##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    Quarterly Report Pursuant to Section 10 or 15(d) of the Securities Exchange Act of 1934 for
the quarterly period ended March 31, 2005.
 Commission File Number: 000-51239 ROCKVILLE FINANCIAL, INC. (Exact name of registrant as specified in its charter)
 Connecticut
(State or other jurisdiction of incorporation or organization)
    
    30-0288470
(I.R.S. Employer Identification No.)25 Park Street, Rockville, Connecticut
(Address of principal executive officers)
    
    06066
(Zip Code)
 (860) 291-3600
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. o
Yes                  No
þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Ruler 12B-2 of
the Exchange Act). Yes
o
             No þ Indicate the number of shares outstanding for each of the issuers classes of common stock, as of
the last practicable date. Common Stock (no par value)
    
    0Class
    
    Outstanding at May 10, 2005
    Rockville Financial, Inc.
    
    1




---



Table of Contents Page No.Part I  FINANCIAL INFORMATIONItem 1. Interim Financial StatementsCondensed Consolidated Statement of Condition at March 31, 2005
and December 31, 2004 (unaudited)
    
    
    3Condensed Consolidated Statements of Income for the three months ended
March 31, 2005 and 2004 (unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Capital for the three months ended
March 31, 2005 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30Part II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    32Item 6.Exhibits
    
    
    32SIGNATURES
    
    
    33EX-3.2 BYLAWS OF ROCKVILLE FINANCIAL, INC.EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
  Separate financial statements for Rockville Financial, Inc. have not been included in this
filing because Rockville Financial, Inc. was formed on December 17, 2004 and as of March
31, 2005 had only engaged in organizational activities. Rockville Financial, Inc.
    
    2




---



##### Table of Contents



Part I  FINANCIAL INFORMATION 
 Item 1. Interim Financial Statements: Charter Oak Community Bank Corp. and Subsidiaries 
 Condensed Consolidated Statements of Condition
 (In Thousands)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    23,563
    
    
    $
    18,652Short-term investments
    
    
    1,168
    
    
    
    3,448Total cash and cash equivalents
    
    
    24,731
    
    
    
    22,100AVAILABLE FOR SALE SECURITIES-At fair value
    
    
    129,875
    
    
    
    136,007LOANS RECEIVABLE (Net of allowance for loan
losses of $6,789 in 2005 and $6,371 in 2004)
    
    
    733,145
    
    
    
    696,249FEDERAL HOME LOAN BANK STOCK
    
    
    7,758
    
    
    
    7,412ACCRUED INTEREST RECEIVABLE
    
    
    3,210
    
    
    
    3,013DEFERRED TAX ASSET
    
    
    2,536
    
    
    
    1,606BANK PREMISES AND EQUIPMENT-Net
    
    
    7,599
    
    
    
    7,382GOODWILL
    
    
    1,070
    
    
    
    1,070CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
    
    
    8,372
    
    
    
    8,290OTHER ASSETS
    
    
    5,221
    
    
    
    6,784TOTAL
    
    $
    923,517
    
    
    $
    889,913LIABILITIES AND CAPITALLIABILITIESDeposits:Non-interest bearing
    
    $
    74,821
    
    
    $
    77,972Interest bearing
    
    
    643,378
    
    
    
    614,526Total deposits
    
    
    718,199
    
    
    
    692,498MORTGAGORS AND INVESTORS ESCROW ACCOUNTS
    
    
    2,406
    
    
    
    3,979ADVANCES FROM THE FEDERAL HOME LOAN BANK
    
    
    127,779
    
    
    
    118,015ACCRUED EXPENSES AND OTHER LIABILITIES
    
    
    6,889
    
    
    
    6,895Total liabilities
    
    
    855,273
    
    
    
    821,387COMMITMENTS AND CONTINGENCIESCAPITAL:Capital
    
    
    68,255
    
    
    
    67,338Accumulated other comprehensive (loss) income, net of tax
    
    
    (11
    )
    
    
    1,188Total capital
    
    
    68,244
    
    
    
    68,526TOTAL
    
    $
    923,517
    
    
    $
    889,913
 See accompanying notes to condensed consolidated financial statements. Rockville Financial, Inc.
    
    3




---



##### Table of Contents



Charter Oak Community Bank Corp. and Subsidiaries 
 Condensed Consolidated Statements of Income
 (In Thousands)
 For the Three Months EndedMarch 31,2005
    
    
    2004(Unaudited)INTEREST AND DIVIDEND INCOME:Loans
    
    $
    9,623
    
    
    $
    7,570Securities-interest
    
    
    1,223
    
    
    
    1,206Interest bearing deposits
    
    
    18
    
    
    
    53Securities-dividends
    
    
    154
    
    
    
    81Total interest and dividend income
    
    
    11,018
    
    
    
    8,910INTEREST EXPENSEDeposits
    
    
    2,491
    
    
    
    1,869Borrowed funds
    
    
    1,276
    
    
    
    1,132Total interest expense
    
    
    3,767
    
    
    
    3,001Net interest income
    
    
    7,251
    
    
    
    5,909PROVISION FOR LOAN LOSSES
    
    
    750
    
    
    
    502Net interest income after provision
for loan losses
    
    
    6,501
    
    
    
    5,407NONINTEREST INCOME:Service charges and fees
    
    
    817

    
    
    
    688Net gain from sale of securities
    
    
    78
    
    
    
    25Total noninterest income
    
    
    895
    
    
    
    713NONINTEREST EXPENSE:Salaries and employee benefits
    
    
    3,057
    
    
    
    2,513Service bureau fees
    
    
    638
    
    
    
    556Occupancy and equipment
    
    
    741
    
    
    
    725Professional fees
    
    
    409
    
    
    
    205Marketing and promotions
    
    
    355
    
    
    
    158Insurance and FDIC assessments
    
    
    43
    
    
    
    58Other
    
    
    876
    
    
    
    703Total noninterest expense
    
    
    6,119
    
    
    
    4,918INCOME BEFORE INCOME TAXES
    
    
    1,277
    
    
    
    1,202PROVISION FOR INCOME TAXES
    
    
    360
    
    
    
    366NET INCOME
    
    $
    917
    
    
    $
    836
 See accompanying notes to condensed consolidated financial statements. Rockville Financial, Inc.
    
    4




---



##### Table of Contents



Charter Oak Community Bank Corp. and Subsidiaries 
 Condensed Consolidated
Statement of Changes in Capital
 (In Thousands)
 Accumulated OtherComprehensiveCapital
    
    
    (Loss) Income
    
    
    Total(Unaudited)BALANCE  January 1, 2005
    
    $
    67,338
    
    
    $
    1,188
    
    
    $
    68,526Comprehensive (loss) income:Net income
    
    
    917
    
    
    
    
    
    
    
    917Change in
unrealized gain on available for sale securities, net of taxes
    
    
    
    
    
    
    (1,199
    )
    
    
    (1,199
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (282
    )BALANCE  March 31, 2005
    
    $
    68,255
    
    
    $
    (11
    )
    
    $
    68,244
 See accompanying notes to condensed consolidated financial statements. Rockville Financial, Inc.
    
    5




---



##### Table of Contents



Charter Oak Community Bank Corp. and Subsidiaries 
 Condensed Consolidated Statements of Cash Flows
 (In Thousands)
 For the Three Months EndedMarch 31,2005
    
    
    2004(Unaudited)CASH FLOWS FROM ACTIVITIES:Net income
    
    $
    917
    
    
    $
    836Adjustments to reconcile net income to net cash
provided by operating activities:Amortization and accretion of premiums and discounts
on investments  net
    
    
    104
    
    
    
    191Provision for loan losses
    
    
    750
    
    
    
    502Net gain from sale of securities
    
    
    (78
    )
    
    
    (25
    )Depreciation and amortization
    
    
    281
    
    
    
    346Deferred income taxes
    
    
    (312
    )
    
    
    (68
    )Increase in cash surrender value of bank owned life insurance
    
    
    (82
    )
    
    
    (65
    )Change in assets and liabilities:Deferred loan fees and premiums
    
    
    (46
    )
    
    
    (497
    )Accrued interest receivable
    
    
    (197
    )
    
    
    58Other assets
    
    
    1,299
    
    
    
    210Accrued expenses and other liabilities
    
    
    (6
    )
    
    
    297Net cash provided by operating activities
    
    
    2,630
    

    
    
    1,785CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of available for sale securities
    
    
    2,717
    
    
    
    451Proceeds from maturities of available for sale securities
    
    
    4,084
    
    
    
    7,970Principal payments on available for sale
mortgage-backed securities
    
    
    3,713
    
    
    
    8,748Purchase of available for sale securities
    
    
    (6,225
    )
    
    
    (14,266
    )Purchase of Federal Home Loan Bank Stock
    
    
    (346
    )
    
    
    Net increase in loans and loans held for sale
    
    
    (37,600
    )
    
    
    (15,919
    )Purchases of bank premises and equipment
    
    
    (498
    )
    
    
    (324
    )Net cash used in investing activities
    
    
    (34,155
    )
    
    
    (13,340
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net (decrease) increase in non-interest bearing deposits
    
    
    (3,151
    )
    
    
    3,223Net increase in interest bearing deposits
    
    
    28,852
    
    
    
    50,487Decrease in mortgagors and investors escrow accounts
    
    
    (1,573
    )
    
    
    (1,547
    )Proceeds from Federal Home Loan Bank advances
    
    
    14,800
    
    
    
    7,000Repayments of Federal Home Loan Bank advances
    
    
    (5,036
    )
    
    
    (15,034
    )Payment of reorganization costs
    
    
    264
    
    
    
    Net cash provided by financing activities
    
    
    34,156
    
    
    
    44,129
 (Continued) Rockville Financial, Inc.
    
