UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Fiscal Year Ended December 31, 2009

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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 offices)		(Zip Code)

Title of Class		Name of each exchange where registered
Common Stock, no par value		NASDAQ Global Select Stock Market

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes. þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. oYes. þ No

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

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12B-2 of the Exchange Act

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act). Yes o No þ

The aggregate market value of voting and non-voting common equity held by non-affiliates of Rockville Financial, Inc. as of June 30, 2009 was $70.4 million based upon the closing price of $10.95 as of June 30, 2009, the last business day of the registrant’s most recently completed second quarter. Directors and officers of the Registrant are deemed to be affiliates solely for the purposes of this calculation.

As of February 26, 2010, there were 19,554,774 shares of Registrant’s common stock outstanding.

Portions of the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders, expected to be filed pursuant to Regulation 14A within 120 days after the end of the 2009 fiscal year, are incorporated by reference into Part III of this Report on Form 10-K.

 

 

Rockville Financial, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2009
Table of Contents

		Page No.
Part I
Forward-looking statements			3
Item 1. Business			5
Item 1A. Risk Factors			34
Item 1B. Unresolved Staff Comments			39
Item 2. Properties			40
Item 3. Legal Proceedings			40
Item 4. Removed and reserved			40
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			41
Item 6. Selected Financial Data			44
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			61
Item 8. Financial Statements and Supplementary Data			63
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			114
Item 9A. Controls and Procedures			114
Item 9B. Other Information			114
Part III
Item 10. Directors, Executive Officers and Corporate Governance			115
Item 11. Executive Compensation			115
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			115
Item 13. Certain Relationships and Related Transactions, and Director Independence			115
Item 14. Principal Accountant Fees and Services			115
Part IV
Item 15. Exhibits and Financial Statement Schedules			116
Signatures			118
EX-10.1.1
EX-10.2.1
EX-10.4.1
EX-10.5.1
EX-21
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32

Part I

FORWARD-LOOKING STATEMENTS

This Form 10-K 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.
	•		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.
	•		If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
	•		Our stock value may be negatively affected by federal regulations restricting takeovers and our mutual holding company structure.
	•		Persons who purchase our stock will own a minority of Rockville Financial, Inc.’s common stock and might not be able to exercise voting control over most matters put to a vote of stockholders.
	•		When we declare dividends on our common stock, Rockville Financial MHC, Inc. might be prohibited from waiving the receipt of dividends by current Federal Reserve Board policy.
	•		Further implementation of our stock benefit plans could increase our costs, which could reduce our income.

	•		Because we intend to continue to increase our commercial real estate and commercial business loan originations, our lending risk may increase, and downturns in the real estate market or local economy could adversely affect our earnings.
	•		The trading volume in our stock is less than in larger publicly traded companies which can cause price volatility, hinder your ability to sell our common stock and may lower the market price of the stock.
	•		The Emergency Economic Stabilization Act (“EESA”) of 2008 has had 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 did not participate, could dramatically change the competitive environment in which we operate.

Any forward-looking statements made by or on behalf of us in this Form 10-K speak only as of the date of this Form 10-K. 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, consult any further disclosures of a forward-looking nature we may make in future filings.

Item 1. Business

General

Rockville Financial, Inc., (the “Company”), a state-chartered mid-tier stock holding company holds all of the common stock of Rockville Bank (“the Bank”). The Federal Reserve Board regulates the Company, a mid-tier stock holding company, and its parent, Rockville Financial MHC, Inc., the top-tier mutual holding company.

The Bank is a state-chartered stock savings bank organized in Connecticut in 1858 that provides a full range of banking services to consumer and commercial customers through its main office in Rockville, CT, twenty-one branches located in Hartford, New London and Tolland Counties in Connecticut and 45 automated teller machines (“ATM”), including 13 stand-alone ATM facilities. The Bank is regulated by the State of Connecticut Department of Banking and the Federal Deposit Insurance Corporation (the “FDIC”). The Bank’s deposits are insured to the maximum allowable under the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”).

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, families, professionals and businesses in the market areas it serves. Rockville Bank is a community-oriented provider of traditional banking products and services to business organizations and individuals, offering products such as residential, commercial real estate, commercial business and consumer loans and a variety of deposit products.

The Company’s business philosophy is to remain an independent, 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 and expanding our commercial real estate and commercial business lending activities.

The Company employed 211 full-time equivalent employees at December 31, 2009. Management of the Company and the Bank are substantially identical. The Company does not own or lease any property but instead uses the premises, equipment and furniture of the Bank.

Competition

We face competition within our market area both in making loans and attracting deposits. Hartford, New London and Tolland Counties have a high concentration of financial institutions including large commercial banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. As of June 30, 2009, based on the FDIC’s most recent annual Summary of Deposits Report, our market share of deposits represented 25.1% of deposits in Tolland County, the second largest market share in that county, 2.0% of deposits in Hartford County and 0.4% of deposits in New London County.

Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while continuing to support the communities within our service area.

Market Area

We operate in a primarily suburban market area that has a stable population and household base. All of our current offices are located in Connecticut in Hartford, New London and Tolland Counties. Our market area is located in the north central part of Connecticut including, in part, the eastern part of the greater Hartford metropolitan area. Our main office is located in Rockville and is located approximately 15 miles from Hartford. Hartford, New London and Tolland Counties have a mix of industry groups and employment sectors, including services, wholesale/retail trade and manufacturing as the basis of the local economy. Our primary market area for deposits includes the communities in which we maintain our banking office locations. Our primary lending area is broader

than our primary deposit market area and includes all of Hartford, New London and Tolland Counties, and parts of the adjacent Windham and Middlesex Counties. In addition to our primary lending areas we have expanded lending activities to include an out of state regional commercial real estate lending program.

Lending Activities

Historically, our principal lending activity has been the origination of first mortgage loans for the purchase or refinancing of one-to-four family residential real estate. One-to-four family residential real estate mortgage loans represented $754.8 million, or 55.0%, of our loan portfolio at December 31, 2009. We also offer commercial real estate loans, commercial business loans, construction mortgage loans and consumer loans. Commercial real estate loans totaled $426.0 million, or 31.0%, of our total loan portfolio at December 31, 2009. Commercial business loans totaled $113.2 million, or 8.3%, of our total loan portfolio at December 31, 2009. Construction mortgage loans totaled $71.1 million, or 5.2%, of our loan portfolio at December 31, 2009. Consumer loans, consisting primarily of loans on new and used automobiles, loans secured by deposit accounts and unsecured personal loans, totaled $7.7 million, or 0.6%, of our total loan portfolio at December 31, 2009. As of December 31, 2009, loans to borrowers engaged in similar activities did not exceed 10% of total loans outstanding. The largest exposure to a related group was $19.5 million at December 31, 2009. These loans are performing according to their terms. Our net deferred loan fees and premiums totaled $632,000 at December 31, 2009.

