CONNECTICUT BANCSHARES INC/DE - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to _________________

Commission File Number 0-28389

CONNECTICUT BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Delaware		06-1564613

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

923 Main Street, Manchester, Connecticut		06040

(Address of principal executive offices)		(Zip Code)

(860) 646-1700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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.

Yes x

No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x

No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: the Issuer had 10,991,927 of common stock, par value $0.01 per share, outstanding as of May 8, 2003.

CONNECTICUT BANCSHARES, INC.
FORM 10-Q

INDEX

		Page

PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Condition as of March 31, 2003 and December 31, 2002	2

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002	3

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2003 and 2002	4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	26

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings	27
Item 2.	Changes in Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 5.	Other Information	27
Item 6.	Exhibits and Reports on Form 8-K	27

SIGNATURES		28

CERTIFICATIONS		29

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Condition
(Dollars in thousands)

	March 31, 2003			December 31, 2002

	(unaudited)
ASSETS
Cash and cash equivalents	$	82,257		$	25,264
Securities available for sale, at fair value		741,296			841,622
Loans held for sale		120			—
Loans, net		1,592,042			1,540,567
Federal Home Loan Bank Stock, at cost		30,783			30,783
Premises and equipment, net		17,218			17,793
Accrued interest receivable		12,163			12,613
Other real estate owned		—			—
Cash surrender value of life insurance		44,392			43,803
Current and deferred income taxes		—			58
Goodwill		19,488			19,488
Other intangible assets, net		9,204			9,598
Other assets		5,597			5,953

Total assets	$	2,554,560		$	2,547,542

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	1,583,736		$	1,595,979
Short-term borrowed funds		115,777			121,052
Mortgagors’ escrow accounts		12,161			15,097
Advances from Federal Home Loan Bank		551,108			533,890
Current and deferred income taxes		407			—
Accrued benefits and other liabilities		35,788			29,964

Total liabilities		2,298,977			2,295,982

Stockholders’ equity:
Common stock ($.01 par value; 45,000,000 shares authorized; 11,274,168 and 11,270,968 shares issued at March 31, 2003 and December 31, 2002, respectively)		113			113
Additional paid-in capital		111,540			110,345
Retained earnings		155,030			149,554
ESOP unearned compensation		(7,289	)		(7,444	)
Restricted stock unearned compensation		(10,164	)		(10,880	)
Treasury stock, at cost (185,641 and 165,422 shares at March 31, 2003 and December 31, 2002, respectively)		(6,310	)		(5,522	)
Accumulated other comprehensive income		12,663			15,394

Total stockholders’ equity		255,583			251,560

Total liabilities and stockholders’ equity	$	2,554,560		$	2,547,542

See notes to condensed consolidated financial statements.

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations
(Dollars in thousands, except for per share data)

	For the Three Months Ended

	March 31, 2003			March 31, 2002

	(unaudited)
Interest and dividend income:
Interest income on loans	$	24,769		$	24,937
Interest and dividends on investment securities		8,851			10,096

Total interest and dividend income		33,620			35,033

Interest expense:
Interest on deposits and escrow		6,370			9,711
Interest on short-term borrowed funds		208			456
Interest on advances from Federal Home Loan Bank		6,176			5,943

Total interest expense		12,754			16,110

Net interest income		20,866			18,923
Provision for loan losses		375			375

Net interest income after provision for loan losses		20,491			18,548

Noninterest income:
Service charges and fees		3,437			2,845
Income from cash surrender value of life insurance		589			585
Brokerage commission income		289			360
Gains on sales of securities, net		844			683
Other than temporary impairment of investment securities		(359	)		—
Gains on mortgage loan sales, net		42			88
Other		167			159

Total noninterest income		5,009			4,720

Noninterest expense:
Salaries		4,714			4,611
Employee benefits		3,897			3,044
Fees and services		1,645			1,851
Occupancy, net		1,051			1,076
Furniture and equipment		838			963
Marketing		418			475
Amortization of other intangible assets		394			1,271
Foreclosed real estate expense		30			64
Net gains on sales of repossessed assets		(4	)		(24	)
Other operating expenses		1,559			1,697

Total noninterest expense		14,542			15,028

Income before provision for income taxes		10,958			8,240
Provision for income taxes		3,616			2,670

Net income	$	7,342		$	5,570

Earnings per share:
Basic	$	0.74		$	0.55
Diluted	$	0.68		$	0.52
Weighted average shares outstanding:
Basic		9,953,080			10,115,457
Diluted		10,863,235			10,744,499

See notes to condensed consolidated financial statements.

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands)

	Common Stock					Additional Paid-In Capital		Retained Earnings			ESOP Unearned Compensation			Restricted Stock Unearned Compensation			Treasury Stock			Accumulated Other Comprehensive Income			Total

	Shares				Amount

BALANCE, January 1, 2003		11,105,546		$	113	$	110,345	$	149,554		$	(7,444	)	$	(10,880	)	$	(5,522	)	$	15,394		$	251,560
Change in ESOP unearned compensation		—			—		460		—			155			—			—			—			615
Exercise of stock options, including tax benefits		3,200			—		82		—			—			—			—			—			82
Tax benefits from vesting of restricted stock awards		—			—		653		—			—			—			—			—			653
Dividends declared ($0.18)		—			—		—		(1,866	)		—			—			—			—			(1,866	)
Treasury stock purchased		(20,219	)		—		—		—			—			—			(788	)		—			(788	)
Change in restricted stock unearned compensation		—			—		—		—			—			716			—			—			716
Comprehensive income:
Net income		—			—		—		7,342			—			—			—			—			7,342
Change in unrealized gain on securities available for sale, net of taxes		—			—		—		—			—			—			—			(2,731	)		(2,731	)

Total comprehensive income		—			—		—		7,342			—			—			—			(2,731	)		4,611

BALANCE, March 31, 2003		11,088,527		$	113	$	111,540	$	155,030		$	(7,289	)	$	(10,164	)	$	(6,310	)	$	12,663		$	255,583

BALANCE, January 1, 2002		11,235,608		$	112	$	108,354	$	127,737		$	(8,065	)	$	(6,395	)	$	—		$	13,631		$	235,374
Change in ESOP unearned compensation		—			—		254		—			155			—			—			—			409
Exercise of stock options, including tax benefits		23,140			1		494		—			—			—			—			—			495
Tax benefits from vesting of restricted stock awards		—			—		244		—			—			—			—			—			244
Treasury stock purchased		(8,922	)		—		—		—			—			—			(232	)		—			(232	)
Change in restricted stock unearned compensation		—			—		—		—			—			399			—			—			399
Other		—			—		—		352			—			—			—			—			352
Comprehensive income:
Net income		—			—		—		5,570			—			—			—			—			5,570
Change in unrealized gain on securities available for sale, net of taxes		—			—		—		—			—			—			—			(2,173	)		(2,173	)

Total comprehensive income		—			—		—		5,570			—			—			—			(2,173	)		3,397

BALANCE, March 31, 2002		11,249,826		$	113	$	109,346	$	133,659		$	(7,910	)	$	(5,996	)	$	(232	)	$	11,458		$	240,438

See notes to condensed consolidated financial statements.