    6




---



##### Table of Contents



Charter Oak Community Bank Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows- Continued
(In Thousands) For the Three Months EndedMarch 31,2005
    
    
    2004(Unaudited)NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    2,631
    
    
    
    32,574CASH AND CASH EQUIVALENTS  Beginning of year
    
    
    22,100
    
    
    
    28,454CASH AND CASH EQUIVALENTS  End of period
    
    $
    24,731
    
    
    $
    61,028SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    3,739
    
    
    $
    3,033Income taxes
    
    
    
    
    
    
    
 See accompanying notes to condensed consolidated financial statements. Rockville Financial, Inc.
    
    7




---



##### Table of Contents



Charter Oak Community Bank Corp. 
 Notes to Unaudited
Condensed Consolidated Financial Statements
  1.
    Mutual Holding Company Reorganization and Minority Stock IssuanceCharter Oak Community Bank Corp., (the Company) is a Connecticut-chartered nonstock
corporation and a mutual bank holding company. Its wholly-owned subsidiary, Rockville Bank
(the Bank) provides a full range of banking services to consumer and commercial customers
through its main office in Rockville and fifteen branches located in Hartford and Tolland
counties in Connecticut. The Banks deposits are insured under the Bank Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation.On December 8, 2004, the Boards of Directors of the Company and the Bank approved the Plan
of Reorganization and Minority Stock Issuance (the Plan) to reorganize the holding
company structure form of ownership from a single tier mutual holding company structure to
a two-tier holding company structure. Pursuant to the Plan, a new wholly-owned subsidiary,
Rockville Financial, Inc. (RFI) was formed in December 2004 and will become a state
chartered mid-tier stock holding company. Upon completion of the reorganization, the
Company will transfer ownership of Rockville Banks capital stock in exchange for a 55%
ownership interest in RFI. According to the Plan, 43% of shares of RFI are to be offered
initially for subscription to (1) depositors with eligible accounts at the Bank as of March
31, 2003; then to (2) the Companys tax-qualified employee benefit plans, which will
provide retirement benefits to the Companys employees; then to (3) depositors with
eligible accounts at the Bank as of December 31, 2004; then to (4) employees, officers and
directors of the Bank or RFI; and then to (5) corporators of the Company (the Subscription
Offering). The common stock will be offered at $10.00 per share. If any shares of the
common stock remain unsold in the Subscription Offering, the Company will offer such shares
for sale in a community offering where natural persons residing in Hartford and Tolland
Counties, Connecticut will have a purchase preference (the Community Offering). The
Community Offering, if any, may commence concurrently with, during or promptly after, the
Subscription Offering. Shares may also be sold to the public. RFI will offer between
6,176,950 and 9,610,608 shares. The Company expects the offering to close by the end of May 2005.As of March 31, 2005, the Company has not engaged in any business activities other than
owning the common stock of Rockville Bank. RFI has had no activity to date.For a period of five years following completion of the Plan, no person, acting singly or
with an associate or group of persons acting in concert, shall directly, or indirectly,
offer to acquire or acquire the beneficial ownership of more than ten percent (10%) of any
class of an equity security of RFI without the prior approval of the Connecticut Banking
Commissioner.Reorganization costs are deferred and will reduce the proceeds from the shares sold in the
reorganization. If the reorganization is not completed, all costs will be charged as an
expense. As of March 31, 2005 and December 31, 2004, $923,934 and $811,280, respectively,
of reorganization costs had been incurred and are included in other assets in the
accompanying condensed consolidated balance sheets.In connection with the reorganization, the Company intends to establish an Employee Stock
Ownership Plan (ESOP) for eligible employees. Employees of the Company who have completed
1,000 hours of service in a period of six to twelve consecutive months and have attained
age 21 will be eligible to participate. To fund the purchase of 8% of the shares of common
stock issued in the reorganization, the ESOP trust will borrow funds from RFI. The loan to
the ESOP trust will be repaid principally from the Banks contributions to the ESOP trust.
Shares purchased by the ESOP will be held by a trustee for allocations among participants
as the loan is repaid. Rockville Financial, Inc.
    
    8




---



##### Table of Contents



2.
    Basis of Presentation and Principles of ConsolidationRockville Financial, Inc. is not currently an operating company and will have no
activity until completion of the reorganization. The Condensed Consolidated Interim
Financial Statements and the accompanying Notes presented in this report include the
accounts of the Charter Oak Community Bank Corp. and its two wholly-owned subsidiaries, RFI
and Rockville Bank, and the Banks wholly-owned subsidiaries, The SBR Mortgage Company, The
Savings Bank of Rockville Investment Company and Rockville Financial Services, Inc.The Condensed Consolidated Interim Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions to SEC Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by GAAP for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included in the
condensed financial statements. Certain prior period amounts have been reclassified to
conform with current period presentation. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of operations for the three
months ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. These financial statements should be read
in conjunction with the financial statements and notes thereto included in the Companys
2004 Consolidated Financial Statements included in the Companys Registration Statement on
Form S-1, as amended.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 amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the dates of the condensed 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. Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, determination
of pension assumptions, the valuation of deferred tax assets and the evaluation of
available for sale securities for other than temporary impairment.  3.
    Recent Accounting PronouncementsIn December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment,
which will require compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of compensation
cost will be measured based upon the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be remeasured each reporting period.
Compensation cost will be recognized over the period that an employee provides service in
exchange for the award. Statements 123(R) replaces FASB Statement 123, Accounting for
Stock-Based Compensation,and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees.SFAS No. 123 (R) is effective for the Company as of January 1, 2006. The Company
is in the process of determining the method of adoption and the impact of SFAS No. 123(R)
upon adoption. Rockville Financial, Inc.
    
    9




---



##### Table of Contents



4.
    Available for Sale Investment Securities:The amortized cost, gross unrealized gains, gross unrealized losses and approximate
fair values of available for sale investment securities at March 31, 2005 and December 31,
2004 are as follows: Amortized
    
    
    Gross Unrealized
    
    
    FairMarch 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:U.S. Government and agency obligations
    
    $
    1,996
    
    
    $
    
    
    
    $
    13
    
    
    $
    1,983U.S. Government sponsored enterprises
    
    
    24,999
    
    
    
    
    
    
    
    423
    
    
    
    24,576Mortgage-backed securities
    
    
    63,529
    
    
    
    261
    
    
    
    761
    
    
    
    63,029Corporate debt securities
    
    
    25,574
    
    
    
    406
    
    
    
    23
    
    
    
    25,957Other debt securities
    
    
    1,433
    
    
    
    51
    
    
    
    
    
    
    
    1,484Total debt securities
    
    
    117,531
    
    
    
    718
    
    
    
    1,220
    
    
    
    117,029Marketable equity securities
    
    
    9,725
    
    
    
    3,120
    
    
    
    325
    
    
    
    12,520Non-marketable equity securities
    
    
    326
    
    
    
    
    
    
    
    
    
    
    
    326$
    127,582
    
    
    $
    3,838
    
    
    $
    1,545
    
    
    $
    129,875
 Amortized
    
    
    Gross Unrealized
    
    
    FairDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:U.S. Government and agency obligations
    
    $
    1,994
    
    
    $
    
    
    
    $
    10
    
    
    $
    1,984U.S. Government sponsored enterprises
    
    
    24,160
    
    
    
    11
    
    
    
    118
    
    
    
    24,053Mortgage-backed securities
    
    
    67,291
    
    
    
    464
    
    
    
    396
    
    
    
    67,359Corporate debt securities
    
    
    28,384
    
    
    
    905
    
    
    
    
    
    
    
    29,289Other debt securities
    
    
    1,434
    
    
    
    72
    
    
    
    
    
    
    
    1,506Total debt securities
    
    
    123,263
    
    
    
    1,452
    
    
    
    524
    
    
    
    124,191Marketable equity securities
    
    
    8,309
    
    
    
    3,341
    
    
    
    160
    
    
    
    11,490Non-marketable equity securities
    
    
    326
    
    
    
    
    
    
    
    
    
    
    
    326$
    131,898
    
    
    $
    4,793
    
    
    $
    684
    
    
    $
    136,007
  At March 31, 2005, the net unrealized gain on securities available for sale of $2.3
million, net of income taxes of $.8 million, or $1.5 million is included in accumulated
other comprehensive income. At December 31, 2004, the net unrealized gain on securities
available for sale of $4.1 million, net of income taxes of $1.4 million, or $2.7 million is
included in accumulated other comprehensive income. Rockville Financial, Inc.
    
