )
|Advances from Federal Home Loan Bank                                                                                                              |  |      | (2,401   | ) |      |   | (3,322   | )    |  |   | (1,148   | )
|Amortization of mortgage servicing rights                                                                                                         |  |      | 757      |   |      |   | 611      |      |  |   | 881      |  
|Net gains on sales of other real estate owned                                                                                                     |  |      | (59      | ) |      |   | (13      | )    |  |   | (74      | )
|Net loss on disposal of fixed assets                                                                                                              |  |      | 4        |   |      |   | 145      |      |  |   | 9        |  
|Gains on sales of securities, net                                                                                                                 |  |      | (5,666   | ) |      |   | (2,703   | )    |  |   | (481     | )
|Other than temporary impairment of investment securities                                                                                          |  |      | 359      |   |      |   | 1,493    |      |  |   | 4,076    |  
|Gains on mortgage loan sales, net                                                                                                                 |  |      | (197     | ) |      |   | (203     | )    |  |   | (346     | )
|Deferred income tax (benefit) provision                                                                                                           |  |      | (2,845   | ) |      |   | 214      |      |  |   | (3,290   | )
|Granting of restricted stock to former Chairman of the Board                                                                                      |  |      |         |   |      |   |         |      |  |   | 276      |  
|Granting of stock options to former Chairman of the Board                                                                                         |  |      |         |   |      |   |         |      |  |   | 266      |  
|Accelerated vesting of restricted stock                                                                                                           |  |      | 1,419    |   |      |   |         |      |  |   | 214      |  
|Accelerated vesting of stock options                                                                                                              |  |      |         |   |      |   | 7        |      |  |   | 124      |  
|Employee retirement expenses                                                                                                                      |  |      |         |   |      |   |         |      |  |   | 508      |  
|ESOP compensation expense                                                                                                                         |  |      | 2,752    |   |      |   | 1,963    |      |  |   | 1,368    |  
|Change in restricted stock unearned compensation                                                                                                  |  |      | 2,825    |   |      |   | 1,843    |      |  |   | 1,630    |  
|Relocation and branch closing costs                                                                                                               |  |      |         |   |      |   |         |      |  |   | 872      |  
|Income from cash surrender value life insurance                                                                                                   |  |      | (2,347   | ) |      |   | (2,407   | )    |  |   | (1,032   | )
|Changes in operating assets and liabilities, net of amounts acquired -                                                                            |  |      |          |   |      |   |          |      |  |   |          |  
|Accrued interest receivable                                                                                                                       |  |      | 2,200    |   |      |   | 320      |      |  |   | 1,127    |  
|Other assets                                                                                                                                      |  |      | 3,878    |   |      |   | (967     | )    |  |   | (1,964   | )
|Other liabilities                                                                                                                                 |  |      | (262     | ) |      |   | 3,043    |      |  |   | 2,160    |  
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                                                                                         |  |      | 40,716   |   |      |   | 39,224   |      |  |   | 24,887   |  
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Loan originations, purchases and recoveries, net of repayments                                                                                    |  |      | (138,034 | ) |      |   | (125,684 | )    |  |   | (153,166 | )
|Proceeds from sales of loans                                                                                                                      |  |      | 5,698    |   |      |   | 4,405    |      |  |   | 7,322    |  
|Proceeds from maturities and calls of available for sale securities                                                                               |  |      | 102,816  |   |      |   | 26,151   |      |  |   | 27,482   |  
|Proceeds from sales of available for sale securities                                                                                              |  |      | 96,448   |   |      |   | 179,715  |      |  |   | 145,050  |  
|Purchases of available for sale securities                                                                                                        |  |      | (385,367 | ) |      |   | (417,645 | )    |  |   | (115,673 | )
|Purchases of Federal Home Loan Bank stock                                                                                                         |  |      |         |   |      |   |         |      |  |   | (4,846   | )
|Proceeds from sales of Federal Home Loan Bank stock                                                                                               |  |      | 3,746    |   |      |   |         |      |  |   |         |  
|Proceeds from principal payments of mortgage-backed securities and collateralized mortgage obligations                                            |  |      | 284,733  |   |      |   | 129,803  |      |  |   | 91,129   |  
|Acquisition of First Federal, net of cash acquired                                                                                                |  |      | (207     | ) |      |   | (1,260   | )    |  |   | (12,812  | )
|Proceeds from sales of other real estate owned                                                                                                    |  |      | 279      |   |      |   | 212      |      |  |   | 419      |  
|Purchase of cash surrender value life of insurance                                                                                                |  |      |         |   |      |   |         |      |  |   | (20,000  | )
|Proceeds from sales of premises and equipment                                                                                                     |  |      |         |   |      |   | 1,628    |      |  |   |         |  
|Purchases of premises and equipment                                                                                                               |  |      | (503     | ) |      |   | (3,390   | )    |  |   | (5,247   | )
|Other investing activities                                                                                                                        |  |      |         |   |      |   | (300     | )    |  |   |         |  
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                                                                                             |  |      | (30,391  | ) |      |   | (206,365 | )    |  |   | (40,342  | )
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Funding of trustee purchases of restricted stock                                                                                                  |  |      |         |   |      |   | (6,702   | )    |  |   | (9,620   | )
|Purchase of treasury stock                                                                                                                        |  |      | (16,222  | ) |      |   | (5,522   | )    |  |   |         |  
|Proceeds from exercise of stock options                                                                                                           |  |      | 8,103    |   |      |   | 623      |      |  |   | 64       |  
|Dividends paid                                                                                                                                    |  |      | (7,407   | ) |      |   | (5,945   | )    |  |   | (3,257   | )
|Net increase in savings, money market, NOW and demand deposits                                                                                    |  |      | 70,223   |   |      |   | 98,791   |      |  |   | 79,692   |  
|Net decrease in certificates of deposit                                                                                                           |  |      | (59,589  | ) |      |   | (91,710  | )    |  |   | (54,974  | )
|Net increase in short-term borrowed funds                                                                                                         |  |      | 1,997    |   |      |   | 3,872    |      |  |   | 10,687   |  
|Increase in mortgagors escrow accounts                                                                                                           |  |      | 4,568    |   |      |   | 4,517    |      |  |   | 734      |  
|Increase in advances from Federal Home Loan Bank                                                                                                  |  |      | 11,846   |   |      |   | 71,857   |      |  |   | 49,956   |  
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                                                                         |  |      | 13,519   |   |      |   | 69,781   |      |  |   | 73,282   |  
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                                                              |  |      | 23,844   |   |      |   | (97,360  | )    |  |   | 57,827   |  
|                                                                                                                                                  |  |      |         
|CASH AND CASH EQUIVALENTS, beginning of year                                                                                                      |  |      | 25,264   |   |      |   | 122,624  |      |  |   | 64,797   |  
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|CASH AND CASH EQUIVALENTS, end of year                                                                                                            |  | $    | 49,108   |   |      | $ | 25,264   |      |  | $ | 122,624  |  
|                                                                                                                                                  |  |      |          |   |      |   |          |      |  |   |          |  
|SUPPLEMENTAL INFORMATION:                                                                                                                         |  |      |          |   |      |   |          |      |  |   |          |  
|Cash paid for -                                                                                                                                   |  |      |          |   |      |   |          |      |  |   |          |  
|Interest                                                                                                                                          |  | $    | 48,180   |   |      | $ | 59,618   |      |  | $ | 54,541   |  
|Income taxes                                                                                                                                      |  |      | 14,626   |   |      |   | 10,563   |      |  |   | 9,350    |  
|Non-cash transactions -                                                                                                                           |  |      |          |   |      |   |          |      |  |   |          |  
|Transfers from loans to other real estate owned                                                                                                   |  |      | 328      |   |      |   | 91       |      |  |   | 304      |  
|Dividends declared not paid                                                                                                                       |  |      |         |   |      |   |         |      |  |   | 1,461    |  



See notes to consolidated financial
statements.









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CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements

December 31, 2003, 2002 and 2001



|(1) | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
|--- | ------------------------------------------------



Organization



The accompanying consolidated financial statements include the accounts of Connecticut Bancshares, Inc. (CTBS), successor to Connecticut
Bankshares, M.H.C. (MHC) and its wholly-owned subsidiary, The Savings Bank of Manchester (SBM or the Bank), and its wholly-owned subsidiaries, SBM, Ltd., 923 Main, Inc. and Savings Bank of Manchester Mortgage
Company, Inc. (SBM Mortgage). Collectively, all of the aforementioned entities are referred to herein as the Company. SBM Mortgage, a passive investment company for Connecticut income tax purposes, was established to service
and hold loans secured by real property. As discussed in Note 2, MHC adopted a Plan of Reorganization pursuant to which, in March 2000, MHC merged into SBM, with SBM being the surviving corporation, and SBM continuing as a state-chartered stock
savings bank and a wholly-owned subsidiary of CTBS. All material intercompany balances and transactions have been eliminated in consolidation.



In 2000, the Bank funded and formed SBM Charitable Foundation, Inc. (the New Foundation), a not-for-profit organization, in connection with
the conversion. The New Foundation was funded with a contribution of 832,000 common shares, or an amount equal to 8% of the common stock sold in the conversion (see Note 2). The New Foundation is dedicated to charitable purposes within the
Banks local community, including community development activities. In 1998, the Bank contributed securities with a fair market value of $3.00 million to the Savings Bank of Manchester Foundation, Inc. (the Old Foundation), also a
not-for-profit organization. In 2001, the Old Foundation was merged into the New Foundation with the New Foundation being the surviving entity. In accordance with generally accepted accounting principles in the United States of America, the New
Foundation is not consolidated in the accompanying consolidated financial statements. The New Foundation will remain independent from NHSB after the closing of the transaction between NHSB and SBM. The New Foundation will continue to provide grants
to individuals and not-for-profit organizations to the communities in Central and Eastern Connecticut.



On July 16, 2003, the Company announced it entered into an Agreement and Plan of Merger with The New Haven Savings Bank (NHSB). The
Companys stockholders will receive $52.00 in cash in exchange for each share of the Companys common stock held. If the transaction closes after March 31, 2004, the merger price is subject to increase based on the Companys earnings
less dividends paid from that date to the end of the month preceding the closing date of the merger. As a condition precedent to the merger, NHSB will convert from a Connecticut-chartered mutual savings bank to a Connecticut-chartered stock savings
bank and simultaneously form a holding company. The transaction is subject to the approval of the stockholders of the Company, for which a stockholder meeting has been scheduled for March 30, 2004. The Company expects the transaction to close within
several days following the stockholders meeting. In connection with the pending transaction, the Company agreed to take action to accelerate the vesting of all unvested restricted stock awards that have been granted to certain officers. The vesting
acceleration occurred on November 25, 2003 and the Company recorded a charge of $1.42 million, based on the fair value of the common stock which is included in merger expenses in the accompanying consolidated statement of operations for the year
ended December 31, 2003. During the year ended December 31, 2003 the Company incurred an additional $2.69 million of other merger-related expenses, primarily professional fees, relating to the pending merger.



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Business



CTBS does not transact any material business other than through the Bank. CTBS used 50% of the net proceeds from the conversion to buy all of the
common stock of SBM and retained the remaining 50% (see Note 2), which primarily was invested in fixed income securities. The Bank, with its main office located in Manchester, Connecticut, operates through twenty-eight branches located primarily in
eastern Connecticut. The Banks primary source of income is interest received on loans to customers, which include small and middle market businesses and individuals residing within the Banks service area.



Cash flows



Cash and cash equivalents include cash and due from banks and short-term
investments with original maturities of 90 days or less.



Earnings per share



Basic earnings per share
represents income available to stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential
shares had been issued or earned, determined under the treasury stock method.



The following table sets forth the calculation of basic and diluted earnings per share for the periods indicated (dollars in thousands, except per share amounts):

|
|

|                                     |  |                    |            |   |                   |   |            |                   |  |   |            |  
|------------------------------------ |  | ------------------ | ---------- | - | ----------------- | - | ---------- | ----------------- |  | - | ---------- | -
|                                     |  | For the Year Ended |           
|                                     |  | December 31, 2003  |            |   | December 31, 2002 |   |            | December 31, 2001 | 
|Net income                           |  | $                  | 27,430     |   |                   | $ | 25,949     |                   |  | $ | 12,764     |  
|                                     |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Weighted average shares outstanding: |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Weighted average shares outstanding  |  |                    | 10,618,902 |   |                   |   | 10,853,446 |                   |  |   | 10,919,389 |  
|Less: unearned ESOP shares           |  |                    | (691,098   | ) |                   |   | (751,002   | )                 |  |   | (810,906   | )
|                                     |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Basic                                |  |                    | 9,927,804  |   |                   |   | 10,102,444 |                   |  |   | 10,108,483 |  
|                                     |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Dilutive impact of:                  |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Stock options                        |  |                    | 512,334    |   |                   |   | 341,390    |                   |  |   | 179,710    |  
|Restricted stock                     |  |                    | 370,148    |   |                   |   | 350,663    |                   |  |   | 407,173    |  
|                                     |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Diluted                              |  |                    | 10,810,286 |   |                   |   | 10,794,497 |                   |  |   | 10,695,366 |  
|                                     |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Earnings per share:                  |  |                    |            |   |                   |   |            |                   |  |   |            |  
|Basic                                |  | $                  | 2.76       |   |                   | $ | 2.57       |                   |  | $ | 1.26       |  
|Diluted                              |  | $                  | 2.54       |   |                   | $ | 2.40       |                   |  | $ | 1.19       |  



During the years ended
December 31, 2003, 2002 and 2001 there were no stock options that were excluded from the computation of earnings per share as no stock options were antidilutive during these periods.



Use of estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported



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amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from managements estimates and assumptions. The most significant
estimates that are particularly susceptible to changes in the near term relate to the determination of the allowance for loan losses (See Note 8), other than temporary impairment of securities (See Note 7), income taxes (See Note 15), intangible
assets acquired and pension and other postretirement benefits (See Note 14). Actual amounts could differ significantly from these estimates.



Loans and allowance for loan losses



Loans are stated at their principal amounts outstanding net of unearned income. Interest on loans is recorded as income based on rates applied to
principal amounts outstanding. Some installment and commercial loans are made on a discounted basis, and the unearned discount is recorded in income by use of a method that approximates the effective interest method. Interest on loans is credited to
income as earned based on contractual rates applied to principal amounts outstanding. The accrual of interest is discontinued when payments are 90 days or more delinquent and when a reasonable doubt exists as to the collectability of the principal
or interest. When interest accruals are discontinued, previously recognized accrued interest income is charged against earnings. When a loan becomes 90 days or more past due, interest income is recognized on the cash basis, only if in
managements judgment all principal is expected to be collected.



Loan origination fees and certain direct loan origination costs are capitalized, and the net fee or cost is recognized in interest income using the effective interest method over the contractual life of the loans. When loans are prepaid,
sold or participated out, the unamortized portion of deferred fees and related origination costs are recognized as income at that time. As of December 31, 2003 and 2002, net deferred loan fees were approximately $1.26 million and $693,000,
respectively.



