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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended September 30, 2008.
 Commission File Number: 000-51239
 ROCKVILLE FINANCIAL, INC.
 (Exact name of registrant as specified in its charter)
 Connecticut
    
    30-0288470(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)25 Park Street, Rockville, Connecticut
    
    06066(Address of principal executive officers)
    
    (Zip Code)
 (860) 291-3600
(Registrants telephone number, including area code)
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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Table of Contents
 PagePart I  FINANCIAL INFORMATIONItem 1. Interim Financial StatementsCondensed Consolidated Statements of Condition as of September 30, 2008 and December 31, 2007 (unaudited)
    
    
    3Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    41Item 4. Controls and Procedures
    
    
    42Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    43Item 1A. Risk Factors
    
    
    43Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    43Item 4. Submission of Matters to a Vote of Security Holders
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    44SIGNATURES
    
    
    46EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
   Rockville Financial, Inc.
    
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Part I  FINANCIAL INFORMATION
 
 Item 1. Interim Financial Statements:
 Rockville Financial, Inc.
 
 Condensed Consolidated Statements of Condition
 (In Thousands, Except Share Amounts)
 (Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    19,544
    
    
    $
    18,616Short-term investments
    
    
    763
    
    
    
    5,382Total cash and cash equivalents
    
    
    20,307
    
    
    
    23,998AVAILABLE FOR SALE SECURITIES-At fair value
    
    
    146,638
    
    
    
    136,372HELD TO MATURITY SECURITIES-At amortized cost
    
    
    24,550
    
    
    
    LOANS RECEIVABLE (Net of allowance for loan
losses of $11,220 in 2008 and $10,620 in 2007)
    
    
    1,250,742
    
    
    
    1,116,327FEDERAL HOME LOAN BANK STOCK
    
    
    16,319
    
    
    
    11,168ACCRUED INTEREST RECEIVABLE
    
    
    4,958
    
    
    
    4,156DEFERRED TAX ASSET-Net
    
    
    8,424
    
    
    
    3,963BANK PREMISES AND EQUIPMENT-Net
    
    
    15,712
    
    
    
    14,352GOODWILL
    
    
    1,070
    
    
    
    1,070CASH SURRENDER VALUE OF BANK OWNED LIFE INSURANCE
    
    
    9,613
    
    
    
    9,322OTHER ASSETS
    
    
    4,644
    
    
    
    6,284TOTAL
    
    $
    1,502,977
    
    
    $
    1,327,012LIABILITIES AND CAPITALLIABILITIESDEPOSITSNoninterest bearing
    
    $
    113,970
    
    
    $
    99,378Interest bearing
    
    
    881,789
    
    
    
    851,660Total deposits
    
    
    995,759
    
    
    
    951,038MORTGAGORS AND INVESTORS ESCROW ACCOUNTS
    
    
    2,894
    
    
    
    5,568ADVANCES FROM THE FEDERAL HOME LOAN BANK
    
    
    343,928
    
    
    
    201,741PAYABLE FOR SECURITIES PURCHASED
    
    
    
    
    
    
    118ACCRUED EXPENSES AND OTHER LIABILITIES
    
    
    11,811
    
    
    
    12,174Total liabilities
    
    
    1,354,392
    
    
    
    1,170,639COMMITMENTS AND CONTINGENCIES (Note 11)STOCKHOLDERS EQUITYPreferred stock (no par value; 1,000,000 shares authorized;
no shares issued and outstanding)
    
    
    
    
    
    
    Common stock (no par value; 29,000,000 shares authorized;
19,568,284 shares and 19,568,284 shares issued and outstanding (includes 193,170
shares and 110,970 shares of unvested restricted stock) at September 30, 2008 and
December 31, 2007, respectively
    
    
    85,249
    
    
    
    85,249Additional paid-in capital
    
    
    3,247
    
    
    
    3,009Unallocated stock held by ESOP
    
    
    (5,210
    )
    
    
    (5,734
    )Treasury stock, at cost (695,253 shares and 496,730 shares at September 30, 2008
and December 31, 2007, respectively)
    
    
    (9,709
    )
    
    
    (7,293
    )Retained earnings
    
    
    75,776
    
    
    
    81,383Accumulated other comprehensive loss, net of tax
    
    
    (768
    )
    
    
    (241
    )Total stockholders equity
    
    
    148,585
    
    
    
    156,373TOTAL
    
    $
    1,502,977
    
    
    $
    1,327,012
   Rockville Financial, Inc.
    
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Rockville Financial, Inc.
 
 Condensed Consolidated Statements of Income
 (In Thousands, Except Share and Per Share Amounts)
 (Unaudited)
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST AND DIVIDEND INCOME:Loans
    
    $
    17,266
    
    
    $
    17,190
    
    
    $
    50,662
    
    
    $
    49,608Securities-interest
    
    
    2,057
    
    
    
    1,447
    
    
    
    5,434
    
    
    
    4,103Interest bearing deposits
    
    
    1
    
    
    
    23
    
    
    
    33
    
    
    
    75Securities-dividends
    
    
    352
    
    
    
    289
    
    
    
    1,433
    
    
    
    847Total interest and dividend income
    
    
    19,676
    
    
    
    18,949
    
    
    
    57,562
    
    
    
    54,633INTEREST EXPENSEDeposits
    
    
    5,688
    
    
    
    6,984
    
    
    
    19,174
    
    
    
    19,974Borrowed funds
    
    
    2,784
    
    
    
    2,166
    
    
    
    7,204
    
    
    
    6,159Total interest expense
    
    
    8,472
    
    
    
    9,150
    
    
    
    26,378
    
    
    
    26,133Net interest income
    
    
    11,204
    
    
    
    9,799
    
    
    
    31,184
    
    
    
    28,500PROVISION FOR LOAN LOSSES
    
    
    700
    
    
    
    157
    
    
    
    949
    
    
    
    590Net interest income after provision
for loan losses
    
    
    10,504
    
    
    
    9,642
    
    
    
    30,235
    
    
    
    27,910NONINTEREST (LOSS) INCOME:Service charges and fees
    
    
    1,430
    
    
    
    1,258
    
    
    
    4,068
    
    
    
    3,612Net gain from sale of securities
    
    
    129
    
    
    
    148
    
    
    
    401
    
    
    
    453Other than temporary impairment of
securities
    
    
    (11,514
    )
    
    
    
    
    
    
    (12,670
    )
    
    
    Total noninterest (loss) income
    
    
    (9,955
    )
    
    
    1,406
    
    
    
    (8,201
    )
    
    
    4,065NONINTEREST EXPENSE:Salaries and employee benefits
    
    
    4,083
    
    
    
    4,193
    
    
    
    13,649
    
    
    
    12,113Service bureau fees
    
    
    943
    
    
    
    898
    
    
    
    2,810
    
    
    
    2,506Occupancy and equipment
    
    
    1,062
    
    
    
    917
    
    
    
    3,095
    
    
    
    2,591Professional fees
    
    
    377
    
    
    
    400
    
    
    
    1,142
    
    
    
    1,173Marketing and promotions
    
    
    294
    
    
    
    186
    
    
    
    1,041
    
    
    
    803Insurance and FDIC assessments
    
    
    178
    
    
    
    43
    
    
    
    522
    
    
    
    143Other
    
    
    1,296
    
    
    
    1,014
    
    
    
    3,674
    
    
    
    3,020Total noninterest expense
    
    
    8,233
    
    
    
    7,651
    
    
    
    25,933
    
    
    
    22,349(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (7,684
    )
    
    
    3,397
    
    
    
    (3,899
    )
    
    
    9,626PROVISION FOR INCOME TAXES
    
    
    (2,382
    )
    
    
    1,136
    
    
    
    (1,145
    )
    
    
    3,199NET (LOSS) INCOME
    
    $
    (5,302
    )
    
    $
    2,261
    
    
    $
    (2,754
    )
    
    $
    6,427
   Rockville Financial, Inc.
    
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Rockville Financial, Inc.
Condensed Consolidated Statements of Income  Continued
(Unaudited)
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income per share
(see Note 2):Basic
    
    $
    (0.29
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.34Diluted
    
    
    (0.29
    )
    
    
    0.12
    
    
    
    (0.15
    )
    
    
    0.34Weighted average shares outstanding:Basic
    
    
    18,341,243
    
    
    
    18,702,072
    
    
    
    18,451,538
    
    
    
    18,809,718Diluted
    
    
    18,341,243
    
    
    
    18,702,072
    
    
    
    18,451,538
    
    
    
    18,809,718
   Rockville Financial, Inc.
    
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Rockville Financial, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 (Unaudited)
 (In Thousands)
 For the Nine MonthsEnded September 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (2,754
    )
    
    $
    6,427Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Amortization and accretion of premiums and discounts
on investments, net
    
    
    (38
    )
    
    
    40Stock compensation expense
    
    
    2,133
    
    
    
    1,461Provision for loan losses
    
    
    949
    
    
    
    590Net gain from sale of securities
    
    
    (401
    )
    
    
    (453
    )Other than temporary impairment of securities
    
    
    12,670
    
    
    
    Depreciation and amortization
    
    
    1,115
    
    
    
    1,031Deferred income taxes
    
    
    (4,189
    )
    
    
    (439
    )Increase in cash surrender value of bank owned life insurance
    
    
    (291
    )
    
    
    (274
    )Change in assets and liabilities:Deferred loan fees and premiums
    
    
    180
    
    
    
    178Accrued interest receivable
    
    
    (802
    )
    
    
    (609
    )Other assets
    
    
    1,756
    
    
    
    1,327Accrued expenses and other liabilities
    
    
    345
    
    
    
    1,299Net cash provided by operating activities
    
    
    10,673
    
    
    
    10,578CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of available for sale securities
    
    
    5,620
    
    
    
    4,886Proceeds from calls and maturities of available for sale securities
    
    
    11,000
    
    
    
    12,600Principal payments on available for sale mortgage-backed securities
    
    
    14,219
    
    
    
    9,148Principal payments on held to maturity mortgage-backed securities
    
    
    1,420
    
    
    
    Purchase of available for sale securities
    
    
    (54,980
    )
    
    
    (37,090
    )Purchase of held to maturity securities
    
    
    (25,949
    )
    
    
    Purchase of Federal Home Loan Bank stock
    
    
    (5,151
    )
    
    
    (1,078
    )Proceeds from sales of loans
    
    
    8,300
    
    
    
    Net increase in loans
    
    
    (143,844
    )
    
    
    (82,216
    )Purchases of bank premises and equipment
    
    
    (2,475
    )
    
    
    (2,714
    )Net cash used in investing activities
    
    
    (191,840
    )
    
    
    (96,464
    )CASH FLOWS FROM FINANCING ACTIVITIES:Common stock repurchased
    
    
    (3,905
    )
    
    
    (4,374
    )Net increase in noninterest bearing deposits
    
    
    14,592
    
    
    
    1,542Net increase in interest bearing deposits
    
    
    30,129
    
    
    
    66,922Net decrease in mortgagors and investors escrow accounts
    
    
    (2,674
    )
    
    
    (2,589
    )Net short-term advances from Federal Home Loan Bank
    
    
    95,000
    
    
    
    (1,000
    )Proceeds from Federal Home Loan Bank advances
    
    
    67,320
    
    
    
    34,800Repayments of Federal Home Loan Bank advances
    
    
    (20,133
    )
    
    
    (5,125
    )Cash dividends paid on common stock
    
    
    (2,853
    )
    
    
    (2,334
    )Net cash provided by financing activities
    
    
    177,476
    
    
    
    87,842NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,691
    )
    
    
    1,956CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    23,998
    
    
    
    22,381CASH AND CASH EQUIVALENTS  End of period
    
    $
    20,307
    
    
    $
    24,337SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest
    
    $
    26,289
    
    
    $
    25,957Income taxes
    
    
    1,751
    
    
    
    3,001
   Rockville Financial, Inc.
    
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Rockville Financial, Inc. and Subsidiaries
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1.
    
