##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the quarterly period ended March 31, 2006.
 Commission File Number: 000-51239
 ROCKVILLE FINANCIAL, INC.
 (Exact name of registrant as specified in its charter)
 Connecticut
    
    30-0288470(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)25 Park Street, Rockville, Connecticut
    
    06066(Address of principal executive officers)
    
    (Zip Code)
 (860) 291-3600
(Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### Table of Contents



Table of Contents
 Page No.Part I  FINANCIAL INFORMATIONItem 1. Interim Financial StatementsCondensed Consolidated Statements of Condition at March 31, 2006 and December 31, 2005 (unaudited)
    
    
    3Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 (unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Shareholders Equity for the three months ended March 31, 2006 (unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 6. Exhibits
    
    
    32SIGNATURES
    
    
    34EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Interim Financial Statements:
 Rockville Financial, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Condition
 (In Thousands Except Share Amounts)
 (Unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    17,461
    
    
    $
    18,117Short-term investments
    
    
    1,855
    
    
    
    5,494Total cash and cash equivalents
    
    
    19,316
    
    
    
    23,611AVAILABLE FOR SALE SECURITIES-At fair value
    
    
    129,018
    
    
    
    129,049LOANS RECEIVABLE (Net of allowance for loan
losses of $8,713 in 2006 and $8,675 in 2005)
    
    
    923,293
    
    
    
    859,700FEDERAL HOME LOAN BANK STOCK
    
    
    8,858
    
    
    
    8,498ACCRUED INTEREST RECEIVABLE
    
    
    3,787
    
    
    
    3,777DEFERRED TAX ASSET-Net
    
    
    3,620
    
    
    
    3,417BANK PREMISES AND EQUIPMENT-Net
    
    
    11,855
    
    
    
    11,317GOODWILL
    
    
    1,070
    
    
    
    1,070CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
    
    
    8,696
    
    
    
    8,615OTHER ASSETS
    
    
    6,407
    
    
    
    7,115TOTAL
    
    $
    1,115,920
    
    
    $
    1,056,169LIABILITIES AND CAPITALLIABILITIESDeposits:Non-interest bearing
    
    $
    88,184
    
    
    $
    85,855Interest bearing
    
    
    701,868
    
    
    
    675,541Total deposits
    
    
    790,052
    
    
    
    761,396MORTGAGORS AND INVESTORS ESCROW ACCOUNTS
    
    
    2,822
    
    
    
    4,794ADVANCES FROM THE FEDERAL HOME LOAN BANK
    
    
    163,229
    
    
    
    130,867ACCRUED EXPENSES AND OTHER LIABILITIES
    
    
    7,606
    
    
    
    8,207Total liabilities
    
    
    963,709
    
    
    
    905,264COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock (no par value; 1,000,000 shares authorized;
no shares issued and outstanding )
    
    
    
    
    
    
    Common stock (no par value; 29,000,000 shares authorized;
19,435,000 shares issued and outstanding)
    
    
    85,249
    
    
    
    85,249Additional paid in capital
    
    
    287
    
    
    
    213Unallocated stock held by ESOP
    
    
    (7,010
    )
    
    
    (6,368
    )Retained earnings
    
    
    72,713
    
    
    
    70,764Accumulated other comprehensive income, net of tax
    
    
    972
    
    
    
    1,047Total capital
    
    
    152,211
    
    
    
    150,905TOTAL
    
    $
    1,115,920
    
    
    $
    1,056,169
  3




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Rockville Financial, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Income
 (In Thousands, Except Share and Per Share Amounts)
 (Unaudited)
 For the Three Months EndedMarch 31,2006
    
    
    2005INTEREST AND DIVIDEND INCOME:Loans
    
    $
    12,857
    
    
    $
    9,623Securities-interest
    
    
    1,237
    
    
    
    1,223Interest bearing deposits
    
    
    23
    
    
    
    18Securities-dividends
    
    
    210
    
    
    
    154Total interest and dividend income
    
    
    14,327
    
    
    
    11,018INTEREST EXPENSEDeposits
    
    
    3,799
    
    
    
    2,491Borrowed funds
    
    
    1,631
    
    
    
    1,276Total interest expense
    
    
    5,430
    
    
    
    3,767Net interest income
    
    
    8,897
    
    
    
    7,251PROVISION FOR LOAN LOSSES
    
    
    450
    
    
    
    750Net interest income after provision
for loan losses
    
    
    8,447
    
    
    
    6,501NONINTEREST INCOME:Service charges and fees
    
    
    887
    
    
    
    817Net gain from sale of securities
    
    
    114
    
    
    
    78Total noninterest income
    
    
    1,001
    
    
    
    895NONINTEREST EXPENSE:Salaries and employee benefits
    
    
    3,426
    
    
    
    3,057Service bureau fees
    
    
    705
    
    
    
    638Occupancy and equipment
    
    
    906
    
    
    
    741Professional fees
    
    
    250
    
    
    
    409Marketing and promotions
    
    
    218
    
    
    
    355Insurance and FDIC assessments
    
    
    54
    
    
    
    43Other
    
    
    971
    
    
    
    876Total noninterest expense
    
    
    6,530
    
    
    
    6,119INCOME BEFORE INCOME TAXES
    
    
    2,918
    
    
    
    1,277PROVISION FOR INCOME TAXES
    
    
    969
    
    
    
    360NET INCOME
    
    $
    1,949
    
    
    $
    917Net income
per share (see Note 2):Basic and diluted
    
    $
    .10
    
    
    $
    N/AWeighted average shares outstanding:Basic and diluted
    
    
    18,824,042
    
    
    
    N/A
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Rockville Financial, Inc. and Subsidiaries
 
 Consolidated Statement of Changes in Stockholders Equity
 For the Three Months Ended March 31, 2006
 (Dollars in Thousands, Except Share Amounts)
 (Unaudited)
 Unallocated
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    Common
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Shares Held
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Dollars
    
    
    Capital
    
    
    by ESOP
    
    
    Earnings
    
    
    Income
    
    
    EquityThree months ended
March 31, 2006:Balance at January 1, 2006
    
    
    19,435,000
    
    
    $
    85,249
    
    
    $
    213
    
    
    $
    (6,368
    )
    
    $
    70,764
    
    
    $
    1,047
    
    
    $
    150,905Shares purchased for ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (817
    )
    
    
    
    
    
    
    
    
    
    
    (817
    )Compensation expense for
ESOP
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    249Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,949
    
    
    
    
    
    
    
    1,949Change in net unrealized
loss
on securities
available for
sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    (75
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,874Balance at March 31, 2006
    
    
    19,435,000
    
    
    $
    85,249
    
    
    $
    287
    
    
    $
    (7,010
    )
    
    $
    72,713
    
    
    $
    972
    
    
    $
    152,211
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Rockville Financial, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 (In Thousands)
 (Unaudited)
 For the Three Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,949
    
    
    $
    917Adjustments to reconcile net income to net cash
provided by operating activities:Amortization and accretion of premiums and discounts
on investments  net
    
    
    51
    
    
    
    104Provision for loan losses
    
    
    450
    
    
    
    750Net gain from sale of securities
    
    
    (114
    )
    
    
    (78
    )Compensation expense for ESOP
    
    
    249
    
    
    
    Depreciation and amortization
    
    
    330
    
    
    
    281Deferred income taxes
    
    
    (164
    )
    
    
    (312
    )Increase in cash surrender value of bank owned life insurance
    
    
    (81
    )
    
    
    (82
    )Change in assets and liabilities:Deferred loan fees and premiums
    
    
    16
    
    
    
    (46
    )Accrued interest receivable
    
    
    (10
    )
    
    
    (197
    )Other assets
    
    
    708
    
    
    
    1,299Accrued expenses and other liabilities
    
    
    (600
    )
    
    
    (6
    )Net cash provided by operating activities
    
    
    2,784
    
    
    
    2,630CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of available for sale securities
    
    
    976
    
    
    
    2,717Proceeds from maturities of available for sale securities
    
    
    2,750
    
    
    
    4,084Principal payments on available for sale
mortgage-backed securities
    
    
    3,193
    
    
    
    3,713Purchase of available for sale securities
    
    
    (6,940
    )
    
    
    (6,225
    )Purchase of Federal Home Loan Bank Stock
    
    
    (360
    )
    
    
    (346
    )Proceeds from sales of loans
    
    
    948
    
    
    
    Net increase in loans
    
    
    (65,007
    )
    
    
    (37,600
    )Purchases of bank premises and equipment
    
    
    (868
    )
    
    
    (498
    )Net cash used in investing activities
    
    
    (65,308
    )
    
    
    (34,155
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in non-interest bearing deposits
    
    
    2,329
    
    
    
    (3,151
    )Net increase in interest bearing deposits
    
    
    26,327
    
    
    
    28,852Decrease in mortgagors and investors escrow accounts
    
    
    (1,972
    )
    
    
    (1,573
    )Proceeds from Federal Home Loan Bank advances
    
    
    175,084
    
    
    
    14,800Repayments of Federal Home Loan Bank advances
    
    
    (142,722
    )
    
    
    (5,036
    )Acquisition of common stock for ESOP
    
    
    (817
    )
    
    
    Payment of reorganization costs
    
    
    
    
    
    
    264Net cash provided by financing activities
    
    
    58,229
    
    
    
    34,156NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (4,295
    )
    
    
    2,631CASH AND CASH EQUIVALENTSBeginning of year
    
    
    23,611
    
    
    
    22,100CASH AND CASH EQUIVALENTSEnd of period
    
    $
    19,316
    
    
    $
    24,731SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during period for:Interest
    
    $
    5,372
    
    
    $
    3,739Income taxes
    
    $
    437
    
    
    $
    
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Rockville Financial, Inc. and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1.
    