The Bank devotes significant attention to
maintaining high loan quality through its underwriting standards, active servicing of loans and aggressive management of nonperforming assets. The allowance for loan losses is maintained at a level estimated by management to provide adequately for
probable loan losses which are inherent in the loan portfolio. Probable loan losses are estimated based on a quarterly review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent factors. In
assessing risks inherent in the portfolio, management considers the risk of loss on nonperforming and classified loans including an analysis of collateral in each situation. The Banks methodology for assessing the appropriateness of the
allowance for loan losses includes several key elements. Problem loans are identified and analyzed individually to estimate specific losses. The loan portfolio is also segmented into pools of loans that are similar in type and risk characteristics
(i.e., commercial, consumer and mortgage loans). Loss factors based on the Banks historical chargeoffs are applied using the Banks historic experience and may be adjusted for significant factors that, in managements judgment,
affect the collectability of the portfolio as of the evaluation date. Additionally, the portfolio is segmented into pools based on internal risk ratings with estimated loss factors applied to each rating category. Other factors considered in
determining probable loan losses are the impact of larger concentrations in the portfolio, trends in loan growth, the relationship and trends in recent years of recoveries as a percentage of prior chargeoffs and peer banks loss experience.



The allowance for loan losses consists of a formula allowance
for various loan portfolio classifications and an amount for loans identified as impaired, if necessary. The allowance is an estimate, and ultimate losses may vary from current estimates. Changes in the estimate are recorded in the results of
operations in the period in which they become known, along with provisions for estimated losses incurred during that period.



A portion of the allowance for loan losses is not allocated to any specific segment of the loan portfolio. This non-specific reserve is maintained for two
primary reasons: there exists an inherent subjectivity and imprecision to the analytical processes employed, and the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact
the portfolio in ways currently unforeseen. Moreover, management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: market risk factors, such as the effects of economic
variability on the entire



F-10



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##### Table of Contents

portfolio, and unique portfolio risk factors that are inherent characteristics of the Banks loan
portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Banks loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying
collateral. Unique portfolio risk factors may include industry or geographic concentrations, or trends that may exacerbate losses resulting from economic events which the Bank may not be able to fully diversify out of its portfolio.



Due to the inherent imprecise nature of the loan loss estimation process and
ever changing conditions, these risk attributes may not be adequately captured in data related to the formula-based loan loss components used to determine allocations in the Banks analysis of the adequacy of the allowance for loan losses.
Management, therefore, has established and maintains an unallocated allowance for loan losses. The amount of the unallocated allowance was $3.05 million at December 31, 2003 compared to $3.24 million at December 31, 2002. As a percentage of the
allowance for loan losses, the unallocated was 18.44% of the total allowance for loan losses at December 31, 2003 and 20.04% of the total allowance for loan losses at December 31, 2002.



Although management believes that it uses the best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary, and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes
it has established its existing allowance for loan losses consistent with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Banks loan portfolio, will not
request the Bank to increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate
or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Material increases in the allowance for loan losses will adversely affect the Banks financial condition and results
of operations.



A loan is considered to be impaired when it is
probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans, as defined, may be measured based on the present value of expected future cash flows, discounted at the
loans original effective interest rate, or on the loans observable market price or the fair value of the collateral if the loan is collateral-dependent. When the measurement of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through the allowance for loan losses.



Certain impaired loans are required to be measured based on the present value of expected future cash flows discounted at the loans original effective interest rate. As a practical expedient, impairment also may
be measured based on the loans observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded
through the allowance for loan losses. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions of
principal.



Investment and mortgage-backed securities



Investments are classified into one of three categories
and accounted for as follows:



|                                                                                                                                                 |  |                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Category                                                                                                                                         |  | Accounting Treatment                                                                                                                            
|Trading, representing debt, equity and mortgage-backed securities which are held for resale in the near term                                     |  | Reported at fair value, with unrealized gains and losses included in noninterest income                                                         
|                                                                                                                                                 | 
|Held to maturity, representing debt and mortgage-backed securities for which the Company has the positive intent and ability to hold to maturity |  | Reported at amortized cost                                                                                                                      
|                                                                                                                                                 | 
|Available for sale, representing debt, equity and mortgage-backed securities not classified as trading or held to maturity                       |  | Reported at fair value, with unrealized gains and losses, net of tax, reported as a separate component of accumulated other comprehensive income



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On a quarterly basis, the Company reviews investment and mortgage-backed securities with unrealized
depreciation for six consecutive months and other securities with unrealized depreciation on a judgmental basis to assess whether the decline in fair value is temporary or other than temporary. The Company judges whether the decline in value is from
company-specific events, industry developments, general economic conditions or other reasons. Once the estimated reasons for the decline are identified, further judgments are required as to whether those conditions are likely to reverse and, if so,
whether that reversal is likely to result in a recovery of the fair value of the investment in the near term. If it is judged not to be near term, a charge is taken which results in a new cost basis.



Realized gains and losses from the sale of investments are recorded on the
trade date by specific identification of the security sold.



All securities at December 31, 2003 and 2002 were classified as available for sale.



Income taxes



Items of
income and expense recognized in different time periods for financial reporting purposes and for purposes of computing income taxes currently payable (temporary differences) give rise to deferred income taxes which are reflected in the consolidated
financial statements. A deferred tax liability or asset is recognized for the estimated future tax effects, based upon enacted law, attributed to temporary differences. If applicable, the deferred tax asset is reduced by the amount of any tax
benefits that, based on available evidence, are not likely to be realized.



The Company has not provided for Connecticut state income taxes since December 31, 1998 since it has a passive investment company (PIC) as permitted by Connecticut law. The Company believes it complies with the state
PIC requirements and that no state taxes are due from December 31, 1998 through December 31, 2003.



Intangible assets



On August 31, 2001, the Bank acquired all of the outstanding common stock of First Federal Savings and Loan Association of East Hartford (First
Federal) (see Note 4). In connection with the acquisition, the Company recorded goodwill of $19.97 million, a core deposit intangible of $8.85 million and a noncompete intangible asset of $3.55 million. The core deposit intangible is being
amortized over eight years on a straight-line basis, and the noncompete agreement intangible is being amortized over the twelve-month term of the agreement on a straight-line basis. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangibles, goodwill related to the First Federal acquisition on August 31, 2001 was never amortized, and is subject to an annual fair-value-based impairment test. The Company completed its
initial assessment of the goodwill as of January 1, 2002, in accordance with the provisions of SFAS No. 142 and as of September 30, 2003 and 2002, the Company completed its annual assessments of goodwill. No impairment charges were recorded as a
result of the initial or annual assessments. The Company will perform its annual assessment of impairment on September 30 of each subsequent year or sooner if impairment indicators are present. During the third quarter of 2002, the Bank finalized
its allocation of the purchase price for the First Federal acquisition which resulted in a $482,000 reduction in goodwill and income taxes payable. The adjustment primarily represented a reduction in tax reserves as of the acquisition date. During
2003, there was no goodwill acquired, no impairment losses recognized and no goodwill included in the gain or loss on disposal of a reporting unit.



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During 2002, the Bank acquired the assets of On Line Services, a company that provided merchant
processing services mainly in western Massachusetts. The Bank recorded a $300,000 intangible asset related to the customer list acquired in connection with the purchase and is amortizing the asset on a straight-line basis over an eight-year period.



In 1997, the Bank acquired certain assets of a branch in West
Hartford, Connecticut. The premium of $250,000, for lease rights acquired, is being amortized over the remaining term of the lease (10 years) using the straight line method.



In 1995, the Bank acquired certain fixed assets and assumed certain deposit liabilities of two branches in Storrs and
Enfield, Connecticut. In consideration of the assumption of certain deposit liabilities, the Bank received cash and other assets. The resultant premium of approximately $4.06 million is being amortized over 10 years using the straight line method.



The following tables show the activity in intangible assets
for the periods indicated (in thousands):



|                                                                          |  |          |        |   |                       |   |        |                      |  |   |         |   |  |                |      |   |       |   |       |       |  |   |     |   |  |   |        |  
|------------------------------------------------------------------------- |  | -------- | ------ | - | --------------------- | - | ------ | -------------------- |  | - | ------- | - |  | -------------- | ---- | - | ----- | - | ----- | ----- |  | - | --- | - |  | - | ------ | -
|                                                                          |  | Goodwill |        |   | CoreDepositIntangible |   |        | NoncompeteAgreements |  |   | Pension |   |  | BranchPremiums |      |   | Other |   |       | Total | 
|Balance at December 31, 2001                                              |  | $        | 19,970 |   |                       | $ | 8,477  |                      |  | $ | 2,366   |   |  | $              | 549  |   |       | $ | 1,535 |       |  | $ |    |   |  | $ | 32,897 |  
|                                                                          |  |          |        |   |                       |   |       
|Finalization of allocation of purchase price of First Federal acquisition |  |          | (482   | ) |                       |   |       |                      |  |   |        |   |  |                |     |   |       |   |      |       |  |   |    |   |  |   | (482   | )
|                                                                          |  |          |        |   |                       |   |       
|Minimum pension liability (see Note 14)                                   |  |          |       |   |                       |   |       |                      |  |   |        |   |  |                | 299  |   |       |   |      |       |  |   |    |   |  |   | 299    |  
|                                                                          |  |          |        |   |                       |   |       
|On Line Services acquisition                                              |  |          |       |   |                       |   |       |                      |  |   |        |   |  |                |     |   |       |   |      |       |  |   | 300 |   |  |   | 300    |  
|                                                                          |  |          |        |   |                       |   |       
|Amortization                                                              |  |          |       |   |                       |   | (1,105 | )                    |  |   | (2,366  | ) |  |                |     |   |       |   | (432  | )     |  |   | (25 | ) |  |   | (3,928 | )
|                                                                          |  |          |        |   |                       |   |        |                      |  |   |         |   |  |                |      |   |       |   |       |       |  |   |     |   |  |   |        |  
|Balance at December 31, 2002                                              |  |          | 19,488 |   |                       |   | 7,372  |                      |  |   |        |   |  |                | 848  |   |       |   | 1,103 |       |  |   | 275 |   |  |   | 29,086 |  
|                                                                          |  |          |        |   |                       |   |       
|Amortization                                                              |  |          |       |   |                       |   | (1,106 | )                    |  |   |        |   |  |                |     |   |       |   | (432  | )     |  |   | (37 | ) |  |   | (1,575 | )
|                                                                          |  |          |        |   |                       |   |       
|Minimum pension liability (see Note 14)                                   |  |          |       |   |                       |   |       |                      |  |   |        |   |  |                | (263 | ) |       |   |      |       |  |   |    |   |  |   | (263   | )
|                                                                          |  |          |        |   |                       |   |        |                      |  |   |         |   |  |                |      |   |       |   |       |       |  |   |     |   |  |   |        |  
|Balance at December 31, 2003                                              |  | $        | 19,488 |   |                       | $ | 6,266  |                      |  | $ |        |   |  | $              | 585  |   |       | $ | 671   |       |  | $ | 238 |   |  | $ | 27,248 |  
|                                                                          |  |          |        |   |                       |   |        |                      |  |   |         |   |  |                |      |   |       |   |       |       |  |   |     |   |  |   |        |  



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##### Table of Contents

|                                                                            |  |                                             |        |                                             |   |       
|--------------------------------------------------------------------------- |  | ------------------------------------------- | ------ | ------------------------------------------- | - | ------
|                                                                            |  | December 31, 2003                           |        | December 31, 2002                          
|                                                                            |  | (in thousands)                             
|Intangible assets subject to amortization:                                  |  |                                             |        |                                             |   |       
|Core deposit intangible                                                     |  | $                                           | 6,266  |                                             | $ | 7,372 
|Branch premiums                                                             |  |                                             | 671    |                                             |   | 1,103 
|Other                                                                       |  |                                             | 238    |                                             |   | 275   
|                                                                            |  |                                             |        |                                             |   |       
|Total                                                                       |  |                                             | 7,175  |                                             |   | 8,750 
|                                                                            |  |                                             |        |                                             |   |       
|Intangible assets not subject to amortization:                              |  |                                             |        |                                             |   |       
|Goodwill                                                                    |  |                                             | 19,488 |                                             |   | 19,488
|Minimum pension liability                                                   |  |                                             | 585    |                                             |   | 848   
|                                                                            |  |                                             |        |                                             |   |       
|Total                                                                       |  |                                             | 20,073 |                                             |   | 20,336
|                                                                            |  |                                             |        |                                             |   |       
|Total intangible assets                                                     |  | $                                           | 27,248 |                                             | $ | 29,086
|                                                                            |  |                                             |        |                                             |   |       
|                                                                            |  |                                            
|                                                                            |  | December 31, 2003                           |        | December 31, 2002                          
|                                                                            |  | (in thousands)                              |        | (in thousands)                             
|Accumulated net amortization for intangible assets subject to amortization: |  |                                             |        |                                             |   |       
|Core deposit intangible                                                     |  | $                                           | 2,580  |                                             | $ | 1,474 
|Branch premiums                                                             |  |                                             | 3,642  |                                             |   | 3,210 
|Other                                                                       |  |                                             | 62     |                                             |   | 25    
|                                                                            |  |                                             |        |                                             |   |       
|Total                                                                       |  | $                                           | 6,284  |                                             | $ | 4,709 
|                                                                            |  |                                             |        |                                             |   |       
|                                                                            |  |                                            
|                                                                            |  | For the TwelveMonths EndedDecember 31, 2003 |        | For the TwelveMonths EndedDecember 31, 2002
|                                                                            |  | (in thousands)                             
|Amortization expense:                                                       |  |                                             |        |                                             |   |       
|Noncompete agreements                                                       |  | $                                           |       |                                             | $ | 2,366 
|Core deposit intangible                                                     |  |                                             | 1,106  |                                             |   | 1,105 
|Branch premiums                                                             |  |                                             | 432    |                                             |   | 432   
|Other                                                                       |  |                                             | 37     |                                             |   | 25    
|                                                                            |  |                                             |        |                                             |   |       
|Total                                                                       |  | $                                           | 1,575  |                                             | $ | 3,928 
|                                                                            |  |                                             |        |                                             |   |       



For the five years
ending December 31, the estimated aggregate annual amortization expense is as follows (in thousands):



|     |  |   |      
|---- |  | - | -----
|2004 |  | $ | 1,576
|2005 |  |   | 1,338
|2006 |  |   | 1,169
|2007 |  |   | 1,169
|2008 |  |   | 1,144



Pension and Other
Postretirement Employee Benefits



The determination of the
Companys obligation and expense for pension and other postretirement benefits is dependent on the Companys selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 14 to the
consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and healthcare costs. In accordance with accounting principles generally accepted
in the United States of America,



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##### Table of Contents

actual results that differ from the Companys assumptions are accumulated and amortized over future
periods and therefore, generally affect the Companys recognized expense and recorded obligation in such future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or
significant changes in assumptions may materially affect pension and other postretirement obligations and the Companys future expense.



Mortgage servicing rights



The cost of mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate adjusted for a prepayment default factor. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.



When participating interests in loans sold have an average contractual interest rate, adjusted for normal servicing fees, that differs from the agreed
yield to the purchaser, gains or losses are recognized equal to the present value of such differential over the estimated remaining life of such loans. The resulting excess servicing is amortized over the estimated life using a method approximating
the effective interest method.



Quoted market prices are not
available for the servicing receivables. Thus, the servicing receivables and the amortization thereon periodically are evaluated in relation to estimated future servicing revenues, taking into consideration changes in interest rates, current
prepayment rates and expected future cash flows. The Bank evaluates the carrying value of the servicing receivables by estimating the future servicing income of the servicing receivables based on managements best estimate of remaining loan
lives and discounted at the original discount rate.