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows
(In thousands)

	For the Three Months Ended

	March 31, 2003			March 31, 2002

	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,342		$	5,570
Adjustments to reconcile net income to net cash provided by operating activities, excluding effects of acquisition:
Provision for loan losses		375			375
Depreciation		723			794
Amortization/accretion -
Other intangible assets		394			1,271
Premium on bonds		1,902			1,596
Amortization/accretion of fair market adjustment from First Federal Savings and Loan Association of East Hartford (“First Federal”) acquisition -
Loans		215			348
Time deposits		(158	)		(803	)
Advances from Federal Home Loan Bank		(745	)		(858	)
Amortization of mortgage servicing rights		195			159
Net gains on sales of other real estate owned		(4	)		(24	)
Net loss on disposal of fixed assets		—			122
Gains on sales of securities, net		(844	)		(683	)
Other than temporary impairment of securities		359			—
Gains on mortgage loan sales, net		(42	)		(88	)
Deferred income tax provision		2,614			2,175
ESOP compensation expense		615			409
Change in restricted stock unearned compensation		716			399
Income from cash surrender value life insurance		(589	)		(585	)
Changes in operating assets and liabilities, net of amounts acquired-
Accrued interest receivable		450			(27	)
Other assets		159			(1,571	)
Other liabilities		(2,059	)		(1,362	)

Net cash provided by operating activities		11,618			7,217

CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases, net of repayments		(53,676	)		(39,183	)
Proceeds from sales of loans		1,522			1,863
Proceeds from maturities and calls of available for sale securities		48,758			9,000
Proceeds from sales of available for sale securities		29,055			124,859
Purchases of available for sale securities		(31,552	)		(190,142	)
Proceeds from principal payments of mortgage-backed securities and collateralized mortgage obligations		56,447			37,985
Acquisition of First Federal, net of cash acquired		(117	)		(695	)
Proceeds from sales of other real estate owned		17			145
Proceeds from sales of premises and equipment		—			1,341
Purchases of premises and equipment		(148	)		(1,434	)

Net cash provided (used) in investing activities		50,306			(56,261	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock		(788	)		(232	)
Proceeds from exercise of stock options		56			408
Dividends paid		(1,866	)		(1,461	)
Net increase in savings, money market, NOW and demand deposits		5,130			35,399
Net decrease in certificates of deposit		(17,215	)		(17,013	)
Net decrease in short-term borrowed funds		(5,275	)		(14,401	)
Decrease in mortgagors’ escrow accounts		(2,936	)		(2,068	)
Increase in advances from Federal Home Loan Bank		17,963			9,963

Net cash (used in) provided by financing activities		(4,931	)		10,595

Net increase (decrease) in cash and cash equivalents		56,993			(38,449	)
CASH AND CASH EQUIVALENTS, beginning of period		25,264			122,624

CASH AND CASH EQUIVALENTS, end of period	$	82,257		$	84,175

SUPPLEMENTAL INFORMATION:
Cash paid for -
Interest	$	12,630		$	16,114
Income taxes, net		1,001			1,200
Non-cash transactions -
Transfers from loans to other real estate owned		11			33

See notes to condensed consolidated financial statements.

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

(1)	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

	Basis of financial statements presentation

	The accompanying condensed consolidated financial statements were prepared in accordance with instructions to Form 10-Q and, therefore, do not include information or notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial statements have been included. Such adjustments are the only adjustments contained in the accompanying condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for Connecticut Bancshares, Inc. (“CTBS”) and subsidiary included in CTBS’ Form 10-K for the year ended December 31, 2002. The results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

	Principles of consolidation and presentation

	The accompanying condensed consolidated financial statements include the accounts of CTBS and its wholly-owned subsidiary, The Savings Bank of Manchester (“SBM” or the “Bank”), and its wholly-owned subsidiaries (collectively, the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.

	Business

	The Bank, with its main office located in Manchester, Connecticut, operates through twenty-eight branches located primarily in eastern Connecticut. The Bank’s primary source of income is interest received on loans to customers, which include small and middle market businesses and individuals residing within the Bank’s service area.

	On April 22, 2003, CTBS declared a quarterly cash dividend of $0.18 per share, or $1.87 million, on outstanding shares of its common stock. The dividend will be paid on May 27, 2003 to stockholders of record as of the close of business on May 12, 2003.

	Earnings per share

	Basic earnings per share represents income available to stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential shares had been issued or earned. The following table sets forth the calculation of basic and diluted earnings per share for the periods indicated (dollars in thousands, except per share amounts):

	For the Three Months Ended

	March 31, 2003			March 31, 2002

Net income	$	7,342		$	5,570

Weighted average shares outstanding		10,666,770			10,889,051
Less: unearned ESOP shares		(713,690	)		(773,594	)

Basic		9,953,080			10,115,457

Dilutive impact of:
Stock options		489,104			277,356
Restricted stock		421,051			351,686

Diluted		10,863,235			10,744,499

Earnings per share:
Basic	$	0.74		$	0.55
Diluted	$	0.68		$	0.52

	During the three months ended March 31, 2003 and 2002 there were no stock options that were excluded from the computation of earnings per share as no stock options were antidilutive during these periods.

	Comprehensive Income

	Statement of Financial Accounting Standards (“SFAS”) No. 130 “Reporting Comprehensive Income” establishes standards for separately reporting comprehensive income and its components. Components of comprehensive income represent changes in equity resulting from transactions and other events and circumstances from non-owner sources. A reconciliation of other comprehensive income for the three months ended March 31, 2003 and 2002 was as follows (in thousands):

	For the Three Months Ended

	March 31, 2003			March 31, 2002

Unrealized gains on securities:
Change in unrealized holding gains arising during the period, net of tax	$	(2,416	)	$	(1,729	)
Reclassification adjustment for gains and other than temporary impairment included in net income, net of tax		(315	)		(444	)

Other comprehensive income	$	(2,731	)	$	(2,173	)

	Reclassifications

	Certain prior period amounts have been reclassified to conform to the current period presentation.