    Basis of Presentation and Principles of ConsolidationThe condensed consolidated interim financial statements and the accompanying notes
presented in this report include the accounts of Rockville Financial, Inc., its
wholly-owned subsidiary Rockville Bank, and the Banks wholly-owned subsidiaries, The SBR
Mortgage Company, The SBR Investment Corp. 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
consolidated financial statements. The results of operations for the three and nine months
ended September 30, 2008 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2008. These condensed consolidated financial statements
should be read in conjunction with the Companys 2007 consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2007.Certain reclassifications have been made in the 2007 repayments of Federal Home Loan Bank
advances in the condensed consolidated statements of cash flows in order to conform to the
2008 classifications. Previously, Federal Home Loan Bank net short-term borrowings were
presented net against long-term advances from the Federal Home Loan Bank. This
reclassification to Federal Home Loan Bank advances did not have any effect on the 2007 net
cash provided by financing activities in the condensed consolidated statements of cash
flows.The preparation of financial statements in conformity with GAAP 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, pension assumptions, stock compensation expense, uncertain tax positions, deferred
tax assets and the evaluation of available for sale securities for other than temporary
impairment.2.
    
    Earnings Per ShareThe following table set forth the calculation of basic and diluted earnings per share for
the three and nine months ended September 30, 2008 and 2007 (In thousands except share and
per share information):
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (5,302
    )
    
    $
    2,261
    
    
    $
    (2,754
    )
    
    $
    6,427Weighted-average
basic shares
outstanding
    
    
    18,341,243
    
    
    
    18,702,072
    
    
    
    18,451,538
    
    
    
    18,809,718Diluted effect of
stock options and
unvested restricted
stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average
diluted shares
    
    
    18,341,243
    
    
    
    18,702,072
    
    
    
    18,451,538
    
    
    
    18,809,718Earnings per share:Basic
    
    $
    (0.29
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.34Diluted
    
    $
    (0.29
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.34
  Rockville Financial, Inc.
    
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Treasury shares and unallocated common shares held by the ESOP are not included in the
weighted-average number of common shares outstanding for either basic or diluted earnings
per share calculations. Unvested restricted shares are not included in the weighted-average
number of common shares outstanding for basic earnings per share calculations but are
included in the weighted-average diluted share calculation. The Companys common stock
equivalents relate solely to stock options issued and outstanding and unvested restricted
stock awards. At September 30, 2008, options to purchase 213,500 of common stock at
exercise prices ranging from $14.35 to $17.77 and 86,970 unvested restricted shares at
grant prices ranging from $11.98 to $17.77, were not considered in the computation of
potential common shares for the purpose of diluted EPS, since the shares were anti-dilutive due to the Companys net loss
for the period. At September 30, 2007, options to purchase 256,600 of common stock at
exercise prices ranging from $14.35 to $17.77, were not considered in the computation of
potential common shares for the purpose of diluted EPS, since the exercise prices of the
options were greater than the average market price of the Companys stock for the
period.3.
    
    Recent Accounting PronouncementsIn October 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP 157-3) No. 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.FSP 157-3 clarifies the application of FASB Statement
No. 157, Fair Value Measurements,in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 was effective upon issuance and
did not have any effect on the Companys consolidated financial condition or results of
operations.In April 2008, the FASB issued FSP No. 142-3 (FSP 142-3), Determination of the Useful
Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The
intent of FSP 142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS 141(R), Business Combinations, and other U.S.
generally accepted accounting principles. FSP 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. The Company does not expect the adoption of FSP
 142-3 will have a material effect on its consolidated financial statements.In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
141(revised 2007), (SFAS 141R) Business Combinations. The Statement requires that all
business combinations be accounted for under the acquisition method. The Statement
requires that the assets, liabilities and noncontrolling interests of a business
combination be measured at fair value at the acquisition date. The acquisition date is
defined as the date an acquirer obtains control of the entity, which is typically the
closing date. The Statement requires that all acquisition and restructuring related costs
be expensed as incurred and that any contingent consideration be measured at fair value and
recorded as either equity or a liability with the liability remeasured at fair value in
subsequent periods. The Statement is effective January 1, 2009. An entity may not apply it
before that date. The Company does not expect the adoption of SFAS 141R to have a material
effect on its consolidated financial statements.In December 2007, the FASB issued SFAS No. 160 (SFAS 160), Noncontrolling Interests in
Consolidated Financial Statementsan amendment to ARB No. 51. The Statement requires that a
noncontrolling interest (formerly minority interest) be measured at fair value at the
acquisition date and be presented in the equity section on the balance sheet. The Statement
requires that purchases or sales of equity interests that do not result in a change in
control be accounted for as equity transactions with no resulting gain or loss. If control
is lost, the noncontrolling interest is remeasured to fair value and a gain or loss is
recorded. The Statement is effective January 1, 2009. The Company does not expect the
adoption of SFAS 160 to have a material effect on its consolidated financial statements.In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative
Instruments and Hedging Activities  an amendment of FASB Statement No. 133. The Statement
requires enhanced disclosures about an entitys derivative and hedging activities and
thereby improves
  Rockville Financial, Inc.
    
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the transparency of financial reporting. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. The Statement is
effective January 1, 2009. The Company does not expect the adoption of SFAS 161 to have a
material effect on its consolidated financial statements.
 4.
    
    Other-Than-Temporary Impairment of InvestmentsDebt and equity securities are classified as available for sale and recorded at fair
value, with unrealized gains or losses excluded from earnings and recorded as other
comprehensive income (loss), net of tax in the Condensed Consolidated Statements of
Condition. On a quarterly basis, securities with unrealized depreciation for twelve or more
consecutive months and other securities with unrealized losses are reviewed as deemed
appropriate to assess whether the decline in fair value is temporary or other than
temporary. It is assessed whether the decline in value is from company-specific events,
industry developments, general economic conditions or other reasons. After the reasons for
the decline are identified, further judgments are required as to whether those conditions
are likely to reverse and, if so, whether that reversal is likely to result in a recovery
of the fair value of the investment in the near term. If it is judged not to be near term,
a charge is taken which results in a new cost basis. Declines in the fair value of
available for sale securities below their cost that are deemed to be other than temporary
are reflected in earnings. Management can designate securities as held to maturity.
Held to maturity securities are debt securities that management has the positive intent
and ability to hold to maturity. As of September 30, 2008, management has $24.6 million of
securities classified as held to maturity on the balance sheet with a market value of
$24.5 million.During the three months and nine months ended September 30, 2008, we recorded an other than
temporary impairment charge of $11.5 million and $12.7 million, respectively. During the
three months and nine months ended September 30, 2008, we recorded an other than temporary
impairment charge of $9.8 million and $11.0 million, respectively, related to the preferred
stock of Freddie Mac and Fannie Mae. The charge for the impairment was computed using the
closing prices of the securities as of the date of the impairment. The Companys remaining
investment in these securities was $895,000 with no unrealized gain or loss at September
30, 2008. During the three and nine months ended September 30, 2008, we recorded an other
than temporary impairment charge of $1.1 million related to one AAA rated pooled trust
preferred security. The charge for the impairment was based on a Level 3 price for the
pooled trust preferred security as of the date of the impairment. The Companys remaining
investment in this pooled trust preferred security was $1.8 million with no unrealized gain
or loss at September 30, 2008. During the three and nine months ended September 30, 2008,
we recorded an other than temporary impairment charge of $395,000 related to one mutual
fund. The charge for the impairment was computed using the closing price of the security as
of the date of the impairment. The Companys remaining investment in this mutual fund was
$2.1 million with no unrealized gain or loss at September 30, 2008. During the three and
nine months ended September 30, 2008, we recorded an other than temporary impairment charge
of $208,000 related to four common stock securities. The charge for the impairment was
computed using the closing prices of the securities as of the date of the impairment. The
Companys remaining investment in these four common stock securities was $263,000 with no
unrealized gain or loss at September 30, 2008. The Company will continue to review its
entire portfolio for other than temporarily impaired securities with additional attention
being given to high risk securities such as the preferred stock of Freddie Mac and Fannie
Mae and the one pooled trust preferred security that the Company owns.Management believes the policy for evaluating securities for other than temporary
impairment is critical because it involves significant judgments by management and could
have a material impact on our net income. The aggregate unrealized loss for securities in
an unrealized loss position for 12 or more consecutive months as of September 30, 2008
consisted of securities that management believes are not other than temporarily impaired as
management has the intent and ability to hold these investments until their fair value
recovers, which may be maturity in the case of debt securities.
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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, 2008:
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss(In Thousands)Available for sale:Mortgage-backed securities
    
    $
    43,942
    
    
    $
    419
    
    
    $
    4,138
    
    
    $
    95
    
    
    $
    48,080
    
    
    $
    514Corporate debt securities
    
    
    2,775
    
    
    
    159
    
    
    
    100
    
    
    
    
    
    
    
    2,875
    
    
    
    159Total debt securities
    
    
    46,717
    
    
    
    578
    
    
    
    4,238
    
    
    
    95
    
    
    
    50,955
    
    
    
    673Marketable equity securities
    
    
    4,636
    
    
    
    651
    
    
    
    78
    
    
    
    15
    
    
    
    4,714
    
    
    
    666Total
    
    $
    51,353
    
    
    $
    1,229
    
    
    $
    4,316
    
    
    $
    110
    
    
    $
    55,669
    
    
    $
    1,339
 The Companys investment portfolio contained no mortgage-backed securities that are subject
to the risk of sub-prime lending as of September 30, 2008. Although the Company has not
been adversely impacted by recent events affecting the mortgage industry, continuing shifts
in the markets perception of credit quality of securities backed by residential mortgage
loans may result in increased volatility of market price and periods of illiquidity that
can negatively impact the valuation of certain issuers of securities held by the Company.5.
    
    Fair Value MeasurementsEffective January 1, 2008, the Company adopted SFAS 157 (SFAS 157), Fair Value
Measurements. SFAS 157 defines fair value, establishes a framework for measuring the fair
value of assets and liabilities based upon a three-tier hierarchy, and expands disclosures
about fair value measurements but does not expand the use of fair value in any new
circumstances. The fair value hierarchy is as follows:
 Level 1:
    
    Unadjusted quoted prices for identical assets or liabilities in active
markets that are accessible as of the measurement date.Level 2:
    
    Inputs other than those quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These include
quoted prices for similar assets and liabilities in active markets, inputs other than
quoted prices that are observable for the asset or liability (e.g., interest rates and
yield curves observable at commonly quoted intervals), or inputs that are derived
primarily from or corroborated by observable market data by correlations or other
means.Level 3:
    
    Unobservable inputs that reflect the Companys assumptions about the
assumptions that market participants would use in pricing the assets or liabilities.
 The following valuation methodologies are used for assets and liabilities recorded at fair
value:Investment Securities Available for Sale: Investment securities available for sale
are recorded at fair value on a recurring basis. Fair value measurement is based upon
quoted prices, if available. If quoted prices are not available, fair values are measured
using independent pricing models. Level 1 securities are those traded on active markets for
identical securities including U.S. treasury debt securities, equity securities and mutual
funds. Level 2 securities include U.S. government agency obligations, U.S. government
sponsored enterprises, mortgage-backed securities and corporate debt securities. Level 3
securities include private placement securities and thinly traded equity securities.Impaired Loans: SFAS 114, Accounting by Creditors for an Impairment of a Loan
requires that a creditor recognize the impairment of a loan if the present value of
expected future cash flows discounted at the loans effective interest rate (or,
alternatively, the observable market price of the loan or the fair value of the collateral)
is less than the recorded investment in the impaired loan. Non-recurring fair value
adjustments to collateral dependent loans are recorded, when necessary, to reflect partial
write-downs based upon observable market price or current appraised value of the
collateral. The Company records impaired loans as non-recurring Level 3 fair value
measurements.Other Liabilities: The Company records deferred director compensation and
supplemental savings and retirement plans at fair value based upon Level 1 quoted market
prices.
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Assets and Liabilities Recorded at Fair Value on a Recurring Basis:
 Fair Value MeasurementsAt September 30, 2008, Using:(in thousands)Quoted Pricesin ActiveMarkets for
    
    Other
    
    SignificantFair Value
    
    Identical
    
    Observable
    
    UnobservableSeptember
    
    Assets
    
    Inputs
    
    InputsDescription
    
    30, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Available for Sale Securities
    
    $
    146,638
    
    
    $
    17,502
    
    
    $
    127,043
    
    
    $
    2,093Total Assets Measured at Fair Value
    
    $
    146,638
    
    
    $
    17,502
    
    
    $
    127,043
    
    
    $
    2,093Other Liabilities(1)
    
    $
    312
    
    
    $
    312
    
    
    $
    
    
    