Stock-based compensation



SFAS No. 123,
Accounting for Stock-Based Compensation encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Stock options issued under the Companys stock option plans generally have no intrinsic value at the grant date, and under APB Opinion No. 25 no compensation cost is recognized
for them.



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##### Table of Contents

The Company applies APB No. 25 and related interpretations in accounting for its stock compensation
plans. Had compensation cost been determined consistent with SFAS No. 123, the Companys pro forma net income and basic and diluted earnings per share would have been (in thousands, except per share data):



|                                                                                         |  |                    |        |                  |   |                  |  |   |       
|---------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- | - | ---------------- |  | - | ------
|                                                                                         |  | For the Year Ended
|                                                                                         |  | December 31,2003   |        | December 31,2002 |   | December 31,2001
|Net income:                                                                              |  |                    |        |                  |   |                  |  |   |       
|Net income as reported                                                                   |  | $                  | 27,430 |                  | $ | 25,949           |  | $ | 12,764
|Less effect of compensation expense determined under fair value based method, net of tax |  |                    | 1,844  |                  |   | 2,207            |  |   | 1,002 
|                                                                                         |  |                    |        |                  |   |                  |  |   |       
|Pro forma net income                                                                     |  | $                  | 25,586 |                  | $ | 23,742           |  | $ | 11,762
|                                                                                         |  |                    |        |                  |   |                  |  |   |       
|Earnings per share:                                                                      |  |                    |        |                  |   |                  |  |   |       
|As reported:                                                                             |  |                    |        |                  |   |                  |  |   |       
|Basic                                                                                    |  | $                  | 2.76   |                  | $ | 2.57             |  | $ | 1.26  
|Diluted                                                                                  |  | $                  | 2.54   |                  | $ | 2.40             |  | $ | 1.19  
|                                                                                         |  |                    |       
|Pro forma:                                                                               |  |                    |        |                  |   |                  |  |   |       
|Basic                                                                                    |  | $                  | 2.58   |                  | $ | 2.35             |  | $ | 1.16  
|Diluted                                                                                  |  | $                  | 2.37   |                  | $ | 2.20             |  | $ | 1.10  



Fair value was
estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:



|                        |  |                
|----------------------- |  | ---------------
|                        |  | Grant Date 2002
|Risk free interest rate |  | 3.95%          
|Expected life           |  | 10 years       
|Expected volatility     |  | 29%            
|Dividend yield          |  | 2.00%          
|Fair value              |  | $13.91 - $17.48



No stock options were
granted during 2003.



Related party transactions



Directors and officers of the Bank and their associates
have been customers of, and have had transactions with the Bank, and management expects that such persons will continue to have such transactions in the future. All deposit accounts, loans, services and commitments comprising such transactions were
made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers, and, in the
opinion of management, the transactions did not involve more than normal risks of collectability, favored treatment or terms, or present other unfavorable features (see Note 8 for further details regarding related party transactions).



Premises and equipment



Depreciation of premises and equipment and amortization of leasehold
improvements are computed using the straight line basis over the estimated useful lives of the assets (3-39 years) or in the case of leasehold improvements, the lease term if shorter.



Short-term borrowed funds



Short-term borrowings are comprised of uninsured accounts which are secured by investment securities.



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##### Table of Contents

Other real estate owned



Other real estate owned, comprised of real estate acquired through foreclosure or acceptance of a deed in lieu of
foreclosure, is carried at the lower of cost or fair market value, net of estimated costs to sell. Property is transferred to other real estate owned at the lower of cost or fair market value, net of estimated selling costs, with any excess over
cost charged to the allowance for loan losses. Any further decline in value based on subsequent changes to estimated fair market value or any loss upon ultimate disposition of the property is charged to expense.



Comprehensive (loss) income



A reconciliation of other comprehensive (loss) income for the years ended
December 31, 2003, 2002 and 2001 was as follows (in thousands):



|                                                                                                             |  |      |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                             |  | 2003 |         |   | 2002 |   |        | 2001 | 
|Unrealized gains on securities:                                                                              |  |      |         |   |      |   |        |      |  |   |        |  
|                                                                                                             |  |      |        
|Change in unrealized holding gains arising during the period, net of tax                                     |  | $    | (7,581  | ) |      | $ | 4,284  |      |  | $ | (1,870 | )
|                                                                                                             |  |      |        
|Reclassification adjustment for gains and other than temporary impairment included in net income, net of tax |  |      | (3,450  | ) |      |   | (787   | )    |  |   | 2,337  |  
|                                                                                                             |  |      |        
|Additional minimum pension liability, net of tax benefit                                                     |  |      | (1,652  | ) |      |   | (1,734 | )    |  |   |       |  
|                                                                                                             |  |      |         |   |      |   |        |      |  |   |        |  
|Other comprehensive (loss) income                                                                            |  | $    | (12,683 | ) |      | $ | 1,763  |      |  | $ | 467    |  
|                                                                                                             |  |      |         |   |      |   |        |      |  |   |        |  



Segment information



The Bank reports certain financial information about
significant revenue-producing segments of the business for which such information is available and utilized by the chief operating decision-maker. Specific information to be reported for individual operating segments includes a measure of profit and
loss, certain revenue and expense items and total assets. As a community-oriented financial institution, substantially all of the Banks operations involve the delivery of loan and deposit products to customers. Management makes operating
decisions and assesses performance based on an ongoing review of these community-banking operations, which constitutes the Banks only operating segment for financial reporting purposes.



Recent accounting pronouncements



In April 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The adoption of SFAS No. 145 on January 1, 2003 did not have any effect on the Companys
consolidated financial statements.



In June 2002, the FASB
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The adoption of SFAS No. 146 on January 1, 2003 did not have any effect on the Companys consolidated financial statements.



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##### Table of Contents

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. The standard amends and clarifies financial reporting for derivative instruments and for hedging activities accounted for under SFAS No. 133 and is effective for contracts entered into or modified, and for hedges
designated, after June 30, 2003. The standard does not have a material impact on the Companys consolidated financial statements since the Company did not have any derivative instruments during 2003.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity. The standard establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such
instruments be classified as liabilities. The standard is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Certain
provisions of SFAS No.150 related to the application of paragraphs 9 and 10 have been deferred indefinitely. Adoption of the standard did not have any impact on the Companys consolidated financial statements.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). The Interpretation requires certain guarantees to be recorded at fair value and also
requires a guarantor to make new disclosures, even when the likelihood of making payments under the guarantee is remote. In general, the interpretation applies to contracts or indemnification agreements that contingently require the guarantor to
make payments to the guaranteed party based on changes in an underlying contact that is related to an asset, liability, or an equity security of the guaranteed party. The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. Adoption of this statement on January 1, 2003 did not have any impact on the Companys consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which
requires an enterprise to assess if consolidation is appropriate based upon its variable economic interests in variable interest entities (VIEs). The Company does not invest in investment structures that require analysis under this
Interpretation and Interpretation No. 46 does not have any impact on the Companys consolidated financial statements.



In its November 2003 meeting, the Emerging Issues Task Force (EITF) reached a consensus relating to disclosure requirements under EITF No. 03-01 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF No. 03-01). This issue addresses how to determine the meaning of other-than-temporary in accounting for impairments and its application to certain
investments. The disclosure requirements are effective for the Companys December 31, 2003 year-end and have been incorporated herein (see Notes 6 and 7).



In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement
Benefits, that improves financial statement disclosures for defined benefit plans. The project was initiated by the FASB earlier this year in response to concerns raised by investors and other users of financial statements about the need for
greater transparency of pension information. The change replaces existing FASB disclosure requirements for pensions. The guidance is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003, and
have been incorporated herein (see Note 14).



|(2) | CONVERSION TO STOCK FORM OF OWNERSHIP
|--- | -------------------------------------



On August 30, 1999, the Boards of Directors of MHC and SBM adopted a Plan of Reorganization and, on October 6, 1999 and October 26, 1999, unanimously
amended the Plan of Reorganization (as amended, the Plan), pursuant to which, on March 1, 2000, MHC converted from the mutual holding company form to the stock holding company form of organization. All of the outstanding common stock of
SBM was sold to CTBS which issued and sold its stock pursuant to the Plan. The net proceeds of the offering were $90.50 million, after expenses of approximately $4.30 million. All of the stock of CTBS sold in the conversion was offered to eligible
account holders, employee benefit plans of the Bank and certain other eligible subscribers in subscription and direct community offerings pursuant to subscription rights in order of priority as set forth in the Plan. Additionally, the Bank
established an Employee Stock Ownership Plan (ESOP) for the benefit of eligible employees, which became effective upon the conversion (see Note 14).



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##### Table of Contents

The Plan provided for the establishment of the New Foundation. The New Foundation was funded with a
contribution of 832,000 common shares, or an amount equal to 8% of the common stock sold in the conversion.



Effective upon the conversion, the Company entered into employment and change in control agreements with certain executives and certain eligible employees
of the Company and the Bank. The agreements include, among other things, provisions for minimum annual compensation and certain lump-sum severance payments in the event of a change in control. The pending transaction with NHSB will be
considered a change of control and certain executives and eligible employees of the Company and the Bank will receive lump-sum severance payments totaling $14.23 million in connection with the above-mentioned agreements.



The Banks deposit accounts continue to be insured by the FDIC and were
not affected by the conversion. In accordance with the Plan, upon the completion of the conversion, the Bank established a special liquidation account for the benefit of eligible account holders and in an amount equal to the equity of
the Bank less any subordinated debt approved as bona fide capital of the Bank, as of the date of its latest statement of condition contained in the final prospectus used in connection with the conversion. The date was September 30, 1999, and the
amount established was $117.6 million. The liquidation account, which totaled $36.44 million and $42.58 million at December 31, 2003 and 2002, respectively, is reduced annually by an amount proportionate to the decrease in eligible deposit accounts.
Eligible account holders continuing to maintain deposit accounts at the Bank are entitled, on a complete liquidation of the Bank after the conversion, to an interest in the liquidation account prior to any payment to the stockholders of the Bank.
The Banks retained earnings are substantially restricted with respect to payment of dividends to stockholders due to the liquidation account. The liquidation account will terminate on the tenth anniversary of the consummation date of the
conversion.



The primary source of funds for the Company to pay
dividends is in the form of dividends received from SBM. Neither the Company nor SBM may declare or pay dividends on, or repurchase any of its shares of common stock, if the effect thereof would cause stockholders equity to be reduced below
either the balance required for the liquidation account or applicable regulatory capital maintenance requirements, or if such declaration, payment or repurchase would otherwise violate regulatory requirements.



|(3) | COMMON STOCK
|--- | ------------



On January 2, 2001, the Company awarded 449,280 restricted shares of common stock to various employees and non-employee directors of the Company in
accordance with the Connecticut Bancshares, Inc. 2000 Stock-Based Incentive Plan (the Stock Plan). These awards represent 100% of the restricted shares available in the Stock Plan. The shares were awarded with a vesting schedule of five
years, with 20% of the shares vesting each year to the recipient. The first 20% installment vested on January 2, 2002. The closing market price of the Companys common stock on the date of the awards was $18.25. The Company is amortizing the
unearned restricted stock compensation on a straight-line basis over the vesting period, except for the awards to certain officers as described below.



In conjunction with the restricted stock awards from the Stock Plan, the Company established a trust and hired an independent trustee (the
Trustee) to administer and maintain records of the restricted stock awards. From March 8, 2001 to March 30, 2001, the Trustee purchased in the open market 449,280 shares of common stock of the Company for the benefit of the restricted
stock award recipients. These shares were purchased for an aggregate of approximately $9,364,000 at prices ranging from $20.13 to $21.13 per share, resulting in an average cost of $20.84 per share. The Company advanced funds necessary to acquire
these shares in the open market by the trustee.



On August 27,
2001, the Company awarded 11,232 restricted shares of common stock outside of the Stock Plan to the former Chairman of the Board of Directors of the Company. The shares were awarded with a vesting schedule of five years, with 20% of the shares
vesting each year. The first 20% installment vested on January 2, 2002. The shares are not subject to any performance requirements, and the former Chairman does not provide any services to the Company. The closing market price of the Companys
common stock on the date of the grant was $24.45. The Company recorded a charge of $274,622 in the quarter ended September 30, 2001 as a director retirement expense.



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##### Table of Contents

In conjunction with the August 27, 2001 restricted stock award, the Company established a trust and hired
the Trustee to administer and maintain records of the restricted stock award. On September 18, 2001, the Trustee purchased in the open market 11,232 shares of common stock of the Company for the benefit of the restricted stock award recipient. These
shares were purchased for approximately $255,000, or $22.74 per share. The Company advanced funds necessary to acquire these shares in the open market by the trustee.



On September 24, 2001, the Company granted 28,080 non-qualified stock options outside of the Stock Plan to the former
Chairman of the Board of Directors of the Company. The shares were awarded with a vesting schedule of five years, with 20% of the shares vesting each year. The first 20% installment vested on December 15, 2001. The options are not subject to any
performance requirements, and the former Chairman does not provide any services to the Company. The closing market price of the Companys common stock on the date of the awards was $21.80. The exercise price of the stock options granted is
$17.625 per share. The Black-Scholes model resulted in a fair value of $9.48 per option as of the grant date. The Company recorded a charge of $266,283 in the quarter ended September 30, 2001 as a director retirement expense.



On September 24, 2001, the Company accelerated the vesting of 11,232 shares
of restricted stock awarded on January 2, 2001 and 28,080 non-qualified stock options awarded on December 15, 2000 to an existing director who retired from the Banks Board on December 31, 2001. The closing market price of the Companys
common stock on the date of the acceleration was $21.80. The exercise price for the stock options are $17.625 per share. As a result of the modification, the Company recorded charges of $214,110 for the restricted stock and $117,234 for the stock
options in the quarter ended September 30, 2001 as director retirement expenses.



On September 14, 2001, CTBS announced that its Board of Directors authorized the repurchase of up to 561,600 shares, or approximately 5%, of its outstanding shares of common stock. It was intended that such shares
would be repurchased in open market transactions, including unsolicited block purchases, over the next six to twelve months, subject to market conditions. CTBS repurchased 165,422 shares for approximately $5.52 million, or an average of $33.38 per
share during 2002 and repurchased 393,219 shares for approximately $16.22 million, or an average of $41.25 per share during 2003, for a total of 558,641 shares repurchased for $21.74 million, or an average of $38.92 per share.



On October 21, 2002, the Company awarded 168,750 restricted shares of common
stock to various employees and non-employee directors of the Company in accordance with the Connecticut Bancshares, Inc. 2002 Equity Compensation Plan (the Equity Compensation Plan). These awards represent 100% of the restricted shares
available in the Equity Compensation Plan. The shares were awarded with a vesting schedule of five years, with 20% of the shares vesting each year to the recipient. The first 20% installment vests on October 21, 2003. The closing market price of the
Companys common stock on the date of the awards was $37.50. The Company is amortizing the unearned restricted stock compensation on a straight-line basis over the vesting period except for the awards for certain officers as described below.



In conjunction with the restricted stock awards from the
Equity Compensation Plan, the Company established a trust and hired the Trustee to administer and maintain records of the restricted stock awards. From November 4, 2002 to November 22, 2002 the Trustee purchased in the open market 168,750 shares of
common stock of the Company for the benefit of the restricted stock award recipients. These shares were purchased for approximately $6,702,000 at prices ranging from $37.64 to $41.08 per share, resulting in an average cost of $39.72 per share. The
Company advanced funds necessary to acquire these shares in the open market by the trustee.