(2)	RECENT ACCOUNTING PRONOUNCEMENTS

	In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. The adoption of SFAS No. 145 on January 1, 2003 did not have any effect on the Company’s consolidated financial statements.

	In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The adoption of SFAS No. 146 on January 1, 2003 did not have any effect on the Company’s consolidated financial statements.

	In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure and amendment to FASB No. 123”, which provides three optional transition methods for entities that decide to voluntarily adopt the fair value recognition principles of SFAS No. 123, “Accounting for Stock-Based Compensation”, and modifies the disclosure requirements of that Statement. The Company has not adopted the fair value recognition principles of SFAS No. 123. The Company has included the quarterly disclosures required by SFAS No. 148 in this filing.

	In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). The Interpretation requires certain guarantees to be recorded at fair value and also requires a guarantor to make new disclosures, even when the likelihood of making payments under the guarantee is remote. In general, the Interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying contact that is related to an asset, liability, or an equity security of the guaranteed party. The recognition provisions of FIN 45 are effective on a prospective basis for guarantees issued or modified after December 31, 2002. Adoption of this statement on January 1, 2003 did not have any impact on the Company’s consolidated financial statements.

	In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest

	Entities”, which requires an enterprise to assess if consolidation is appropriate based upon its variable economic interests in variable interest entities (“VIE’s”). The Company does not invest in investment structures that require analysis under this Interpretation and Interpretation No. 46 does not have any impact on the Company’s consolidated financial statements.

(3)	LOANS

	Loans are summarized as follows:

	March 31, 2003			December 31, 2002

	(in thousands)
One- to four-family mortgages	$	940,109		$	907,188
Construction mortgages		68,273			64,182
Commercial and multi-family mortgages		283,977			275,818
Commercial business loans		182,162			180,612
Installment loans		133,835			128,939

Total loans		1,608,356			1,556,739
Less: Allowance for loan losses		(16,314	)		(16,172	)

Total loans, net	$	1,592,042		$	1,540,567

A summary of the allowance for loan losses is as follows:

	For the Three Months Ended March 31, 2003			For the Year Ended December 31, 2002

	(in thousands)
Balance, beginning of period	$	16,172		$	15,228
Provision for loan losses		375			1,500
Loans charged off		(285	)		(1,781	)
Recoveries		52			1,225

Balance, end of period	$	16,314		$	16,172

(4)	DEPOSITS

	Deposits were as follows:

	March 31, 2003		December 31, 2002

	(in thousands)
Certificates of deposit:
Original maturity of less than one year	$	128,544	$	127,703
Original maturity of one year or more		415,668		433,956
Time certificates in denominations of $100,000 or more		81,616		81,542

Total certificates of deposit		625,828		643,201

Savings accounts		393,718		383,085
Money market accounts		205,152		209,301
NOW accounts		232,686		230,293
Demand deposits		126,352		130,099

Total deposits	$	1,583,736	$	1,595,979

(5)

INTANGIBLE ASSETS

	March 31, 2003		December 31, 2002

	(in thousands)
Intangible assets subject to amortization:
Core deposit intangible	$	7,095	$	7,372
Branch premiums		995		1,103
Other		266		275

Total		8,356		8,750

Intangible assets not subject to amortization:
Goodwill		19,488		19,488
Minimum pension liability		848		848

Total		20,336		20,336

Total intangible assets	$	28,692	$	29,086


	March 31, 2003		December 31, 2002

	(in thousands)
Accumulated amortization for intangible assets subject to amortization:
Core deposit intangible	$	1,751	$	1,474
Branch premiums		3,318		3,210
Other		34		25

Total	$	5,103	$	4,709


	For the Three Months Ended

	March 31, 2003		March 31, 2002

	(in thousands)
Amortization expense:
Noncompete agreements	$	—	$	887
Core deposit intangible		277		276
Branch premiums		108		108
Other		9		—

Total	$	394	$	1,271

For the five years ending December 31, the estimated aggregate annual amortization expense is as follows (in thousands):

2003	$	1,576
2004		1,576
2005		1,338
2006		1,169
2007		1,169

During the three months ended March 31, 2003, there was no goodwill acquired, no impairment losses recognized and no goodwill included in the gain or loss on disposal of a reporting unit.

(6)	OTHER THAN TEMPORARY IMPAIRMENT OF SECURITIES

	On a quarterly basis, the Company reviews available for sale investment securities with unrealized depreciation for six consecutive months as well as other securities with circumstances warranting review to assess whether the decline in fair value is temporary or other than temporary. The Company judges whether the decline in value is from company-specific events, industry developments, general economic conditions or other reasons. Once the estimated 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. In accordance with this policy, during the three months ended March 31, 2003 the Company recorded other than temporary impairment charges for one equity security and one investment in a limited partnership for a total of $359,000. The charge for the equity investment was computed using the closing price of the security as of March 31, 2003. The equity security impaired is publicly traded. The impairment charge for the limited partnership was equal to the difference between the carrying value of the investment and the fair value of the Company’s share of the partner’s capital as calculated by the partnership. The limited partnership is not publicly traded. There were no material unrecognized impairment losses as of March 31, 2003 or 2002. The Company did not record an other than temporary impairment charge during the three months ended March 31, 2002.

(7)	STOCK-BASED COMPENSATION

	The Company applies APB No. 25 and related interpretations in accounting for its stock compensation plans. Had compensation cost been determined consistent with the fair value method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s pro forma net income and pro forma basic and diluted earnings per share would have been (in thousands, except per share data):

	For The Three Months Ended

	March 31, 2003		March 31, 2002

Net income:
Net income as reported	$	7,342	$	5,570
Less effect of compensation expense determined under fair value based method, net of tax		560		242

Pro forma net income	$	6,782	$	5,328

Pro forma earnings per share:
Basic	$	0.68	$	0.53
Diluted	$	0.62	$	0.50

Fair value was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	Grant date For the three months months ended March 31, 2002

Risk free interest rate		3.95	%
Expected life		10 years
Expected volatility		29	%
Dividend yield		2.00	%
Fair value	$	17.48

	There were no options granted during the quarter ended March 31, 2003.

