##### 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 1934for the quarterly period ended September 30, 2005.
 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
  o þ
  o þ
  Common Stock (no par value)
    
    19,435,000Class
    
    Shares Outstanding at November 14, 2005




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Table of Contents
 PagePart I  FINANCIAL INFORMATIONItem 1. Interim Financial StatementsCondensed Consolidated Statements of Condition at September 30, 2005
and December 31, 2004 (unaudited)
    
    
    3Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 2005 and 2004 (unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Capital and Stockholders Equity
for the nine months ended September 30, 2005 (unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 (unaudited)
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34Part II  OTHER INFORMATIONItem 6. Exhibits
    
    
    35SIGNATURES
    
    
    36EX-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.
 
 Condensed Consolidated Statements of Condition
(Unaudited)
(In Thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    19,210
    
    
    $
    18,652Short-term investments
    
    
    5,330
    
    
    
    3,448Total cash and cash equivalents
    
    
    24,540
    
    
    
    22,100AVAILABLE FOR SALE SECURITIES-At fair value
    
    
    129,050
    
    
    
    136,007LOANS RECEIVABLE (Net of allowance for loan
losses of $8,123 in 2005 and $6,371 in 2004)
    
    
    817,144
    
    
    
    696,249FEDERAL HOME LOAN BANK STOCK
    
    
    8,498
    
    
    
    7,412ACCRUED INTEREST RECEIVABLE
    
    
    3,420
    
    
    
    3,013DEFERRED TAX ASSET
    
    
    3,948
    
    
    
    1,606BANK PREMISES AND EQUIPMENT-Net
    
    
    8,891
    
    
    
    7,382GOODWILL
    
    
    1,070
    
    
    
    1,070CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
    
    
    8,534
    
    
    
    8,290OTHER ASSETS
    
    
    4,947
    
    
    
    6,784TOTAL
    
    $
    1,010,042
    
    
    $
    889,913LIABILITIES AND CAPITALLIABILITIESDeposits:Non-interest bearing
    
    $
    79,453
    
    
    $
    77,972Interest bearing
    
    
    641,317
    
    
    
    614,526Total deposits
    
    
    720,770
    
    
    
    692,498MORTGAGORS AND INVESTORS ESCROW ACCOUNTS
    
    
    2,263
    
    
    
    3,979ADVANCES FROM THE FEDERAL HOME LOAN BANK
    
    
    122,905
    
    
    
    118,015PAYABLE FOR SECURITIES PURCHASED
    
    
    5,000
    
    
    
    ACCRUED EXPENSES AND OTHER LIABILITIES
    
    
    8,689
    
    
    
    6,895Total liabilities
    
    
    859,627
    
    
    
    821,387COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock (no par value; 1,000,000 shares authorized;
no shares issued and outstanding at September 30, 2005)
    
    
    
    
    
    
    Common stock (no par value; 29,000,000 shares authorized;
19,435,000 shares issued and outstanding at September 30, 2005)
    
    
    85,249
    
    
    
    Additional paid in capital
    
    
    219
    
    
    
    Unallocated stock held by ESOP
    
    
    (4,366
    )
    
    
    Retained earnings
    
    
    68,952
    
    
    
    67,338Accumulated other comprehensive income, net of tax
    
    
    361
    
    
    
    1,188Total stockholders equity
    
    
    150,415
    
    
    
    68,526TOTAL
    
    $
    1,010,042
    
    
    $
    889,913
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Rockville Financial, Inc.
 
 Condensed Consolidated Statements of Income
 (Unaudited)
 (In Thousands)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004INTEREST AND DIVIDEND INCOME:Loans
    
    $
    10,920
    
    
    $
    8,549
    
    
    $
    30,912
    
    
    $
    24,061Securities-interest
    
    
    1,108
    
    
    
    1,257
    
    
    
    3,552
    
    
    
    3,693Interest bearing deposits
    
    
    31
    
    
    
    24
    
    
    
    76
    
    
    
    134Securities-dividends
    
    
    179
    
    
    
    92
    
    
    
    507
    
    
    
    260Total interest and dividend income
    
    
    12,238
    
    
    
    9,922
    
    
    
    35,047
    
    
    
    28,148INTEREST EXPENSEDeposits
    
    
    2,806
    
    
    
    2,170
    
    
    
    7,899
    
    
    
    6,052Borrowed funds
    
    
    1,278
    
    
    
    1,212
    
    
    
    3,760
    
    
    
    3,351Total interest expense
    
    
    4,084
    
    
    
    3,382
    
    
    
    11,659
    
    
    
    9,403Net interest income
    
    
    8,154
    
    
    
    6,540
    
    
    
    23,388
    
    
    
    18,745PROVISION FOR LOAN LOSSES
    
    
    450
    
    
    
    795
    
    
    
    2,050
    
    
    
    1,822Net interest income after provision
for loan losses
    
    
    7,704
    
    
    
    5,745
    
    
    
    21,338
    
    
    
    16,923NONINTEREST INCOME:Service charges and fees
    
    
    1,000
    
    
    
    874
    
    
    
    2,721
    
    
    
    2,373Net gain (loss) from sale of securities
    
    
    88
    
    
    
    (21
    )
    
    
    253
    
    
    
    91Other than temporary impairment of
securities
    
    
    
    
    
    
    (223
    )
    
    
    
    
    
    
    (223
    )Total noninterest income
    
    
    1,088
    
    
    
    630
    
    
    
    2,974
    
    
    
    2,241NONINTEREST EXPENSE:Salaries and employee benefits
    
    
    3,271
    
    
    
    2,820
    
    
    
    9,517
    
    
    
    8,077Service bureau fees
    
    
    654
    
    
    
    609
    
    
    
    1,996
    
    
    
    1,663Occupancy and equipment
    
    
    756
    
    
    
    671
    
    
    
    2,130
    
    
    
    2,096Professional fees
    
    
    257
    
    
    
    116
    
    
    
    933
    
    
    
    537Marketing and promotions
    
    
    213
    
    
    
    207
    
    
    
    783
    
    
    
    739Insurance and FDIC assessments
    
    
    48
    
    
    
    39
    
    
    
    155
    
    
    
    124Contribution to Rockville BankCommunity Foundation, Inc.
    
    
    
    
    
    
    
    
    
    
    3,887
    
    
    
    Other
    
    
    824
    
    
    
    770
    
    
    
    2,536
    
    
    
    2,711Total noninterest expense
    
    
    6,023
    
    
    
    5,232
    
    
    
    21,937
    
    
    
    15,947INCOME BEFORE INCOME TAXES
    
    
    2,769
    
    
    
    1,143
    
    
    
    2,375
    
    
    
    3,217PROVISION FOR INCOME TAXES
    
    
    881
    
    
    
    344
    
    
    
    761
    
    
    
    976NET INCOME
    
    $
    1,888
    
    
    $
    799
    
    
    $
    1,614
    
    
    $
    2,241
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Rockville Financial, Inc.
Condensed Consolidated Statements of Income  Continued
 For the Three
    
    For the Period
    
    For the NineFor the Three
    
    Months
    
    from May 20,
    
    MonthsMonths Ended
    
    Ended
    
    2005 to
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net income (loss) per share
(see Note 3):Basic and Diluted
    
    $
    .10
    
    
    
    N/A
    
    
    
    (.01
    )
    
    
    N/AWeighted average shares outstanding:Basic and Diluted
    
    
    19,030,650
    
    
    
    N/A
    
    
    
    19,025,688
    
    
    
    N/A
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Rockville Financial, Inc. and Subsidiaries
 
 Consolidated Statement of Changes in Stockholders Equity
 For the Nine Months Ended September 30, 2005 and 2004
 (Dollars in Thousands, Except Per Share Amounts)
 (Unaudited)
 Unallocated
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    Common
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock

    
    
    Paid in
    
    
    Shares Held
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    by ESOP
    
    
    Earnings
    
    
    Income
    
    
    EquityNine months
ended September 30,
2005:Balance at January
1, 2005
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    67,338
    
    
    $
    1,188
    
    
    $
    68,526Issuance of common
stock to Rockville
Financial MHC, Inc.
    
    
    10,689,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common
stock, net of
expenses of $2.3
million (Note 1)
    
    
    8,357,050
    
    
    
    81,299
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,299Issuance of common
stock to Rockville
Bank Community,
Foundation, Inc.,
including
additional tax
benefit due to
higher basis for
tax purposes
    
    
    388,700
    
    
    
    3,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,950Shares purchased
for ESOP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,803
    )
    
    
    
    
    
    
    
    
    
    
    (4,803
    )ESOP Expense
    
    
    
    
    
    
    
    
    
    
    219
    
    
    
    437
    
    
    
    
    
    
    
    
    
    
    
    656Comprehensive
income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,614
    
    
    
    
    
    
    
    1,614Change in net
unrealized gain on
securities
available for
sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (827
    )
    
    
    (827
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    787Balance at
September 30, 2005
    
    
    19,435,000
    
    
    $
    85,249
    
    
    $
    219
    
    
    $
    (4,366
    )
    
    $
    68,952
    
    
    $
    361
    
    
    $
    150,415
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Rockville Financial, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 (In Thousands)
 For the Nine Months EndedSeptember 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,614
    
    
    $
    2,241Adjustments to reconcile net income to net cash
provided by operating activities:Amortization and accretion of premiums and discounts
on investments
    
    
    267
    
    
    
    511Provision for loan losses
    
    
    2,050
    
    
    
    1,822Contribution to Rockville Bank Community Foundation, Inc.
    
