Exhibit 13.0

                          Annual Report to Stockholders

<PAGE>

                 Selected Consolidated Financial and Other Data

      The following table sets forth certain consolidated summary historical
financial information concerning the financial position of Naugatuck Valley
Financial and its subsidiary, Naugatuck Valley Savings, at the dates and for the
periods indicated. The financial data is derived in part from, and should be
read in conjunction with, the consolidated financial statements and related
notes of Naugatuck Valley Financial appearing later in this annual report.

<TABLE>
<CAPTION>
                                                               At December 31,
                                          ----------------------------------------------------------
                                            2004         2003         2002        2001        2000
                                          --------     --------     --------    --------    --------
                                                                (In thousands)
<S>                                        <C>          <C>          <C>         <C>         <C>
Financial Condition Data:
Total assets                               $265,449     $243,956     $227,998    $201,105    $177,449
Securities held-to-maturity                   5,168        1,561        1,364         596         723
Securities available-for-sale                31,096       37,166       32,512      20,407      12,132
Loans receivable, net                       203,820      180,378      166,046     158,456     145,831
Cash and cash equivalents                     7,575        9,775       18,158      12,643      11,242
Deposits                                    193,366      183,455      173,231     156,662     136,452
FHLB advances                                15,826       34,990       31,119      23,372      22,036
Total capital                                51,571       21,217       19,850      17,497      15,984
</TABLE>

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                          ----------------------------------------------------------
                                            2004         2003         2002        2001        2000
                                          --------     --------     --------    --------    --------
                                                               (In thousands)
<S>                                       <C>           <C>          <C>          <C>        <C>
Operating Data:
Interest and dividend income              $12,713       $12,644      $13,178      $12,631    $12,318
Interest expense                            3,559         4,241        5,299        6,178      5,923
                                          -------       -------      -------      -------    -------
Net interest income                         9,154         8,403        7,879        6,453      6,395
Provision for loan losses                      --            45          231           80         73
                                          -------       -------      -------      -------    -------
Net interest income after provision
   for loan losses                          9,154         8,358        7,648        6,373      6,322
Noninterest income                          1,078         1,115          972          743        601
Noninterest expense                         9,803         6,845        5,820        5,392      4,497
                                          -------       -------      -------      -------    -------
Income before provision for
   income taxes                               429         2,628        2,800        1,724      2,426
Provision for income taxes                     14           822          880          542        807
                                          -------       -------      -------      -------    -------
Net income                                $   415       $ 1,806      $ 1,920      $ 1,182    $ 1,619
                                          =======       =======      =======      =======    =======
Net income per share(1)                   $  0.07       $    --      $    --      $    --    $    --
                                          =======       =======      =======      =======    =======
</TABLE>

----------
(1)   Net income per share is for the fourth quarter 2004. Before September 30,
      2004, Naugatuck Valley Savings operated as a mutual institution and,
      accordingly, had no per share data.


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                                                  At or For the Year Ended December 31,
                                                    ------------------------------------------------------------
                                                     2004          2003         2002         2001          2000
                                                    ------        ------       ------       ------        ------
<S>                                                <C>           <C>          <C>          <C>           <C>
Performance Ratios:
Return on average assets                             0.16%         0.77%        0.91%        0.65%         0.96%

Return on average equity                             1.41          8.59        10.23         6.95         10.71

Interest rate spread (1)                             3.75          3.77         3.77         3.50          3.78

Net interest margin (2)                              3.85          3.85         3.90         3.71          3.98

Noninterest expense to average assets                3.81          2.94         2.75         2.96          2.68

Efficiency ratio (3)                                95.49         71.62        65.20        74.43         63.58

Average interest-earning assets to
   average interest-bearing liabilities            106.90        103.69       105.20       105.87        105.57

Average equity to average assets                    11.43          9.02         8.86         9.35          9.01

Capital Ratios:
Total capital to risk-weighted assets               23.61%        16.21%       15.37%       14.74%        15.50%

Tier I capital to risk-weighted assets              22.52         14.96        14.12        13.47         14.25

Tier I capital to adjusted total assets (4)         14.78          8.64         8.30         8.40          8.83

Total equity to total assets                        19.43          8.70         8.71         8.70          9.01

Asset Quality Ratios:
Allowance for loan losses as a percent of
   total loans                                       0.89%         0.99%        1.19%        1.16%         1.18%

Allowance for loan losses as a percent of
   nonperforming loans                             306.88        199.78       162.91       144.66        171.14

Net charge-offs (recoveries) to average loans
   outstanding during the period                    (0.01)         0.13         0.05        (0.02)         0.18

Nonperforming loans as a percent of
   total loans                                       0.29          0.50         0.73         0.80          0.69

Nonperforming assets as a percent of
   total assets                                      0.25          0.46         0.58         0.72          0.65

Other Data:
Number of:
   Deposit accounts                                22,599        22,447       22,059       21,823        21,228

   Full service customer service facilities             5             5            4            4             3
</TABLE>

----------
(1)   Represents the difference between the weighted average yield on average
      interest-earning assets and the weighted average cost of interest-bearing
      liabilities.

