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 September 30, 2003

¨	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 ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

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 10,997,370 of common stock, par value $0.01 per share, outstanding as of November 6, 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 September 30, 2003 and December 31, 2002	2

	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and 2002	3

	Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2003 and 2002	4

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003 and 2002	5

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	31

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 2.	Changes in Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Submission of Matters to a Vote of Security Holders	32

Item 5.	Other Information	32

Item 6.	Exhibits and Reports on Form 8-K	32

SIGNATURES		33

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Condition

(Dollars in thousands)

	September 30, 2003			December 31, 2002
	(unaudited)
ASSETS

Cash and cash equivalents	$	115,591		$	25,264
Securities available for sale, at fair value		627,450			841,622
Loans, net		1,678,186			1,540,567
Federal Home Loan Bank Stock, at cost		30,783			30,783
Premises and equipment, net		16,115			17,793
Accrued interest receivable		10,549			12,613
Other real estate owned		112			—
Cash surrender value of life insurance		45,587			43,803
Current and deferred income taxes		7,410			58
Goodwill		19,488			19,488
Other intangible assets, net		8,417			9,598
Other assets		6,345			5,953

Total assets	$	2,566,033		$	2,547,542


LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	1,592,262		$	1,595,979
Short-term borrowed funds		120,332			121,052
Mortgagors’ escrow accounts		12,205			15,097
Advances from Federal Home Loan Bank		554,759			533,890
Accrued benefits and other liabilities		30,216			29,964

Total liabilities		2,309,774			2,295,982

Stockholders’ equity:
Common stock ($.01 par value; 45,000,000 shares authorized; 11,531,311 and 11,270,968 shares issued at September 30, 2003 and December 31, 2002, respectively)		115			113
Additional paid-in capital		120,079			110,345
Retained earnings		167,331			149,554
ESOP unearned compensation		(6,979	)		(7,444	)
Restricted stock unearned compensation		(8,731	)		(10,880	)
Treasury stock, at cost (558,641 and 165,422 shares at September 30, 2003 and December 31, 2002, respectively)		(21,744	)		(5,522	)
Accumulated other comprehensive income		6,188			15,394

Total stockholders’ equity		256,259			251,560

Total liabilities and stockholders’ equity	$	2,566,033		$	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
	September 30, 2003			September 30, 2002
	(unaudited)
Interest and dividend income:
Interest income on loans	$	24,371		$	25,354
Interest and dividends on investment securities		7,137			9,754

Total interest and dividend income		31,508			35,108


Interest expense:
Interest on deposits and escrow		5,439			8,452
Interest on short-term borrowed funds		184			442
Interest on advances from Federal Home Loan Bank		6,139			5,856

Total interest expense		11,762			14,750

Net interest income		19,746			20,358
Provision for loan losses		300			375

Net interest income after provision for loan losses		19,446			19,983


Noninterest income:
Service charges and fees		4,156			3,302
Income from cash surrender value of life insurance		598			616
Brokerage commission income		327			468
Gains on sales of securities, net		3,949			619
Other than temporary impairment of investment securities		—			(410	)
Gains on mortgage loan sales, net		54			41
Other		134			119

Total noninterest income		9,218			4,755


Noninterest expense:
Salaries		4,905			5,342
Employee benefits		3,816			2,745
Fees and services		1,645			1,732
Occupancy, net		968			961
Furniture and equipment		848			942
Marketing		478			475
Amortization of other intangible assets		394			985
Foreclosed real estate (income) expense		(2	)		88
Net gains on sales of repossessed assets		(37	)		(8	)
Merger expenses		1,235			—
Other operating expenses		1,611			1,417

Total noninterest expense		15,861			14,679

Income before provision for income taxes		12,803			10,059
Provision for income taxes		4,289			3,320

Net income	$	8,514		$	6,739


Earnings per share:
Basic	$	0.86		$	0.66
Diluted	$	0.79		$	0.62

Weighted average shares outstanding:
Basic		9,854,969			10,134,565
Diluted		10,750,447			10,814,817

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 Nine Months Ended
	September 30, 2003			September 30, 2002
	(unaudited)
Interest and dividend income:
Interest income on loans	$	73,877		$	75,541
Interest and dividends on investment securities		23,918			30,020

Total interest and dividend income		97,795			105,561


Interest expense:
Interest on deposits and escrow		17,584			27,007
Interest on short-term borrowed funds		582			1,304
Interest on advances from Federal Home Loan Bank		18,496			17,708

Total interest expense		36,662			46,019

Net interest income		61,133			59,542
Provision for loan losses		975			1,125

Net interest income after provision for loan losses		60,158			58,417


Noninterest income:
Service charges and fees		11,415			9,211
Income from cash surrender value of life insurance		1,784			1,808
Brokerage commission income		1,120			1,286
Gains on sales of securities, net		5,458			1,671
Other than temporary impairment of investment securities		(359	)		(680	)
Gains on mortgage loan sales, net		125			190
Other		433			488

Total noninterest income		19,976			13,974


Noninterest expense:
Salaries		14,584			15,016
Employee benefits		11,323			8,536
Fees and services		4,857			5,578
Occupancy, net		2,962			2,978
Furniture and equipment		2,511			2,914
Marketing		1,220			1,567
Amortization of other intangible assets		1,181			3,535
Foreclosed real estate expense		83			179
Net gains on sales of repossessed assets		(42	)		(16	)
Merger expenses		1,722			—
Other operating expenses		4,811			4,759

Total noninterest expense		45,212			45,046

Income before provision for income taxes		34,922			27,345
Provision for income taxes		11,588			8,920

Net income	$	23,334		$	18,425

Earnings per share:
Basic	$	2.36		$	1.82
Diluted	$	2.16		$	1.71

Weighted average shares outstanding:
Basic		9,885,825			10,137,470
Diluted		10,787,029			10,802,544

See notes to condensed consolidated financial statements.