The composition of the Bank’s loan portfolio was as follows at the dates indicated:

		At December 31,
		2009								2008								2007								2006								2005
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in thousands)
Real estate loans:
Residential (1)		$	754,838				54.98	%		$	746,041				57.26	%		$	666,003				59.18	%		$	640,076				61.46	%		$	557,306				64.31	%
Commercial			426,028				31.03				351,474				26.97				284,460				25.28				232,550				22.33				149,006				17.19
Construction (2)			71,078				5.18				89,099				6.84				70,617				6.27				63,902				6.14				47,105				5.44
Commercial business loans			113,240				8.25				106,684				8.19				92,869				8.25				97,234				9.34				109,099				12.59
Installment, collateral and other loans			7,742				0.56				9,629				0.74				11,469				1.02				7,607				0.73				4,119				0.47
Total loans			1,372,926				100.00	%			1,302,927				100.00	%			1,125,418				100.00	%			1,041,369				100.00	%			866,635				100.00	%
Net deferred loan costs and premiums			632								1,417								1,529								1,813								1,740
Allowance for loan losses			(12,539	)							(12,553	)							(10,620	)							(9,827	)							(8,675	)
Loans, net		$	1,361,019							$	1,291,791							$	1,116,327							$	1,033,355							$	859,700

Residential Mortgage Loans: One of our primary lending activities consists of the origination of one-to-four family residential mortgage loans that are primarily secured by properties located in Hartford, New London and Tolland Counties. Of the $754.8 million one-to-four family residential mortgage loans at December 31, 2009, $69.6 million were fixed rate home equity loans and $118.7 million consisted of balances outstanding on home equity lines of credit. Generally, one-to-four family residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We usually do not make loans with a loan-to-value ratio in

excess of 97% for loans secured by single-family homes. Fixed rate mortgage loans generally are originated for terms of 10, 15, 20, 25 and 30 years. Typically, all fixed rate residential mortgage loans are underwritten according to Federal Home Loan Mortgage Corporation (“Freddie Mac”) policies and procedures. Fixed rate residential mortgage loans are periodically sold in the secondary market. We will usually retain the servicing rights for all loans that we sell in the secondary market. We originated $132.4 million of fixed rate one-to-four family residential loans during the year ended December 31, 2009, $44.0 million of which were sold in the secondary market.

We also offer adjustable-rate mortgage loans for one-to-four family properties, with an interest rate which adjusts annually based on the one-year Constant Maturity Treasury Bill Index, after either a one-, three-, four-, five-, seven-, or nine-year initial fixed rate period. We originated $71.7 million of adjustable rate one-to-four family residential loans during the year ended December 31, 2009. Additionally, we purchased $2.5 million in adjustable rate mortgages from two local mortgage banking firms during the year ended December 31, 2009. Our adjustable rate mortgage loans generally provide for maximum rate adjustments of 200 basis points per adjustment, with a lifetime maximum adjustment up to 6%, regardless of the initial rate. Our adjustable rate mortgage loans amortize over terms of up to 30 years.

Adjustable rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable rate mortgage loans may be limited during periods of rapidly rising interest rates. Of our one-to-four family residential loans, $178.7 million, or 31.5%, had adjustable rates of interest at December 31, 2009 and $86.4 million of these loans will see a rate reset in the next twelve months. Continued declines in real estate values and the slow down in the housing market may make it more difficult for borrowers experiencing financial difficulty to sell their homes or refinance their debt due to their declining collateral values.

In an effort to provide financing for low and moderate income home buyers, we offer a first time home buyer program at reduced rates and favorable closing costs. This program allows the first time home buyer to borrow with lower down payment requirements, lower origination points, and reduced fees. These loans are offered with adjustable rates of interest at terms of up to 30 years. Such loans are secured by one-to-four family residential properties. All of these loans are originated using government agency underwriting guidelines.

All residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property. We also require homeowner’s insurance and, where circumstances warrant, flood insurance on properties securing real estate loans. At December 31, 2009, our largest residential mortgage loan had a principal balance of $1.6 million. This loan is performing in accordance with its repayment terms.

We also offer home equity loans and home equity lines of credit, both of which are secured by owner-occupied one-to-four family residences. At December 31, 2009, home equity loans and equity lines of credit totaled $188.3 million, or 13.7%, of total loans. At December 31, 2009, the unadvanced amounts of home equity lines of credit totaled $125.5 million. The underwriting standards utilized for home equity loans and home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Home equity loans are offered with fixed rates of interest and with terms up to 15 years. The loan-to-value ratio for our home equity loans and our lines of credit is generally limited to no more than 90%. Our home equity lines of credit have ten year terms and adjustable rates of interest which are indexed to the prime rate, as reported in The Wall Street Journal. Interest rates on home equity lines of credit are generally limited to a maximum rate of 18% per annum.

Commercial Real Estate Loans: We originate commercial real estate loans and loans on owner- occupied properties used for a variety of business purposes including small office buildings, industrial facilities and retail facilities. These projects are generally located in our primary market

area. At December 31, 2009, commercial mortgage loans totaled $426.0 million, or 31.0%, of total loans. Our commercial real estate underwriting policies provide that typically such real estate loans may be made in amounts of up to 80% of the appraised value of the property provided such loan complies with our current loans-to-one borrower limit. Our commercial real estate loans may be made with terms of up to 20 years and amortization schedules up to 30 years and are offered with interest rates that are fixed or adjust periodically and are generally indexed to the Federal Home Loan Bank of Boston Classic Advance Rates. In reaching a decision on whether to make a commercial real estate loan, we consider gross revenues and the net operating income of the property, the borrower’s expertise, business cash flow and credit history, and the appraised value of the underlying property. In addition, with respect to commercial real estate rental properties, we will also consider the terms and conditions of the leases and the credit quality of the tenants. We typically require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before interest, taxes, depreciation and amortization divided by interest expense and current maturities of long term debt) of at least 1.15 times. Environmental surveys are generally required for commercial real estate loans. Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals and owners of 20% or more of the entity.