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis discusses changes in the financial condition and results of operations for the three months ended March 31, 2003 and 2002, and should be read in conjunction with the Company’s condensed consolidated financial statements and the notes thereto, appearing elsewhere herein.

Forward Looking Statements

This Form 10-Q contains forward looking statements that are based on assumptions and describe future plans, strategies and expectations of the Company. These forward looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. Subject to applicable laws and regulations, the Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions which may be made to any forward looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. Further information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s Form 10-K filing for the year ended December 31, 2002.

General

The Company’s results of operations depend primarily on net interest income, which represents the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. The Bank generates noninterest income primarily from fees charged on customers’ accounts and fees earned on activities such as investment services provided through a third party registered broker-dealer. The Bank’s noninterest expenses primarily consist of employee compensation and benefits, occupancy expense, marketing and other operating expenses. The Company’s results of operations are also affected by general economic and competitive conditions, notably changes in market interest rates, government policies and regulations. The Bank exceeded all of its regulatory capital requirements at March 31, 2003.

Comparison of Financial Condition at March 31, 2003 and December 31, 2002

Total assets increased $7.02 million, or 0.28%, to $2.555 billion at March 31, 2003 as compared to $2.548 billion at December 31, 2002. The increase in assets was mainly attributable to a $57.00 million increase in cash and cash equivalents and a $51.47 million increase in net loans partially offset by a $100.32 million decrease in securities. The increase in cash and cash equivalents was mainly due to prepayments on mortgage-backed securities and collateralized mortgage obligations as well as $48.73 million of securities that were called during the first quarter of 2003. The increase in loans was primarily due to a $32.92 million increase in one- to four-family mortgages, an $8.16 million increase in commercial and multi-family mortgages and a $4.90 million increase in installment loans. The growth in assets was primarily funded by an increase in advances from the Federal Home Loan Bank of Boston (“FHLB”) of $17.22 million, partially offset by a decrease in deposits of $12.24 million.

The following table presents the amortized cost and fair value of the Company’s available for sale securities, by type, at the dates indicated:

	At March 31, 2003				At December 31, 2002

	Amortized Cost		Fair Value		Amortized Cost		Fair Value

	(in thousands)
Debt securities:
Asset-backed securities	$	74,876	$	76,789	$	91,370	$	93,676
U.S. Government and agency
obligations		107,627		114,615		156,466		164,580
Municipal obligations		23,216		23,983		23,357		23,978
Corporate securities		59,053		62,035		63,209		66,143

Total		264,772		277,422		334,402		348,377

Equity securities:
Marketable equity securities		14,921		16,565		17,427		21,753
Debt mutual funds		9,306		9,310		9,249		9,267
Other equity securities		1,193		1,193		1,388		1,388

Total		25,420		27,068		28,064		32,408

Total debt and equity securities		290,192		304,490		362,466		380,785
Mortgage-backed securities:
Collateralized mortgage obligations		209,662		212,801		247,236		250,428
Mortgage-backed securities		219,292		224,005		205,569		210,409

Total mortgage-backed securities		428,954		436,806		452,805		460,837

Total available for sale securities	$	719,146	$	741,296	$	815,271	$	841,622

Available for sale securities decreased $100.32 million, or 11.92%, from a fair value of $841.62 million at December 31, 2002 to a fair value of $741.30 million at March 31, 2003. The Company had proceeds from sales of $29.06 million (including net gains of $844,000), maturities and calls of $48.76 million and principal payments of $56.45 million of securities during the three months ended March 31, 2003. The Company also experienced a decrease in unrealized gains on securities of $4.20 million from December 31, 2002 to March 31, 2003. Securities purchased totaled $31.55 million during the three months ended March 31, 2003.

Net loans increased $51.47 million, or 3.34%, from $1.54 billion at December 31, 2002 to $1.59 billion at March 31, 2003. Residential mortgages (including residential construction mortgages) increased $31.25 million, or 3.38%, from $925.08 million at December 31, 2002 to $956.33 million at March 31, 2003 due to continuing loan demand mainly due to refinancing activity in a low interest rate environment. Commercial real estate, commercial construction and business loans increased $15.46 million, or 3.08%, from $502.73 million at December 31, 2002, to $518.19 million at March 31, 2003, primarily due to an increase in commercial mortgage originations. As of March 31, 2003, commercial loans represented 32.22% of the Bank’s loan portfolio.

Deposits totaled $1.58 billion at March 31, 2003, a decrease of $12.24 million, or 0.77%, compared to $1.60 billion at December 31, 2002. Certificates of deposit decreased $17.37 million, or 2.70%, from $643.20 million at December 31, 2002 to $625.83 million at March 31, 2003. Savings and money market accounts increased $6.48 million, or 1.09%, from $592.39 million at December 31, 2002 to $598.87 million at March 31, 2003. With certificate of deposit rates at a relatively low level, retail depositors may be holding their funds in savings, money market and checking accounts until interest rates rise. In addition, the Bank offers a short-term transactional repurchase agreement (repo) account to commercial businesses and retail customers. These repo accounts are shown as short-term borrowed funds in the accompanying condensed consolidated statements of condition. Short-term borrowed funds decreased $5.27 million, or 4.35%, from $121.05 million to $115.78 million during the first three months of 2003. Advances from the FHLB increased $17.22 million, or 3.23%, from $533.89 million to $551.11 million during the first three months of 2003.

Nonperforming assets totaled $2.68 million at March 31, 2003, compared to $2.89 million at December 31, 2002, a decrease of $215,000, or 7.43%. The Bank did not have any other real estate owned at March 31, 2003 or December 31, 2002. During the first quarter of 2003 the Bank foreclosed on and subsequently sold one residential property.

The following table sets forth information regarding nonperforming loans and other real estate owned:

	March 31, 2003			December 31, 2002

	(in thousands)
Nonperforming loans:
Loans past due 90 days and still accruing:
One- to four- family mortgages	$	424		$	527
Commercial and multifamily mortgages		—			395
Commercial business		77			313
Installment		108			108

Total loans past due 90 days and still accruing		609			1,343

Loans on nonaccrual:
One- to four- family mortgages		298			306
Commercial and multifamily mortgages		393			393
Commercial business		984			852

Total loans on nonaccrual		1,675			1,551

Troubled debt restructurings:
Commercial and multifamily mortgages		395			—

Total troubled debt restructurings		395			—

Total nonperforming loans		2,679			2,894
Other real estate owned		—			—

Total nonperforming assets	$	2,679		$	2,894

Total nonperforming loans as a percentage of gross loans		0.17	%		0.19	%

Total nonperforming assets as a percentage of total assets		0.10	%		0.11	%

On a monthly basis, management informs the Board of Directors of the amount of loans delinquent for more than 30 days, all loans in foreclosure and all foreclosed and repossessed property that the Bank owns. The Bank ceases accruing interest on mortgage loans when principal or interest payments are delinquent 90 days or more unless management determines that the loan principal and interest is fully secured and in the process of collection. Once the accrual of interest on a loan is discontinued, all interest previously accrued is reversed against current period interest income once management determines that interest is uncollectable.