    $
    Total Liabilities Measured at Fair Value
    
    $
    312
    
    
    $
    312
    
    
    $
    
    
    
    $
    
 (1)
    
    Deferred directors compensation and supplemental savings and retirement plans.
 The changes in Level 3 assets measured at fair value on a recurring basis are summarized in
the following table:
 Investment SecuritiesAvailable for Sale(in thousands)For the three
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30,
    
    
    September 30,2008
    
    
    2008Balance of recurring Level 3 assets  beginning of period
    
    $
    2,741
    
    
    $
    308Total gains or losses (realized/unrealized):Included in earnings-realized
    
    
    
    
    
    
    Included in earnings-unrealized
    
    
    (1,073
    )
    
    
    (1,073
    )Included in other comprehensive income
    
    
    426
    
    
    
    426Purchases, sales, issuances and settlements, net
    
    
    (1
    )
    
    
    (8
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    2,440Balance of recurring Level 3 assets  end of period
    
    $
    2,093
    
    
    $
    2,093Net unrealized losses included in net income for the
period relating to assets held at September 30, 2008
    
    $
    1,073
    
    
    $
    1,073
 The following table presents the Companys assets measured at fair value on a nonrecurring
basis for the nine months ended September 30, 2008:
 (in thousands)Quoted Pricesin ActiveMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableSeptember
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    30, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Impaired Loans
    
    $
    6,621
    
    
    $
    
    
    
    $
    
    
    
    $
    6,621Total Assets Measured at Fair Value
    
    $
    6,621
    
    
    $
    
    
    
    $
    
    
    
    $
    6,621Other Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Liabilities Measured at Fair Value
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 In accordance with FASB Statement No. 114, Accounting by Creditors for Impairment of a
Loan, impaired loans, with carrying amounts of $6.6 million had specific valuation
allowances totaling $4,000, which were included in the allowance for loan losses.
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The adoption of SFAS 157 did not have a material impact on the consolidated financial
statements or results of operations of the Company.SFAS No. 159 (SFAS 159) provides entities with an option to report selected financial
assets and liabilities at fair value, with the objective to reduce the complexity in
accounting for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. The Company adopted SFAS 159 on January 1, 2008
and has not elected the fair value option for any financial assets and liabilities at
September 30, 2008. As such, its adoption did not have a material impact on the
consolidated financial statements or results of operations of the Company.6.
    
    Loans Receivable and Allowance for Loan LossesA summary of the Companys loan portfolio at September 30, 2008 and December 31, 2007 is as
follows:
 September 30, 2008
    
    
    December 31, 2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real estate loans:Residential
    
    $
    728,960
    
    
    
    57.83
    %
    
    $
    666,003
    
    
    
    59.18
    %Commercial
    
    
    320,317
    
    
    
    25.41
    
    
    
    284,460
    
    
    
    25.28Construction
    
    
    98,921
    
    
    
    7.85
    
    
    
    70,617
    
    
    
    6.27Commercial business loans
    
    
    102,262
    
    
    
    8.11
    
    
    
    92,869
    
    
    
    8.25Installment, collateral
and other loans
    
    
    10,152
    
    
    
    0.80
    
    
    
    11,469
    
    
    
    1.02Total loans
    
    
    1,260,612
    
    
    
    100.00
    %
    
    
    1,125,418
    
    
    
    100.00
    %Net deferred loan fees
and premiums
    
    
    1,350
    
    
    
    
    
    
    
    1,529Allowance for loan losses
    
    
    (11,220
    )
    
    
    
    
    
    
    (10,620
    )Loans, net
    
    $
    1,250,742
    
    
    
    
    
    
    $
    1,116,327
 Changes in the allowance for loan losses for the three and nine months ended September 30,
2008 and 2007 are as follows:
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In Thousands)Balance, beginning of period
    
    $
    10,915
    
    
    $
    10,367
    
    
    $
    10,620
    
    
    $
    9,827Provision for loan losses
    
    
    700
    
    
    
    157
    
    
    
    949
    
    
    
    590Loans charged-off
    
    
    (405
    )
    
    
    (37
    )
    
    
    (498
    )
    
    
    (67
    )Recoveries of loans
previously charged-off
    
    
    10
    
    
    
    31
    
    
    
    149
    
    
    
    168Balance, end of period
    
    $
    11,220
    
    
    $
    10,518
    
    
    $
    11,220
    
    
    $
    10,518
 7.
    
    Benefit PlansThe Company sponsors a noncontributory defined benefit pension plan (the Pension Plan)
covering all full-time employees hired before January 1, 2005. Participants become 100%
vested after five years of employment. The Companys funding policy is to contribute
annually the maximum amount that can be deducted for Federal income tax purposes, while
meeting the minimum funding standards established by the ERISA.The Company entered into a supplemental retirement agreement with three executive officers
of the Bank.
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Effective December 1, 2004 and restated December 17, 2007, the Bank adopted the
Supplemental Executive Retirement Plan (the SERP) covering two executive officers of the
Company. The SERP was established to provide two executive officers with a retirement
benefit equal to 70% of their respective average annual earnings over the 12-month period
during the last 120 months of employment producing the highest average or, if higher, the
executives current annual earnings, which include base salary plus annual incentive
compensation. The SERP benefit is offset by the executives benefits under the
tax-qualified Retirement Plan, the Supplemental Savings and Retirement Plan, Supplemental
Executive Retirement Agreement and any split dollar insurance policy benefits. On March 31,
2008 a lump sum settlement payment of $1.2 million was elected by one of the executive
officers.The Company also has supplemental retirement plans (the Supplemental Plans) that provide
benefits for certain key executive officers. The Supplemental Plans provide restorative
payments to certain executives who are prevented from receiving the full benefits
contemplated by the tax-qualified Retirement Plan, 401(k) Plan and Employee Stock Ownership
Plan. Benefits under the Supplemental Plans are based on a predetermined formula. The
benefits under the Supplemental Plans are reduced by other employee benefits. The liability
arising from the Supplemental Plans is being accrued over the participants remaining
periods of service so that at the expected retirement dates, the present value of the
annual payments will have been expensed.The Company also provides an unfunded post-retirement medical, health and life insurance
benefit plan for retirees and employees hired prior to March 1, 1993.The amounts related to the Pension Plan, Supplemental Plans and the SERPs are reflected in
the tables that follow as Pension Plans:
 Components of Net Periodic Benefit Cost
 Pension Plans
    
    
    Post-retirement BenefitsThree Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Service cost
    
    $
    218
    
    
    $
    238
    
    
    $
    2
    
    
    $
    5Interest cost
    
    
    276
    
    
    
    248
    
    
    
    25
    
    
    
    30Expected return on
plan assets
    
    
    (334
    )
    
    
    (263
    )
    
    
    
    
    
    
    Amortization of net
actuarial losses
    
    
    92
    
    
    
    121
    
    
    
    5
    
    
    
    22Amortization of prior
service cost
    
    
    78
    
    
    
    78
    
    
    
    4
    
    
    
    5Net periodic benefit cost
    
    $
    330
    
    
    $
    422
    
    
    $
    36
    
    
    $
    62
 Pension Plans
    
    
    Post-retirement BenefitsNine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Service cost
    
    $
    652
    
    
    $
    714
    
    
    $
    7
    
    
    $
    14Interest cost
    
    
    847
    
    
    
    744
    
    
    
    74
    
    
    
    91Expected return on
plan assets
    
    
    (1,002
    )
    
    
    (789
    )
    
    
    
    
    
    
    Amortization of net
actuarial losses
    
    
    316
    
    
    
    364
    
    
    
    14
    
    
    
    66Amortization of prior
service cost
    
    
    234
    
    
    
    234
    
    
    
    14
    
    
    
    14Amount recognized due to
settlement
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    1,165
    
    
    $
    1,267
    
    
    $
    109
    
    
    $
    185
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No contributions have been made to the pension plan for the nine months ended September 30,
2008. During the nine months ended September 30, 2008 the Company contributed $69,000 to
the post-retirement benefit plan. The Company anticipates contributing an additional
$32,000 during the year ended December 31, 2008 to the post-retirement benefit plan. The
Company plans to contribute approximately $600,000 to the pension plan for the 2008 plan
year.The Company has a tax-qualified 401(k) plan for the benefit of its eligible employees.
Beginning January 1, 2005, the 401(k) Plan was amended to pay all employees, even those who
do not contribute to the 401(k) Plan, an automatic 3% of pay safe harbor contribution
that is fully vested instead of the matching contribution previously provided to
participants of the 401(k) Plan. For employees hired on or after January 1, 2005, a
discretionary matching contribution equal to a uniform percentage of the amount of the
salary reduction the employee elected to defer, which percentage will be determined each
year by the Company. The 401(k) expense for the nine months ended September 30, 2008 and
2007 was $240,000 and $205,000, respectively.The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 158 (SFAS 158), Employers Accounting for Defined Benefit Pension and Other
Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)
requiring the recognition of the funded status of defined benefit plans as of December 31,
2006. The statement requires the Company to measure plan assets and benefit obligations as
of the date of the Companys fiscal year-end statement of financial position and is
effective for the Company on January 1, 2008. The Company offers a defined benefit pension
plan whose measurement date of the pension plan assets and benefit obligations is
presently October 1 and will be changed in accordance with the provisions of SFAS 158 to
the Companys year-end of December 31, effective December 31, 2008.8.
    
    Stock Based CompensationThe Board of Directors and stockholders of the Company approved the Rockville Financial,
Inc. 2006 Stock Incentive Award Plan (the Plan) in 2006. The Plan allows the Company to
use stock options, stock awards, stock appreciation rights and performance awards to
attract, retain and reward performance of qualified employees and others who contribute to
the success of the Company. The Plan allowed for the issuance of a maximum of 349,830
restricted stock shares and 874,575 stock options in connection with Awards under the Plan.
As of September 30, 2008, there were 40,682 restricted stock shares and 532,450 stock
options that remain available for future grants under the Plan.The Company accounts for stock-based compensation in accordance with SFAS 123R, Share-Based
Payment. Under SFAS 123R, the fair value of stock option and restricted stock awards,
measured at grant date, is amortized to compensation expense on a straight-line basis over
the vesting period. The Company accelerates the recognition of compensation costs for
stock-based awards granted to retirement-eligible employees and employees who become
retirement-eligible prior to full vesting of the award because the Companys incentive
compensation plans allow for vesting at the time an employee retires. Stock-based
compensation granted to non-retirement-eligible individuals is expensed over the normal
vesting period.Total employee and director share-based compensation expense recognized for stock options
and restricted stock for the three and nine months ended September 30, 2008 was $175,000
and $1.6 million, with a related tax benefit recorded of $60,000 and $558,000,
respectively, of which director share-based compensation expense recognized (in the
consolidated statement of income as other noninterest expense) was $99,000 and $313,000,
respectively and officer share-based compensation expense recognized (in the consolidated
statement of income as salaries and benefit noninterest expense) was $76,000 and $1.3
million, respectively. The total charge of $1.6 million for the nine months ended September
30, 2008 includes $197,000 related to 16,441 vested restricted shares used for income tax
withholding payments on behalf of certain executives which occurred in the first quarter of
2008.On February 20, 2008, the Board of Directors Stock Award Committee awarded 92,559 shares of
restricted stock to executive officers (net of 16,441 shares which were used by the
executives for income tax withholding as described above) with a fair value of $1.3
million, net of estimated forfeitures, as measured on the grant date. The Board of
Directors Stock Award Committee also awarded stock options to purchase 128,625 shares of
the Companys stock with a grant date fair value of $350,000, net of estimated forfeitures,
to both executive officers and directors of the Company. The stock options were granted
with an exercise price of $11.98 per share and the right to exercise the
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stock options expires February 20, 2018. Twenty percent of the restricted stock and stock
options vested immediately with the remaining award vesting twenty percent annually over
the next four years.
 Stock Options:The following table presents the activity related to stock options under the Plan for the
three months ended September 30, 2008:
 Weighted Average
    
    
    AggregateWeighted
    
    
    Remaining
    
    
    IntrinsicStock
    
    
    Average
    
    
    Contractual Term
    
    
    ValueOptions
    
    
    Exercise Price
    
    
    (in years)
    
    
    (in thousands)Stock options outstanding at July 1, 2008
    
    
    342,125
    
    
    $
    14.74Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Stock options outstanding at
September 30, 2008
    
    
    342,125
    
    
    $
    14.74
    
    
    