    Basis of Presentation and Principles of ConsolidationThe condensed consolidated interim financial statements and the accompanying notes
presented in this report include the accounts of Rockville Financial, Inc. and its
wholly-owned subsidiary 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. All significant intercompany accounts and transactions have been eliminated in
consolidation. The results of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the year ending December 31,
2006. These condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the Companys 2005
consolidated financial statements included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2005.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.2.
    
    Earnings Per ShareStatement of Financial Accounting Standards (SFAS) No. 128, Earnings per Sharesets
forth computational, presentation and disclosure requirements regarding basic and diluted
earnings per share. When presented, basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted-average number
of shares outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.Earnings per share data is not presented in these consolidated financial statements prior
to May 20, 2005 because shares of common stock were not issued until May 20, 2005;
therefore, per share information for prior periods is not meaningful.
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The following table sets forth the calculation of basic and diluted earnings per share for
the three months ended March 31, 2006:
 For theThree Months EndedMarch 31, 2006(Dollars in thousands,except per shareinformation)Net income
    
    $
    1,949Weighted average shares outstanding
    
    
    19,435,000Less: unearned weighted average
ESOP shares
    
    
    (610,958
    )Basic and Diluted shares
    
    
    18,824,042Earnings (loss) per share:Basic and Diluted
    
    $
    .10
 3.
    
    Stock-Based Compensation:On January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R eliminates the
alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock
compensation awards issued to employees. SFAS 123R now requires companies to measure the
cost of employee services received in exchange for an award of equity instruments based on
the grant-date estimated fair value of the award. That estimated cost will be recognized
over the period during which an employee is required to provide services in exchange for
the award, known as the requisite service period (usually the vesting period). SFAS 123R
requires the use of the Modified Prospective Application Method. Under this method SFAS
123R is applied to new awards and to awards modified, repurchased or cancelled after the
effective date. Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered (such as unvested options) that are outstanding as
of the date of adoption shall be recognized as the remaining requisite services are
rendered. The compensation cost relating to unvested awards at the date of adoption shall
be based on the grant-date estimated fair value of those awards as calculated under the pro
forma disclosure provisions of SFAS 123. The adoption of these new rules did not impact the
Companys condensed consolidated financial statements since the Company has not issued any
stock options or restricted stock.4.
    
    Other Recent Accounting Pronouncement:In March 2006, the FASB issued SFAS No. 156, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities- an Amendment of FASB Statement No.140,
which requires that all separately recognized servicing rights be initially measured at
fair value, if practicable. For each class of separately recognized service assets and
liabilities, the Statement will permit an entity to choose either of the following
subsequent measurement methods (1) amortize servicing assets or liabilities in proportion
to and over the period of estimated net servicing income or net servicing loss or (2)
report servicing assets or liabilities at fair value at each reporting date and report
changes in fair value in earnings in the period in which the changes occur. The Statement
also requires additional disclosures for all separately recognized servicing rights. The
Statement is effective for new transactions occurring and for subsequent measurement in the
earlier of the first fiscal year that begins after September 15, 2006. The adoption of
these rules is not expected to have a material impact on the Companys consolidated
financial statements.
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5.
    
    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, 2006 and December 31,
2005 are as follows:
 Amortized
    
    
    Gross Unrealized
    
    
    FairMarch 31, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:U.S. Government and agency obligations
    
    $
    1,981
    
    
    $
    
    
    
    $
    7
    
    
    $
    1,974U.S. Government sponsored enterprises
    
    
    41,999
    
    
    
    
    
    
    
    613
    
    
    
    41,386Mortgage-backed securities
    
    
    54,086
    
    
    
    100
    
    
    
    1,363
    
    
    
    52,823Corporate debt securities
    
    
    16,302
    
    
    
    52
    
    
    
    48
    
    
    
    16,306Other debt securities
    
    
    983
    
    
    
    20
    
    
    
    
    
    
    
    1,003Total debt securities
    
    
    115,351
    
    
    
    172
    
    
    
    2,031
    
    
    
    113,492Marketable equity securities
    
    
    11,444
    
    
    
    4,090
    
    
    
    249
    
    
    
    15,285Non-marketable equity securities
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    241$
    127,036
    
    
    $
    4,262
    
    
    $
    2,280
    
    
    $
    129,018
 Amortized
    
    
    Gross Unrealized
    
    
    FairDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:U.S. Government and agency obligations
    
    $
    1,974
    
    
    $
    
    
    
    $
    1
    
    
    $
    1,973U.S. Government sponsored enterprises
    
    
    35,999
    
    
    
    3
    
    
    
    509
    
    
    
    35,493Mortgage-backed securities
    
    
    57,324
    
    
    
    137
    
    
    
    1,090
    
    
    
    56,371Corporate debt securities
    
    
    18,975
    
    
    
    127
    
    
    
    122
    
    
    
    18,980Other debt securities
    
    
    984
    
    
    
    32
    
    
    
    
    
    
    
    1,016Total debt securities
    
    
    115,256
    
    
    
    299
    
    
    
    1,722
    
    
    
    113,833Marketable equity securities
    
    
    11,456
    
    
    
    3,764
    
    
    
    245
    
    
    
    14,975Non-marketable equity securities
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    241$
    126,953
    
    
    $
    4,063
    
    
    $
    1,967
    
    
    $
    129,049
 At March 31, 2006, the net unrealized gain on securities available for sale of $2.0
million, net of income taxes of $.7 million, or $1.3 million is included in accumulated
other comprehensive income. At December 31, 2005, the net unrealized gain on securities
available for sale of $2.1 million, net of income taxes of $.7 million, or $1.4 million is
included in accumulated other comprehensive income.
 9




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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, 2006 and December 31, 2005:
 March 31, 2006
    
    Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In thousands)Available for sale:U.S. Government and agency
Obligations
    
    $
    1,974
    
    
    $
    7
    
    
    $
    
    
    
    $
    
    
    
    $
    1,974
    
    
    $
    7U.S. Government sponsored
enterprises
    
    
    17,892
    
    
    
    107
    
    
    
    23,494
    
    
    
    506
    
    
    
    41,386
    
    
    
    613Mortgage-backed securities
    
    
    21,549
    
    
    
    411
    
    
    
    25,350
    
    
    
    952
    
    
    
    46,899
    
    
    
    1,363Corporate debt securities
    
    
    6,694
    
    
    
    29
    
    
    
    481
    
    
    
    19
    
    
    
    7,175
    
    
    
    48Total debt securities
    
    
    48,109
    
    
    
    554
    
    
    
    49,325
    
    
    
    1,477
    
    
    
    97,434
    
    
    
    2,031Marketable equity securities
    
    
    3,867
    
    
    
    170
    
    
    
    273
    
    
    
    79
    
    
    
    4,140
    
    
    
    249Total
    
    $
    51,976
    
    
    $
    724
    
    
    $
    49,598
    
    
    $
    1,556
    
    
    $
    101,574
    
    
    $
    2,280
 December 31, 2005
    
    Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In thousands)Available for sale:U.S. Government and agency
Obligations
    
    $
    1,973
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    1,973
    
    
    $
    1U.S. Government sponsored
enterprises
    
    
    14,846
    
    
    
    154
    
    
    
    17,644
    
    
    
    355
    
    
    
    32,490
    
    
    
    509Mortgage-backed securities
    
    
    21,423
    
    
    
    308
    
    
    
    27,032
    
    
    
    782
    
    
    
    48,455
    
    
    
    1,090Corporate debt securities
    
    
    5,169
    
    
    
    89
    
    
    
    467
    
    
    
    33
    
    
    
    5,636
    
    
    
    122Total debt securities
    
    
    43,411
    
    
    
    552
    
    
    
    45,143
    
    
    
    1,170
    
    
    
    88,554
    
    
    
    1,722Marketable equity securities
    
    
    5,491
    
    
    
    220
    
    
    
    354
    
    
    
    25
    
    
    
    5,845
    
    
    
    245Total
    
    $
    48,902
    
    
    $
    772
    
    
    $
    45,497
    
    
    $
    1,195
    
    
    $
    94,399
    
    
    $
    1,967
 As of March 31, 2006 and December 31, 2005, 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.
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6.
    