The allowance for loan losses was $16.31 million at March 31, 2003, an increase of $142,000 from the $16.17 million recorded at December 31, 2002. The allowance for loan losses as a percentage of gross loans was 1.01% at March 31, 2003 as compared to 1.04% at December 31, 2002. The allowance for loan losses as a percentage of nonperforming loans was 608.96% at March 31, 2003 as compared to 558.81% at December 31, 2002.

The Bank devotes significant attention to maintaining high loan quality through its underwriting standards, active servicing of loans and aggressive management of nonperforming assets. The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable loan losses which are inherent in the loan portfolio. Probable loan losses are estimated based on a quarterly review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent factors. In assessing risks inherent in the portfolio, management considers the risk of loss on nonperforming and classified loans including an analysis of collateral in each situation. The Bank’s methodology for assessing the appropriateness

of the allowance for loan losses includes several key elements. Problem loans are identified and analyzed individually to estimate specific losses including an analysis of estimated future cash flows for impaired loans. The loan portfolio is also segmented into pools of loans that are similar in type and risk characteristics (i.e., commercial, consumer and mortgage loans). Loss factors based on the Bank’s historical chargeoffs are applied using the Bank’s historical experience and may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. Additionally, the portfolio is segmented into pools based on internal risk ratings with loss factors applied to each rating category. Other factors considered in determining probable loan losses are any changes in concentrations in the portfolio, trends in loan growth, the relationship and trends in recent years of recoveries as a percentage of prior chargeoffs and peer banks’ loss experience.

The allowance for loan losses consists of a formula allowance for various loan portfolio classifications and an amount for loans identified as impaired, if necessary. The allowance is an estimate, and ultimate losses may vary from current estimates. Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period.

A portion of the allowance for loan losses is not allocated to any specific segment of the loan portfolio. This unallocated reserve is maintained for two primary reasons: there exists an inherent subjectivity and imprecision to the analytical processes employed, and the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Moreover, management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: market risk factors, such as the effects of economic variability on the entire portfolio, and unique portfolio risk factors that are inherent characteristics of the Bank’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Bank’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry or geographic concentrations, or trends that may exacerbate losses resulting from economic events which the Bank may not be able to fully diversify out of its portfolio.

Due to the inherent imprecise nature of the loan loss estimation process and ever changing conditions, these risk attributes may not be adequately captured in data related to the formula-based loan loss components used to determine allocations in the Bank’s analysis of the adequacy of the allowance for loan losses. Management, therefore, has established and maintains an unallocated allowance for loan losses. The amount of the unallocated allowance was $3.52 million at March 31, 2003 as compared to $3.24 million at December 31, 2002. As a percentage of the allowance for loan losses, the unallocated was 21.58% of the total allowance for loan losses at March 31, 2003 and 20.04% of the total allowance for loan losses at December 31, 2002.

The Bank uses three separate methods to estimate the allowance for loan losses as discussed above and then uses a weighted average formula to estimate the final allowance for loan losses. The Bank uses a portfolio segmentation method, a risk rating method, and a historical method for estimating the allowance for loan losses. The weighting factors were 45%, 45% and 10%, respectively at both March 31, 2003 and December 31, 2002.

Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary, and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its existing allowance for loan losses consistent with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Bank’s loan portfolio, will not request the Bank to increase its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the

factors discussed above. Material increases in the allowance for loan losses will adversely affect the Bank’s financial condition and results of operations.

Accrued benefits and other liabilities increased $5.83 million from $29.96 million at December 31, 2002 to $35.79 million at March 31, 2003. The increase was primarily due to the purchase of a mortgage-backed security of $8.00 million which settled on April 24, 2003. The security purchase is included in securities available for sale, at fair value. The purchase price is included in accrued benefits and other liabilities as of March 31, 2003. The Bank paid for the security in April 2003 using available funds currently invested in short-term investments. This increase was partially offset by higher accrued liabilities at December 31, 2002, primarily due to accrued employee bonuses.

Total stockholders’ equity increased $4.02 million, or 1.60%, to $255.58 million at March 31, 2003 compared to $251.56 million on December 31, 2002. The increase is due primarily to net income of $7.34 million for the three months ended March 31, 2003 partially offset by the decrease in the unrealized gain, net of tax, on securities available for sale during the first quarter of 2003. In addition, the Company repurchased 20,219 shares of its common stock during the first quarter of 2003 for $788,541 and has repurchased 185,641 shares of its common stock since its conversion to a public company on March 2, 2000 at a weighted average price of $33.99 per share, for a total of $6.31 million. The Company had previously announced that its Board of Directors has authorized the repurchase of up to 561,600, or approximately 5%, of its outstanding shares of its common stock.

Comparison of Operating Results for the Three Months Ended March 31, 2003 and 2002

Net Income. Net income for the quarter ended March 31, 2003 was $7.34 million compared to $5.57 million for the first quarter of 2002. The results for the quarter ended March 31, 2003 include a $1.95 million, or 10.31%, increase in net interest income, primarily due to a lower cost of funds and higher volume of loans and lower asset yields. Net income also increased from an increase in service charge and fee income of $592,000 and lower amortization of other intangible assets of $877,000 due to noncompete agreements with former First Federal executives which became fully amortized during the third quarter of 2002. Net income was reduced due to higher employee benefits of $853,000 primarily due to increased restricted stock, pension and ESOP expenses.