    8.7
    
    
    $
    485Options exercisable at September 30, 2008
    
    
    188,025
    
    
    $
    14.63
    
    
    
    8.7
    
    
    $
    243
 The following table presents the activity related to stock options under the Plan for the
nine months ended September 30, 2008:
 Weighted Average
    
    
    AggregateWeighted
    
    
    Remaining
    
    
    IntrinsicStock
    
    
    Average
    
    
    Contractual Term
    
    
    ValueOptions
    
    
    Exercise Price
    
    
    (in years)
    
    
    (in thousands)Stock options outstanding at January 1, 2008
    
    
    213,500
    
    
    $
    16.40Granted
    
    
    128,625
    
    
    
    11.98Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Stock options outstanding at September 30,
2008
    
    
    342,125
    
    
    $
    14.74
    
    
    
    8.7
    
    
    $
    485
 The following table presents the unvested Stock Option activity for the three months ended
September 30, 2008:
 Weighted AverageNumber
    
    
    Grant-of Shares
    
    
    Date Fair ValueUnvested as of July 1, 2008
    
    
    161,500
    
    
    $
    3.65Granted
    
    
    
    
    
    
    Vested
    
    
    (7,400
    )
    
    
    4.08Forfeited, expired or canceled
    
    
    
    
    
    
    Unvested as of September 30, 2008
    
    
    154,100
    
    
    $
    3.63
 The following table presents the unvested Stock Option activity for the nine months ended
September 30, 2008:
 Weighted AverageNumber
    
    
    Grant-of Shares
    
    
    Date Fair ValueUnvested as of January 1, 2008
    
    
    105,600
    
    
    $
    4.25Granted
    
    
    128,625
    
    
    
    2.72Vested
    
    
    (80,125
    )
    
    
    2.99Forfeited, expired or canceled
    
    
    
    
    
    
    Unvested as of September 30, 2008
    
    
    154,100
    
    
    $
    3.63
 The total grant date fair value of options that vested during the three months ended
September 30, 2008 and 2007 was $30,000 and $207,000, respectively and was $240,000 and
$207,000 for the options that vested during the nine months ended September 30, 2008 and
2007, respectively.As of September 30, 2008, the unrecognized cost related to the stock options awarded of
$264,000 will be recognized over a weighted-average period of 1.8 years.For share-based compensation recognized for the nine months ended September 30, 2008, the
Company used the Black-Scholes option pricing model for estimating the fair value of stock
options granted Additional options were granted during February 2008. The weighted average
estimated fair
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values of stock option grants and the assumptions that were used in calculating such fair
values were based on estimates at the date of grant as follows:
 2008
    
    2007Weighted per share average fair value of
options granted
    
    $
    2.72
    
    
    $
    4.34Assumptions:Risk free interest rate
    
    
    3.24
    %
    
    
    4.55
    %Expected volatility
    
    
    22.11
    %
    
    
    15.83
    %Expected dividend yield
    
    
    1.67
    %
    
    
    .90
    %Expected life of options granted
    
    6 years
    
    6 years
 The expected volatility was determined using both the Companys historical trading
volatility as well as the historical volatility of an index published by SNL Financial for
mutual holding companys common stock over the expected average life of the options. The
index was used as the Companys stock has only been publicly traded since May 23, 2005.The Company estimates option forfeitures using historical data on employee terminations.The expected life of stock options granted is derived using the simplified method and
represents the period of time that stock options granted are expected to be outstanding.The risk-free interest rate for periods within the contractual life of the stock option is
based on the average five and seven U.S. Treasury Note yield curve in effect at the date of
grant.The expected dividend yield reflects an estimate of the dividends the Company expects to
declare over the expected life of the options granted.Stock options provide grantees the option to purchase shares of common stock at a specified
exercise price and expire ten years from the date of grant.The Company plans to use Treasury stock to satisfy future stock option exercises.Additional information regarding stock options outstanding as of September 30, 2008, is as
follows:
 Options Outstanding
    
    
    Exercisable OptionsWeighted-AverageRange
    
    
    
    
    
    
    Remaining
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-of
    
    
    
    
    
    
    Contractual
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Life
    
    
    Exercise
    
    
    
    
    
    
    ExercisePrices
    
    
    Shares
    
    
    (Years)
    
    
    Price
    
    
    Shares
    
    
    Price$
    11.98
    
    
    
    128,625
    
    
    
    9.4
    
    
    $
    11.98
    
    
    
    64,525
    
    
    $
    11.98$
    14.35
    
    
    
    85,500
    
    
    
    8.9
    
    
    $
    14.35
    
    
    
    63,300
    
    
    $
    14.35$
    17.77
    
    
    
    128,000
    
    
    
    8.2
    
    
    $
    17.77
    
    
    
    60,200
    
    
    $
    17.77
 Restricted Stock:
 Restricted stock provides grantees with rights to shares of common stock upon completion of
a service period. During the restriction period, all shares are considered outstanding and
dividends are paid on the restricted stock.
 The following table presents the activity for Restricted Stock for the three months ended
September 30, 2008:
 Weighted AverageNumber
    
    
    Grant-of Shares
    
    
    Date Fair ValueUnvested as of July 1, 2008
    
    
    86,970
    
    
    $
    15.77Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Unvested as of September 30, 2008
    
    
    86,970
    
    
    $
    15.77
  Rockville Financial, Inc.
    
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The following table presents the activity for Restricted Stock for the nine months ended
September 30, 2008:
 Weighted AverageNumber
    
    
    Grant-of Shares
    
    
    Date Fair ValueUnvested as of January 1, 2008
    
    
    59,970
    
    
    $
    17.63Granted
    
    
    92,559
    
    
    
    11.98Vested
    
    
    (65,559
    )
    
    
    12.12Forfeited
    
    
    
    
    
    
    Unvested as of September 30, 2008
    
    
    86,970
    
    
    $
    15.77
 The fair value of restricted shares that vested during the nine months ended September 30,
2008 was $986,000 with no shares vesting during the three months ended September 30, 2008,
or the three and nine months ended September 30, 2007. The weighted average grant date fair
value of restricted stock granted during the nine months ended September 30, 2008 was
$11.98. There were no restricted stock shares granted during the nine months ended
September 30, 2007.As of September 30, 2008, there was $807,000 of total unrecognized compensation cost
related to unvested restricted stock which is expected to be recognized over a
weighted-average period of 2.2 years.Twenty-two percent, or 19,390, of the remaining unvested restricted stock shares will vest
in 2008, 29,085 shares in 2009, 24,095 shares in 2010, 7,200 in 2011 and 7,200 will vest in
2012. All unvested restricted stock shares are expected to vest.Employee Stock Ownership Plan:As part of the reorganization and stock offering completed
in May 2005, the Company established an Employee Stock Ownership Plan (ESOP) for eligible
employees of the Bank, and authorized the Company to lend the funds to the ESOP to purchase
699,659 or 3.6% of the shares issued in the initial public offering. Upon completion of the
reorganization, the ESOP borrowed $4.4 million from the Company to purchase 437,287 shares
of common stock. Additional shares of 59,300 and 203,072 were subsequently purchased by the
ESOP in the open market at a total cost of $817,000 and $2.7 million in 2006 and 2005,
respectively, with additional funds borrowed from the Company. The Bank intends to make
annual contributions to the ESOP that will be adequate to fund the payment of regular debt
service requirements attributable to the indebtedness of the ESOP.The interest rate for the ESOP loan is the prime rate plus one percent, or 6.00% at
September 30, 2008. 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,
2008, the outstanding principal and interest due was $6.2 million, and principal payments
of $2.0 million have been made on the loan since inception.ESOP expense for the nine months ended September 30, 2008 and 2007 was $688,000 and
$785,000, respectively. At September 30, 2008, there were 209,898 allocated and 489,761
unreleased ESOP shares; and the unreleased shares had an aggregate fair value of $7.7
million.9.
    
    Income TaxesEffective January 1, 2007, the Company has adopted the provisions of FASB issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  An
Interpretation of FASB Statement No. 109and there was no material effect on the
consolidated condensed financial statements. As a result, there was no cumulative effect
related to adopting FIN 48. As of September 30, 2008 and December 31, 2007, there were no
unrecognized tax benefits related to federal and state income tax matters. The Company is
currently open to audit under the statute of limitations by the Internal Revenue Service
and state taxing authorities for the years ended December 31, 2004 through 2007.As of December 31, 2007 and September 30, 2008, the Company has not accrued any interest
related to uncertain tax positions.
  Rockville Financial, Inc.
    
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10.
    
    Accumulated Other Comprehensive (Loss) IncomeComponents of accumulated other comprehensive (loss) income, net of taxes, consist of the
following:
 UnrealizedGain (Loss) on
    
    
    AccumulatedAvailable-
    
    
    OtherUnamortized
    
    
    For-Sale
    
    
    ComprehensiveBenefit Plans
    
    
    Securities
    
    
    (Loss) Income(In Thousands)January 1, 2008
    
    $
    (3,430
    )
    
    $
    3,189
    
    
    $
    (241
    )Change
    
    
    307
    
    
    
    (685
    )
    
    
    (378
    )March 31, 2008
    
    
    (3,123
    )
    
    
    2,504
    
    
    
    (619
    )Change
    
    
    118
    
    
    
    (1,092
    )
    
    
    (974
    )June 30, 2008
    
    
    (3,005
    )
    
    
    1,412
    
    
    
    (1,593
    )Change
    
    
    119
    
    
    
    706
    
    
    
    825September 30, 2008
    
    $
    (2,886
    )
    
    $
    2,118
    
    
    $
    (768
    )
 The following table summarizes other comprehensive (loss) income and the related tax
effects for the three and nine months ended September 30, 2008 and 2007:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Net (loss) income as reported
    
    $
    (5,302
    )
    
    $
    2,261
    
    
    $
    (2,754
    )
    
    $
    6,427Unrealized gain (loss) on securities
available for sale
    
    
    1070
    
    
    
    544
    
    
    
    (1,622
    )
    
    
    444Income tax provision
    
    
    (364
    )
    
    
    (185
    )
    
    
    551
    
    
    
    (151
    )Net unrealized gain (loss) on securities
available for sale
    
    
    706
    
    
    
    359
    
    
    
    (1,071
    )
    
    
    293Amortization of unamortized benefit plans
    
    
    180
    
    
    
    226
    
    
    
    824
    
    
    
    678Income tax provision
    
    
    (61
    )
    
    
    (77
    )
    
    
    (280
    )
    
    
    (231
    )Net amortization of unamortized benefit
plans
    
    
    119
    
    
    
    149
    
    
    
    544
    
    
    
    447Other comprehensive income (loss), net
of income tax
    
    
    825
    
    
    
    508
    
    
    
    (527
    )
    
    
    740Total comprehensive (loss) income
    
    $
    (4,477
    )
    
    $
    2,769
    
    
    $
    (3,281
    )
    
    $
    7,167
 11.
    
    Commitments and ContingenciesFinancial Instruments With Off-Balance Sheet RiskIn 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 standby letters of credit.
Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee by the customer. Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to a third
party. Since these commitments could expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. These commitments involve,
to varying degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the statements of financial condition. The contractual amounts of commitments
to extend credit represent the amounts of potential accounting loss should the contract be
fully drawn upon, the customer default, and the value of any existing collateral
obligations become worthless as it may for on-balance sheet instruments. The Company
evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of credit, is based
on managements credit evaluation.
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Financial instruments whose contract amounts represent credit risk are as follows at
September 30, 2008 and December 31, 2007:
 September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Commitments to extend credit:Future loan commitments
    
    $
    62,434
    
    
    $
    70,993Undisbursed construction loans
    
    
    95,568
    
    
    
    96,788Undisbursed home equity lines of credit
    
    
    109,321
    
    
    
    104,769Undisbursed commercial lines of credit
    
    
    59,221
    
    
    
    49,037Standby letters of credit
    
    
    15,336
    
    
    
    12,312Unused checking overdraft lines of credit
    
    
    112
    
    
    
    104$
    341,992
    
    
    $
    334,003
 12.
    