    Loans Receivable and Allowance for Loan Losses:A summary of the Companys loan portfolio at March 31, 2006 and December 31, 2005 is
as follows:
 March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Real estate loans:Residential
    
    $
    579,701
    
    
    
    62.3
    %
    
    $
    557,306
    
    
    
    64.3
    %Commercial
    
    
    174,244
    
    
    
    18.7
    %
    
    
    149,006
    
    
    
    17.2
    %Construction
    
    
    67,633
    
    
    
    7.3
    %
    
    
    47,105
    
    
    
    5.4
    %821,578
    
    
    
    
    
    
    
    753,417Commercial business loans
    
    
    104,261
    
    
    
    11.2
    %
    
    
    109,099
    
    
    
    12.6
    %Installment, collateral and other loans
    
    
    4,443
    
    
    
    0.5
    %
    
    
    4,119
    
    
    
    0.5
    %Total loans
    
    
    930,282
    
    
    
    100.0
    %
    
    
    866,635
    
    
    
    100.0
    %Net deferred loan costs and premiums
    
    
    1,724
    
    
    
    
    
    
    
    1,740Allowance for loan losses
    
    
    (8,713
    )
    
    
    
    
    
    
    (8,675
    )Loans, net
    
    $
    923,293
    
    
    
    
    
    
    $
    859,700
 Changes in the allowance for loan losses for the periods ended March 31, 2006 and March 31,
2005 are as follows:
 At or Forthe Three MonthsEnded March 31,2006
    
    
    2005(In thousands)Allowance, at beginning of year
    
    $
    8,675
    
    
    $
    6,371Provision for loan losses
    
    
    450
    
    
    
    750Loans charged-off
    
    
    (425
    )
    
    
    (341
    )Recoveries of loans previously charged off
    
    
    13
    
    
    
    9Balance, end of period
    
    $
    8,713
    
    
    $
    6,789
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7.
    
    Deposits:Deposits at March 31, 2006 and December 31, 2005 were as follows:
 March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Demand deposits
    
    $
    88,184
    
    
    
    11.2
    %
    
    $
    85,855
    
    
    
    11.3
    %NOW accounts
    
    
    92,558
    
    
    
    11.7
    %
    
    
    90,706
    
    
    
    11.9
    %Regular savings
    
    
    146,160
    
    
    
    18.4
    %
    
    
    151,551
    
    
    
    19.9
    %Money market and investment savings
    
    
    111,981
    
    
    
    14.2
    %
    
    
    98,363
    
    
    
    12.9
    %Club accounts
    
    
    485
    
    
    
    0.1
    %
    
    
    206
    
    
    
    0.0
    %Total transaction accounts
    
    
    439,368
    
    
    
    55.6
    %
    
    
    426,681
    
    
    
    56.0
    %Time deposits
    
    
    350,684
    
    
    
    44.4
    %
    
    
    334,715
    
    
    
    44.0
    %Total deposits
    
    $
    790,052
    
    
    
    100.0
    %
    
    $
    761,396
    
    
    
    100.0
    %
 A summary of interest expense by account type for the three months ended March 31, 2006 and
2005 is as follows:
 Three Months EndedMarch 31,2006
    
    
    2005(In thousands)Savings and demand deposits
    
    $
    935
    
    
    $
    713Time deposits
    
    
    2,864
    
    
    
    1,778$
    3,799
    
    
    $
    2,491
 8.
    
    Borrowings:The Bank is a member of the Federal Home Loan Bank of Boston (the FHLBB). At March
31, 2006 and December 31, 2005, 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, 2006 and
December 31, 2005, there were no advances outstanding under the line of credit. Other
outstanding advances from the FHLBB aggregated $163.2 million at March 31, 2006, at
interest rates ranging from 2.77% to 6.47%, and $130.9 million at December 31, 2005, at
interest rates ranging from 2.77% to 6.47%.As of March 31, 2006, $50.0 million of FHLBB borrowings were scheduled to mature in less
than one year. The balance of $113.2 million is due at various maturity dates in 2007
through 2013.
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9.
    
    Benefit Plans:The Company sponsors a noncontributory defined benefit pension plan (the Pension
Plan) covering all full-time employees hired before January 1, 2005. Participants become
100% vested after five years of employment. The Company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 uses October 1 as the measurement date for its pension plan and January 1 for
its post-retirement benefit plan.In January 2004, the Bank entered into a supplemental retirement agreement with an
executive officer of the Bank. Additionally, effective December 1, 2004, the Bank adopted
the Supplemental Executive Retirement Plan (the SERP) covering two designated executive
officers of the Company. The SERP provides the two designated officers with a retirement
benefit equal to 70% of their respective average annual earnings, as defined.The Company also has supplemental retirement plans (the Supplemental Plans) that provide
benefits for certain key executive officers. The Supplemental Plans provide restorative
payments to certain executives who are prevented from receiving the full benefits
contemplated by the tax-qualified Retirement Plan, 401(k) Plan and Employee Stock Ownership
Plan. Benefits under the Supplemental Plans are based on a predetermined formula. The
benefits under the Supplemental Plans are reduced by other employee benefits. The liability
arising from the Supplemental Plans is being accrued over the participants remaining
periods of service so that at the expected retirement dates, the present value of the
annual payments will have been expensed.The Company also provides an unfunded post-retirement medical, health and life insurance
benefit plan for retirees and employees hired prior to March 1, 1993.The amounts related to the Pension Plan, Supplemental Plans and the SERPs are reflected in
the tables that follow as Pension Plans:Components of Net Periodic Benefit Cost
 Pension Plans
    
    
    Post-Retirement BenefitsThree Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    199
    
    
    $
    200
    
    
    $
    3
    
    
    $
    2Interest cost
    
    
    222
    
    
    
    182
    
    
    
    24
    
    
    
    20Expected return on
plan assets
    
    
    (244
    )
    
    
    (210
    )
    
    
    
    
    
    
    Amortization of net
actuarial losses
    
    
    124
    
    
    
    84
    
    
    
    15
    
    
    
    8Amortization of prior
service cost (benefits)
    
    
    155
    
    
    
    155
    
    
    
    5
    
    
    
    (1
    )Net periodic benefit cost
    
    $
    456
    
    
    $
    411
    
    
    $
    47
    
    
    $
    29
 No contributions have been made to the pension plan for the three months ended March 31,
2006. During that same period, $24,000 was contributed to the post-retirement plan. The
Company anticipates contributing $1.0 million and $79,000 during the year ended December
31, 2006, to fund the pension and post retirement benefit plans, respectively.401(k)Plan:The Company has a tax-qualified 401(k) plan for the benefit of its eligible
employees. Beginning January 1, 2005, the 401(k) Plan was amended to pay all employees,
even those who do not
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contribute to the 401(k) Plan, an automatic 3% of pay safe harbor contribution that is
fully vested instead of the matching contribution previously provided to participants of
the 401(k) Plan. The 401(k) expense for the quarters ended March 31, 2006 and 2005 was
$128,000 and 68,000, respectively.Employee Stock Ownership Plan:As part of the reorganization and stock offering completed
in May 2005, the Company established an Employee Stock Ownership Plan (ESOP) for eligible
employees of the Bank, and authorized the Company to lend the funds to the ESOP to purchase
699,659 or 3.6% of the shares issued in the initial public offering. Upon completion of the
reorganization, the ESOP borrowed $4.4 million from the Company to purchase 437,287 shares
of common stock. The 262,372 remaining authorized shares were subsequently purchased
by the ESOP in the open market at a cost of $3.5 million with additional funds borrowed
from the Company. The Bank intends to make annual contributions to the ESOP that will be
adequate to fund the payment of regular debt service requirements attributable to the
indebtedness of the ESOP.The interest rate for the ESOP loan is the prime rate plus one percent, or 8.75% as of
March 31, 2006. As the loan is repaid to the Company, shares will be released from
collateral and will be allocated to the accounts of the participants. As of March 31, 2006,
the outstanding principal and interest due was $7.2 million, and principal payments of
$861,000 have been made on the loan since inception.ESOP expense for the quarter ended March 31, 2006 was $249,000. At March 31, 2006, there
were 69,477 allocated, 488 unallocated and 629,694 unreleased ESOP shares, and the
unreleased shares had an aggregate fair value of $9.0 million.10.
    