On November 25, 2003, in connection with the pending merger with NHSB, the Company accelerated the vesting of 55,561 shares of restricted stock that had been granted to 13 officers under the Stock Plan and the Equity
Compensation Plan. The Company recorded a charge of $1.42 million in connection with the acceleration which is included in merger expenses in the consolidated statement of operations for the year ended December 31, 2003.



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##### Table of Contents

|(4) | ACQUISITION OF FIRST FEDERAL
|--- | ----------------------------



On August 31, 2001, the Bank acquired all of the outstanding common stock of First Federal for cash of $106.26 million, excluding transaction costs. As of
December 31, 2003 and 2002, $639,000 and $847,000 had yet to be paid to First Federal shareholders and is included in other liabilities related to shares of First Federal which have not yet been tendered. The purchase was funded primarily with
proceeds from advances from the Federal Home Loan Bank prior to the acquisition. Immediately after the completion of the acquisition, First Federal was merged into the Bank.



The acquisition was accounted for as a purchase and the purchase price was allocated based on the estimated fair market
values of the assets and liabilities acquired. The final allocation of the purchase price was as follows:



|                                    |  |   |          |  
|----------------------------------- |  | - | -------- | -
|Cash and cash equivalents           |  | $ | 91,826   |  
|Investment securities               |  |   | 612,493  |  
|Loans                               |  |   | 282,481  |  
|FHLB stock                          |  |   | 19,283   |  
|Cash surrender value life insurance |  |   | 20,364   |  
|Goodwill                            |  |   | 19,488   |  
|Core deposit intangible             |  |   | 8,846    |  
|Noncompete agreement intangible     |  |   | 3,548    |  
|Other assets                        |  |   | 8,413    |  
|Deposits                            |  |   | (635,123 | )
|FHLB Advances                       |  |   | (316,547 | )
|Other liabilities                   |  |   | (8,808   | )
|                                    |  |   |          |  
|Total purchase price                |  | $ | 106,264  |  
|                                    |  |   |          |  



During 2002, the Bank
finalized its allocation of the purchase price for the First Federal acquisition which resulted in a reduction in goodwill of $482,000 from $19.97 million at December 31, 2001 to $19.49 million at December 31, 2002. The adjustment primarily
represented a reduction in tax reserves as of the acquisition date. The results of First Federal are included in the historical results of the Company subsequent to August 31, 2001. The pro forma information below is theoretical in nature and not
necessarily indicative of future consolidated results of operations of the Company or the consolidated results of operations which would have resulted had the Company acquired the stock of First Federal as of the beginning of the years presented.



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##### Table of Contents

The Companys unaudited pro forma condensed consolidated statement of operations for the year ended
December 31, 2001, assuming First Federal had been acquired as of January 1, 2001, are as follows (in thousands, except per share amounts):



|                                            |  |      |           
|------------------------------------------- |  | ---- | ----------
|                                            |  | 2001
|Interest income                             |  | $    | 161,004   
|Interest expense                            |  |      | 88,302    
|                                            |  |      |           
|Net interest income                         |  |      | 72,702    
|                                            | 
|Provision for loan losses                   |  |      | 2,000     
|Noninterest income                          |  |      | 14,444    
|Noninterest expense                         |  |      | 65,179    
|                                            |  |      |           
|Income before provision for income taxes    |  |      | 19,967    
|                                            | 
|Provision for income taxes                  |  |      | 6,799     
|                                            |  |      |           
|Net income                                  |  | $    | 13,168    
|                                            |  |      |           
|Earnings per share-diluted                  |  | $    | 1.23      
|                                            |  |      |           
|Weighted average shares outstanding-diluted |  |      | 10,695,366
|                                            |  |      |           



|(5) | REGULATORY MATTERS
|--- | ------------------



SBM is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys consolidated financial statements. The regulations require SBM to
meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. SBMs capital amounts and classification are also
subject to qualitative judgments by the banking regulators about components, risk weightings and other factors.



Quantitative measures established by regulations to ensure capital adequacy require SBM to maintain minimum capital ratios (set forth in the table below)
of Tier I leverage capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier I and total capital (as defined) to risk weighted assets (as defined). To be considered adequately capitalized (as defined)
under the regulatory framework from prompt corrective action, SBM must maintain minimum Tier I leverage, Tier I risk-based and total risk-based ratios as set forth in the table.



The Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDICIA) categorizes banks based on
capital levels and triggers certain mandatory and discretionary supervisory responses for institutions that fall below certain capital levels. A bank generally is categorized as well capitalized if it maintains a leverage capital ratio
of at least 5%, a Tier I risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%, and it is not subject to a written agreement, order or capital directive.



As of December 31, 2003 and 2002, management believes that SBM met all
capital adequacy requirements to which it is subject. As of the most recent notification from the Federal Deposit Insurance Corporation, SBM was categorized as well capitalized under the regulatory framework for Prompt Corrective Action, and the
highest capital category, as defined in the FDICIA regulations. Management believes that there are no events or conditions which have occurred subsequent to the notification that would change its category.



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##### Table of Contents

Actual capital amounts and ratios for SBM were (dollars in thousands):



|                                         |  |                  |         |       |                                                    |   |        |          |         |  |      |        |  |       |         |  |      |  
|---------------------------------------- |  | ---------------- | ------- | ----- | -------------------------------------------------- | - | ------ | -------- | ------- |  | ---- | ------ |  | ----- | ------- |  | ---- | -
|                                         |  | Capital Adequacy |         |       | To Be WellCapitalized UnderPrompt CorrectiveAction |  
|                                         |  | Required         |         |       | Actual                                             |   |        | Required |        
|                                         |  | Amount           |         | Ratio |                                                    |   | Amount |          | Ratio   |  |      | Amount |  | Ratio |        
|As of December 31, 2003:                 |  |                  |         |       |                                                    |   |        |          |         |  |      |        |  |       |         |  |      |  
|                                         |  |                  |         |       |                                                    |  
|Tier 1 Capital (to Total Average Assets) |  | $                | 100,678 |       | 4.0                                                | % |        | $        | 180,845 |  | 7.2  | %      |  | $     | 125,848 |  | 5.0  | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                  | 65,595  |       | 4.0                                                | % |        |          | 180,845 |  | 11.0 | %      |  |       | 98,393  |  | 6.0  | %
|Total Capital (to Risk Weighted Assets)  |  |                  | 131,191 |       | 8.0                                                | % |        |          | 197,388 |  | 12.0 | %      |  |       | 163,989 |  | 10.0 | %
|                                         |  |                  |         |       |                                                    |  
|As of December 31, 2002:                 |  |                  |         |       |                                                    |   |        |          |         |  |      |        |  |       |         |  |      |  
|                                         |  |                  |         |       |                                                    |  
|Tier 1 Capital (to Total Average Assets) |  | $                | 99,395  |       | 4.0                                                | % |        | $        | 188,040 |  | 7.6  | %      |  | $     | 124,244 |  | 5.0  | %
|Tier 1 Capital (to Risk Weighted Assets) |  |                  | 63,919  |       | 4.0                                                | % |        |          | 188,040 |  | 11.8 | %      |  |       | 95,878  |  | 6.0  | %
|Total Capital (to Risk Weighted Assets)  |  |                  | 127,838 |       | 8.0                                                | % |        |          | 204,212 |  | 12.8 | %      |  |       | 159,797 |  | 10.0 | %



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##### Table of Contents

|(6) | INVESTMENT SECURITIES
|--- | ---------------------



As of December 31, 2003 and 2002, the amortized cost and market value of available for sale investment securities were (in thousands):



|                                       |  |                |         |                        |   |                         |  |   |              |   |  |   |        
|-------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | - | ------------ | - |  | - | -------
|                                       |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Market Value
|                                       |  |                |        
|                                       |  |                |        
|December 31, 2003                      |  |                |         |                        |   |                         |  |   |              |   |  |   |        
|                                       |  |                |         |                       
|U.S. Government and agency obligations |  | $              | 149,252 |                        | $ | 4,010                   |  | $ | (57          | ) |  | $ | 153,205
|Municipal obligations                  |  |                | 22,650  |                        |   | 1,269                   |  |   |             |   |  |   | 23,919 
|Corporate securities                   |  |                | 47,009  |                        |   | 1,772                   |  |   |             |   |  |   | 48,781 
|Mortgage-backed securities             |  |                | 226,126 |                        |   | 2,462                   |  |   | (204         | ) |  |   | 228,384
|Collateralized mortgage obligations    |  |                | 198,441 |                        |   | 1,721                   |  |   | (2,567       | ) |  |   | 197,595
|Asset-backed securities                |  |                | 65,041  |                        |   | 1,106                   |  |   | (105         | ) |  |   | 66,042 
|Common stock and mutual funds          |  |                | 5,411   |                        |   |                        |  |   | (26          | ) |  |   | 5,385  
|Other equity securities                |  |                | 1,258   |                        |   |                        |  |   |             |   |  |   | 1,258  
|                                       |  |                |         |                        |   |                         |  |   |              |   |  |   |        
|Total                                  |  | $              | 715,188 |                        | $ | 12,340                  |  | $ | (2,959       | ) |  | $ | 724,569
|                                       |  |                |         |                        |   |                         |  |   |              |   |  |   |        
|                                       |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Market Value
|                                       |  |                |        
|                                       |  |                |        
|December 31, 2002                      |  |                |         |                        |   |                         |  |   |              |   |  |   |        
|                                       |  |                |         |                       
|U.S. Government and agency obligations |  | $              | 156,466 |                        | $ | 8,114                   |  | $ |             |   |  | $ | 164,580
|Municipal obligations                  |  |                | 23,357  |                        |   | 621                     |  |   |             |   |  |   | 23,978 
|Corporate securities                   |  |                | 63,209  |                        |   | 2,934                   |  |   |             |   |  |   | 66,143 
|Mortgage-backed securities             |  |                | 205,569 |                        |   | 4,840                   |  |   |             |   |  |   | 210,409
|Collateralized mortgage obligations    |  |                | 247,236 |                        |   | 3,364                   |  |   | (172         | ) |  |   | 250,428
|Asset-backed securities                |  |                | 91,370  |                        |   | 2,318                   |  |   | (12          | ) |  |   | 93,676 
|Common stock and mutual funds          |  |                | 26,676  |                        |   | 4,803                   |  |   | (459         | ) |  |   | 31,020 
|Other equity securities                |  |                | 1,388   |                        |   |                        |  |   |             |   |  |   | 1,388  
|                                       |  |                |         |                        |   |                         |  |   |              |   |  |   |        
|Total                                  |  | $              | 815,271 |                        | $ | 26,994                  |  | $ | (643         | ) |  | $ | 841,622
|                                       |  |                |         |                        |   |                         |  |   |              |   |  |   |        



At December 31, 2003,
all of the securities with gross unrealized losses have been in a continuous unrealized loss position for less than 12 months.



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##### Table of Contents

At December 31, 2003, the Company did not own any investment or mortgage-backed securities of a single
issuer, other than securities guaranteed by the U.S. Government or its agencies, which had an aggregate book value in excess of 10% of the Companys capital at that date.



The Company had no securities classified as held to maturity or trading at December 31, 2003 and 2002, respectively. The
Company does not currently use or maintain a trading account.



As of December 31, 2003, the amortized cost and market values of debt securities, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.



|                                       |  |                         |         |             |   |        
|-------------------------------------- |  | ----------------------- | ------- | ----------- | - | -------
|                                       |  | As of December 31, 2003
|                                       |  | AmortizedCost           |         | MarketValue
|Due in one year or less                |  | $                       | 46,568  |             | $ | 47,454 
|Due after one year through five years  |  |                         | 279,487 |             |   | 283,952
|Due after five years through ten years |  |                         | 68,633  |             |   | 71,380 
|Due after ten years                    |  |                         | 313,831 |             |   | 315,140
|                                       |  |                         |         |             |   |        
|Total                                  |  | $                       | 708,519 |             | $ | 717,926
|                                       |  |                         |         |             |   |        



For the years ended
December 31, 2003 and 2002, proceeds from the sales of available for sale securities were approximately $96.45 million and $179.72 million, respectively. Gross gains of approximately $8.03 million and $3.95 million, respectively, and gross losses of
approximately $2.36 million and $1.25 million respectively, were realized on those sales for the years ended December 31, 2003 and 2002.



As of December 31, 2003 and 2002, investment securities with a book value of approximately $190.72 million and $200.19 million were pledged as security
for short-term borrowed funds, U.S. Treasury tax and loan payments and municipal deposits held by the Bank, respectively.



|(7) | OTHER THAN TEMPORARY IMPAIRMENT OF SECURITIES
|--- | ---------------------------------------------



On a quarterly basis, the Company reviews available for sale investment securities with unrealized depreciation for six consecutive months and other
securities with unrealized depreciation on a judgmental basis to assess whether the decline in fair value is temporary or other than temporary. The Company judges whether the decline in value is from company-specific events, industry developments,
general economic conditions or other reasons. Once the estimated reasons for the decline are identified, further judgments are required as to whether those conditions are likely to reverse and, if so, whether that reversal is likely to result in a
recovery of the fair value of the investment in the near term. Unrealized losses which are not expected to reverse in the near term are charged to operations. In accordance with this policy, during the years ended December 31, 2003 and 2002 the
Company recorded other than temporary impairment charges of $359,000 and $1.49 million, respectively. The 2003 charge is for one equity security and one investment in a limited partnership. The charge for the equity investment was computed using the
closing price of the security as of the date of impairment. The equity security impaired is publicly traded. The impairment charge for the limited partnership was equal to the difference between the carrying value of the investment and the fair
value of the Companys share of the partners capital as calculated by the partnership at the date of impairment. The limited partnership is not publicly traded. The 2002 charge was computed using the closing prices of the securities as of
the date of impairment. The securities impaired during 2002 were publicly traded. There were no material unrecognized impairment losses as of December 31, 2003 and 2002.



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##### Table of Contents

|(8) | LOANS
|--- | -----



As of December 31, 2003 and 2002, the Banks residential mortgage loan portfolio was collateralized by one- to four-family real estate, located
primarily in central and eastern Connecticut. The commercial mortgage loan portfolio was collateralized primarily by multi-family, commercial and manufacturing properties located in Connecticut and surrounding states. A variety of different assets,
including business assets, rental income properties, and manufacturing and commercial properties, collateralized a majority of the commercial loans. The composition of the Banks loan portfolio as of December 31, 2003 and 2002 is as follows (in
thousands):



|                                          |  |      |           |   |      |   |           |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                          |  | 2003 |           |   | 2002 |  
|One- to four-family residential mortgages |  | $    | 981,023   |   |      | $ | 907,188   |  
|Construction mortgages                    |  |      | 73,657    |   |      |   | 64,182    |  
|Commercial and multifamily mortgages      |  |      | 304,632   |   |      |   | 275,818   |  
|Commercial business loans                 |  |      | 187,905   |   |      |   | 180,612   |  
|Installment loans                         |  |      | 140,054   |   |      |   | 128,939   |  
|                                          |  |      |           |   |      |   |           |  
|Total loans                               |  |      | 1,687,271 |   |      |   | 1,556,739 |  
|Less - Allowance for loan losses          |  |      | (16,543   | ) |      |   | (16,172   | )
|                                          |  |      |           |   |      |   |           |  
|Total loans, net                          |  | $    | 1,670,728 |   |      | $ | 1,540,567 |  
|                                          |  |      |           |   |      |   |           |  



The Bank services
certain loans that it has sold without recourse to third parties. The aggregate amount of loans serviced for others approximated $78.62 million and $142.62 million as of December 31, 2003 and 2002, respectively. Fee income from servicing loans for
others was approximately $321,000, $477,000 and $555,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Mortgage servicing rights of approximately $827,000 and $1.44 million were capitalized as of December 31, 2003 and 2002,
respectively. Amortization of mortgage servicing rights was approximately $757,000, $611,000 and $881,000 for the years ended December 31, 2003, 2002 and 2001, respectively. During 2001, in response to the falling interest rate environment, the Bank
reduced its estimate of remaining loan lives on serviced loans. This reduction in estimate resulted in a charge of approximately $370,000 to earnings in the fourth quarter of 2001, and is included in the amount above.