    10




---



##### Table of Contents



The following table summarizes gross unrealized losses and fair value, aggregated by
investment category and length of time the investments have been in a continuous unrealized
loss position, at March 31, 2005 and December 31, 2004: Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedMarch 31, 2005
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In thousands)Available for sale:U.S. Government and agency
obligations
    
    $
    1,983
    
    
    $
    13
    
    
    $
    
    
    
    $
    
    
    
    $
    1,983
    
    
    $
    13U.S. Government sponsored
enterprises
    
    
    18,712
    
    
    
    287
    
    
    
    5,864
    
    
    
    136
    
    
    
    24,576
    
    
    
    423Mortgage-backed securities
    
    
    30,651
    
    
    
    259
    
    
    
    19,317
    
    
    
    502
    
    
    
    49,968
    
    
    
    761Corporate debt securities
    
    
    2,478
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    2,478
    
    
    
    23Total debt securities
    
    
    53,824
    
    
    
    582
    
    
    
    25,181
    
    
    
    638
    
    
    
    79,005
    
    
    
    1,220Marketable equity securities
    
    
    5,438
    
    
    
    277
    
    
    
    215
    
    
    
    48
    
    
    
    5,653
    
    
    
    325Total
    
    $
    59,262
    
    
    $
    859
    
    
    $
    25,396
    
    
    $
    686
    
    
    $
    84,658
    
    
    $
    1,545
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31,
2004
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In thousands)Available for sale:U.S. Government and agency
obligations
    
    $
    1,984
    
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    1,984
    
    
    $
    10U.S. Government sponsored
enterprises
    
    
    15,894
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    15,894
    
    
    
    118Mortgage-backed securities
    
    
    24,170
    
    
    
    275
    
    
    
    7,657
    
    
    
    121
    
    
    
    31,827
    
    
    
    396Total debt securities
    
    
    42,048
    
    
    
    403
    
    
    
    7,657
    
    
    
    121
    
    
    
    49,705
    
    
    
    524Marketable equity securities
    
    
    1,881
    
    
    
    143
    
    
    
    80
    
    
    
    17
    
    
    
    1,961
    
    
    
    160Total
    
    $
    43,929
    
    
    $
    546
    
    
    $
    7,737
    
    
    $
    138
    
    
    $
    51,666
    
    
    $
    684
  As of March 31, 2005 and December 31, 2004, management determined that none of the
securities in an unrealized loss position were other than temporarily impaired based on
their evaluation of current market trends, the nature of the investments and industry
analysis. Management has both the intent and ability to hold the securities with unrealized
losses for twelve months or more for the time necessary to recover the amortized cost. Rockville Financial, Inc.
    
    11




---



##### Table of Contents



5.
    Loans Receivable and Allowance for Loan Losses:A summary of the Companys loan portfolio at March 31, 2005 and December 31, 2004 is
as follows: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Residental
    
    $
    474,706
    
    
    $
    450,054Commercial
    
    
    139,691
    
    
    
    136,594Construction (net of undisbursed
portion of $26,038 and $22,994
respectively)
    
    
    24,267
    
    
    
    22,067638,664
    
    
    
    608,715Commercial business loans
    
    
    96,191
    
    
    
    88,700Installment loans
    
    
    2,175
    
    
    
    2,268Collateral loans
    
    
    1,126
    
    
    
    1,205Total loans
    
    
    738,156
    
    
    
    700,888Net deferred loan costs and premiums
    
    
    1,778
    
    
    
    1,732Allowance for loan losses
    
    
    (6,789
    )
    
    
    (6,371
    )Loans, net
    
    $
    733,145
    
    
    $
    696,249
  Changes in the allowance for loan losses for the periods ended March 31, 2005 and March 31,
2004 are as follows: At or Forthe Three MonthsEnded March 31,2005
    
    
    2004(In thousands)Allowance, at beginning of year
    
    $
    6,371
    
    
    $
    4,971Provision for loan losses
    
    
    750
    
    
    
    502Loans charged-off
    
    
    (341
    )
    
    
    (366
    )Recoveries of loans previously charged off
    
    
    9
    
    
    
    8Balance, end of period
    
    $
    6,789
    
    
    $
    5,115
 Rockville Financial, Inc.
    
    12




---



##### Table of Contents



6.
    DEPOSITSDeposits at March 31, 2005 and December 31, 2004 were as follows: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Demand and NOW
    
    $
    172,129
    
    
    $
    166,740Regular savings
    
    
    168,249
    
    
    
    161,215Money market and investment savings
    
    
    98,286
    
    
    
    84,789Club accounts
    
    
    468
    
    
    
    205Time deposits
    
    
    279,067
    
    
    
    279,549$
    718,199
    
    
    $
    692,498
  A summary of interest expense by account type for the three months ended March 31, 2005 and
2004 is as follows: Three Months EndedMarch 31,2005
    
    
    2004(In thousands)Savings and demand deposits
    
    $
    713
    
    
    $
    507Time deposits
    
    
    1,778
    
    
    
    1,362$
    2,491
    
    
    $
    1,869
  7.
    Borrowings:The Bank is a member of the Federal Home Loan Bank of Boston (the FHLBB). At March
31, 2005 and December 31, 2004, the Bank had access to a pre-approved secured line of
credit with the FHLBB of $10 million and the capacity to obtain additional advances up to a
certain percentage of the value of its qualified collateral, as defined in the FHLBB
Statement of Credit Policy. In accordance with an agreement with the FHLBB, the qualified
collateral must be free and clear of liens, pledges and encumbrances. At March 31, 2005 and
December 31, 2004, there were no advances outstanding under the line of credit. Other
outstanding advances from the FHLBB aggregated $127.8 million at March 31, 2005, at
interest rates ranging from 2.77% to 6.47%, and $118.0 million at December 31, 2004, at
interest rates ranging from 2.35% to 6.47%.As of March 31, 2005, $31.8 million of FHLBB borrowings were scheduled to mature in less
than one year. The balance of $96.0 million is due at various maturity dates in 2006
through 2013. Rockville Financial, Inc.
    
    13




---



##### Table of Contents



8.
    Benefit Plans:The Company sponsors a noncontributory defined benefit pension plan (the Pension
Plan) covering all full-time employees. Participants become eligible for the Plan after
attaining age 21 and completing one year of service. Participants become 100% vested after
five years of employment. The Banks funding policy is to contribute annually the maximum
amount that can be deducted for Federal income tax purposes, while meeting the minimum
funding standards established by the ERISA.The Company also provides unfunded post-retirement medical, health and life insurance
benefits for retirees and employees hired prior to March 1, 1993. In December 2003, the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) became
law. The Act provides prescription drug benefits to retirees. Employers currently offering
prescription drug benefits to retirees may be eligible for subsidies under the Act. The
FASB has not yet issued specific authoritative guidance on accounting for the provisions of
the Act and is permitting deferral of recognition. Due to the lack of authoritative
guidance, the impact of the Act has not been included in the other post-retirement benefit
obligation or expense.The Company uses September 30 as the measurement date for its pension plan and December 31
for its post-retirement benefit plan.In January 2004, the Company established a supplemental retirement agreement with an
executive officer of the Company. Additionally, effective December 1, 2004, the Company
adopted the Supplemental Executive Retirement Plan (the SERP) covering two designated
executive officers of the Bank. The SERP provides the two designated officers with a
retirement benefit equal to 70% of their respective average annual earnings, as defined.Components of Net Periodic Benefit Cost Pension Plans
    
    
    Post-Retirement BenefitsThree Months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    200
    
    
    $
    141
    
    
    $
    2
    
    
    $
    2Interest cost
    
    
    182
    
    
    
    139
    
    
    
    20
    
    
    
    24Expected return on
plan assets
    
    
    (210
    )
    
    
    (118
    )
    
    
    
    
    
    
    Amortization of net
actuarial losses
    
    
    84
    
    
    
    82
    
    
    
    8
    
    
    
    19Amortization of prior
service cost (benefits)
    
    
    155
    
    
    
    2
    
    
    
    (1
    )
    
    
    (15
    )Net periodic benefit cost
    
    $
    411
    
    
    $
    246
    
    
    $
    29
    
    
    $
    30
  No contributions have been made to the pension plan for the three months ended March 31,
2005. During that same period, $19,000 was contributed to the post-retirement plan. The
Company anticipates contributing $600,000 and $87,000 during the year ended December 31,
2005, to fund the pension and post retirement benefit plans, respectively. Rockville Financial, Inc.
    
    14




---



##### Table of Contents



9.
    Other Comprehensive (Loss) Income:The following table summarizes the components of other comprehensive (loss) income and
the related tax effects for the three months ended March 31, 2005 and 2004: For the Three Months Ended March 31, 2005Before-Tax
    
    
    
    
    
    
    Net-of-TaxAmount
    
    
    Taxes
    
    
    Amount(In thousands)Unrealized losses arising during the period
    
    $
    (1,895
    )
    
    $
    645
    
    
    $
    (1,250
    )Add reclassification adjustment for net gain from sale
of securities recognized in net income
    
    
    78
    
    
    
    (27
    )
    
    
    51Total other comprehensive loss
    
    $
    (1,817
    )
    
    $
    618
    
    
    $
    (1,199
    )
 For the Three Months Ended March 31, 2004Before-Tax
    
    
    
    
    
    
    Net-of-TaxAmount
    
    
    Taxes
    
    
    Amount(In thousands)Unrealized gains arising during the period
    
    $
    687
    
    
    $
    (233
    )
    
    $
    454Add reclassification adjustment for net gain from sale
of securities recognized in net income
    
    
    25
    
    
    
    (9
    )
    
    
    16Total other comprehensive income
    
    $
    712
    
    
    $
    (242
    )
    
    $
    470
  10.
    Commitments and Contingencies:Financial Instruments With Off-Balance Sheet Risk:In the normal course of business, the Company is a party to financial instruments with
off-balance-sheet risk to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, undisbursed portions of construction
loans, unused commercial and consumer lines of credit and stand-by letters of credit.
Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. Since these
commitments could expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. These commitments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts recognized in
the statements of financial condition. The contractual amounts of commitments to extend
credit represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral obligations
become worthless as it may for on-balance-sheet
instruments. The Company evaluates each customers creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on managements credit evaluation. Rockville Financial, Inc.
    