    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, 2006 and 2005:
 Three Months Ended March 31, 2006Before-Tax
    
    
    
    
    
    
    Net-of-TaxAmount
    
    
    Taxes
    
    
    Amount(In thousands)Unrealized losses arising during the period
    
    $
    (228
    )
    
    $
    78
    
    
    $
    (150
    )Add reclassification adjustment for net gain
from
sale of securities recognized in net income
    
    
    114
    
    
    
    (39
    )
    
    
    75Total other comprehensive loss
    
    $
    (114
    )
    
    $
    39
    
    
    $
    (75
    )
 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
    )
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11.
    
    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 by the customer. 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.Financial instruments whose contract amounts represent credit risk are as follows at March
31, 2006 and December 31, 2005:
 March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Commitments to extend credit:Future loan commitments
    
    $
    43,004
    
    
    $
    51,964Undisbursed construction loans
    
    
    74,472
    
    
    
    64,143Undisbursed home equity lines of credit
    
    
    93,491
    
    
    
    82,119Undisbursed commercial lines of credit
    
    
    18,986
    
    
    
    17,127Standby letters of credit
    
    
    11,570
    
    
    
    10,107Unused checking overdraft lines of credit
    
    
    95
    
    
    
    98$
    241,618
    
    
    $
    225,558
 12.
    
    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.13.
    
    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 Company and 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, 2006, the Company and the Bank exceeded all regulatory capital
requirements and is considered well capitalized under regulatory guidelines.
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##### Table of Contents



The following is a summary of the Company and the Banks regulatory capital amounts and
ratios as of March 31, 2006 and December 31, 2005 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 ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in Thousands)Rockville Bank:March 31, 2006Total capital to risk weighted assets
    
    $
    119,897
    
    
    
    12.5
    %
    
    $
    76,734
    
    
    
    8.0
    %
    
    $
    95,918
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    110,825
    
    
    
    11.6
    
    
    
    38,216
    
    
    
    4.0
    
    
    
    57,323
    
    
    
    6.0Tier I capital to total average assets
    
    
    110,825
    
    
    
    10.4
    
    
    
    42,625
    
    
    
    4.0
    
    
    
    53,281
    
    
    
    5.0Rockville Bank:December 31, 2005Total capital to risk weighted assets
    
    $
    117,882
    
    
    
    15.5
    %
    
    $
    60,842
    
    
    
    8.0
    %
    
    $
    76,053
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    108,898
    
    
    
    14.3
    
    
    
    30,461
    
    
    
    4.0
    
    
    
    45,692
    
    
    
    6.0Tier I capital to total average assets
    
    
    108,898
    
    
    
    10.6
    
    
    
    41,094
    
    
    
    4.0
    
    
    
    51,367
    
    
    
    5.0Rockville Financial, Inc.:March 31, 2006Total capital to risk weighted assets
    
    $
    157,470
    
    
    
    16.5
    %
    
    $
    76,349
    
    
    
    8.0
    %
    
    $
    95,436
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    148,398
    
    
    
    15.5
    
    
    
    38,296
    
    
    
    4.0
    
    
    
    57,444
    
    
    
    6.0Tier I capital to total average assets
    
    
    148,398
    
    
    
    13.9
    
    
    
    42,704
    
    
    
    4.0
    
    
    
    53,381
    
    
    
    5.0Rockville Financial, Inc.:December 31, 2005Total capital to risk weighted assets
    
    $
    156,000
    
    
    
    20.4
    %
    
    $
    61,176
    
    
    
    8.0
    %
    
    $
    76,471
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    147,016
    
    
    
    19.3
    
    
    
    30,470
    
    
    
    4.0
    
    
    
    45,704
    
    
    
    6.0Tier I capital to total average assets
    
    
    147,016
    
    
    
    14.3
    
    
    
    41,123
    
    
    
    4.0
    
    
    
    51,404
    
    
    
    5.0
 Connecticut law restricts the amount of dividends that the Bank can pay based on
earnings for the current year and the preceding two years.In accordance with Connecticut banking regulations, the Bank has established two
liquidation accounts (the Liquidation Accounts) for the benefit of its deposit account
holders at, respectively, the time of (1) the Banks conversion in 1997 from a mutual
savings bank to a stock savings bank, and (2) the reorganization in 2005 of the Banks
single-tier mutual holding company to its current structure with the Company as a mid-tier
holding company with public stockholders. Each of the Liquidation Accounts was established
in an amount, respectively, equal to the Banks equity capital as of the latest practicable
date prior to each of the above events, and each Liquidation Account will be maintained for
ten (10) years from its establishment. Each of the Liquidation Accounts is divided into
sub-accounts representing the respective amounts of the holders deposit accounts at the
time of the establishment of the amount of each Liquidation Account. Each of the
Liquidation Accounts is reduced in amount annually, as of the end of the Banks fiscal
year, to reflect any reduction in the balance in any deposit sub-account at that time from
the balance at the time of the previous measurement. Sub-account balances, and accordingly
the amount of each Liquidation Account, will never increase irrespective of any increase in
the balances in the respective deposit accounts. The function of the Liquidation Accounts
is to establish priorities for the distribution of the Banks assets among its depositors
and the Companys stockholders in the unlikely event of the Banks complete liquidation,
and their function shall not operate to restrict the use or application of the equity
capital of the Company.
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##### Table of Contents



14.
    
    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 35% for the three months
ended March 31, 2006 and March 31, 2005 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
 Forward Looking StatementsThis Form 10-Q contains forward-looking statements that are within the meaning of the
Private Securities Litigation Reform Act of 1995. Such 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.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 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 or the Financial
Accounting Standards Board, may affect expected financial reporting.
    
    Future changes in interest rates may reduce our profits which could have a
negative impact on the value of our stock.
    
    We are subject to lending risk and could incur losses in our loan portfolio
despite our underwriting practices.
    
    Strong competition within our market area may limit our growth and profitability.
    
    We may be unable to leverage stock sale proceeds efficiently and effectively.
    
    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-K speak
only as of the date of this Form 10-K. 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
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##### Table of Contents



statement was made. The reader should, however, consult any further disclosures of a
forward-looking nature the Company may make in future filings.OverviewRockville Financial, Inc. (the Company) is a state-chartered mid-tier stock holding
company formed on December 17, 2004. The Reorganization and Minority Stock Issuance Plan
(the Plan) adopted by the Companys and Rockville Banks Boards of Directors was
completed on May 20, 2005. Pursuant to the Plan, the Company became a mid-tier holding
company. Rockville Financial MHC, Inc. holds fifty-five percent of the Companys common
stock, and the Company became the holder of all the common stock of Rockville Bank (the
Bank). The Bank provides a full range of banking services to consumer and commercial
customers through its main office in Rockville and seventeen 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.The Company 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,
offering products such as residential and commercial real estate loans, consumer loans and
a variety of deposit products. Our business philosophy is to remain a community-oriented
franchise and to 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.Critical Accounting PoliciesAllowance for Loan Losses:The allowance for loan losses is the amount estimated by
management as necessary to cover potential credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for loan losses
which is charged against income. Management believes the policy is critical because
determination of the amount of the allowance involves significant judgments and
assumptions. There have been no significant changes to the methodology or approach to
determining the allowance for loan losses, since the beginning of 2003, and there are no
plans to change the methodology used.Management performs a quarterly evaluation of the adequacy of the allowance for loan losses
and presents the evaluation to both the Board Lending Committee and the Board of Directors.
In addition, the credit area of the Bank is responsible for the accuracy of loan risk
ratings and prepares an Asset Quality Report on a quarterly basis and provides summary
reports to the Board Lending Committee on a monthly basis. A variety of factors are
considered in establishing this estimate including, but not limited to, historical loss and
charge off data, current economic conditions, historical and current delinquency
statistics, geographic and industry concentrations, the adequacy of the underlying
collateral, the financial strength of our borrowers, results of internal and external loan
reviews and other relevant factors. This evaluation is inherently subjective as it
requires material estimates by management that may be susceptible to significant change.The analysis has two broad components: specific and general allocations. Specific
allocations are made for loans for which collection of contractual principal and interest
is uncertain. In such cases, the size of the specific allocation is measured by
determining an expected collection or, for collateral-dependent loans, the fair value of
the collateral adjusted for market conditions and selling expenses. The general allocation
is determined by segregating the remaining loans by type of loan, risk weighting (if
applicable) and payment history. Historical loss experience, delinquency trends, general
economic conditions and geographic and industry concentrations are also considered. This
analysis establishes factors that are applied to the loan groups to determine the amount of
the general allowance for loan losses. If the allowance for loan losses is too low, the
Company may incur higher provisions for loan
 18