As of December 31, 2003 and 2002, loans to related parties totaled
approximately $7.64 million and $7.82 million, respectively. For the year ended December 31, 2003, new loans of approximately $2.57 million were granted to these parties and principal payments of approximately $2.75 million were received. Related
parties include directors and officers of the Company, their respective affiliates in which they have a controlling interest and their immediate family members. For the years ended December 31, 2003 and 2002, all loans to related parties were
performing.



F-26



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##### Table of Contents

Allowance for loan losses



For the years ended December 31, 2003, 2002 and 2001, an analysis of the allowance for loan losses is as follows (in
thousands):



|                             |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                             |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Balance, beginning of year   |  | $    | 16,172 |   |      | $ | 15,228 |      |  | $ | 11,694 |  
|Acquisition of First Federal |  |      |       |   |      |   |       |      |  |   | 2,174  |  
|Provision for loan losses    |  |      | 1,275  |   |      |   | 1,500  |      |  |   | 2,000  |  
|Loans charged off            |  |      | (1,235 | ) |      |   | (1,781 | )    |  |   | (1,131 | )
|Recoveries                   |  |      | 331    |   |      |   | 1,225  |      |  |   | 491    |  
|                             |  |      |        |   |      |   |        |      |  |   |        |  
|Balance, end of year         |  | $    | 16,543 |   |      | $ | 16,172 |      |  | $ | 15,228 |  
|                             |  |      |        |   |      |   |        |      |  |   |        |  



|(9) | NONPERFORMING ASSETS
|--- | --------------------



Nonperforming assets include loans for which the Bank does not accrue interest (nonaccrual loans), loans 90 days past due and still accruing
interest and other real estate owned. Nonaccrual loans and loans 90 days past due and still accruing interest represent the Banks impaired loans. For the years ended December 31, 2003, 2002 and 2001, the average recorded investment in impaired
loans was approximately $2.66 million, $8.03 million and $6.88 million, respectively. As of December 31, 2003 and 2002, nonperforming assets were as follows (in thousands):



|                                                |  |              |       |      |   |      
|----------------------------------------------- |  | ------------ | ----- | ---- | - | -----
|                                                |  | December 31,
|                                                |  | 2003         |       | 2002
|Loans past due 90 days and still accruing:      |  |              |       |      |   |      
|One- to four family mortgages                   |  | $            | 291   |      | $ | 527  
|Commercial and multifamily mortgages            |  |              | 778   |      |   | 395  
|Commercial business                             |  |              | 42    |      |   | 313  
|Installment                                     |  |              | 174   |      |   | 108  
|                                                |  |              |       |      |   |      
|Total loans past due 90 days and still accruing |  |              | 1,285 |      |   | 1,343
|                                                |  |              |       |      |   |      
|Loans on nonaccrual:                            |  |              |       |      |   |      
|One- to four family mortgages                   |  |              | 113   |      |   | 306  
|Commercial and multifamily mortgages            |  |              |      |      |   | 393  
|Commercial business                             |  |              | 4,973 |      |   | 852  
|Installment                                     |  |              | 62    |      |   |     
|                                                |  |              |       |      |   |      
|Total loans on nonaccrual                       |  |              | 5,148 |      |   | 1,551
|                                                |  |              |       |      |   |      
|Total nonperforming loans                       |  |              | 6,433 |      |   | 2,894
|Other real estate owned                         |  |              | 112   |      |   |     
|                                                |  |              |       |      |   |      
|Total nonperforming assets                      |  | $            | 6,545 |      | $ | 2,894
|                                                |  |              |       |      |   |      



In January 2004, two
commercial real estate loans totaling $1.6 million were placed on nonaccrual status. One loan for $807,000 was reported as 60 days past due at December 31, 2003. The second loan for $778,000 was reported as 90 days past due and still accruing at
December 31, 2003 and therefore is included in December 31, 2003 nonperforming loans.



For the years ended December 31, 2003, 2002 and 2001, had interest income been accrued on nonaccrual loans at contractual rates, interest income would have increased by approximately $104,000, $136,000 and $446,000,
respectively. For the years ended December 31, 2003, 2002 and 2001, interest income on impaired loans of approximately $56,000, $111,000 and $79,000, respectively, were recognized. As of December 31, 2003, 2002 and 2001, no significant additional
funds were committed to customers whose loans were nonperforming.



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##### Table of Contents

As of December 31, 2003 and 2002, the Bank had impaired loans of approximately $6.43 million and $2.89
million, respectively, for which an additional allowance for loan losses of $395,000 and $80,000, respectively, were required. For the years ended December 31, 2003, 2002 and 2001, approximately $1.24 million, $1.78 million and $1.13 million,
respectively, was charged off on nonaccrual loans.



|(10) | DEPOSITS
|---- | --------



As of December 31, 2003 and 2002, deposits consisted of the following (in thousands):

|                                                       |  |      |           |      |   |          
|------------------------------------------------------ |  | ---- | --------- | ---- | - | ---------
|                                                       |  | 2003 |           | 2002
|Certificates of deposit:                               |  |      |           |      |   |          
|Original maturity of less than one year                |  | $    | 126,820   |      | $ | 127,703  
|Original maturity of one year or more                  |  |      | 376,073   |      |   | 433,956  
|Time certificates in denominations of $100,000 or more |  |      | 80,398    |      |   | 81,542   
|                                                       |  |      |           |      |   |          
|Total certificates of deposit                          |  |      | 583,291   |      |   | 643,201  
|                                                       |  |      |           |      |   |          
|Savings accounts                                       |  |      | 400,123   |      |   | 383,085  
|Money market accounts                                  |  |      | 232,639   |      |   | 209,301  
|NOW accounts                                           |  |      | 237,919   |      |   | 230,293  
|Demand deposits                                        |  |      | 152,320   |      |   | 130,099  
|                                                       |  |      |           |      |   |          
|Total deposits                                         |  | $    | 1,606,292 |      | $ | 1,595,979
|                                                       |  |      |           |      |   |          



At December 31, 2003,
the scheduled maturities of time deposits were as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2004       |  | $ | 373,767
|2005       |  |   | 72,260 
|2006       |  |   | 43,207 
|2007       |  |   | 57,745 
|2008       |  |   | 36,308 
|Thereafter |  |   | 4      
|           |  |   |        
|Total      |  | $ | 583,291
|           |  |   |        



For the years ended
December 31, 2003, 2002 and 2001, interest expense on time deposits in denominations greater than $100,000 was approximately $2.40 million, $3.25 million and $3.68 million, respectively.



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##### Table of Contents

|(11) | ADVANCES FROM FEDERAL HOME LOAN BANK AND SHORT-TERM BORROWED FUNDS
|---- | ------------------------------------------------------------------



As of December 31, 2003 and 2002, SBM had the following borrowings from Federal Home Loan Bank of Boston (FHLB) (dollars in thousands):



|             |  |                    |  |      |        |      |   |       
|------------ |  | ------------------ |  | ---- | ------ | ---- | - | ------
|InterestRate |  | Maturity Date      |  | 2003 |        | 2002
|1.56%        |  | January 3, 2003    |  | $    |       |      | $ | 2,000 
|5.84%        |  | April 22, 2003     |  |      |       |      |   | 20,000
|6.84%        |  | August 11, 2003    |  |      |       |      |   | 10,000
|6.45%        |  | August 15, 2003    |  |      |       |      |   | 25,000
|5.44%        |  | September 16, 2003 |  |      |       |      |   | 10,000
|6.68%        |  | September 29, 2003 |  |      |       |      |   | 10,000
|2.63%        |  | October 1, 2003    |  |      |       |      |   | 6,000 
|2.06%        |  | January 29, 2004   |  |      | 7,000  |      |   | 7,000 
|1.32%        |  | February 10, 2004  |  |      | 10,000 |      |   |      
|1.41%        |  | March 1, 2004      |  |      | 20,000 |      |   |      
|3.60%        |  | April 12, 2004     |  |      | 10,000 |      |   | 10,000
|1.40%        |  | May 7, 2004        |  |      | 10,000 |      |   | 10,000
|6.48%        |  | May 17, 2004       |  |      | 10,000 |      |   |      
|1.49%        |  | August 9, 2004     |  |      | 20,000 |      |   |      
|6.66%        |  | October 4, 2004    |  |      | 25,000 |      |   | 25,000
|3.97%        |  | October 25, 2004   |  |      | 15,000 |      |   | 15,000
|2.38%        |  | October 29, 2004   |  |      | 5,000  |      |   | 5,000 
|6.65%        |  | November 8, 2004   |  |      | 20,000 |      |   | 20,000
|2.14%        |  | November 15, 2004  |  |      | 10,000 |      |   | 10,000
|3.97%        |  | November 22, 2004  |  |      | 15,000 |      |   | 15,000
|6.40%        |  | November 30, 2004  |  |      | 5,000  |      |   | 5,000 
|4.19%        |  | December 7, 2004   |  |      | 5,000  |      |   | 5,000 
|4.52%        |  | December 21, 2004  |  |      | 5,000  |      |   | 5,000 
|3.97%        |  | January 18, 2005   |  |      | 10,000 |      |   | 10,000
|6.05%        |  | May 2, 2005        |  |      | 30,000 |      |   | 30,000
|2.50%        |  | May 4, 2005        |  |      | 10,000 |      |   | 10,000
|4.02%        |  | July 1, 2005       |  |      | 7,000  |      |   | 7,000 
|2.75%        |  | September 20, 2005 |  |      | 10,000 |      |   | 10,000
|2.92%        |  | October 31, 2005   |  |      | 5,000  |      |   | 5,000 
|2.68%        |  | November 14, 2005  |  |      | 10,000 |      |   | 10,000
|2.43%        |  | November 21, 2005  |  |      | 25,000 |      |   |      
|6.52%        |  | November 30, 2005  |  |      | 4,000  |      |   | 4,000 
|6.39%        |  | December 6, 2005   |  |      | 5,000  |      |   | 5,000 
|2.46%        |  | February 13, 2006  |  |      | 10,000 |      |   |      
|2.93%        |  | March 20, 2006     |  |      | 10,000 |      |   | 10,000
|6.53%        |  | * October 2, 2006  |  |      | 20,000 |      |   | 20,000
|3.06%        |  | November 13, 2006  |  |      | 7,000  |      |   | 7,000 
|4.91%        |  | December 7, 2006   |  |      | 5,000  |      |   | 5,000 
|5.28%        |  | December 21, 2006  |  |      | 5,000  |      |   | 5,000 
|4.84%        |  | January 16, 2007   |  |      | 5,000  |      |   | 5,000 
|4.66%        |  | July 2, 2007       |  |      | 7,000  |      |   | 7,000 
|3.38%        |  | November 13, 2007  |  |      | 6,000  |      |   | 6,000 



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##### Table of Contents

|                         |  |                     |         |      |        |         |  |       
|------------------------ |  | ------------------- | ------- | ---- | ------ | ------- |  | ------
|InterestRate             |  | Maturity Date       |         | 2003 |        | 2002   
|5.88%                    |  | July 9, 2008        |         |      | 10,000 |         |  | 10,000
|5.63%                    |  | September 16, 2008  |         |      | 13,056 |         |  | 13,056
|4.99%                    |  | October 30, 2008    |         |      | 20,000 |         |  | 20,000
|5.49%                    |  | December 8, 2008    |         |      | 5,000  |         |  | 5,000 
|5.90%                    |  | December 22, 2008   |         |      | 5,000  |         |  | 5,000 
|5.50%                    |  | January 15, 2009    |         |      | 5,000  |         |  | 5,000 
|4.34%                    |  | August 14, 2009     |         |      | 10,000 |         |  | 10,000
|7.10%                    |  | September 10, 2009  |         |      | 4,679  |         |  | 4,833 
|5.91%                    |  | * January 13, 2010  |         |      | 20,000 |         |  | 20,000
|4.85%                    |  | February 8, 2010    |         |      | 10,000 |         |  | 10,000
|6.56%                    |  | * April 12, 2010    |         |      | 20,000 |         |  | 20,000
|6.58%                    |  | * February 27, 2012 |         |      | 20,000 |         |  | 20,000
|5.39%                    |  | * December 16, 2013 |         |      | 15,000 |         |  | 15,000
|                         |  | Unamortized premium |         |      | 2,600  |         |  | 5,001 
|                         |  |                     |         |      |        |         |  |       
|Total advances from FHLB |  | $                   | 543,335 |      | $      | 533,890
|                         |  |                     |         |      |        |         |  |       

---

|* | These advances have call dates ranging from January 2003 through December 2008.
|- | -------------------------------------------------------------------------------



These advances are contractual agreements with the FHLB. If the Bank were to opt to prepay any of the advances prior to
their maturity date, the Bank may incur a prepayment penalty.



In accordance with generally accepted accounting principles, the Bank recorded the FHLB advances acquired from First Federal at the market value on the date of acquisition. The Bank recorded an adjustment of $9.47 million to record the
advances at fair value. The Bank is amortizing this premium on a level-yield basis over the remaining lives of the advances.



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##### Table of Contents

The following table presents certain information regarding the Banks FHLB advances and short-term
borrowed funds at the dates or for the periods indicated.



|                                                               |  |                                       |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                               |  | At or For the Year Ended December 31, |        
|                                                               |  | 2003                                  |         |   | 2002 |   |         | 2001 | 
|                                                               |  | (dollars in thousands)                |        
|Average balance outstanding:                                   |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  | $                                     | 555,223 |   |      | $ | 477,042 |      |  | $ | 235,440 |  
|Short-term borrowed funds                                      |  |                                       | 119,385 |   |      |   | 116,318 |      |  |   | 110,823 |  
|Maximum amount outstanding at any month-end during the period: |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 571,825 |   |      |   | 562,901 |      |  |   | 457,033 |  
|Short-term borrowed funds                                      |  |                                       | 125,357 |   |      |   | 124,315 |      |  |   | 125,866 |  
|Balance outstanding at end of period:                          |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 540,735 |   |      |   | 528,889 |      |  |   | 457,033 |  
|Short-term borrowed funds                                      |  |                                       | 123,049 |   |      |   | 121,052 |      |  |   | 117,180 |  
|Weighted average interest rate during the period:              |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 4.35    | % |      |   | 4.92    | %    |  |   | 5.20    | %
|Short-term borrowed funds                                      |  |                                       | 0.66    |   |      |   | 1.41    |      |  |   | 2.60    |  
|Weighted average interest rate at end of period:               |  |                                       |         |   |      |   |         |      |  |   |         |  
|Federal Home Loan Bank advances                                |  |                                       | 4.26    |   |      |   | 4.65    |      |  |   | 5.01    |  
|Short-term borrowed funds                                      |  |                                       | 0.64    |   |      |   | 0.90    |      |  |   | 1.77    |  



SBMs FHLB stock
collateralizes the FHLB advances. In addition, mortgage loans and otherwise unencumbered investment securities qualified as collateral available to the FHLB were pledged to secure these advances, unused credit lines and letters of credit issued by
the FHLB. As of December 31, 2003, SBM had the ability to borrow a total of approximately $736.45 million from FHLB.