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2003 and 2002 (unaudited)

(Dollars in thousands)

	Common Stock				Additional Paid-In Capital		Retained Earnings			ESOP Unearned Compen- sation			Restricted Stock Unearned Compen- sation			Treasury Stock			Accumulated Other Comprehensive Income			Total
	Shares		Amount		Additional Paid-In Capital		Retained Earnings			ESOP Unearned Compen- sation			Restricted Stock Unearned Compen- sation			Treasury Stock			Accumulated Other Comprehensive Income			Total
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	—			—		1,514		—			465			—			—			—			1,979
Exercise of stock options, including tax benefits	260,343			2		7,567		—			—			—			—			—			7,569
Tax benefits from vesting of restricted stock awards	—			—		653		—			—			—			—			—			653
Dividends declared ($0.54 per share)	—			—		—		(5,557	)		—			—			—			—			(5,557	)
Treasury stock purchased	(393,219	)		—		—		—			—			—			(16,222	)		—			(16,222	)
Change in restricted stock unearned compensation	—			—		—		—			—			2,149			—			—			2,149
Comprehensive income:
Net income	—			—		—		23,334			—			—			—			—			23,334
Change in unrealized gain on securities available for sale, net of taxes	—			—		—		—			—			—			—			(9,206	)		(9,206	)

Total comprehensive income	—			—		—		23,334			—			—			—			(9,206	)		14,128

BALANCE, September 30, 2003	10,972,670		$	115	$	120,079	$	167,331		$	(6,979	)	$	(8,731	)	$	(21,744	)	$	6,188		$	256,259

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	—			—		922		—			466			—			—			—			1,388
Exercise of stock options, including tax benefits	31,756			1		690		—			—			—			—			—			691
Accelerated vesting of stock options	—			—		7		—			—			—			—			—			7
Tax benefits from vesting of restricted stock awards	—			—		244		—			—			—			—			—			244
Dividends declared ($0.27 per share)	—			—		—		(2,821	)		—			—			—			—			(2,821	)
Treasury stock purchased	(165,422	)		—		—		—			—			—			(5,522	)		—			(5,522	)
Change in restricted stock unearned compensation	—			—		—		—			—			1,199			—			—			1,199
Other	—			—		—		352			—			—			—			—			352
Comprehensive income:
Net income	—			—		—		18,425			—			—			—			—			18,425
Change in unrealized gain on securities available for sale, net of taxes	—			—		—		—			—			—			—			4,169			4,169

Total comprehensive income	—			—		—		18,425			—			—			—			4,169			22,594

BALANCE, September 30, 2002	11,101,942		$	113	$	110,217	$	143,693		$	(7,599	)	$	(5,196	)	$	(5,522	)	$	17,800		$	253,506

See notes to condensed consolidated financial statements.

CONNECTICUT BANCSHARES, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(In thousands)

	For the Nine Months Ended
	September 30, 2003			September 30, 2002
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	23,334		$	18,425
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		975			1,125
Depreciation		2,136			2,388
Amortization/accretion -
Other intangible assets		1,181			3,535
Premium on bonds		5,620			4,037
Amortization/accretion of fair market adjustment from First Federal Savings and Loan Association of East Hartford (“First Federal”) acquisition -
Loans		599			981
Time deposits		(278	)		(1,773	)
Advances from Federal Home Loan Bank		(2,017	)		(2,569	)
Amortization of mortgage servicing rights		643			412
Net gains on sales of other real estate owned		(42	)		(16	)
Net loss on disposal of fixed assets		4			145
Gains on sales of securities, net		(5,458	)		(1,671	)
Other than temporary impairment of securities		359			680
Gains on mortgage loan sales, net		(125	)		(190	)
Deferred income tax provision		1,166			98
Accelerated vesting of stock options		—			7
ESOP compensation expense		1,979			1,388
Change in restricted stock unearned compensation		2,149			1,199
Income from cash surrender value life insurance		(1,784	)		(1,808	)
Changes in operating assets and liabilities-
Accrued interest receivable		2,064			105
Other assets		(677	)		(2,483	)
Other liabilities		447			1,148

Net cash provided by operating activities		32,275			25,163


CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and purchases, net of repayments		(142,869	)		(104,288	)
Proceeds from sales of loans		3,487			4,137
Proceeds from maturities and calls of available for sale securities		97,590			11,011
Proceeds from sales of available for sale securities		59,158			160,149
Purchases of available for sale securities		(200,748	)		(229,470	)
Proceeds from principal payments of mortgage - backed securities and collateralized mortgage obligations		243,128			91,710
Acquisition of First Federal, net of cash acquired		(195	)		(1,157	)
Proceeds from sales of other real estate owned		246			212
Proceeds from sales of premises and equipment		—			1,628
Purchases of premises and equipment		(462	)		(2,994	)
Other investing activities		—			(301	)

Net cash provided by (used in) investing activities		59,335			(69,363	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock		(16,222	)		(5,522	)
Proceeds from exercise of stock options		4,661			559
Dividends paid		(5,557	)		(2,821	)
Net increase in savings, money market, NOW and demand deposits		47,063			74,173
Net decrease in certificates of deposit		(50,502	)		(72,681	)
Net (decrease) increase in short-term borrowed funds		(720	)		2,352
Decrease in mortgagors’ escrow accounts		(2,892	)		(2,718	)
Increase in advances from Federal Home Loan Bank		22,886			9,895

Net cash (used in) provided by financing activities		(1,283	)		3,237

Net increase (decrease) in cash and cash equivalents		90,327			(40,963	)
CASH AND CASH EQUIVALENTS, beginning of period		25,264			122,624

CASH AND CASH EQUIVALENTS, end of period	$	115,591		$	81,661


SUPPLEMENTAL INFORMATION:
Cash paid for -
Interest	$	36,629		$	46,126
Income taxes, net		10,401			8,236
Non-cash transactions -
Transfers from loans to other real estate owned		314			91

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 nine months ended September 30, 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 July 16, 2003, the Company announced it entered into an Agreement and Plan of Merger with The New Haven Savings Bank (“NHSB”). The Company’s stockholders will receive $52.00 in cash in exchange for each share of the Company’s common stock held. If the transaction closes after March 31, 2004, the merger price is subject to increase based on the Company’s earnings less dividends paid from that date to the end of the month preceding the closing date of the merger. As a condition precedent to the merger, NHSB will convert from a Connecticut-chartered mutual savings bank to a Connecticut-chartered stock savings bank and simultaneously form a holding company. The transaction is subject to several other conditions, including the receipt of regulatory approvals and the approval of the stockholders of the Company. In connection with the pending transaction, the Company has agreed to take action to accelerate to December 31, 2003 the vesting of all unvested restricted stock awards that have been granted to certain officers. The vesting acceleration will occur upon action by the Board of Directors and the Company will record a charge based on the fair value of the common stock upon such action. The Company expects this charge to approximate $2.80 million, $1.82 million net of tax, based on the market value of the common stock, and occur in the fourth quarter of 2003. Additionally, during the three and nine months ended September 30, 2003 the Company incurred $1.24 million and $1.72 million in expenses, primarily professional fees, relating to the pending merger.