(2)   Represents net interest income as a percent of average interest-earning
      assets.

(3)   Represents noninterest expense (less intangible amortization) divided by
      the sum of net interest income and noninterest income.

(4)   Data for 2003 represents Tier 1 capital to average assets.


                                       3
<PAGE>

                     Management's Discussion and Analysis of
                  Results of Operations and Financial Condition

      The objective of this section is to help the reader understand our views
on our results of operations and financial condition. You should read this
discussion in conjunction with the consolidated financial statements and notes
to the financial statements that appear at the end of this annual report.

Overview

      Income. We have two primary sources of pre-tax income. The first is net
interest income, which is the difference between interest income, the income
that we earn on our loans and investments, and interest expense, the interest
that we pay on our deposits and borrowings.

      To a much lesser extent, we also recognize pre-tax income from fees and
service charges, which is the compensation we receive from providing products
and services. Our primary noninterest income comes from service charges on
deposit accounts. We also earn income from bank owned life insurance, sales of
loans and investments, investment advisory services, ATM charges and other
services.

      Expenses. The expenses we incur in operating our business consist of
compensation, taxes and benefits, office occupancy, computer processing fees,
federal insurance premiums and other expenses.

      Compensation, taxes and benefits consist primarily of the salaries and
wages paid to our employees and directors, payroll taxes and expenses for
retirement and other employee benefits.

      Occupancy expenses, which are the fixed and variable costs of buildings
and equipment, consist primarily of lease payments, real estate taxes,
depreciation charges, maintenance, and costs of utilities.

      Computer processing fees includes fees paid to our third-party data
processing servicer and our network security expenses.

      Federal insurance premiums are payments we make to the Federal Deposit
Insurance Corporation for insurance of our deposit accounts.

      Other expenses include expenses for attorneys, accountants and
consultants, advertising, telephone, charitable contributions, insurance, office
supplies, postage and other miscellaneous operating activities.

Critical Accounting Policies

      We consider accounting policies involving significant judgments and
assumptions by management that have, or could have, a material impact on the
carrying value of certain assets or on income to be critical accounting
policies. We consider the following to be critical accounting policies:
allowance for loan losses and deferred income taxes.

      Allowance for Loan Losses. Determining the amount of the allowance for
loan losses necessarily involves a high degree of judgment. Management reviews
the level of the allowance on a quarterly basis, at a minimum, and establishes
the provision for loan losses based on the composition of the loan portfolio,
delinquency levels, loss experience, economic conditions, and other factors
related to the collectibility of the loan portfolio.

      Although we believe that we use the best information available to
establish the allowance for loan losses, future additions to the allowance may
be necessary based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors. We engage an independent
review of our commercial loan portfolio annually and adjust our loan ratings
based upon this review. In addition, our regulatory authorities as an integral
part of their examination process, periodically review our allowance for loan
losses. Such agencies may


                                       4
<PAGE>

require us to recognize adjustments to the allowance based on its judgments
about information available to it at the time of its examination. See notes 2
and 4 of the notes to the financial statements included in this annual report.

      Deferred Income Taxes. We use the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. If current available information raises doubt as to
the realization of the deferred tax assets, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of recognition of the resulting tax
liabilities and assets, including projections of future taxable income. These
judgments and estimates are reviewed continually as regulatory and business
factors change. See note 11 of the notes to the financial statements in this
annual report.

Operating Strategy

      Our mission is to operate and grow a profitable community-oriented
financial institution serving primarily retail customers and small businesses in
our market area. To achieve this, we plan to continue our strategy of:

      1.    operating as an independent community-oriented financial
            institution;

      2.    expanding our branch network and upgrading our existing branches;

      3.    pursuing opportunities to increase and diversify lending in our
            market area;

      4.    applying conservative underwriting practices to maintain the high
            quality of our loan portfolio;

      5.    managing our net interest margin and interest rate risk;

      6.    increasing core deposits; and

      7.    increasing noninterest income.