    
    3,887
    
    
    
    Net (gain) loss from sale of securities
    
    
    (253
    )
    
    
    (91
    )Other than temporary impairment of securities
    
    
    
    
    
    
    223ESOP Expense
    
    
    656
    
    
    
    Depreciation and amortization
    
    
    870
    
    
    
    982Loss on disposal of equipment
    
    
    17
    
    
    
    Deferred income taxes
    
    
    (1,854
    )
    
    
    (339
    )Increase in cash surrender value of bank owned life insurance
    
    
    (244
    )
    
    
    (200
    )Change in assets and liabilities:Deferred loan fees and premiums
    
    
    34
    
    
    
    (1,525
    )Accrued interest receivable
    
    
    (407
    )
    
    
    (245
    )Other assets
    
    
    520
    
    
    
    (913
    )Accrued expenses and other liabilities
    
    
    1,794
    
    
    
    1,456Net cash provided by operating activities
    
    
    8,951
    
    
    
    3,922CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of available for sale securities
    
    
    4,753
    
    
    
    3,003Proceeds from maturities of available for sale securities
    
    
    9,601
    
    
    
    13,065Principal payments on available for sale mortgage-backed
securities
    
    
    12,456
    
    
    
    8,384Purchase of available for sale securities
    
    
    (16,119
    )
    
    
    (32,840
    )Purchase of Federal Home Loan Bank Stock
    
    
    (1,086
    )
    
    
    (1,343
    )Proceeds from the sale of loans
    
    
    6,328
    
    
    
    Purchase of bank owned life insurance
    
    
    
    
    
    
    (2,000
    )Net increase in loans
    
    
    (129,307
    )
    
    
    (122,203
    )Purchases of bank premises and equipment
    
    
    (2,396
    )
    
    
    (761
    )Proceeds
from the surrender of bank owned life insurance
    
    
    1,317
    
    
    
    Net cash used in investing activities
    
    
    (114,453
    )
    
    
    (134,695
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in non-interest bearing deposits
    
    
    1,481
    
    
    
    12,183Net increase in interest bearing deposits
    
    
    26,791
    
    
    
    105,079Decrease in mortgagors and investors escrow accounts
    
    
    (1,716
    )
    
    
    (1,584
    )Proceeds from Federal Home Loan Bank advances
    
    
    26,000
    
    
    
    98,000Repayments of Federal Home Loan Bank advances
    
    
    (21,110
    )
    
    
    (83,103
    )Net proceeds from common stock offering
    
    
    81,299
    
    
    
    Acquisition of common stock by ESOP
    
    
    (4,803
    )
    
    
    Net cash provided by financing activities
    
    
    107,942
    
    
    
    130,575NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    2,440
    
    
    
    (198
    )CASH AND CASH EQUIVALENTS  Beginning of year
    
    
    22,100
    
    
    
    28,454CASH AND CASH EQUIVALENTS  End of period
    
    $
    24,540
    
    
    $
    28,256SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    11,611
    
    
    $
    9,411Income taxes
    
    
    1,700
    
    
    
    700
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Rockville Financial, Inc. and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1.
    
    Mutual Holding Company Reorganization and Minority Stock IssuanceRockville Financial, Inc., (the Company), a state-chartered mid-tier stock holding
company was formed on December 17, 2004 to reorganize Charter Oak Community Bank Corp. from
a state-chartered mutual holding company to a state-chartered two-tier mutual and stock
holding company. On May 20, 2005, the Reorganization and Minority Stock Issuance Plan (the
Plan) adopted by the Company, Charter Oak Community Bank Corp. and Rockville Bank
Boards of Directors was completed. Charter Oak Community Bank Corp.s name was changed to
Rockville Financial MHC, Inc. and 100% of the stock of its wholly-owned subsidiary
Rockville Bank (the Bank) was exchanged for 10,689,250 shares, or 55% of the stock issued
by the Company. Rockville Bank provides a full range of banking services to consumer and
commercial customers through its main office in Rockville and sixteen 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 sold 8,357,050 shares of its common stock, representing 43% of the
outstanding common shares at $10.00 per share to eligible account holders and employee
benefit plans of the Bank pursuant to subscription rights as set forth in the Plan.
Reorganization costs of $2.3 million were incurred in conducting the offering and were
recorded as a reduction of the proceeds from the shares sold in the reorganization.For a period of five years following completion of the Plan, no person, acting singly or
with an associate or group of persons acting in concert, shall directly, or indirectly,
offer to acquire or acquire the beneficial ownership of more than ten percent (10%) of any
class of an equity security of the Company without the prior approval of the Connecticut
Banking Commissioner.As of September 30, 2005, the Company had not engaged in any business activities other than
owning the common stock of Rockville Bank. Rockville Financial MHC, Inc. does not conduct
any business activity other than owning a majority of the common stock of Rockville
Financial, Inc.In connection with the stock offering, the Company established Rockville Bank Community
Foundation, Inc., a non-profit charitable organization dedicated to helping the communities
that the Bank serves. The Foundation was funded with a contribution of 388,700 shares of
the Companys common stock, representing 2% of the outstanding common shares. The stock
donation resulted in a $3.9 million contribution expense being
recorded, and an additional
$63,000 deferred tax benefit was recognized as the basis of the contribution for tax
purposes which is equal to the stocks trading price on the first day of trading which was higher
than the initial issuance price used to record the contribution expense.As part of the reorganization and stock offering, the Company established an Employee Stock
Ownership Plan (ESOP) for eligible employees. Upon conversion, the ESOP borrowed $4.4
million from the Company to purchase 437,287 shares of common stock, representing 2.2% of
the outstanding common shares. The Bank intends to make annual contributions to the ESOP
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 7.75% as of
September 30, 2005. The ESOP loan principal is payable in ten
equal annual installments. Interest is payable on an annual basis. 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 September 30,
2005, the outstanding principal and interest due was $4.9 million and there have been no
principal payments on the loan since inception. The Company accounts for these ESOP shares
in accordance with Statement of Position 93-6, Employers Accounting for Employee Stock
Ownership Plans(SOP 93-6). Under SOP 93-6, unearned ESOP shares are not considered
outstanding for calculating net income (loss) per common share and are shown as a reduction
of shareholders equity and presented as unearned common shares
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held by ESOP. During the period the ESOP shares are committed to be released, the Company
recognizes compensation cost equal to the fair value of the ESOP
shares and the unearned common shares held by the ESOP will be reduced by the cost of the ESOP
 shares released, and the differential between the fair value and the cost will be charged to
additional paid-in capital. In accordance with SOP 93-6, the loan receivable from the ESOP
to the Company is not reported as an asset nor is the debt of the ESOP reported as a
liability in the Companys financial statements. As of September 30, 2005, all of the ESOP
 shares purchased remain unallocated and no shares have been released to date. The ESOP
compensation expense for the three and nine months ended September 30, 2005 was $447,000
and $674,000, respectively based upon the estimated fair value of the shares the Company
expects to release in 2005.2.
    
    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 nine months ended September 30, 2005 are
not necessarily indicative of the results that may be expected for the year ending December
31, 2005. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the Companys 2004
Consolidated Financial Statements included in the Companys Registration Statement on Form
S-1, as amended.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the dates of the condensed financial statements and
the reported amounts of income and expenses during the reporting periods. Operating results
in the future could vary from the amounts derived from managements estimates and
assumptions. Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, determination
of pension assumptions, the valuation of deferred tax assets and the evaluation of
available for sale securities for other than temporary impairment.3.
    
    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.
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Earnings per share data is not presented in these consolidated financial statements prior
to May 20, 2005 since shares of common stock were not issued until May 20, 2005; therefore,
per share information for prior periods is not meaningful.In accordance with Statement of Position 93-6, Employers Accounting for Employee Stock
Ownership Plans(SOP 93-6), unearned ESOP shares are not considered outstanding for
calculating basic and diluted net income (loss) per common share and ESOP shares committed
to be released are considered to be outstanding for purposes of the earnings per share
computation. Under SOP 93-6, ESOP shares that have not been legally released, but that
relate to employee services rendered during an accounting period (interim or annual) ending
before the related debt service payment is made, should be considered committed to be
released.The following table sets forth the calculation of basic and diluted earnings per share for
the three months ended September 30, 2005 and the period from May 20, 2005 to September 30,
2005:
 For theThree
    
    
    For the PeriodMonths
    
    
    from May 20,Ended
    
    
    2005 toSeptember
    
    
    September 30,30, 2005
    
    
    2005(Dollars in thousands,except per share information)Net income (loss)
    
    $
    1,888
    
    
    $
    (142
    )Weighted average shares outstanding
    
    
    19,435,000
    
    
    
    19,435,000Less: Unallocated weighted average
ESOP shares
    
    
    (439,238
    )
    
    
    (438,620
    )Plus: Committed ESOP Shares
    
    
    34,888
    
    
    
    29,308Basic and Diluted shares
    
    
    19,030,650
    
    
    
    19,025,688Earnings (loss) per share:Basic and Diluted
    
    $
    .10
    
    
    $
    (.01
    )
 4.
    
    Recent Accounting PronouncementsIn December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment,
which will require compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of compensation
cost will be measured based upon the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be re-measured each reporting
period. Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. Statements 123 (R) replaces FASB Statement 123,
Accounting for Stock-Based Compensation,and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees.SFAS No. 123 (R) is effective for the Company as of January 1,
2006. The Company is in the process of determining the method of adoption and the impact of
SFAS No. 123(R) upon adoption.In November 2005, the FASB has issued FASB Staff Position (FSP) FAS 115-1 and 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The
guidance in this FSP addresses the determination of when an investment is considered
impaired,
 10




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##### Table of Contents



whether that impairment is other than temporary, and the measurement of an impairment loss.
The FSP also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses
that have not been recognized as other-than-temporary impairments. The guidance in this FSP
amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities,and FASB Statement No. 124, Accounting for Certain Investments Held by
Not-for-Profit Organizations,and adds a footnote to APB Opinion No. 18, The Equity Method
of Accounting for Investments in Common Stock.The guidance in this FSP nullifies certain
requirements of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments, and supersedes EITF Abstracts,Topic D-44,
Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose
Cost Exceeds Fair Value. The guidance in this FSP is required to be applied to reporting
periods beginning after December 15, 2005. The adoption of these new rules is not expected
to have a material impact on the Companys consolidated financial statements.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 September 30, 2005 and December
31, 2004 are as follows:
 Amortized
    
    
    Gross Unrealized
    
    
    FairSeptember 30, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:U.S. Government and agency obligations
    
    $
    1,999
    
    
    $
    
    
    
    $
    3
    
    
    $
    1,996U.S. Government sponsored enterprises
    
    
    29,999
    
    
    
    
    
    
    
    435
    
    
    
    29,564Mortgage-backed securities
    
    
    61,500
    
    
    
    187
    
    
    
    770
    
    
    
    60,917Corporate debt securities
    
    
    20,001
    
    
    
    215
    
    
    
    7
    
    
    
    20,209Other debt securities
    
    
    1,430
    
    
    
    48
    
    
    
    
    
    
    
    1,478Total debt securities
    
    
    114,929
    
    
    
    450
    
    
    
    1,215
    
    
    
    114,164Marketable equity securities
    
    
    11,024
    
    
    
    3,917
    
    
    
    296
    
    
    
    14,645Non-marketable equity securities
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    241$
    126,194
    
    
    $
    4,367
    
    
    $
    1,511
    
    
    $
    129,050
 Amortized
    
    
    Gross Unrealized
    
    
    FairDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Available for sale:U.S. Government and agency obligations
    
    $
    1,994
    
    
    $
    
    
    
    $
    10
    
    
    $
    1,984U.S. Government sponsored enterprises
    
    
    24,160
    
    
    
    11
    
    
    
    118
    
    
    
    24,053Mortgage-backed securities
    
    
    67,291
    
    
    
    464
    
    
    
    396
    
    
    
    67,359Corporate debt securities
    
    
    28,384
    
    
    
    905
    
    
    
    
    
    
    
    29,289Other debt securities
    
    
    1,434
    
    
    
    72
    
    
    
    
    
    
    
    1,506Total debt securities
    
    
    123,263
    
    
    
    1,452
    
    
    
    524
    
    
    
    124,191Marketable equity securities
    
    
    8,309
    
    
    