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 was paid on May 27, 2003 to stockholders of record as of the close of business on May 12, 2003.

On July 23, 2003, CTBS declared a quarterly cash dividend of $0.18 per share, or $1.81 million, on outstanding shares of its common stock. The dividend will be paid on August 25, 2003 to stockholders of record as of the close of business on August 11, 2003.

On October 27, 2003, CTBS declared a quarterly cash dividend of $0.18 per share, or $1.85 million, on outstanding shares of its common stock. The dividend will be paid on November 24, 2003 to stockholders of record as of the close of business on November 10, 2003.

Earnings per share

Basic earnings per share represents net income 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						For the Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
Net income	$	8,514		$	6,739		$	23,334		$	18,425

Weighted average shares outstanding		10,538,764			10,878,264			10,584,449			10,895,998
Less: unearned ESOP shares		(683,795	)		(743,699	)		(698,624	)		(758,528	)

Basic		9,854,969			10,134,565			9,885,825			10,137,470

Dilutive impact of:
Stock options		536,111			373,407			511,239			335,986
Restricted stock		359,367			306,845			389,965			329,088

Diluted		10,750,447			10,814,817			10,787,029			10,802,544

Earnings per share:
Basic	$	0.86		$	0.66		$	2.36		$	1.82
Diluted	$	0.79		$	0.62		$	2.16		$	1.71

During the three and nine months ended September 30, 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 nine months ended September 30, 2003 and 2002 was as follows (in thousands):

	For the Nine Months Ended
	September 30, 2003			September 30, 2002
Unrealized gains on securities:
Change in unrealized holding gains arising during the period, net of tax	$	(5,892	)	$	4,813
Reclassification adjustment for gains and other than temporary impairment included in net income, net of tax		(3,314	)		(644	)

Other comprehensive (loss) income	$	(9,206	)	$	4,169

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
	September 30, 2003		September 30, 2002
Net income:
Net income as reported	$	8,514	$	6,739
Less effect of compensation expense determined under fair value based method, net of tax		510		252

Pro forma net income	$	8,004	$	6,487

Pro forma earnings per share:
Basic	$	0.81	$	0.64
Diluted	$	0.74	$	0.60

	For The Nine Months Ended
	September 30, 2003		September 30, 2002
Net income:
Net income as reported	$	23,334	$	18,425
Less effect of compensation expense determined under fair value based method, net of tax		1,513		741

Pro forma net income	$	21,821	$	17,684

Pro forma earnings per share:
Basic	$	2.21	$	1.74
Diluted	$	2.02	$	1.64

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

	Grant Date For the Three and Nine Months Ended September 30, 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 nine months ended September 30, 2003.

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 April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. The standard amends and clarifies financial reporting for derivative instruments and for hedging activities accounted for under SFAS No. 133 and is effective for contracts entered into or modified, and for hedges designated, after June 30, 2003. Adoption of the standard is not expected to have a material impact on the Company’s consolidated financial statements since the Company does not have any derivative instruments as of September 30, 2003.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity”. The standard establishes how an issuer classifies and measures certain freestanding financial instruments with characteristics of liabilities and equity and requires that such instruments be classified as liabilities. The standard is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of the standard did not have any impact on the Company’s consolidated financial statements.

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:

	September 30, 2003			December 31, 2002
	(in thousands)
One-to four-family mortgages	$	996,319		$	907,188
Construction mortgages		65,922			64,182
Commercial and multi-family mortgages		308,611			275,818
Commercial business loans		184,874			180,612
Installment loans		138,947			128,939

Total loans		1,694,673			1,556,739
Less: Allowance for loan losses		(16,487	)		(16,172	)

Total loans, net	$	1,678,186		$	1,540,567

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

	For the Nine Months Ended September 30, 2003			For the Year Ended December 31, 2002
	(in thousands)
Balance, beginning of period	$	16,172		$	15,228
Provision for loan losses		975			1,500
Loans charged off		(900	)		(1,781	)
Recoveries		240			1,225

Balance, end of period	$	16,487		$	16,172

(4)

DEPOSITS

Deposits are as follows:

	September 30, 2003		December 31, 2002
	(in thousands)
Certificates of deposit:
Original maturity of less than one year	$	127,260	$	127,703
Original maturity of one year or more		385,834		433,956
Time certificates in denominations of $100,000 or more		79,327		81,542

Total certificates of deposit		592,421		643,201

Savings accounts		403,004		383,085
Money market accounts		215,290		209,301
NOW accounts		230,495		230,293
Demand deposits		151,052		130,099

Total deposits	$	1,592,262	$	1,595,979

(5)

INTANGIBLE ASSETS

	September 30, 2003		December 31, 2002
	(in thousands)
Intangible assets subject to amortization:
Core deposit intangible	$	6,543	$	7,372
Branch premiums		779		1,103
Other		247		275

Total		7,569		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	$	27,905	$	29,086


	September 30, 2003		December 31, 2002
	(in thousands)
Accumulated amortization for intangible assets subject to amortization:
Core deposit intangible	$	2,303	$	1,474
Branch premiums		3,534		3,210
Other		53		25

Total	$	5,890	$	4,709


	For the Nine Months Ended
	September 30, 2003		September 30, 2002
	(in thousands)
Amortization expense:
Noncompete agreements	$	—	$	2,366
Core deposit intangible		829		829
Branch premiums		324		324
Other		28		16

Total	$	1,181	$	3,535

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 nine months ended September 30, 2003 and 2002, there was no goodwill acquired, no impairment losses recognized and no goodwill included in the gain or loss on disposal of a reporting unit. The Company completed its annual test of goodwill for impairment as of September 30, 2003 and found no impairment.