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##### Table of Contents



losses in the future resulting in lower net income. If an estimate of the allowance for
loan losses is too high, we may experience lower provisions for loan losses resulting in
higher net income.Other than Temporary Impairment of Securities:On a quarterly basis, securities with
unrealized depreciation for twelve or more consecutive months and other securities with
unrealized losses are reviewed as deemed appropriate to assess whether the decline in fair
value is temporary or other than temporary. It is assessed whether the decline in value is
from company-specific events, industry developments, general economic conditions or other
reasons. After the reasons for the decline are identified, further judgments are required
as to whether those conditions are likely to reverse and, if so, whether that reversal is
likely to result in a recovery of the fair value of the investment in the near term. If it
is judged not to be near term, a charge is taken which results in a new cost basis.
Declines in the fair value of held to maturity and available for sale securities below
their cost that are deemed to be other than temporary are reflected in earnings.Management believes the policy for evaluating securities for other than temporary
impairment is critical because it involves significant judgments by management and could
have a material impact on our net income. As of March 31, 2006, there was an aggregate
$1.6 million of unrealized losses related to $49.6 million of securities in an unrealized
loss position for 12 or more consecutive months which management determined, based on
current market trends, the nature of the investments, industry analysis, and other
evaluations, were not other than temporarily impaired. The unrealized losses primarily
result from increasing interest rates. If managements judgment regarding impairment of
these securities changes in the future, it will reduce our net income accordingly.Income Taxes:We recognize income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that all or some
portion of the deferred tax assets will not be realized. The Company has not provided for
Connecticut state income taxes since December 31, 1998 because it has created and
maintained a passive investment company (PIC), as permitted by Connecticut law. The
Company believes it is in compliance with the state PIC requirements and that no state
taxes are due from December 31, 1998 through March 31, 2006; however, the Company has not
been audited by the Department of Revenue Services for such periods. If the state were to
determine that the PIC was not in compliance with statutory requirements, a material amount
of taxes could be due. Management believes its tax policies and practices are critical
because the determination of the tax provision and current and deferred tax assets and
liabilities have a material impact on our net income and the carrying value of our assets.
We have no plans to change the tax recognition methodology in the future. If our estimated
valuation allowance is too high or too low it will affect our future net income. As of
March 31, 2006, our net deferred tax asset was $3.6 million and there was no valuation
allowance.Pension and Other Post-Retirement Benefits:We have a noncontributory defined benefit
pension plan that provides benefits for substantially all employees hired before January 1,
2005 who meet certain requirements as to age and length of service. The benefits are based
on years of service and average compensation, as defined. Our funding policy is to
contribute annually the maximum amount that could be deducted for federal income tax
purposes, while meeting the minimum funding standards established by the Employee
Retirement Security Act of 1974 (ERISA).In addition to providing pension benefits, we provide certain health care and life
insurance benefits for retired employees. Participants or eligible employees hired before
March 1993 become eligible for the benefits if they retire after reaching age 62 with five
or more years of service. A fixed percent of annual costs are paid depending on length of
service at retirement. We accrue for the estimated costs of these other post-retirement
benefits through charges to expense during the years that employees render service;
however, we do not fund this plan.
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##### Table of Contents



Management believes the policy for determining pension and other post-retirement benefit
expenses is critical because judgments are required with respect to the appropriate
discount rate, rate of return on assets, salary increases and other items. Management
reviews and updates the assumptions annually. If our estimate of pension and
post-retirement expense is too low we may experience higher expenses in the future reducing
our net income. If our estimate is too high, we may experience lower expenses in the
future increasing our net income.While management believes the assumptions used to estimate expenses related to pension and
other post-retirement benefits are reasonable and appropriate, actual experience may
significantly differ. The pension expense is calculated based upon a number of actuarial
assumptions, including an expected long-term rate of return on our Pension Plan assets of
8.50%. In developing our expected long-term rate of return assumption, we evaluated input
from our actuary and investment consultant, including their review of asset class return
expectations as well as long-term inflation assumptions, and their review of historical
returns based on the current target asset allocations of 61% equity securities, 36% debt
securities and 3% real estate. We regularly review our asset allocation and periodically
rebalance our investments when considered appropriate. While all future forecasting
contains some level of estimation error, we continue to believe that 8.50% falls within a
range of reasonable long-term rate of return expectations for our pension plan assets.The accounting policies followed by the Company 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 subjective decisions or assessments, relate to
income taxes, pension and other post-retirement 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, 2006 and 2005The 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 affected 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, 2006 and 2005.
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##### Table of Contents



Income Statement Summary
 Three Months EndedMarch 31,2006
    
    
    2005
    
    
    $ Change
    
    
    % Change(Dollars in Thousands)Net interest income
    
    $
    8,897
    
    
    $
    7,251
    
    
    $
    1,646
    
    
    
    22.7
    %Provision for loan losses
    
    
    450
    
    
    
    750
    
    
    
    300
    
    
    
    (40.0
    )Noninterest income
    
    
    1,001
    
    
    
    895
    
    
    
    106
    
    
    
    11.8Noninterest expenses
    
    
    6,530
    
    
    
    6,119
    
    
    
    (411
    )
    
    
    (6.7
    )Income before income taxes
    
    
    2,918
    
    
    
    1,277
    
    
    
    1,641
    
    
    
    128.5Provision for income taxes
    
    
    969
    
    
    
    360
    
    
    
    (609
    )
    
    
    (169.2
    )Net income
    
    $
    1,949
    
    
    $
    917
    
    
    $
    1,032
    
    
    
    112.5
    %
 Earnings Summary:Net income increased by $1.0 million, or 112.5%, to $1.9 million for the
quarter ended March 31, 2006 from $917,000 for the same period in the prior year. The
increase in net income primarily resulted from a $1.6 million, or 22.7% increase in our net
interest income, a $300,000, or 40.0% decline in the provision for loan losses, a $106,000,
or 11.8% increase in noninterest income, partially offset by a $411,000, or 6.7% increase
in noninterest expense and a $609,000, or 169.2%, increase in the provision for income
taxes.The $1.6 million increase in our net interest income is predominately due to an $85.1
million, or 78.6% increase in average net interest-earning assets and a 10 basis point
increase in the net interest margin. The increase in the average net interest-earning
assets reflects the use of proceeds from the May 2005 stock issuance in funding loan
growth.The $300,000 decline in the provision for loan losses is the result of our evaluation of
the required allowance amount based upon probable and reasonably estimable losses in our
loan portfolio.The $106,000 increase in noninterest income is principally due to a $70,000 increase in
service charges primarily due to a $60,000 increase in ATM fees as a result of increased
volume in debit card transactions and additions made to our ATM network and an increase on
the net gains on sales of securities of $36,000.The $411,000 increase in noninterest expense is primarily due to an increase of $369,000 in
salary and employee benefits, a $67,000 increase in service bureau fees, a $165,000
increase in occupancy costs and a $95,000 increase in other noninterest expense partially
offset by a $159,000 decrease in professional fees and a $137,000 decline in marketing and
promotions expense. The $369,000 increase in salary and employee benefits reflects an
increase of $138,000 in salary costs principally incurred in connection with the expansion
of branch facilities and the commercial lending division, a $249,000 employee stock
ownership plan (ESOP) expense recorded for the ESOP plan which was established in May
2005 as part of the stock offering and reorganization, and a decrease of $23,000 in other
employee benefits. The $67,000 increase in service bureau fees is mainly due to $50,000 and
$24,000 increase in core processing services and ATM servicing costs, respectively, offset
by a slight decline of $7,000 in wide area network costs. The higher service costs are
primarily attributable to the opening of a new branch in January 2006, the addition of ten
ATMs to our ATM network and the cost associated with increased processing costs due to the
overall growth experienced in loans, deposits and debit card processing. The $165,000
increase in occupancy expense is largely due to increased costs of expanding our branch and
ATM network and completing our construction of our Tolland branch office which was
previously operated from a temporary facility. The decline of $159,000 in professional fees
was mainly due to increased cost incurred in the prior period associated with preparing for
compliance with Section 404 of the Sarbanes Oxley Act. The $137,000 decrease in marketing
expense is primarily due to the timing of marketing programs and the result of cost
containment measures implemented in 2006.The $609,000 increase in the provision for income taxes is chiefly due to a 128.6% increase
in income before taxes and an increase in the estimated effective tax rate for the quarter
ended March 31, 2006 to 33.2% from 28.2% for the same period in the prior year due to the
increase in the average fair value of
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##### Table of Contents



the Companys stock price used to record ESOP expense being limited to cost for tax
deduction purposes.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.
 Three Months Ended March 31,2006
    
    
    2005Interest
    
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    
    and
    
    
    Yield/
    
    
    Average
    
    
    and
    
    
    Yield/Balance
    
    
    Dividends
    
    
    Cost
    
    
    Balance
    
    
    Dividends
    
    
    CostInterest-earning assets:Loans receivable, net
    
    $
    881,150
    
    
    $
    12,857
    
    
    