    3,341
    
    
    
    160
    
    
    
    11,490Non-marketable equity securities
    
    
    326
    
    
    
    
    
    
    
    
    
    
    
    326$
    131,898
    
    
    $
    4,793
    
    
    $
    684
    
    
    $
    136,007
 At September 30, 2005, the net unrealized gain on securities available for sale of $2.9
million, net of income taxes of $1.0 million, or $1.9 million is included in accumulated
other comprehensive income. At December 31, 2004, the net unrealized gain on securities
available for sale of $4.1 million, net of income taxes of $1.4 million, or $2.7 million is
included in accumulated other comprehensive income.
 11




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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 September 30, 2005 and December 31, 2004:
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedSeptember 30, 2005
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In thousands)Available for sale:U.S. Government and agency
obligations
    
    $
    997
    
    
    $
    2
    
    
    $
    999
    
    
    $
    1
    
    
    $
    1,996
    
    
    $
    3U.S. Government sponsored enterprises
    
    
    23,673
    
    
    
    326
    
    
    
    5,891
    
    
    
    109
    
    
    
    29,564
    
    
    
    435Mortgage-backed securities
    
    
    23,839
    
    
    
    206
    
    
    
    22,353
    
    
    
    564
    
    
    
    46,192
    
    
    
    770Corporate debt securities
    
    
    1,401
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    1,401
    
    
    
    7Total debt securities
    
    
    49,910
    
    
    
    541
    
    
    
    29,243
    
    
    
    674
    
    
    
    79,153
    
    
    
    1,215Marketable equity securities
    
    
    5,089
    
    
    
    274
    
    
    
    68
    
    
    
    22
    
    
    
    5,157
    
    
    
    296Total
    
    $
    54,999
    
    
    $
    815
    
    
    $
    29,311
    
    
    $
    696
    
    
    $
    84,310
    
    
    $
    1,511
 Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2004
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss(In thousands)Available for sale:U.S. Government and agency
obligations
    
    $
    1,984
    
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    1,984
    
    
    $
    10U.S. Government sponsored enterprises
    
    
    15,894
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    15,894
    
    
    
    118Mortgage-backed securities
    
    
    24,170
    
    
    
    275
    
    
    
    7,657
    
    
    
    121
    
    
    
    31,827
    
    
    
    396Total debt securities
    
    
    42,048
    
    
    
    403
    
    
    
    7,657
    
    
    
    121
    
    
    
    49,705
    
    
    
    524Marketable equity securities
    
    
    1,881
    
    
    
    143
    
    
    
    80
    
    
    
    17
    
    
    
    1,961
    
    
    
    160Total
    
    $
    43,929
    
    
    $
    546
    
    
    $
    7,737
    
    
    $
    138
    
    
    $
    51,666
    
    
    $
    684
 As of September 30, 2005 and December 31, 2004, management determined that none of the
securities in an unrealized loss position were other than temporarily impaired based on
their evaluation of current market trends, the nature of the investments and industry
analysis. Management has both the intent and ability to hold the securities with unrealized
losses for 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 September 30, 2005 and December 31, 2004
is as follows:
 September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Real estate loans:Residential
    
    $
    530,459
    
    
    
    64.4
    %
    
    $
    450,054
    
    
    
    64.2
    %Commercial
    
    
    145,070
    
    
    
    17.6
    %
    
    
    136,594
    
    
    
    19.5
    %Construction
    
    
    33,541
    
    
    
    4.1
    %
    
    
    22,067
    
    
    
    3.1
    %709,070
    
    
    
    
    
    
    
    608,715Commercial business loans
    
    
    110,836
    
    
    
    13.5
    %
    
    
    88,700
    
    
    
    12.7
    %Installment loans
    
    
    2,509
    
    
    
    0.3
    %
    
    
    2,268
    
    
    
    0.3
    %Collateral loans
    
    
    1,154
    
    
    
    0.1
    %
    
    
    1,205
    
    
    
    0.2
    %Total loans
    
    
    823,569
    
    
    
    100.0
    %
    
    
    700,888
    
    
    
    100.0
    %Net deferred loan costs and premiums
    
    
    1,698
    
    
    
    
    
    
    
    1,732Allowance for loan losses
    
    
    (8,123
    )
    
    
    
    
    
    
    (6,371
    )Loans, net
    
    $
    817,144
    
    
    
    
    
    
    $
    696,249
 Changes in the allowance for loan losses for the periods ended September 30, 2005 and
September 30, 2004 are as follows:
 At or For the Three Months
    
    
    At or For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Allowance, beginning of the
period
    
    $
    7,670
    
    
    $
    5,642
    
    
    $
    6,371
    
    
    $
    4,971Provision for loan losses
    
    
    450
    
    
    
    795
    
    
    
    2,050
    
    
    
    1,822Loans charged-off
    
    
    (17
    )
    
    
    (649
    )
    
    
    (372
    )
    
    
    (1,026
    )Recoveries of loans previously
charged off
    
    
    20
    
    
    
    89
    
    
    
    74
    
    
    
    110Balance, end of period
    
    $
    8,123
    
    
    $
    5,877
    
    
    $
    8,123
    
    
    $
    5,877
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7.
Deposits:
  September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Demand deposits
    
    $
    79,453
    
    
    
    11.0
    %
    
    $
    77,972
    
    
    
    11.3
    %NOW accounts
    
    
    93,157
    
    
    
    12.9
    %
    
    
    88,768
    
    
    
    12.8
    %Regular savings
    
    
    158,432
    
    
    
    22.0
    %
    
    
    161,215
    
    
    
    23.3
    %Money market and investment savings
    
    
    86,170
    
    
    
    12.0
    %
    
    
    84,789
    
    
    
    12.2
    %Club accounts
    
    
    927
    
    
    
    0.1
    %
    
    
    205
    
    
    
    0.0
    %Total transaction accounts
    
    
    418,139
    
    
    
    58.0
    %
    
    
    412,949
    
    
    
    59.6
    %Certificates of deposit
    
    
    302,631
    
    
    
    42.0
    %
    
    
    279,549
    
    
    
    40.4
    %Total deposits
    
    $
    720,770
    
    
    
    100.0
    %
    
    $
    692,498
    
    
    
    100.0
    %
 A summary of interest expense by account type for the three and nine months ended September
30, 2005 and 2004 is as follows:
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Savings and demand deposits
    
    $
    770
    
    
    $
    547
    
    
    $
    2,262
    
    
    $
    1,591Time deposits
    
    
    2,036
    
    
    
    1,623
    
    
    
    5,637
    
    
    
    4,461$
    2,806
    
    
    $
    2,170
    
    
    $
    7,899
    
    
    $
    6,052
 8.
    
    Borrowings:The Bank is a member of the Federal Home Loan Bank of Boston (the FHLBB). At
September 30, 2005 and December 31, 2004, the Bank had access to a pre-approved secured
line of credit with the FHLBB of $10 million and the capacity to obtain additional advances
up to a certain percentage of the value of its qualified collateral, as defined in the
FHLBB Statement of Credit Policy. In accordance with an agreement with the FHLBB, the
qualified collateral must be free and clear of liens, pledges and encumbrances. At
September 30, 2005 and December 31, 2004, there were no advances outstanding under the line
of credit. Other outstanding advances from the FHLBB aggregated $122.9 million at September
30, 2005, at interest rates ranging from 2.77% to 6.47%, and $118.0 million at December 31,
2004, at interest rates ranging from 2.35% to 6.47%.As of September 30, 2005, $19.0 million of FHLBB borrowings were scheduled to mature in
less than one year. The balance of $103.9 million is due at various maturity dates in 2007
through 2013.
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##### Table of Contents



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
eligible for the Plan after attaining age 21 and completing one year of service.
Participants become 100% vested after five years of employment of vesting service. The
Banks funding policy is to contribute annually the maximum amount that can be deducted for
Federal income tax purposes, while meeting the minimum funding standards established by the
ERISA.The Company uses September 30 as the measurement date for its pension plan and December 31
for its post-retirement benefit plan.In January 2004, the Bank established a Supplemental Executive Retirement Agreement with an
executive officer of the Company. Additionally, effective December 1, 2004, the Bank
adopted the Supplemental Executive Retirement Plan (the SERP) covering two designated
executive officers of the Bank. The SERP provides the two designated officers with a
retirement benefit equal to 70% of their respective average annual earnings, as defined.The amounts related to the Pension Plan, supplemental retirement agreement and SERP are
reflected in the tables that follow as Pension Plans:Components of Net Periodic Benefit Cost
 Pension Plans
    
    
    Post-Retirement BenefitsThree Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Service cost
    
    $
    200
    
    
    $
    141
    
    
    $
    2
    
    
    $
    2Interest cost
    
    
    182
    
    
    
    139
    
    
    
    19
    
    
    
    24Expected return on plan assets
    
    
    (210
    )
    
    
    (118
    )
    
    
    
    
    
    
    Amortization of net
actuarial losses
    
    
    84
    
    
    
    82
    
    
    
    8
    
    
    
    19Amortization of prior
service cost (benefits)
    
    
    155
    
    
    
    2
    
    
    
    
    
    
    
    (15
    )Net periodic benefit cost
    
    $
    411
    
    
    $
    246
    
    
    $
    29
    
    
    $
    30
 Pension Plans
    
    
    Post-Retirement BenefitsNine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Service cost
    
    $
    600
    
    
    $
    423
    
    
    $
    6
    
    
    $
    6Interest cost
    
    
    546
    
    
    
    417
    
    
    
    58
    
    
    
    72Expected return on plan assets
    
    
    (630
    )
    
    
    (354
    )
    
    
    
    
    
    
    Amortization of net
actuarial losses
    
    
    252
    
    
    
    246
    
    
    
    24
    
    
    
    57Amortization of prior
service cost (benefits)
    
    
    465
    
    
    
    6
    
    
    
    (1
    )
    
    
    (45
    )Net periodic benefit cost
    
    $
    1,233
    
    
    $
    738
    
    
    $
    87
    
    
    $
    90
 The Company contributed $981,000 to the pension plan during the nine months ended September
30, 2005. The Company contributed $61,000 to the post-retirement plan during the nine
months ended September 30, 2005. The Company anticipates contributing $21,000 to the post
retirement plan during the quarter ending December 31, 2005. No further contributions are
expected to be made to the pension plan during 2005.
 15




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##### Table of Contents



10.
    