SBM maintains a line of credit of $34.00 million with the FHLB which accrues interest at variable rates determined by the FHLB on a daily basis. Amounts
drawn against the line of credit are due within one day of withdrawal; however, such amounts are automatically renewed provided that SBM has sufficient cash balances deposited with the FHLB. Borrowings under the line of credit are secured by U.S.
Government treasury and/or agency bonds. There were no outstanding borrowings on the FHLB line of credit at December 31, 2003 or 2002.



Short-term borrowed funds primarily represents commercial transactional repurchase accounts (business checking accounts, which are not Federal Deposit
Insurance Corporation insured).



|(12) | DIRECTOR AND EMPLOYEE RETIREMENT EXPENSES
|---- | -----------------------------------------



During the third quarter of 2001, the Company recorded $1.42 million of director and employee retirement expenses which represents $872,000 of director
(see Note 3) and $547,000 of employee retirement expenses. In September 2001, the Bank offered an early retirement package to eligible employees. Ten Bank employees opted for the package. The employee retirement expense includes a pension charge of
$264,000 and compensated absences of $283,000.



|(13) | RELOCATION AND BRANCH CLOSING COSTS
|---- | -----------------------------------



During the third quarter of 2001, the Bank recorded $872,000 of relocation and branch closing costs. In conjunction with the acquisition of First Federal,
the Bank closed five of its existing branch offices which were located near First Federal branch locations. The Bank expensed $431,000 in future lease payments, $172,000 in furniture and



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---

##### Table of Contents

equipment and $164,000 in leasehold improvements relating to these branch location closings. In addition,
the Bank relocated certain back office operational departments from a building that was leased to a building that the Bank owns. The Bank expensed $105,000 in the third quarter of 2001 related to leasehold improvements which will no longer be used.



|(14) | BENEFIT PLANS
|---- | -------------



The Bank has a non-contributory defined benefit pension plan (the Pension Plan) covering substantially all employees. The benefits are based
on years of service and average compensation, as defined in the Pension Plan.



The following table sets forth the change in benefit obligation, change in plan assets and the funded status of the Banks pension plan for the years ended December 31, 2003 and 2002. The table includes the
effect from the First Federal acquisition. The table also provides a reconciliation of the Pension Plans funded status and the amounts recognized in the Banks consolidated statements of condition (in thousands):



|                                              |  |      |         |   |      |   |         |  
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                              |  | 2003 |         |   | 2002 |  
|Change in benefit obligation:                 |  |      |         |   |      |   |         |  
|Benefit obligation, beginning of year         |  | $    | 44,969  |   |      | $ | 37,285  |  
|Service cost                                  |  |      | 2,460   |   |      |   | 1,807   |  
|Interest cost                                 |  |      | 2,865   |   |      |   | 2,582   |  
|Actuarial loss                                |  |      | 5,742   |   |      |   | 4,990   |  
|Benefits paid                                 |  |      | (1,907  | ) |      |   | (1,695  | )
|                                              |  |      |         |   |      |   |         |  
|Benefit obligation, end of year               |  | $    | 54,129  |   |      | $ | 44,969  |  
|                                              |  |      |         |   |      |   |         |  
|                                              |  |     
|                                              |  | 2003 |         |   | 2002 |  
|Change in plan assets:                        |  |      |         |   |      |   |         |  
|Fair value of plan assets, beginning of year  |  | $    | 25,965  |   |      | $ | 30,367  |  
|Actual return on plan assets                  |  |      | 4,428   |   |      |   | (2,707  | )
|Contributions to plan                         |  |      | 1,412   |   |      |   |        |  
|Benefits paid                                 |  |      | (1,907  | ) |      |   | (1,695  | )
|                                              |  |      |         |   |      |   |         |  
|Fair value of plan assets, end of year        |  | $    | 29,898  |   |      | $ | 25,965  |  
|                                              |  |      |         |   |      |   |         |  
|                                              |  |     
|                                              |  | 2003 |         |   | 2002 |  
|Funded status                                 |  | $    | (24,231 | ) |      | $ | (19,005 | )
|Employer contributions after measurement date |  |      | 2,159   |   |      |   | 1,412   |  
|Minimum pension liability                     |  |      | (3,714  | ) |      |   | (2,592  | )
|Unrecognized transition asset                 |  |      |        |   |      |   | (40     | )
|Unrecognized prior service cost               |  |      | 221     |   |      |   | 240     |  
|Unrecognized net actuarial loss               |  |      | 14,250  |   |      |   | 10,503  |  
|                                              |  |      |         |   |      |   |         |  
|Accrued benefit cost                          |  | $    | (11,315 | ) |      | $ | (9,482  | )
|                                              |  |      |         |   |      |   |         |  



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##### Table of Contents

Amounts recognized in the statements of condition consist of at December 31 (in thousands):



|                                       |  |      |         |   |      |   |        |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                       |  | 2003 |         |   | 2002 |  
|Accrued benefit cost                   |  | $    | (7,600  | ) |      | $ | (6,890 | )
|Intangible assets                      |  |      | (221    | ) |      |   | (240   | )
|Accumulated other comprehensive income |  |      | (3,494  | ) |      |   | (2,352 | )
|                                       |  |      |         |   |      |   |        |  
|Net amount recognized                  |  | $    | (11,315 | ) |      | $ | (9,482 | )
|                                       |  |      |         |   |      |   |        |  



The accumulated
benefit obligation for the Pension Plan was $43.37 million and $36.86 million at December 31, 2003 and 2002, respectively.



Information concerning the accumulated benefit obligation of the Pension Plan is as follows at December 31 (in thousands):



|                               |  |      |        |      |   |       
|------------------------------ |  | ---- | ------ | ---- | - | ------
|                               |  | 2003 |        | 2002
|Projected benefit obligation   |  | $    | 54,129 |      | $ | 44,969
|Accumulated benefit obligation |  |      | 43,371 |      |   | 36,858
|Fair value of plan assets      |  |      | 29,898 |      |   | 25,965



The components of net
periodic pension cost for the years ended December 31, 2003, 2002 and 2001 were as follows (in thousands):



|                                                   |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Service cost                                       |  | $    | 2,461  |   |      | $ | 1,807  |      |  | $ | 1,348  |  
|Interest cost                                      |  |      | 2,865  |   |      |   | 2,582  |      |  |   | 1,438  |  
|Expected return on plan assets                     |  |      | (4,429 | ) |      |   | 2,707  |      |  |   | (1,621 | )
|Recognized net gain                                |  |      |       |   |      |   |       |      |  |   | (223   | )
|Amortization and deferral                          |  |      | 1,972  |   |      |   | (5,429 | )    |  |   | (69    | )
|Additional amount due to settlement or curtailment |  |      |       |   |      |   |       |      |  |   | 773    |  
|                                                   |  |      |        |   |      |   |        |      |  |   |        |  
|Net periodic pension cost                          |  | $    | 2,869  |   |      | $ | 1,667  |      |  | $ | 1,646  |  
|                                                   |  |      |        |   |      |   |        |      |  |   |        |  



Other information
concerning the additional minimum liability is as follows at December 31:



|                                                                     |  |      |       |      |   |      
|-------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                                     |  | 2003 |       | 2002
|Increase in minimum liability included in other comprehensive income |  | $    | 1,122 |      | $ | 2,592



Significant actuarial
assumptions used in determining the actuarial present value of the projected benefit obligation and the net periodic pension cost were as follows:



|                                        |  |      |   |  |      |   |  |      |  
|--------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                        |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Discount rate                           |  | 6.00 | % |  | 6.50 | % |  | 7.00 | %
|Rate of increase in compensation levels |  | 4.50 | % |  | 4.50 | % |  | 4.50 | %
|Long-term rate of return on assets      |  | 8.50 | % |  | 8.50 | % |  | 8.50 | %



F-33



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##### Table of Contents

The Companys pension plan weighted average asset allocations at December 31, 2003 and 2002 by asset
category are as follows:



|                  |  |                             |   |  |      |  
|----------------- |  | --------------------------- | - |  | ---- | -
|                  |  | Plan Assets at December 31, |  
|                  |  | 2003                        |   |  | 2002 |  
|Equity securities |  | 56                          | % |  | 60   | %
|Debt securities   |  | 39                          | % |  | 35   | %
|Other             |  | 5                           | % |  | 5    | %
|                  |  |                             |   |  |      |  
|Total             |  | 100                         | % |  | 100  | %
|                  |  |                             |   |  |      |  



In developing our
expected long-term rate of return assumption, we evaluated input from our actuaries, including their review of asset class return expectations as well as long-term inflation assumptions. We anticipate that our investment managers will continue to
generate long-term returns of at least 8.50%. We regularly review our asset allocation and periodically rebalance our investments when considered appropriate. We continue to believe that 8.50% is a reasonable long-term rate of return on our Pension
Plan assets. Our pension plan assets had an investment return of 17.22% for the year ended December 31, 2003. We will continue to evaluate our actuarial assumptions, including our expected rate of return, at least annually, and will adjust as
necessary.



The Bank has entered into supplemental retirement
agreements with certain officers and outside directors. The following table sets forth the change in benefit obligation and the funded status of the obligations for the years ended December 31, 2003 and 2002. The table also provides a reconciliation
of the obligations funded status and the amounts recognized in the Banks consolidated statements of condition (in thousands):



|                                       |  |      |         |   |      |   |        |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                       |  | 2003 |         |   | 2002 |  
|Change in benefit obligation:          |  |      |         |   |      |   |        |  
|Benefit obligation, beginning of year  |  | $    | 6,793   |   |      | $ | 4,480  |  
|Service cost                           |  |      | 417     |   |      |   | 370    |  
|Interest cost                          |  |      | 437     |   |      |   | 414    |  
|Actuarial loss                         |  |      | 2,715   |   |      |   | 2,935  |  
|Benefits paid                          |  |      | (55     | ) |      |   |       |  
|Plan amendments                        |  |      | 142     |   |      |   | (1,406 | )
|                                       |  |      |         |   |      |   |        |  
|Benefit obligation, end of year        |  |      | 10,449  |   |      |   | 6,793  |  
|Fair value of plan assets, end of year |  |      |        |   |      |   |       |  
|                                       |  |      |         |   |      |   |        |  
|Funded status                          |  |      | (10,449 | ) |      |   | (6,793 | )
|Unrecognized prior service cost        |  |      | (775    | ) |      |   | (920   | )
|Unrecognized net actuarial loss        |  |      | 6,851   |   |      |   | 4,730  |  
|Minimum pension liability              |  |      | (2,396  | ) |      |   | (1,380 | )
|                                       |  |      |         |   |      |   |        |  
|Accrued benefit cost                   |  | $    | (6,769  | ) |      | $ | (4,363 | )
|                                       |  |      |         |   |      |   |        |  



F-34



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##### Table of Contents

Amounts recognized in the statements of condition consist of at December 31 (in thousands):



|                                       |  |      |        |   |      |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                       |  | 2003 |        |   | 2002 |  
|Accrued benefit cost                   |  | $    | (4,373 | ) |      | $ | (2,982 | )
|Intangible assets                      |  |      | (364   | ) |      |   | (608   | )
|Accumulated other comprehensive income |  |      | (2,032 | ) |      |   | (773   | )
|                                       |  |      |        |   |      |   |        |  
|Net amount recognized                  |  | $    | (6,769 | ) |      | $ | (4,363 | )
|                                       |  |      |        |   |      |   |        |  



The accumulated
benefit obligation for the supplemental retirement agreements with certain officers and outside directors was $6.03 million and $3.72 million at December 31, 2003 and 2002, respectively.



The components of net periodic pension cost for the years ended December 31, 2003, 2002 and 2001 were as follows (in
thousands):



|                             |  |      |       |      |   |       |  |   |    
|---------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ---
|                             |  | 2003 |       | 2002 |   | 2001 
|Service cost                 |  | $    | 417   |      | $ | 370   |  | $ | 230
|Interest cost                |  |      | 437   |      |   | 414   |  |   | 270
|Actual return on plan assets |  |      |      |      |   | 55    |  |   |   
|Amortization and deferral    |  |      | 591   |      |   | 222   |  |   | 399
|                             |  |      |       |      |   |       |  |   |    
|Net periodic pension cost    |  | $    | 1,445 |      | $ | 1,061 |  | $ | 899
|                             |  |      |       |      |   |       |  |   |    



Significant actuarial
assumptions used in determining the actuarial present value of the projected benefit obligation and the net periodic pension cost were as follows:



|                                        |  |               |   |  |               |   |  |               |  
|--------------------------------------- |  | ------------- | - |  | ------------- | - |  | ------------- | -
|                                        |  | 2003          |   |  | 2002          |   |  | 2001          |  
|Discount rate                           |  | 6.00          | % |  | 6.50          | % |  | 7.00          | %
|Rate of increase in compensation levels |  | 4.00 and 4.50 | % |  | 4.00 and 4.50 | % |  | 4.00 and 4.50 | %



In addition to
providing pension benefits, the Bank provides certain health care benefits for retired employees (the Health Care Plan). Only employees retiring before January 1, 1989 are eligible for these benefits, provided they attain age 55 while
working for the Bank. In addition, all employees who have attained age 55 and have ten years of vested service are covered under the Health Care Plan until age 65. Effective January 1, 1993, the Bank began to accrue for the estimated costs of these
benefits through charges to expense during the years that the employees earn these benefits. The following table reconciles the Health Care Plans funded status to the accrued obligation as of December 31, 2003 and 2002 (in thousands):



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2003 |        |   | 2002 |  
|Accumulated postretirement benefit obligation: |  |      |        |   |      |   |        |  
|Retirees                                       |  | $    | (3,104 | ) |      | $ | (3,236 | )
|Other fully eligible participants              |  |      | (373   | ) |      |   | (243   | )
|Other active participants                      |  |      | (1,301 | ) |      |   | (928   | )
|                                               |  |      |        |   |      |   |        |  
|                                               |  |      | (4,778 | ) |      |   | (4,407 | )
|Unrecognized actuarial (loss) gain             |  |      | 433    |   |      |   | 115    |  
|Unrecognized prior service cost                |  |      | 453    |   |      |   | 508    |  
|                                               |  |      |        |   |      |   |        |  
|Accrued benefit cost                           |  | $    | (3,892 | ) |      | $ | (3,784 | )
|                                               |  |      |        |   |      |   |        |  



F-35



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##### Table of Contents

For the years ended December 31, 2003, 2002 and 2001, net postretirement health care cost included the
following components (in thousands):



|                                |  |      |     |      |   |      |  |   |     |  
|------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | --- | -
|                                |  | 2003 |     | 2002 |   | 2001 | 
|Service cost                    |  | $    | 162 |      | $ | 132  |  | $ | 78  |  
|Interest cost                   |  |      | 276 |      |   | 274  |  |   | 86  |  
|Amortization and deferral       |  |      | 55  |      |   | 55   |  |   | (5  | )
|                                |  |      |     |      |   |      |  |   |     |  
|Net postretirement benefit cost |  | $    | 493 |      | $ | 461  |  | $ | 159 |  
|                                |  |      |     |      |   |      |  |   |     |  