A commercial borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and typically includes periodic face-to-face meetings with the borrower. We generally require commercial borrowers to provide updated financial statements and federal tax returns annually. These requirements also apply to all guarantors on commercial loans. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a tenant list and copies of leases, as applicable. The largest commercial real estate loan or commitment as of December 31, 2009 was a loan for $19.5 million, which was performing according to its terms.

Loans secured by commercial real estate, including multi-family properties, generally involve larger principal amounts and a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

Commercial Construction Loans: We offer commercial construction loans including real estate subdivision development loans to licensed contractors and builders for the construction and development of commercial real estate projects and one-to-four family residential properties. At December 31, 2009, commercial construction loans totaled $62.6 million, which amounted to 4.6%, of total loans outstanding. At December 31, 2009, the unadvanced portion of these construction loans totaled $83.6 million. Our commercial real estate underwriting policies provide that typically such real estate loans may be made in amounts of up to 80% of the appraised value of the property provided such loan complies with our current loans-to-one borrower limit. We extend loans to residential subdivision developers for the purpose of land acquisition, the development of infrastructure and the construction of homes. Advances are determined as a percentage of cost or appraised value (whichever is less) and the project is physically inspected prior to each advance. We typically limit the numbers of model homes financed by a customer, with the majority of construction advances supported by purchase contracts. As of December 31, 2009, the largest outstanding commercial construction loan commitment to a single borrower totaled $14.8 million with $10.5 million of advances drawn as of December 31, 2009, which were performing according to their terms. Commercial real estate subdivision loans, commercial real estate and one-to-four family residential loans to contractors entails significant additional risks as compared with single-family residential mortgage lending to owner-occupants. These loans typically involve large loan balances concentrated in single borrowers or groups of related borrowers. A continued economic downturn could have an additional adverse impact on the value of the properties securing construction loans and on the borrower’s ability to sell the units for the amounts necessary to complete the project and repay the loans.

Residential Construction Loans: We originate construction loans to individuals and contractors for the construction and acquisition of personal residences. At December 31, 2009, residential construction mortgage loans amounted to $8.5 million, or 0.6%, of total loans. At December 31, 2009, the unadvanced portion of these construction loans totaled $2.9 million.

Our residential construction mortgage loans generally provide for the payment of interest only during the construction phase, which is typically up to nine months although our policy is to consider construction periods as long as 12 months. At the end of the construction phase, the construction loan converts to a long-term owner-occupied residential mortgage loan. Construction loans can be made with a maximum loan-to-value ratio of 80%. At December 31, 2009, our largest residential construction mortgage loan commitment was for $2.0 million, all of which had been disbursed. This loan is performing according to its terms. Construction loans to individuals are generally made on the same terms as our one-to-four family mortgage loans.

Before making a commitment to fund a residential construction loan, we require an appraisal of the property by an independent licensed appraiser. We also review and inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method.

Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the actual cost (including interest) of construction and other assumptions. If the estimate of construction cost is too low, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value is too high, we may be confronted with a project, when completed, with a value that is insufficient to assure full payment. Construction lending contains a unique risk characteristic as loans are originated under market and economic conditions that may change between the time of origination and the completion and subsequent purchaser financing of the property.

Commercial Business Loans: At December 31, 2009, we had $113.2 million in commercial business loans, of which $24.5 million were guaranteed by either the Small Business Administration (“SBA”) or the United States Department of Agriculture (“USDA”). We occasionally purchase USDA guaranteed loans in the secondary loan market from various experienced brokers. These loans carry a variable rate and adjust on a quarterly basis using the prime rate as the base index. There is no risk of loss of principal or accrued interest up to loan payment dates, as we only purchase the guaranteed portion of the loan. The guarantee is that of the full faith and credit of the United States of America. We determine the loans to be purchased based on net yield, borrower credit rating, size and the business segment composition of the existing portfolio. Monthly payments are received directly from the original lending institution. As of December 31, 2009, of the $24.5 million guaranteed loans, $1.8 million are SBA loans originated by us and $22.7 million were purchased and are fully guaranteed by the USDA. In addition to the SBA and USDA loans, our commercial business loan portfolio at December 31, 2009 included $33.8 million in revolving business lines of credit with an additional $57.7 million of unused lines of credit commitments and $54.9 million in commercial business term loans. Total commercial business loans amounted to 8.3% of total loans as of December 31, 2009.

We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses. Commercial business lending products include term loans and revolving lines of credit. The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit (15% of equity capital and our allowance for loan losses, pursuant to Connecticut law) to which there were no exceptions as of December 31, 2009. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or financing short term cash needs. Commercial business loans are made with either adjustable or fixed rates of interest. Variable rates are based on the prime rate, as published in The Wall Street Journal, plus a margin. Fixed rate commercial loans are set at a margin above the Federal Home Loan Bank of Boston Classic Advance Rates.

When making commercial business loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial business loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial business loans are typically made up to 80% of the value of the loan collateral. We do not typically make unsecured commercial business loans greater than $100,000.

Commercial business loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards. At December 31, 2009, our largest commercial business loan commitment totaled $15.0 million with $12.9 million of advances drawn as of December 31, 2009, which were performing according to their terms. In addition to the commercial business loans discussed above, we had $10.6 million in outstanding letters of credit as of December 31, 2009.

Installment, Collateral and Other Loans: We offer a limited range of installment and collateral consumer loans, principally to customers residing in our primary market area with acceptable credit ratings. Our installment and collateral consumer loans generally consist of loans on new and used automobiles, including indirect automobile loans, loans collateralized by deposit accounts and unsecured personal loans. Installment and collateral consumer loans totaled $7.7 million or 0.6% of our total loan portfolio at December 31, 2009. This portfolio includes $2.0 million of fully secured collateral loans, $5.0 million of direct and indirect auto loans and $754,000 of other consumer unsecured loans. While the asset quality of these portfolios is currently good, there is increased risk associated with auto and consumer loans during economic downturns as increased unemployment and inflationary costs may make it more difficult for some borrowers to repay their loans.

Origination, Purchasing and Servicing of Loans: All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future level of interest rates.