Net Interest Income. Net interest income increased $1.95 million, or 10.31%, to $20.87 million for the first quarter of 2003 compared to $18.92 million for the first quarter of 2002. The increase was primarily due to higher average loans and a lower cost of funds, partially offset by lower asset yields. Total interest and dividend income decreased $1.41 million, or 4.03%, to $33.62 million for the first quarter of 2003 from $35.03 million for the first quarter of 2002. Interest income on loans decreased $168,000, or 0.67%, to $24.77 million for the three months ended March 31, 2003 compared to $24.94 million for the three months ended March 31, 2002. The decrease was due to a 62 basis point decrease in the average yield on loans partially offset by a $134.95 million increase in the average balance of loans outstanding. The decrease in yield and the increase in loan volume were mainly due to a lower rate environment and higher prepayments and refinancings of residential mortgages. Interest and dividend income from investment securities, short-term investments and FHLB stock decreased $1.25 million, or 12.38%, to $8.85 million for the three months ended March 31, 2003 compared to $10.10 million for the three months ended March 31, 2002. The decrease in income was mainly due to lower yields resulting from a lower rate environment. The yield on investment securities, short-term investments and FHLB stock decreased 24 basis points to 4.58% for the quarter ended March 31, 2003 as compared to 4.82% for the quarter ended March 31, 2002.

Interest expense decreased $3.36 million, or 20.86%, to $12.75 million for the three months ended March 31, 2003 compared to $16.11 million for the quarter ended March 31, 2002. The decrease was primarily due to a decrease in the overall cost of funds for interest-bearing liabilities of 70 basis points. The cost of funds for the first quarter of 2003 was 2.44% as compared to 3.14% for the first quarter of 2002. The decrease in the cost of funds was primarily due to a lower rate environment.

Average Balances, Interest and Average Yields/Cost. The following table presents certain information for the periods indicated regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. The yields and rates include fees which are considered adjustments to yields.

	For the Three Months Ended March 31,

	2003							2002

	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate

	(dollars in thousands)
Interest-earning assets:
Loans (1):
Real estate	$	1,280,208	$	20,050		6.26	%	$	1,172,341	$	20,068		6.85	%
Consumer		131,855		1,928		5.85			119,869		2,085		6.96
Commercial (5)		182,320		2,798		6.22			167,223		2,796		6.78

Total loans (5)		1,594,383		24,776		6.23			1,459,433		24,949		6.85

Mortgage-backed securities (2)		203,485		2,469		4.85			139,596		2,135		6.12
Collateralized mortgage obligations (2)		220,533		2,357		4.28			248,735		3,142		5.05
Investment securities (2) (5):
U.S. Government and agency obligations		126,680		1,509		4.83			163,044		1,654		4.11
Municipal obligations		23,291		416		7.14			23,707		418		7.05
Corporate securities		61,714		829		5.37			50,223		871		6.94
Common stock and mutual funds		25,421		232		3.65			45,043		465		4.13
Other investment securities		1,363		2		0.59			993		2		0.81
Asset-backed securities		79,030		916		4.64			85,375		1,021		4.78
Other interest-bearing assets
FHLB stock		30,783		246		3.20			30,783		285		3.70
Short-term investments		19,116		57		1.21			69,478		316		1.84

Total interest-earning assets (5)		2,385,799	$	33,809		5.68	%		2,316,410	$	35,258		6.10	%

Noninterest-earning assets		140,760							130,033

Total assets	$	2,526,559						$	2,446,443

Interest-bearing liabilities:
Deposits:
NOW accounts	$	216,319	$	180		0.34	%	$	204,992	$	293		0.58	%
Savings and money market accounts		594,464		1,050		0.72			545,294		2,264		1.68
Certificates of deposit		635,184		5,101		3.26			728,002		7,123		3.97
Escrow deposits		9,966		39		1.59			7,089		31		1.77

Total interest-bearing deposits		1,455,933		6,370		1.77			1,485,377		9,711		2.65
Short-term borrowed funds		116,664		208		0.72			112,095		456		1.65
Advances from FHLB		551,399		6,176		4.54			481,362		5,943		5.01

Total interest-bearing liabilities		2,123,996	$	12,754		2.44	%		2,078,834	$	16,110		3.14	%

Noninterest-bearing liabilities		147,457							126,295

Total liabilities		2,271,453							2,205,129
Stockholders’ equity		255,106							241,314

Total liabilities and stockholders’ equity	$	2,526,559						$	2,446,443

Net interest-earning assets	$	261,803						$	237,576

Net interest income (5)			$	21,055						$	19,148

Interest rate spread (3) (5)						3.24	%						2.96	%
Net interest margin (4) (5)						3.51	%						3.28	%
Ratio of interest-earning assets to interest-bearing liabilities						112.33	%						111.43	%
Taxable-equivalent adjustments
Loans			$	7						$	12
Investment securities				182							213

Total			$	189						$	225

(1)	Balances are net of undisbursed proceeds of construction loans in process and include nonperforming loans.
(2)	Yields are calculated on amortized cost and exclude the impact of unrealized gains and losses on available for sale securities.
(3)	Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)	Net interest margin represents fully taxable-equivalent net interest income as a percentage of average interest-earning assets.
(5)	Fully taxable-equivalent yields are calculated assuming a 35% federal income tax rate.

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on the interest income and interest expense of the Company. The table presents the effects on a fully taxable-equivalent basis using amortized cost as described in footnotes 2, 4 and 5 in the previous section. 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 rate/vol column shows the effects attributable to changes in both rate and volume, which cannot be segregated. The net column

represents the sum of the prior columns.

For the Three Months
Ended March 31, 2003
Compared to the Three
Months Ended March 31, 2002

	Increase (Decrease) Due to

	Rate			Volume			Rate/Vol			Net

	(in thousands)
Interest-earning assets:
Loans:
Real estate	$	(1,707	)	$	1,846		$	(157	)	$	(18	)
Consumer		(332	)		208			(33	)		(157	)
Commercial		(230	)		252			(20	)		2

Total loans		(2,269	)		2,306			(210	)		(173	)
Mortgage-backed securities		(441	)		977			(202	)		334
Collateralized mortgage obligations		(484	)		(356	)		55			(785	)
Investment securities		(137	)		(684	)		(4	)		(825	)

Total interest-earning assets		(3,331	)		2,243			(361	)		(1,449	)

Interest-bearing liabilities:
Deposits:
NOW accounts		(122	)		16			(7	)		(113	)
Savings and money market accounts		(1,301	)		204			(117	)		(1,214	)
Certificates of deposit		(1,277	)		(908	)		163			(2,022	)
Other		(3	)		13			(2	)		8

Total deposits		(2,703	)		(675	)		37			(3,341	)
Short-term borrowed funds		(256	)		19			(11	)		(248	)
Advances from FHLB		(551	)		865			(81	)		233

Total interest-bearing liabilities		(3,510	)		209			(55	)		(3,356	)

Increase in net interest income	$	179		$	2,034		$	(306	)	$	1,907

Provision for Loan Losses. The provision for loan losses was $375,000 for the quarters ended March 31, 2003 and March 31, 2002. The allowance for loan losses was 1.01% of total loans and 608.96% of nonperforming loans at March 31, 2003 compared to 1.04% and 558.81%, respectively, at December 31, 2002.