    Legal MattersThe 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 MattersThe Company and the Bank are subject to various regulatory capital requirements
administered by Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Companys financial
statements. The regulations require the Company and the Bank meet specific capital
guidelines that involve quantitative measures of the Companys and the Banks assets,
liabilities, and certain off-balance sheet items, as calculated under regulatory accounting
practices. The Companys and the Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings, and other
factors. The Bank was classified at its most recent notification as well capitalized. At
September 30, 2008, the Company and the Bank exceeded all regulatory capital requirements
and are considered well capitalized under regulatory guidelines.
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The following is a summary of the Companys and the Banks regulatory capital amounts and
ratios as of September 30, 2008 and December 31, 2007 compared to the Federal Deposit
Insurance Corporations requirements for classification as a well-capitalized institution
and for minimum capital adequacy:
 To Be WellFor Capital
    
    Capitalized UnderAdequacy
    
    Prompt CorrectiveActual
    
    Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in Thousands)Rockville Bank:September 30, 2008Total capital to risk weighted assets
    
    $
    135,286
    
    
    
    11.9
    %
    
    $
    90,949
    
    
    
    8.0
    %
    
    $
    113,686
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    123,498
    
    
    
    10.9
    
    
    
    45,320
    
    
    
    4.0
    
    
    
    67,981
    
    
    
    6.0Tier I capital to total average assets
    
    
    123,498
    
    
    
    8.4
    
    
    
    58,809
    
    
    
    4.0
    
    
    
    73,511
    
    
    
    5.0Rockville Bank:December 31, 2007Total capital to risk weighted assets
    
    $
    137,212
    
    
    
    13.7
    %
    
    $
    80,124
    
    
    
    8.0
    %
    
    $
    100,155
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    126,099
    
    
    
    12.6
    
    
    
    40,031
    
    
    
    4.0
    
    
    
    60,047
    
    
    
    6.0Tier I capital to total average assets
    
    
    126,099
    
    
    
    9.5
    
    
    
    53,094
    
    
    
    4.0
    
    
    
    66,368
    
    
    
    5.0Rockville Financial, Inc.:September 30, 2008Total capital to risk weighted assets
    
    $
    160,063
    
    
    
    14.1
    %
    
    $
    90,816
    
    
    
    8.0
    %
    
    $
    113,520
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    148,275
    
    
    
    13.1
    
    
    
    45,275
    
    
    
    4.0
    
    
    
    67,912
    
    
    
    6.0Tier I capital to total average assets
    
    
    148,275
    
    
    
    10.0
    
    
    
    59,310
    
    
    
    4.0
    
    
    
    74,138
    
    
    
    5.0Rockville Financial, Inc.:December 31, 2007Total capital to risk weighted assets
    
    $
    166,647
    
    
    
    16.6
    %
    
    $
    80,312
    
    
    
    8.0
    %
    
    $
    100,390
    
    
    
    10.0
    %Tier I capital to risk weighted assets
    
    
    155,534
    
    
    
    15.5
    
    
    
    40,138
    
    
    
    4.0
    
    
    
    60,207
    
    
    
    6.0Tier I capital to total average assets
    
    
    155,534
    
    
    
    11.7
    
    
    
    53,174
    
    
    
    4.0
    
    
    
    66,468
    
    
    
    5.0
 The Company is also considered to be well capitalized under the regulatory framework
specified by the Federal Reserve.Connecticut law restricts the amount of dividends that the Bank can pay based on earnings
for the current year and the preceding two years.On October 22, 2008, Rockville Financial, Inc. made a $10.0 million capital contribution to Rockville Bank.
This capital contribution has no affect to the capital amounts and ratios of Rockville Financial, Inc., but will increase
Rockville Bank's capital amounts and ratios at the time of the capital contribution.
 Rockville Financial, Inc.
    
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking StatementsThis Form 10-Q contains forward-looking statements that are within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based upon the
current beliefs and expectations of our management and are subject to significant risks and
uncertainties. These risks and uncertainties could cause our 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 our control  include
without limitation the following:
 
    
    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 our business.
    
    The ability to increase market share and control expenses may be more difficult
than anticipated.
    
    The recently enacted Emergency Economic Stabilization Act (EESA) of 2008 is
expected to have a profound effect on the financial services industry. The effect
of programs developed under EESA, including the Troubled Asset Recovery and
Capital Purchase Programs in which we may or may not participate, could
dramatically change the competitive environment in which we operate.
    
    Other changes
in laws and regulatory requirements (including those concerning taxes, banking,
securities and insurance) may adversely affect us or our businesses.
    
    Changes in accounting policies and practices, as may be adopted by regulatory
agencies, the Public Company Accounting Oversight Board or the Financial
Accounting Standards Board, may affect expected financial reporting.
    
    Future changes in interest rates may reduce our profits which could have a
negative impact on the value of our stock.
    
    We are subject to lending risk and could incur losses in our loan portfolio
despite our underwriting practices. Changes in real estate values could also
increase our lending risk.
    
    Changes in demand for loan products, financial products and deposit flow could
impact our financial performance.
    
    Strong competition within our market area may limit our growth and
profitability.
    
    We may not manage the risks involved in the foregoing as well as anticipated.
    
    We recently opened new branches which may not become profitable as soon as
anticipated, if at all.
 Any forward-looking statements made by or on behalf of us in this Form 10-Q speak only as
of the date of this Form 10-Q. We do 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, consider any further disclosures of a
forward-looking nature we may make in future filings.
 Rockville Financial, Inc.
    
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##### Table of Contents



OverviewRockville Financial, Inc. (the Company) is a state-chartered mid-tier stock holding
company formed in 2004. The Reorganization and Minority Stock Issuance Plan (the Plan)
adopted by the Companys and Rockville Banks Boards of Directors was completed in 2005.
Pursuant to the Plan, the Company became a mid-tier holding company. Rockville Financial
MHC, Inc. holds fifty-five percent of the Companys common stock, and the Company holds all
the common stock of Rockville Bank (the Bank). The Bank provides a full range of banking
services to consumer and commercial customers through its main office in Rockville and
twenty branches located in Hartford, Tolland and New London counties in Connecticut. The
Banks deposits are insured under the Deposit Insurance Fund, which is administered by the
Federal Deposit Insurance Corporation.The Company strives to remain a leader in meeting the financial service needs of the local
community and to provide quality service to the individuals and businesses in the market
areas that it has served since 1858. Rockville Bank is a community-oriented provider of
traditional banking products and services to business organizations and individuals,
offering products such as residential and commercial real estate loans, consumer loans and
a variety of deposit products. Our business philosophy is to remain a community-oriented
franchise and to continue to focus on providing superior customer service to meet the
financial needs of the communities in which we operate. Current strategies include
expanding our banking network by pursuing new branch locations and branch acquisition
opportunities in our market area, continuing our residential mortgage lending activities
which comprise a majority of our loan portfolio and expanding our commercial real estate
and commercial business lending activities.Critical Accounting PoliciesThe accounting policies followed by the Company and its subsidiaries conform with
accounting principles generally accepted in the United States of America and with general
practices within the banking industry.Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and could potentially result in materially different results
under different assumptions and conditions. We believe that our most critical accounting
policies, which involve the most complex subjective decisions or assessments, relate to
allowance for loan losses, other than temporary impairment of investment securities, income
taxes, pension and other post-retirement benefits and stock compensation.Allowance for Loan Losses:The allowance for loan losses is the amount estimated by
management as necessary to cover probable credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for loan losses
which is charged against income. Management believes the policy is critical because
determination of the amount of the allowance involves significant judgments and
assumptions.Management performs a quarterly evaluation of the adequacy of the allowance for loan losses
and presents the evaluation to both the Board Lending Committee and the Board of Directors.
In addition, the credit area of the Bank is responsible for the accuracy of loan risk
ratings and prepares an Asset Quality Report on a quarterly basis and provides summary
reports to the Board Lending Committee on a monthly basis. A variety of factors are
considered in establishing this estimate including, but not limited to, historical loss and
charge off data, current economic conditions, historical and current delinquency
statistics, geographic and industry concentrations, the adequacy of the underlying
collateral, the financial strength of our borrowers, results of internal and external loan
reviews and other relevant factors. This evaluation is inherently subjective as it requires
material estimates by management that may be susceptible to significant change.The analysis has two broad components: specific and unallocated allowances. The specific
allowance is comprised of two components. The first component is made for loans for which
recovery of the Banks principal investment is uncertain. In such cases, the size of the
specific allowance is measured by determining an expected collection or, for
collateral-dependent loans, the fair value of the collateral adjusted for market conditions
and selling expenses. The second component of the specific allowance is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable) and payment
history. Historical loss experience, delinquency trends, general economic conditions and
 Rockville Financial, Inc.
    
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##### Table of Contents



geographic and industry concentrations are also considered. This analysis establishes
factors that are applied to the loan groups to determine the amount of this component of
the allowance. The unallocated allowance represents the results of an analysis that
measures the probable losses inherent in each portfolio. If the allowance for loan losses
is too low, the Company may incur higher provisions for loan losses in the future resulting
in lower net income. If an estimate of the allowance for loan losses is too high, we may
experience lower provisions for loan losses resulting in higher net income.Other than Temporary Impairment of Securities:Debt and equity securities are classified
as available for sale and recorded at fair value, with unrealized gains or losses
excluded from earnings and recorded as other comprehensive income (loss), net of tax in the
Condensed Consolidated Statements of Condition. On a quarterly basis, securities with
unrealized depreciation for twelve or more consecutive months and other securities with
unrealized losses are reviewed as deemed appropriate to assess whether the decline in fair
value is temporary or other than temporary. It is assessed whether the decline in value is
from company-specific events, industry developments, general economic conditions or other
reasons. After the reasons for the decline are identified, further judgments are required
as to whether those conditions are likely to reverse and, if so, whether that reversal is
likely to result in a recovery of the fair value of the investment in the near term. If it
is judged not to be near term, a charge is taken which results in a new cost basis.
Declines in the fair value of available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings. Management can designate
securities as held to maturity. Held to maturity securities are debt securities that
management has the positive intent and ability to hold to maturity. As of September 30,
2008, management has classified $24.6 million of securities classified as held to
maturity on the balance sheet with a market value of $24.5 million.During the three months and nine months ended September 30, 2008, we recorded an other than
temporary impairment charge of $11.5 million and $12.7 million, respectively. During the
three months and nine months ended September 30, 2008, we recorded an other than temporary
impairment charge of $9.8 million and $11.0 million, respectively, related to the preferred
stock of Freddie Mac and Fannie Mae. The charge for the impairment was computed using the
closing prices of the securities as of the date of the impairment. The Companys remaining
investment in these securities was $895,000 million with no unrealized gain or loss at
September 30, 2008. During the three and nine months ended September 30, 2008, we recorded
an other than temporary impairment charge of $1.1 million related to one AAA rated pooled
trust preferred security. The charge for the impairment was based on a Level 3 price for
the pooled trust preferred security as of the date of the impairment. The Companys
remaining investment in this pooled trust preferred security was $1.8 million with no
unrealized gain or loss at September 30, 2008. During the three and nine months ended
September 30, 2008, we recorded an other than temporary impairment charge of $395,000
related to one mutual fund. The charge for the impairment was computed using the closing
price of the security as of the date of the impairment. The Companys remaining investment
in this mutual fund was $2.1 million with no unrealized gain or loss at September 30, 2008.
During the three and nine months ended September 30, 2008, we recorded an other than
temporary impairment charge of $208,000 related to four common stock securities. The charge
for the impairment was computed using the closing prices of the securities as of the date
of the impairment. The Companys remaining investment in these four common stock securities
was $263,000 with no unrealized gain or loss at September 30, 2008. The Company will
continue to review its entire portfolio for other than temporarily impaired securities with
additional attention being given to high risk securities such as the preferred stock of
Freddie Mac and Fannie Mae and the one pooled trust preferred security that the Company
owns.Management believes the policy for evaluating securities for other than temporary
impairment is critical because it involves significant judgments by management and could
have a material impact on our net income. The aggregate unrealized loss for securities in
an unrealized loss position for twelve or more consecutive months as of September 30, 2008
consisted of securities that management believes are not other than temporarily impaired as
management has the intent and ability to hold these investments until their fair value
recovers, which may be maturity in the case of debt securities.
 Rockville Financial, Inc.
    