    5.84
    %
    
    $
    714,887
    
    
    $
    9,623
    
    
    
    5.38
    %Available for sale securities
    
    
    128,806
    
    
    
    1,336
    
    
    
    4.14
    
    
    
    133,368
    
    
    
    1,302
    
    
    
    3.91Federal Home Loan Bank stock
    
    
    8,568
    
    
    
    111
    
    
    
    5.18
    
    
    
    7,535
    
    
    
    75
    
    
    
    3.98Other earning assets
    
    
    3,748
    
    
    
    23
    
    
    
    2.46
    
    
    
    3,244
    
    
    
    18
    
    
    
    2.21Total interest-earning assets
    
    
    1,022,272
    
    
    
    14,327
    
    
    
    5.61
    
    
    
    859,034
    
    
    
    11,018
    
    
    
    5.13Noninterest-earning assets
    
    
    50,754
    
    
    
    
    
    
    
    
    
    
    
    42,326Total assets
    
    $
    1,073,026
    
    
    
    
    
    
    
    
    
    
    $
    901,360Interest-bearing liabilities:NOW and money market accounts
    
    $
    189,087
    
    
    
    703
    
    
    
    1.49
    
    
    $
    175,739
    
    
    
    459
    
    
    
    1.04Savings accounts
    
    
    148,543
    
    
    
    223
    
    
    
    0.60
    
    
    
    164,819
    
    
    
    247
    
    
    
    0.60Certificates of deposit
    
    
    337,923
    
    
    
    2,864
    
    
    
    3.39
    
    
    
    280,009
    
    
    
    1,778
    
    
    
    2.54Total interest-bearing deposits
    
    
    675,553
    
    
    
    3,790
    
    
    
    2.24
    
    
    
    620,567
    
    
    
    2,484
    
    
    
    1.60Mortgagors and investors escrow accounts
    
    
    2,032
    
    
    
    9
    
    
    
    1.77
    
    
    
    1,851
    
    
    
    7
    
    
    
    1.51Advances from the Federal Home Loan Bank
    
    
    151,332
    
    
    
    1,631
    
    
    
    4.31
    
    
    
    128,351
    
    
    
    1,276
    
    
    
    3.98Total interest-bearing liabilities
    
    
    828,917
    
    
    
    5,430
    
    
    
    2.62
    %
    
    
    750,769
    
    
    
    3,767
    
    
    
    2.01
    %Noninterest-bearing liabilities
    
    
    92,158
    
    
    
    
    
    
    
    
    
    
    
    81,372Total liabilities
    
    
    921,075
    
    
    
    
    
    
    
    
    
    
    
    832,141Capital
    
    
    151,951
    
    
    
    
    
    
    
    
    
    
    
    69,219Total liabilities and capital
    
    $
    1,073,026
    
    
    
    
    
    
    
    
    
    
    $
    901,360Net interest income
    
    
    
    
    
    $
    8,897
    
    
    
    
    
    
    
    
    
    
    $
    7,251Net interest rate spread (1)
    
    
    
    
    
    
    
    
    
    
    2.99
    %
    
    
    
    
    
    
    
    
    
    
    3.12
    %Net interest-earning assets (2)
    
    $
    193,355
    
    
    
    
    
    
    
    
    
    
    $
    108,265Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    3.38
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    123.33
    %
    
    
    
    
    
    
    
    
    
    
    114.42
    %
 
 (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. 22




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##### Table of Contents



Rate Volume AnalysisThe 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, 2006Compared toMarch 31, 2005Increase/(Decrease)Due ToVolume
    
    
    Rate
    
    
    Net(Dollars in thousands)Interest and dividend income:Loans receivable
    
    $
    2,365
    
    
    $
    869
    
    
    $
    3,234Securities int & inc from other assets
    
    
    (168
    )
    
    
    243
    
    
    
    75Total earning assets
    
    
    2,197
    
    
    
    1,112
    
    
    
    3,309Interest expense:NOW and money market accounts
    
    
    36
    
    
    
    208
    
    
    
    244Savings accounts
    
    
    (47
    )
    
    
    25
    
    
    
    (22
    )Time deposits
    
    
    415
    
    
    
    671
    
    
    
    1,086Total interest-bearing deposits
    
    
    404
    
    
    
    904
    
    
    
    1,308FHLB Advances
    
    
    243
    
    
    
    112
    
    
    
    355Total interest bearing liabilities
    
    
    647
    
    
    
    1,016
    
    
    
    1,663Change in net interest income
    
    $
    1,550
    
    
    $
    96
    
    
    $
    1,646
 Net Interest Income: Net interest income before the provision for loan loss was $8.9
million for the quarter ended March 31, 2006, compared to $7.3 million for the same period
in the prior year. The $1.6 million, or 22.7% increase in our net interest income is
primarily due to an $85.1 million, or 78.6% increase in average net interest-earning assets
and a 10 basis point increase in the net interest margin. Average earning assets increased
by $163.2 million, or 19.0% to $1.0 billion as of March 31, 2006 when compared to the same
period in the prior year. The increase in the average net interest-earning assets and
average earning assets reflects the use of stock proceeds in funding loan growth. Our net
interest margin increased 10 basis points to 3.48% for the quarter ended March 31, 2006
from 3.38% for the same period in the prior year. Our net interest rate spread declined 13
basis points due to an increase in our cost of funds resulting from the rising rate
environment we are currently operating in and the strong competition for deposits in our
market area, which was partially offset by the increase in our earning asset yield.Interest and Dividend Income: Interest and dividend income increased by $3.3 million, or
30.0%, to $14.3 million for the quarter ended March 31, 2006 from $11.0 million for the
same period in the prior year. Our yield on earning assets for the quarter ended March 31,
2006 increased 48 basis points to 5.61% when compared to 5.13% for the quarter ended March
31, 2005. Interest income on loans receivable increased by $3.2 million, or 33.6%, to $12.9
million from $9.6 million. The increase in interest and dividend income was due to a $166.3
million, or a 23.3% increase in average loans receivable augmented by a 46 basis point
increase in the average yield on the loan portfolio. The increase in the average yield was
attributable to rising interest rates slightly dampened by a competitive loan environment.
The effect of the rising rates on the Companys portfolio is delayed for
 23




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##### Table of Contents



adjustable-rate residential mortgage loans, with an interest rate which adjusts annually
based on the one-year Constant Maturity Treasury Bill Index, after either a one-, three-,
four-, five-, seven-, or nine-year initial fixed rate period. The prime rate used as an
index to re-price various commercial and home equity adjustable loans increased 200 basis
points during the past year to 7.75% as of March 31, 2006 from 5.75% at March 31, 2005.
Interest and dividend income on available for sale securities and other interest-bearing
assets increased $75,000, or 5.4%, when compared to the same period in the prior year.Interest Expense:Interest expense for the quarter ended March 31, 2006 increased $1.7
million or 44.1% to $5.4 million from $3.8 million from the same period in the prior year.
The increase resulted from a $78.1 million, or a 10.4% increase in average interest-bearing
liabilities and an increase of 61 basis points paid on average interest-bearing liabilities
for the quarter ended March 31, 2006 as compared to the quarter ended March 31, 2005. The
increase in the cost of funds was due to a rising interest rate environment and was
partially mitigated by the increased use of short-term wholesale funding and deposit
account promotions used to attract lower cost core deposits. Average balances on
interest-bearing deposits rose to $675.6 million, an increase of $55.0 million or 8.9% as
of March 31, 2006 compared to $620.6 million as of March 31, 2005. Average balances on
advances from the Federal Home Loan Bank increased $23.0 million, or 17.9%, to $151.3
million as of March 31, 2006 from $128.4 million as of March 31, 2005.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 $450,000 for the quarter ended March 31, 2006, a decrease of $300,000 compared
to the same period in the prior year. At March 31, 2006, the allowance for loan losses
totaled $8.7 million, or 543.5% of non-performing loans, and 0.94% of total loans, compared
to $6.8 million at March 31, 2005, or 105.0% of
non-performing loans and .92% of total
loans. The improvement in the allowance as a percentage of non-performing loans reflects
the reduction of non-performing loans due to a $4.9 million fully guaranteed United States
Department of Agriculture loan that was past due 90 days and was
brought current on April 1, 2005.NonInterest Income:We have the following sources of noninterest income: banking service
charges on deposit accounts, brokerage and insurance fees from Infinex, the Banks
on-premise provider of non-deposit investment services, bank owned life insurance and
mortgage servicing income.Noninterest income increased by $106,000 or 11.8%, to $1.0 million for the quarter ended
March 31, 2006 from $895,000 earned during the same period in the prior year. Service
charges and fees increased $70,000, or 8.5%, to $887,000 for the quarter ended March 31,
2006 compared to $817,000 for the quarter ended March 31, 2005. The increase in noninterest
income was principally due to a $60,000 increase in ATM fees due to increased volume in
debit card transactions, additions made to our ATM network and an increase on the net gains
on sales of securities of $36,000.
 24