    Other Comprehensive Income (Loss):The following table summarizes the components of other comprehensive income (loss) and the
related tax effects for the three and nine months ended September 30, 2005:
 Three Months Ended September 30, 2005Before-Tax
    
    
    
    
    
    
    Net-of-TaxAmount
    
    
    Taxes
    
    
    Amount(In thousands)Unrealized losses arising during the period
    
    $
    (147
    )
    
    $
    50
    
    
    $
    (97
    )Add reclassification adjustment for net gain from
sale of securities recognized in net income
    
    
    88
    
    
    
    (30
    )
    
    
    58Total other comprehensive loss
    
    $
    (59
    )
    
    $
    20
    
    
    $
    (39
    )
 Nine Months Ended September 30, 2005Before-Tax
    
    
    
    
    
    
    Net-of-TaxAmount
    
    
    Taxes
    
    
    Amount(In thousands)Unrealized losses arising during the period
    
    $
    (1506
    )
    
    $
    512
    
    
    $
    (994
    )Add reclassification adjustment for net gain from
sale of securities recognized in net income
    
    
    253
    
    
    
    (86
    )
    
    
    167Total other comprehensive loss
    
    $
    (1,253
    )
    
    $
    426
    
    
    $
    (827
    )
 16




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##### Table of Contents



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. 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
September 30, 2005 and December 31, 2004:
 September 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Commitments to extend credit:Future loan commitments
    
    $
    72,080
    
    
    $
    25,046Undisbursed construction loans
    
    
    56,192
    
    
    
    22,993Undisbursed home equity lines of credit
    
    
    76,314
    
    
    
    59,229Undisbursed commercial lines of credit
    
    
    15,002
    
    
    
    44,049Standby letters of credit
    
    
    7,793
    
    
    
    4,121Unused checking overdraft lines of credit
    
    
    82
    
    
    
    71$
    227,463
    
    
    $
    155,509
 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 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 September 30,
2005, the Company and the Bank exceeded all regulatory capital requirements and is
considered well capitalized under regulatory guidelines.
 17




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##### Table of Contents



The following is a summary of the Banks regulatory capital amounts and ratios as of
September 30, 2005 and December 31, 2004 compared to the Federal Deposit Insurance
Corporations requirements for classification as a well-capitalized institution and for
minimum capital adequacy. Also included is a summary of Rockville Financial, Inc.s
regulatory capital and ratios as of September 30, 2005. The
December 31, 2004 data is not
relevant as the reorganization of the Company was completed on May 20, 2005:
 To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsRockville Bank at September 30, 2005
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal capital to risk weighted assets
    
    $
    114,058
    
    
    
    16.2
    %
    
    $
    56,325
    
    
    
    8.0
    %
    
    $
    70,406
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    105,662
    
    
    
    15.0
    
    
    
    28,158
    
    
    
    4.0
    
    
    
    42,237
    
    
    
    6.0Tier I capital to total average assets
    
    
    105,662
    
    
    
    10.9
    
    
    
    38,918
    
    
    
    4.0
    
    
    
    48,647
    
    
    
    5.0
 To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsRockville Bank at December 31, 2004
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal capital to risk weighted assets
    
    $
    69,509
    
    
    
    11.9
    %
    
    $
    47,125
    
    
    
    8.0
    %
    
    $
    58,906
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    62,942
    
    
    
    10.7
    
    
    
    23,530
    
    
    
    4.0
    
    
    
    35,295
    
    
    
    6.0Tier I capital to total average assets
    
    
    62,942
    
    
    
    7.3
    
    
    
    34,489
    
    
    
    4.0
    
    
    
    43,111
    
    
    
    5.0
 To Be WellFor Capital
    
    
    Capitalized UnderAdequacy
    
    
    Prompt CorrectiveActual
    
    
    Purposes
    
    
    Action ProvisionsRockville Financial, Inc. at September 30, 2005
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal capital to risk weighted assets
    
    $
    153,400
    
    
    
    21.8
    %
    
    $
    56,423
    
    
    
    8.0
    %
    
    $
    70,529
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    145,004
    
    
    
    20.6
    
    
    
    28,211
    
    
    
    4.0
    
    
    
    42,316
    
    
    
    6.0Tier I capital to total average assets
    
    
    145,004
    
    
    
    14.9
    
    
    
    38,927
    
    
    
    4.0
    
    
    
    48,659
    
    
    
    5.0
 14.
    
    Income Taxes:Income taxes are provided on an interim basis using the estimated annual effective tax
rate. The effective tax rate differs from the statutory rate of 34% for the three months
and nine months ended September 30, 2005 and September 30, 2004 primarily due to the
dividend received deduction, tax exempt interest and non-taxable earnings on bank owned
life insurance for all periods.
 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward Looking StatementsManagements Discussion and Analysis included in this Form 10-Q contains statements that
are forward-looking within the meaning of the Private Securities Litigation Reform Act of
1995. Such 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 timeliness of development and acceptance of new products and services may
be different than anticipated.
    
    Technological changes instituted by the Company and by persons who may affect
the Companys business may be more difficult to accomplish or more expensive than
anticipated or may have unforeseen consequences.
    
    The ability to increase market share and control expenses may be more difficult
than anticipated.
    
    Competitive pressures among financial services companies may increase
significantly.
    
    Changes in laws and regulatory requirements (including those concerning taxes,
banking, securities and insurance) may adversely affect the Company or its
businesses.
    
    Changes in accounting policies and practices, as may be adopted by regulatory
agencies, the Public Company Accounting Oversight Board and the Financial
Accounting Standards Board, may affect expected financial reporting.
    
    The costs, effects and outcomes of litigation may adversely affect the Company
or its businesses.
    
    The Company may not manage the risks involved in the foregoing as well as
anticipated.
 Any forward-looking statements made by or on behalf of the Company in this Form 10-Q speak
only as of the date of this Form 10-Q. The Company does not undertake to update
forward-looking statements to reflect the impact of circumstances or events that arise
after the date the forward-looking statement was made. The reader should, however, consult
any further disclosures of a forward-looking nature the Company may make in future filings.
 19




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##### Table of Contents



Critical Accounting PoliciesThe accounting policies followed by the Bank and its subsidiaries conform with accounting
principles generally accepted in the United States of America and with general practices
within the banking industry.Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and could potentially result in materially different results
under different assumptions and conditions. We believe that our most critical accounting
policies, which involve the most complex 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.OverviewRockville Financial, Inc., (the Company), a state-chartered mid-tier stock holding
company was formed on December 17, 2004 to reorganize Charter Oak Community Bank Corp. from
a state-chartered mutual holding company to a state-chartered two-tier mutual and stock
holding company. On May 20, 2005, the Reorganization and Minority Stock Issuance Plan (the
Plan) adopted by the Companys and Banks Board of Directors was completed. Its
wholly-owned subsidiary Rockville Bank (the Bank) provides a full range of banking
services to consumer and commercial customers through its main office in Rockville and
sixteen 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 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.Comparison of Operating Results for the Three Months and Nine Months Ended September 30,
2005 and 2004The Companys results of operations depend primarily on net interest income, which is the
difference between the interest income from earning assets, such as loans and investments,
and the interest expense incurred on interest-bearing liabilities, such as deposits and
other borrowings. The Company also generates noninterest income, including service charges
on deposit accounts, mortgage servicing income, bank owned life insurance income, safe
deposit box rental fees, brokerage fees, insurance commissions and other miscellaneous
fees. The Companys noninterest expense primarily consists of employee compensation and
benefits, occupancy, equipment, and other operating expenses. The Companys results of
operations are also impacted by its provision for loan losses. The following discussion
provides a summary and comparison of the Companys operating results for the three and nine
months ended September 30, 2005 and 2004.
 20




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##### Table of Contents



Income Statement Summary
 For the Three
    
    
    
    
    
    
    For the NineMonths Ended
    
    
    
    
    
    
    Months EndedSeptember 30,
    
    
    
    
    
    
    September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(In thousands)Net interest income
    
    $
    8,154
    
    
    $
    6,540
    
    
    $
    1,614
    
    
    $
    23,388
    
    
    $
    18,745
    
    
    $
    4,643Provision for loan losses
    
    
    450
    
    
    
    795
    
    
    
    345
    
    
    
    2,050
    
    
    
    1,822
    
    
    
    (228
    )Noninterest income
    
    
    1,088
    
    
    
    630
    
    
    
    458
    
    
    
    2,974
    
    
    
    2,241
    
    
    
    733Operating expenses
    
    
    6,023
    
    
    
    5,232
    
    
    
    (791
    )
    
    
    18,050
    
    
    
    15,947
    
    
    
    (2,103
    )Contribution to Rockville
Community Foundation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,887
    
    
    
    
    
    
    
    (3,887
    )Income before income taxes
    
    
    2,769
    
    
    
    1,143
    
    
    
    1,626
    
    
    
    2,375
    
    
    
    3,217
    
    
    
    (842
    )Provision for income taxes
    
    
    881
    
    
    
    344
    
    
    
    (537
    )
    
    
    761
    
    
    
    976
    
    
    
    215Net income
    
    $
    1,888
    
    
    $
    799
    
    
    $
    1,089
    
    
    $
    1,614
    
    
    $
    2,241
    
    
    $
    (627
    )
 Earnings Summary:Net income increased by $1.1 million, or 136.3%, to $1.9 million for the
quarter ended September 30, 2005 from $799,000 for the same period in the prior year
primarily resulting from a $1.6 million, or 24.7% increase in our net interest income, due
to a 91.7% increase in average net interest earning assets and a 15 basis point increase in
the net interest margin, and a $345,000, or 43.4% decline in the provision for loan losses
and a $458,000, or 72.7% increase in noninterest income partially offset by a $791,000, or
15.1% increase in noninterest expense. Basic and diluted earnings per share were $.10 for
the quarter ended September 30, 2005. As this is the second quarter operating as a public
company, per share data is not presented for the three months ended September 30, 2004
since there were no shares outstanding prior to May 20, 2005. The increase in the average
net interest-earning assets reflects the stock proceeds which were used to fund significant
loan growth. The decrease in the provision for loan losses is the result of our evaluation
of the required allowance amount. The increase in noninterest
income is principally due to income being reduced by a $223,000 investment impairment
recorded during the three months ended September 30, 2004 with none recorded during the
three months ended September 30, 2005 and an increase on the net gains on sales of
securities of $109,000 and an increase of $52,000 in ATM fees due to increased volume
experienced by our ATM network and a $52,000 increase in insufficient funds charges as a
result of the growth in demand deposit accounts. The increase in noninterest expense is
primarily due to an increase of $451,000 in salary and employee benefits and a $141,000
increase in professional fees. The increase in salary and employee benefits reflects an
increase of $241,000 in salary costs incurred in connection with the expansion of branch
facilities and the commercial lending division, a $411,000 employee stock ownership plan
(ESOP) expense recorded for the ESOP plan established in 2005 as part of the stock
offering and reorganization and an increase of $168,000 in other benefit expense offset by
a decrease of $401,000 in our phantom stock plan expense as a result of the most recent
valuation used to compute amounts payable under the Plan. The number of full-time
equivalent employees increased to 168 as of September 30, 2005 from 159 as of September 30,
2004. The increase in professional fees was primarily due to legal services.Net income for the nine months ended September 30, 2005, decreased $627,000, or 28.0%, to
$1.6 million, compared with net income of $2.2 million for the nine months ended September
30, 2004. This decline in net income was primarily attributable a $3.9 million expense
related to a common stock contribution to Rockville Bank Community Foundation, Inc. in
connection with the initial public offering with a related tax benefit of $1.3 million. The
Foundation was established with a contribution of 2%, or 388,700 shares of the Companys
common stock to support educational activities and charitable causes in the communities
that the Bank serves. Excluding the Foundation contribution expense and the related tax
benefit, net income would have increased by $2.0 million or 87.6% to $4.2 million for the
nine months ending September 30, 2005 when compared to the same period in the prior year
primarily due to an increase of $4.4 million, or 26.1%, in net interest income after the
provision for loan losses primarily resulting from a $57.7 million, or 61.3% increase in
average net interest-
 21