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Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss(In Thousands)Available for sale:Mortgage-backed
securities
    
    $
    43,942
    
    
    $
    419
    
    
    $
    4,138
    
    
    $
    95
    
    
    $
    48,080
    
    
    $
    514Corporate debt securities
    
    
    2,775
    
    
    
    159
    
    
    
    100
    
    
    
    
    
    
    
    2,875
    
    
    
    159Total debt securities
    
    
    46,717
    
    
    
    578
    
    
    
    4,238
    
    
    
    95
    
    
    
    50,955
    
    
    
    673Marketable equity
securities
    
    
    4,636
    
    
    
    651
    
    
    
    78
    
    
    
    15
    
    
    
    4,714
    
    
    
    666Total
    
    $
    51,353
    
    
    $
    1,229
    
    
    $
    4,316
    
    
    $
    110
    
    
    $
    55,669
    
    
    $
    1,339
 The Companys investment portfolio contained no mortgage-backed securities that are subject
to the risk of sub-prime lending as of September 30, 2008. Although the Company has not
been adversely impacted by recent events affecting the mortgage industry, continuing shifts
in the markets perception of credit quality of securities backed by residential mortgage
loans may result in increased volatility of market price and periods of illiquidity that
can negatively impact the valuation of certain issuers of securities held by the Company.Income Taxes:We recognize income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced by a loan loss
allowance when, in the opinion of management, it is more likely than not that all or some
portion of the deferred tax assets will not be realized. The Company has not provided for
Connecticut state income taxes since December 31, 1998 because it has created and
maintained a passive investment company (PIC), as permitted by Connecticut law. The
Company believes it is in compliance with the state PIC requirements and that no state
taxes are due from December 31, 1999 through September 30, 2008; however, the Company has
not been audited by the Department of Revenue Services for such periods. If the state were
to determine that the PIC was not in compliance with statutory requirements, a material
amount of taxes could be due. As of September 30, 2008, management believes it is more
likely than not that the deferred tax assets will be realized through future reversals of
existing taxable temporary differences. As of September 30, 2008, our net deferred tax
asset was $8.4 million and there was no valuation allowance.On January 1, 2007, the Company changed its accounting policy related to accounting for tax
contingencies in connection with the adoption of FIN 48, an interpretation of Financial
Accounting Standards Board (FASB) Statement 109. See Note 9 - Income Taxes for additional
information.Pension and Other Post-retirement Benefits:We have a noncontributory defined benefit
pension plan that provides benefits for substantially all employees hired before January 1,
2005 who meet certain requirements as to age and length of service. The benefits are based
on years of service and average compensation, as defined. Our funding policy is to
contribute annually in order to meet at least the minimum funding standards established by
the ERISA.In addition to providing pension benefits, we provide certain health care and life
insurance benefits for retired employees. Participants or eligible employees hired before
March 1993 become eligible for the benefits if they retire after reaching age 62 with five
or more years of service. A fixed percent of annual costs are paid depending on length of
service at retirement. We accrue for the estimated costs of these other post-retirement
benefits through charges to expense during the years that employees render service. The
Company makes contributions to cover its current benefits paid under this plan.
 Rockville Financial, Inc.
    
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##### Table of Contents



Management believes the policy for determining pension and other post-retirement benefit
expenses is critical because judgments are required with respect to the appropriate
discount rate, rate of return on assets, salary increases and other items. Management
reviews and updates the assumptions annually. If our estimate of pension and
post-retirement expense is too low we may experience higher expenses in the future reducing
our net income. If our estimate is too high, we may experience lower expenses in the future
increasing our net income.While management believes the assumptions used to estimate expenses related to pension and
other post-retirement benefits are reasonable and appropriate, actual experience may
significantly differ. The pension expense is calculated based upon a number of actuarial
assumptions, including an expected long-term rate of return on our Pension Plan assets. In
developing our expected long-term rate of return assumption, we evaluated input from our
actuary and investment consultant, including their review of asset class return
expectations as well as long-term inflation assumptions, and their review of historical
returns based on target asset allocations. The Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 158 (SFAS 158), Employers Accounting for
Defined Benefit Pension and Other Post-retirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R)requiring the recognition of the funded status of defined
benefit plans as of December 31, 2006. The statement requires the Company to measure plan
assets and benefit obligations as of the date of the Companys fiscal year-end statement of
financial position and is effective for the Company on January 1, 2008. The Company offers
a defined benefit pension plan whose measurement date of the pension plan assets and
benefit obligations is presently October 1 and will be changed in accordance with the
provisions of SFAS 158 to the Companys year-end of December 31, effective December 31,
2008.Stock Compensation:The Company accounts for stock options and restricted stock awards in
accordance with SFAS No. 123 (SFAS 123R), Share-Based Payments (revised 2004). This
statement requires companies to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of the award. These
costs are recognized over the period during which an employee is required to provide
services in exchange for the award, the requisite service period (usually the vesting
period). SFAS 123R requires companies to measure the cost of employee services received in
exchange for stock options, and the Company is required to expense the grant date fair
value of the Companys stock options and restricted stock with a corresponding increase in
equity or a liability, depending on whether the instruments granted satisfy the equity or
liability classification criteria. We use the Black-Scholes option valuation model to value
employee stock awards. Determining the appropriate fair-value model and calculating the
estimated fair value of stock-based awards at the grant date requires considerable
judgment, including estimating stock price volatility, expected option life, expected
dividend rate, risk-free interest rate and expected forfeiture rate. We develop our
estimates based on historical data and market information which can change significantly
over time.Comparison of Operating Results for the Three and Nine Months Ended September 30, 2008 and
2007The 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 and equipment, service bureau fees, and other noninterest expenses. The
Companys results of operations are also affected by its provision for loan losses. The
following discussion provides a summary and comparison of the Companys operating results
for the three and nine months ended September 30, 2008 and 2007.
 Rockville Financial, Inc.
    
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##### Table of Contents



Income Statement Summary
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In thousands)Net interest income
    
    $
    11,204
    
    
    $
    9,799
    
    
    $
    1,405
    
    
    $
    31,184
    
    
    $
    28,500
    
    
    $
    2,684Provision for loan losses
    
    
    700
    
    
    
    157
    
    
    
    543
    
    
    
    949
    
    
    
    590
    
    
    
    359Noninterest (loss) income
    
    
    (9,955
    )
    
    
    1,406
    
    
    
    (11,361
    )
    
    
    (8,201
    )
    
    
    4,065
    
    
    
    (12,266
    )Noninterest expense
    
    
    8,233
    
    
    
    7,651
    
    
    
    582
    
    
    
    25,933
    
    
    
    22,349
    
    
    
    3,584(Loss) income before
income taxes
    
    
    (7,684
    )
    
    
    3,397
    
    
    
    (11,081
    )
    
    
    (3,899
    )
    
    
    9,626
    
    
    
    (13,525
    )Provision for income taxes
    
    
    2,382
    
    
    
    (1,136
    )
    
    
    3,518
    
    
    
    1,145
    
    
    
    (3,199
    )
    
    
    4,344Net (loss) income
    
    $
    (5,302
    )
    
    $
    2,261
    
    
    $
    (7,563
    )
    
    $
    (2,754
    )
    
    $
    6,427
    
    
    $
    (9,181
    )
 Net income decreased by $7.6 million, or 334.5%, to a net loss of $5.3 million for the
quarter ended September 30, 2008 from $2.3 million for the same period in the prior year.
The decrease in net income primarily resulted from a decrease in noninterest income of
$11.4 million, or 808.0%, an increase in noninterest expenses of $582,000, or 7.6%, and an
increase in the provision for loan losses of $543,000, or 345.9%, offset by a $1.4 million,
or 14.3%, increase in our net interest income and a decrease in the provision for income
taxes of $3.5 million, or 309.7%. Income before taxes decreased $11.1 million, or 326.2%, to
a loss of $7.7 million for the quarter ending September 30, 2008 from income before taxes
of $3.4 million for the same period in the prior year. When excluding from both periods
losses from other than temporary impairment of securities and expenses relating to the
issuance of restricted stock and stock options, income before taxes would have increased
$230,000, or 6.1% for the three months ending September 30, 2008 when compared to the same
period in the prior year versus decreasing $11.1 million when not excluding those expenses.
Losses from other than temporary impairment of securities were $11.5 million for the three
months ended September 30, 2008 compared to none for the three months ended September 30,
2007, and were the primary change in noninterest (loss) income between both periods.
Expenses relating to the issuance of restricted stock and stock options decreased $203,000
to $175,000 for the three months ended September 30, 2008 when compared to $378,000 for the
three months ended September 30, 2007.The $1.4 million increase in our net interest income is attributable to a $4.3 million, or
2.0%, increase in average net interest-earning assets and a 1 basis point increase in our
net interest margin. The 1 basis point increase in our net interest margin was due to a
decline of 54 basis points in the average yield earned on $1.4 billion average earning
assets more than offset by a 73 basis point decline in the weighted average rate paid on
$1.2 billion of average interest-bearing liabilities. Our net interest margin was 3.16% for
the three months ended September 30, 2008 compared to 3.15% for the same period in the
prior year. The increase in the average net interest-earning assets is the result of a
$173.4 million, or 14.0%, increase in earning assets partially offset by a $169.1 million,
or 16.4%, increase in interest-bearing liabilities.The $543,000 increase in the provision for loan losses for the quarter ended September 30,
2008 compared to the same period in the prior year is the result of our evaluation of the
required allowance amount based upon probable and reasonably estimable losses in our loan
portfolio.The $11.4 million decrease in noninterest (loss) income recorded for the quarter ended
September 30, 2008 when compared to the same period in the prior year is principally due to
other than temporary impairment charges related to $9.8 million of preferred stock of
Freddie Mac and Fannie Mae, $1.1 million related to one pooled trust preferred security,
$395,000 related to one mutual fund and $208,000 related to four common stocks, a $19,000
decrease in the net gains on sales of securities offset by a $172,000 increase in service
charges, resulting primarily from a $105,000 increase in overdraft fees, a $63,000 increase
in ATM fees as a result of increased volume in debit card transactions and additions made
to our ATM network and a $5,000 decrease in brokerage fees paid by Infinex, Inc.The $582,000 increase in noninterest expense for the quarter ended September 30, 2008 when
compared to the same period in the prior year was primarily attributable to, a $45,000
increase in service bureau fees, a $145,000 increase in occupancy and equipment costs, a
$108,000 increase in
 Rockville Financial, Inc.
    
    26




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##### Table of Contents



marketing and promotions, a $135,000 increase in insurance and FDIC assessments and a
$282,000 increase in other noninterest expenses offset by a decrease of $110,000 in salary
and employee benefits and a $23,000 decrease in professional fees. The $110,000 decrease in
salary and employee benefits reflects a $237,000 decrease in stock incentive award
expenses related to the Stock Incentive Award Plan, a decrease of $48,000 for estimated
bonus expense and a $111,000 decrease in pension and supplemental retirement and savings
agreement expenses offset by an increase of $277,000 in salary costs principally incurred
in connection with annual salary increases, the expansion of branch facilities and the
commercial banking division in the third quarter of 2008 when compared to the third quarter
of 2007. The $45,000 increase in service bureau fees is mainly due to a $10,000 increase in
ATM servicing fees and a $58,000 increase in wide area network telecommunications servicing
costs offset by a $24,000 decrease in core processing service costs. The higher servicing
costs are primarily attributable to continued expansion of the branch network. The $145,000
increase in occupancy expense is largely due to expansion of our branch and ATM network.
The $282,000 increase in other noninterest expenses primarily reflects an increase in
director fees and expenses of $44,000, including $34,000 in additional stock incentive plan
expenses, an increase in human resource and training expenses of $76,000, an increase in
off-balance sheet allowance expense of $17,000, and an increase in appraisals and credit
reports of $69,000 offset by a decrease in printing and forms expenses of $39,000.Net income decreased by $9.2 million, or 142.9%, to a net loss of $2.8 million for the nine
months ended September 30, 2008 from a net income of $6.4 million for the same period in
the prior year. The decrease in net income primarily resulted from a decrease in
noninterest income of $12.3 million, or 301.8%, an increase in noninterest expenses of $3.6
million, or 16.0%, and an increase in the provision for loan losses of $359,000, or 60.9%,
offset by a $2.7 million, or 9.4%, increase in our net interest income and a decrease in
the provision for income taxes of $4.3 million, or 135.8%. Income before taxes decreased
$13.5 million, or 140.5%, to a loss of $3.9 million for the nine months ending September
30, 2008 from income before taxes of $9.6 million for the same period in the prior year.
When excluding from both periods losses from other than temporary impairment of securities
and expenses relating to the issuance of restricted stock and stock options, income before
taxes would have increased $110,000, or 1.1% for the nine months ending September 30, 2008
when compared to the same period in the prior year versus decreasing $13.5 million when not
excluding those expenses. Losses from other than temporary impairment of securities were
$12.7 million for the nine months ended September 30, 2008 compared to none for the nine
months ended September 30, 2007 and was the primary change in noninterest (loss) income
between both periods. Expenses relating to the issuance of restricted stock and stock
options increased $965,000 to $1.6 million for the nine months ended September 30, 2008
when compared to $677,000 for the nine months ended September 30, 2007.The $2.7 million increase in our net interest income is attributable to a $5.8 million, or
2.8%, increase in average net interest-earning assets, partially offset by a 6 basis point
decline in our net interest margin. Our net interest margin was 3.08% for the nine months
ended September 30, 2008 compared to 3.14% for the same period in the prior year. The
increase in the average net interest-earning assets is the result of a $140.7 million, or
11.6%, increase in earning assets and partially offset by a $134.9 million, or 13.5%,
increase in interest-bearing liabilities.The $359,000 increase in the provision for loan losses for the first nine months ended
September 30, 2008 compared to the same period in the prior year is the result of our
evaluation of the required allowance amount based upon probable and reasonably estimable
losses in our loan portfolio.The $12.3 million decrease in noninterest (loss) income recorded for the nine months ended
September 30, 2008 when compared to the same period in the prior year is principally due to
other than temporary impairment charges related to $11.0 million of preferred stock of
Freddie Mac and Fannie Mae, $1.1 million related to one pooled trust preferred security,
$395,000 related to one mutual fund and $208,000 related to four common stocks, and a $52,000
decrease in the net gains on sales of securities offset by a $456,000 increase in service
charges, resulting primarily from a $211,000 increase in overdraft fees, a $167,000
increase in ATM fees as a result of increased volume in debit card transactions and
additions made to our ATM network and an increase in brokerage fees of $63,000 paid by
Infinex, Inc.
 Rockville Financial, Inc.
    