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##### Table of Contents



NonInterest Expense:Noninterest expense increased by $411,000, or 6.7%, to $6.5 million
for the quarter ended March 31, 2006 from $6.1 million for the same period in the prior
year. The following table summarizes noninterest expense for the quarter ended March 31,
2006 and 2005:
 Three MonthsEndedMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)(In thousands)Salaries and employee benefits
    
    $
    3,426
    
    
    $
    3,057
    
    
    $
    369Service bureau fees
    
    
    705
    
    
    
    638
    
    
    
    67Occupancy and equipment
    
    
    906
    
    
    
    741
    
    
    
    165Professional fees
    
    
    250
    
    
    
    409
    
    
    
    (159
    )Marketing and promotions
    
    
    218
    
    
    
    355
    
    
    
    (137
    )Insurance and FDIC assessments
    
    
    54
    
    
    
    43
    
    
    
    11Other
    
    
    971
    
    
    
    876
    
    
    
    95Total noninterest expense
    
    $
    6,530
    
    
    $
    6,119
    
    
    $
    411
 Salary and benefits increased $369,000 due to an increased staffing level in connection
with the expansion of branch facilities and the commercial lending division, a $249,000
employee stock ownership plan (ESOP) expense recorded for the ESOP plan which was
established in May 2005 as part of the stock offering and reorganization, and a decrease of
$23,000 in other employee benefits. The $67,000 increase in service bureau fees is mainly
due to $50,000 and $24,000 increase in core processing services and ATM servicing costs,
respectively, offset by a slight decline of $7,000 in wide area network costs. The higher
service costs are primarily attributable to the opening of a new branch in January 2006,
the addition of ten ATMs to our ATM network and the cost associated with increased
processing costs due to the overall growth experienced in loans, deposits and debit card
processing. The $165,000 increase in occupancy expense is largely due to increased costs of
expanding our branch and ATM network and completing the construction of our Tolland branch
office which was previously operated from a temporary facility. The decline of $159,000 in
professional fees was mainly due to increased cost incurred in the prior period associated
with preparing for compliance with Section 404 of the Sarbanes Oxley Act. The $137,000
decrease in marketing expense is primarily due to the timing of marketing programs and the
result of cost containment measures implemented in 2006.
 25




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##### Table of Contents



Other noninterest expense increased by $95,000 or 10.8% to $971,000 for the quarter ended
March 31, 2006 compared to $876,000 for the same period in the prior year. Significant
components of other noninterest expense are as follows:
 Three MonthsEndedMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)(In thousands)Directors fees
    
    $
    84
    
    
    $
    90
    
    
    $
    (6
    )Appraisal and credit report
    
    
    119
    
    
    
    95
    
    
    
    24Telephone
    
    
    31
    
    
    
    62
    
    
    
    (31
    )Postage
    
    
    86
    
    
    
    53
    
    
    
    33Courier
    
    
    83
    
    
    
    57
    
    
    
    26Dues and subscriptions
    
    
    51
    
    
    
    43
    
    
    
    8Service charges
    
    
    31
    
    
    
    33
    
    
    
    (2
    )Printing and forms
    
    
    87
    
    
    
    28
    
    
    
    59Other
    
    
    399
    
    
    
    415
    
    
    
    (16
    )Total other noninterest expense
    
    $
    971
    
    
    $
    876
    
    
    $
    95
 Income Tax Expense:Income tax expense increased $609,000 or 169.2% to $969,000 for the
quarter ended March 31, 2006 as compared to $360,000 incurred for the same period in the
prior year. Income taxes are provided on an interim basis using the estimated annual
effective tax rate. The increase in the provision for income taxes is due to an increase in
the estimated effective tax rate for the quarter ended March 31, 2006 to 33.2% from 28.2%
for the same period in the prior year due to the increase in the average fair value of the
Companys stock price used to record ESOP expense being limited to cost for tax deduction
purposes. Our effective tax rate differs from the statutory rate of 35% for the three
months ended March 31, 2006 and March 31, 2005 primarily due to the dividend received
deduction, non-taxable earnings on bank owned life insurance and the add-back of the excess
of fair value over the cost basis of ESOP expense to taxable income for both periods.Comparison of Financial Condition at March 31, 2006 and December 31, 2005Summary:The Companys total assets increased $59.8 million, or 5.7%, to $1.12 billion
at March 31, 2006, primarily due to a $63.6 million increase in loans receivable partially
offset by a $4.3 million reduction in cash and cash equivalents as short-term investments
were partially used to fund loan growth. Available for sale investment securities remained
constant at $129.0 million as of March 31, 2006 compared to the balance outstanding at
December 31, 2005. Net loans receivable increased 7.4%, to $923.3 million at March 31, 2006
as compared to $859.7 million at December 31, 2005 primarily due to increases in commercial
real estate, one-to-four family residential and construction mortgages.Deposits increased $28.7 million, or 3.8%, to 790.1 million at March 31, 2006. The growth
was principally attributable to increases in demand deposits, NOW accounts, money market
and investment savings accounts and time deposits due to expanded branch operations and
successful deposit account promotions. Federal Home Loan Bank advances increased $32.4
million, or 24.7%, to $163.2 million at March 31, 2006 from $130.9 at December 31, 2005.
The Federal Home Loan Bank borrowing increases were primarily used to fund loan growth.Total capital increased $1.3 million, or 0.9%, to $152.2 million at March 31, 2006 compared
to $150.9 million at December 31, 2005 primarily due to earnings offset by ESOP purchases
and ESOP compensation expense.Investment Securities:At March 31, 2006, the Companys investment portfolio, consisted
solely of available for sale securities, was $129.0 million, or 11.6% of total assets. At
March 31, 2006, the net unrealized gain on investment securities available for sale was
$1.3 million, net of taxes, compared to $1.4 million as of December 31, 2005. Rising market
interest rates continued to negatively impact the
 26




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##### Table of Contents



fair value of the Companys debt securities and such losses were offset by gains
experienced in the marketable equity security portfolio during the quarter ended March 31,
2006.Lending Activities:Net loans receivable increased $63.6 million, or 7.4%, to $923.3
million at March 31, 2006 as compared to $859.7 million at December 31, 2005 primarily due
to increases in commercial real estate, one-to-four family residential and construction
mortgages.Residential real estate loans increased $22.4 million, or 4.0%, to $579.7 million.
Commercial real estate loans increased $25.2 million, or 16.9%, to $174.2 million.
Construction loans increased $20.5 million, or 43.6%, to $67.6 million. The increase in
loans reflects continued demand for loans, an increase in our branch network and commercial
lending staff. Commercial business loans includes $37.2 million and $43.2 million of loans
fully guaranteed by the United States Department of Agriculture as of March 31, 2006 and
December 31, 2005, 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 expansion of the commercial
lending division.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 nonaccrual status. Our policies require six months of continuous
payments in order for the loan to be removed from nonaccrual status.
 March 31,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Nonaccrual loans:Residential(1)
    
    $
    666
    
    
    $
    821Commercial
    
    
    413
    
    
    
    667Commercial business loans
    
    
    42
    
    
    
    172Installment, collateral and other loans
    
    
    18
    
    
    
    6Total nonaccrual loans(2)
    
    
    1,139
    
    
    
    1,666Accruing loan past due 90 days or more(3)
    
    
    
    
    
    
    4,897Troubled debt restructurings
    
    
    464
    
    
    
    614Total non-performing loans
    
    
    1,603
    
    
    
    7,177Real estate owned
    
    
    
    
    
    
    Total non-performing assets
    
    $
    1,603
    
    
    $
    7,177Total non-performing loans to total loans
    
    
    0.17
    %
    
    
    0.83
    %Total non-performing loans to total assets
    
    
    0.14
    %
    
    
    0.68
    %Allowance for loan losses as a percent of total loans
    
    
    0.94
    %
    
    
    1.00
    %Allowance for loan losses as a percent of non-performing loans
    
    
    543.5
    %
    
    
    120.9
    %
 
 (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
nonaccrual loans totaled $54,000 for the three months ended March 31, 2006 and $59,000
for the year ended December 31, 2005.(3)
    
    Balance represents a loan that is fully guaranteed by the United States
Agriculture Department and was repaid in full in January 2006. 27