Significant actuarial
assumptions used in determining the actuarial present value of the projected benefit obligation and the net postretirement health care cost are as follows:



|                                                                                  |  |      |   |  |      |   |  |      |  
|--------------------------------------------------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                                                  |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Discount rate                                                                     |  | 6.00 | % |  | 6.50 | % |  | 7.00 | %
|Health care cost trend rate assumed for next year                                 |  | 7.00 | % |  | 7.00 | % |  | 7.00 | %
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  | 7.00 | % |  | 7.00 | % |  | 7.00 | %
|Year that rate reaches the ultimate trend rate                                    |  | 2003 |   |  | 2002 |   |  | 2001 |  



Assumed health care
cost trends have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:



|                                             |  |                              |     |                              |   |      |  
|-------------------------------------------- |  | ---------------------------- | --- | ---------------------------- | - | ---- | -
|                                             |  | One PercentagePoint Increase |     | One PercentagePoint Decrease |  
|Effect on total of service and interest cost |  | $                            | 53  |                              | $ | (45  | )
|Effect on postretirement benefit obligation  |  |                              | 439 |                              |   | (381 | )



In connection with the
Plan of Conversion, the Bank established an ESOP which acquired 8%, or 898,560, of the shares which were issued in the conversion at a price of $10.36 per share. The purchase of the shares by the ESOP was funded by a loan of $9.31 million from the
Company. The loan is to be repaid in fifteen equal annual installments of principal and interest of $1.12 million. Interest on the loan is fixed at 8.75%. ESOP expense for the years ended December 31, 2003 and 2002 was $2.61 million and $1.87
million, respectively. ESOP expense is based on the market value of the Companys common stock at the time shares are allocated to employees, which may differ from the $10.36 cost of those shares.



|(15) | INCOME TAXES
|---- | ------------



For the years ended December 31, 2003, 2002 and 2001, the provision for (benefit from) income taxes consisted of the following (in thousands):



|                                         |  |      |        |   |      |   |        |  |   |        |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------ | -
|                                         |  | 2003 |        |   | 2002 |   | 2001   | 
|Current federal tax provision            |  | $    | 17,313 |   |      | $ | 12,412 |  | $ | 9,665  |  
|Deferred federal tax provision (benefit) |  |      | (2,845 | ) |      |   | 214    |  |   | (3,290 | )
|                                         |  |      |        |   |      |   |        |  |   |        |  
|Total provision for income taxes         |  | $    | 14,468 |   |      | $ | 12,626 |  | $ | 6,375  |  
|                                         |  |      |        |   |      |   |        |  |   |        |  



F-36



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##### Table of Contents

As of December 31, 2003 and 2002, the components of the net deferred income tax asset included in current
and deferred income taxes in the accompanying consolidated statements of condition were (in thousands):



|                                                 |  |      |        |   |      |   |         |  
|------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------- | -
|                                                 |  | 2003 |        |   | 2002 |  
|Deferred tax assets:                             |  |      |        |   |      |   |         |  
|Allowance for loan losses                        |  | $    | 5,789  |   |      | $ | 5,600   |  
|Benefits                                         |  |      | 8,667  |   |      |   | 6,983   |  
|Branch premiums                                  |  |      | 514    |   |      |   | 375     |  
|Payments and interest on nonaccrual loans        |  |      | 155    |   |      |   | 324     |  
|Investment securities impairment                 |  |      | 1,782  |   |      |   | 1,613   |  
|Capital loss                                     |  |      |       |   |      |   | 231     |  
|Compensation                                     |  |      | 774    |   |      |   | 312     |  
|Other                                            |  |      | 333    |   |      |   | 792     |  
|                                                 |  |      |        |   |      |   |         |  
|                                                 |  |      | 18,014 |   |      |   | 16,230  |  
|                                                 |  |      |        |   |      |   |         |  
|Deferred tax liabilities:                        |  |      |        |   |      |   |         |  
|Unrealized gain on available for sale securities |  |      | (3,284 | ) |      |   | (9,223  | )
|Core deposit intangible and noncompete agreement |  |      | (2,429 | ) |      |   | (2,523  | )
|Premium/discount on First Federal                |  |      | (871   | ) |      |   | (2,451  | )
|Accretion                                        |  |      | (889   | ) |      |   | (1,050  | )
|Premises and equipment                           |  |      | (726   | ) |      |   | (474    | )
|Mortgage servicing rights                        |  |      | (289   | ) |      |   | (505    | )
|Other                                            |  |      | (94    | ) |      |   | (104    | )
|                                                 |  |      |        |   |      |   |         |  
|                                                 |  |      | (8,582 | ) |      |   | (16,330 | )
|                                                 |  |      |        |   |      |   |         |  
|Net deferred tax (liability) asset               |  | $    | 9,432  |   |      | $ | (100    | )
|                                                 |  |      |        |   |      |   |         |  



Effective for taxable
years commencing after December 31, 1998, financial service companies are permitted to establish in the State of Connecticut a passive investment company (PIC) to hold and manage loans secured by real property. In 1999, SBM established a
PIC, as a wholly-owned subsidiary, and transferred a portion of its real estate mortgage portfolio from SBM to the PIC. Income earned by the PIC is exempt from Connecticut corporation business tax and dividends received by the financial service
company from the PIC were not taxable through December 31, 2003.



F-37



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##### Table of Contents

For the years ended December 31, 2003, 2002 and 2001, the provision for income taxes differed from the
amount computed by applying the statutory federal income tax rate (35%) to income before provision for income taxes for the following reasons (in thousands):



|                                           |  |      |        |   |      |   |        |      |  |   |       |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                           |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Tax provision at statutory rate            |  | $    | 14,664 |   |      | $ | 13,501 |      |  | $ | 6,699 |  
|Increase (decrease) in tax resulting from: |  |      |        |   |      |   |        |      |  |   |       |  
|Cash surrender value of life insurance     |  |      | (821   | ) |      |   | (842   | )    |  |   | (361  | )
|Tax exempt income                          |  |      | (376   | ) |      |   | (373   | )    |  |   | (90   | )
|ESOP                                       |  |      | 697    |   |      |   | 436    |      |  |   | 262   |  
|Dividends received deduction               |  |      | (74    | ) |      |   | (147   | )    |  |   | (196  | )
|Other, net                                 |  |      | 378    |   |      |   | 51     |      |  |   | 61    |  
|                                           |  |      |        |   |      |   |        |      |  |   |       |  
|                                           |  | $    | 14,468 |   |      | $ | 12,626 |      |  | $ | 6,375 |  
|                                           |  |      |        |   |      |   |        |      |  |   |       |  



As of December 31,
2003, the Banks allowance for loan losses for federal income tax return purposes was approximately $19.0 million. If any portion of this allowance is used for purposes other than to absorb loan losses and write-downs of other real estate
owned, such amounts will become subject to income tax at the then current tax rate. Management does not anticipate that capital will be used in such a way so as to require the payment of taxes on taxable income resulting from the recapture of the
tax allowance. As a result, in accordance with SFAS No. 109, no provision for such tax has been recorded in the accompanying consolidated financial statements.



|(16) | STOCK-BASED COMPENSATION
|---- | ------------------------



The Company established the Connecticut Bancshares, Inc. 2000 Stock-Based Incentive Plan and the 2002 Equity Compensation Plan (jointly, the Stock
Incentive Plans) to attract and retain qualified personnel in key positions and to provide employees with an interest in the Company as an incentive to contribute to its success. The Stock Incentive Plans authorize the granting of options to
purchase common stock of the Company and awards of restricted shares of common stock. All employees and non-employee directors of the Company are eligible to receive awards under the Stock Incentive Plans. The Stock Incentive Plans are administered
by a committee (the Committee). Subject to certain regulatory conditions, the Committee has the authority to determine the amount of options granted to any individual and the dates on which each option will become exercisable. The
exercise price of all options is determined by the Committee but is at least 100% of the fair market value of the underlying common stock at the time of the grant. In addition, subject to certain regulatory conditions, the Committee has the
authority to determine the amounts of restricted stock awards granted to any individual and the dates on which restricted stock awards granted will vest or any other conditions which must be satisfied before vesting.



F-38



---

##### Table of Contents

A summary of the status of the Companys Stock Incentive Plans as it relates to stock options as of
December 31, 2003, 2002 and 2001 and changes during the years ended on those dates is presented below:



|                                         |  |                 |   |  |                                |      
|---------------------------------------- |  | --------------- | - |  | ------------------------------ | -----
|                                         |  | Number ofShares |   |  | Weighted AverageExercise Price
|Options outstanding at December 31, 2000 |  | 1,017,776       |   |  | $                              | 17.63
|Granted                                  |  | 35,580          |   |  |                                | 18.51
|Forfeited                                |  | (7,800          | ) |  |                                | 17.63
|Exercised                                |  | (3,608          | ) |  |                                | 17.63
|                                         |  |                 |   |  |                                |      
|Options outstanding at December 31, 2001 |  | 1,041,948       |   |  |                                | 17.66
|Granted                                  |  | 729,000         |   |  |                                | 37.20
|Forfeited                                |  | (1,800          | ) |  |                                | 17.63
|Exercised                                |  | (35,360         | ) |  |                                | 17.63
|                                         |  |                 |   |  |                                |      
|Options outstanding at December 31, 2002 |  | 1,733,788       |   |  | $                              | 25.87
|Exercised                                |  | (422,606        | ) |  |                                | 19.14
|                                         |  |                 |   |  |                                |      
|Options outstanding at December 31, 2003 |  | 1,311,182       |   |  | $                              | 28.04
|                                         |  |                 |   |  |                                |      



At December 31, 2003
and 2002, options were exercisable on 299,524 and 365,658 shares of stock with a weighted average exercise price of $25.06 and $17.64, respectively.



The following table summarizes by plan the options available for grant at December 31, 2003:



|                            |  |                                |   |  |                              |  
|--------------------------- |  | ------------------------------ | - |  | ---------------------------- | -
|                            |  | 2000 Stock-BasedIncentive Plan |   |  | 2002 EquityCompensation Plan |  
|Options available for grant |  | 1,123,200                      |   |  | 675,000                      |  
|Options granted             |  | (1,123,200                     | ) |  | (621,476                     | )
|                            |  |                                |   |  |                              |  
|Options remaining for grant |  |                               |   |  | 53,524                       |  
|                            |  |                                |   |  |                              |  



The following table
summarizes information related to outstanding options as of December 31, 2003:



|               |  |                    |  |                                                   |  |                                |      
|-------------- |  | ------------------ |  | ------------------------------------------------- |  | ------------------------------ | -----
|Exercise Price |  | Number Outstanding |  | Weighted AverageRemaining ContractualLife (Years) |  | Weighted AverageExercise Price
|$17.63         |  | 611,382            |  | 7.00                                              |  | $                              | 17.63
|$21.80         |  | 4,500              |  | 7.73                                              |  |                                | 21.80
|$27.74         |  | 18,000             |  | 8.14                                              |  |                                | 27.74
|$37.50         |  | 677,300            |  | 8.80                                              |  |                                | 37.50
|               |  |                    |  |                                                   |  |                                |      
|Total          |  | 1,311,182          |  | 7.95                                              |  | $                              | 28.04
|               |  |                    |  |                                                   |  |                                |      



F-39



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##### Table of Contents

|(17) | SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
|---- | -----------------------------------------------------------------



The following table presents quarterly consolidated financial information for the Company for 2003 and 2002 (in thousands):



|                                                    |  |               |        |   |              |   |        |               |  |   |              |   |  |               |        |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | ------------- |  | - | ------------ | - |  | ------------- | ------ | - | ------------ | - | ------ | ------------- |  | - | ------------ | - |  | - | ------ | - |  | - | ------ | -
|                                                    |  | 2003          |        |   | 2002         |  
|                                                    |  | FourthQuarter |        |   | ThirdQuarter |   |        | SecondQuarter |  |   | FirstQuarter |   |  | FourthQuarter |        |   | ThirdQuarter |   |        | SecondQuarter |  |   | FirstQuarter |  
|Interest and dividend income                        |  | $             | 31,015 |   |              | $ | 31,508 |               |  | $ | 32,667       |   |  | $             | 33,620 |   |              | $ | 35,004 |               |  | $ | 35,108       |   |  | $ | 35,420 |   |  | $ | 35,033 |  
|Interest expense                                    |  |               | 11,446 |   |              |   | 11,762 |               |  |   | 12,146       |   |  |               | 12,754 |   |              |   | 13,888 |               |  |   | 14,750       |   |  |   | 15,159 |   |  |   | 16,110 |  
|                                                    |  |               |        |   |              |   |        |               |  |   |              |   |  |               |        |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|Net interest income                                 |  |               | 19,569 |   |              |   | 19,746 |               |  |   | 20,521       |   |  |               | 20,866 |   |              |   | 21,116 |               |  |   | 20,358       |   |  |   | 20,261 |   |  |   | 18,923 |  
|Provision for loan losses                           |  |               | 300    |   |              |   | 300    |               |  |   | 300          |   |  |               | 375    |   |              |   | 375    |               |  |   | 375          |   |  |   | 375    |   |  |   | 375    |  
|                                                    |  |               |        |   |              |   |        |               |  |   |              |   |  |               |        |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|Net interest income after provision for loan losses |  |               | 19,269 |   |              |   | 19,446 |               |  |   | 20,221       |   |  |               | 20,491 |   |              |   | 20,741 |               |  |   | 19,983       |   |  |   | 19,886 |   |  |   | 18,548 |  
|Noninterest income (1)                              |  |               | 5,327  |   |              |   | 9,218  |               |  |   | 5,749        |   |  |               | 5,009  |   |              |   | 5,052  |               |  |   | 4,755        |   |  |   | 4,498  |   |  |   | 4,720  |  
|Noninterest expense                                 |  |               | 15,231 |   |              |   | 14,626 |               |  |   | 14,600       |   |  |               | 14,263 |   |              |   | 14,563 |               |  |   | 14,679       |   |  |   | 15,338 |   |  |   | 15,028 |  
|Merger expenses (2)                                 |  |               | 2,389  |   |              |   | 1,235  |               |  |   | 209          |   |  |               | 279    |   |              |   |       |               |  |   |             |   |  |   |       |   |  |   |       |  
|                                                    |  |               |        |   |              |   |        |               |  |   |              |   |  |               |        |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|Income before provision for income taxes            |  |               | 6,976  |   |              |   | 12,803 |               |  |   | 11,161       |   |  |               | 10,958 |   |              |   | 11,230 |               |  |   | 10,059       |   |  |   | 9,046  |   |  |   | 8,240  |  
|Provision for income taxes                          |  |               | (2,880 | ) |              |   | (4,289 | )             |  |   | (3,683       | ) |  |               | (3,616 | ) |              |   | (3,706 | )             |  |   | (3,320       | ) |  |   | (2,931 | ) |  |   | (2,670 | )
|                                                    |  |               |        |   |              |   |        |               |  |   |              |   |  |               |        |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|Net income                                          |  | $             | 4,096  |   |              | $ | 8,514  |               |  | $ | 7,478        |   |  | $             | 7,342  |   |              | $ | 7,524  |               |  | $ | 6,739        |   |  | $ | 6,115  |   |  | $ | 5,570  |  
|                                                    |  |               |        |   |              |   |        |               |  |   |              |   |  |               |        |   |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  

---

|(1) | Third quarter 2003 includes net gains on securities of $3.95 million.
|--- | ---------------------------------------------------------------------

|(2) | In connection with the pending merger with NHSB, the Company agreed to take action to accelerate the vesting of all unvested restricted stock awards that have been granted to
certain officers. The vesting acceleration occurred on November 25, 2003 and the Company recorded a charge of $1.42 million, based on the fair value of the common stock which is included in merger expenses in the accompanying consolidated statement
of operations for the year ended December 31, 2003. During the year ended December 31, 2003 the Company incurred an additional $2.69 million of other merger expenses, primarily professional fees.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(18) | COMMITMENTS AND CONTINGENCIES
|---- | -----------------------------



Cash and due from banks withdrawal and usage reserve requirements



The Bank is required to maintain reserves against its transaction accounts and non-personal time deposits. As of December
31, 2003 and 2002, cash and due from banks withdrawal/usage reserve requirements of approximately $5.97 million and $7.47 million, respectively, existed as a result of Federal Reserve requirements to maintain certain average balances.