    27




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##### Table of Contents



Net Interest Income Analysis
 Average Balance Sheets, Interest and Yields/Costs:
 Rockville Financial, Inc.
    
    28




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##### Table of Contents



Three Months Ended September 30,2008
    
    
    2007Average
    
    
    Interest and
    
    
    Yield/
    
    
    Average
    
    
    Interest andBalance
    
    
    Dividends
    
    
    Cost
    
    
    Balance
    
    
    Dividends
    
    
    Yield/ Cost(Dollars in thousands)Interest-earning assets:Loans receivable, net
    
    $
    1,215,459
    
    
    $
    17,266
    
    
    
    5.68
    %
    
    $
    1,092,391
    
    
    $
    17,190
    
    
    
    6.29
    %Total investment securities
    
    
    184,930
    
    
    
    2,316
    
    
    
    5.01
    
    
    
    137,825
    
    
    
    1,577
    
    
    
    4.58Federal Home Loan Bank stock
    
    
    14,748
    
    
    
    93
    
    
    
    2.52
    
    
    
    10,206
    
    
    
    159
    
    
    
    6.23Other earning assets
    
    
    1,611
    
    
    
    1
    
    
    
    0.25
    
    
    
    2,911
    
    
    
    23
    
    
    
    3.16Total interest-earning assets
    
    
    1,416,748
    
    
    
    19,676
    
    
    
    5.56
    
    
    
    1,243,333
    
    
    
    18,949
    
    
    
    6.10Noninterest-earning assets
    
    
    60,549
    
    
    
    
    
    
    
    
    
    
    
    52,873Total assets
    
    $
    1,477,297
    
    
    
    
    
    
    
    
    
    
    $
    1,296,206Interest-bearing liabilities:NOW and money market accounts
    
    $
    264,788
    
    
    
    1,218
    
    
    
    1.84
    
    
    $
    197,310
    
    
    
    784
    
    
    
    1.59Savings accounts
    
    
    126,483
    
    
    
    194
    
    
    
    0.61
    
    
    
    126,924
    
    
    
    196
    
    
    
    0.62Time deposits
    
    
    493,085
    
    
    
    4,266
    
    
    
    3.46
    
    
    
    519,293
    
    
    
    5,995
    
    
    
    4.62Total interest-bearing deposits
    
    
    884,356
    
    
    
    5,678
    
    
    
    2.57
    
    
    
    843,527
    
    
    
    6,975
    
    
    
    3.31Mortgagors and investors escrow accounts

    
    2,490
    
    
    
    10
    
    
    
    1.61
    
    
    
    2,359
    
    
    
    9
    
    
    
    1.53Advances from the Federal Home Loan Bank


    313,480
    
    
    
    2,784
    
    
    
    3.55
    
    
    
    185,329
    
    
    
    2,166
    
    
    
    4.67Total interest-bearing liabilities
    
    
    1,200,326
    
    
    
    8,472
    
    
    
    2.82
    %
    
    
    1,031,215
    
    
    
    9,150
    
    
    
    3.55
    %Noninterest-bearing liabilities
    
    
    123,415
    
    
    
    
    
    
    
    
    
    
    
    108,499Total liabilities
    
    
    1,323,741
    
    
    
    
    
    
    
    
    
    
    
    1,139,714Capital
    
    
    153,556
    
    
    
    
    
    
    
    
    
    
    
    156,492Total liabilities and capital
    
    $
    1,477,297
    
    
    
    
    
    
    
    
    
    
    $
    1,296,206Net interest income
    
    
    
    
    
    $
    11,204
    
    
    
    
    
    
    
    
    
    
    $
    9,799Net interest rate spread (1)
    
    
    
    
    
    
    
    
    
    
    2.74
    %
    
    
    
    
    
    
    
    
    
    
    2.55
    %Net interest-earning assets (2)
    
    $
    216,422
    
    
    
    
    
    
    
    
    
    
    $
    212,118Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.16
    %
    
    
    
    
    
    
    
    
    
    
    3.15
    %Average interest-earning assets to
average interest-bearing 
liabilities
    
    
    
    
    
    
    
    
    
    
    118.03
    %
    
    
    
    
    
    
    
    
    
    
    120.57
    %
 
 (1)
    
    Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing liabilities.(2)
    
    Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.(3)
    
    Net interest margin represents the annualized net interest income divided by
average total interest-earning assets. Rockville Financial, Inc.
    
    29




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##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007Average
    
    
    Interest and
    
    
    Yield/
    
    
    Average
    
    
    Interest andBalance
    
    
    Dividends
    
    
    Cost
    
    
    Balance
    
    
    Dividends
    
    
    Yield/ Cost(Dollars in thousands)Interest-earning assets:Loans receivable, net
    
    $
    1,164,667
    
    
    $
    50,662
    
    
    
    5.80
    %
    
    $
    1,063,495
    
    
    $
    49,608
    
    
    
    6.22
    %Total investment securities
    
    
    169,189
    
    
    
    6,490
    
    
    
    5.11
    
    
    
    132,840
    
    
    
    4,460
    
    
    
    4.48Federal Home Loan Bank stock
    
    
    12,868
    
    
    
    377
    
    
    
    3.91
    
    
    
    9,960
    
    
    
    490
    
    
    
    6.56Other earning assets
    
    
    2,704
    
    
    
    33
    
    
    
    1.63
    
    
    
    2,462
    
    
    
    75
    
    
    
    4.06Total interest-earning assets
    
    
    1,349,428
    
    
    
    57,562
    
    
    
    5.69
    
    
    
    1,208,757
    
    
    
    54,633
    
    
    
    6.03Noninterest-earning assets
    
    
    58,053
    
    
    
    
    
    
    
    
    
    
    
    51,536Total assets
    
    $
    1,407,481
    
    
    
    
    
    
    
    
    
    
    $
    1,260,293Interest-bearing liabilities:NOW and money market accounts
    
    $
    243,214
    
    
    
    3,581
    
    
    
    1.96
    
    
    $
    188,196
    
    
    
    2,221
    
    
    
    1.57Savings accounts
    
    
    125,259
    
    
    
    574
    
    
    
    0.61
    
    
    
    128,834
    
    
    
    590
    
    
    
    0.61Time deposits
    
    
    515,159
    
    
    
    14,979
    
    
    
    3.88
    
    
    
    503,382
    
    
    
    17,126
    
    
    
    4.54Total interest-bearing deposits
    
    
    883,632
    
    
    
    19,134
    
    
    
    2.89
    
    
    
    820,412
    
    
    
    19,937
    
    
    
    3.24Mortgagors and investors escrow accounts
    
    
    3,262
    
    
    
    40
    
    
    
    1.63
    
    
    
    3,001
    
    
    
    37
    
    
    
    1.64Advances from the Federal Home Loan Bank


    247,506
    
    
    
    7,204
    
    
    
    3.88
    
    
    
    176,125
    
    
    
    6,159
    
    
    
    4.66Total interest-bearing liabilities
    
    
    1,134,400
    
    
    
    26,378
    
    
    
    3.10
    %
    
    
    999,538
    
    
    
    26,133
    
    
    
    3.49
    %Noninterest-bearing liabilities
    
    
    116,978
    
    
    
    
    
    
    
    
    
    
    
    104,311Total liabilities
    
    
    1,251,378
    
    
    
    
    
    
    
    
    
    
    
    1,103,849Capital
    
    
    156,103
    
    
    
    
    
    
    
    
    
    
    
    156,444Total liabilities and capital
    
    $
    1,407,481
    
    
    
    
    
    
    
    
    
    
    $
    1,260,293Net interest income
    
    
    
    
    
    $
    31,184
    
    
    
    
    
    
    
    
    
    
    $
    28,500Net interest rate spread (1)
    
    
    
    
    
    
    
    
    
    
    2.59
    %
    
    
    
    
    
    
    
    
    
    
    2.54
    %Net interest-earning assets (2)
    
    $
    215,028
    
    
    
    
    
    
    
    
    
    
    $
    209,219Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    3.08
    %
    
    
    
    
    
    
    
    
    
    
    3.14
    %Average interest-earning assets to

average interest-bearing 
liabilities
    
    
    
    
    
    
    
    
    
    
    118.96
    %
    
    
    
    
    
    
    
    
    
    
    120.93
    %
 
 (1)
    
    Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing liabilities.(2)
    
    Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.(3)
    
    Net interest margin represents the annualized net interest income divided by
average total interest-earning assets. Rockville Financial, Inc.
    
    30




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##### Table of Contents



Rate Volume Analysis
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2008Compared to
    
    
    Compared toSeptember 30, 2007
    
    
    September 30, 2007Increase (Decrease)
    
    
    
    
    
    
    Increase (Decrease)Due To
    
    
    
    
    
    
    Due ToVolume
    
    
    Rate
    
    
    Net
    
    
    Volume
    
    
    Rate
    
    
    Net(In thousands)Interest and dividend income:Loans receivable
    
    $
    557
    
    
    $
    (481
    )
    
    $
    76
    
    
    $
    3,626
    
    
    $
    (2,572
    )
    
    $
    1,054Securities interest, dividends &
income from other assets
    
    
    602
    
    
    
    49
    
    
    
    651
    
    
    
    1,451
    
    
    
    424
    
    
    
    1,875Total earning assets
    
    
    1,159
    
    
    
    (432
    )
    
    
    727
    
    
    
    5,077
    
    
    
    (2,148
    )
    
    
    2,929Interest expense:NOW and money market accounts
    
    
    297
    
    
    
    137
    
    
    
    434
    
    
    
    737
    
    
    
    623
    
    
    
    1,360Savings accounts
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (16
    )
    
    
    3
    
    
    
    (13
    )Time deposits
    
    
    (290
    )
    
    
    (1,439
    )
    
    
    (1,729
    )
    
    
    412
    
    
    
    (2,559
    )
    
    
    (2,147
    )Total interest-bearing deposits
    
    
    6
    
    
    
    (1,302
    )
    
    
    (1,296
    )
    
    
    1,133
    
    
    
    (1,933
    )
    
    
    (800
    )FHLB Advances
    
    
    947
    
    
    
    (329
    )
    
    
    618
    
    
    
    1,783
    
    
    
    (738
    )
    
    
    1,045Total interest bearing liabilities
    
    
    953
    
    
    
    (1,631
    )
    
    
    (678
    )
    
    
    2,916
    
    
    
    (2,671
    )
    
    
    245Change in net interest income
    
    $
    206
    
    
    $
    1,199
    
    
    $
    1,405
    
    
    $
    2,161
    
    
    $
    523
    
    
    $
    2,684
 Net Interest Income:
  Rockville Financial, Inc.
    