    15




---



##### Table of Contents



Financial instruments whose contract amounts represent credit risk are as follows at March
31, 2005 and December 31, 2004: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Commitments to extend credit:Future loan commitments
    
    $
    27,594
    
    
    $
    25,046Undisbursed construction loans
    
    
    26,038
    
    
    
    22,993Undisbursed home equity lines of credit
    
    
    64,315
    
    
    
    59,229Undisbursed commercial lines of credit
    
    
    42,670
    
    
    
    44,049Standby letters of credit
    
    
    4,196
    
    
    
    4,121Unused checking overdraft lines of credit
    
    
    75
    
    
    
    71$
    164,888
    
    
    $
    155,509
 Legal Matters: The Company is involved in various legal proceedings which have arisen in the normal course
of business. Management believes that resolution of these matters will not have a material
effect on the Companys financial condition or results of operations.  11.
    Regulatory Matters: The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal 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
financial statements. The regulations require the Bank meet specific capital guidelines
that involve quantitative measures of the Companys and the Banks assets, liabilities, and
certain off-balance-sheet items, as calculated under regulatory accounting practices. The
Companys and the Banks capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors. The Bank
was classified at its most recent notification as well capitalized. At March 31, 2005,
the Bank exceeded all of our regulatory capital requirements and is considered well
capitalized under regulatory guidelines. The following is a summary of the Banks regulatory capital amounts and ratios as of March
31, 2005 and December 31, 2004 compared to the Federal Deposit Insurance Corporations
requirements for classification as a well-capitalized institution and for minimum capital
adequacy: To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsRockville Bank at March 31, 2005
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal capital to risk weighted assets
    
    $
    70,855
    
    
    
    11.6
    %
    
    $
    48,866
    
    
    
    8.0
    %
    
    $
    61,082
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    63,859
    
    
    
    10.5
    
    
    
    24,327
    
    
    
    4.0
    
    
    
    36,491
    
    
    
    6.0Tier I capital to total average assets
    
    
    63,859
    
    
    
    7.1
    
    
    
    35,977
    
    
    
    4.0
    
    
    
    44,971
    
    
    
    5.0
 Rockville Financial, Inc.
    
    
    16




---



##### Table of Contents



To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsRockville Bank at December 31, 2004
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal capital to risk weighted assets
    
    $
    69,509
    
    
    
    11.8
    %
    
    $
    47,125
    
    
    
    8.0
    %
    
    $
    58,906
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    62,942
    
    
    
    10.7
    
    
    
    23,530
    
    
    
    4.0
    
    
    
    35,295
    
    
    
    6.0Tier I capital to total average assets
    
    
    62,942
    
    
    
    7.3
    
    
    
    34,489
    
    
    
    4.0
    
    
    
    43,111
    
    
    
    5.0
  12.
    Income Taxes: Income taxes are provided on an interim basis using the estimated annual effective tax
rate. Our effective tax rate differs from the statutory rate of 34% for the three months
ended March 31, 2005 and March 31, 2004 primarily due to the dividend received deduction
and non-taxable earnings on bank owned life insurance for both periods. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Charter Oak Community Bank Corp., (the Company) is a Connecticut-chartered nonstock
corporation and a mutual bank holding company. Its wholly-owned subsidiary, Rockville Bank
(the Bank) provides a full range of banking services to consumer and commercial customers
through its main office in Rockville and fifteen branches located in Hartford and Tolland
counties in Connecticut. The Banks deposits are insured under the Bank Insurance Fund,
which is administered by the Federal Deposit Insurance Corporation. On December 8, 2004, the Boards of Directors of the Company and the Bank approved the Plan
of Reorganization and Minority Stock Issuance (the Plan) to reorganize the holding
company structure form of ownership from a single tier mutual holding company structure to
a two-tier holding company structure. Pursuant to the Plan, a new wholly-owned subsidiary,
Rockville Financial, Inc. (RFI) was formed in December 2004 and will become a state
chartered mid-tier stock holding company. Upon completion of the reorganization, the
Company will transfer the ownership of Rockville Banks capital stock in exchange for a 55%
ownership interest in RFI. Charter Oak Community Bank Corp. strives to remain a leader in meeting the financial
service needs of the local community and to provide quality service to the individuals and
businesses in the market areas that it has served since 1858. Rockville Bank is a
community-oriented provider of traditional banking products and services to business
organizations and individuals, including products such as residential and commercial real
estate loans, consumer loans and a variety of deposit products, who meets the needs of its
customers through a community-based and service-oriented approach to banking. Our business
philosophy is to remain a community-oriented franchise and continue to focus on providing
superior customer service to meet the financial needs of the communities in which we
operate. Current strategies include expanding our banking network by pursuing new branch
locations and branch acquisition opportunities in our market area, continuing our
residential mortgage lending activities which comprise a majority of our loan portfolio and
expanding our commercial real estate and commercial business lending activities. Forward Looking Statements Managements Discussion and Analysis included in this Form 10-Q contains statements that
are forward-looking within the meaning of the Private Securities Litigation Reform Act of
1995. Such Rockville Financial, Inc.
    
    
    17




---



##### Table of Contents



statements are based upon the current beliefs and expectations of the management of the
Company and are subject to significant risks and uncertainties. These risks and
uncertainties could cause the Companys results to differ materially from those set forth
in such forward-looking statements. Such risks and uncertainties are described herein and
in the Companys Registration Statement on Form S-1A filed with the U.S. Securities and
Exchange Commission (SEC) and available at the SECs Internet site (www.sec.gov), to
which reference is hereby made. Forward-looking statements can be identified by the fact that they do not relate strictly
to historical or current facts. Words such as believes, anticipates, expects,
intends, plans, estimates, targeted and similar expressions, and future or
conditional verbs, such as will, would, should, could or may, are intended to
identify forward-looking statements but are not the only means to identify these
statements. Forward-looking statements involve risks and uncertainties. Actual conditions, events or
results may differ materially from those contemplated by a forward-looking statement.
Factors that could cause this differencemany of which are beyond the Companys
controlinclude the following, without limitation:  
    Local, regional and national business or economic conditions may differ from
those expected.
    The effects of and changes in trade, monetary and fiscal policies and laws,
including the U.S. Federal Reserve Boards interest rate policies, may adversely
affect the Companys business.
    The timeliness of development and acceptance of new products and services may
be different than anticipated.
    Technological changes instituted by the Company and by persons who may affect
the Companys business may be more difficult to accomplish or more expensive than
anticipated or may have unforeseen consequences.
    The ability to increase market share and control expenses may be more difficult
than anticipated.
    Competitive pressures among financial services companies may increase
significantly.
    Changes in laws and regulatory requirements (including those concerning taxes,
banking, securities and insurance) may adversely affect the Company or its
businesses.
    Changes in accounting policies and practices, as may be adopted by regulatory
agencies, the Public Company Accounting Oversight Board and the Financial
Accounting Standards Board, may affect expected financial reporting.
    The costs, effects and outcomes of litigation may adversely affect the Company
or its businesses.
    Upon completion of the reorganization described in this
report, Rockville Financial Inc., is unable to manage the risks and
costs of operating as a publicly owned company as efficiently as
anticipated.
    The Company may not manage the risks involved in the foregoing as well as
anticipated. Any forward-looking statements made by or on behalf of the Company in this Form 10-Q speak
only as of the date of this Form 10-Q. The Company does not undertake to update
forward-looking statements to reflect the impact of circumstances or events that arise
after the date the forward-looking statement was made. The reader should, however, consult
any further disclosures of a forward-looking nature the Company may make in future filings. Critical Accounting Policies The accounting policies followed by the Bank and its subsidiaries conform with accounting
principles generally accepted in the United States of America and with general practices
within the banking industry. Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and could potentially result in materially different results
under different assumptions and conditions. We believe that our most critical accounting
policies, which involve the most complex Rockville Financial, Inc.
    
    
    18




---



##### Table of Contents



subjective decisions or assessments, relate to income taxes, pension and other
postretirement benefits, the allowance for loan losses and other than temporary impairment
of investment securities. Comparison of Operating Results for the Three Months Ended March 31, 2005 and 2004 The Companys results of operations depend primarily on net interest income, which is the
difference between the interest income from earning assets, such as loans and investments,
and the interest expense incurred on interest-bearing liabilities, such as deposits and
other borrowings. The Company also generates noninterest income, including service charges
on deposit accounts, mortgage servicing income, bank owned life insurance income, safe
deposit box rental fees, brokerage fees, insurance commissions and other miscellaneous
fees. The Companys noninterest expense primarily consists of employee compensation and
benefits, occupancy, equipment, and other operating expenses. The Companys results of
operations are also impacted by its provision for loan losses. The following discussion
provides a summary and comparison of the Companys operating results for the quarters ended
March 31, 2005 and 2004. Earnings Summary:Net income increased by $81,000, or 9.7%, to $917,000 for the quarter
ended March 31, 2005 from $836,000 for the same period in the prior year. The increase in
net income primarily resulted from a $1.1 million, or 20.2% increase in our net interest
income after provision for loan losses due to an increase in loan volume, partially offset
by a 27 basis point decline in the average loan yield and a $248,000 increase in the
provision for loan losses and a $182,000, or 25.5% increase in noninterest income offset by
a $1.2 million, or 24.4% increase in noninterest expense. The increase in noninterest
income was mainly attributable to an increase of $61,000 in ATM fees due to additions made
to our ATM network and an increase of $53,000 in gains on sales of investment securities.
The increase in noninterest expense is primarily due to an increase in salary and benefits,
professional fees and marketing and promotions expense of $544,000, $204,000 and $197,000,
respectively. The increase in salary and benefit expenses is due to increased staffing
levels related to the growth of both our branch network and our Commercial Lending division
and increases in other benefits expense. The increase in professional fees includes
expenses of $154,000 that were incurred in connection with preparing for Section 404
compliance with the Sarbanes Oxley Act and fees associated with transactions related to the
stock offering made in conjunction with the reorganization into a two-tier holding company. The increase in marketing and promotion expense was incurred to take advantage of
growth opportunities created by bank consolidations in our market area. Net Interest Income Analysis: Average Balance Sheets, Interest and Yields/Costs:The following tables set forth average
balance sheets, average yields and costs, and certain other information for the periods
indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not
material. All average balances are daily average balances. Non-accrual loans were included
in the computation of average balances, but have been reflected in the table as loans
carrying a zero yield. The yields set forth below include the effect of deferred fees,
discounts and premiums that are amortized or accreted to interest income or expense. Rockville Financial, Inc.
    
