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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2011.
Commission File Number: 001-35028
ROCKVILLE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
     
Connecticut
(State or other jurisdiction of incorporation or organization)
  27-3577029
(I.R.S. Employer Identification No.)
     
25 Park Street, Rockville, Connecticut
(Address of principal executive offices)
  06066
(Zip Code)
(860) 291-3600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter prior that the registrant was required to submit and post such files). Yes o No þ
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12B-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act). Yes o No þ
As of July 29, 2011, there were 29,506,948 shares of Registrant’s no par value common stock outstanding.
 
 

 


 

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Exhibits
       
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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Table of Contents

Part I — FINANCIAL INFORMATION
     Item 1. Interim Financial Statements
Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Condition
(In Thousands, Except Share Amounts)

(Unaudited)
                 
    June 30,     December 31,  
    2011     2010  
ASSETS
               
CASH AND CASH EQUIVALENTS:
               
Cash and due from banks
  $ 30,502     $ 16,692  
Short-term investments
    50,230       44,016  
 
           
Total cash and cash equivalents
    80,732       60,708  
AVAILABLE FOR SALE SECURITIES-At fair value
    153,838       125,447  
HELD TO MATURITY SECURITIES-At amortized cost
    11,327       13,679  
LOANS HELD FOR SALE
          380  
LOANS RECEIVABLE (Net of allowance for loan losses of $15,328 in 2011 and $14,312 in 2010)
    1,430,609       1,410,498  
FEDERAL HOME LOAN BANK STOCK, at cost
    17,007       17,007  
ACCRUED INTEREST RECEIVABLE
    4,578       4,176  
DEFERRED TAX ASSET-Net
    7,744       11,327  
PREMISES AND EQUIPMENT-Net
    14,507       14,912  
GOODWILL
    1,149       1,149  
CASH SURRENDER VALUE OF BANK-OWNED LIFE INSURANCE
    10,648       10,459  
OTHER REAL ESTATE OWNED
    148       990  
CURRENT FEDERAL TAX RECEIVABLE
    7,603        
PREPAID FDIC ASSESSMENTS
    2,930       3,875  
OTHER ASSETS
    3,857       3,466  
 
           
 
  $ 1,746,677     $ 1,678,073  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
LIABILITIES:
               
DEPOSITS:
               
Non-interest-bearing
  $ 166,863     $ 168,736  
Interest-bearing
    1,110,007       1,050,524  
 
           
Total deposits
    1,276,870       1,219,260  
MORTGAGORS’ AND INVESTORS’ ESCROW ACCOUNTS
    6,418       6,131  
ADVANCES FROM THE FEDERAL HOME LOAN BANK
    116,892       261,423  
AVAILABLE FOR SALE SECURITIES PAYABLE
          10,534  
ACCRUED EXPENSES AND OTHER LIABILITIES
    14,372       14,297  
 
           
TOTAL LIABILITIES
    1,414,552       1,511,645  
 
           
COMMITMENTS AND CONTINGENCIES (Note 13)
               
STOCKHOLDERS’ EQUITY:
               
Preferred stock (no par value; 2,000,000 and 1,000,000 shares authorized; no shares issued and outstanding)
           
Common stock (no par value; 60,000,000 shares authorized; 29,506,948 and 29,653,088 shares issued and 29,506,948 and 28,610,081 outstanding at June 30, 2011 and December 31, 2010, respectively)
    243,776       85,249  
Additional paid-in capital
    14,932       4,789  
Unearned compensation — ESOP
    (10,028 )     (3,478 )
Treasury stock, at cost (1,043,007 shares at December 31, 2010)
          (9,495 )
Retained earnings
    86,522       90,645  
Accumulated other comprehensive loss, net of tax
    (3,077 )     (1,282 )
 
           
TOTAL STOCKHOLDERS’ EQUITY
    332,125       166,428  
 
           
 
  $ 1,746,677     $ 1,678,073  
 
           
See accompanying notes to unaudited consolidated financial statements

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Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Share Data)
(Unaudited)
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2011     2010     2011     2010  
INTEREST AND DIVIDEND INCOME:
                               
Loans
  $ 17,481     $ 17,357     $ 35,016     $ 34,998  
Securities-interest
    1,286       1,145       2,335       2,342  
Securities-dividends
    149       115       279       218  
Interest-bearing deposits
    16       3       31       3  
 
                       
Total interest and dividend income
    18,932       18,620       37,661       37,561  
 
                       
 
                               
INTEREST EXPENSE:
                               
Deposits
    2,897       2,853       5,808       5,853  
Borrowed funds
    2,265       2,608       4,688       5,151  
 
                       
Total interest expense
    5,162       5,461       10,496       11,004  
 
                       
Net interest income
    13,770       13,159       27,165       26,557  
 
                               
PROVISION FOR LOAN LOSSES
    754       909       1,506       1,812  
 
                       
Net interest income after provision for loan losses
    13,016       12,250       25,659       24,745  
 
                       
 
                               
NON-INTEREST INCOME:
                               
Total other-than-temporary impairment losses on equity securities
                (29 )      
Service charges and fees
    1,682       1,992       3,278       3,234  
Net gain from sales of securities
    6,201             6,201       188  
Net gain from sales of loans
          364       59       523  
Other income (loss)
    (64 )     9       (2 )     107  
 
                       
Total non-interest income
    7,819       2,365       9,507       4,052  
 
                       
 
                               
NON-INTEREST EXPENSE:
                               
Salaries and employee benefits
    6,613       4,831       12,284       9,621  
Service bureau fees
    1,128       987       2,187       1,986  
Occupancy and equipment
    1,100       1,055       2,266       2,182  
Professional fees
    498       368       1,182       758  
Marketing and promotions
    441       397       765       671  
FDIC assessments
    506       401       1,020       801  
Other real estate owned
    15       99       74       467  
Contribution to Rockville Bank Foundation, Inc.
                5,043        
Loss on extinguishment of debt
    8,914             8,914        
Other
    1,493       1,254       2,917       2,541  
 
                       
Total non-interest expense
    20,708       9,392       36,652       19,027  
 
                       
 
                               
INCOME (LOSS) BEFORE INCOME TAXES
    127       5,223       (1,486 )     9,770  
 
                               
INCOME TAX PROVISION (BENEFIT)
    84       1,759       (507 )     3,452  
 
                       
 
                               
NET INCOME (LOSS)
  $ 43     $ 3,464     $ (979 )   $ 6,318  
 
                       
See accompanying notes to unaudited consolidated financial statements.
(Continued)

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Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Operations — Concluded
(In Thousands, Except Share Data)
(Unaudited)
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2011     2010     2011     2010  
Net income (loss) per share (see Note 2):
                               
Basic
  $ 0.00     $ 0.12     $ (0.03 )   $ 0.22  
Diluted
  $ 0.00     $ 0.12     $ (0.03 )   $ 0.22  
 
                               
Weighted-average shares outstanding:
                               
Basic
    28,803,416       28,086,689       28,941,501       28,087,770  
Diluted
    28,931,099       28,116,659       28,941,501       28,105,296  

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Rockville Financial, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity
(In Thousands, Except Share Data)
(Unaudited)
                                                                         
    Common Stock                                             Accumulated        
                    Additional     Unearned     Treasury     Treasury             Other     Total  
        Paid-in     Compensation     Stock —     Stock —     Retained     Comprehensive     Stockholders’  
    Shares     Amount     Capital     — ESOP     Shares     Amount     Earnings     Loss     Equity  
Balance at December 31, 2010
    19,551,057     $ 85,249     $ 4,789     $ (3,478 )     687,682     $ (9,495 )   $ 90,645     $ (1,282 )   $ 166,428  
 
                                                                       
Comprehensive loss:
                                                                       
Net loss
                                        (979 )           (979 )
Net unrealized loss on securities available for sale, net of reclassification adjustments and tax effects
                                              (2,118 )     (2,118 )
Change in accumulated other comprehensive loss related to employee benefit plans, net of reclassification adjustments and tax effects
                                              323       323  
 
                                                                     
Total comprehensive loss
                                                                    (2,774 )
 
                                                                     
Cancel Rockville Financial MHC, Inc. shares
    (10,689,250 )           9,685                                     9,685  
Treasury shares retired
    (687,682 )     (9,495 )                 (687,682 )     9,495                    
Exchange of common stock @ 1.5167 shares per common share
    4,222,539                                                  
Fractional share distribution
    (2,226 )     (22 )                                         (22 )
Proceeds from stock offering, net of offering costs
    17,109,886       168,044                                           168,044  
Purchase of common stock by ESOP
                      (7,071 )                             (7,071 )
Share-based compensation expense
    6,166             383                                     383  
ESOP shares released or committed to be released
                122       521                               643  
Cancellation of shares for tax withholding
    (3,542 )           (47 )                                   (47 )
Dividends paid ($0.13 per common share)
                                        (3,144 )           (3,144 )
 
                                                     
Balance at June 30, 2011
    29,506,948     $ 243,776     $ 14,932     $ (10,028 )         $     $ 86,522     $ (3,077 )   $ 332,125  
 
                                                     
                                                                       
See accompanying notes to unaudited consolidated financial statements.

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Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
                 
    For the Six Months  
    Ended June 30,  
    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net (loss) income
  $ (979 )   $ 6,318  
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
               
Amortization and accretion of premiums and discounts on investments, net
    (39 )     (89 )
Share-based compensation expense
    383       254  
Amortization of ESOP Expense
    643       398  
Provision for loan losses
    1,506       1,812  
Net gain from sales of securities
    (6,201 )     (188 )
Loss on extinguishment of debt
    8,914        
Other-than-temporary impairment of securities
    29        
Loans originated for sale
    (4,597 )     (26,122 )
Proceeds from sales of loans
    4,977       26,122  
Loss on sale of OREO
    93       91  
Depreciation and amortization
    672       741  
Loss on disposal of equipment
    110       1  
Deferred income tax provision (benefit)
    4,724       (149 )
Increase in cash surrender value of bank-owned life insurance
    (189 )     (191 )
Net change in:
               
Deferred loan fees and premiums
    (202 )     (1 )
Accrued interest receivable
    (402 )     (266 )
Prepaid FDIC assessment
    945       727  
Other assets
    (7,994 )     40  
Accrued expenses and other liabilities
    (10,135 )     (3,366 )
 
           
Net cash (used in) provided by operating activities
    (7,742 )     6,132  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sales of available for sale securities
    14,465       399  
Proceeds from calls and maturities of available for sale securities
    7,500       470  
Principal payments on available for sale securities
    8,619       11,255  
Principal payments on held to maturity mortgage-backed securities
    2,380       2,360  
Purchases of available for sale securities
    (56,052 )     (22,957 )
Proceeds from sale of OREO
    933       682  
Capitalized OREO costs
          (105 )
Purchase of loans
          (82 )
Loan (originations) principal payments, net
    (21,599 )     (24,306 )
Purchases of premises and equipment
    (402 )     (87 )
Proceeds from sale of other assets
    25        
 
           
Net cash used in investing activities
    (44,131 )     (32,371 )
 
           
 
               
See accompanying notes to unaudited consolidated financial statements.
(Continued)

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Table of Contents

Rockville Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows — Concluded
(In Thousands)
(Unaudited)
                 
    For the Six Months  
    Ended June 30,  
    2011     2010  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase in deposits
    57,610       21,271  
Net increase (decrease) in mortgagors’ and investors’ escrow accounts
    287       (1,210 )
Net decrease in short-term Federal Home Loan Bank advances
          (7,000 )
Proceeds from long-term Federal Home Loan Bank advances
          20,800  
Contractual repayment of long-term Federal Home Loan Bank advances
    (22,331 )     (5,101 )
Prepayment of long-term Federal Home Loan Bank advances and penalty
    (131,114 )      
Common stock purchase by ESOP
    (7,071 )      
Proceeds from stock offering, net of offering costs
    168,044        
Cancellation of Rockville Financial, MHC Inc. shares
    9,685        
Fractional shares paid
    (22 )      
Cancellation of shares for tax withholding
    (47 )     (30 )
Cash dividends paid on common stock
    (3,144 )     (2,262 )
 
           
Net cash provided by financing activities
    71,897       26,468  
 
           
 
               
NET INCREASE IN CASH AND CASH EQUIVALTENTS
    20,024       229  
 
               
CASH AND CASH EQUIVALENTS—Beginning of period
    60,708       19,307  
 
           
 
               
CASH AND CASH EQUIVALENTS—End of period
  $ 80,732     $ 19,536  
 
           
 
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the year for:
               
Interest
  $ 10,983     $ 10,990  
Income taxes
    3,100       5,050  
Transfer of loans to other real estate owned
    184       665  
Goodwill recognition from subsidiary acquisition
          79  
Transfer to fixed assets from subsidiary acquisition
          23  
See accompanying notes to unaudited consolidated financial statements.