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##### Table of Contents



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 an allowance 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 allowance 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. 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 allowance 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 nonaccrual 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 was $8.7 million at March 31, 2006 and December 31, 2005. The
increase in the allowance resulted from a $450,000 provision for loan losses for the
quarter ended March 31, 2006 offset by $412,000 in net charge-offs. The allowance was
deemed adequate based upon managements analysis and includes a reduction of $300,000 for
the provision recorded during the quarter ended March 31, 2006 when compared to the same
period in the prior year as a result of our evaluation of the required allowance amount
based upon probable and reasonably estimable losses in our loan portfolio. At March 31,
2006, the allowance for loan losses represented 0.94% of total loans and 543.5% of
non-performing loans, compared to 1.0% of total loans and 120.9% of non-performing loans as
of December 31, 2005. The improvement in the allowance as a percentage of non-performing
loans reflects the reduction of non-performing loans due to a $4.9 million fully guaranteed
United
 28




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##### Table of Contents



States Department of Agriculture loan that was past due 90 days and still accruing as of
December 31, 2005 that was repaid in full in January 2006.Deposits:Deposits increased $28.7 million, or 3.8%, to $790.1 million at March 31, 2006.
The growth was principally attributable to increases in demand deposits, NOW accounts, money
market and investment savings accounts and time deposits due to expanded branch operations
and successful deposit account promotions.Liquidity and Capital Resources:We maintain liquid assets at levels we consider adequate
to meet our liquidity needs. 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, 2006 and December 31, 2005,
respectively, $19.3 million and $23.6 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.During the quarters ended March 31, 2006 and 2005, our loan originations and purchases, net
of collected principal and loan sales, totaled $64.1 million and $37.6 million,
respectively, reflecting net growth in our portfolio. Cash received from the calls and
maturities of investment securities totaled $2.8 million and $4.1 million during the
quarters ended March 31, 2006 and 2005, respectively. We purchased $6.9 million and $6.2
million and received proceeds from the sale of $976,000 and $2.7 million in available for
sale investment securities during the quarters ended March 31, 2006 and 2005, respectively.
The Company received $3.2 million and $3.7 million in principal payments on available for
sale mortgage-backed securities during the quarters ended March 31, 2006 and 2005,
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 $28.7 million and $25.7 million for the quarters ended March 31, 2006 and
2005, respectively.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, 2006, we had $163.2 million in advances from the Federal Home Loan Bank of Boston
and an additional available borrowing limit of $149.6 million based on collateral
requirements of the Federal Home Loan Bank of Boston. Internal policies limit borrowings to
20% of total assets, or $223.2 million at March 31, 2006.At March 31, 2006, we had outstanding commitments to originate loans of $43.0 million and
unfunded commitments under lines of credit and stand-by letters of credit of $198.6
million. At March 31, 2006, time deposits scheduled to mature in less than one year totaled
$273.3 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.
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##### Table of Contents



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.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, 2006 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 Months200 basis point increase in rates
    
    
    (2.6
    )200 basis point decrease in rates
    
    
    (4.5
    )
 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, or the
change will be limited to 20% of the flat rate scenario ROA ( for every 100 basis point
interest rate change), whichever is less. 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
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##### Table of Contents



fall. At March 31, 2006, income at risk (i.e., the change in net interest income) decreased
2.6% and 4.5% based on a 200 basis point increase or decrease, respectively. At March 31,
2006, return on assets is modeled to decrease by 4 and 10 basis points based on a 200 basis
point increase and a 200 basis point decrease, 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 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.
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##### Table of Contents



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 1A. Risk Factors
 There have been no material changes in the discussion pertaining to the Risk Factors
previously disclosed in Item 1A of the Companys Annual Report on Form 10-K for the period
ended December 31, 2005.
 
 Item 6. Exhibits
 3.1
    
    Certificate of Incorporation of Rockville Financial, Inc. (incorporated
herein by reference to Exhibit 3.1 to the Registration Statement on the Form S-1
filed for Rockville Financial Inc., as amended, initially filed on December 17,
2004 (File No. 333-121421))3.2
    
    Bylaws of Rockville Financial, Inc. (incorporated herein by
reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q filed for
Rockville Financial, Inc. on May 13, 2005)3.3
    
    Form of Common Stock Certificate of Rockville Financial, Inc.
(incorporated herein by reference to Exhibit 4 to the Registration Statement on
the Form S-1 filed for Rockville Financial, Inc., as amended, initially filed on
December 17, 2004 (File No. 333-121421))10.1
    
    Employment Agreement by and among Rockville Financial, Inc.,
Rockville Bank and William J. McGurk, effective May 20, 2005 (incorporated
herein by reference to Exhibit 10.4 to the Post Effective Amendment No. 1 to the
Registration Statement on Form S-1 of Rockville Financial, Inc. filed on April
22, 2005)10.1.1
    
    Employment Agreement by and among Rockville Financial, Inc., Rockville Bank
and Joseph F. Jeamel, Jr., effective May 20, 2005 (incorporated herein by
reference to Exhibit 10.4.1 to the Post Effective Amendment No. 1 to the
Registration Statement on Form S-1 filed for Rockville Financial, Inc. filed on
April 22, 2005)10.1.2
    
    Employment Agreement by and among Rockville Financial, Inc., Rockville Bank
and Gregory A. White effective May 20, 2005 (incorporated herein by reference to
Exhibit 10.4.2 to the Post Effective Amendment No. 1 to the Registration
Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on April
22, 2005)10.1.3
    
    Employment Agreement by and among Rockville Financial, Inc., Rockville Bank
and Kristen A. Johnson, effective May 20, 2005 (incorporated herein by reference
to Exhibit 10.4.2 to the Post Effective Amendment No. 1 to the Registration
Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on April
22, 2005)10.1.4
    
    Employment Agreement by and among Rockville Financial, Inc., Rockville Bank
and Charles J. DeSimone, Jr., effective May 20, 2005 (incorporated
herein by reference to Exhibit 10.4.2 to the Post Effective Amendment
No. 1 to the Registration Statement filed on Form S-1 filed for
Rockville Financial, Inc. filed on April 22, 2005)10.1.5
    
    Employment Agreement by and among Rockville Financial, Inc., Rockville Bank
and Richard J. Trachimowicz, effective May 20, 2005 (incorporated herein by
reference to
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##### Table of Contents



Exhibit 10.4.2 to the Post Effective Amendment No. 1 to the
Registration Statement filed on Form S-1 filed for Rockville Financial, Inc.
filed on April 22, 2005)10.1.6
    
    Employment Agreement by and among Rockville Financial, Inc., Rockville Bank
and Ratna Ray, effective May 20, 2005 (incorporated herein by reference to
Exhibit 10.4.2 to the Post Effective Amendment No. 1 to the Registration
Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on April
22, 2005)10.1.7
    
    Employment Agreement by and among Rockville Financial, Inc., Rockville Bank
and Laurie A. Rosner, effective May 20, 2005 (incorporated herein by reference
to Exhibit 10.4.2 to the Post Effective Amendment No. 1 to the Registration
Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on April
22, 2005)10.2.1
    
    Supplemental Savings and Retirement Plan of Rockville Bank (incorporated
herein by reference to Exhibit 10.13 to the Pre-Effective Amendment No. 1 to the
Registration Statement filed on Form S-1 filed for Rockville Financial, Inc.
filed on March 29, 2005)10.2.2
    
    First amendment to Exhibit 10.2.1, the Supplemental Savings and Retirement
Plan of Rockville Bank (incorporated herein by reference to Exhibit 10.2.2 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2005
filed on March 31, 2006).10.2.3
    
    Rockville Bank Officer Incentive Compensation Plan (incorporated herein by
reference to Exhibit 10.2.3 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2005 filed on March 31, 2006).10.2.4
    
    Rockville Bank Supplemental Executive Retirement Agreement for Joseph F.
Jeamel, Jr. (incorporated herein by reference to Exhibit 10.9 to the
Registration Statement filed on Form S-1 filed for Rockville Financial, Inc.
filed on December 17, 2004)10.2.5
    
    Executive Split Dollar Life Insurance Agreement for Joseph F. Jeamel, Jr.
(incorporated herein by reference to Exhibit 10.11 to the Registration Statement
filed on Form S-1 filed for Rockville Financial, Inc. filed on December 17,
2004)10.2.6
    
    Rockville Bank Supplemental Executive Retirement Plan (incorporated herein by
reference to Exhibit 10.12 to the Registration Statement filed on Form S-1 filed
for Rockville Financial, Inc. filed on December 17, 2004)14
    
    Standards of Conduct Policy for Senior Financial Officers
(incorporated herein by reference to Exhibit 14 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2005 filed on March 31, 2006).14.1.1
    
    Standards of Conduct Policy for the Board of Directors (incorporated herein by
reference to Exhibit 14.1.1 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2005 filed on March 31, 2006).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer filed herewith.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer filed herewith.32.0
    
    Section 1350 Certification of the Chief Executive Officer and
Chief Financial Officer attached hereto.
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##### 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 15, 2006By:
    
    /s/ Mr. Gregory A. WhiteMr. Gregory A. WhiteChief Financial Officer and TreasurerDate:
    
    May 15, 2006
 34