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##### Table of Contents



earning assets and a $733,000, or 32.7% increase in noninterest income partially offset by
a $2.1 million, or 13.2% increase in noninterest expense.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 September 302005
    
    
    2004Average
    
    
    Interest and
    
    
    Yield/
    
    
    Average
    
    
    Interest and
    
    
    Yield/Balance
    
    
    Dividends
    
    
    Cost
    
    
    Balance
    
    
    Dividends
    
    
    Cost(Dollars in thousands)Interest-earning assets:Loans receivable, net
    
    $
    796,165
    
    
    $
    10,920
    
    
    
    5.49
    %
    
    $
    629,665
    
    
    $
    8,549
    
    
    
    5.43
    %Available for sale securities
    
    
    122,081
    
    
    
    1,196
    
    
    
    3.92
    
    
    
    134,317
    
    
    
    1,311
    
    
    
    3.90Federal Home Loan Bank stock
    
    
    8,498
    
    
    
    91
    
    
    
    4.28
    
    
    
    6,894
    
    
    
    38
    
    
    
    2.19Other earning assets
    
    
    3,662
    
    
    
    31
    
    
    
    3.33
    
    
    
    6,865
    
    
    
    24
    
    
    
    1.39Total interest-earning assets
    
    
    930,406
    
    
    
    12,238
    
    
    
    5.26
    
    
    
    777,741
    
    
    
    9,922
    
    
    
    5.10Noninterest-earning assets
    
    
    45,276
    
    
    
    
    
    
    
    
    
    
    
    38,766Total assets
    
    $
    975,682
    
    
    
    
    
    
    
    
    
    
    $
    816,507Interest-bearing liabilities:NOW and money market accounts
    
    $
    179,521
    
    
    
    510
    
    
    
    1.14
    
    
    $
    145,118
    
    
    
    302
    
    
    
    0.83Savings accounts
    
    
    164,556
    
    
    
    251
    
    
    
    0.61
    
    
    
    157,872
    
    
    
    241
    
    
    
    0.61Certificates of deposit
    
    
    275,767
    
    
    
    2,036
    
    
    
    2.95
    
    
    
    257,925
    
    
    
    1,623
    
    
    
    2.52Total interest-bearing deposits
    
    
    619,844
    
    
    
    2,797
    
    
    
    1.81
    
    
    
    560,915
    
    
    
    2,166
    
    
    
    1.54Mortgagors and investors escrow accounts
    
    
    2,002
    
    
    
    9
    
    
    
    1.80
    
    
    
    1,150
    
    
    
    4
    
    
    
    1.39Advances from the Federal Home Loan Bank
    
    
    118,649
    
    
    
    1,278
    
    
    
    4.31
    
    
    
    116,629
    
    
    
    1,212
    
    
    
    4.16Total interest-bearing liabilities
    
    
    740,495
    
    
    
    4,084
    
    
    
    2.21
    %
    
    
    678,694
    
    
    
    3,382
    
    
    
    1.99
    %Noninterest-bearing liabilities
    
    
    85,197
    
    
    
    
    
    
    
    
    
    
    
    71,122Total liabilities
    
    
    825,692
    
    
    
    
    
    
    
    
    
    
    
    749,816Capital
    
    
    149,990
    
    
    
    
    
    
    
    
    
    
    
    66,691Total liabilities and capital
    
    $
    975,682
    
    
    
    
    
    
    
    
    
    
    $
    816,507Net interest income
    
    
    
    
    
    $
    8,154
    
    
    
    
    
    
    
    
    
    
    $
    6,540Net interest rate spread (1)
    
    
    
    
    
    
    
    
    
    
    3.05
    %
    
    
    
    
    
    
    
    
    
    
    3.11
    %Net interest-earning assets (2)
    
    $
    189,911
    
    
    
    
    
    
    
    
    
    
    $
    99,047Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.51
    %
    
    
    
    
    
    
    
    
    
    
    3.36
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    125.65
    %
    
    
    
    
    
    
    
    
    
    
    114.59
    %
 
 (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



Nine Months Ended September 302005
    
    
    2004Average
    
    
    Interest and
    
    
    Yield/
    
    
    Average
    
    
    Interest and
    
    
    Yield/Balance
    
    
    Dividends
    
    
    Cost
    
    
    Balance
    
    
    Dividends
    
    
    Cost(Dollars in thousands)Interest-earning assets:Loans receivable, net
    
    $
    758,073
    
    
    $
    30,912
    
    
    
    5.44
    %
    
    $
    578,078
    
    
    $
    24,061
    
    
    
    5.55
    %Available for sale securities
    
    
    127,911
    
    
    
    3,804
    
    
    
    3.96
    
    
    
    128,479
    
    
    
    3,850
    
    
    
    4.00Federal Home Loan Bank stock
    
    
    8,118
    
    
    
    255
    
    
    
    4.18
    
    
    
    6,346
    
    
    
    103
    
    
    
    2.16Other earning assets
    
    
    3,697
    
    
    
    76
    
    
    
    2.74
    
    
    
    21,353
    
    
    
    134
    
    
    
    0.84Total interest-earning assets
    
    
    897,799
    
    
    
    35,047
    
    
    
    5.20
    
    
    
    734,256
    
    
    
    28,148
    
    
    
    5.11Noninterest-earning assets
    
    
    45,023
    
    
    
    
    
    
    
    
    
    
    
    36,673Total assets
    
    $
    942,822
    
    
    
    
    
    
    
    
    
    
    $
    770,929Interest-bearing liabilities:NOW and money market accounts
    
    $
    179,956
    
    
    
    1,477
    
    
    
    1.09
    
    
    $
    139,771
    
    
    
    876
    
    
    
    0.84Savings accounts
    
    
    166,348
    
    
    
    755
    
    
    
    0.60
    
    
    
    152,790
    
    
    
    694
    
    
    
    0.61Certificates of deposit
    
    
    276,321
    
    
    
    5,637
    
    
    
    2.72
    
    
    
    242,504
    
    
    
    4,461
    
    
    
    2.45Total interest-bearing deposits
    
    
    622,625
    
    
    
    7,869
    
    
    
    1.69
    
    
    
    535,065
    
    
    
    6,031
    
    
    
    1.50Mortgagors and investors escrow accounts
    
    
    2,501
    
    
    
    30
    
    
    
    1.61
    
    
    
    1,775
    
    
    
    21
    
    
    
    1.58Advances from the Federal Home Loan Bank
    
    
    120,783
    
    
    
    3,760
    
    
    
    4.15
    
    
    
    103,222
    
    
    
    3,351
    
    
    
    4.33Total interest-bearing liabilities
    
    
    745,909
    
    
    
    11,659
    
    
    
    2.08
    %
    
    
    640,062
    
    
    
    9,403
    
    
    
    1.96
    %Noninterest-bearing liabilities
    
    
    88,266
    
    
    
    
    
    
    
    
    
    
    
    64,145Total liabilities
    
    
    834,175
    
    
    
    
    
    
    
    
    
    
    
    704,207Capital
    
    
    108,647
    
    
    
    
    
    
    
    
    
    
    
    66,722Total liabilities and capital
    
    $
    942,822
    
    
    
    
    
    
    
    
    
    
    $
    770,929Net interest income
    
    
    
    
    
    $
    23,388
    
    
    
    
    
    
    
    
    
    
    $
    18,745Net interest rate spread (1)
    
    
    
    
    
    
    
    
    
    
    3.12
    %
    
    
    
    
    
    
    
    
    
    
    3.15
    %Net interest-earning assets (2)
    
    $
    151,890
    
    
    
    
    
    
    
    
    
    
    $
    94,194Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.47
    %
    
    
    
    
    
    
    
    
    
    
    3.40
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    120.36
    %
    
    
    
    
    
    
    
    
    
    
    114.72
    %
 
 (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. 23




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##### Table of Contents



Rate Volume Analysis
 The following table sets forth the effects of changing rates and volumes on our net
interest income for the periods indicated. The rate column shows the effects attributable
to changes in rate (changes in rate multiplied by prior volume). The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by prior rate).
The net column represents the sum of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have been
allocated proportionately based on the changes due to rate and the changes due to volume.
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Compared to
    
    
    Compared toSeptember 30, 2004
    
    
    September 30, 2004Increase (Decrease)
    
    
    
    
    
    
    Increase (Decrease)Due To
    
    
    
    
    
    
    Due ToVolume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    Net(Dollars in thousands)Interest and dividend income:Loans receivable
    
    $
    2,276
    
    
    $
    95
    
    
    $
    2,371
    
    
    $
    8,274
    
    
    $
    (1,423
    )
    
    $
    6,851Securities interest, dividends &
income from other assets
    
    
    (443
    )
    
    
    388
    
    
    
    (55
    )
    
    
    (936
    )
    
    
    984
    
    
    
    48Total earning assets
    
    
    1,833
    
    
    
    483
    
    
    
    2,316
    
    
    
    7,338
    
    
    
    (439
    )
    
    
    6,899Interest expense:NOW and money market accounts
    
    
    81
    
    
    
    127
    
    
    
    208
    
    
    
    289
    
    
    
    313
    
    
    
    602Savings accounts
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    
    69
    
    
    
    
    
    
    
    69Certificates of deposit
    
    
    119
    
    
    
    294
    
    
    
    413
    
    
    
    660
    
    
    
    516
    
    
    
    1,176Total interest-bearing deposits
    
    
    215
    
    
    
    421
    
    
    
    636
    
    
    
    1,018
    
    
    
    829
    
    
    
    1,847FHLB Advances
    
    
    21
    
    
    
    45
    
    
    
    66
    
    
    
    765
    
    
    
    (356
    )
    
    
    409Total interest bearing liabilities
    
    
    236
    
    
    
    466
    
    
    
    702
    
    
    
    1,783
    
    
    
    473
    
    
    
    2,256Change in net interest income
    
    $
    1,597
    
    
    $
    17
    
    
    $
    1,614
    
    
    $
    5,555
    
    
    $
    (912
    )
    