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Rockville Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1.   Basis of Presentation and Principles of Consolidation
    On March 3, 2011, Rockville Financial, Inc., (the “Company”), completed the “second-step” conversion of Rockville Bank (the “Bank”) from a mutual holding company structure to a stock holding company structure (the “Conversion”) pursuant to a Plan of Conversion and Reorganization (the “Plan”). As part of the conversion, New Rockville Financial, Inc. succeeded Rockville Financial, Inc. as the stock holding company of Rockville Bank, and Rockville Financial MHC, Inc. was dissolved. Upon completion of the Conversion, the Company became the holding company for the Bank and acquired ownership of all the issued and outstanding shares of the Bank’s common stock. In connection with the Conversion, 17,109,886 shares of common stock of the Company (the “Common Stock”) were sold in a subscription offering to certain depositors of the Bank and its employee stock ownership plan for $10.00 per share, or $171,099,000 in the aggregate (the “Offering”) net of offering costs of $3,055,000. In accordance with the Plan, 1.5167 shares of Common Stock (without taking into consideration cash issued in lieu of fractional shares) were issued in exchange for each outstanding share of common stock of the Company’s predecessor, also named Rockville Financial, Inc. (“Old RFI”), the former state-chartered mid-tier holding company for the Bank, held by persons other than Rockville Financial MHC, Inc., the mutual holding company that owned the majority of Old RFI’s common stock. New Rockville Financial, Inc. changed its name to Rockville Financial, Inc. effective March 3, 2011.
 
    The conversion was accounted for as a reorganization with no change to the historical basis of Rockville Financial, Inc.’s assets, liabilities, and equity. All references to the number of shares outstanding for purposes of calculating per share amounts are restated to give retroactive recognition to the exchange ratio applied in the conversion.
 
    The 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 interim consolidated financial statements. The results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. These interim consolidated financial statements should be read in conjunction with the Company’s 2010 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
    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 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 and other post-retirement benefits, share-based compensation expense, valuation of deferred tax assets and the evaluation of investment securities for other-than-temporary impairment.

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2.   Earnings Per Share
    The following table sets forth the calculation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2011 and 2010:
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2011     2010     2011     2010  
            (In thousands, except share data)          
Net income (loss)
  $ 43     $ 3,464     $ (979 )   $ 6,318  
 
                       
 
                               
Weighted-average basic shares outstanding
    28,803,416       28,086,689       28,941,501       28,087,770  
Diluted effect of stock options
    127,683       29,970             17,526  
 
                       
Weighted-average diluted shares
    28,931,099       28,116,659       28,941,501       28,105,296  
 
                       
Earnings per share:
                               
Basic
  $ 0.00     $ 0.12     $ (0.03 )   $ 0.22  
 
                       
Diluted
  $ 0.00     $ 0.12     $ (0.03 )   $ 0.22  
 
                       
    Share and per share amounts related to periods prior to the date of completion of the conversion (March 3, 2011) have been restated to give retroactive recognition to the exchange ratio applied in the conversion (1.5167). Treasury shares for 2010 and unallocated common shares held by the ESOP for 2011 and 2010 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 included in the weighted-average number of common shares outstanding for basic earnings per share calculations. For the six months ended June 30, 2011 and 2010, the Company’s common stock equivalents relate solely to stock options granted and outstanding. For the three months ended June 30, 2011 and 2010, options to purchase 127,683 and 29,970 shares of common stock, respectively, were considered in the computation of potential common shares for the purpose of diluted EPS. Stock options that would have an anti-dilutive effect on earnings per share are excluded from the calculation. For the six months ended June 30, 2010, options to purchase 17,526 shares of common stock were considered in the computation of potential common shares for the purpose of diluted EPS. For the six months ended June 30, 2011, no options to purchase shares of common stock were considered in the computation of potential common shares for the purpose of diluted EPS as the effect of the including them would have been anti-dilutive.
3.   Recent Accounting Pronouncements
    Comprehensive Income (Topic 220): In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income. The Update eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity to improve comparability, consistency, and transparency of financial reporting. An entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for the Company for the first interim and annual periods beginning after December 15, 2011 and will be applied retrospectively. Adoption of ASU 2011-05 is not expected to have a material impact on the Company’s consolidated financial statements.
 
    Fair Value Measurement (Topic 820): In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs). The amendments in this Update are intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs and to explain how to measure fair value. This guidance is effective for the Company for the first interim and annual periods beginning after December 15, 2011 and will be applied prospectively. Adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial statements.
 
    Receivables (Topic 310): In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU clarifies the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties for

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    purposes of determining whether a restructuring constitutes a troubled debt restructuring. This guidance is effective for the Company for the first interim period beginning after June 15, 2011 but will be applied retrospectively to January 1, 2011 for the Company’s 2011 fiscal year. Adoption of ASU 2011-02 is not expected to have a material impact on the Company’s consolidated financial statements.
 
    Receivables (Topic 310): In January 2011, the FASB issued ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU No. 2010-20 (see below). This ASU delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20. ASU No. 2011-02 (above) clarifies the guidance of what constitutes a troubled debt restructuring. Adoption of ASU 2011-01 occurs upon adoption of ASU 2011-02 and is not expected to have a material impact on the Company’s consolidated financial statements.
 
    Receivables, (Topic 310): In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this Update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses, and, (3) the changes and reasons for those changes in the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010 and the disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company has incorporated the end of reporting period disclosures in the December 31, 2010 consolidated financial statements. The disclosures about activity are incorporated into the June 30, 2011 consolidated financial statements and have significantly increased the Company’s loan disclosures.
4.   Fair Value Measurements
The Company groups its assets and liabilities generally measured at fair value in three levels based upon a three-tier hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The fair value hierarchy is as follows:
  Level 1:   Quoted prices are available in active markets for identical investments as of the reporting date. The quoted price is not adjusted because of the size of the position relative to trading volume.
       
  Level 2:   Pricing inputs are observable for the asset or liability, either directly or indirectly but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.
       
  Level 3:   Pricing inputs are unobservable for the assets and liabilities and include situations where there is little, if any, market activity and the determination of fair value requires significant judgment or estimation.
 
      The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such instances, the determination of which category within the fair value hierarchy is appropriate for any given asset or liability is based on the lowest level of input that is significant to the fair value of the asset or liability.
Items Measured at Fair Value on a Recurring Basis: The following valuation methodologies are used for assets that are recorded at fair value on a recurring basis. There were no liabilities recorded at fair value on a recurring basis.
Available for Sale Securities: 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 an independent pricing service. 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, corporate and other debt securities. Level 3 securities include private placement securities and thinly traded equity securities. All fair value measurements are obtained from a third party pricing service and are not adjusted by management.

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    Assets Recorded at Fair Value on a Recurring Basis:
                                 
            Fair Value Measurements  
            At June 30, 2011  
            Quoted              
            Prices in              
            Active              
            Markets for     Other     Significant  
            Identical     Observable     Unobservable  
    Total Fair     Assets     Inputs     Inputs  
    Value     (Level 1)     (Level 2)     (Level 3)  
            (In thousands)          
Available for Sale Securities:
                               
U.S. Government and government-sponsored enterprise obligations
  $ 44,381     $ 3,009     $ 41,372     $  
Government-sponsored residential mortgage-backed securities
    101,593             101,593        
Corporate debt securities
    4,550             4,550        
Marketable equity securities
    3,314       3,241             73  
 
                       
Total assets measured at fair value
  $ 153,838     $ 6,250     $ 147,515     $ 73  
 
                       
                                 
            Fair Value Measurements  
            At December 31, 2010  
            Quoted              
            Prices in              
            Active              
            Markets for     Other     Significant  
            Identical     Observable     Unobservable  
    Total Fair     Assets     Inputs     Inputs  
    Value     (Level 1)     (Level 2)     (Level 3)  
            (In thousands)          
Available for Sale Securities:
                               
U.S. Government and government-sponsored enterprise obligations
  $ 34,327     $ 3,017     $ 31,310     $  
Government-sponsored residential mortgage-backed securities
    70,390             70,390        
Corporate debt securities
    4,008             4,008        
Marketable equity securities
    16,722       16,649             73  
 
                       
Total assets measured at fair value
  $ 125,447     $ 19,666     $ 105,708     $ 73  
 
                       
    There were no changes in Level 3 assets measured at fair value for the six months ended June 30, 2011 and there were no transfers in or out of Level 1 and Level 2 for the six months ended June 30, 2011.
 
    Items Measured at Fair Value on a Non-Recurring Basis:
 
    The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
 
    The following is a description of the valuation methodologies used for certain assets that are recorded at fair value on a non-recurring basis.
 
    Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is recorded at fair value as determined by real estate appraisals less the estimated selling expense. Appraisals are based upon observable market data such as comparable sales within the real estate market; however, assumptions made are based on management’s judgment of the appraisals and current real estate market conditions and therefore these assets are classified as non-recurring Level 3 assets in the fair value hierarchy.

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Impaired Loans: Accounting standards require 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 and the specific reserve allocations based upon observable market price or current appraised value of the collateral less costs and discounts based on management’s judgment of current conditions. Based on the significance of management’s judgment, the Company records collateral dependent impaired loans as non-recurring Level 3 fair value measurements.
Assets Recorded at Fair Value on a Non-recurring Basis:
The following table presents the Company’s assets measured at fair value on a non-recurring basis for the three and six months ended June 30, 2011 and 2010:
                                                 
            Fair Value Measurements              
            At June 30, 2011 using:              
            Quoted Prices                          
            in Active                          
            Markets for     Other     Significant     Total Losses     Total Losses  
            Identical     Observable     Unobservable     for the three     for the six  
            Assets     Inputs     Inputs     months ended     months ended  
    Total     (Level 1)     (Level 2)     (Level 3)     June 30, 2011     June 30, 2011  
 
                    (In thousands)                  
Other real estate owned
  $ 148     $     $     $ 148     $     $  
Impaired loans
    1,286                   1,286       (10 )     (318 )
 
Total
  $ 1,434     $     $     $ 1,434     $ (10 )   $ (318 )
 
                                                 
            Fair Value Measurements              
            At June 30, 2010 using:              
            Quoted Prices                          
            in Active                          
            Markets for     Other     Significant     Total Losses     Total Losses  
            Identical     Observable     Unobservable     for the three     for the six  
            Assets     Inputs     Inputs     months ended     months ended  
    Total     (Level 1)     (Level 2)     (Level 3)     June 30, 2010     June 30, 2010  
 
                    (In thousands)                  
Other real estate owned
  $ 2,953     $     $     $ 2,953     $     $  
Impaired loans
    7,067                   7,067       (941 )     (1,444 )
 
Total
  $ 10,020     $     $     $ 10,020     $ (941 )   $ (1,444 )
 
There were no liabilities reported at fair value on a non-recurring basis on the balance sheet at June 30, 2011 or 2010.

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As of June 30, 2011 and December 31, 2010, the carrying value and estimated fair values of the Company’s financial instruments are as described below.
                                 
    June 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
            (In thousands)          
Financial assets:
                               
Cash and cash equivalents
  $ 80,732     $ 80,732     $ 60,708     $ 60,708  
Available for sale securities
    153,838       153,838       125,447       125,447  
Held to maturity securities
    11,327       12,288       13,679       14,638  
Loans receivable-net
    1,430,609       1,446,040       1,410,498       1,415,387  
Loans held for sale
                380       380  
FHLBB stock
    17,007       17,007       17,007       17,007  
Accrued interest receivable
    4,578       4,578       4,176       4,176  
 
                               
Financial liabilities:
                               
Deposits
    1,276,870       1,284,251       1,219,260       1,200,517  
Mortgagors’ and investors’ escrow accounts
    6,418       6,418       6,131       6,131  
Advances from FHLBB
    116,892       122,241       261,423       274,557  
Certain financial instruments and all nonfinancial investments are exempt from disclosure requirements. Accordingly, the aggregate fair value of amounts presented above may not necessarily represent the underlying fair value of the Company.

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5. Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available for sale and held to maturity securities at June 30, 2011 and December 31, 2010 are as follows:
                                 
            Gross
Unrealized
    Gross
Unrealized
       
June 30, 2011   Amortized Cost     Gains     Losses     Fair Value  
            (In thousands)          
Available for sale:
                               
Debt securities:
                               
U.S. Government and government- sponsored enterprise obligations
  $ 44,440     $ 193     $ 252     $ 44,381  
Government-sponsored residential mortgage-backed securities
    97,536       4,058       1       101,593  
Corporate debt securities
    5,908       13       1,371       4,550  
 
                       
Total debt securities
    147,884       4,264       1,624       150,524  
 
                       
Marketable equity securities, by sector:
                               
Banks
    79       85             164  
Industrial
    109       60             169  
Mutual funds
    2,687       109             2,796  
Oil and gas
    132       53             185  
 
                       
Total marketable equity securities
    3,007       307             3,314  
 
                       
Total available for sale securities
  $ 150,891     $ 4,571     $ 1,624     $ 153,838  
 
                       
At June 30, 2011, the net unrealized gain on securities available for sale of $2.9 million, net of income taxes of $1.0 million, or $1.9 million, is included in accumulated other comprehensive loss.
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized        
June 30, 2011   Cost     Gains     Losses     Fair Value  
            (In thousands)          
Held to maturity:
                               
Government-sponsored residential mortgage-backed securities
  $ 11,327     $ 961     $     $ 12,288  
 
                       
In June 2011, the Company sold $14.5 million in available-for-sale equity investments which includes $283,000 of Fannie Mae and Freddie Mac preferred stock securities. The sale of securities resulted in a gain of $6.2 million, or $4.0 million after tax. In addition to taking advantage of the opportunity to realize a gain, the sale almost entirely eliminated the Company’s equity securities portfolio, removing a significant risk of market volatility from the Company’s balance sheet. While management does not anticipate using new equity investments as part of the on-going investment strategy, the Company continues to hold a modest equity portfolio to preserve its ability to utilize equity investments in the future.