    
    19




---



##### Table of Contents



Three Months Ended March 31,2005
    
    
    2004Average
    
    
    Interest and
    
    
    
    
    
    
    Average
    
    
    Interest and
    
    
    Yield/Balance
    
    
    Dividends
    
    
    Yield/ Cost
    
    
    Balance
    
    
    Dividends
    
    
    CostInterest-earning assets:Loans receivable, net
    
    $
    714,887
    
    
    $
    9,623
    
    
    
    5.38
    %
    
    $
    535,996
    
    
    $
    7,570
    
    
    
    5.65
    %Available for sale securities
    
    
    133,368
    
    
    
    1,302
    
    
    
    3.90
    
    
    
    124,901
    
    
    
    1,254
    
    
    
    4.02Federal Home Loan Bank stock
    
    
    7,535
    
    
    
    75
    
    
    
    3.98
    
    
    
    6,069
    
    
    
    33
    
    
    
    2.17Other earning assets
    
    
    3,244
    
    
    
    18
    
    
    
    2.22
    
    
    
    28,035
    
    
    
    53
    
    
    
    0.76Total interest-earning assets
    
    
    859,034
    
    
    
    11,018
    
    
    
    5.13
    
    
    
    695,001
    
    
    
    8,910
    
    
    
    5.13Noninterest-earning assets
    
    
    42,326
    
    
    
    
    
    
    
    
    
    
    
    36,311Total assets
    
    $
    901,360
    
    
    
    
    
    
    
    
    
    
    $
    731,312Interest-bearing liabilities:NOW and money market accounts
    
    $
    175,739
    
    
    
    459
    
    
    
    1.04
    
    
    $
    132,303
    
    
    
    282
    
    
    
    0.85Savings accounts
    
    
    164,819
    
    
    
    247
    
    
    
    0.60
    
    
    
    145,248
    
    
    
    220
    
    
    
    0.61Certificates of deposit
    
    
    280,009
    
    
    
    1,778
    
    
    
    2.54
    
    
    
    225,460
    
    
    
    1,362
    
    
    
    2.42Total interest-bearing deposits
    
    
    620,567
    
    
    
    2,484
    
    
    
    1.60
    
    
    
    503,011
    
    
    
    1,864
    
    
    
    1.48Mortgagors and investors escrow accounts
    
    
    1,851
    
    
    
    7
    
    
    
    1.51
    
    
    
    1,364
    
    
    
    5
    
    
    
    1.47Advances from the Federal Home Loan Bank
    
    
    128,351
    
    
    
    1,276
    
    
    
    3.98
    
    
    
    102,395
    
    
    
    1,132
    
    
    
    4.42Total interest-bearing liabilities
    
    
    750,769
    
    
    
    3,767
    
    
    
    2.01
    %
    
    
    606,770
    
    
    
    3,001
    
    
    
    1.98
    %Noninterest-bearing liabilities
    
    
    81,372
    
    
    
    
    
    
    
    
    
    
    
    57,687Total liabilities
    
    
    832,141
    
    
    
    
    
    
    
    
    
    
    
    664,457Capital
    
    
    69,219
    
    
    
    
    
    
    
    
    
    
    
    66,855Total liabilities and capital
    
    $
    901,360
    
    
    
    
    
    
    
    
    
    
    $
    731,312Net interest income
    
    
    
    
    
    $
    7,251
    
    
    
    
    
    
    
    
    
    
    $
    5,909Net interest rate spread (1)
    
    
    
    
    
    
    
    
    
    
    3.12
    %
    
    
    
    
    
    
    
    
    
    
    3.15
    %Net interest-earning assets (2)
    
    $
    108,265
    
    
    
    
    
    
    
    
    
    
    $
    88,231Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.38
    %
    
    
    
    
    
    
    
    
    
    
    3.40
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    114.42
    %
    
    
    
    
    
    
    
    
    
    
    114.54
    %
   (1)
    Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing liabilities.(2)
    Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.(3)
    Net interest margin represents the annualized net interest income divided by
average total interest-earning assets. Rockville Financial, Inc.
    
    
    20




---



##### Table of Contents



Rate Volume Analysis The following table sets forth the effects of
changing rates and volumes on our net interest income for the periods
indicated. 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). The net column represents the
sum of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be
segregated have been allocated proportionately based on the changes
due to rate and the changes due to volume. Three Months EndedMarch 31, 2005Compared toMarch 31, 2004Increase/(Decrease)Due ToVolume
    
    
    Rate
    
    
    Net(Dollars in thousands)Interest and dividend income:Loans receivable
    
    $
    4,328
    
    
    $
    (2,275
    )
    
    $
    2,053Securities int & inc from other assets
    
    
    (593
    )
    
    
    648
    
    
    
    55Total earning assets
    
    
    3,735
    
    
    
    (1,627
    )
    
    
    2,108Interest expense:NOW and money market accounts
    
    
    105
    
    
    
    72
    
    
    
    177Savings accounts
    
    
    29
    
    
    
    
    
    
    
    29Certificates of deposit
    
    
    345
    
    
    
    71
    
    
    
    416Total interest-bearing deposits
    
    
    479
    
    
    
    143
    
    
    
    622FHLB Advances
    
    
    750
    
    
    
    (606
    )
    
    
    144Total interest bearing liabilities
    
    
    1,229
    
    
    
    (463
    )
    
    
    766Change in net interest income
    
    $
    2,506
    
    
    $
    (1,164
    )
    
    $
    1,342
 Net Interest Income: Net interest income before the provision for loan loss was $7.3
million for the quarter ended March 31, 2005, compared to $5.9 million for the same period
in the prior year. This $1.3 million, or 22.7% increase in net interest income before the
provision for loan losses is primarily due to increased loan volume partially offset by a
27 basis point decline in average loan yield. Average earning assets increased by $164.0
million to $859.0 million as of March 31, 2005 when compared to the same period in the
prior year. Our net interest margin declined 2 basis points to 3.38% for the quarter ended
March 31, 2005 from 3.40%. Interest and Dividend Income: Interest and dividend income increased by $2.1 million, or
23.7%, to $11.0 million for the quarter ended March 31, 2005 from $8.9 million for the same
period in the prior year. Our yield on earning assets for the quarter ended March 31, 2005
remained constant at 5.13% when compared to the three months ended March 31, 2004. Interest
income on loans receivable increased by $2.1 million, or 27.1%, to $9.6 million from $7.6
million. The increase in interest and dividend income was due to a $178.9 million, or a
33.4% increase in average loans receivable offset by a 27 basis point decline in the
average yield on the loan portfolio. The decline in the average yield was attributable to a
competitive loan environment and the impact of the annual re-pricing of adjustable rate
residential mortgages offset by increases in the average yield on loans priced based on
prime rate. The prime rate used as an index to re-price various commercial and home equity
adjustable loans increased 175 basis points during the past year to 5.75% as of March 31,
2005 from 4.0% at March 31, 2004. Interest and dividend income on securities increased $90,000, or 7.0%, when compared to the same period in the prior year. Interest Expense:Interest expense for the three months ended March 31, 2005 increased
$766,000 or 25.5% to $3.8 million from $3.0 million from the same period in the prior year.
The increase resulted from a $144.0 million, or a 23.7% increase in average
interest-bearing liabilities and an increase of 3 basis points paid on average
interest-bearing liabilities for the three months ended March 31, 2005 as compared to the
three months ended March 31, 2004. The increase in the cost of funds was due to a rising
interest rate environment and was largely mitigated by the increased use of short-term
wholesale funding and deposit account strategies to attract lower cost core deposits.
Average balances on interest- Rockville Financial, Inc.
    