Generally, we retain in our portfolio all loans that we originate, however, for strategic reasons, including our interest rate risk management objectives, we periodically sell fixed rate residential mortgage loans which conform to the underwriting standards specified by Freddie Mac. We also sell all mortgage loans insured by the Connecticut Housing Finance Authority (“CHFA”). All one-to-four family loans that we sell are sold pursuant to master commitments negotiated with Freddie Mac and are sold on a non-recourse basis. Historically, in such instances, our loans have been typically sold to either Federal National Mortgage Association (“Fannie Mae”) or Freddie Mac, and we have retained the rights to service those loans. We currently have no reason to believe our practices will change in the near future. Depending on interest rate levels at the time of any such sale, loans may be sold at either a net gain or a net loss. Additionally, there is no guarantee we will be able to reinvest the proceeds from any future loan sales at interest rates comparable to the interest rates on the loans that are sold. Reinvestment in loans with lower interest rates would result in lower interest income on the reinvested proceeds compared to the interest income previously generated by the loans that were sold.

At December 31, 2009, the Company was servicing loans sold in the amount of $57.7 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.

In addition to purchasing loans guaranteed by the USDA or SBA, the Company purchases adjustable rate one-to-four family residential mortgage loans from two local mortgage banking firms licensed with the Connecticut Department of Banking. These local mortgage bankers are not employed by the Company and sell their loans based on competitive pricing. During the year ended December 31, 2009, the Company purchased $2.5 million in adjustable rate loans from these firms, underwritten to the same credit specifications as the Company’s internally originated loans.

Loan Maturity Schedule

The following table sets forth the loan maturity schedule at December 31, 2009:

		Loans Maturing
						After One
		Within One				But Within
		Year				Five Years				After Five Years				Total
		(In thousands)
Real estate loans:
Residential(1)		$	1,329			$	27,178			$	726,331			$	754,838
Commercial			8,063				76,036				341,929				426,028
Construction			11,130				21,400				38,548				71,078
Commercial business loans			2,378				33,970				76,892				113,240
Installment, collateral and other loans			228				5,603				1,911				7,742
Total		$	23,128			$	164,187			$	1,185,611			$	1,372,926

Loans Contractually Due Subsequent to December 31, 2009

The following table sets forth the scheduled repayments of fixed and adjustable rate loans at December 31, 2009 that are contractually due after December 31, 2010:

		Due After December 31, 2010
		Fixed				Adjustable				Total
		(In thousands)
Real estate loans:
Residential(1)		$	456,689			$	296,820			$	753,509
Commercial			164,693				253,272				417,965
Construction			—				59,948				59,948
Commercial business loans			17,520				93,342				110,862
Installment, collateral and other loans			6,941				573				7,514
Total loans		$	645,843			$	703,955			$	1,349,798

Loan Approval Procedures and Authority: The Company’s lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by the Bank’s Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan, and the adequacy of the value of the property that will secure the loan, if applicable. To assess the borrower’s ability to repay, we review the employment and credit history and information on the historical and projected income and expenses of borrowers.

The Company’s policies and loan approval limits are established by the Bank’s Board of Directors. The Board of Directors has designated lending authority based on officer level and loan type to a limited group of officers to approve loans of various amounts up to $500,000. The President, the Executive Vice President and the Senior Vice President, Commercial Banking Officer can approve loans for up to and including $1.5 million. Loans over $1.5 million up to $5.0 million are approved by the Board of Director’s Lending Committee. Loans above $5.0 million must be approved by the Board of Directors.

Non-performing and Problem Assets Delinquency notices are mailed monthly to all delinquent borrowers, advising them of the amount of their delinquency. When a loan becomes more than 30 days delinquent, the Bank sends a letter advising the borrower of the delinquency. The borrower is given 30 days to pay the delinquent payments or to contact the Bank to make arrangements to bring the loan current over a longer period of time. If the borrower fails to bring the loan current within 90 days from the original due date or to

make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are started. We may consider forbearance in select cases where a temporary loss of income is the primary cause of the delinquency, if a reasonable plan is presented by the borrower to cure the delinquency in a reasonable period of time after his or her income resumes.

All non-commercial mortgage loans are reviewed on a regular basis, and such loans are placed on non-accrual status when they become more than 90 days delinquent. Commercial real estate and commercial business loans are evaluated for non-accrual status on a case-by-case basis, but are typically placed on a non-accrual status when they become more than 90 days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is reversed, and further income is recognized only to the extent received. For the year ended December 31, 2009, $233,000 of interest income related to non-accrual loans was reversed compared to $237,000 recorded for 2008.

Classified Assets: Under our internal risk rating system, we currently classify loans and other assets considered to be of lesser quality as “substandard,” “doubtful,” “loss” or “impaired” assets. An asset is considered “substandard” if it is inadequately protected by either the current net worth or the paying capacity of the obligor or by the collateral pledged, if any. “Substandard” assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets classified as “impaired” are those that exhibit elevated risk characteristics that differentiate themselves from the homogeneous loan categories.

The loan portfolio is reviewed on a regular basis to determine whether any loans require risk classification or reclassification. Not all classified assets constitute non-performing assets.

Loan Delinquencies

The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

		Loans Delinquent For																Total
		60-89 Days								90 Days and Over
		Number				Amount				Number				Amount				Number				Amount
		(Dollars in thousands)
At December 31, 2009
Residential(1)			11			$	2,072				17			$	1,970				28			$	4,042
Commercial			1				421				5				2,242				6				2,663
Construction			—				—				7				6,630				7				6,630
Commercial business loans			1				20				2				41				3				61
Installment, collateral and other loans			—				—				—				—				—				—
Total			13			$	2,513				31			$	10,883				44			$	13,396
At December 31, 2008
Residential(1)			9			$	1,237				8			$	1,357				17			$	2,594
Commercial			2				652				2				1,202				4				1,854
Construction			—				—				4				3,021				4				3,021
Commercial business loans			3				923				2				372				5				1,295
Installment, collateral and other loans			3				47				8				339				11				386
Total			17			$	2,859				24			$	6,291				41			$	9,150
At December 31, 2007
Residential(1)			4			$	389				6			$	407				10			$	796
Commercial			2				79				1				74				3				153
Construction			1				515				—				—				1				515
Commercial business loans			2				164				2				692				4				856
Installment, collateral and other loans			2				4				—				—				2				4
Total			11			$	1,151				9			$	1,173				20			$	2,324

Non-performing Assets: The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Once a loan is 90 days delinquent or either the borrower or the loan collateral experiences an event that makes collectibility suspect, the loan is placed on “non-accrual” status. Company policy requires six months of continuous payments in order for the loan to be removed from non-accrual status.