Lease commitments



The Bank leases certain of its premises and equipment under lease agreements
which expire at various dates through July 2015. The Bank has the option to renew certain of the leases at fair rental values. Rental expense was approximately $1.37 million, $1.37 million and $1.26 million for the years ended December 31, 2003,
2002 and 2001, respectively.



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As of December 31, 2003, minimum rental commitments under noncancellable operating leases were (in
thousands):



|           |  |            |      
|---------- |  | ---------- | -----
|Year       |  | Commitment
|2004       |  |            | 1,247
|2005       |  |            | 1,017
|2006       |  |            | 798  
|2007       |  |            | 566  
|2008       |  |            | 384  
|Thereafter |  |            | 991  
|           |  |            |      
|Total      |  | $          | 5,003
|           |  |            |      



Loan commitments
and letters of credit



The Bank is a party to financial
instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments included commitments to extend credit of approximately $242.30 million and $270.53 million as of
December 31, 2003 and 2002, respectively, and standby letters of credit of approximately $7.07 million and $4.78 million as of December 31, 2003 and 2002, respectively.



These consolidated financial instruments involve, to varying degrees, elements of credit and interest rate risk. The
Banks exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does
for existing loans. Management believes that the Bank controls the credit risk of these financial instruments through credit approvals, lending limits, monitoring procedures and the receipt of collateral when deemed necessary.



Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments could expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements. Bank management evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon
extension of credit, is based on managements credit evaluation of the customer. Collateral held varies but may include income producing commercial properties, accounts receivable, inventory and property, plant and equipment.



Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in existing loan facilities to customers. The Bank holds real estate and marketable securities
as collateral supporting those commitments for which collateral is deemed necessary.



|(19) | LEGAL CONTINGENCIES
|---- | -------------------



Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on
the Companys consolidated financial statements.



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##### Table of Contents

|(20) | PARENT COMPANY FINANCIAL INFORMATION
|---- | ------------------------------------



Summarized information relative to the statements of condition as of December 31, 2003 and 2002 and statements of operations and cash flows for the years
ended December 31, 2003, 2002 and 2001 of Connecticut Bancshares, Inc. (parent company only) are presented as follows (in thousands):



|                                           |  |      |         |      |   |        
|------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                           |  | 2003 |         | 2002
|Statements of Condition                    |  |      |         |      |   |        
|Assets:                                    |  |      |         |      |   |        
|Cash and cash equivalents                  |  | $    | 11,043  |      | $ | 7,360  
|Investment in SBM                          |  |      | 210,811 |      |   | 232,339
|Securities available for sale              |  |      | 28,296  |      |   | 7,609  
|Current and deferred income taxes          |  |      | 13,774  |      |   | 4,303  
|Accrued interest receivable                |  |      |        |      |   | 7      
|Other assets                               |  |      | 35      |      |   | 21     
|                                           |  |      |         |      |   |        
|Total assets                               |  | $    | 263,959 |      | $ | 251,639
|                                           |  |      |         |      |   |        
|Liabilities and stockholders equity:      |  |      |         |      |   |        
|Other liabilities                          |  | $    | 126     |      | $ | 79     
|                                           |  |      |         |      |   |        
|Total liabilities                          |  |      | 126     |      |   | 79     
|                                           |  |      |         |      |   |        
|Stockholders equity                       |  |      | 263,833 |      |   | 251,560
|                                           |  |      |         |      |   |        
|Total liabilities and stockholders equity |  | $    | 263,959 |      | $ | 251,639
|                                           |  |      |         |      |   |        



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|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                  |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Statements of Operations                                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|Interest and dividend income:                                                                     |  |      |        |   |      |   |        |      |  |   |        |  
|Interest and dividend income on investment securities                                             |  | $    | 469    |   |      | $ | 1,289  |      |  | $ | 2,246  |  
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Noninterest income:                                                                               |  |      |        |   |      |   |        |      |  |   |        |  
|Gains on sales of securities, net                                                                 |  |      | 249    |   |      |   | 726    |      |  |   | 520    |  
|Other than temporary impairment of securities                                                     |  |      | (201   | ) |      |   |       |      |  |   | (160   | )
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Total noninterest income                                                                          |  |      | 48     |   |      |   | 726    |      |  |   | 360    |  
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Noninterest expense:                                                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Salaries and employee benefits                                                                    |  |      | 5,449  |   |      |   | 3,736  |      |  |   | 3,511  |  
|Fees and services                                                                                 |  |      | 603    |   |      |   | 759    |      |  |   | 992    |  
|Merger-related expenses                                                                           |  |      | 4,111  |   |      |   |       |      |  |   |       |  
|Other operating expenses                                                                          |  |      | 146    |   |      |   | 156    |      |  |   | 179    |  
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Total noninterest expense                                                                         |  |      | 10,309 |   |      |   | 4,651  |      |  |   | 4,682  |  
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Loss before (benefit from) provision for income taxes and equity in undistributed earnings of SBM |  |      | (9,792 | ) |      |   | (2,636 | )    |  |   | (2,076 | )
|(Benefit from) provision for income taxes                                                         |  |      | (3,282 | ) |      |   | (1,285 | )    |  |   | 82     |  
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Loss before equity in undistributed earnings of SBM                                               |  |      | (6,510 | ) |      |   | (1,351 | )    |  |   | (2,158 | )
|Equity in undistributed earnings of SBM                                                           |  |      | 33,940 |   |      |   | 27,300 |      |  |   | 14,922 |  
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                                                        |  | $    | 27,430 |   |      | $ | 25,949 |      |  | $ | 12,764 |  
|                                                                                                  |  |      |        |   |      |   |        |      |  |   |        |  



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|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                            |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Statements of Cash Flows                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from operating activities:                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                  |  | $    | 27,430  |   |      | $ | 25,949  |      |  | $ | 12,764  |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Accretion on bonds, net                                                                     |  |      | (67     | ) |      |   | (153    | )    |  |   | (253    | )
|Gains on sales of securities, net                                                           |  |      | (249    | ) |      |   | (726    | )    |  |   | (520    | )
|Other than temporary impairment of investment securities                                    |  |      | 201     |   |      |   |        |      |  |   | 160     |  
|Deferred income tax provision (benefit)                                                     |  |      | (1,646  | ) |      |   | 693     |      |  |   | (97     | )
|Granting of restricted stock to former Chairman of the Board                                |  |      |        |   |      |   |        |      |  |   | 276     |  
|Granting of stock options to former Chairman of the Board                                   |  |      |        |   |      |   |        |      |  |   | 266     |  
|Accelerated vesting of restricted stock                                                     |  |      |        |   |      |   |        |      |  |   | 214     |  
|Accelerated vesting of stock options                                                        |  |      |        |   |      |   | 7       |      |  |   | 124     |  
|Change in ESOP unearned compensation                                                        |  |      | 2,752   |   |      |   | 1,963   |      |  |   | 1,368   |  
|Change in restricted stock unearned compensation                                            |  |      | 4,244   |   |      |   | 1,843   |      |  |   | 1,630   |  
|Changes in operating assets and liabilities -                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest receivable                                                                 |  |      | 7       |   |      |   | 178     |      |  |   | 204     |  
|Other assets                                                                                |  |      | (14     | ) |      |   | 90      |      |  |   |        |  
|Other liabilities                                                                           |  |      | 47      |   |      |   | 65      |      |  |   | (1,680  | )
|Change in equity of SBM due to minimum pension liability                                    |  |      | (1,652  | ) |      |   | (1,734  | )    |  |   |        |  
|Equity in undistributed earnings of SBM                                                     |  |      | (33,940 | ) |      |   | (27,300 | )    |  |   | (14,922 | )
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by operating activities                                         |  |      | (2,887  | ) |      |   | 875     |      |  |   | (466    | )
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from maturities of available for sale securities                                   |  |      | 1,000   |   |      |   |        |      |  |   | 5,900   |  
|Proceeds from sales of available for sale securities                                        |  |      | 8,834   |   |      |   | 13,109  |      |  |   | 12,482  |  
|Purchases of available for sale securities                                                  |  |      | (32,691 | ) |      |   | (2,011  | )    |  |   | (1,858  | )
|Proceeds from principal payments of available for sale securities                           |  |      | 1,953   |   |      |   | 1,707   |      |  |   | 409     |  
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by investing activities                                         |  |      | (20,904 | ) |      |   | 12,805  |      |  |   | 16,933  |  
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Funding of trustee purchases of restricted stock                                            |  |      |        |   |      |   | (6,702  | )    |  |   | (9,620  | )
|Purchase of treasury stock                                                                  |  |      | (16,222 | ) |      |   | (5,522  | )    |  |   |        |  
|Proceeds from exercise of stock options                                                     |  |      | 8,103   |   |      |   | 623     |      |  |   | 64      |  
|Dividend upstreamed from SBM                                                                |  |      | 43,000  |   |      |   |        |      |  |   |        |  
|Dividends paid                                                                              |  |      | (7,407  | ) |      |   | (5,945  | )    |  |   | (3,257  | )
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                         |  |      | 27,474  |   |      |   | (17,546 | )    |  |   | (12,813 | )
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                        |  |      | 3,683   |   |      |   | (3,866  | )    |  |   | 3,654   |  
|                                                                                            |  |      |        
|CASH AND CASH EQUIVALENTS, beginning of year                                                |  |      | 7,360   |   |      |   | 11,226  |      |  |   | 7,572   |  
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of year                                                      |  | $    | 11,043  |   |      | $ | 7,360   |      |  | $ | 11,226  |  
|                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  



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|(21) | CASH SURRENDER VALUE OF LIFE INSURANCE
|---- | --------------------------------------



In 2001, the Bank purchased $20.00 million of Bank Owned Life Insurance (BOLI). The Bank purchased these policies for the purpose of
protecting itself against the cost/loss due to the death of key employees and to offset the Banks future obligations to its employees under various retirement and benefit plans. On August 31, 2001, the Bank acquired $20.36 million of BOLI as a
result of the acquisition of First Federal. The total value of BOLI at December 31, 2003 and December 31, 2002 was $46.15 million and $43.80 million, respectively. The Bank recorded income from BOLI of $2.35 million and $2.41 million in 2003 and
2002, respectively.



|(22) | DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
|---- | ------------------------------------------------------



The Bank is required to disclose the estimated fair value of financial instruments, both assets and liabilities recognized and not recognized in the
consolidated statements of condition, for which it is practicable to estimate fair value.



The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.



Cash and cash equivalents, cash surrender value of life insurance, Federal
Home Loan Bank stock and accrued interest receivable



The
carrying amount is a reasonable estimate of fair value.



Securities available for sale



For marketable
equity securities and other securities held for investment purposes, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for
similar securities.



Loans held for sale



The fair value of residential mortgage loans held for sale is estimated
using quoted market prices provided by government agencies.



Loans



The fair value of the net loan
portfolio is estimated by discounting the loans future cash flows using the prevailing interest rates as of year-end at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.



The book and fair values of unrecognized commitments to
extend credit and standby letters of credit were not significant as of December 31, 2002 and 2001.



Deposits and short-term borrowed funds



The fair value of savings, NOW, demand and money market deposits, as well as short-term borrowed funds and mortgagors escrow accounts, is the amount
payable on demand as of year-end. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates offered for deposits of similar remaining maturities as of year-end.



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Advances from Federal Home Loan Bank



The fair value of advances is estimated by discounting the future cash flows
using the rates offered for advances of similar remaining maturities as of year-end.



Values not determined



The above excludes certain financial, as well as non-financial, instruments from its disclosure requirements, including premises and equipment, the intangible value of the Banks portfolio of loans serviced (both for itself and for
others) and related servicing network, and the intangible value inherent in the Banks deposit relationships (i.e., core deposits), among other assets and liabilities. Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.



As of December 31, 2003 and
2002, the estimated fair values and recorded book balances of the Banks financial instruments were (in thousands):



|                                       |  |                     |           |            |   |                     |  |            |           |  |   |          
|-------------------------------------- |  | ------------------- | --------- | ---------- | - | ------------------- |  | ---------- | --------- |  | - | ---------
|                                       |  | 2003                |           | 2002      
|                                       |  | RecordedBookBalance |           | Fair Value |   | RecordedBookBalance |  | Fair Value
|Assets:                                |  |                     |           |            |   |                     |  |            |           |  |   |          
|                                       |  |                     |           |           
|Cash and cash equivalents              |  | $                   | 49,108    |            | $ | 49,108              |  | $          | 25,264    |  | $ | 25,264   
|Securities available for sale          |  |                     | 724,569   |            |   | 724,569             |  |            | 841,622   |  |   | 841,622  
|Loans, net                             |  |                     | 1,670,728 |            |   | 1,675,589           |  |            | 1,540,567 |  |   | 1,578,333
|Federal Home Loan Bank Stock           |  |                     | 27,037    |            |   | 27,037              |  |            | 30,783    |  |   | 30,783   
|Cash surrender value of life insurance |  |                     | 46,150    |            |   | 46,150              |  |            | 43,803    |  |   | 43,803   
|Accrued interest receivable            |  |                     | 10,413    |            |   | 10,413              |  |            | 12,613    |  |   | 12,613   
|                                       |  |                     |           |           
|Liabilities:                           |  |                     |           |            |   |                     |  |            |           |  |   |          
|                                       |  |                     |           |           
|Deposits -                             |  |                     |           |            |   |                     |  |            |           |  |   |          
|Savings                                |  | $                   | 400,122   |            | $ | 400,122             |  | $          | 383,085   |  | $ | 383,085  
|Money market                           |  |                     | 232,640   |            |   | 232,640             |  |            | 209,301   |  |   | 209,301  
|Certificates of deposit                |  |                     | 583,291   |            |   | 591,055             |  |            | 643,201   |  |   | 656,972  
|NOW                                    |  |                     | 237,919   |            |   | 237,919             |  |            | 230,293   |  |   | 230,293  
|Demand                                 |  |                     | 153,320   |            |   | 153,320             |  |            | 130,099   |  |   | 130,099  
|Short-term borrowed funds              |  |                     | 123,049   |            |   | 123,049             |  |            | 121,052   |  |   | 121,052  
|Mortgagors escrow accounts            |  |                     | 19,665    |            |   | 19,665              |  |            | 15,097    |  |   | 15,097   
|Advances from Federal Home Loan Bank   |  |                     | 543,335   |            |   | 562,069             |  |            | 533,890   |  |   | 562,596  



F-46