(6)

SECURITIES AVAILABLE FOR SALE

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 nine months ended September 30, 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 the date of impairment. 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 on the date of impairment. The limited partnership is not publicly traded. The Company recorded an other than temporary impairment charge during the nine months ended September 30, 2002 of $680,000 for three equity securities that are publicly traded. The charges for the equity investments were computed using the closing price of each security as of the date of impairment. There were no material unrealized losses as of September 30, 2003 or 2002.

During the third quarter of 2003, the Company substantially liquidated its marketable equity securities portfolio for proceeds of $17.59 million, and net gains of $3.95 million.

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 and nine months ended September 30, 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, including those with respect to its pending merger with NHSB. 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 and in the Company’s other filings with the Securities and Exchange Commission.

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 September 30, 2003.

On July 16, 2003, the Company announced it entered into an Agreement and Plan of Merger with NHSB. The Company’s stockholders will receive $52.00 in cash in exchange for each share of the Company’s common stock held. If the transaction closes after March 31, 2004, the merger price is subject to increase based on the Company’s earnings less dividends paid from that date to the end of the month preceding the closing date of the merger. As a condition precedent to the merger, NHSB will convert from a Connecticut-chartered mutual savings bank to a Connecticut-chartered stock savings bank and simultaneously form a holding company. The transaction is subject to several other conditions, including the receipt of regulatory approvals and the approval of the stockholders of the Company. In connection with the pending transaction, the Company has agreed to take action to accelerate to December 31, 2003 the vesting of all unvested restricted stock awards that have been granted to certain officers. The vesting acceleration will occur upon action by the Board of Directors and the Company will record a charge based on the fair value of the common stock upon such action. The Company expects this charge to approximate $2.80 million, $1.82 million net of tax, based on the market value of the common stock, and occur in the fourth quarter of 2003. Additionally, during the three and nine months ended September 30, 2003 the Company incurred $1.24 million and $1.72 million in expenses, primarily professional fees, relating to the pending merger.

Comparison of Financial Condition at September 30, 2003 and December 31, 2002

Total assets increased $18.49 million, or 0.73%, to $2.57 billion at September 30, 2003 as compared to $2.55 billion at December 31, 2002. The increase in assets was mainly attributable to a $137.62 million increase in net loans and a $90.33 million increase in cash and cash equivalents partially offset by a $214.17 million decrease in securities. The increase in net loans was primarily due to a $89.13 million increase in one- to four-family mortgages, a $37.05 million increase in commercial business loans and commercial and multi-family mortgages and a $10.01 million increase in installment loans. The increase in cash and cash equivalents and the decrease in securities were mainly due to prepayments on mortgage-backed securities and collateralized mortgage obligations as well as $97.59 million of securities that were called or matured during the first nine months of 2003. The growth in assets was primarily funded by an increase in advances from the Federal Home Loan Bank of Boston (“FHLB”) of $20.87 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 September 30, 2003				At December 31, 2002
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Debt securities:
Asset-backed securities	$	67,075	$	68,480	$	91,370	$	93,676
U.S. Government and agency obligations		69,925		75,852		156,466		164,580
Municipal obligations		22,888		23,918		23,357		23,978
Corporate securities		51,152		53,493		63,209		66,143

Total		211,040		221,743		334,402		348,377

Equity securities:
Marketable equity securities		1,000		1,000		17,427		21,753
Debt mutual funds		9,404		9,351		9,249		9,267
Other equity securities		1,354		1,354		1,388		1,388

Total		11,758		11,705		28,064		32,408

Total debt and equity securities		222,798		233,448		362,466		380,785

Mortgage-backed securities:
Collateralized mortgage obligations		215,969		215,016		247,236		250,428
Mortgage-backed securities		176,496		178,986		205,569		210,409

Total mortgage-backed securities		392,465		394,002		452,805		460,837

Total available for sale securities	$	615,263	$	627,450	$	815,271	$	841,622

Available for sale securities decreased $214.17 million, or 25.45%, from a fair value of $841.62 million at December 31, 2002 to a fair value of $627.45 million at September 30, 2003. The Company had proceeds from sales of $59.16 million (including net gains of $5.46 million); maturities and calls of $97.59 million and principal payments of $243.13 million of securities during the nine months ended September 30, 2003. During the third quarter of 2003, the Company decided to substantially liquidate its marketable equity security portfolio and had proceeds from the sale of $17.59 million (including net gains of $3.95 million). The Company also experienced a net decrease in unrealized gains on securities of $14.16 million from December 31, 2002 to September 30, 2003. Securities purchased totaled $200.75 million during the nine months ended September 30, 2003.

During the third quarter of 2003, the Company substantially liquidated its marketable equity securities portfolio for proceeds of $17.59 million, and net gains of $3.95 million.

Net loans increased $137.62 million, or 8.93%, from $1.54 billion at December 31, 2002 to $1.68 billion at September 30, 2003. Residential mortgages (including residential construction mortgages) increased $89.21 million, or 9.64%, from $925.08 million at December 31, 2002 to $1.01 billion at September 30, 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 $38.70 million, or 7.70%, from $502.73 million at December 31, 2002, to $541.43 million at September 30, 2003, primarily due to an increase in commercial mortgage originations. As of September 30, 2003, commercial loans represented 31.95% of the Bank’s loan portfolio as compared to 32.66% at September 30, 2002.

Deposits totaled $1.59 billion at September 30, 2003, a decrease of $3.72 million, or 0.23%, compared to $1.60 billion at December 31, 2002. Checking accounts increased $21.16 million, or 5.87%, from $360.39 million at December 31, 2002 to $381.55 million at September 30, 2003. Savings and money market accounts increased $25.90 million, or 4.37%, from $592.39 million at December 31, 2002 to $618.29 million at September 30, 2003. Certificates of deposit decreased $50.78 million, or 7.89%, from $643.20 million at December 31, 2002 to $592.42 million at September 30, 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 $720,000, or 0.59%, from $121.05 million to $120.33 million during the first nine months of 2003. Advances from the FHLB increased $20.87 million, or 3.91%, from $533.89 million to $554.76 million during the first nine months of 2003.