		At December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands)
Non-accrual loans:
Residential(1)		$	3,106			$	2,607			$	407			$	422			$	821
Commercial			2,242				2,726				74				311				667
Construction			6,630				4,385				—				—				—
Commercial business loans			61				334				692				114				172
Installment, collateral and other loans			7				11				5				8				6
Total non-accrual loans(2)			12,046				10,063				1,178				855				1,666
Accruing loans past due 90 days or more			—				—				—				—				4,897	(3)
Other accruing loans			—				—				—				78				—
Troubled debt restructurings			—				372				391				560				614
Total non-performing loans			12,046				10,435				1,569				1,493				7,177
Other real estate owned			3,061				—				—				—				—
Other non-performing assets			—				—				—				—				—
Total non-performing assets		$	15,107			$	10,435			$	1,569			$	1,493			$	7,177
Total non-performing loans to total loans			0.88	%			0.80	%			0.14	%			0.14	%			0.83	%(4)
Total non-performing loans to total assets			0.77	%			0.68	%			0.12	%			0.12	%			0.68	%(5)

Potential problem loans: The Bank performs an internal analysis of the loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated, Special Mention, Substandard or Doubtful are reviewed by management on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as being Loss are normally fully charged off. Typically, loans risk rated Substandard or more severe are transferred to the Special Assets area. All special mention, substandard and doubtful loans are included on the Company’s “watchlist” which is updated quarterly. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation for further discussion of non-performing assets.

The Company closely monitors the watchlist for signs of deterioration to mitigate the growth in non-accrual loans. At December 31, 2009, $15.8 million of commercial loans and $1.5 million of residential and consumer loans were included on the watchlist that are not considered impaired.

Allowance for Loan Losses

Rockville Bank maintains an allowance for loan losses to reflect the level of loss inherent in the loan portfolio. The assessment of loss is comprised of an evaluation of homogeneous loan pools, a specific analysis of loans that are impaired in order to assess the value of the underlying collateral or future cash flows in determining the amount of estimated loss and a general, unallocated pool. In 2007, the Bank adopted certain changes to the ALLL methodology in order to conform to the Interagency Policy Statement on the Allowance for Loan and Lease Losses that was published by federal bank regulatory agencies in December 2006. At December 31, 2006, the unallocated allowance totaled $1.562 million and decreased to $838 million at December 31, 2007 as the revised methodology resulted in a more precise allocation based on the risk analysis by homogeneous loan type. Continued refinement of the methodology is primarily responsible for the subsequent decreases in the unallocated amount to $212,000 at December 31, 2008 and to $209,000 at December 31, 2009.

General Reserve: Homogenous loan pools are determined by loan type and are comprised of: 1) residential first mortgages 2) commercial real estate mortgages 3) residential second mortgages 4) commercial loans 5) construction loans 6) SBA and USDA guaranteed loans, as well as, smaller loans pools consisting of unsecured consumer loans, collateral loans and auto loans. Each of these loan types is evaluated on a quarterly basis to determine historical loss rates; delinquency; growth and composition trends within the portfolio; the impact of management and underwriting changes; shifts in risk ratings; and regional and economic conditions influencing portfolio performance with management allocating loss factors based on these evaluations.

Specific Reserve: Loans displaying risk characteristics that differentiate themselves from the homogeneous pool are tested separately for impairment. These loans include those in non-accrual status, restructured loans or loans which maybe collateral dependent. Individual evaluations of cash flow or the fair value of collateral supporting these obligations is performed in order to determine the most probable level of loss or impairment. Based on this analysis, specific reserves are assigned to the impaired loan and are incorporated in the calculation of the allowance for loan losses. The allowance includes a specific component for impaired loans, a general component for pools of outstanding loans and a small unallocated component for model imprecision.

Unallocated Reserve: 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 loss expense in the future resulting in lower net income. If an estimate of the allowance for loan losses is too high, the Company may experience lower provisions for loan loss expense resulting in higher net income. The unallocated allowance decreased to $209,000 as of December 31, 2009 from $212,000 as of December 31, 2008.

Review of Credit Quality: At the time of loan origination, a risk rating based on a nine point grading system is assigned to each loan based on the loan officer’s assessment of risk. More complex loans, such as commercial business loans and commercial real estate, require that our internal independent credit area further evaluate the risk rating of the individual loan, with the credit area having final determination of the appropriate risk rating. These more complex loans and relationships receive an in-depth analysis and periodic review to assess the appropriate risk rating on a post-closing basis with changes made to the risk rating as the borrower’s and economic conditions warrant. The credit quality of the Company’s loan portfolio is reviewed by a third party risk assessment firm and by the Company’s internal credit management function. Review findings are reported periodically to senior management, the Board Lending Committee and the Board of Directors. This process is supplemented with several risk assessment tools including monitoring of delinquency levels, analysis of historical loss experience by loan type, identification of portfolio concentrations by borrower and industry, and a review of economic conditions that might impact loan quality. Based on these findings the allowance for each loan type is evaluated. The allowance for loan losses is calculated on a quarterly basis and reported to the Board of Directors.

Any loan that is 90 or more days delinquent is placed on non-accrual and classified as a non-performing asset. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due in accordance with the terms of the loan agreement. An allowance is maintained for impaired loans to reflect the difference, if any, between the principal balance of the loan and the present value of projected cash flows, observable fair value or the loan’s collateral value. In addition, the Company’s bank regulatory agencies periodically review the adequacy of the

allowance for loan losses as part of their review and examination processes. The regulatory agencies may require that the Company recognize additions to the allowance based on their judgments of information available to them at the time of their review or examination.

Each quarter, management, in conjunction with the Board Lending Committee, evaluates the total balance of the allowance for loan losses based on several factors some of which are not loan specific, but are reflective of the inherent losses in the loan portfolio. This process includes, but is not limited to, a periodic review of loan collectability in light of historical experience, the nature and volume of loan activity, conditions that may affect the ability of the borrower to repay, underlying value of collateral, if applicable, and economic conditions in our immediate market area. First, loans are grouped by type within each risk weighting classification status. All loans 90 days or more delinquent or classified as trouble debt restructuring are evaluated individually, based primarily on the value of the collateral securing the loan and the ability of the borrower to repay as agreed. Specific loan loss allowances are established as required by this analysis. All loans for which a specific loss allowance has not been assigned are segregated by loan type, delinquency status or loan risk rating grade and a loss allowance is established by using loss experience data and management’s judgment concerning other matters it considers significant including the current economic environment. The allowance is allocated to each category of loan based on the results of the above analysis.

This analysis process is both quantitative and subjective, as it requires management to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at levels to absorb probable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.

Schedule of Allowance for Loan Losses

The following table sets forth activity in the allowance for loan losses for the years indicated.