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            Gross     Gross        
    Amortized     Unrealized     Unrealized        
    Cost     Gains     Losses     Fair Value  
December 31, 2010           (In thousands)          
Available for sale:
                               
Debt securities:
                               
U.S. Government and government-sponsored enterprise obligations
  $ 35,018     $     $ 691     $ 34,327  
Government-sponsored residential mortgage-backed securities
    67,047       3,358       15       70,390  
Corporate debt securities
    5,895             1,887       4,008  
 
                       
Total debt securities
    107,960       3,358       2,593       108,725  
 
                       
Marketable equity securities, by sector:
                               
Banks
    1,256       3,366       9       4,613  
Consumer and household products
    1,134       67       24       1,177  
Food and beverage service
    1,151       326       30       1,447  
Government-sponsored enterprises
    283       58       63       278  
Healthcare/pharmaceutical
    387             44       343  
Industrial
    695       313       20       988  
Integrated utilities
    742       93             835  
Mutual funds
    2,666       100             2,766  
Oil and gas
    754       608             1,362  
Technology/Semiconductor
    228       142             370  
Telecommunications
    662       103       5       760  
Transportation
    294       57             351  
Other industries
    1,030       420       18       1,432  
 
                       
Total marketable equity securities
    11,282       5,653       213       16,722  
 
                       
Total available for sale securities
  $ 119,242     $ 9,011     $ 2,806     $ 125,447  
 
                       
 
                               
Held to maturity:
                               
Government-sponsored residential mortgage-backed securities
  $ 13,679     $ 959     $     $ 14,638  
 
                       
At December 31, 2010, the net unrealized gain on securities available for sale of $6.2 million, net of income taxes of $2.2 million, or $4.0 million, is included in accumulated other comprehensive loss.
The amortized cost and fair value of debt securities at June 30, 2011 by contractual maturities are presented below. Actual maturities may differ from contractual maturities because the securities may be called or repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

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    Available for Sale     Held to Maturity  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
June 30, 2011           (In thousands)          
Maturity:
                               
Within 1 year
  $ 3,008     $ 3,009     $     $  
After 1 but within 5 years
    24,506       24,688              
After 5 but within 10 years
    20,000       19,771              
After 10 years
    2,834       1,463              
 
                       
 
    50,348       48,931              
Mortgage-backed securities
    97,536       101,593       11,327       12,288  
 
                       
 
  $ 147,884     $ 150,524     $ 11,327     $ 12,288  
 
                       
At June 30, 2011, securities with a fair value of $3.0 million were pledged to secure public deposits and U.S. Treasury, tax and loan payments.
For the six months ended June 30, 2011, sales proceeds of available for sale securities totaled $14.5 million with gross gains totaling $6.3 million and gross losses totaling $125,000.
As of June 30, 2011, the Company did not own any investment or mortgage-backed securities of a single issuer, other than securities guaranteed by the U.S. Government or government-sponsored enterprises, which had an aggregate book value in excess of 10% of the Company’s stockholders’ equity.
The following tables summarize gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position, as of June 30, 2011 and December 31, 2010:
                                                 
    Less than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
June 30, 2011   (In thousands)  
Available for sale:
                                               
U.S. Government and government-sponsored enterprise obligations
  $ 16,748     $ 252     $     $     $ 16,748     $ 252  
Government-sponsored residential mortgage-backed securities
    62       1                   62       1  
Corporate debt securities
                1,464       1,371       1,464       1,371  
 
                                   
Total debt securities
  $ 16,810     $ 253     $ 1,464     $ 1,371     $ 18,274     $ 1,624  
 
                                   

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    Less than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
December 31, 2010   (In thousands)  
Available for sale:
                                               
U.S. Government and government-sponsored enterprises
  $ 34,327     $ 691     $     $     $ 34,327     $ 691  
Government-sponsored residential mortgage-backed securities
    5,046       14       30       1       5,076       15  
Corporate debt
                3,908       1,887       3,908       1,887  
 
                                   
Total debt securities
    39,373       705       3,938       1,888       43,311       2,593  
Marketable equity securities
    1,097       152       624       61       1,721       213  
 
                                   
Total
  $ 40,470     $ 857     $ 4,562     $ 1,949     $ 45,032     $ 2,806  
 
                                   
Of the securities summarized above as of June 30, 2011, 7 issues had unrealized losses for less than twelve months and 1 issue had an unrealized loss for twelve months or more. As of December 31, 2010, 21 issues had unrealized losses for less than twelve months and 9 issues had losses for twelve months or more.
U.S. Government and government-sponsored enterprises and mortgage-backed securities. The unrealized losses on the Company’s U.S. Government and government-sponsored securities were caused by increases in the rate spread to comparable treasury securities. The Company does not expect these securities to settle at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before the recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011.
Corporate debt securities. The unrealized losses on corporate debt securities related to one pooled trust preferred security, Preferred Term Security XXVIII, Ltd (PRETSL XXVIII). The unrealized loss on this security is caused by the low interest rate environment because it reprices quarterly to three month LIBOR and market spreads on similar securities have increased. The yield on this security is 0.69% verses a coupon rate at purchase of 5.27%. No loss of principal or break in yield is projected. Based on the existing credit profile, management does not believe that this investment will suffer from any credit related losses. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2011.
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.
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 operations.

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6. Loans Receivable and Allowance for Loan Losses
A summary of the Company’s loan portfolio is as follows:
                 
    June 30, 2011     December 31, 2010  
    (In thousands)  
Real estate loans:
               
Residential
  $ 724,061     $ 719,925  
Commercial
    509,045       489,511  
Construction
    71,846       78,627  
Commercial business loans
    135,816       130,303  
Installment and collateral loans
    4,783       5,921  
 
           
 
               
Total loans
    1,445,551       1,424,287  
 
               
Net deferred loan costs and premiums
    386       523  
Allowance for loan losses
    (15,328 )     (14,312 )
 
           
Loans, net
  $ 1,430,609     $ 1,410,498  
 
           
                 
    June 30, 2011     December 31, 2010  
    (In thousands)  
Recorded investment in impaired loans for which there is a related allowance for loan losses
  $ 1,534     $ 2,233  
Recorded investment in impaired loans for which there is no related allowance for loan losses
    11,328       10,127  
 
           
 
               
Total impaired loans
  $ 12,862     $ 12,360  
 
           
Valuation allowance related to impaired loans
  $ 247     $ 358  
 
               
Year to date average recorded investment in impaired loans
  $ 12,441     $ 13,112  
 
               
Year to date interest income recognized on impaired loans on a cash basis
  $ 211     $ 343  
The Company has no commitments to lend additional funds to borrowers whose loans are impaired.
Credit Quality Information
The Company utilizes a nine grade internal loan rating system for residential and commercial real estate, construction, commercial and installment and collateral loans as follows:
Loans rated 1 — 5: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 6: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
At the time of loan origination, a risk rating based on this 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 loans require that our internal independent credit area further evaluate the risk rating of

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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 on a semi-annual basis and by the Company’s internal credit management function. The internal and external analysis of the loan portfolio is utilized 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.
The following table presents the Company’s loans by risk rating at June 30, 2011 and December 31, 2010.
                                         
    Residential     Commercial                     Installment  
    Real Estate     Real Estate     Construction     Commercial     and Collateral  
    (In thousands)  
June 30, 2011
                                       
Loans rated 1 - 5
  $ 714,270     $ 472,800     $ 63,944     $ 130,994     $ 4,752  
Loans rated 6
    1,591       20,871       3,294       2,386        
Loans rated 7
    8,165       15,374       4,608       1,992       31  
Loans rated 8
    35                   444        
Loans rated 9
                             
 
                             
 
  $ 724,061     $ 509,045     $ 71,846     $ 135,816     $ 4,783  
 
                             
 
                                       
December 31, 2010
                                       
Loans rated 1 - 5
  $ 711,949     $ 451,723     $ 70,647     $ 125,280     $ 5,876  
Loans rated 6
    2,047       22,838       2,960       1,869       11  
Loans rated 7
    5,929       14,950       5,020       3,154       34  
Loans rated 8
                             
Loans rated 9
                             
 
                             
 
  $ 719,925     $ 489,511     $ 78,627     $ 130,303     $ 5,921  
 
                             
Note: All loans rated 9 have been fully written-off.
The Company’s lending activities are conducted primarily in Connecticut. The Company grants single-family and multi-family residential loans, commercial loans and a variety of consumer loans. In addition, the Company grants single-family grants loans for the construction of residential homes, residential developments and land development projects. The ultimate repayment of these loans is dependent on the borrower’s credit worthiness, the local economy and, for real estate loans, the local real estate market.

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Changes in the allowance for loss losses for the periods ended June 30, 2011 and 2010 are as follows:
                                 
    For the Three     For the Three     For the Six     For the Six  
    Months Ended     Months Ended     Months Ended     Months Ended  
    June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
    (In thousands)  
Balance, beginning of period
  $ 15,026     $ 13,418     $ 14,312     $ 12,539  
Provision for loan losses:
                               
Real estate(1)
    671       655       1,078       1,501  
Commercial
    69       339       161       463  
Installment and collateral
    (21 )     (5 )     (19 )     (4 )
Unallocated
    35       (80 )     286       (148 )
Loans charged-off:
                               
Real estate(1)
    (235 )     (1,155 )     (315 )     (1,155 )
Commercial
    (216 )     (25 )     (216 )     (50 )
Consumer
    (9 )     (8 )     (17 )     (14 )
Recoveries of loans previously charged-off:
                               
Real estate(1)
    1       1       48       3  
Commercial
    3             4        
Installment and collateral
    4       4       6       9  
 
                       
Balance, end of period
  $ 15,328     $ 13,144     $ 15,328     $ 13,144  
 
                       
 
(1)   Includes residential real estate, commercial real estate and construction loans.
Further information pertaining to the allowance for loan losses and impaired loans at June 30, 2011 and December 31, 2010 follows:
                                                         
    Residential     Commercial                     Installment              
    Real     Real                     and              
    Estate     Estate     Construction     Commercial     Collateral     Unallocated     Total  
June 30, 2011   (In thousands)  
Amount of allowance for loan losses for loans deemed to be impaired
  $ 245     $     $     $     $ 2     $     $ 247  
Amount of allowance for loan losses for loans not deemed to be impaired
    4,932       5,734       1,710       2,245       49       411       15,081  
Loans deemed to be impaired
    7,239       2,559       2,171       866       27             12,862  
Loans not deemed to be impaired
    716,822       506,486       69,675       134,950       4,756             1,432,689  

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    Residential     Commercial                     Installment              
    Real     Real                     and              
    Estate     Estate     Construction     Commercial     Collateral     Unallocated     Total  
December 31, 2010   (In thousands)  
Amount of allowance for loan losses for loans deemed to be impaired
  $ 156     $ 21     $     $ 176     $ 5     $     $ 358  
Amount of allowance for loan losses for loans not deemed to be impaired
    4,532       5,448       1,653       2,120       76       125       13,954  
Loans deemed to be impaired
    5,976       2,990       2,646       714       34             12,360  
Loans not deemed to be impaired
    713,949       486,521       75,981       129,589       5,887             1,411,927  
 
                                                       
The following is a summary of past due and non-accrual loans at June 30, 2011 and December 31, 2010:
                                                 
                    Greater             Past Due        
                    than 89             90 Days        
    30-59     60-89     Days             or More     Loans on  
    Days Past     Days Past     Past     Total     and Still     Non-  
    Due     Due     Due     Past Due     Accruing     accrual  
June 30, 2011   (In thousands)  
Real estate loans:
                                               
Residential
  $ 433     $ 957     $ 4,785     $ 6,175     $     $ 7,239  
Commercial
          112       1,722       1,834             2,559  
Construction
    948       1,003       2,171       4,122             2,171  
Commercial business loans
    431       27       124       582             866  
Installment and collateral loans
    8       6       1       15             27  
 
                                   
Total
  $ 1,820     $ 2,105     $ 8,803     $ 12,728     $     $ 12,862  
 
                                   
                                                 
                    Greater             Past Due        
                    than 89             90 Days        
    30-59     60-89     Days             or More     Loans on  
    Days Past     Days Past     Past     Total     and Still     Non-  
    Due     Due     Due     Past Due     Accruing     accrual  
December 31, 2010   (In thousands)  
Real estate loans:
                                               
Residential
  $ 7,899     $ 1,634     $ 2,952     $ 12,485     $     $ 5,976  
Commercial
                2,347       2,347             2,990  
Construction
    1,101       187       2,646       3,934             2,646  
Commercial business loans
    200       119       445       764             714  
Installment and collateral loans
    11       4       34       49             34  
 
                                   
Total
  $ 9,211     $ 1,944     $ 8,424     $ 19,579     $     $ 12,360  
 
                                   