    
    21




---



##### Table of Contents



bearing deposits rose to $620.6 million, an increase of $117.6 million or 23.4% as of March
31, 2005 compared to $503.0 million as of March 31, 2004. Provision for Loan Losses:The allowance for loan losses is maintained at a level necessary
to absorb estimated credit losses that are both probable and reasonably estimable at the
dates of the financial statements. Management evaluates the adequacy of the allowance for
loan losses on a quarterly basis and charges any provision for loans losses needed to
current operations. The assessment considers historical loss experience, the types of loans
and the amount of loans in the loan portfolio, adverse situations that may affect the
borrowers ability to repay, estimated value of any underlying collateral, and prevailing
economic conditions. Based on our evaluation of these factors, management recorded a
provision of $750,000 for the three months ended March 31, 2005, an increase of $ 248,000
compared to the same period in the prior year. The provision increased primarily as a
result of significant loan growth. At March 31, 2005, the allowance for loan losses totaled
$6.8 million, or 444.6% of nonperforming loans, excluding a nonperforming fully guaranteed
USDA loan for $4.9 million which was brought current April 1, 2005, and 0.92% of total
loans, compared to $6.4 million at December 31, 2004, or 265.7% of nonperforming loans and
0.91% of total loans. NonInterest Income:We have the following sources of noninterest income: banking service
charges on deposit accounts, Infinex brokerage and insurance fees, bank owned life
insurance and mortgage servicing income. Noninterest income increased by $182,000, or 25.5%, to $895,000 for the three months ended
March 31, 2005 from $713,000 earned during the same period in the prior year. Service
charges and fees increased $129,000 or 18.8% to $817,000 for the three months ended March
31, 2005 compared to $688,000 for the three months ended March 31, 2004. The increase in
service charges and fees was partially attributable to an increase of $61,000 or 37.0% in
ATM fees earned due to the addition of four ATM facilities during the period and enhanced
ATM marketing programs. NonInterest Expense:Noninterest expense increased by $1.2 million, or 24.4%, to $6.1
million for the three months ended March 31, 2005 from $4.9 million for the same period in
the prior year. The following table summarizes noninterest expense for the three months
ended March 31, 2005 and 2004: Three MonthsEndedMarch 31,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)(In thousands)Salaries and employee benefits
    
    $
    3,057
    
    
    $
    2,513
    
    
    $
    544Service bureau fees
    
    
    638
    
    
    
    556
    
    
    
    82Occupancy and equipment
    
    
    741
    
    
    
    725
    
    
    
    16Professional fees
    
    
    409
    
    
    
    205
    
    
    
    204Marketing and promotions
    
    
    355
    
    
    
    158
    
    
    
    197Insurance and FDIC assessments
    
    
    43
    
    
    
    58
    
    
    
    (15
    )Other
    
    
    876
    
    
    
    703
    
    
    
    173Total noninterest expense
    
    $
    6,119
    
    
    $
    4,918
    
    
    $
    1,201
 Salary and benefits increased $544,000 due to an increased staffing level in connection
with the expansion of branch facilities and the commercial lending division, and increases
in other benefit expenses. The number of full-time equivalent employees increased to 166
employees as of March 31, 2005 from 150 as of March 31, 2004. The increase in other
benefits expense was primarily due to an increase of $200,000 in supplemental retirement
and phantom stock benefits for certain executive officers. The $204,000 increase in
professional fees includes expenses of $154,000 that were incurred in connection with
preparing for Section 404 compliance with the Sarbanes-Oxley Act and fees associated with
transactions related to the offering. Marketing and promotions expense increased Rockville Financial, Inc.
    
    
    22




---



##### Table of Contents



$197,000 or 124.7% primarily as a result of the marketing cost incurred to take advantage
of growth opportunities resulting from bank consolidations in our market area. Other non-interest expense increased by $173,000 or 24.6% to $876,000 for the three months
ended March 31, 2005 compared to $703,000 for the same period in the prior year.
Significant components of other non-interest expense are as follows: Three MonthsEndedMarch 31,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)(In thousands)Directors fees
    
    $
    90
    
    
    $
    68
    
    
    $
    22Appraisal and credit report
    
    
    95
    
    
    
    41
    
    
    
    54Telephone
    
    
    62
    
    
    
    55
    
    
    
    7Postage
    
    
    53
    
    
    
    71
    
    
    
    (18
    )Courier
    
    
    57
    
    
    
    51
    
    
    
    6Dues and subscriptions
    
    
    43
    
    
    
    49
    
    
    
    (6
    )Service charges
    
    
    33
    
    
    
    33
    
    
    
    Printing and forms
    
    
    28
    
    
    
    21
    
    
    
    7Other
    
    
    415
    
    
    
    314
    
    
    
    101Total other noninterest expense
    
    $
    876
    
    
    $
    703
    
    
    $
    173
 Income Tax Expense:Income tax expense decreased $6,000 or 1.6% to $360,000 for the three
months ended March 31, 2005 as compared to $366,000 incurred for the same period in the
prior year. Income taxes are provided on an interim basis using the estimated annual
effective tax rate. Our effective tax rate differs from the statutory rate of 34% for the
three months ended March 31, 2005 and March 31, 2004 primarily due to the dividend received
deduction and non-taxable earnings on bank owned life insurance for both periods. Comparison of Financial Condition at March 31, 2005 and December 31, 2004 Summary:The Companys total assets increased $33.6 million, or 3.8%, to $923.5
million at March 31, 2005, as compared to $889.9 million at December 31, 2004, primarily
due to a $36.9 million increase in loans receivable partially offset by a $6.1 million
reduction in available for sale securities. Cash and cash equivalents increased $2.6
million, or 11.9%, due to increased cash levels associated with the addition of two new
branches in 2004 and the expansion of our ATM network. Net loans receivable increased $36.9
million, or 5.3%, to $733.1 million at March 31, 2005 as compared to $696.2 million at
December 31, 2004 primarily due to an increase in one-to-four family residential mortgages
and to a lesser extent, an increase in commercial business loans. Available for sale
investment securities declined $6.1 million or 4.5% to $129.9 million at March 31, 2005 as
compared to $136.0 million at December 31, 2004. The proceeds from the investment
securities were used to fund loan growth. Deposits increased $25.7 million, or 3.7%, to 718.2 million at March 31, 2005. The growth
was principally attributable to increases in NOW accounts and money market and investment
savings accounts due to expanded branch operations and increased marketing efforts. Federal
Home Loan Bank advances increased $9.8 million, or 8.3%, to $127.8 million at March 31,
2005 from $118.0 at December 31, 2004. The Federal Home Loan Bank borrowing increases were
primarily short term overnight advances used to fund loan demand. It is anticipated that
these short-term borrowings will be repaid with proceeds from the initial public offering. Rockville Financial, Inc.
    
    
    23




---



##### Table of Contents



Total capital decreased $282,000, or 0.4%, to $68.2 million at March 31, 2005 compared to
$68.5 million at December 31, 2004 primarily due to a $1.2 million decrease in unrealized
gains on available for sale securities, net of taxes. The decline in unrealized gains was
due to rising market interest rates negatively impacting the fair value of the Companys
debt securities during the period and a downward trend in the stock market negatively
affecting the fair value of marketable equity securities. Investment Securities:At March 31, 2005, the Companys investment portfolio, consisted
solely of available for sale securities, was $129.9 million, or 14.1% of total assets. This
decrease of $6.1 million, or 4.5% in investment securities, compared to December 31, 2004,
was primarily due to scheduled repayments and maturities which were used to fund loan
growth. At March 31, 2005, the net unrealized gain on investment securities available for
sale was $1.5 million, net of taxes, compared to $2.7 million as of December 31, 2004. As
noted earlier, rising market interest rates negatively impacted the fair value of the
Companys debt securities during the period and a downward trend in the stock market
negatively affected the fair value of marketable equity securities. The following table displays a summary of the Companys investment securities as of March
31, 2005 and December 31, 2004: March 31, 2005
    
    
    December 31, 2004Amortized
    
    
    Fair
    
    
    Percent of
    
    
    Amortized
    
    
    
    
    
    
    Percent ofCost
    
    
    Value
    
    
    Protfolio
    
    
    Cost
    
    
    Fair Value
    
    
    Portfolio(Dollars in thousands)Available for sale:U.S. Government and agency obligations
    
    $
    1,996
    
    
    $
    1,983
    
    
    
    1.5
    %
    
    $
    1,994
    
    
    $
    1,984
    
    
    
    1.5
    %U.S. Government sponsored enterprises
    
    
    24,999
    
    
    
    24,576
    
    
    
    18.9
    
    
    
    24,160
    
    
    
    24,053
    
    
    
    17.7Mortgage-backed securities
    
    
    63,529
    
    
    
    63,029
    
    
    
    48.6
    
    
    
    67,291
    
    
    
    67,359
    
    
    
    49.5Corporate debt securities
    
    
    25,574
    
    
    
    25,957
    
    
    
    20.0
    
    
    
    28,384
    
    
    
    29,289
    
    
    
    21.5Other debt securities
    
    
    1,433
    
    
    
    1,484
    
    
    
    1.1
    
    
    
    1,434
    
    
    
    1,506
    
    
    
    1.1Total debt securities
    
    
    117,531
    
    
    
    117,029
    
    
    
    90.1
    
    
    
    123,263
    
    
    
    124,191
    
    
    
    91.3Marketable equity securities
    
    
    9,725
    
    
    
    12,520
    
    
    
    9.6
    
    
    
    8,309
    
    
    
    11,490
    
    
    
    8.5Non-marketable equity securities
    
    
    326
    
    
    
    326
    
    
    
    0.3
    
    
    
    326
    
    
    
    326
    
    
    
    0.2$
    127,582
    
    
    $
    129,875
    
    
    
    100.0
    %
    
    $
    131,898
    
    
    $
    136,007
    
    
    
    100.0
    %
 Rockville Financial, Inc.
    