Nonperforming assets totaled $2.16 million at September 30, 2003, compared to $2.89 million at December 31, 2002, a decrease of $731,000, or 25.26%. Other real estate owned totaled $112,000 at September 30, 2003 compared to $0 at December 31, 2002. During the first nine months of 2003 the Bank foreclosed on three residential properties and subsequently sold two of those properties.

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

	September 30, 2003			December 31, 2002
	(in thousands)
Nonperforming loans:
Loans past due 90 days and still accruing:
One- to four- family mortgages	$	390		$	527
Commercial and multifamily mortgages		—			395
Commercial business		187			313
Installment		244			108

Total loans past due 90 days and still accruing		821			1,343

Loans on nonaccrual:
One- to four- family mortgages		125			306
Commercial and multifamily mortgages		286			393
Commercial business		819			852

Total loans on nonaccrual		1,230			1,551

Total nonperforming loans		2,051			2,894
Other real estate owned		112			—

Total nonperforming assets	$	2,163		$	2,894

Total nonperforming loans as a percentage of gross loans		0.12	%		0.19	%

Total nonperforming assets as a percentage of total assets		0.08	%		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 $16.49 million at September 30, 2003; an increase of $315,000 from the $16.17 million recorded at December 31, 2002. The allowance for loan losses as a percentage of gross loans was 0.97% at September 30, 2003 as compared to 1.04% at December 31, 2002. The allowance for loan losses as a percentage of nonperforming loans was 803.85% at September 30, 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 $3.59 million at September 30, 2003 as compared to $3.24 million at December 31, 2002. As a percentage of the allowance for loan losses, the unallocated was 21.77% of the total allowance for loan losses at September 30, 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 September 30, 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.

Total stockholders’ equity increased $4.70 million, or 1.87%, to $256.26 million at September 30, 2003 compared to $251.56 million on December 31, 2002. The increase is due primarily to net income of $23.33 million for the nine months ended September 30, 2003 and the exercise of stock options and related tax benefits of $7.57 million. Partially offsetting this increase was the repurchase of 393,219 shares of Company common stock during the first nine months of 2003 for $16.22 million and a reduction in accumulated other comprehensive income. As of September 30, 2003, the Company has repurchased 558,641 shares of its common stock since its conversion to a public company on March 2, 2000 at a weighted average price of $38.92 per share, for a total of $21.74 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 decrease in accumulated other comprehensive income was due to a reduction in the unrealized gain on securities available for sale, net of taxes, of $9.21 million. The decline in the unrealized gain was due to the realization of $5.46 of security gains during the nine months ended September 30, 2003 and a higher interest rate environment reducing the fair value of the Bank’s fixed income portfolio.

Comparison of Operating Results for the Three Months Ended September 30, 2003 and 2002

Net Income. Net income for the quarter ended September 30, 2003 was $8.51 million compared to $6.74 million for the quarter ended September 30, 2002. Net income increased as a result of higher gains on sales of securities of $3.33 million, increases in service charge and fee income of $854,000 and lower amortization of other intangible assets of $548,000 due to noncompete agreements with former First Federal Savings and Loan Association of East Hartford (“First Federal”) executives which became fully amortized during the third quarter of 2002. The results for the quarter ended September 30, 2003 include a $612,000 decrease in net interest income, primarily due to lower asset yields, partially offset by a lower cost of funds and higher volume of loans. Net income was also reduced due to higher employee benefits of $1.07 million primarily due to increased restricted stock, pension and ESOP expenses. During the third quarter of 2003 the Company incurred $1.24 million in merger related expenses, primarily professional fees related to the pending merger with NHSB, further reducing net income in comparison to the prior year quarter.

Net Interest Income. Net interest income decreased $612,000, or 3.00%, to $19.75 million for the third quarter of 2003 compared to $20.36 million for the third quarter of 2002. The decrease was primarily due to lower asset yields, partially offset by higher average loans and a lower cost of funds. Total interest and dividend income decreased $3.60 million, or 10.25%, to $31.51 million for the third quarter of 2003 from

$35.11 million for the third quarter of 2002. Interest income on loans decreased $983,000, or 3.87%, to $24.37 million for the three months ended September 30, 2003 compared to $25.35 million for the three months ended September 30, 2002. The decrease was due to an 86 basis point decrease in the average yield on loans partially offset by a $160.22 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 interest rate environment and higher prepayments and refinancings of residential mortgages. Interest and dividend income from investment securities, short-term investments and FHLB stock decreased $2.61 million, or 26.77%, to $7.14 million for the three months ended September 30, 2003 compared to $9.75 million for the three months ended September 30, 2002. The decrease in income was mainly due to lower yields resulting from a lower interest rate environment. The yield on investment securities, short-term investments and FHLB stock decreased 101 basis points to 3.94% for the quarter ended September 30, 2003 as compared to 4.95% for the quarter ended September 30, 2002.

Interest expense decreased $2.99 million, or 20.27%, to $11.76 million for the three months ended September 30, 2003 compared to $14.75 million for the quarter ended September 30, 2002. The decrease was primarily due to a decrease in the overall cost of funds for interest-bearing liabilities of 66 basis points. The cost of funds for the third quarter of 2003 was 2.17% as compared to 2.83% for the third quarter of 2002. The decrease in the cost of funds was primarily due to a lower interest 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 September 30,
	2003						2002
	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
	(dollars in thousands)
Interest-earning assets:
Loans ⁽¹⁾:
Real estate	$	1,357,263	$	19,719	5.81	%	$	1,229,096	$	20,500	6.67	%
Consumer		138,775		1,857	5.35			120,816		1,985	6.57
Commercial ⁽⁵⁾		190,083		2,817	5.88			175,987		2,878	6.49

Total loans ⁽⁵⁾		1,686,121		24,393	5.78			1,525,899		25,363	6.64

Mortgage-backed securities ⁽²⁾		189,310		1,846	3.90			109,458		1,715	6.27
Collateralized mortgage obligations ⁽²⁾		228,008		2,061	3.62			212,984		2,876	5.40
Investment securities ⁽²⁾ ⁽⁵⁾:
U.S. Government and agency obligations		72,213		1,049	5.76			168,291		1,969	4.64
Municipal obligations		23,044		414	7.19			23,580		419	7.11
Corporate securities		51,246		652	5.09			62,363		930	5.97
Common stock and mutual funds		17,040		149	3.50			30,594		309	4.04
Other investment securities		1,356		2	0.59			1,066		2	0.75
Asset-backed securities		67,611		741	4.38			107,042		1,187	4.44
Other interest-bearing assets
FHLB stock		30,783		237	3.08			30,783		291	3.78
Short-term investments		59,900		146	0.97			56,024		251	1.78