    31




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##### Table of Contents



Interest and Dividend Income:
  Interest Expense:
  Rockville Financial, Inc.
    
    32




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##### Table of Contents



Provision for Loan Losses:
 Noninterest (Loss) Income:
   Noninterest Expense:
 Rockville Financial, Inc.
    
    33




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In thousands)Salaries and employee benefits
    
    $
    4,083
    
    
    $
    4,193
    
    
    $
    (110
    )
    
    $
    13,649
    
    
    $
    12,113
    
    
    $
    1,536Service bureau fees
    
    
    943
    
    
    
    898
    
    
    
    45
    
    
    
    2,810
    
    
    
    2,506
    
    
    
    304Occupancy and equipment
    
    
    1,062
    
    
    
    917
    
    
    
    145
    
    
    
    3,095
    
    
    
    2,591
    
    
    
    504Professional fees
    
    
    377
    
    
    
    400
    
    
    
    (23
    )
    
    
    1,142
    
    
    
    1,173
    
    
    
    (31
    )Marketing and promotions
    
    
    294
    
    
    
    186
    
    
    
    108
    
    
    
    1,041
    
    
    
    803
    
    
    
    238Insurance and FDIC
Assessments
    
    
    178
    
    
    
    43
    
    
    
    135
    
    
    
    522
    
    
    
    143
    
    
    
    379Other
    
    
    1,296
    
    
    
    1,014
    
    
    
    282
    
    
    
    3,674
    
    
    
    3,020
    
    
    
    654Total noninterest expense
    
    $
    8,233
    
    
    $
    7,651
    
    
    $
    582
    
    
    $
    25,933
    
    
    $
    22,349
    
    
    $
    3,584
 th
 th
 Rockville Financial, Inc.
    
    34




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In thousands)Directors fees
    
    $
    209
    
    
    $
    165
    
    
    $
    44
    
    
    $
    631
    
    
    $
    537
    
    
    $
    94Telephone
    
    
    54
    
    
    
    42
    
    
    
    12
    
    
    
    155
    
    
    
    167
    
    
    
    (12
    )Postage
    
    
    100
    
    
    
    85
    
    
    
    15
    
    
    
    281
    
    
    
    280
    
    
    
    1Courier
    
    
    73
    
    
    
    79
    
    
    
    (6
    )
    
    
    256
    
    
    
    224
    
    
    
    32Dues and subscriptions
    
    
    49
    
    
    
    46
    
    
    
    3
    
    
    
    169
    
    
    
    170
    
    
    
    (1
    )Service charges
    
    
    51
    
    
    
    34
    
    
    
    17
    
    
    
    131
    
    
    
    96
    
    
    
    35Printing and forms
    
    
    77
    
    
    
    116
    
    
    
    (39
    )
    
    
    298
    
    
    
    237
    
    
    
    61Other
    
    
    683
    
    
    
    447
    
    
    
    236
    
    
    
    1,753
    
    
    
    1,309
    
    
    
    444Total other noninterest expense
    
    $
    1,296
    
    
    $
    1,014
    
    
    $
    282
    
    
    $
    3,674
    
    
    $
    3,020
    
    
    $
    654
   Income Tax (Benefit) Expense:
 Comparison of Financial Condition at September 30, 2008 and December 31, 2007
 Summary:
 Rockville Financial, Inc.
    
    35




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##### Table of Contents



Investment Securities:
 Lending Activities:
 Rockville Financial, Inc.
    
    36




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##### Table of Contents



Non-performing Assets:
 September 30,
    
    
    December 31,2008
    
    
    2007(Dollars in thousands)Nonaccrual loans:Residential(1)
    
    $
    2,061
    
    
    $
    407Commercial
    
    
    
    
    
    
    74Commercial business loans
    
    
    4,173
    
    
    
    692Installment, collateral and other loans
    
    
    11
    
    
    
    5Total nonaccrual loans(2)
    
    
    6,245
    
    
    
    1,178Accruing loan past due 90 days or more
    
    
    
    
    
    
    Other accruing loans
    
    
    
    
    
    
    Troubled debt restructurings
    
    
    377
    
    
    
    391Total non-performing loans
    
    
    6,622
    
    
    
    1,569Real estate owned
    
    
    
    
    
    
    Total non-performing assets
    
    $
    6,622
    
    
    $
    1,569Total non-performing loans to total loans
    
    
    0.53
    %
    
    
    0.14
    %Total non-performing loans to total assets
    
    
    0.44
    %
    
    
    0.12
    %Allowance for loan losses as a percent of total loans
    
    
    0.89
    %
    
    
    0.94
    %Allowance for loan losses as a percent of
non-performing loans
    
    
    169
    %
    
    
    677
    %
 
 (1)
    
    Residential mortgage loans include one-to-four family mortgage loans, home
equity loans, and home equity lines of credit.(2)
    
    The amount of income that was contractually due but not recognized on
nonaccrual loans totaled $151,000 and $53,000 at September 30, 2008 and December 31,
2007, respectively. Allowance for Loan Losses:
   Rockville Financial, Inc.
    
    37




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##### Table of Contents



Accounting by Creditors for Impairment of a Loan Accounting by Creditors for Impairment for
Loan-Income Recognition and Disclosures
    Rockville Financial, Inc.
    
    38




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##### Table of Contents



Deposits:
 Liquidity and Capital Resources:
      Rockville Financial, Inc.
    
    39




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##### Table of Contents



Rockville Financial, Inc.
    
    40




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 General:
  Quantitative Analysis
 Income Simulation:
 PercentageIncrease (Decrease) inEstimated NetInterest IncomeOver 12 Months300 basis point increase in rates
    
    
    (1.44
    )50 basis point decrease in rates
    
    
    0.90
 Rockville Financial, Inc.
    
    41




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures:
 Changes in Internal Controls:
 Rockville Financial, Inc.
    
    42




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##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (c)
    
    The following table provides information about repurchases of common stock by the
Company during the quarter ended September 30, 2008:
 Issuer Purchases of Equity SecuritiesMaximumNumber ofTotal Number of
    
    
    Shares thatShares
    
    
    May Yet BeTotal
    
    
    
    
    
    
    Purchased as
    
    
    PurchasedNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Under theShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    Programs(1)7/1/08  7/31/08
    
    
    40,400
    
    
    $
    12.68
    
    
    
    40,400
    
    
    
    694,7188/1/08  8/31/08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    694,7189/1/08  9/30/08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    694,718Total
    
    
    40,400
    
    
    $
    12.68
    
    
    
    40,400
    
    
    
    694,718
 
 (1)
    
    Effective January 2008, the Company adopted a plan to repurchase of up to
978,400 of our outstanding shares of common stock on the open market. At June 30,
2008, there were 735,118 shares available to be purchased under this program. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  Rockville Financial, Inc.
    
    43




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##### Table of Contents



Item 6. Exhibits
 3.1
    
    Certificate of Incorporation of Rockville Financial, Inc.
(incorporated herein by reference to Exhibit 3.1 to the Registration Statement on
the Form S-1 filed for Rockville Financial Inc., as amended, initially filed on
December 17, 2004 (File No. 333-121421))3.2
    
    Bylaws of Rockville Financial, Inc. (incorporated herein by reference
to Exhibit 3.2 to the Quarterly Report on Form 10-Q filed for Rockville Financial,
Inc. on May 13, 2005)3.2.1
    
    Amendment dated December 12, 2007 to the Bylaws of Rockville
Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Current
Report on the Companys Form 8-K filed on December 12, 2007)3.2.2
    
    Amendment dated February 13, 2008 to the Bylaws of Rockville
Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Current
Report on the Companys Form 8-K filed on February 14, 2008)3.3
    
    Form of Common Stock Certificate of Rockville Financial, Inc.
(incorporated herein by reference to Exhibit 4 to the Registration Statement on
the Form S-1 filed for Rockville Financial, Inc., as amended, initially filed on
December 17, 2004 (File No. 333-121421))10.1
    
    Employment Agreement by and among Rockville Financial, Inc.,
Rockville Bank and William J. McGurk, effective May 20, 2005 (incorporated herein
by reference to Exhibit 10.4 to the Post Effective Amendment No. 1 to the
Registration Statement on Form S-1 of Rockville Financial, Inc. filed on April 22,
2005)10.1.1
    
    Amendment dated December 22, 2006 to the Employment Agreement dated as of May
20, 2005 between Rockville Financial, Inc., Rockville Bank and William J. McGurk
(incorporated herein by reference to Exhibit 10.1.1 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2006 filed on March 16, 2007)10.2
    
    Employment Agreement by and among Rockville Financial, Inc.,
Rockville Bank and Joseph F. Jeamel, Jr., effective May 20, 2005 (incorporated
herein by reference to Exhibit 10.4.1 to the Post Effective Amendment No. 1 to the
Registration Statement on Form S-1 filed for Rockville Financial, Inc. filed on
April 22, 2005)10.2.1
    
    Amendment dated December 22, 2006 to the Employment Agreement dated as of May
20, 2005 between Rockville Financial, Inc., Rockville Bank and Joseph F. Jeamel,
Jr. (incorporated herein by reference to Exhibit 10.2.1 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2006 filed on March 16, 2007)10.3
    
    Employment Agreement by and among Rockville Financial, Inc.,
Rockville Bank and Gregory A. White effective May 20, 2005 (incorporated herein by
reference to Exhibit 10.4.2 to the Post Effective Amendment No. 1 to the
Registration Statement filed on Form S-1 filed for Rockville Financial, Inc. filed
on April 22, 2005)10.3.1
    
    Amendment dated December 22, 2006 to the Employment Agreement dated as of May
20, 2005 between Rockville Financial, Inc., Rockville Bank and Gregory A. White
(incorporated herein by reference to Exhibit 10.3.1 to the Companys Annual Report
on Form 10-K for the year ended December 31, 2006 filed on March 16, 2007)10.4
    
    Employment Agreement by and among Rockville Financial, Inc.,
Rockville Bank and Christopher E. Buchholz, effective June 7, 2006 (incorporated
herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed for
Rockville Financial, Inc. filed on June 13, 2006)10.5
    
    Supplemental Savings and Retirement Plan of Rockville Bank as amended
and restated effective December 31, 2007 (incorporated herein by reference to
Exhibit 10.5 to the Current Report on Form 8-K filed for Rockville Financial, Inc.
filed on December 18, 2007)
 Rockville Financial, Inc.
    
    44




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##### Table of Contents



10.6
    
    Rockville Bank Officer Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.2.3 to the Companys Annual Report on Form 10-K
for the year ended December 31, 2005 filed on March 31, 2006)10.7
    
    Rockville Bank Supplemental Executive Retirement Agreement for Joseph
F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.9 to the
Registration Statement filed on Form S-1 filed for Rockville Financial, Inc. filed
on December 17, 2004)10.7.1
    
    First Amendment to the Supplemental Executive Retirement Agreement for Joseph F.
Jeamel, Jr. (incorporated herein by reference to Exhibit 10.7.1 to the Current
Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007)10.8
    
    Executive Split Dollar Life Insurance Agreement for Joseph F. Jeamel,
Jr. (incorporated herein by reference to Exhibit 10.11 to the Registration
Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on December
17, 2004)10.9
    
    Rockville Bank Supplemental Executive Retirement Plan (incorporated
herein by reference to Exhibit 10.12 to the Registration Statement filed on Form
S-1 filed for Rockville Financial, Inc. filed on December 17, 2004)10.10
    
    Rockville Financial, Inc. 2006 Stock Incentive Award Plan
(incorporated herein by reference to Appendix B in the Definitive Proxy Statement
on Form 14A for Rockville Financial, Inc. filed on July 3, 2006)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
filed herewith.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
filed herewith.32
    
    Section 1350 Certification of the Chief Executive Officer and Chief
Financial Officer attached hereto.
 Rockville Financial, Inc.
    
    45




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##### Table of Contents



SIGNATURES
  Rockville Financial, Inc.By:
    
    /s/ Gregory A. White

Gregory A. WhiteSVP, Chief Financial Officer and TreasurerDate:
    
    November 10, 2008
 Rockville Financial, Inc.
    
    46