    
    24




---



##### Table of Contents



Lending Activities:Net loans receivable increased $36.9 million, or 5.3%, to $733.1
million at March 31, 2005 as compared to $696.2 million at December 31, 2004 primarily due
to an increase in one-to-four family residential mortgages and to a lesser extent, an
increase in commercial business loans. The composition of the Banks loan portfolio was as follows for the period indicated: March 31,
    
    
    December 31,2005
    
    
    2004Loan Category
    
    
    
    
    
    (Dollars in thousands)Real estate loans:Residential
    
    $
    474,706
    
    
    
    64.3
    %
    
    $
    450,054
    
    
    
    64.2
    %Commercial
    
    
    139,691
    
    
    
    18.9
    
    
    
    136,594
    
    
    
    19.5Construction
    
    
    24,267
    
    
    
    3.3
    
    
    
    22,067
    
    
    
    3.1Commercial business loans
    
    
    96,191
    
    
    
    13.0
    
    
    
    88,700
    
    
    
    12.7Installment loans
    
    
    2,175
    
    
    
    0.3
    
    
    
    2,268
    
    
    
    0.3Collateral loans
    
    
    1,126
    
    
    
    0.2
    
    
    
    1,205
    
    
    
    0.2Total loans
    
    
    738,156
    
    
    
    100.0
    %
    
    
    700,888
    
    
    
    100.0
    %Net deferred loan fees and premium
    
    
    1,778
    
    
    
    
    
    
    
    1,732Allowance for loan losses
    
    
    (6,789
    )
    
    
    
    
    
    
    (6,371
    )Loans, Net
    
    $
    733,145
    
    
    
    
    
    
    $
    696,249
 Residential real estate loans increased $24.7 million, or 5.5%, to $474.7 million. This
increase in loans reflects continued demand for loans in a favorable interest rate
environment, a no-closing costs loan program for refinanced residential loans introduced
last year and a home equity line of credit marketing campaign. Commercial business loans
increased $7.5 million, or 8.5%, to $96.2 million at March 31, 2005. Commercial business
loans includes $47.8 million and $48.2 million of loans fully guaranteed by the United
States Department of Agriculture as of March 31, 2005 and December 31, 2004, respectively.
The remaining commercial business loans represent loans partially guaranteed by the Small
Business Administration, revolving business lines of credit and term loans. Management
expects to grow the commercial real estate, commercial construction and commercial business
loan portfolios due to the hiring of two additional commercial lenders and an additional
credit analyst. Rockville Financial, Inc.
    
    
    25




---



##### Table of Contents



Non-performing Assets:The table below sets forth the amounts and categories of our
non-performing assets at the dates indicated. Once a loan is 90 days delinquent or either
the borrower or the loan collateral experiences an event that makes collectibility suspect,
the loan is placed on non-accrual status. Our policies require six months of continuous
payments in order for the loan to be removed from non-accrual status. March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Non-accrual loans:Residential(1)
    
    $
    201
    
    
    $
    423Commercial
    
    
    179
    
    
    
    598Commercial business loans
    
    
    135
    
    
    
    326Installment, collateral and other loans
    
    
    16
    
    
    
    6Total non-accrual loans(2)
    
    
    531
    
    
    
    1,353Accruing loan past due 90 days or more(3)
    
    
    4,936
    
    
    
    Troubled debt restructurings
    
    
    996
    
    
    
    1,045Total non-performing loans
    
    
    6,463
    
    
    
    2,398Real estate owned
    
    
    100
    
    
    
    150Total non-performing assets
    
    $
    6,563
    
    
    $
    2,548Total non-performing loans to total loans
    
    
    0.88
    %
    
    
    0.34
    %Total non-performing loans to total assets
    
    
    0.70
    %
    
    
    0.27
    %Allowance for loan losses as a percent of total loans
    
    
    0.92
    %
    
    
    0.91
    %Allowance for loan losses as a percent of
non-performing loans
    
    
    105.04
    %
    
    
    265.68
    %
   (1)
    
    Residential mortgage loans include one-to-four family mortgage loans, home
equity loans, and home equity lines of credit.(2)
    
    The amount of income that was contractually due but not recognized on
non-accrual loans totaled $23,000 and $96,000 for the three months ended March 31,
2005 and March 31, 2004, respectively.(3)
    
    Balance as of March 31, 2005 represents a loan that is fully guaranteed by
the United States Agriculture Department which was brought current on April 1, 2005. Allowance for Loan Losses:The methodology used for determining the adequacy of the loan
loss contains three key components: 1) a general valuation allowance for each loan type
within the portfolio; 2) a higher reserve valuation by type and grade for loans that have
been adversely graded; and 3) a specific allowance for loans that have been identified as
problem loans or for loans that have an elevated risk profile, including certain impaired
or non-performing assets. General Valuation Allowance. The Bank establishes a reserve for loans that are
deemed to have a normal risk profile in recognition of the fact that some inherent expected
future loss is associated with the extension of credit. The reserve amount is determined by
loan type, historical loss experience for that particular loan type, credit quality trends,
delinquency levels, quality of collateral and changes in general economic and business
conditions. Adversely Graded Loans. A loan is considered adversely graded when it has a higher
than normal risk profile with the possibility of not receiving timely loan payments and is
graded by the degree of risk. Rockville Financial, Inc.
    
    
    26




---



##### Table of Contents



Depending on the loan grade, the type of loan and the degree of collateral protection, a
percentage allocation is made in determining the adequacy of the Allowance for Loan Losses. Specific Allowance. Adversely graded loans are reviewed individually in order to
ensure that the percentage allocation adequately reflects the identified risk level. If the
risk level exceeds the standard percentage allocation, then a specific reserve is
established for that loan. The credit quality of the Banks loan portfolio is reviewed by a third party risk
assessment firm, regulatory examiners and by the Banks internal credit management
function. Review findings are reported periodically to senior management, the Board Lending
Committee and the Board of Directors. This process is supplemented with several risk
assessment tools including monitoring of delinquency levels, analysis of historical loss
experience by loan type, identification of portfolio concentrations by borrower and
industry, and a review of economic conditions that might impact loan quality. Based on
these findings the percentage reserved for each loan type is evaluated to ensure a proper
reserve percentage. The Allowance for Loan Losses is calculated on a quarterly basis and
reported to the Board of Directors. Any loan that is 90 or more days delinquent is placed on non-accrual and classified as a
non-performing asset. A loan is classified as impaired when it is probable that the Bank
will be unable to collect all amounts due in accordance with the terms of the loan
agreement. In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment for Loan-Income
Recognition and Disclosures, an allowance is maintained for impaired loans to reflect the
difference, if any, between the principal balance of the loan and the present value of
projected cash flows, observable fair value or collateral value. SFAS No. 114 defines an
impaired loan as a loan for which it is probable that the lender will not collect all
amounts due under the contractual terms of the loan. This analysis process is both quantitative and subjective, as it requires us to make
estimates that are susceptible to revisions as more information becomes available. Although
we believe that we have established the allowance at levels to absorb probable and
estimable losses, future additions may be necessary if economic or other conditions in the
future differ from the current environment. The allowance for loan losses increased $418,000, or 6.6%, to $6.8 million at March 31,
2005. The increase in loan loss resulted from a $750,000 provision for loan losses for the
three months ended March 31, 2005 offset by $332,000 in net charge-offs. The increase in
the allowance was deemed necessary based upon managements analysis and the growth of the
loan portfolio. At March 31, 2005, the allowance for loan losses represented 0.92% of total
loans and 444.6% of non-performing loans, excluding the fully guaranteed non-performing
USDA loan which was brought current on April 1, 2005 and 105.0% of non-performing loans
when including the fully guaranteed non-performing USDA loan, compared to 0.91% of total
loans and 265.7% of non-performing loans as of December 31, 2004. Rockville Financial, Inc.
    
    
    27




---



##### Table of Contents



Deposits:The following table displays a summary of the Companys deposits as of March 31,
2005 and December 31, 2004: March 31,
    
    
    December 31,2005
    
    

2004(Dollars in
thousands)Deposit
type:Demand deposits
    
    $
    74,821
    
    
    
    10.4
    %
    
    $
    77,972
    
    
    
    11.3
    %NOW accounts
    
    
    97,308
    
    
    
    13.5
    
    
    
    88,768
    
    
    
    12.8Regular savings
    
    
    168,249
    
    
    
    23.4
    
    
    
    161,215
    
    
    
    23.3Money market
and investment savings
    
    
    98,286
    
    
    
    13.7
    
    
    
    84,789
    
    
    
    12.2Club accounts
    
    
    468
    
    
    
    0.1
    
    
    
    205
    
    
    
    0.0Total transaction accounts
    
    
    439,132
    
    
    
    61.1
    
    
    
    412,949
    
    
    
    59.6Certificates of deposit
    
    
    279,067
    
    
    
    38.9
    
    
    
    279,549
    
    
    
    40.4Total deposits
    
    $
    718,199
    
    
    
    100.0
    %
    
    $
    692,498
    
    
    
    100.0
    %
 Deposits increased $25.7 million, or 3.7%, to $718.2 million at March 31, 2005. The growth
was principally attributable to increases in NOW accounts and money market and investment
savings accounts due to expanded branch operations and increased marketing efforts. The
Company promoted an ultimate money market product at a competitive rate that required
direct deposit of a checking account in order to qualify for the product. Liquidity and Capital Resources:We maintain liquid assets at levels we consider adequate
to meet our liquidity needs. Our liquidity ratio averaged 20.4% and 25.6% for the three
months ended March 31, 2005 and the year ended December 31, 2004, respectively. We adjust
our liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows
and pay real estate taxes on mortgage loans. We also adjust liquidity as appropriate to
meet asset and liability management objectives. Our primary sources of liquidity are deposits, amortization and prepayment of loans,
maturities of investment securities and other short-term investments, and earnings and
funds provided from operations. While scheduled principal repayments on loans are a
relatively predictable source of funds, deposit flows and loan prepayments are greatly
influenced by market interest rates, economic conditions, and rates offered by our
competition. We set the interest rates on our deposits to maintain a desired level of total
deposits. In addition, we invest excess funds in short-term interest-earning assets, which
provide liquidity to meet lending requirements. A portion of our liquidity consists of cash and cash equivalents, which are a product of
our operating, investing and financing activities. At March 31, 2005 and December 31, 2004,
respectively, $24.7 million and $22.1 million of our assets were invested in cash and cash
equivalents. Our primary sources of cash are principal repayments on loans, proceeds from
the calls and maturities of investment securities, increases in deposit accounts and
advances from the Federal Home Loan Bank of Boston. The Company plans to use the proceeds received from the initial public offering to repay
$21.8 million in short-term advances from the Federal Home Loan Bank, to purchase
investments and for general corporate purposes. Rockville Financial, Inc.
    