		At or For the Years Ended December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands)
Balance at beginning of year		$	12,553			$	10,620			$	9,827			$	8,675			$	6,371
Provision for loan losses			1,961				2,393				749				1,681				2,700
Charge-offs:
Real estate(1)			(1,471	)			(257	)			(21	)			(45	)			—
Commercial business loans			(593	)			(314	)			(76	)			(498	)			(591	)
Installment and collateral loans			(49	)			(50	)			(76	)			(78	)			(55	)
Total charge-offs			(2,113	)			(621	)			(173	)			(621	)			(646	)
Recoveries:
Real estate(1)			8				9				5				5				31
Commercial business loans			114				122				191				70				209
Installment and collateral loans			16				30				21				17				10
Total recoveries			138				161				217				92				250
Net (charge-offs) recoveries			(1,975	)			(460	)			44				(529	)			(396	)
Allowance at end of year		$	12,539			$	12,553			$	10,620			$	9,827			$	8,675
Ratios:
Allowance for loan losses to non-performing loans at end of year			104.09	%			120.30	%			676.86	%			658.20	%			120.87	%
Allowance for loan losses to total loans outstanding at end of year			0.91	%			0.96	%			0.94	%			0.94	%			1.00	%
Net charge-offs to average loans outstanding			0.15	%			0.04	%			0.00	%			0.05	%			0.05	%

Allocation of Allowance for Loan Losses: The following table sets forth the allowance for loan losses allocated by loan category, the percent of allowance in each category to total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

		At December 31,
		2009												2008												2007
										% of Loans in												% of Loans in												% of Loans in
		Allowance for Loan				% of Allowance for				Category to Total				Allowance for Loan				% of Allowance for				Category to Total				Allowance for Loan				% of Allowance for				Category to Total
		Losses				Loan Losses				Loans				Losses				Loan Losses				Loans				Losses				Loan Losses				Loans
		(Dollars in thousands)
Real Estate:
Residential(1)		$	4,243				33.84	%			54.97	%		$	3,952				31.48	%			57.26	%		$	2,673				25.17	%			59.18	%
Commercial			4,662				37.18				31.03				3,978				31.69				26.97				3,387				31.89				25.28
Construction			1,490				11.88				5.18				1,925				15.33				6.84				1,285				12.10				6.27
Commercial business loans			1,832				14.61				8.25				2,180				17.37				8.19				2,102				19.79				8.25
Installment, collateral and other			103				0.82				0.57				306				2.44				0.74				335				3.16				1.02
Unallocated allowance			209				1.67				—				212				1.69				—				838				7.89				—
Total allowance for loan losses		$	12,539				100.00	%			100.00	%		$	12,553				100.00	%			100.00	%		$	10,620				100.00	%			100.00	%

		At December 31,
		2006												2005
																						% of Loans in
		Allowance for Loan				% of Allowance for				% of Loans in Category to				Allowance for Loan				% of Allowance for				Category to Total
		Losses				Loan Losses				Total Loans				Losses				Loan Losses				Loans
		(Dollars in thousands)
Real Estate:
Residential(1)		$	1,051				10.70	%			61.46	%		$	1,035				11.93	%			64.31	%
Commercial			4,241				43.16				22.33				3,459				39.88				17.19
Construction			959				9.76				6.14				707				8.15				5.44
Commercial business loans			1,959				19.93				9.34				1,541				17.76				12.59
Installment, collateral and other			55				0.56				0.73				27				0.31				0.47
Unallocated allowance			1,562				15.89				—				1,906				21.97				—
Total allowance for loan losses		$	9,827				100.00	%			100.00	%		$	8,675				100.00	%			100.00	%

Investment Activities

The Company’s Chief Financial Officer is responsible for implementing its Investment Policy. The Investment Policy is reviewed annually by management and any changes to the policy are recommended to and are subject to the approval of the Asset Liability Committee, and subsequently the Board of Directors. Authority to make investments under the approved Investment Policy guidelines is delegated by the Board to the Investment Committee, comprised of the President and Chief Executive Officer, the Chief Operating Officer, the Executive Vice President, the Chief Financial Officer, the Treasury Officer and the Vice President of Information Technology. While general investment strategies are developed and authorized by the Investment Committee, the execution of specific actions rests with the President, Chief Operating Officer and Chief Financial Officer who may act jointly or severally. In addition, two other officers under the supervision of the Chief Financial Officer have execution authority that is limited to cash management transactions. The Chief Financial Officer is responsible for ensuring that the guidelines and requirements included in the Investment Policy are followed and that all securities are considered prudent for investment.

In addition, the Company utilizes the services of an independent investment advisor to assist in managing the investment portfolio. The investment advisor is responsible for maintaining current information regarding securities dealers with whom the Company is conducting business. A list of appropriate dealers is provided at least annually to the Board of Directors for approval and authorization, and new securities dealers are approved prior to the execution of trades. The investment advisor, through its assigned portfolio manager, must contact the Investment Committee to review all investment recommendations and transactions and receive approval from the Committee prior to execution of any transaction.

The Company’s Investment Policy requires that all securities transactions be conducted in a safe and sound manner. Investment decisions must be based upon a thorough analysis of each security instrument to determine its credit quality and fit within our overall asset/liability management objectives, its effect on our risk-based capital and the overall prospects for yield and/or appreciation.

Investment Securities Portfolio: The following table sets forth the carrying values of our available for sale securities portfolio at the dates indicated.

		At December 31,
		2009								2008								2007
		Amortized Cost				Fair Value				Amortized Cost				Fair Value				Amortized Cost				Fair Value
										(In thousands)
Available for Sale:
U.S. Government and government-sponsored enterprise obligations		$	7,017			$	7,052			$	2,031			$	2,048			$	14,016			$	14,036
Government-sponsored residential mortgage-backed securities			72,537				75,967				117,517				120,395				96,494				97,096
Corporate debt securities			5,879				4,656				4,831				4,887				4,068				3,863
Other debt securities			722				731				725				739				978				995
Marketable equity securities			10,509				14,345				10,437				12,940				15,744				20,141
Other equity securities			—				—				241				241				241				241
Total available for sale		$	96,664			$	102,751			$	135,782			$	141,250			$	131,541			$	136,372

During the year ended December 31, 2009, the Company recorded an other-than-temporary impairment charge of $65,000 related to one mutual fund. The charge for the impairment was computed using the closing price of the security as of the date of impairment. The Company’s remaining investment in this mutual fund was $1.4 million with a $55,000 unrealized gain at December 31, 2009. During the year ended December 31, 2009, the Company recorded an other-than-temporary impairment charge of $297,000 related to five common stock securities. The charge for the impairment was computed using the closing price of the securities as of the date of impairment. The Company’s remaining investment in these five common stock securities was $648,000 with a net $133,000 unrealized loss at December 31, 2009. 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 one pooled trust preferred security that the Company owns.