Total interest-earning assets ⁽⁵⁾		2,426,632	$	31,690	5.22	%		2,328,084	$	35,312	6.06	%

Noninterest-earning assets		140,326						137,681

Total assets	$	2,566,958					$	2,465,765

Interest-bearing liabilities:
Deposits:
NOW accounts	$	232,386	$	176	0.30	%	$	209,424	$	298	0.56	%
Savings and money market accounts		617,198		898	0.58			584,741		2,000	1.36
Certificates of deposit		598,326		4,321	2.87			673,542		6,121	3.61
Escrow deposits		11,550		44	1.51			7,801		33	1.68

Total interest-bearing deposits		1,459,460		5,439	1.48			1,475,508		8,452	2.27
Short-term borrowed funds		117,591		184	0.62			119,477		442	1.47
Advances from FHLB		573,190		6,139	4.25			470,943		5,856	4.93

Total interest-bearing liabilities		2,150,241	$	11,762	2.17	%		2,065,928	$	14,750	2.83	%

Noninterest-bearing liabilities		164,476						145,783

Total liabilities		2,314,717						2,211,711
Stockholders’ equity		252,241						254,054

Total liabilities and stockholders’ equity	$	2,566,958					$	2,465,765

Net interest-earning assets	$	276,391					$	262,156

Net interest income ⁽⁵⁾			$	19,928					$	20,562

Interest rate spread ⁽³⁾ ⁽⁵⁾					3.05	%					3.23	%
Net interest margin ⁽⁴⁾ ⁽⁵⁾					3.30	%					3.55	%
Ratio of interest-earning assets to interest-bearing liabilities					112.85	%					112.69	%
Taxable-equivalent adjustments
Loans			$	22					$	9
Investment securities				160						195

Total			$	182					$	204

⁽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 September 30, 2003 Compared to the Three Months Ended September 30, 2002
	Increase (Decrease) Due to
	Rate			Volume			Rate/Vol			Net
	(in thousands)
Interest-earning assets:
Loans:
Real estate	$	(2,643	)	$	2,138		$	(276	)	$	(781	)
Consumer		(368	)		295			(55	)		(128	)
Commercial		(270	)		231			(22	)		(61	)

Total loans		(3,281	)		2,664			(353	)		(970	)
Mortgage-backed securities		(648	)		1,251			(472	)		131
Collateralized mortgage obligations		(951	)		203			(67	)		(815	)
Investment securities		120			(1,856	)		(232	)		(1,968	)

Total interest-earning assets		(4,760	)		2,262			(1,124	)		(3,622	)

Interest-bearing liabilities:
Deposits:
NOW accounts		(139	)		33			(16	)		(122	)
Savings and money market accounts		(1,149	)		111			(64	)		(1,102	)
Certificates of deposit		(1,258	)		(683	)		141			(1,800	)
Other		(3	)		16			(2	)		11

Total deposits		(2,549	)		(523	)		59			(3,013	)
Short-term borrowed funds		(255	)		(7	)		4			(258	)
Advances from FHLB		(812	)		1,271			(176	)		283

Total interest-bearing liabilities		(3,616	)		741			(113	)		(2,988	)

(Decrease) increase in net interest income	$	(1,144	)	$	1,521		$	(1,011	)	$	(634	)

Provision for Loan Losses. The provision for loan losses was $300,000 for the quarter ended September 30, 2003 and $375,000 for the quarter ended September 30, 2002. The Bank lowered its provision for loan losses as nonperforming loans are at lower levels than prior years. Additionally, the Bank had less past due loans and less net charge-offs than in the prior year. There were some encouraging signs in the economy in the third quarter of 2003 as well. Manufacturing output was slightly higher and, with wartime concerns subsided, manufacturers are ordering new equipment. The allowance for loan losses was 0.97% of total loans and 803.85% of nonperforming loans at September 30, 2003 compared to 1.04% and 558.81%, respectively, at December 31, 2002.

Noninterest Income. Noninterest income for the third quarter of 2003 was $9.22 million, a $4.46 million, or 93.70%, increase from $4.76 million for the third quarter of 2002. The increase in noninterest income over the prior year quarter was primarily due to an increase in gains on sales of securities, an increase in service charges and fees and a decrease in charges for other than temporary impairment of investment securities. Gains on sales of securities increased $3.33 million from the prior year quarter. During the third quarter of 2003, the Company decided to substantially liquidate its marketable equity securities portfolio and had proceeds of $17.59 million, and net gains of $3.95 million. Service charges and fees increased $854,000 as compared to the prior year quarter primarily due to increases in checking account and commercial real estate loan prepayment fees. During the third quarter of 2003 there were no charges recorded for other than temporary impairment, while in the prior year quarter a charge for other than temporary impairment totaling $410,000 was recorded for two equity securities.

Noninterest Expense. Noninterest expense for the third quarter of 2003 was $15.86 million, a $1.18 million, or 8.04%, increase from $14.68 million for the third quarter of 2002. The increase in noninterest expense from the prior year quarter was primarily due to merger related expenses and an increase in employee benefits partially offset by decreases in amortization of other intangible assets and salaries. The Company incurred $1.24 million in expenses, primarily professional fees, relating to the pending merger with NHSB in the quarter ended September 30, 2003. Employee benefits increased primarily due to increased restricted stock, pension and ESOP expenses. In conjunction with the 2001 acquisition of First Federal, the Bank recorded an intangible asset for noncompete agreements with former First Federal executives. The agreements were amortized over their twelve-month term through the third quarter of 2002. Salary expense decreased primarily due to higher cost deferrals relating to the origination of residential mortgages.

Provision for Income Taxes. Income tax expense increased $969,000 from $3.32 million for the third quarter of 2002 to $4.29 million for the quarter ended September 30, 2003. The effective tax rate for the current quarter was 33.50% compared to 33.01% in the prior year quarter.