    
    28




---



##### Table of Contents



During the three months ended March 31, 2005 and 2004, our loan originations and purchases,
net of collected principal and loan sales, totaled $37.6 million and $15.9 million,
respectively, reflecting net growth in our portfolio due to a favorable interest rate
environment and a no-closing cost residential loan program targeted at the refinance
market. Cash received from the calls and maturities of investment securities totaled $4.1
million and $8.0 million during the three months ended March 31, 2005 and 2004,
respectively. We purchased $6.2 million and $14.3 million and received proceeds from the
sale of $2.7 million and $451,000 in available for sale investment securities during the
three months ended March 31, 2005 and 2004, respectively. Deposit flows are generally affected by the level of interest rates, the interest rates and
products offered by local competitors, and other factors. The net increases in total
deposits were $25.7 million and $53.7 million for the three months ended March 31, 2005 and
2004, respectively. Rockville Bank experienced higher deposit levels in 2004 and 2005 due
to the consolidation of competitors in its markets. Liquidity management is both a daily and longer-term function of business management. If we
require funds beyond our ability to generate them internally, borrowing agreements exist
with the Federal Home Loan Bank of Boston, which provide an additional source of funds. At
March 31, 2005, we had $127.8 million in advances from the Federal Home Loan Bank of Boston
and an additional available borrowing limit of $143.5 million based on collateral
requirements of the Federal Home Loan Bank of Boston. Internal policies limit borrowings to
20% of total assets, or $184.7 million at March 31, 2005. At March 31, 2005, we had outstanding commitments to originate loans of $27.6 million and
unfunded commitments under lines of credit and stand-by letters of credit of $137.3
million. At March 31, 2005, certificates of deposit scheduled to mature in less than one
year totaled $182.4 million. Based on prior experience, management believes that a
significant portion of such deposits will remain with us, although there can be no
assurance that this will be the case. In the event a significant portion of our deposits
are not retained by us, we will have to utilize other funding sources, such as Federal Home
Loan Bank of Boston advances in order to maintain our level of assets. Alternatively, we
would reduce our level of liquid assets, such as our cash and cash equivalents in order to
meet funding needs. In addition, the cost of such deposits may be significantly higher if
market interest rates are higher or there is an increased amount of competition for
deposits in our market area at the time of renewal. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk General:The majority of our assets and liabilities are monetary in nature.
Consequently, our most significant form of market risk is interest rate risk. Our assets,
consisting primarily of mortgage loans, in general have longer contractual maturities than
our liabilities, consisting primarily of deposits. As a result, a principal part of our
business strategy is to manage interest rate risk and reduce the exposure of our net
interest income to changes in market interest rates. Accordingly, our Board of Directors
has established an Asset/Liability Committee which is responsible for evaluating the
interest rate risk inherent in our assets and liabilities, for determining the level of
risk that is appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with the
guidelines approved by the Board of Directors. Management monitors the level of interest
rate risk on a regular basis and the Asset/Liability Committee meets at least quarterly to
review our asset/liability policies and interest rate risk position. We have sought to manage our interest rate risk in order to minimize the exposure of our
earnings and capital to changes in interest rates. During the low interest rate environment
that has existed in recent years, we have implemented the following strategies to manage
our interest rate risk: (i) emphasizing adjustable rate loans including, adjustable rate
one-to-four family, commercial and consumer loans, (ii) reducing and shortening the
expected average life of the investment portfolio, and (iii) whenever possible, lengthening
the term structure of our deposit base and our borrowings from the Federal Home Loan Bank
of Boston. These measures should serve to reduce the volatility of our future net interest
income in different interest rate environments. Rockville Financial, Inc.
    
    
    29




---



##### Table of Contents



Quantitative Analysis: Income Simulation:Simulation analysis is an estimate of our interest rate risk exposure
at a particular point in time. It is a dynamic method in that it incorporates our
forecasted balance sheet growth assumptions under the different interest rate scenarios
tested. We utilize the income simulation method to analyze our interest rate sensitivity
position to manage the risk associated with interest rate movements. At least quarterly,
our Asset/Liability Committee reviews the potential effect changes in interest rates could
have on the repayment or repricing of rate sensitive assets and funding requirements of
rate sensitive liabilities. Our most recent simulation uses projected repricing of assets
and liabilities at March 31, 2005 on the basis of contractual maturities, anticipated
repayments and scheduled rate adjustments. Prepayment rate assumptions can have a
significant impact on interest income simulation results. Because of the large percentage
of loans and mortgage-backed securities we hold, rising or falling interest rates may have
a significant impact on the actual prepayment speeds of our mortgage related assets that
may in turn effect our interest rate sensitivity position. When interest rates rise,
prepayment speeds slow and the average expected life of our assets would tend to lengthen
more than the expected average life of our liabilities and therefore would most likely
result in a decrease to our asset sensitive position. PercentageIncrease (Decrease) inEstimated NetInterest IncomeOver 12 Months300 basis point increase in rates
    
    
    (8.7
    )%150 basis point increase in rates
    
    
    2.3150 basis point decrease in rates
    
    
    (9.4
    )
 Rockville Banks Asset/Liability policy limits projected changes in net interest income to
a maximum variance of (5%) for every 100 basis point interest rate change measured over a
twelve-month and a twenty-four month period when compared to the flat rate scenario. In
addition, our return on assets (ROA) may change by a maximum of (15) basis points for every
100 basis point interest rate change when compared to the flat rate scenario. These limits
are re-evaluated on a periodic basis (not less than annually) and may be modified, as
appropriate. Because of the asset-sensitivity of our balance sheet, income is projected to
decrease by a greater amount if interest rates fall. At March 31, 2005, income at risk
(i.e., the change in net interest income) was a decrease of 8.7% and a decrease of 9.4%
based on a 300 basis point increase and a 150 basis point decrease in interest rates,
respectively. At March 31, 2005, return on assets is modeled to decrease by 19 basis points
and to decrease by 22 basis points based on a 300 basis point increase and a 150 basis
point decrease in interest rates, respectively. While we believe the assumptions used are
reasonable, there can be no assurance that assumed prepayment rates will approximate actual
future mortgage-backed security and loan repayment activity. 
 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures:As of the end of the period covered
by this report, based upon an evaluation of the Companys disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934),
the Chief Executive Officer and the Chief Financial Officer of the Company have concluded
that the Companys disclosure controls and procedures are effective to ensure that the
information required to be disclosed by the Company in its Exchange Act reports is
recorded, processed, summarized and reported within the applicable time periods specified
by the SECs rules and forms and is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Controls:During the quarter under report, there was no change in the
Companys internal control over financial reporting (as defined in Rule 13a-15(f)
under the Rockville Financial, Inc.
    
    
    30




---



##### Table of Contents



Securities and Exchange Act of 1934) that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting. 
 Part II  OTHER INFORMATION 
 Item 1. Legal Proceedings The Company is party to various litigation matters arising in the ordinary course of
business. Although the ultimate resolution of these matters cannot be determined at this
time, management of the Company does not believe that such matters, individually or in the
aggregate, will have a material adverse effect on the future results of operations or
financial condition of the Company. 
 Item 6. Exhibits  2.0
    - Amended and Restated Plan of Reorganization and Minority Stock Issuance (incorporated herein by
reference to Exhibit 2 to the
   Registration Statement on
Form S-1 files for Rockville Financial Inc., as amended,
initially filed on December 17, 2004   (File No. 333-121421))3.1
    - Charter of Rockville Financial Inc. (incorporated herein by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1 files   for Rockville Financial Inc., as amended,
initially filed on December 17, 2004 (File No. 333-121421))3.2
    - Bylaws of Rockville Financial Inc.4
    - Form of Specimen Stock Certificate of Rockville Financial,
Inc. (incorporated by reference to Exhibit 4 to the Registration   Statement on Form S-1 files for Rockville Financial Inc., as
amended, initially filed on December 17, 2004 (File
No. 333-121421))31.1
    - Rule 13a-14(a)/15d-14(a) Certification.31.2
    - Rule 13a-14(a)/15d-14(a) Certification.32
    - Section 1350 Certifications. Rockville Financial, Inc.
    
    
    31




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized. Rockville Financial, Inc.By:
    
    /s/ Mr. William J. McGurkMr. William J. McGurkPresident and Chief Executive OfficerDate:
    
    May 13, 2005By:
    
    /s/ Mr. Gregory A. WhiteMr. Gregory A. WhiteChief Financial Officer and TreasurerDate:
    
    May 13, 2005
 Rockville Financial, Inc.
    
    
    32