The Company implemented new accounting guidance during the year (See Note 2 — Basis of Presentation, Principles of Consolidation and Significant Accounting Policies in the accompanying financial statements) which was applied to existing debt securities held by the Company as of December 31, 2008. For those debt securities for which the fair value of the security is less than its amortized cost and the Company does not intend to sell such security and it is not more likely than not that the Company will be required to sell such security prior to the recovery of its amortized cost basis less any credit losses, the credit component of the other-than-temporary impairment losses is recognized in earnings while the non-credit component is recognized in other comprehensive income, net of related taxes. As a result, the Company reclassified the non-credit component of the other-than-temporary impairment loss previously recognized in earnings during 2008 for two corporate debt securities — GE Capital Corporation and PRETSL XXVIII. The reclassification was reflected as a cumulative effect adjustment of $1.0 million ($1.6 million before taxes) that increased retained earnings and increased accumulated other comprehensive loss. The amortized cost basis of these debt securities for which other-than-temporary impairment losses were recognized during 2008 were adjusted by the amount of the cumulative effect adjustment before taxes.

During the year ended December 31, 2008, the Company recorded an other-than-temporary impairment charge of $11.6 million related to the preferred stock of Freddie Mac and Fannie Mae as a result of actions taken in the third quarter of 2008 to place those agencies into conservatorship. The Company’s remaining investment in these securities was $283,000 with no unrealized gain or loss at December 31, 2008. During the year ended December 31, 2008, the Company 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. During the year ended December 31, 2008, we recorded an other-than-temporary impairment charge of $587,000 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 $1.7 million with no unrealized gain or loss at December 31, 2008. During the year ended December 31, 2008, we recorded an other-than-temporary impairment charge of $493,000 related to one AAA rated corporate debt security. 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 corporate debt security was $2.4 million with no unrealized gain or loss at December 31, 2008. During the year ended December 31, 2008, we recorded an other-than-temporary impairment charge of $1.1 million related to eleven 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 eleven common stock securities was $1.7 million with no unrealized gain of loss at December 31, 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.

During the year ended December 31, 2007, the Company recorded an other-than-temporary impairment charge of $233,000 related to the preferred stock of a U.S. government-sponsored enterprise. 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 security was $544,000 with no unrealized gain or loss at December 31, 2007.

Consistent with our overall business and asset/liability management strategy, which focuses on sustaining adequate levels of core earnings, most securities purchased were classified available for sale at December 31, 2009.

U.S. Government and Government-Sponsored Enterprises: At December 31, 2009, the Company’s U.S. Government and government-sponsored enterprise portfolio totaled $7.1 million, all of which were classified as available for sale. There were no structured notes or derivatives in the portfolio.

Government-Sponsored Enterprise Residential Mortgage-Backed Securities: The Company purchases mortgage-backed securities insured or guaranteed by U.S. Government agencies and government-sponsored entities, including Fannie Mae, Freddie Mac and Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and lower our credit risk as a result of the guarantees provided by Fannie Mae, Freddie Mac, and Ginnie Mae.

Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate which is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on mortgage-backed securities backed by one-to-four family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as the Company and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees, mortgage servicing and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize the Company’s borrowing obligations.

At December 31, 2009, the carrying value of mortgage-backed securities totaled $95.0 million, or 6.1% of assets and 6.4% of interest-earning assets, $76.0 million of which were classified as available for sale and $19.0 million of which were classified as held to maturity. At December 31, 2009, 13% of the mortgage-backed securities were backed by adjustable rate loans and 87% were backed by fixed rate mortgage loans. The available for sale mortgage-backed securities portfolio had a book yield of 5.16% at December 31, 2009 and the held to maturity mortgage-backed securities portfolio had a book yield of 5.36% at December 31, 2009. The estimated fair value of our mortgage-backed securities at December 31, 2009 was $96.0 million, which is $4.4 million more than the amortized cost of $91.6 million. Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk

associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.

The Company’s investment portfolio contained no mortgage-backed securities that are subject to the risk of “sub-prime” lending as of December 31, 2009. Though the Company does not have a direct exposure to sub-prime related assets, the value and related income of the Company’s mortgage-backed securities are sensitive to changes in economic conditions, including delinquencies and/or defaults on the underlying mortgages. Though the Company has not been adversely impacted by recent events affecting the mortgage industry, continuing shifts in the market’s perception of credit quality on 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 securities held by the Company.

Corporate Bonds: At December 31, 2009, the carrying value of the Company’s corporate bond portfolio totaled $4.7 million, all of which was classified as available for sale. The corporate bond portfolio reprices quarterly to LIBOR and had a book yield of 0.67% at December 31, 2009. Although corporate bonds may offer higher yields than U.S. Treasury or agency securities of comparable duration, corporate bonds also have a higher risk of default due to possible adverse changes in the credit-worthiness of the issuer. In order to mitigate this risk, our Investment Policy requires that corporate debt obligation purchases be rated “A” or better by a nationally recognized rating agency. A security that is subsequently downgraded below investment grade will require additional analysis of credit worthiness and a determination will be made to hold or dispose of the investment.

Other Debt Securities: These securities consist primarily of obligations issued by states, counties and municipalities or their agencies and include general obligation bonds, industrial development revenue bonds and other revenue bonds. The Company’s Investment Policy requires that such state agency or municipal obligation purchases be rated “A” or better by a nationally recognized rating agency. A security that is subsequently downgraded below investment grade will require additional analysis of credit worthiness and a determination will be made to hold or dispose of the investment. At December 31, 2009, the Company’s state agency and municipal obligations portfolio totaled $731,000.

Marketable Equity Securities: We currently maintain a diversified equity securities portfolio. At December 31, 2009, the fair value of the Company’s marketable equity securities portfolio totaled $14.3 million, or 0.9% of total assets, all of which were classified as available for sale. The portfolio consisted of $11.1 million of diversified common stock, $0.5 million of preferred stock issued by government-sponsored entities and $2.7 million of mutual funds. At December 31, 2009, the maximum investment in any single issuer was $2.6 million. The industries represented by our common stock investments are diverse and include banking, insurance and financial services, integrated utilities and various industrial sectors. Our investments in preferred stock consisted of investments in two government-sponsored enterprises, and the maximum investment in any single issuer was $287,000. The total equity portfolio will not exceed 100% of the Tier I capital of the Bank.