Noninterest Income. Noninterest income was $5.01 million for the three months ended March 31, 2003 as compared to $4.72 million for the three months ended March 31, 2002. The increase was primarily due to higher service charges and fees and an increase in net gains on sales of securities partially offset by higher charges for other than temporary impairment and lower brokerage commissions. Service charges and fees were $3.44 million for the three months ended March 31, 2003 compared to $2.85 million for the three months ended March 31, 2002. Income from service charges and fees increased $391,000 from demand deposit account fees, $79,000 from increased fees on merchant services and fees and $77,000 from prepayment penalties on loans. During the first quarter of 2003, the Bank recognized net security

gains of $844,000 as compared to net security gains of $683,000 in the first quarter of 2002. The Company sold various debt and equity securities throughout the first quarter of 2003. The Company recorded other than temporary impairment charges for one equity security and one investment in a limited partnership for a total of $359,000 while during the first quarter of 2002 no other than temporary impairment charges were recognized. The charge for the equity investment was computed using the closing price of the security as of March 31, 2003. The equity security impaired is publicly traded. The impairment charge for the limited partnership was equal to the difference between the carrying value of the investment and the fair value of the Company’s share of the partner’s capital as calculated by the partnership. The limited partnership is not publicly traded. There were no material unrecognized impairment losses as of March 31, 2003 or 2002. Brokerage commissions declined from $360,000 for the three months ended March 31, 2002 to $289,000 for the three months ended March 31, 2003 primarily due to the general market environment which was influenced by the uncertainty concerning the war in Iraq.

Noninterest Expense. Noninterest expense decreased $486,000, or 3.23%, from $15.03 million for the three months ended March 31, 2002 to $14.54 million for the three months ended March 31, 2003. Decreases in noninterest expense for the quarter included amortization of other intangible assets, fees and services and other operating expenses. Due to the acquisition of First Federal in August 2001, the Company recorded other intangible assets related to noncompete agreements with former First Federal executives and core deposits. The noncompete agreements with former First Federal executives were for a term of one year and became fully amortized during the third quarter of 2002. The amortization decrease of $877,000 over the prior year quarter is primarily due to the full amortization of the noncompete agreements. Fees and services decreased $206,000 over the prior year quarter primarily because of lower information technology consulting, loan servicing and other consulting fees. Other operating expenses were lower primarily due to lower office supply and merchant services expenses. Increases in noninterest expense for the current year quarter were primarily in employee benefits. Increases in employee benefit expenses of $853,000 over the prior year quarter were primarily due to increased restricted stock, pension and ESOP expenses.

Provision for Income Taxes. Income tax expense increased $946,000 from $2.67 million for the first quarter of 2002 to $3.62 million for the quarter ended March 31, 2003. The effective tax rate for the current quarter was 33.00% compared to 32.40% in the prior year quarter.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short- term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers as well as maintaining the flexibility to take advantage of investment opportunities. Primary sources of funds consist of deposit inflows, loan repayments, maturities, paydowns, sales of collateralized mortgage obligations, investment and mortgage-backed securities and advances from FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, loan and mortgage-backed security prepayments and security calls are influenced by general interest rates, economic conditions and competition.

The Company’s primary investing activities are (1) originating residential one- to four-family mortgage loans and, to a lesser extent, commercial business and real estate loans, multi-family loans, single-family construction loans, home equity loans and lines of credit and consumer loans, and (2) investing in mortgage-backed securities, collateralized mortgage obligations, U.S. Government and agency obligations and corporate equity securities and debt obligations. These activities are funded primarily by principal and interest payments on loans, maturities of securities, deposit growth and Advances from the FHLB. During the three months ended March 31, 2003, the Bank’s loan originations, net of repayments, totaled $53.68 million. For the three months ended March 31, 2003, the Company purchased investments in mortgage-backed securities, U.S. Government and agency obligations and corporate equity securities and debt obligations totaling $31.55 million. The Bank experienced a net decrease in total deposits of $12.09 million for the three months ended March 31, 2003. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Bank and its local competitors and other factors. During the three months ended March 31,2003, the Company

repurchased 20,219 shares of its common stock at a weighted average price of $39.00 per share, for a total of $788,541 and has repurchased 185,641 shares of its common stock since its conversion to a public company on March 2, 2000 at a weighted average price of $33.99 per share, for a total of $6.31 million. The Company had previously announced that its Board of Directors has authorized the repurchase of up to 561,600, or approximately 5%, of its outstanding shares of its common stock. The Company closely monitors its liquidity position on a daily basis. If the Company should require additional funds, additional funds are available through advances from FHLB and through repurchase agreement borrowing facilities.

Outstanding commitments for all loans and unadvanced construction loans and lines of credit totaled $245.18 million at March 31, 2003. Management of the Bank anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit that are scheduled to mature in one year or less from March 31, 2003 totaled $362.94 million. The Bank relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. Occasionally, the Bank will also offer special competitive promotions to its customers to increase retention and promote deposit growth. Based upon the Bank’s historical experience with deposit retention, management believes that a significant portion of its deposits will remain with the Bank.

SBM must satisfy various regulatory capital requirements administered by the federal banking agencies including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2003, SBM exceeded all of its regulatory capital requirements with a leverage capital level of $196.91 million, or 7.86% of average assets, which is above the required level of $100.18 million, or 4.00%, and total risk-based capital of $213.22 million, or 12.89% of risk weighted assets, which is above the required level of $132.33 million, or 8.00%. SBM is considered “well capitalized” under regulatory guidelines.

Impact of Inflation and Changing Prices

The condensed consolidated financial statements and related data presented in this report have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation.