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The following is a summary of impaired loans with and without a valuation allowance as of June 30, 2011 and December 31, 2010.
                                                 
    June 30, 2011     December 31, 2010  
 
           
            Unpaid                          
    Recorded     Principal     Related     Recorded     Unpaid Principal     Related  
    Investment     Balance     Allowance     Investment     Balance     Allowance  
    (In thousands)  
Impaired loans without a valuation allowance:
                                               
Real estate loans:
                                               
Residential
  $ 5,726     $ 5,726     $     $ 4,804     $ 4,804     $  
Commercial
    2,558       2,558             2,393       2,393        
Construction
    2,171       2,171             2,646       2,646        
Commercial business loans
    866       866             277       277        
Installment and collateral loans
    7       7             7       7        
 
                                   
Total
    11,328       11,328             10,127       10,127        
 
                                   
 
                                               
Impaired loans with a valuation allowance:
                                               
Real estate loans:
                                               
Residential
    1,513       1,758       245       1,016       1,172       156  
Commercial
                      576       597       21  
Construction
                                   
Commercial business loans
                      261       437       176  
Installment and collateral loans
    21       22       2       22       27       5  
 
                                   
Total
    1,534       1,780       247       1,875       2,233       358  
 
                                   
Total
  $ 12,862     $ 13,108     $ 247     $ 12,002     $ 12,360     $ 358  
 
                                   

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The following is a summary of average recorded investment in impaired loans with and without a valuation allowance and interest income recognized on those loans for the three months ended June 30, 2011 and 2010.
                                                 
    For the Three Months     For the Three Months  
    Ended June 30, 2011     Ended June 30, 2010  
                    Interest                     Interest  
                    Income                     Income  
    Average     Interest     Recognized     Average     Interest     Recognized  
    Recorded     Income     on a Cash     Recorded     Income     on a Cash  
    Investment     Recognized     Basis     Investment     Recognized     Basis  
    (In thousands)  
Impaired loans without a valuation allowance:
                                               
Real estate loans:
                                               
Residential
  $ 4,836     $ 51     $ 51     $ 2,076     $ 19     $ 19  
Commercial
    1,782       36       36       4,032       5       5  
Construction
    2,409                   2,432              
Commercial business loans
    330       8       8       184              
Installment and collateral loans
    5                   7              
 
                                   
Total
    9,362       95       95       8,731       24       24  
 
                                   
 
                                               
Impaired loans with a valuation allowance:
                                               
Real estate loans:
                                               
Residential
    1,557       18       18       1,795       19       19  
Commercial
    1,196                   1,025              
Construction
                      2,486              
Commercial business loans
    551       4       4       434              
Installment and collateral loans
    29       1       1                    
 
                                   
Total
    3,333       23       23       5,740       19       19  
 
                                   
Total
  $ 12,695     $ 118     $ 118     $ 14,471     $ 43     $ 43  
 
                                   

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The following is a summary of average recorded investment in impaired loans with and without a valuation allowance and interest income recognized on those loans for the six months ended June 30, 2011 and 2010.
                                                 
    For the Six Months     For the Six Months  
    Ended June 30, 2011     Ended June 30, 2010  
                    Interest                     Interest  
                    Income                     Income  
    Average     Interest     Recognized     Average     Interest     Recognized  
    Recorded     Income     on a Cash     Recorded     Income     on a Cash  
    Investment     Recognized     Basis     Investment     Recognized     Basis  
    (In thousands)  
Impaired loans without a valuation allowance:
                                               
Real estate loans:
                                               
Residential
  $ 5,133     $ 122     $ 122     $ 2,066     $ 42     $ 42  
Commercial
    2,041       40       40       3,297       31       31  
Construction
    2,329                   2,387       2       2  
Commercial business loans
    508       27       27       128       2       2  
Installment and collateral loans
    5       1       1       7              
 
                                   
Total
    10,016       190       190       7,885       77       77  
 
                                   
 
                                               
Impaired loans with a valuation allowance:
                                               
Real estate loans:
                                               
Residential
    1,401       20       20       1,550       41       41  
Commercial
    766                   822              
Construction
                      3,102              
Commercial business loans
    237                   304       2       2  
Installment and collateral loans
    21       1       1                    
 
                                   
Total
    2,425       21       21       5,778       43       43  
 
                                   
Total
  $ 12,441     $ 211     $ 211     $ 13,663     $ 120     $ 120  
 
                                   
Management has established the allowance for loan loss in accordance with GAAP for the period ending June 30, 2011 based on the current risk assessment and level of loss that is believed to exist within the portfolio. This level of reserve is deemed an appropriate estimate of probable loan losses inherent in the loan portfolio as of June 30, 2011 based upon the analysis conducted and given the portfolio composition, delinquencies, charge offs and risk rating changes experienced during the first two quarters of 2011 and the three-year evaluation period utilized in the analysis. Based on the qualitative assessment of the portfolio and in thorough consideration of non-performing loans, management believes that the allowance for loan losses properly supports the level of associated loss and risk.

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7. Federal Home Loan Bank Borrowings and Stock
The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). At June 30, 2011 and December 31, 2010, the Bank had access to a pre-approved secured line of credit with the FHLBB of $10.0 million. In accordance with an agreement with the FHLBB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At June 30, 2011 and December 31, 2010, there were no advances outstanding under the line of credit.
On June 29, 2011, the Company announced that it completed a balance sheet restructuring strategy. The Bank completed the repayment of $122.2 million of FHLBB advances with a weighted average interest rate of 4.17%. The borrowings extinguished were bullet advances with maturities in 2012 or later with rates that equaled or exceeded 3.00%. The repayment of the FHLBB advances incurred a pre-payment of penalty of $8.9 million, or $5.8 million after tax.
Subsequent to the receipt of funds from the recent second-step conversion, the Company was investing excess liquidity in low yielding short-term duration investments. With continued deposit growth and access to substantial liquidity though multiple sources, management felt it was prudent to apply excess liquidity to pay-down high cost borrowings to ideally position the balance sheet for growth in the current interest rate environment.
Contractual maturities and weighted average rates of outstanding advances from the FHLBB as of June 30, 2011 and December 31, 2010 are summarized below:
                                 
    June 30, 2011     December 31, 2010  
            Weighted-
Average
            Weighted-
Average
 
    Amount     Rate     Amount     Rate  
    (Dollars in thousands)  
2011
  $ 51,000       3.75 %   $ 73,320       3.70 %
2012
    7,000       4.09       37,400       4.21  
2013
                63,000       4.12  
2014
    8,112       3.70       26,912       4.13  
2015
    29,000       2.58       39,000       2.95  
Thereafter
    21,780       3.61       21,791       3.61  
 
                           
 
  $ 116,892       3.45 %   $ 261,423       3.80 %
 
                           
At June 30, 2011, five advances totaling $30.0 million with interest rates ranging from 3.19% to 4.39% are callable. Advances are collateralized by first mortgage loans with an estimated eligible collateral value of $354.3 million and $392.5 million at June 30, 2011 and December 31, 2010, respectively. The Bank is required to acquire and hold shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, and up to 4.5% of its advances (borrowings) from the FHLBB. The carrying value of FHLBB stock approximates fair value based on the most recent redemption provisions of the stock.

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8. Share-Based Compensation Plans
The Company maintains and operates the Rockville Financial, Inc. 2006 Stock Incentive Award Plan (the “Plan”) as approved by the Company’s Board of Directors and stockholders. 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. Prior to the Company’s second-step stock offering effective March 3, 2011, the Plan allowed for the issuance of a maximum of 349,830 restricted stock shares and 874,575 stock options. After adjusting for the 1.5167 exchange ratio established as a result of the stock offering, as of June 30, 2011, there were 24,406 restricted stock shares and 397,550 stock options that remain available for future grants under the Plan. There were 6,166 restricted shares and 64,573 stock option awards granted in 2011.
Total employee and Director share-based compensation expense recognized for stock options and restricted stock was $266,000 and $379,000 with a related tax benefit recorded of $93,000 and $133,000 for the three and six months ended June 30, 2011 of which Director share-based compensation expense recognized (in the consolidated statement of operations as other non-interest expense) was $16,000 and $31,000, respectively and officer share-based compensation expense recognized (in the consolidated statement of operations as salaries and benefit expense) was $251,000 and $347,000, respectively. The total charge of $379,000 for the six months ended June 30, 2011 includes $71,000 related to 5,927 vested restricted shares used for income tax withholding on behalf of certain executives which occurred in the first six months of 2011.
Stock Options: The following table presents the activity related to stock options under the Plan for the six months ended June 30, 2011:
                                 
                    Weighted Average     Aggregate  
            Weighted     Remaining     Intrinsic  
    Stock     Average     Contractual Term     Value  
    Options     Exercise Price     (in years)     (In thousands)  
 
Stock options outstanding at December 31, 2010(1)
    846,107     $ 8.44                  
Granted
    64,573       10.21                  
Exercised
                           
Forfeited or expired
    12,918       7.45                  
 
Stock options outstanding at June 30, 2011
    897,762     $ 8.58       6.4     $ 1,557  
 
Options exercisable at June 30, 2011
    727,516     $ 8.69       6.2     $  
 
 
(1)   The December 31, 2010 number of shares and weighted average price have been restated to reflect an exchange rate of 1.5167 related to the Company’s second-step stock offering.
The aggregate fair value of vested options was $190,000 and $91,000 for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, the unrecognized cost related to the stock options awarded of $414,000 will be recognized over a weighted-average period of 3.0 years.
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 six months ended June 30, 2011:
                 
            Weighted Average  
    Number     Grant-Date  
    of Shares     Fair Value  
 
Unvested as of December 31, 2010(1)
    41,916     $ 7.27  
Granted
    6,166       10.54  
Vested
    (20,870 )     7.55  
Forfeited
    (3,031 )     7.35  
 
Unvested as of June 30, 2011
    24,181     $ 7.85  
 
 
(1)   The December 31, 2010 number of shares and weighted average price have been restated to reflect an exchange rate of 1.5167 related to the Company’s second-step stock offering.
The fair value of restricted shares that vested during the six months ended June 30, 2011 and 2010 was $157,000 and $124,000, respectively. There were 6,166 shares of restricted stock granted during the six months ended June 30, 2011. As of June 30, 2011, there was $157,000 of total unrecognized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 2.6 years.

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Of the remaining unvested restricted stock, 2,501 shares will vest in 2011, 10,479 shares in 2012, 6,234 in 2013, and 3,734 in 2014 and 1,233 in 2015. All unvested restricted stock shares are not expected to vest.
9. Income Taxes
As of June 30, 2011 and December 31, 2010, there were no material uncertain tax positions 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 after December 31, 2006.
As of June 30, 2011 and December 31, 2010, the Company has not accrued any interest and penalties related to uncertain tax positions.
10. Accumulated Other Comprehensive (Loss) Income
Components of accumulated other comprehensive (loss) income, net of taxes, consist of the following:
                         
                    Accumulated  
    Minimum     Net Unrealized Gain     Other  
    Pension     on Available For     Comprehensive  
    Liability     Sale Securities     Loss  
            (In thousands)          
December 31, 2010
  $ (5,315 )   $ 4,033     $ (1,282 )
 
                       
Change
    323       (2,118 )     (1,795 )
 
                 
June 30, 2011
  $ (4,992 )   $ 1,915     $ (3,077 )
 
                 
The following table summarizes other comprehensive income and the related tax effects for the six months ended June 30, 2011:
         
    June 30, 2011  
    (In thousands)  
Net loss
  $ (979 )
 
     
Unrealized losses on securities available for sale
    (3,259 )
Income tax benefit
    1,141  
 
     
Net unrealized gain on securities available for sale
    (2,118 )
 
     
Benefit plans amortization
    497  
Income tax provision
    (174 )
 
     
Net benefit plans amortization
    323  
 
     
Total other comprehensive loss, net of tax
    (1,795 )
 
     
Total comprehensive loss
  $ (2,774 )
 
     
11. Regulatory Matters
The 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 to 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. At June 30, 2011, the Bank exceeded all regulatory capital requirements and is 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 June 30, 2011 and December 31, 2010 compared to the Federal Deposit Insurance Corporation’s requirements for classification as a well-capitalized institution and for minimum capital adequacy:
                                                 
                                    Minimum To Be  
                    Minimum For     Well Capitalized  
                    Capital     Under  
                    Adequacy     Prompt Corrective  
    Actual     Purposes     Action Provisions  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Dollars in thousands)  
Rockville Bank:
                                               
June 30, 2011
                                               
Total capital to risk weighted assets
  $ 255,398       18.9 %   $ 108,162       8.0 %   $ 135,203       10.0 %
Tier 1 capital to risk weighted assets
    239,711       17.7       54,080       4.0       81,120       6.0  
Tier 1 capital to total average assets
    239,711       12.9       74,560       4.0       93,200       5.0  
 
                                               
December 31, 2010
                                               
Total capital to risk weighted assets
  $ 167,793       12.7 %   $ 105,530       8.0 %   $ 131,913       10.0 %
Tier 1 capital to risk weighted assets
    153,090       11.6       52,744       4.0       79,116       6.0  
Tier 1 capital to total average assets
    153,090       9.1       67,515       4.0       84,394       5.0  
 
                                               
Rockville Financial, Inc.:
                                               
June 30, 2011
                                               
Total capital to risk weighted assets
  $ 349,659       25.8 %   $ 108,463       8.0 %     N/A       N/A  
Tier 1 capital to risk weighted assets
    333,972       24.6       54,216       4.0       N/A       N/A  
Tier 1 capital to total average assets
    333,972       18.0       74,093       4.0       N/A       N/A  
 
                                               
December 31, 2010
                                               
Total capital to risk weighted assets
  $ 181,178       13.7 %   $ 105,566       8.0 %     N/A       N/A  
Tier 1 capital to risk weighted assets
    166,475       12.6       52,765       4.0       N/A       N/A  
Tier 1 capital to total average assets
    166,475       10.4       64,090       4.0       N/A       N/A  
Connecticut law restricts the amount of dividends that the Bank can pay based on earnings for the current year and the preceding two years. As of June 30, 2011, $21.0 million is available for payment of dividends.
A reconciliation of the Company’s capital to regulatory capital is as follows:
                 
    June 30, 2011     December 31, 2010  
    (In thousands)  
Total capital per financial statements
  $ 332,125     $ 166,428  
Accumulated other comprehensive loss
    3,077       1,282  
Intangible assets
    (1,149 )     (1,149 )
 
           
Servicing assets
    (81)       (86 )
 
           
Total Tier 1 capital
    333,972       166,475  
Allowance for loan and other losses includible in Tier 2
               
capital
    15,687       14,703  
 
           
Total capital per regulatory reporting
  $ 349,659     $ 181,178  
 
           

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     Forward-Looking Statements
This 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.
 