    $
    4,643
 Net Interest Income: Net interest income before the provision for loan loss increased
24.7% to $8.2 million for the quarter ended September 30, 2005, compared to $6.5 million
for the same period in the prior year and increased 24.8% to $23.4 million for the nine
months ended September 30, 2005, compared to $18.7 million for the nine months ended
September 30, 2004. The increase for both the three and nine months ended September 30,
2005 is primarily due to a 91.7% and 61.3% respective increase in average net interest
earning assets which reflects the receipt of stock proceeds which were used to fund the
significant loan growth achieved during the periods. Average net earning assets increased
to $189.9 million from $99.0 million for the three months ended September 30, 2005 from the
same period in the prior year and increased to $151.9 million from $94.2 million for the
nine months ended September 30, 2005 when compared to the same period in the prior year.
Our net interest
margin increased 15 basis points to 3.51% from 3.36% for the quarter ended September 30,
2005 compared to the same period during the prior year and increased 7 basis points to
3.47% from 3.40% for the nine months ended September 30, 2005 compared to the same period
during the prior year.Interest and Dividend Income: Interest and dividend income increased 23.3%, to $12.2
million for the three months ended September 30, 2005 from $9.9 million for the three
months ended September 30, 2004 and increased 24.5% to $35.0 million for the nine months
ended September 30, 2005 from $28.1 earned during the same period in the prior year.
Interest income on loans receivable increased by 27.7% to $10.9 million for the three
months ended September 30, 2005 from $8.5 million for the three months ended September 30,
2004 and increased 28.5% to $30.9 million for the nine months ended
 24




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##### Table of Contents



September 30, 2005 from $24.1 million for the nine months ended September 30, 2004.
The increase in interest and dividend income for both the three and nine month periods
ended September 30, 2005 when compared to the same period in 2004 was due to a 26.4% and
31.1% increase in average loans receivable, respectively. The average loan yield for the
three months ended September 30, 2005 changed slightly to 5.49% from 5.43% when comparing
the average yield for the three months ended September 30, 2005 to the same period in the
prior year and the average loan yield for the nine months ended September 30, 2005 declined 11
basis points when compared to the same period in the prior year from 5.55% to 5.44% despite
a rising rate environment due to an increase of $22.8 million in the average balance of the
lower yielding fully guaranteed USDA loan portfolio and an increase of $61.6 million in
the average balance of purchased adjustable rate residential hybrid loans offset by
increases in the average yield on loans priced based on adjustable rates. 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 6.75% as of September 30, 2005 from 4.75% at
September 30, 2004. The average loan yields were also reduced by 13 basis points for the
three months ended and 7 basis points for the nine months ended September 30, 2005 when
compared to September 30, 2004 due to $255,000 and $374,000, respectively, in write-offs of
unamortized premiums on USDA loans that became non-performing and have been or will be
repaid by USDA. Interest and dividend income on available for sale securities decreased to
$1.3 million for the three months ended September 30, 2005 from $1.4 million for the same
period in the prior period due to the decline in the average available for sale portfolio.
Interest and dividend income on available for sale securities remained constant at $4.1
million for the nine months ended September 30, 2005 and 2004.Interest Expense:Interest expense for the three months ended September 30, 2005 increased
20.8% to $4.1 million from $3.4 million for the three months ended in September 30, 2004
and increased 24.0% to $11.7 million for the nine months ended September 30, 2005 from $9.4
million for the nine months ended September 30, 2004. The increase in both the three and
nine months ended September 30, 2005 compared to the same periods in the prior year was
primarily attributable to an increase in volume and the weighted average rate paid due to a
rising rate environment. For the three months ended September 30, 2005, average
interest-bearing liabilities rose 9.1% to $740.5 million from $678.7 million for the three
months ended September 30, 2004 and the average rate paid for the period increased 22 basis
points to 2.21% from the 1.99% average rate paid for the three months ended September 30,
2004. For the nine months ended September 30, 2005, average interest-bearing liabilities
increased 16.5% to $745.9 million from $640.1 million for the nine months ended September
30, 2004 and the average rate paid for the period increased 12 basis points to 2.08% from
the 1.96% average rate paid for the nine months ended September 30, 2004. The increase in
the cost of funds was due to a rising interest rate environment and was largely mitigated
by the increased use of short-term wholesale funding and deposit account strategies to
attract lower cost core deposits. For the three and nine months ended September 30, 2005,
average core deposits rose 13.6% and 18.4%, to $344.1 million and $346.3 million,
respectively from $303.0 million and $292.6 million the three and nine months ended
September 30, 2004, respectively.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 three months ended September 30, 2005, a decrease of
$345,000 compared to the same period in the prior year. The provision decreased primarily
as a result of our evaluation of the loan portfolio and estimated allowance requirements.
At September 30, 2005, the allowance for loan losses totaled
$8.1 million, or 119.6% of
nonperforming loans and 0.99% of total loans, compared to $6.4 million at December 31,
2004, or 265.7% of nonperforming loans and 0.91% of total loans. Excluding a $4.9 million
loan fully guaranteed United States Department of Agriculture (USDA) classified as
nonperforming as of September 30, 2005, the allowance for loan
losses totaled 429.1% of
nonperforming loans.
 25




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##### Table of Contents



Noninterest Income:Sources of noninterest income primarily include banking service charges on
deposit accounts, Infinex brokerage and insurance fees, bank owned life insurance and
mortgage servicing income.Noninterest income increased by 72.7%, to $1.1 million for the three months ended September
30, 2005 from $630,000 earned during the same period in the prior year and increased 32.7%
to $3.0 million from $2.2 million for the nine months ended September 30, 2004. The
increase in noninterest income when comparing the current period to the prior year was
primarily due to income being reduced by a $223,000 investment impairment recorded during
the three months ended September 30, 2004 and an increase of $109,000 in net gains from the
sales of securities and an increase of $52,000 in ATM fees due to increased volume of our
ATM network and a $52,000 increase in insufficient funds charges as a result of the growth
in demand deposit accounts and the number of overdrafts experienced during the period.
Service charges and fees increased 14.4% to $1.0 million for the three months ended
September 30, 2005 compared to $874,000 for the three months ended September 30, 2004.Noninterest Expense:Noninterest expense increased by 15.1%, to $6.0 million for the three
months ended September 30, 2005 from $5.2 million for the same period in the prior year and
increased 37.6% to $21.9 million for the nine months ended September 30, 2005 from $15.9
million for the same period in the prior year.The following table summarizes noninterest expense for the three months and nine months
ended September 30, 2005 and 2004:
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(In thousands)Salaries and employee benefits
    
    $
    3,271
    
    
    $
    2,820
    
    
    $
    451
    
    
    $
    9,517
    
    
    $
    8,077
    
    
    $
    1,440Service bureau fees
    
    
    654
    
    
    
    609
    
    
    
    45
    
    
    
    1,996
    
    
    
    1,663
    
    
    
    333Occupancy and equipment
    
    
    756
    
    
    
    671
    
    
    
    85
    
    
    
    2,130
    
    
    
    2,096
    
    
    
    34Professional fees
    
    
    257
    
    
    
    116
    
    
    
    141
    
    
    
    933
    
    
    
    537
    
    
    
    396Marketing and promotions
    
    
    213
    
    
    
    207
    
    
    
    6
    
    
    
    783
    
    
    
    739
    
    
    
    44Insurance and FDIC
Assessments
    
    
    48
    
    
    
    39
    
    
    
    9
    
    
    
    155
    
    
    
    124
    
    
    
    31Contribution to Rockville BankCommunity Foundation, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,887
    
    
    
    
    
    
    
    3,887Other
    
    
    824
    
    
    
    770
    
    
    
    54
    
    
    
    2,536
    
    
    
    2,711
    
    
    
    (175
    )Total noninterest expense
    
    $
    6,023
    
    
    $
    5,232
    
    
    $
    791
    
    
    $
    21,937
    
    
    $
    15,947
    
    
    $
    5,990
 Salary and benefits expense increased 16.0% to $3.3 million for the three months ended
September 30, 2005 compared to $2.8 million for the three months ended September 30, 2004
due to an increase of $241,000 in salary costs incurred in connection with the expansion of
branch facilities and the commercial lending division, and a $411,000 employee stock
ownership plan (ESOP) expense recorded for the ESOP plan established in 2005 as part of
the stock offering and reorganization, and increases of $168,000 in other benefit expenses
offset by a decrease of $401,000 in a phantom stock plan that was established prior to the
stock offering and declined in value as a result of the most recent
valuation used to compute amounts payable under the plan. The number of full-time equivalent employees increased to 168 as of
September 30, 2005 from 159 as of September 30, 2004. Occupancy and equipment expense
increased 12.7% to $756,000 for the three months ended September 30, 2005 compared to
$671,000 for the three months ended September 30, 2004 and is attributable to increases in many
components of the expense, primarily to the opening of our Glastonbury branch and upgrades
and additions made to our ATM network. The $141,000 increase in professional fees was
primarily due to increased fees incurred for various legal services.
 26




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##### Table of Contents



Salary and benefits expense increased 17.8% to $9.5 million for the nine months ended
September 30, 2005 compared to $8.1 million for the nine months ended September 30, 2004
mainly resulting from
an increase of $751,000 in salary costs incurred in connection with the expansion of branch
facilities and the commercial lending division, and a $674,000 employee stock ownership
plan (ESOP) expense recorded for the ESOP plan established in 2005 as part of the stock
offering and reorganization. Service bureau fees increased 20.0%, for the nine months ended
September 30, 2005 when compared to the same period in the prior year primarily resulting
from increased costs of $119,000 for ATM servicing due to the additions made to our ATM
network, $167,000 increase in core processing costs due to increased capacity and a $47,000
increase in wide area network costs. Professional fees increased 73.7% to $933,000, for the
nine months ended September 30, 2005 when compared to $537,000 for the same period in the
prior year due to an increase of $153,000 in external audit costs, $161,000 in legal fees
and $82,000 in consultant fees due to higher accounting, legal and consulting costs
associated with public reporting requirements and assistance with Section 404 of the
Sarbanes Oxley compliance requirements.Other non-interest expense increased by 7.0% to $824,000 for the three months ended
September 30, 2005 compared to $770,000 for the same period in the prior year and decreased
by 6.5% to $2.5 million for the nine months ended September 30, 2005 compared to $2.7
million for the same period in the prior year. Significant components of other non-interest
expense are as follows:
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    Change(In thousands)Directors fees
    
    $
    78
    
    
    $
    73
    
    
    $
    5
    
    
    $
    249
    
    
    $
    227
    
    
    $
    22Appraisal and credit report
    
    
    93
    
    
    
    110
    
    
    
    (17
    )
    
    
    312
    
    
    
    311
    
    
    
    1Telephone
    
    
    62
    
    
    
    58
    
    
    
    4
    
    
    
    181
    
    
    
    181
    
    
    
    Postage
    
    
    80
    
    
    
    53
    
    
    
    27
    
    
    
    214
    
    
    
    169
    
    
    
    45Courier
    
    
    66
    
    
    
    43
    
    
    
    23
    
    
    
    174
    
    
    
    161
    
    
    