Comparison of Operating Results for the Nine Months Ended September 30, 2003 and 2002

Net Income. Net income for the nine months ended September 30, 2003 was $23.33 million compared to $18.43 million for the nine months ended September 30, 2002. The results for the nine months ended September 30, 2003 include a $1.59 million increase in net interest income, primarily due to a lower cost of funds and higher volume of loans, partially offset by lower asset yields. Net income also increased as a result of increases in service charge and fee income of $2.21 million, higher net gains on sales of securities of $3.79 million and lower amortization of other intangible assets of $1.73 million 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 $2.78 million primarily due to increased restricted stock, pension and ESOP expenses. During the first nine months of 2003 the Company incurred $1.72 million in merger related expenses, further reducing net income in comparison to the prior year period.

Net Interest Income. Net interest income increased $1.59 million, or 2.67%, to $61.13 million for the first nine months of 2003 compared to $59.54 million for the first nine months 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 $7.76 million, or 7.35%, to $97.80 million for the first nine months of 2003 from $105.56 million for the first nine months of 2002. Interest income on loans decreased $1.66 million, or 2.20%, to $73.88 million for the nine months ended September 30, 2003 compared to $75.54 million for the nine months ended September 30, 2002. The decrease was due to a 74 basis point decrease in the average yield on loans partially offset by a $145.85 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 interest rate environment and higher

prepayments and refinancings of residential mortgages. Interest and dividend income from investment securities, short-term investments and FHLB stock decreased $6.10 million, or 20.32%, to $23.92 million for the nine months ended September 30, 2003 compared to $30.02 million for the nine months ended September 30, 2002. The decrease in income was mainly due to lower yields resulting from a lower interest rate environment. The yield on investment securities, short-term investments and FHLB stock decreased 70 basis points to 4.23% for the nine months ended September 30, 2003 as compared to 4.93% for the nine months ended September 30, 2002.

Interest expense decreased $9.36 million, or 20.34%, to $36.66 million for the nine months ended September 30, 2003 compared to $46.02 million for the nine months ended September 30, 2002. The decrease was primarily due to a decrease in the overall cost of funds for interest-bearing liabilities of 68 basis points. The cost of funds for the first nine months of 2003 was 2.29% as compared to 2.97% for the first nine months of 2002. The decrease in the cost of funds was primarily due to a lower interest rate environment.

	For the Nine Months Ended September 30,
	2003						2002
	Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate
	(dollars in thousands)
Interest-earning assets:
Loans⁽¹⁾:
Real estate	$	1,317,692	$	59,778	6.05	%	$	1,201,801	$	60,962	6.76	%
Consumer		135,609		5,706	5.61			120,399		6,120	6.78
Commercial ⁽⁵⁾		186,856		8,429	6.03			172,108		8,492	6.60

Total loans ⁽⁵⁾		1,640,157		73,913	6.01			1,494,308		75,574	6.75

Mortgage-backed securities ⁽²⁾		202,233		6,531	4.31			123,371		5,749	6.21
Collateralized mortgage obligations ⁽²⁾		220,610		6,562	3.97			229,227		9,077	5.28
Investment securities ^{(2) (5)}:
U.S. Government and agency obligations		100,604		3,828	5.09			166,055		5,573	4.49
Municipal obligations		23,171		1,245	7.16			23,650		1,256	7.08
Corporate securities		55,706		2,189	5.24			57,093		2,702	6.31
Common stock and mutual funds		22,191		558	3.35			36,920		1,089	3.93
Other investment securities		1,327		5	0.50			1,007		7	0.93
Asset-backed securities		72,919		2,454	4.49			102,827		3,522	4.57
Other interest-bearing assets
FHLB stock		30,783		725	3.14			30,783		863	3.74
Short-term investments		41,019		331	1.08			57,643		783	1.82

Total interest-earning assets ⁽⁵⁾		2,410,720	$	98,341	5.44	%		2,322,884	$	106,195	6.10	%

Noninterest-earning assets		144,287						134,708

Total assets	$	2,555,007					$	2,457,592

Interest-bearing liabilities:
Deposits:
NOW accounts	$	226,568	$	527	0.31	%	$	209,684	$	899	0.57	%
Savings and money market accounts		607,768		2,880	0.63			566,878		6,206	1.46
Certificates of deposit		615,964		14,029	3.05			698,360		19,785	3.79
Escrow deposits		12,908		148	1.53			9,210		117	1.70

Total interest-bearing deposits		1,463,208		17,584	1.61			1,484,132		27,007	2.43
Short-term borrowed funds		117,405		582	0.66			113,400		1,304	1.54
Advances from FHLB		563,226		18,496	4.39			475,028		17,708	4.98

Total interest-bearing liabilities		2,143,839	$	36,662	2.29	%		2,072,560	$	46,019	2.97	%

Noninterest-bearing liabilities		156,926						137,627

Total liabilities		2,300,765						2,210,187
Stockholders’ equity		254,242						247,405

Total liabilities and stockholders’ equity	$	2,555,007					$	2,457,592

Net interest-earning assets	$	266,881					$	250,324

Net interest income ⁽⁵⁾			$	61,679					$	60,176

Interest rate spread ^{(3) (5)}					3.15	%					3.13	%
Net interest margin ^{(4) (5)}					3.41	%					3.45	%
Ratio of interest-earning assets to interest-bearing liabilities					112.45	%					112.08	%
Taxable-equivalent adjustments
Loans			$	36					$	33
Investment securities				510						601

Total			$	546					$	634

⁽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 Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002
	Increase (Decrease) Due to
	Rate			Volume			Rate/Vol			Net
	(in thousands)
Interest-earning assets:
Loans:
Real estate	$	(6,441	)	$	5,879		$	(622	)	$	(1,184	)
Consumer		(1,054	)		773			(133	)		(414	)
Commercial		(728	)		728			(63	)		(63	)

Total loans		(8,223	)		7,380			(818	)		(1,661	)
Mortgage-backed securities		(1,765	)		3,675			(1,128	)		782
Collateralized mortgage obligations		(2,259	)		(341	)		85			(2,515	)
Investment securities		(380	)		(3,971	)		(109	)		(4,460	)

Total interest-earning assets		(12,627	)		6,743			(1,970	)		(7,854	)