    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.
 
    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.
 
    Further implementation of our stock benefit plans could increase our costs, which will 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 Emergency Economic Stabilization Act (“EESA”) of 2008 has and may continue to have a significant impact on the banking industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 and has resulted in dramatic regulatory changes that will affect the industry in general, and may impact the Company’s competitive position in ways that can’t be predicted at this time.
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

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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.
Overview
Rockville Financial, Inc., (the “Company”), a state-chartered bank holding company holds all of the common stock of Rockville Bank (“the Bank”). The Federal Reserve Board regulates the Company. The Company is the successor through reorganization effective March 3, 2011 to Rockville Financial, Inc. (“Old RFI”), a mid-tier holding company that owned the Bank and which itself was owned by Rockville Financial MHC, Inc. as majority owner and public stockholders (See Note 1).
The Company strives to remain a leader in meeting the financial service needs of the local community and to provide quality service to the individuals and businesses in the market areas that it has served since 1858. Rockville Bank is a community-oriented provider of traditional banking products and services to business organizations and individuals, offering products such as residential and commercial real estate loans, consumer loans and a variety of deposit products. Our business philosophy is to remain a community-oriented franchise and continue to focus on providing superior customer service to meet the financial needs of the communities in which we operate. Current strategies include expanding our banking network by pursuing new branch locations and branch acquisition opportunities in our market area, continuing our residential mortgage lending activities which comprise a majority of our loan portfolio and continuing to expand our commercial real estate and commercial business lending activities and growing our deposit base.
Critical Accounting Policies
The accounting policies followed by the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies, which involve the most complex subjective decisions or assessments, relate to allowance for loan losses, other-than-temporary impairment of investment securities, income taxes, pension and other post-retirement benefits and share-based compensation.
Allowance for Loan Losses: The allowance for loan losses is established as embedded losses are estimated to have occurred through the provisions for losses charged against operations and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is inherently subjective and is based on past loan loss experience, known and inherent losses and size of the loan portfolios, an assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, review of regulatory authority examination reports and other relevant factors. An allowance is maintained for impaired loans to reflect the difference, if any, between the carrying value of the loan and the present value of the projected cash flows or collateral value. Loans are charged-off against the allowance for loan losses when management believes that the uncollectibility of principal is confirmed. Any subsequent recoveries are credited to the allowance for loan losses when received. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, when considered necessary. There are three components for the allowance for loan loss calculation:
General component:
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels and trends in delinquencies; level and trend of charge-offs and recoveries; trends in volume and types of loans; effects of changes in risk selection and underwriting standards, changes in risk selection and underwriting standards; experience and depth of lending weighted average risk rating; and national and local economic trends and conditions. In the second quarter of 2011 the allowance for loan loss methodology was revised to utilize the most recent three year loss history as compared to the previous five year loss history. This change was made as management deemed that the shorter loss history period was most reflective of the level of inherent loss existing under the current economic environment. As a result of the change, the amount allocated to the general component of the reserve increased by $159,000.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

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Residential first and second mortgages — The Bank establishes maximum loan-to-value and debt-to-income ratios and minimum credit scores as an integral component of the underwriting criteria. Loans in these segments are collateralized by owner-occupied residential real estate and repayment is dependent on the income and credit quality of the individual borrower. Within the qualitative allowance factors, national and local economic trends including unemployment rates and potential declines in property value are key elements reviewed as a component of establishing the appropriate allocation. Overall economic conditions, unemployment rates and housing price trends will influence the underlying credit quality of these segments.
Commercial real estate — Loans in this segment are primarily income-producing properties throughout Connecticut and select markets in the Northeast. The underlying cash flows generated by the properties could be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually, continually monitors the cash flows of these loans and performs stress testing.
Construction loans — Loans in this segment primarily include commercial real estate development and residential subdivision loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial loans — Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy and its effect on business profitability and cash flow could have an effect on the credit quality in this segment.
Installment and collateral loans — Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
Allocated component:
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Residential and consumer loans are evaluated for impairment if payments are 90 days or more delinquent. Updated property evaluations are obtained at time of impairment and serve as the basis for the loss allocation if foreclosure is probable or the loan is collateral dependent.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
When a loan is determined to be impaired the Company makes a determination if the repayment of the obligation is collateral dependent. As a majority of impaired loans are collateralized by real estate, appraisals on the underlying value of the property securing the obligation are utilized in determining the specific impairment amount that is allocated to the loan as a component of the allowance calculation. If the loan is collateral dependent, an updated appraisal is obtained within a short period of time from the date the loan is determined to be impaired; typically no longer than 30 days for a residential property and 90 days for a commercial real estate property. The appraisal and the appraised value are reviewed for adequacy and then further discounted for estimated disposition costs and the period of time until resolution, in order to determine the impairment amount. The Company updates the appraised value at least annually and on a more frequent basis if current market factors indicate a potential change in valuation.
The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired.
Unallocated component:
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

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Credit Quality: The majority of the Company’s loans are collateralized by real estate located in central and eastern Connecticut in addition to a portion of the commercial real estate loan portfolio located in the Northeast region of the United States. Accordingly, the collateral value of a substantial portion of the Company’s loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions in these areas. The allowance for loan losses has been determined in accordance with GAAP, under which we are required to maintain an allowance for probable losses at the balance sheet date. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that our allowance for loan losses is adequate to cover specifically identifiable losses, as well as, estimated losses inherent in our portfolio that are probable, but not specifically identifiable.
While management uses available information to recognize losses on loans, future additions to the allowance or charge-offs may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies have the authority to require the Company to recognize additions to the allowance or charge-offs based on the agencies’ judgments about information available to them at the time of their examination.
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 in excess of $250,000 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. On an annual basis updated financial information is reviewed on all commercial loans with a relationship exposure of $250,000 and greater and the risk rating is evaluated based on current operating performance. Commercial loans under $250,000 and residential mortgage loans are re-evaluated if there is a delinquency greater than 30 days.
The credit quality of the Company’s commercial loan portfolio is further reviewed by a third party risk assessment firm which performs semi-annual reviews encompassing 65% to 70% of the commercial loan portfolio on an annual basis. Review findings and any related risk rating changes are reported to senior management, the Board Lending Committee and the Board of Directors.
Other-than-Temporary Impairment of Securities: On a quarterly basis, 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, credit losses on debt 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 for equity securities and for debt securities that have an identified credit loss. Losses on debt securities with no identified credit loss component are reflected in other comprehensive income. In the first six months of 2011, the Company experienced losses totaling $29,000 consisting of one available for sale equity security which was deemed to be other-than-temporarily impaired. Held to maturity securities are comprised of U.S. government-sponsored mortgage-backed securities with no unrealized losses at June 30, 2011. 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.
Income Taxes: The Company recognizes 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 an 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.
In 1998, the Company created and has since maintained a “passive investment company” (“PIC”), as permitted by Connecticut law. At June 30, 2011, there were no material uncertain tax positions 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 after December 31, 2006. 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 June 30, 2011, management believes it is more likely than not that the deferred tax assets will be

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realized through future reversals of existing taxable temporary differences. As of June 30, 2011, our net deferred tax asset was $7.7 million and there was no valuation allowance.
Pension and Other Post-retirement Benefits: We have a noncontributory defined benefit pension plan that provides benefits for substantially all employees hired before January 1, 2005 who meet certain requirements as to age and length of service. The benefits are based on years of service and average compensation, as defined. Our funding policy is to contribute annually the maximum amount that could be deducted for federal income tax purposes, while meeting the minimum funding standards established by the Employee Retirement Security Act of 1974 (“ERISA”).
In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees. Participants or eligible employees hired before March 1993 become eligible for the benefits if they retire after reaching age 62 with five or more years of service. A fixed percent of annual costs are paid depending on length of service at retirement. We accrue for the estimated costs of these other post-retirement benefits through charges to expense during the years that employees render service. The Company makes contributions to cover its current benefits paid under this plan.
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.
Share-based Compensation: The Company accounts for stock options and restricted stock 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). The Company expenses 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. The Company uses the Black-Scholes option valuation model to value stock options. Determining the appropriate fair-value model and calculating the estimated fair value of share-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. The Company develops estimates based on historical data and market information which can change significantly over time.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2011 and 2010
The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans and investments, and the interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest 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 non-interest expense primarily consists of employee compensation and benefits, occupancy and equipment, service bureau fees, and other non-interest 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 six months ended June 30, 2011 and 2010.
Income Statement Summary
                                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2011     2010     Change     2011     2010     Change  
                    (In thousands)                  
Net interest income
  $ 13,770     $ 13,159     $ 611     $ 27,165     $ 26,557     $ 608  
Provision for loan losses
    754       909       (155 )     1,506       1,812       (306 )
Non-interest income
    7,819       2,365       5,454       9,507       4,052       5,455  
Non-interest expense
    20,708       9,392       11,316       36,652       19,027       17,625  
 
                                   
Income (loss) before income taxes
    127       5,223       (5,096 )     (1,486 )     9,770       (11,256 )
Income tax provision (benefit)
    84       1,759       (1,675 )     (507 )     3,452       (3,959 )
 
                                   
Net income (loss)
  $ 43     $ 3,464     $ (3,421 )   $ (979 )   $ 6,318     $ (7,297 )
 
                                   

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Net income decreased $3.4 million to $43,000 for the quarter ended June 30, 2011 compared to $3.5 million for the same period last year. The decrease in net income primarily resulted from the balance sheet restructuring that occurred in June 2011. The restructuring better positions the Company to compete in the current rate environment while maintaining a flexible liquidity position for future opportunities. The restructuring involved the prepayment of $122.2 million of FHLBB borrowings which resulted in a pretax prepayment penalty of $8.9 million recorded as non-interest expense. An increase in salary and benefits expense of $1.8 million also contributed to the increase in non-interest expense for the three months ended June 30, 2011 over June 30, 2010. The results of our first quarter study on our infrastructure needs mandated the need for additional human resources as the Company prepares to leverage its additional capital and accelerate our growth following the second-step conversion completed in March 2011. Also, as part of the restructuring, the Company sold $8.2 million of available for sale securities which resulted in a pretax gain of $6.2 million. Net interest income increased $611,000 due to a $312,000 increase in interest and dividend income on earning assets coupled with a $299,000 decline in the cost of funds.
Net income decreased by $7.3 million from the six months ended June 30, 2011 compared to the same period last year and resulted in a loss of $979,000. The decrease in net income mainly resulted from a contribution of $5.0 million, $3.3 million after tax, made by the Company to the Rockville Bank Foundation, Inc. and the net effects of the balance sheet restructuring described above. Salary and benefits expense was $12.3 million, an increase of $2.7 million over the six months ended June 30, 2010 as the Company prepares for growth. The increase also reflects expense incurred during the period relating to the retirement of an executive. Net interest income increased $608,000 due to a $100,000 increase in income on earning assets coupled with a $508,000 decline in the cost of funds.