Impact of New Accounting Standards

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. The adoption of SFAS No. 145 on January 1, 2003 did not have any effect on the Company’s consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The adoption of SFAS No. 146 on January 1, 2003 did not have any effect on the Company’s consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure and amendment to FASB No. 123”, which provides three optional transition methods for entities that decide to voluntarily adopt the fair value recognition principles of SFAS No. 123, “Accounting for Stock-Based Compensation”, and modifies the disclosure requirements of that Statement. The Company has not adopted the fair value recognition principles of SFAS No. 123. The Company has

included the quarterly disclosures required by SFAS No. 148 in this filing.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). The Interpretation requires certain guarantees to be recorded at fair value and also requires a guarantor to make new disclosures, even when the likelihood of making payments under the guarantee is remote. In general, the Interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying contact that is related to an asset, liability, or an equity security of the guaranteed party. The recognition provisions of FIN 45 are effective on a prospective basis for guarantees issued or modified after December 31, 2002. Adoption of this statement on January 1, 2003 did not have any impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which requires an enterprise to assess if consolidation is appropriate based upon its variable economic interests in variable interest entities (“VIE’s”). The Company does not invest in investment structures that require analysis under this Interpretation and Interpretation No. 46 does not have any impact on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Bank’s most significant form of market risk is interest rate risk. The principal objectives of the Bank’s interest rate risk management are to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given its business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with its established policies. The Bank has an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets quarterly and reports trends and interest rate risk position to the Executive Committee of the Board of Directors and the Board of Directors. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank. The Bank manages interest rate risk by:

(1)	maintaining a high quality securities portfolio that provides adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market interest rates, the overall maturity and duration of which is monitored in relation to the repricing of its loan portfolio;

(2)	promoting lower cost liability accounts such as demand deposits and business repurchase accounts; and

(3)	using advances from the FHLB to better structure maturities of its interest rate sensitive liabilities.

The Bank’s market risk also includes equity price risk. The Bank’s common stock and mutual fund portfolio had gross unrealized gains of $2.51 million and gross unrealized losses of $865,000 at March 31, 2003 which are included, net of taxes, in accumulated other comprehensive income, a separate component of the Bank’s capital. If equity security prices decline due to unfavorable market conditions or other factors, the Bank’s capital would decrease.

The Bank’s investment policy authorizes it to be a party to financial instruments with off-balance sheet risk in the normal course of business to reduce its exposure to fluctuations in interest rates. All counter-parties must be pre-approved by the Bank’s Executive Committee and reported to its Investment Committee. At March 31, 2003 the Bank had no derivative instruments.

Quantitative Aspects of Market Risk

The Company analyzes its interest rate sensitivity position to manage the risk associated with interest rate movements through the use of balance sheet simulation. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

The Company’s goal is to manage asset and liability positions so as to moderate the effects of interest rate fluctuations on net interest income. Balance sheet simulations are completed quarterly and presented to the Bank’s Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on net interest income under a range of assumptions. The numerous assumptions used in the simulation process are reviewed by the Asset/Liability Committee on a quarterly basis. Changes to these assumptions can significantly effect the results of the balance sheet simulation. The simulation incorporates assumptions regarding potential delays in the repricing of certain assets and liabilities when market rates change and changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is only an estimate of the Company’s interest rate risk exposure at a particular point in time. The Company continually reviews the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of the Company’s exposure as a percentage of estimated net interest income for the next twelve and twenty-four month periods using balance sheet simulation. The simulation uses projected repricing of assets and liabilities at March 31, 2003 on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments. Prepayment rates can have a significant impact on the Company’s balance sheet simulation. Because of the large percentage of loans, collateralized mortgage obligations and mortgage-backed securities held by the Company, rising or falling interest rates have a significant impact on the prepayment speeds of the Company’s earning assets, which in turn effect the Company’s rate sensitivity position. When open-market interest rates rise, prepayments tend to slow. When open-market interest rates fall, prepayments tend to rise. The Company’s asset sensitivity would be reduced if prepayments slow, and vice versa. While the Bank believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security, collateralized mortgage obligation and loan repayment activity.

	Percentage Change in Estimated Net Interest Income Over

	12 months			24 months

200 basis point increase in rates		-0.40	%		-0.30	%
200 basis point decrease in rates		-1.74	%		-6.80	%

The two hundred basis point change in rates in the above table is assumed to occur evenly over the next twelve months. Based on the scenario above, net income would be adversely affected (within the Bank’s internal guidelines) in both the twelve and twenty-four month periods in both a rising and declining rate environment. For each percentage point change in net interest income, the effect on net income would be $537,000, assuming a 35% tax rate.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

The Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of a date within 90 days of the filing date of this quarterly report. The Company’s disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective.

Changes in internal controls

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of the Company’s evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company’s business. The Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on the consolidated financial condition or operations of the Company.

Item 2. Changes in Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.

	(a)		Exhibits

	3.1		Certificate of Incorporation of Connecticut Bancshares, Inc. (1)
	3.2		Second Amended and Restated Bylaws of Connecticut Bancshares, Inc. (2)
	4.0		Stock Certificate of Connecticut Bancshares, Inc. (1)
	11.0		Computation of Per Share Earnings (Incorporated by reference in Part I, hereto)
	99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
	99.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

	(1)	Incorporated by reference into this document from the Exhibits filed with the Registration Statement on Form S-1, and any amendments thereto, Registration No. 333-90865.
	(2)	Incorporated by reference into this document from the Quarterly Report on Form 10-Q dated March 31, 2001 and filed with the Securities and Exchange Commission on May 4, 2001.

	(b)	Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CONNECTICUT BANCSHARES, INC.

Dated: May 12, 2003		By:	/s/ RICHARD P. MEDUSKI

			Richard P. Meduski President and Chief Executive Officer (principal executive officer)

Dated: May 12, 2003		By:	/s/ MICHAEL J. HARTL

			Michael J. Hartl Senior Vice President and Chief Financial Officer (principal accounting and financial officer)

CERTIFICATIONS

I,	Richard P. Meduski, certify, that:

1.		I have reviewed this quarterly report on Form 10-Q of Connecticut Bancshares, Inc. (“the registrant”);

2.		Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

			a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

			b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

			c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.		The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

			a)	all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

			b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 12, 2003
		/s/ RICHARD P. MEDUSKI

		Richard P. Meduski President and Chief Executive Officer (principal executive officer)

CERTIFICATIONS

I,	Michael J. Hartl, certify, that:

1.		I have reviewed this quarterly report on Form 10-Q of Connecticut Bancshares, Inc. (“the registrant”);

2.		Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

			a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

			b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

			c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.		The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

			a)	all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

			b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 12, 2003
	/s/ MICHAEL J. HARTL

	Michael J. Hartl Senior Vice President and Chief Financial Officer (principal accounting and financial officer)

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