    13Dues and subscriptions
    
    
    44
    
    
    
    32
    
    
    
    12
    
    
    
    127
    
    
    
    111
    
    
    
    16Service charges
    
    
    32
    
    
    
    33
    
    
    
    (1
    )
    
    
    97
    
    
    
    98
    
    
    
    (1
    )Printing and forms
    
    
    24
    
    
    
    55
    
    
    
    (31
    )
    
    
    109
    
    
    
    96
    
    
    
    13Other
    
    
    345
    
    
    
    313
    
    
    
    32
    
    
    
    1,073
    
    
    
    1,357
    
    
    
    (284
    )Total other noninterest expense
    
    $
    824
    
    
    $
    770
    
    
    $
    54
    
    
    $
    2,536
    
    
    $
    2,711
    
    
    $
    (175
    )
 Income Tax Expense:Income tax expense increased 156.1% to a $881,000 tax expense for the
three months ended September 30, 2005 as compared to $344,000 income tax expense incurred
for the three months ended September 30, 2004 and decreased 22.0% to a $761,000 tax expense
for the nine months ended September 30, 2005 as compared to $976,000 income tax expense
incurred for the same period in the prior year. Income taxes are provided on an interim
basis using the estimated annual effective tax rate. Our effective tax rate differs from
the statutory rate of 34% for the three months and nine months ended September 30, 2005 and
September 30, 2004 primarily due to the dividend received deduction and non-taxable
earnings on bank owned life insurance for both periods.
 27




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##### Table of Contents



Comparison of Financial Condition at September 30, 2005 and December 31, 2004Summary:The Companys total assets increased $120.1 million, or 13.5%, to $1.0
billion at September 30, 2005, as compared to $889.9 million at December 31, 2004,
primarily due to a $120.9 million or 17.4% increase in loans which was mainly funded with
the proceeds received from our initial public offering. Net loans receivable increased to
$817.2 million at September 30, 2005 as compared to $696.2 million at December 31, 2004
primarily due to an increase in one-to-four family residential mortgages and to a lesser
extent, an increase in commercial business loans. Available for sale investment securities
declined $7.0 million or 5.1% to $129.1 million at September 30, 2005 as compared to $136.0
million at December 31, 2004. The proceeds from the investment securities were used to fund
loan growth.Deposits increased $28.3 million, or 4.1%, to $720.8 million at September 30, 2004. The
growth was principally attributable to a $23.1 million increase in certificates of deposits
as a result of several promotions conducted during the quarter. Federal Home Loan Bank
advances increased $4.9 million, or 4.1%, to $122.9 million at September 30, 2005 from
$118.0 at December 31, 2004 as advances were used to meet funding needs during the period.Total capital increased $81.9 million, or 119.5%, to $150.4 million at September 30, 2005
compared to $68.5 million at December 31, 2004 primarily due the $81.3 million in net stock
proceeds received in the initial public offering which was used to fund loan growth and
repay short-term borrowings at the Federal Home Loan Bank.Investment Securities:At September 30, 2005, the Companys investment portfolio, consisted
solely of available for sale securities, was $129.1 million, or 12.8% of total assets. The
decrease of $7.0 million, or 5.1% in investment securities, compared to December 31, 2004,
was primarily due to scheduled repayments and maturities which were used to fund loan
growth. At September 30, 2005, the net unrealized gain on investment securities available
for sale was $1.9 million, net of taxes, compared to $2.7 million as of December 31, 2004.
Rising market interest rates negatively impacted the fair value of the Companys debt
securities during the period and a downward trend in the stock market negatively affected
the fair value of marketable equity securities.The following table displays a summary of the Companys investment securities as of
September 30, 2005 and December 31, 2004:
 September 30, 2005
    
    
    December 31, 2004Percent
    
    
    
    
    
    
    
    
    
    
    PercentAmortized
    
    
    Fair
    
    
    of
    
    
    Amortized
    
    
    Fair
    
    
    ofCost
    
    
    Value
    
    
    Portfolio
    
    
    Cost
    
    
    Value
    
    
    Portfolio(Dollars in thousands)Available for sale:U.S. Government and agency obligations
    
    
    1,999
    
    
    $
    1,996
    
    
    
    1.6
    %
    
    $
    1,994
    
    
    $
    1,984
    
    
    
    1.5
    %U.S. Government sponsored enterprises
    
    
    29,999
    
    
    
    29,564
    
    
    
    22.9
    
    
    
    24,160
    
    
    
    24,053
    
    
    
    17.7Mortgage-backed securities
    
    
    61,500
    
    
    
    60,917
    
    
    
    47.2
    
    
    
    67,291
    
    
    
    67,359
    
    
    
    49.5Corporate debt securities
    
    
    20,001
    
    
    
    20,209
    
    
    
    15.7
    
    
    
    28,384
    
    
    
    29,289
    
    
    
    21.5Other debt securities
    
    
    1,430
    
    
    
    1,478
    
    
    
    1.1
    
    
    
    1,434
    
    
    
    1,506
    
    
    
    1.1Total debt securities
    
    
    114,929
    
    
    
    114,164
    
    
    
    88.5
    
    
    
    123,263
    
    
    
    124,191
    
    
    
    91.3Marketable equity securities
    
    
    11,024
    
    
    
    14,645
    
    
    
    11.3
    
    
    
    8,309
    
    
    
    11,490
    
    
    
    8.5Non-marketable equity securities
    
    
    241
    
    
    
    241
    
    
    
    0.2
    
    
    
    326
    
    
    
    326
    
    
    
    0.2$
    126,194
    
    
    $
    129,050
    
    
    
    100.0
    %
    
    $
    131,898
    
    
    $
    136,007
    
    
    
    100.0
    %
 28




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##### Table of Contents



Lending Activities:Net loans receivable increased $120.9 million, or 17.4%, to $817.4
million at September 30, 2005 as compared to $696.2 million at December 31, 2004 primarily
due to an increase in one-to-four family residential mortgages and to a lesser extent, an
increase in commercial business loans.The composition of the Banks loan portfolio was as follows for the period indicated:
 September 30,
    
    
    December 31,2005
    
    
    2004Loan Category
    
    (Dollars in thousands)Real estate loans:Residential
    
    $
    530,459
    
    
    
    64.4
    %
    
    $
    450,054
    
    
    $
    64.2
    %Commercial
    
    
    145,070
    
    
    
    17.6
    
    
    
    136,594
    
    
    
    19.5Construction
    
    
    33,541
    
    
    
    4.1
    
    
    
    22,067
    
    
    
    3.1Commercial business loans
    
    
    110,836
    
    
    
    13.5
    
    
    
    88,700
    
    
    
    12.7Installment loans
    
    
    2,509
    
    
    
    0.3
    
    
    
    2,268
    
    
    
    0.3Collateral loans
    
    
    1,154
    
    
    
    0.1
    
    
    
    1,205
    
    
    
    0.2Total loans
    
    
    823,569
    
    
    
    100.0
    %
    
    
    700,888
    
    
    
    100.0
    %Net deferred loan fees and premiums
    
    
    1,698
    
    
    
    
    
    
    
    1,732Allowance for loan losses
    
    
    (8,123
    )
    
    
    
    
    
    
    (6,371
    )Loans, net
    
    $
    817,144
    
    
    
    
    
    
    $
    696,249
 Residential real estate loans increased $80.4 million, or 17.9%, to $530.5 million. This
increase in loans reflects continued demand for loans in a favorable interest rate
environment, a no-closing costs loan program for refinanced residential loans introduced
last year, the use of two established local mortgage bankers to originate adjustable rate
hybrid residential loans and a home equity line of credit marketing campaign. Commercial
business loans increased $22.1 million, or 25.0%, to $110.8 million at September 30, 2005.
Commercial business loans includes $45.3 million and $48.2 million of loans fully
guaranteed by the United States Department of Agriculture as of September 30, 2005 and
December 31, 2004, respectively. The remaining commercial business loans represent loans
partially guaranteed by the Small Business Administration, revolving business lines of
credit and term loans. Management expects to grow the commercial real estate, commercial
construction and commercial business loan portfolios due to the hiring additional
commercial lenders and an additional credit analyst.
 29




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##### Table of Contents



Non-performing Assets:The table below sets forth the amounts and categories of our
non-performing assets at the dates indicated. Once a loan is 90 days delinquent or either
the borrower or the loan collateral experiences an event that makes collectibility suspect,
the loan is placed on non-accrual status. Our policies require six months of continuous
payments in order for the loan to be removed from non-accrual status.
 September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Non-accrual loans:Residential(1)
    
    $
    614
    
    
    $
    423Commercial
    
    
    415
    
    
    
    598Commercial business loans
    
    
    176
    
    
    
    326Installment, collateral and other loans
    
    
    7
    
    
    
    6Total non-accrual loans(2)
    
    
    1,212
    
    
    
    1,353Accruing loan past due 90 days or more(3)
    
    
    4,897
    
    
    
    Troubled debt restructurings
    
    
    681
    
    
    
    1,045Total non-performing loans
    
    
    6,790
    
    
    
    2,398Real estate owned
    
    
    
    
    
    
    150Total non-performing assets
    
    $
    6,790
    
    
    $
    2,548Total non-performing loans to total loans
    
    
    0.82
    %
    
    
    0.34
    %Total non-performing loans to total assets
    
    
    0.67
    %
    
    
    0.27
    %Allowance for loan losses as a percent of total loans
    
    
    0.99
    %
    
    
    0.91
    %Allowance for loan losses as a percent of non-performing loans
    
    
    119.63
    %
    
    
    265.68
    %
 
 (1)
    
    Residential mortgage loans include one-to-four family mortgage loans, home
equity loans, and home equity lines of credit.(2)
    
    The amount of income that was contractually due but not recognized on
non-accrual loans totaled $62,000 and $63,000 for the nine months ended September 30,
2005 and September 30, 2004, respectively.3)
    