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Net Interest Income Analysis
Average Balance Sheets, Interest and Yields/Costs: The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Loans held for sale and non-accrual loans are included in the computation of interest-earning average balances, with non-accrual loans carrying a zero yield. The yields set forth below include the effect of deferred costs, discounts and premiums that are amortized or accreted to interest income or expense.
                                                 
    Three Months Ended June 30,  
    2011     2010  
    Average     Interest and     Yield/     Average     Interest and     Yield/  
    Balance     Dividends     Cost     Balance     Dividends     Cost  
                    (Dollars in thousands)                  
Interest-earning assets:
                                               
Loans receivable, net (1)
  $ 1,423,417     $ 17,481       4.91 %   $ 1,361,615     $ 17,357       5.10 %
Investment securities
    186,620       1,422       3.05       122,359       1,260       4.12  
Federal Home Loan Bank stock
    17,007       13       0.31       17,007              
Other earning assets
    163,694       16       0.04       13,797       3       0.09  
 
                                       
Total interest-earning assets
    1,790,738       18,932       4.23       1,514,778       18,620       4.92  
 
                                           
Non-interest-earning assets
    76,215                       67,480                  
 
                                           
Total assets
  $ 1,866,953                     $ 1,582,258                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
NOW and money market accounts
  $ 359,100       334       0.37     $ 351,897       388       0.44  
Savings accounts (5)
    182,739       118       0.26       163,487       146       0.36  
Time deposits
    561,638       2,445       1.74       481,623       2,319       1.93  
 
                                       
Total interest-bearing deposits
    1,103,477       2,897       1.05       997,007       2,853       1.14  
Advances from the Federal Home Loan Bank
    235,185       2,265       3.85       259,508       2,608       4.02  
 
                                       
Total interest-bearing liabilities
    1,338,662       5,162       1.54 %     1,256,515       5,461       1.74 %
 
                                           
Non-interest-bearing liabilities
    190,436                       163,065                  
 
                                           
Total liabilities
    1,529,098                       1,419,580                  
Stockholders’ equity
    337,855                       162,678                  
 
                                           
Total liabilities and stockholders’ equity
  $ 1,866,953                     $ 1,582,258                  
 
                                           
 
                                               
Net interest income
          $ 13,770                     $ 13,159          
 
                                           
Net interest rate spread (2)
                    2.69 %                     3.18 %
Net interest-earning assets (3)
  $ 452,076                     $ 258,263                  
 
                                           
Net interest margin (4)
                    3.08 %                     3.47 %
Average interest-earning assets to average interest-bearing liabilities
                    133.77 %                     120.55 %
 
(1)   Includes loans held for sale.
 
(2)   Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
 
(3)   Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
 
(4)   Net interest margin represents the annualized net interest income divided by average total interest-earning assets.
 
(5)   Includes mortgagors’ and investors’ escrow accounts.

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    Six Months Ended June 30,  
    2011     2010  
    Average     Interest and     Yield/     Average     Interest and     Yield/  
    Balance     Dividends     Cost     Balance     Dividends     Cost  
                    (Dollars in thousands)                  
Interest-earning assets:
                                               
Loans receivable, net (1)
  $ 1,419,050     $ 35,016       4.94 %   $ 1,359,526     $ 34,998       5.15 %
Investment securities
    162,354       2,588       3.19       120,860       2,560       4.24  
Federal Home Loan Bank stock
    17,007       26       0.31       17,007              
Other earning assets
    160,362       31       0.04       7,316       3       0.08  
 
                                       
Total interest-earning assets
    1,758,773       37,661       4.28       1,504,709       37,561       4.99  
 
                                           
Non-interest-earning assets
    94,910                       66,684                  
 
                                           
Total assets
  $ 1,853,683                     $ 1,571,393                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
NOW and money market accounts
  $ 352,270       691       0.39     $ 346,874       793       0.46  
Savings accounts (5)
    175,077       237       0.27       156,983       274       0.35  
Time deposits
    556,456       4,880       1.75       483,414       4,786       1.98  
 
                                       
Total interest-bearing deposits
    1,083,803       5,808       1.07       987,271       5,853       1.19  
Advances from the Federal Home Loan Bank
    245,015       4,688       3.83       262,882       5,151       3.92  
 
                                       
Total interest-bearing liabilities
    1,328,818       10,496       1.58 %     1,250,153       11,004       1.76 %
 
                                           
Non-interest-bearing liabilities
    245,777                       160,141                  
 
                                           
Total liabilities
    1,574,595                       1,410,294                  
Stockholders’ Equity
    279,088                       161,099                  
 
                                           
Total liabilities and stockholders’ equity
  $ 1,853,683                     $ 1,571,393                  
 
                                           
 
                                               
Net interest income
          $ 27,165                     $ 26,557          
 
                                           
Net interest rate spread (2)
                    2.70 %                     3.23 %
Net interest-earning assets (3)
  $ 429,955                     $ 254,556                  
 
                                           
Net interest margin (4)
                    3.09 %                     3.53 %
Average interest-earning assets to average interest-bearing liabilities
                    132.36 %                     120.36 %
 
(1)   Includes loans held for sale.
 
(2)   Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
 
(3)   Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
 
(4)   Net interest margin represents the annualized net interest income divided by average total interest-earning assets.
 
(5)   Includes mortgagors’ and investors’ escrow accounts.

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Rate-Volume Analysis
The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
                                                 
    Three Months Ended             Six Months Ended          
    June 30, 2011 Compared to     June 30, 2011 Compared to  
    June 30, 2010     June 30, 2010  
    Increase (Decrease)             Increase (Decrease)        
    Due To             Due To        
    Volume     Rate     Net     Volume     Rate     Net  
                    (In thousands)                  
Interest and dividend income:
                                               
Loans receivable
  $ 772     $ (648 )   $ 124     $ 1,500     $ (1,482 )   $ 18  
Securities interest, dividends & income from other assets
    1,096       (908 )     188       2,080       (1,998 )     82  
 
                                   
Total earning assets
    1,868       (1,556 )     312       3,580       (3,480 )     100  
 
                                   
 
                                               
Interest expense:
                                               
NOW and money market accounts
    8       (62 )     (54 )     12       (114 )     (102 )
Savings accounts
    16       (44 )     (28 )     29       (67 )     (38 )
Time deposits
    362       (236 )     126       676       (582 )     94  
 
                                   
Total interest-bearing deposits
    386       (342 )     44       717       (763 )     (46 )
FHLBB Advances
    (237 )     (106 )     (343 )     (343 )     (119 )     (462 )
 
                                   
Total interest-bearing liabilities
    149       (448 )     (299 )     374       (882 )     (508 )
 
                                   
 
                                               
Change in net interest income
  $ 1,719     $ (1,108 )   $ 611     $ 3,206     $ (2,598 )   $ 608  
 
                                   
Net Interest Income: Net interest income before the provision for loan loss was $13.8 million for the three months ended June 30, 2011, compared to $13.2 million for the same period in the prior year, an increase of $600,000. In the second quarter of 2011 interest income on earning assets was $18.9 million, an increase of $312,000, yielding an average of 4.23%, a decrease of 69 basis points, as compared to the same period of 2010. Average interest-bearing liabilities increased $82.1 million, or 6.5%, to $1.34 billion for the three months ended June 30, 2011, costing an average of 1.54%, a decrease of 20 basis points. Average time deposits increased $80.0 million in the second quarter of 2011. Average NOW and money market account balances increased $7.2 million and average savings account balances increased $19.3 million compared to the same period last year. In the second quarter of 2011, the cost of interest-bearing liabilities was $5.2 million, a decrease of $299,000 from the same period last year.
The increase in the average interest-earning assets reflects the net impact of the second-step conversion in March 2011 and the balance sheet restructuring in June 2011. Loan growth remained strong averaging $61.8 million higher in the second quarter of 2011 compared to the second quarter of 2010. In the second quarter of 2011, average available for sale securities increased $64.3 million over the same period last year due to the purchases made possible by the additional funds gathered in the second-step conversion and despite the sale of $8.2 million of securities in late June 2011 as part of the balance sheet restructuring efforts. The increase in average interest-bearing liabilities reflects the net impact of continued growth of average core interest-bearing deposits of $26.5 million and an $80.0 million increase in time deposits. Average FHLBB borrowings fell $24.3 million in the second quarter 2011 from the same period last year as the Bank completed the repayment of $122.2 million of FHLBB advances in June 2011. Average net interest-earning assets increased by $193.8 million to $452.1 million. The Company’s net interest margin decreased 39 basis points to 3.08% compared to 3.47% for the same period in the prior year. The Company’s net interest rate spread decreased 49 basis points to 2.69% due to a 69 basis point reduction in the earning asset yield combined with a decrease in the cost of funds of 20 basis points.

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Net interest income before the provision for loan loss was $27.2 million for the six months ended June 30, 2011, compared to $26.6 million for the same period in the prior year. The increase in net interest income of $608,000, or 2.3%, is primarily due to a $175.4 million, or 68.9%, increase in average net interest-earning assets, partially offset by a 44 basis point decrease in the Company’s net interest margin to 3.09% as funds acquired through our second-step conversion were initially placed in relatively low-yielding assets. Average earning assets increased by $254.1 million, or 16.9%, to $1.76 billion while average interest-bearing liabilities increased $78.7 million, or 6.3% to $1.33 billion due to our yearlong campaign to raise deposits. The increase in the average net interest-earning assets reflects the growth obtained through the second-step conversion and the net impact of continued strong loan growth funded primarily by time deposits. Our net interest rate spread decreased 53 basis points to 2.70% from 3.23% for the same period in the prior year due to a 71 basis point decrease in our average earning asset yield resulting from the reinvestment of the cash received in the second-step conversion in low-yielding assets which was partially offset by an 18 basis point decline in our average cost of funds.
Interest and Dividend Income: Interest and dividend income increased $312,000, or 1.7%, to $18.9 million for the three months ended June 30, 2011 from $18.6 million for the same period in the prior year. An increase of $64.3 million of average available for sale securities offset by a 107 basis point decline in the yield on those securities accounted for $162,000 additional interest and dividend income on investment securities. Interest income on loans receivable increased $124,000, or 0.7%, to $17.5 million. The increase in loan interest income was due to growth in average net loans for the period of $61.8 million, or 4.5% which was offset by a 19 basis point reduction on average loan yields. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. The Company’s yield on interest-earning assets decreased 69 basis points to 4.23% from 4.92%. The decrease in the average yield was attributable to the reinvestment of the cash received in the second-step conversion to low-yielding investments and the addition of new loans and investments at lower yields than the second quarter last year and adjustable rate loans repricing downward. The effect of the lowering rates on the Company’s portfolio is delayed for adjustable-rate residential mortgage loans, with interest rates which adjust annually based on the one-year Constant Maturity Treasury Bill Index, after either a one, three, four, five, seven, or nine-year initial fixed rate period. The prime rate used as an index to re-price various commercial and home equity adjustable loans remained unchanged at 3.25% for the three months ended June 30, 2011 compared to the same period last year. The one-year Constant Maturity Treasury Bill Index used to re-price adjustable rate residential mortgages decreased 12 basis points during the past year to 0.19% at June 30, 2011 compared to 0.31% at June 30, 2010.
For the six months ended June 30, 2011, interest and dividend income increased $100,000, or 0.3%, to $37.7 million from $37.6 million for the same period in the prior year. The Company’s average interest-earning assets grew $254.1 million while the yield on interest-earning assets decreased 71 basis points to 4.28% from 4.99%. An increase of $41.5 million of average available for sale securities offset by a 105 basis point decline in yield accounted for a $28,000 increase in interest and dividend income. Interest income on loans receivable increased $18,000, or 0.1%, to $35.0 million. Dividends earned on FHLBB stock totaled $26,000 year to date since the reinstatement of the dividend in the first quarter of this year. Other earning assets, consisting mainly of overnight funds, earned $28,000 year to date. Average net loans totaled $1.42 billion, $59.5 million higher in the second quarter of 2011 than the same period last year, however the 21 basis point reduction on average loan yields offset most of the expected revenue increase.
Interest Expense: Interest expense for the three months ended June 30, 2011 decreased $299,000, or 5.5%, to $5.2 million from $5.5 million compared to the same period last year. The savings resulted from a decrease of 20 basis points paid on average interest-bearing liabilities which was offset by an $82.1 million, or a 6.5%, increase in average interest-bearing liabilities. The decrease in the cost of funds was primarily due to the impact that the sustained low interest rate environment had on the Company’s interest-bearing deposits during the second quarter of 2011 resulting in a reduction in the cost of funds of 9 basis points. Average balances on interest-bearing deposits rose to $1.10 billion, an increase of $106.5 million as the growth in time deposits accounted for $80.0 million of the total growth. NOW and money market accounts and savings accounts increased $7.2 million and $19.3 million, respectively. Generally, management would prefer to fund growth with deposits instead of wholesale borrowings. Current market conditions are such that the growth in deposits and the additional capital received from the stock conversion allowed the Company to reduce its FHLBB borrowings by $122.2 million to $116.9 million at June 30, 2011 eliminating annualized pretax interest expense of $5.4 million and reducing total cost of funds going forward. Average outstanding advances from the Federal Home Loan Bank were $235.2 million. The interest rate on these borrowings averaged 3.85%, a decrease of 17 basis points compared to the average rate of 4.02% last year.
Interest expense for the six months ended June 30, 2011 decreased $508,000, or 4.6%, to $10.5 million from $11.0 million compared to the same period in the prior year. The savings resulted from a decrease of 18 basis