Investments in equity securities involve risk as they are not insured or guaranteed investments and are affected by stock market fluctuations. Such investments are carried at their market value and can directly affect our net capital position.

Portfolio Maturities and Yields: The composition and maturities of the investment securities portfolio at December 31, 2009 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State agency and municipal obligations as well as common and preferred stock yields have not been adjusted to a tax-equivalent basis. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2009, mortgage-backed securities with adjustable rates totaled $12.6 million.

																		More than Five
										More than One Year								Years through Ten
		One Year or Less								through Five Years								Years								More than Ten Years								Total Securities
						Weighted								Weighted-								Weighted-								Weighted-								Weighted-
		Fair				- Average				Fair				Average				Fair				Average				Fair				Average				Fair				Average
December 31, 2009		Value				Yield				Value				Yield				Value				Yield				Value				Yield				Value				Yield
																		(Dollars in thousands)
Available for Sale
Debt Securities:
U.S. Government and government-sponsored enterprise obligations		$	2,018				0.36	%		$	5,035				3.41	%		$	—				—	%		$	—				—	%		$	7,053				2.53	%
Mortgage-backed securities			—				—				1,780				4.01				1,909				5.13				72,278				5.18				75,967				5.16
Corporate debt securities			—				—				2,971				0.55				—				—				1,684				0.80				4,655				0.67
Other debt securities			—				—				—				—				731				4.49				—				—				731				4.49
Total debt securities		$	2,018				0.36	%		$	9,786				2.65	%		$	2,640				4.95	%		$	73,962				5.08	%			88,406				4.70	%
Marketable equity securities																																			14,345
Total securities available for sale																																		$	102,751

Sources of Funds:

General: Deposits have traditionally been the Company’s primary source of funds for use in lending and investment activities. In addition to deposits, funds are derived from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. See Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operation” – Liquidity and Capital Resources.

Deposits: A majority of our depositors are persons who work or reside in Hartford, New London and Tolland Counties and, to a lesser extent, other northeastern Connecticut communities. We offer a selection of deposit instruments, including checking, savings, money market savings accounts, negotiable order of withdrawal (“NOW”) accounts and fixed-rate time deposits. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. The Company had $14.3 million brokered deposits at December 31, 2009, through participation in CDARS reciprocal deposit program. The Company did not have any borrowings from deposit brokers at December 31, 2009.

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies, market rates, liquidity requirements, rates paid by competitors and growth goals. To attract and retain deposits, we rely upon personalized customer service, long-standing relationships and competitive interest rates.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on historical experience, management believes our deposits are relatively stable. Expansion of the branch network and the commercial banking division, as well as deposit promotions and disintermediation from investment firms due to increasing uncertainty in the financial markets, has provided the Company with opportunities to attract new deposit relationships.

It is unclear whether the recent growth in deposits will reflect our historical, stable experience with deposit customers. The ability to attract and maintain money market accounts and time deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At December 31, 2009, $491.9 million, or 43.6%, of our deposit accounts were time deposits, of which $359.8 million had maturities of one year or less.

The following table displays a summary of the Company’s deposits as of the dates indicated:

		At December 31,
		2009												2008												2007
										Weighted- Average												Weighted- Average												Weighted- Average
		Balance				Percent				Rate				Balance				Percent				Rate				Balance				Percent				Rate
																		(Dollars in thousands)
Deposit type:
Demand deposits		$	150,484				13.3	%			0.00%			$	116,113				11.1	%			0.00%			$	99,378				10.5	%			0.00%
NOW accounts			108,099				9.6				0.34				86,943				8.4				0.43				85,854				9.0				0.51
Regular savings			143,601				12.7				0.30				121,527				11.7				0.60				121,800				12.8				0.60
Money market and investment savings			234,737				20.8				0.65				188,110				18.0				1.78				120,971				12.7				3.15
Club accounts			247				0.0				2.04				227				0.0				2.04				216				0.0				2.04
Total core accounts			637,168				56.4				0.13				512,920				49.2				0.87				428,219				45.0				1.16
Time deposits			491,940				43.6				2.29				529,588				50.8				3.57				522,819				55.0				4.49
Total deposits		$	1,129,108				100.0	%			1.07%			$	1,042,508				100.0	%			2.24%			$	951,038				100.0	%			2.99%

As of December 31, 2009, the aggregate amount of outstanding time deposits in amounts greater than or equal to $100,000 was $168.5 million. The following table sets forth the maturity of those time deposits as of December 31, 2009.

		(In thousands)
Three months or less		$	47,890
Over three months through six months			26,563
Over six months through one year			52,149
Over one year through three years			37,537
Over three years			4,338
Total		$	168,477

The following table sets forth the time deposits classified by interest rate as of the dates indicated.

		At December 31,
		2009				2008				2007
						(In thousands)
Interest Rate:
0.00% - 1.00%		$	56,155			$	1,987			$	1,178
1.01% - 2.00%			204,712				632				1,002
2.01% - 3.00%			101,412				132,356				60,161
3.01% - 4.00%			82,360				296,257				42,480
4.01% - 5.00%			42,259				87,475				327,519
5.01% - 6.00%			5,042				10,881				90,479
Total		$	491,940			$	529,588			$	522,819

The following table sets forth the amounts and maturities of time deposits at December 31, 2009:

										Over Two				Over																Percentage of
						Over One				Years to				Three				Over Four												Total
		One Year				Year to Two				Three				Years to				Years to												Time Deposit
		and nder				Years				Years				Four Years				Five Years				Thereafter				Total				Accounts
														(Dollars in thousands)
Interest Rate:
0.00% - 1.00%		$	56,150			$	5			$	—			$	—			$	—			$	—			$	56,155				11.42	%
1.01% - 2.00%			182,145				22,475				92				—				—				—				204,712				41.61
2.01% - 3.00%			40,919				47,703				4,552				767				7,471				—				101,412				20.62
3.01% - 4.00%			62,276				4,958				3,679				8,401				3,046				—				82,360				16.74
4.01% - 5.00%			16,238				9,242				10,306				4,435				461				1,577				42,259				8.59
5.01% - 6.00%			2,029				1,533				1,207				249				—				24				5,042				1.02
Total		$	359,757			$	85,916			$	19,836			$	13,852			$	10,978			$	1,601			$	491,940				100.00	%