    Balance as of September 30, 2005 represents a loan that is fully guaranteed
by the United States Agriculture Department.
 Allowance for Loan Losses:The methodology used for determining the adequacy of the loan
loss contains three key components: 1) a general valuation allowance for each loan type
within the portfolio; 2) a higher reserve valuation by type and grade for loans that have
been adversely graded; and 3) a specific allowance for loans that have been identified as
problem loans or for loans that have an elevated risk profile, including certain impaired
or non-performing assets.General Valuation Allowance. The Bank establishes a reserve for loans that are
deemed to have a normal risk profile in recognition of the fact that some inherent expected
future loss is associated with the extension of credit. The reserve amount is determined by
loan type, historical loss experience for that particular loan type, credit quality trends,
delinquency levels, quality of collateral and changes in general economic and business
conditions.Adversely Graded Loans. A loan is considered adversely graded when it has a higher
than normal risk profile with the possibility of not receiving timely loan payments and is
graded by the degree of risk. 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.
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Specific Allowance. Adversely graded loans are reviewed individually in order to
ensure that the percentage allocation adequately reflects the identified risk level. If the
risk level exceeds the standard percentage allocation, then a specific reserve is
established for that loan.The credit quality of the Banks loan portfolio is reviewed by a third party risk
assessment firm, regulatory examiners and by the Banks internal credit management
function. Review findings are reported periodically to senior management, the Board Lending
Committee and the Board of Directors. This process is supplemented with several risk
assessment tools including monitoring of delinquency levels, analysis of historical loss
experience by loan type, identification of portfolio concentrations by borrower and
industry, and a review of economic conditions that might impact loan quality. Based on
these findings the percentage reserved for each loan type is evaluated to ensure a proper
reserve percentage. The Allowance for Loan Losses is calculated on a quarterly basis and
reported to the Board of Directors.Any loan that is 90 or more days delinquent is classified as a non-performing asset. A loan
is classified as impaired when it is probable that the Bank will be unable to collect all
amounts due in accordance with the terms of the loan agreement. In accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment for Loan-Income Recognition and Disclosures, an
allowance is maintained for impaired loans to reflect the difference, if any, between the
principal balance of the loan and the present value of projected cash flows, observable
fair value or collateral value. SFAS No. 114 defines an impaired loan as a loan for which
it is probable that the lender will not collect all amounts due under the contractual terms
of the loan.This analysis process is both quantitative and subjective, as it requires us to make
estimates that are susceptible to revisions as more information becomes available. Although
we believe that we have established the allowance at levels to absorb probable and
estimable losses, future additions may be necessary if economic or other conditions in the
future differ from the current environment.The allowance for loan losses increased $1.8 million, or 27.5%, to $8.1 million at
September 30, 2005 from $6.4 million at December 31,
2004. The increase in the allowance for loan losses resulted from a $2.1 million provision for loan losses for the nine months ended September
30, 2005 offset by $298,000 in net charge-offs. The increase in the allowance was deemed
necessary based upon managements analysis and the growth of the loan portfolio. At
September 30, 2005, the allowance for loan losses represented 0.99% of total loans and
429.1% of non-performing loans, excluding the fully guaranteed non-performing USDA loan
and 119.6% of non-performing loans when including the
fully guaranteed non-performing USDA loan, compared to 0.91% of total loans and 265.7% of
non-performing loans as of December 31, 2004.
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Deposits:The following table displays a summary of the Companys deposits as of September
30, 2005 and December 31, 2004:
 September 30,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Demand deposits
    
    $
    79,453
    
    
    
    11.0
    %
    
    $
    77,972
    
    
    
    11.3
    %NOW accounts
    
    
    93,157
    
    
    
    12.9
    
    
    
    88,768
    
    
    
    12.8Regular savings
    
    
    158,432
    
    
    
    22.0
    
    
    
    161,215
    
    
    
    23.3Money market and
investment savings
    
    
    86,170
    
    
    
    12.0
    
    
    
    84,789
    
    
    
    12.2Club accounts
    
    
    927
    
    
    
    0.1
    
    
    
    205
    
    
    
    0.0Total transaction accounts
    
    
    418,139
    
    
    
    58.0
    
    
    
    412,949
    
    
    
    59.6Certificates of deposit
    
    
    302,631
    
    
    
    42.0
    
    
    
    279,549
    
    
    
    40.4Total deposits
    
    $
    720,770
    
    
    
    100.0
    %
    
    $
    692,498
    
    
    
    100.0
    %
 Deposits increased $28.3 million, or 4.1%, to $720.8 million at September 30, 2004. The
growth was principally attributable to a $23.1 million increase in Certificates of deposits as
a result of several promotions conducted during the quarter. The certificate of deposit
promotions required the use of direct deposit checking in order to qualify for the promotion
in an effort to increase core deposits.Liquidity and Capital Resources:We maintain liquid assets at levels we consider adequate
to meet our liquidity needs. Our liquidity ratio averaged 20.3% and 25.6% for the nine
months ended September 30, 2005 and the year ended December 31, 2004, respectively. We
adjust our liquidity levels to fund loan commitments, repay our borrowings, fund deposit
outflows and pay real estate taxes on mortgage loans. We also adjust liquidity as
appropriate to meet asset and liability management objectives.Our primary sources of liquidity are deposits, amortization and prepayment of loans,
maturities of investment securities and other short-term investments, and earnings and
funds provided from operations. While scheduled principal repayments on loans are a
relatively predictable source of funds, deposit flows and loan prepayments are greatly
influenced by market interest rates, economic conditions, and rates offered by our
competition. We set the interest rates on our deposits to maintain a desired level of total
deposits. In addition, we invest excess funds in short-term interest-earning assets, which
provide liquidity to meet lending requirements.A portion of our liquidity consists of cash and cash equivalents, which are a product of
our operating, investing and financing activities. At September 30, 2005 and December 31,
2004, respectively, $24.5 million and $22.1 million of our assets were invested in cash and
cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds
from the calls and maturities of investment securities, increases in deposit accounts and
advances from the Federal Home Loan Bank of Boston.The Company used the proceeds received from the initial public offering to repay $44.8
million in short-term advances from the Federal Home Loan Bank, to fund loans and for
general corporate purposes.During the nine months ended September 30, 2005 and 2004, our loan originations and
purchases, net of collected principal and loan sales, totaled $123.0 million and $122.2
million, respectively, reflecting net growth in our portfolio due to a favorable interest
rate environment, a no-closing cost residential loan program targeted at the refinance
market and the use of two established local mortgage bankers to
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originate adjustable rate
hybrid residential loans. Cash received from the calls and maturities of
investment securities totaled $9.6 million and $13.1 million during the nine months ended
September 30, 2005 and 2004, respectively. We purchased $21.1 million and $32.8 million and
received proceeds from the sale of $4.8 million and $3.0 million in available for sale
investment securities during the nine months ended September 30, 2005 and 2004,
respectively.Deposit flows are generally affected by the level of interest rates, the interest rates and
products offered by local competitors, and other factors. The net increases in total
deposits were $28.3 million and $117.3 million for the nine months ended September 30, 2005
and 2004, respectively. Rockville Bank experienced higher deposit levels in 2004 and 2005
due to the consolidation of competitors in its markets.Liquidity management is both a daily and longer-term function of business management. If
the Bank requires funds beyond its ability to generate them internally, borrowing
agreements exist with the Federal Home Loan Bank of Boston, which provide an additional
source of funds. At September 30, 2005, the Bank had $122.9 million in advances from the
Federal Home Loan Bank of Boston and an additional available borrowing limit of $171.5
million based on collateral requirements of the Federal Home Loan Bank of Boston. Internal
policies limit borrowings to 20% of total assets, or $202.0 million at September 30, 2005.At September 30, 2005, the Bank had outstanding commitments to originate loans of $72.1
million and unfunded commitments under lines of credit and stand-by letters of credit of
$155.4 million. At September 30, 2005, certificates of deposit scheduled to mature in less
than one year totaled $166.3 million. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Bank, 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 the Bank, other funding sources will be utilized, such as Federal Home
Loan Bank of Boston advances in order to maintain our level of assets. Alternatively, the
Bank would reduce our level of liquid assets, such as, cash and cash equivalents in order
to meet funding needs. In addition, the cost of such deposits may be significantly higher
if market interest rates are higher or there is an increased amount of competition for
deposits in our market area at the time of renewal.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 General:The majority of our assets and liabilities are monetary in nature.
Consequently, our most significant form of market risk is interest rate risk. Our assets,
consisting primarily of mortgage loans, in general have longer contractual maturities than
our liabilities, consisting primarily of deposits. As a result, a principal part of our
business strategy is to manage interest rate risk and reduce the exposure of our net
interest income to changes in market interest rates. Accordingly, our Board of Directors
has established an Asset/Liability Committee which is responsible for evaluating the
interest rate risk inherent in our assets and liabilities, for determining the level of
risk that is appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with the
guidelines approved by the Board of Directors. Management monitors the level of interest
rate risk on a regular basis and the Asset/Liability Committee meets at least quarterly to
review our asset/liability policies and interest rate risk position.We have sought to manage our interest rate risk in order to minimize the exposure of our
earnings and capital to changes in interest rates. During the low interest rate environment
that has existed in recent years, we have implemented the following strategies to manage
our interest rate risk: (i) emphasizing adjustable rate loans including, adjustable rate
one-to-four family, commercial and consumer loans, (ii) reducing and shortening the
expected average life of the investment portfolio, and (iii) whenever possible, lengthening
the term structure of our deposit base and our borrowings from the Federal Home Loan Bank
of Boston. These measures should serve to reduce the volatility of our future net interest
income in different interest rate environments.
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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 September 30, 2005 on the basis of contractual maturities, anticipated repayments and
scheduled rate adjustments. Prepayment rate assumptions can have a significant impact on
interest income simulation results. Because of the large percentage of loans and
mortgage-backed securities we hold, rising or falling interest rates may have a significant
impact on the actual prepayment speeds of our mortgage related assets that may in turn
effect our interest rate sensitivity position. When interest rates rise, prepayment speeds
slow and the average expected life of our assets would tend to lengthen more than the
expected average life of our liabilities and therefore would most likely result in a
decrease to our asset sensitive position.
 Percentage Increase(Decrease) in EstimatedNet Interest IncomeOver 12 Months300 basis point increase in rates
    
    
    (2.3
    )%200 basis point decrease in rates
    
    
    (8.8
    )
 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 scenatrio 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
fall. At September 30, 2005, income at risk (i.e., the change in net interest income) was a
decrease of 2.3% and a decrease of 8.8% based on a 300 basis point increase and a 200 basis
point decrease in interest rates, respectively. At September 30, 2005, return on assets is
modeled to decrease by 2 basis points and to decrease by 21 basis points based on a 300
basis point increase and a 200 basis point decrease in interest rates, respectively. While
we believe the assumptions used are reasonable, there can be no assurance that assumed
prepayment rates will approximate actual future mortgage-backed security and loan repayment
activity.
 
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures:As of the end of the period covered
by this report, based upon an evaluation of the Companys disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934),
the Chief Executive Officer and the Chief Financial Officer of the Company have concluded
that the Companys disclosure controls and procedures are effective to ensure that the
information required to be disclosed by the Company in its Exchange Act reports is
recorded, processed, summarized and reported within the applicable time periods specified
by the SECs rules and forms and is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.Changes in Internal Controls:During the quarter under report, there was no change in the
Companys internal control over financial reporting (as defined in Rule 13a-15(f) under the
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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Part II  OTHER INFORMATION
 
 Item 6. Exhibits
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SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
 Rockville Financial, Inc.By:
    
    /s/ Mr. William J. McGurkMr. William J. McGurkPresident and Chief Executive OfficerDate:
    
    November 14, 2005By:
    
    /s/ Mr. Gregory A. WhiteMr. Gregory A. WhiteChief Financial Officer and TreasurerDate:
    
    November 14, 2005
 36