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points paid on average interest-bearing liabilities in combination with a $78.7 million, or a 6.3%, increase in average interest-bearing liabilities. The decrease in the cost of funds was primarily due to the impact of having $17.9 million fewer average balances in FHLBB borrowings coupled with a drop of 9 basis points in the cost of borrowings. Average balances on interest-bearing deposits rose to $1.08 billion, an increase of $96.5 million, as the growth in time deposits totaled $73.0 million, NOW and money market accounts increased $5.4 million and savings accounts grew $18.1 million. Average outstanding advances from the Federal Home Loan Bank were $245.0 million with an average cost of 3.83%.
Provision for Loan Losses: The allowance for loan losses is maintained at a level management determined to be appropriate to absorb estimated credit losses that are probable at the dates of the financial statements. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis and charges any provision for loans losses needed to current operations. The assessment considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Based on our evaluation of these factors, management recorded provisions of $754,000 for the three months ended June 30, 2011, as compared to $909,000 for the same period in the prior year primarily due to continued assessment of estimated exposure on impaired loans. The repayment of these impaired loans is largely dependent upon the sale and value of collateral that may be impacted by current real estate conditions. At June 30, 2011, the allowance for loan losses totaled $15.3 million, which represented 1.06% of total loans and 119.18% of non-performing loans compared to an allowance for loan losses of $14.3 million, which represented 1.00% of total loans and 115.79% of non-performing loans as of December 31, 2010.
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 listed on the Company’s “watchlist” and 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. In addition, the Company maintains a listing of “criticized loans” consisting of Substandard and Doubtful loans which are transferred to the Special Assets area which totaled $30.6 million at June 30, 2011.
The Company closely monitors the watchlist for signs of deterioration to mitigate the growth in non-accrual loans. At June 30, 2011, watchlist loans totaled $58.8 million, of which $45.9 million are not considered impaired.
Non-interest Income: The Company has the following sources of non-interest income: banking service charges on deposit accounts, bank-owned life insurance, mortgage servicing income, loan fee income, gains on sales of securities, derivative financial instruments and brokerage and insurance fees from Infinex, Inc., the Bank’s on-premise provider of non-deposit investment services.
Non-interest income increased by $5.5 million to $7.8 million for the quarter ended June 30, 2011, compared to $2.4 million for the same period last year due to the gain of $6.2 million on the sale of $8.2 million of securities recognized as part of the balance sheet restructuring plan. Service charges and fees decreased $310,000 to $1.7 million for the quarter. The decrease was mainly attributable to a $409,000 reduction in loan fee income generated by Rockville Bank Mortgage, Inc. due to slowing loan demand and a net reduction in the collection of insufficient funds fees of $58,000 resulting from a policy change implemented late last year. Partially offsetting these was an increase in ATM fees of $80,000 and loan servicing income of $87,000. During the second quarter of 2011, the Company did not sell any fixed rate residential mortgages in the secondary market as it did in the prior year resulting in a reduction of net gains from the sale of loans of $364,000. Additionally, the Company’s other non-interest income fell $74,000 due to the loss on the disposal of fixed assets in the Company’s Vernon Connecticut branch totaling $107,000, which was razed due to winter storm damage and will be reconstructed by the fourth quarter of 2011, and which was offset by lower losses on the sale of other real estate owned properties of $30,000. There was no other-than-temporary impairment of securities in the second quarter of either year.
Non-interest income increased by $5.5 million to $9.5 million for the six months ended June 30, 2011, compared to $4.1 million for the same period last year. There were gains from the sale of securities of $6.2 million in 2011, primarily the result of the balance sheet restructuring, compared to $188,000 of gains in 2010, an increase of $6.0 million. Service charges and fees increased $44,000 primarily due to increases in ATM fees of $163,000 and an increase of $62,000 in loan servicing income offset by reductions totaling $60,000 of loan fee income generated by Rockville Bank Mortgage, Inc., $23,000 of reverse mortgage commissions and $100,000 in insufficient fund fees. Gains on the sale of loans decreased $465,000 in the first six months of 2011 and the loss on the disposal of fixed assets increased $109,000 compared to the same period last year. There was $29,000 of other-than-temporary impairment of securities in 2011 compared to none in 2010.

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Non-interest Expense: The following table summarizes non-interest expense for the three and six months ended June 30, 2011 and 2010:
                                                 
    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2011     2010     Change     2011     2010     Change  
                    (In thousands)                  
Salaries and employee benefits
  $ 6,613     $ 4,831     $ 1,782     $ 12,284     $ 9,621     $ 2,663  
Service bureau fees
    1,128       987       141       2,187       1,986       201  
Occupancy and equipment
    1,100       1,055       45       2,266       2,182       84  
Professional fees
    498       368       130       1,182       758       424  
Marketing and promotions
    441       397       44       765       671       94  
FDIC assessments
    506       401       105       1,020       801       219  
Other real estate owned
    15       99       (84 )     74       467       (393 )
Contribution to Rockville Bank Foundation, Inc.
                      5,043             5,043  
Loss on extinguishment of debt
    8,914             8,914       8,914             8,914  
Other
    1,493       1,254       239       2,917       2,541       376  
 
                                   
Total non-interest expense
  $ 20,708     $ 9,392     $ 11,316     $ 36,652     $ 19,027     $ 17,625  
 
                                   
Non-interest expense increased $11.3 million, or 120.5%, to $20.7 million for the three months ended June 30, 2011 compared to $9.4 million for the same period in the prior year. The $8.9 million penalty paid on the prepayment of FHLBB advances which was completed as part of the Company’s balance sheet restructuring plan accounted for 78.8% of the non-interest expense increase in the second quarter 2011 compared to the second quarter 2010. Salary and employee benefits expense increased $1.8 million which was attributable to rebuilding the Information Technology organization, adding to and strengthening the risk-management organization, and expanding the commercial lending staff as the Company prepares to leverage our capital and support growth following the second-step conversion completed in March 2011. Included in the $1.8 million increase of salary and employee benefits expense is the recognition of $830,000 of retirement expenses to a former executive effective June 30, 2011, and contractual payments of a $100,000 cash bonus to the current Chief Executive Officer and approximately an additional $120,000 of either sign-on bonuses to new executives or final cash payments to the former Chief Executive Officer. The number of full-time equivalent employees increased to 252 as of June 30, 2011 compared to 242 as of June 30, 2010. The majority of the increase was from the creation of new positions which included a Chief Risk Officer, two commercial lenders, an internal audit manager, a Bank Secrecy Act officer, two retail branch administration officers, an information security officer, and a treasury officer. Service bureau fees increased $141,000 as the result of higher ATM servicing fees of $41,000, other service bureau fees of $94,000 and wide-area network servicing fees of $6,000. Occupancy and equipment expense increased $45,000 mainly due to increases in utilities and maintenance expense which was offset by decreases in rent and depreciation expense. Professional fees increased $130,000, of which, $73,000 was for audit and legal fees and $57,000 for consulting fees. $80,000 of the increase was mainly attributable to the retention of consultants to perform a bank-wide efficiency and human capital study to evaluate infrastructure and risk management needs as the Company prepares to leverage our capital following the second-step conversion from a Mutual Holding Company status. Marketing and promotions expense increased $44,000 mainly due to the introduction and succession planning process of the Company’s new chief executive officer and increased advertising to take advantage of competitive opportunities. Other real estate owned expense decreased $84,000 for the quarter ended June 30, 2011 which was consistent with the decrease in the level of foreclosed assets.
Non-interest expense increased $17.6 million, or 92.6%, to $36.7 million for the six months ended June 30, 2011 compared to $19.0 million for the same period in the prior year. The $8.9 million FHLBB prepayment penalty to the FHLBB and the $5.0 million contribution to the Rockville Bank Foundation, Inc. accounted for 79.2% of the increase. In addition to these nonrecurring expenses, salary and employee benefits expense increased $2.3 million which is related to the aforementioned additions to staff in preparation for the Bank’s growth plans, the aforementioned executive retirement, additional bonus and obligation payments to the current Chief Executive Officer, William H. W. Crawford, IV, of $300,000 and to the former Chief Executive Officer, William J. McGurk, of $200,000 during the period ended March 31, 2011, and to some extent new expenses related to the newly created Chief Risk Officer position, and the head Information Technology. Service bureau fees increased $201,000, primarily as the result of higher ATM servicing fees of $65,000 and service bureau fees of $129,000. Occupancy and equipment expense increased $84,000 mainly due to increases in utilities and maintenance expense which was offset by decreases in depreciation expense. Professional fees increased $424,000 due to

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increases in consulting fees of $359,000 and audit and legal fees of $65,000 which were necessary to consider and evaluate the infrastructure and risk management needs to proceed with the Bank’s growth plans.
Marketing and promotions expense increased $94,000 mainly due to the introduction of the Company’s new chief executive officer and increased advertising to take advantage of competitive opportunities. FDIC assessments increased $219,000 as a result of the growth in deposit balances. Other real estate owned expense decreased $393,000.
Income Tax Provision: Income tax provision decreased $1.7 million to $84,000 for the three months ended June 30, 2011 as compared to $1.8 million for the same period in the prior year. Year to date income tax benefit is $507,000 due to the loss experienced in the first six months of 2011. Income taxes are provided on an interim basis using the estimated annual effective tax rate. The effective tax rate was 34.1% and 35.3% of pretax income for the six months ended June 30, 2011 and 2010, respectively.
The decrease in the effective tax rate was attributable to an increase in state income tax. Due to increased activity in Massachusetts, the Company began filing Massachusetts corporation income tax return for the calendar year 2010. The Company recorded a federal income tax benefit of 35.4% and a provision for state income taxes of 1.3% providing an effective tax rate of 34.1% for the period ended June 30, 2011.
Comparison of Financial Condition at June 30, 2011 and December 31, 2010
Summary: The Company’s total assets increased $68.5 million, or 4.1%, to $1.75 billion at June 30, 2011, from $1.68 billion at December 31, 2010, primarily due to the second-step conversion completed on March 3, 2011 which raised $168.0 million. Proceeds from the conversion were used to purchase short-term investments, available for sale securities and to pay off FHLBB advances, and on June 29, 2011, the Bank completed the repayment of $122.2 million of FHLBB advances with a weighted average interest rate of 4.17%. Additionally, the Bank also sold approximately $14.5 million in available-for-sale equity investments.
Cash and cash equivalents increased to $80.7 million, or 33.0%, at June 30, 2011 from $60.7 million at December 31, 2010. Available for sale securities increased to $153.8 million, or 22.6%, at June 30, 2011 from $125.4 million at year end. Net loans receivable increased $20.1 million, or 1.4%, to $1.43 billion at June 30, 2011 compared to December 31, 2010. Compared to the second quarter of 2010, average earning assets increased by $254.1 million, or 16.9%, to $1.76 billion mainly due to the additional $168.0 million in net proceeds received from the Company’s stock conversion in the first quarter of 2011 and $59.5 million in loan growth. Deposits increased $57.6 million, or 4.7%, from December 31, 2010, to $1.28 billion at June 30, 2011. Interest-bearing deposits grew $59.5 million in the first six months of 2011 to $1.11 billion from $1.05 billion at December 31, 2010. Non-interest-bearing deposits totaled $166.9 million at June 30, 2011, a decrease of $1.9 million from year end 2010. Federal Home Loan Bank advances decreased $144.5 million, or 55.3%, to $116.9 million at June 30, 2011 from $261.4 million at December 31, 2010.
Total stockholders’ equity increased $165.7 million, or 99.6%, to $332.1 million at June 30, 2011 compared to $166.4 million at December 31, 2010. This was due to the capital raised in the second-step conversion completed in the first quarter of 2011. As a result, common stock increased $158.5 million, net of retired treasury shares totaling $9.5 million, and additional paid-in capital increased $10.0 million. In addition, the level of unallocated ESOP shares increased to $10.0 million from $3.5 million as additional shares were purchased for the ESOP thereby reducing equity by $6.6 million. Also reducing total equity was the reduction in retained earnings of $4.1 million due to the operating loss and the payment of dividends in 2011 and an increase of $1.8 million in the accumulated other comprehensive loss.
Investment Securities: At June 30, 2011, the Company’s investment portfolio was $165.2 million, or 9.5% of total assets, consisted of available for sale securities of $153.9 million and held to maturity securities of $11.3 million. The increase in available for sale securities of $28.4 million as compared to December 31, 2010, was mainly due to the purchase of $39.3 million of government-sponsored enterprise mortgage-backed investments and $16.8 million of U.S. Government-sponsored enterprise investments offset by the proceeds received from the sale of $14.5 million of equity securities and Fannie Mae and Freddie Mac preferred securities at a gain of $6.2 million, $8.6 million of principal payments of government-sponsored enterprise mortgage-backed securities, $7.5 million of U.S. Government-sponsored enterprise mortgage-backed investments which were called and a reduction of the unrealized gains on available for sale securities of $3.3 million. At June 30, 2011, the available for sale securities portfolio was comprised of $44.4 million in U.S. Government and U.S. Government-sponsored enterprise securities, $4.5 million in corporate bonds, $101.6 million in Government-sponsored residential mortgage-backed securities and $3.3 million in marketable equity securities. The decrease in the net unrealized gains on investment securities available for sale largely reflects the common and preferred equity sales in the quarter and to a lesser degree, the effect of decreasing long-term investment market rates had on the debt securities portfolio during the first three months of 2011. The held to maturity securities portfolio had an