Interest-bearing liabilities:
Deposits:
NOW accounts		(411	)		72			(33	)		(372	)
Savings and money market accounts		(3,520	)		448			(254	)		(3,326	)
Certificates of deposit		(3,879	)		(2,334	)		457			(5,756	)
Other		(11	)		47			(5	)		31

Total deposits		(7,821	)		(1,767	)		165			(9,423	)
Short-term borrowed funds		(742	)		46			(26	)		(722	)
Advances from FHLB		(2,108	)		3,288			(392	)		788

Total interest-bearing liabilities		(10,671	)		1,567			(253	)		(9,357	)

(Decrease) increase in net interest income	$	(1,956	)	$	5,176		$	(1,717	)	$	1,503

Provision for Loan Losses. The provision for loan losses was $975,000 for the nine months ended September 30, 2003 and $1.13 million for the nine months ended September 30, 2002. The Bank lowered its provision for loan losses as nonperforming loans are at lower levels than prior years. Additionally, the Bank had less past due loans and less net charge-offs than in the prior year. There were some encouraging signs in the economy in the third quarter of 2003 as well. Manufacturing output was slightly higher and, with wartime concerns subsided, manufacturers are ordering new equipment. The allowance for loan losses was 0.97% of total loans and 803.85% of nonperforming loans at September 30, 2003 compared to 1.04% and 558.81%, respectively, at December 31, 2002.

Noninterest Income. Noninterest income was $19.98 million for the nine months ended September 30, 2003 as compared to $13.97 million for the nine months ended September 30, 2002. The increase in noninterest income over the prior year was primarily due to an increase in gains on sales of securities and an increase in service charges and fees. Gains on sales of securities increased $3.79 million from the prior year. During the third quarter of 2003, the Company decided to substantially liquidate its marketable equity securities portfolio and had proceeds of $17.59 million, and net gains of $3.95 million. Service charges and fees increased $2.21 million as compared to the prior year primarily due to increases in checking account, commercial real estate loan prepayment and merchant services fees.

Noninterest Expense. Noninterest expense for the first nine months of 2003 was $45.21 million, a $166,000, or 0.38%, increase from $45.05 million for the first nine months of 2002. The increase in noninterest expense from the prior year period was primarily due to merger related expenses and an increase in employee benefits, partially offset by decreases in amortization of other intangible assets, fees and services, salaries, furniture and equipment and marketing expenses. The Company incurred $1.72 million in expenses, primarily professional fees, relating to the pending merger with NHSB in the nine months ended September 30, 2003. Employee benefits increased primarily due to increased restricted stock, pension and ESOP expenses. In conjunction with the 2001 acquisition of First Federal, the Bank recorded an intangible asset for noncompete agreements with former First Federal executives. The agreements were amortized over their twelve-month term through the third quarter of 2002. Fees and services decreased primarily due to lower consulting fees for information technology and investments. Salary expense decreased primarily due to higher cost deferrals relating to the origination of residential mortgages. Furniture and equipment expenses decreased as certain assets became fully depreciated. Marketing expenses decreased as the Bank reduced its expense related to various media advertising.

Provision for Income Taxes. Income tax expense increased $2.67 million from $8.92 million for the first nine months of 2002 to $11.59 million for the nine months ended June 30, 2003. The effective tax rate for the nine months ended September 30, 2003 was 33.18% compared to 32.62% in the prior year period.

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 the 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 nine months ended September 30, 2003, the Bank’s loan originations, net of repayments, totaled $142.87 million. For the nine months ended September 30, 2003, the Company purchased investments in mortgage-backed securities, U.S. Government and agency obligations and corporate equity securities and debt obligations totaling $200.75 million, had proceeds from principal payments of mortgage-backed securities and collateralized mortgage obligations of $243.13 million and had proceeds from maturities and calls of available for sale securities of $97.59 million. The Bank experienced a net decrease in total deposits of $3.72 million for the nine months ended September 30, 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 nine

months ended September 30, 2003, the Company repurchased 393,219 shares of its common stock at a weighted average price of $41.25 per share, for a total of $16.22 million and has repurchased 558,641 shares of its common stock since its conversion to a public company on March 2, 2000 at a weighted average price of $38.92 per share, for a total of $21.74 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 the FHLB and through repurchase agreement borrowing facilities.

Outstanding commitments for all loans and unadvanced construction loans and lines of credit totaled $252.24 million at September 30, 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 September 30, 2003 totaled $349.31 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 September 30, 2003, SBM exceeded all of its regulatory capital requirements with a leverage capital level of $201.62 million, or 7.91% of average assets, which is above the required level of $101.93 million, or 4.00%, and total risk-based capital of $218.10 million, or 12.80% of risk weighted assets, which is above the required level of $136.30 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.

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 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 September 30, 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 September 30, 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	-2.60	%	-3.57	%
100 basis point decrease in rates	0.42	%	-0.81	%

Prior to the June 30, 2003 quarter, the Bank’s ALCO policy stated that the Bank has established acceptable levels of interest rate risk as follows:

“Projected Net Interest Income over the next twelve months will not be reduced by more than 10% given a change in interest rates of 200 basis points (+ or -) over a one year horizon. This limit will be re-evaluated on a periodic basis (not less than annually) and may be modified, as appropriate.”

Management believes that under the current rate environment, a change of interest rates downward of 200 basis points is a highly remote interest rate scenario. Therefore during the second quarter of 2003, Management modified the limit and a 100 basis point decrease in interest rates will be used for policy purposes rather than a 200 basis point decrease. This limit will be re-evaluated periodically and may be modified as appropriate.

The two hundred and one 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 $511,000, 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 the end of the period covered by this 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. In addition, based on this evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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)

31.0		Certifications pursuant to Rule 13a – 14(a)/15d – 14(a)

32.0		Certifications pursuant to 18 U.S.C. Section 1350

(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

On July 18, 2003 the Company filed a Form 8-K to announce The New Haven Savings Bank and Connecticut Bancshares, Inc. entered into an Agreement and Plan of Merger.

On July 24, 2003, the Company furnished a Form 8-K to announce its financial results for the quarter ended June 30, 2003.

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: November 12, 2003		By:	/s/ Richard P. Meduski

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



Dated: November 12, 2003	By:	/s/ Michael J. Hartl

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

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CONNECTICUT BANCSHARES INC/DE 10-Q