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amortized cost of $11.3 million comprised of Government-sponsored residential mortgage-backed securities that had a fair market value of $12.3 million at June 30, 2011. Principal payments totaling $2.4 million were made on held to maturity securities during the six months ended June 30, 2011; there were no purchases.
Lending Activities: Net loans receivable increased $20.1 million to $1.43 billion at June 30, 2011. The increase was primarily due to increases in commercial real estate loans of $19.5 million and commercial business loans of $5.3 million. Residential real estate loans increased $4.1 million to $724.1 million as demand for new borrowings has decreased in 2011 compared to last year. Real estate construction loans decreased $6.9 million to $71.8 million from year end. As of June 30, 2011 and December 31, 2010, commercial business loans consisted of $18.7 million and $19.6 million, respectively, of loans fully guaranteed by the United States Department of Agriculture.
Deposits: Deposits increased $57.6 million to $1.28 billion at June 30, 2011 compared to $1.22 billion at December 31, 2010. At June 30, 2011, non-interest-bearing deposits were $166.9 million, a decrease of $1.9 million and interest-bearing deposits were $1.11 billion, an increase of $59.5 million, compared to December 31, 2010. Money market and investment savings account balances were $238.5 million, an increase of $11.5 million, regular savings and club account balances were $181.3 million, an increase of $19.0 million, and NOW account balances were $128.9 million, an increase of $11.6 million as compared to December 31, 2010. Certificates of deposit balances were $561.2 million, an increase of $17.4 million in the first six months of 2011 compared to year end. At June 30, 2011, core deposits were $715.7 million, an increase of $40.2 million compared to December 31, 2010. The Company has been promoting competitive rate shorter-term time deposits and money market accounts in response to the competition within our marketplace to maintain existing market share and to fund loan growth and reduce borrowings.
Liquidity and Capital Resources: The Company maintains liquid assets at levels the Company considers adequate to meet its liquidity needs. The Company adjusts its liquidity levels to fund loan commitments, repay its borrowings, fund deposit outflows, pay escrow obligations on all items in the loan portfolio and to fund operations. The Company also adjusts liquidity as appropriate to meet asset and liability management objectives.
The Company’s primary sources of liquidity are deposits, amortization and prepayment of loans, the sale in the secondary market of loans held for sale, maturities and sales of investment securities and other short-term investments, periodic pay downs of mortgage-backed securities, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. The Company sets the interest rates on our deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
A portion of the Company’s liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At June 30, 2011, $80.7 million of the Company’s assets were invested in cash and cash equivalents compared to $60.7 million at December 31, 2010. The Company’s primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, increases in deposit accounts, proceeds from residential loan sales and advances from the Federal Home Loan Bank of Boston.
Liquidity management is both a daily and longer-term function of business management. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Boston, which provide an additional source of funds. At June 30, 2011, the Company had $116.9 million in advances from the Federal Home Loan Bank of Boston and an additional available borrowing limit of $237.4 million based on collateral requirements of the Federal Home Loan Bank of Boston. Internal policies limit borrowings to 30% of total assets, or $524.0 million at June 30, 2011.
At June 30, 2011, the Company had outstanding commitments to originate loans of $72.9 million and unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $288.9 million. At June 30, 2011, time deposits scheduled to mature in less than one year totaled $405.4 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company, although there can be no assurance that this will be the case. In the event a significant portion of its deposits are not retained by the Company, it will have to utilize other funding sources, such as Federal Home Loan Bank of Boston advances in order to maintain its level of assets. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
General: The majority of the Company’s assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. The Company’s assets, consisting primarily of mortgage loans, in general have longer contractual maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, the Board of Directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given the Company’s business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least quarterly to review our asset/liability policies and interest rate risk position.
The Company has sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. During the low interest rate environment that has existed in recent years, we have implemented the following strategies to manage our interest rate risk: (i) emphasizing adjustable rate loans including, adjustable rate one-to-four family, commercial and consumer loans, (ii) reducing and shortening the expected average life of the investment portfolio, and (iii) periodically lengthening the term structure of our borrowings from the Federal Home Loan Bank of Boston. Additionally, from the first quarter of 2009 through the first quarter of 2011, the Company sold fixed rate residential mortgages to the secondary market. No sales to the secondary market were made in the second quarter of 2011 due to market conditions. These measures should serve to reduce the volatility of our future net interest income in different interest rate environments.
Quantitative Analysis
Income Simulation: Simulation analysis is an estimate of the Company’s interest rate risk exposure at a particular point in time. It is a dynamic method in that it incorporates our forecasted balance sheet growth assumptions under the different interest rate scenarios tested. The Company utilizes the income simulation method to analyze our interest rate sensitivity position to manage the risk associated with interest rate movements. At least quarterly, our Asset/Liability Committee reviews the potential effect changes in interest rates could have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. The Company’s most recent simulation uses projected repricing of assets and liabilities at June 30, 2011 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions can have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed securities it holds, rising or falling interest rates may have a significant impact on the actual prepayment speeds of the Company’s mortgage related assets that may in turn affect its interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected life of the Company’s assets would tend to lengthen more than the expected average life of its liabilities and therefore would most likely result in a decrease to the Company’s asset sensitive position.
         
    Percentage Decrease  
    in Estimated  
    Net Interest Income  
    Over 12 Months  
300 basis point increase in rates
    (1.24 %)
50 basis point decrease in rates
    (1.55 )
Rockville Bank’s Asset/Liability policy currently limits projected changes in net interest income to a maximum variance of (5%) for every 100 basis point interest rate change measured over a twelve-month and a twenty-four month period when compared to the flat rate scenario. In addition, the Company’s policy limits change in return on assets (“ROA”) by a maximum of (15) basis points for every 100 basis point interest rate change when compared to the flat rate scenario, or the change will be limited to 20% of the flat rate scenario ROA (for every 100 basis point interest rate change), whichever is less. These policy limits are re-evaluated on a periodic basis (not less than annually) and may be modified, as appropriate. Because of the slight asset-sensitivity of the Company’s balance sheet, income is projected to decrease more if interest rates fall. Also included in the decreasing rate scenario is the assumption that further declines are reflective of a deeper recession as well as narrower credit spreads from Federal Market intervention. At June 30, 2011, income at risk (i.e., the change in net interest income) decreased 1.24% and decreased 1.55% based on a 300 basis point average increase or a 50

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basis point average decrease, respectively. At June 30, 2011, return on assets is modeled to decrease by 5 basis points and decrease 2 basis points based on a 300 basis point increase or a 50 basis point decrease, respectively. While we believe the assumptions used are reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Our management has evaluated, with the participation and under the supervision of our chief executive officer (“CEO”) and chief financial officer (“CFO”), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of such date, the Company’s disclosure controls and procedures are effective in ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls: During the quarter under report, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act ) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various litigation matters arising in the ordinary course of business. Although the ultimate resolution of these matters cannot be determined at this time, management of the Company does not believe that such matters, individually or in the aggregate, will have a material adverse effect on the future results of operations or financial condition of the Company.
Item 1A. Risk Factors
Our success greatly depends on the contributions of our senior management and other key personnel. In April, 2011 William J. McGurk, our longstanding President and Chief Executive Officer, retired as scheduled. Mr. McGurk remains on our Board of Directors until his term expires in 2013 and continues to serve in a consulting role. In addition, our Executive Vice President and Chief Operating Officer, Joseph F. Jeamel, Jr. retired on June 30, 2010. Mr. Jeamel remains on the Board until 2013 when his current term expires. In January 2011, the Company announced Mr. William H.W. Crawford, IV as Mr. McGurk’s replacement which became effective on Mr. McGurk’s retirement. While we will strive to make this transition as smooth as possible, the Company’s business or operations may be disrupted due to the transition of CEO responsibilities and any other management changes as the Company adjusts to new leadership. In addition, our success will depend on our ability to recruit and retain additional highly-skilled personnel.
There have been no other material changes in the Risk Factors previously disclosed in Item 1A of the Company’s annual report on Form 10-K for the period ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchase of Equity Securities During 2011:
Effective January 2008, the Company adopted a plan to repurchase up to 978,400 of our outstanding shares of common stock on the open market. At December 31, 2010, there were 674,718 shares available to be purchased under this program (based on the Reorganization exchange ratio of 1.5167, this is 1,483,939 shares). These shares were cancelled during the conversion; Rockville Financial, Inc. is prohibited from purchasing its shares for one year following the conversion except for limited purposes.

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Item 3. Defaults Upon Senior Securities
None
Item 4. Removed and Reserved
Item 5. Other Information
None

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Item 6. Exhibits
             
 
    2.1     Amended and Restated Plan of Conversion and Reorganization (incorporated herein by reference to Exhibit 2.1 to the Registration Statement filed on the Form S-1 for Rockville Financial, Inc. on September 16, 2010)
 
 
    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. on September 16, 2010)
 
 
    3.1.1     Amendment of Certificate of Incorporation of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.1.1 to the Registration Statement on the Form S-1 filed for Rockville Financial, Inc. on September 16, 2010)
 
 
    3.2     Bylaws of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registration Statement on the Form S-1 filed for Rockville Financial, Inc. on September 16, 2010)
 
 
    4.1     Form of Common Stock Certificate of Rockville Financial, Inc. (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on the Form S-1 filed for Rockville Financial, Inc. on September 16, 2010)
 
 
    10.1     Advisory Agreement entered into by and between Rockville Bank and William J. McGurk (incorporated herein by reference to Exhibit 10.1 to the Current Report on the Company’s Form 8-K filed on January 26, 2011)
 
 
    10.2     Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and John T. Lund, effective January 4, 2010 (incorporated herein by reference to Exhibit 3.1 to the Current Report on the Company’s Form 8-K filed on January 7, 2010)
 
 
    10.2.1     Supplemental Executive Retirement Agreement of Rockville Bank for John T. Lund effective December 6, 2010 (incorporated by reference to Exhibit 10.3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011)
 
 
    10.2.2     Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and John T. Lund, effective January 1, 2011 (incorporated herein by reference to Exhibit 10.15 to the Current Report on the Company’s Form 8-K filed on January 10, 2011)
 
 
    10.2.3     Change-in-Control and Restricted Covenant Agreement by and among Rockville Financial, Inc., Rockville Bank and John T. Lund, effective January 2, 2009 (incorporated herein by reference to Exhibit 10.3 to the Annual Report on Rockville Financial, Inc.’s Form 10-K for the year ended December 31, 2008 filed on March 11, 2009 (File No. 000-51239))
 
 
    10.3     Rockville Financial, Inc., the Bank and Christopher E. Buchholz Retirement Agreement and Release (the “Agreement”) as of June 30, 2011 (incorporated herein by reference to Exhibit 10.1 to the Current Report on the Company’s Form 8-K filed on July 11, 2011)
 
 
    10.4     Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Richard J. Trachimowicz, effective January 1, 2009 (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 11, 2009)
 
 
    10.4.1     Rockville Bank Extension Notice Agreement by and among Rockville Financial, Inc., Rockville Bank and Richard J. Trachimowicz, effective January 1, 2010 (incorporated by reference to Exhibit 10.5.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed on March 10, 2010)
 
 
    10.4.2     Supplemental Executive Retirement Agreement of Rockville Bank for Richard J. Trachimowicz effective December 6, 2010 (incorporated by reference to Exhibit 10.5.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011)
 
 
    10.4.3     Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Richard J. Trachimowicz, effective January 1, 2011 (incorporated herein by reference to Exhibit 10.5 to the Current Report on the Company’s Form 8-K filed on January 10, 2011)
 
 
    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)

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    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 (File No. 000-52139))
 
 
    10.7     Rockville Bank Supplemental Executive Retirement Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.8 to the Registration Statement filed on Form S-1 filed for Rockville Financial New, Inc. on September 16, 2010)
 
 
    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 (File No. 333-121421))
 
 
    10.9     Rockville Bank Supplemental Executive Retirement Plan as amended and restated effective December 31, 2007 (incorporated herein by reference to Exhibit 10.9 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007)
 
 
    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 (File No. 000-51239))
 
 
    10.11     Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and William H.W. Crawford, IV, effective January 3, 2011 (incorporated herein by reference to Exhibit 10.15 to the Current Report on the Company’s Form 8-K filed on January 6, 2011)
 
 
    10.12     Supplemental Executive Retirement Agreement of Rockville Bank for Mark A. Kucia effective December 6, 2010 (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011)
 
 
    10.12.1     Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Mark A. Kucia, effective January 1, 2011(incorporated by reference to Exhibit 10.13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011)
 
 
    10.13     Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and Marino J. Santarelli effective July 18, 2011 (incorporated herein by reference to Exhibit 10.1 to the Current Report on the Company’s Form 8-K filed on July 19, 2011)
 
 
    14     Rockville Financial, Inc., Rockville Bank, Standards of Conduct Policy — Employees (incorporated herein by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 17, 2008)
 
 
    31.1     Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer filed herewith.
 
 
    31.2     Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer filed herewith
 
 
    32.0     Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer attached hereto

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Rockville Financial, Inc.
 
 
  By:   /s/ John T. Lund    
    John T. Lund   
    EVP, Chief Financial Officer and Treasurer   
 
Date: August 9, 2011

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