      Operating as an independent community-oriented financial institution

      We have a long tradition of focusing on the needs of consumers and small
sized businesses in our community and being an active corporate citizen. Unlike
some large banks, our decisions are made locally, we have many long time
employees, and customers have access to senior management. In recent years, we
have upgraded our computer systems and expanded our customer service
initiatives. In addition to standard conveniences such as ATMs, we offer
extended hours, Internet banking, bill payment, and a "voice response" inquiry
phone line. We deliver personalized service and respond with flexibility to
customer needs. We believe our community orientation is attractive to our
customers and distinguishes us from the large regional banks that operate in our
market area and we intend to maintain this focus as we grow. In addition, in
connection with our reorganization we established the Naugatuck Valley Savings
and Loan Foundation as a means of enhancing our long-standing commitment to our
local communities. The foundation was funded with our common stock and makes
grants and donations to non-profit and community groups and projects.

      Expanding our branch network and upgrading our existing branches

      In 2000, our branch network consisted of three locations. At that time, we
recognized an opportunity to prudently expand to the south of our main office in
Naugatuck. As a result of bank mergers over time, a number of communities ceased
to enjoy the services of community banking on both a personal and small business
level. In an effort to bring community banking back to the Greater Naugatuck
Valley, and in order to take advantage of the expansion of commuting patterns in
southwest Connecticut, we expanded our branch network through de novo branching.
In 2001 and 2003, we opened two new branches in Shelton and Derby, Connecticut,
respectively. These branches helped us to increase our low-cost core deposit
base. Additionally, our lending programs have benefited from our presence in
Shelton. An additional branch in Seymour, Connecticut opened in January 2005. We
intend to


                                       5
<PAGE>

continue to expand by opening a branch in Southbury, Connecticut, which we
expect to open in the first quarter of 2006. In addition to branching, we have
focused on upgrading existing facilities. In 2001, we moved our Naugatuck (New
Haven Road) branch to a larger building, and we have leased and acquired
properties to be used to relocate our Shelton branch and to improve access to
our Beacon Falls branch in 2005. We intend to continue to pursue opportunities
to upgrade our current branch facilities and to pursue expansion in the Greater
Naugatuck Valley in future years through de novo branching and branch
acquisitions, and we also may consider exploring expansion opportunities in
surrounding counties. Although we do not expect our branch expansion plans to
have a material impact on our cash flows, we cannot assure you that this
strategy will be accretive to our earnings.

      Pursuing opportunities to increase and diversify lending in our market
area

      Our loan portfolio has increased $58.0 million, or 39.7%, since December
31, 2000. In particular, since December 31, 2000, our commercial real estate,
commercial business and construction loan portfolio has increased $37.2 million,
or 471.4%, and at December 31, 2004 was 22.1% of our total loan portfolio.
During this period, we have increased our presence in our market area by
expanding our branch network and have taken advantage of the significant growth
in both residential and commercial real estate development in parts of our
market area. We expect to continue to expand all of our lending activities and,
in particular, intend to continue to pursue lending relationships associated
with commercial real estate and construction lending opportunities. Commercial
real estate and construction loans generally expose a lender to greater risk of
non-payment and loss than one- to four-family loans. We plan to hire additional
lending personnel to assist us with this expansion.

      Applying conservative underwriting practices to maintain the quality of
our loan portfolio

      High asset quality is a key to long-term financial success. We have sought
to grow and diversify our loan portfolio, while maintaining a high level of
asset quality and moderate credit risk, using underwriting standards which we
believe are conservative and diligent monitoring and collection efforts. At
December 31, 2004, our nonperforming loans (loans which are 90 or more days
delinquent) were 0.29% of our total loan portfolio and 0.22% of our total
assets.

      Managing our net interest margin and interest rate risk

      We intend to continue to maximize our net interest margin through the
aggressive pursuit of high quality loans in our market area. We will continue to
strive to increase consumer and commercial loans in order to increase our net
interest margin. Our investment portfolio has been deployed primarily into
variable rate instruments or instruments with relatively short maturities with
the goal of managing interest rate risk. Commercial and consumer loans generally
expose a lender to greater risk of non-payment and loss than one- to four-family
loans.

      Increasing core deposits

      Retail deposits are our primary source of funds for investing and lending.
We have been successful in increasing our core deposits, which include checking
accounts and all other deposit account types except certificate accounts. Core
deposits are generally lower cost to us than certificate accounts, and they are
generally less sensitive to withdrawal when interest rates fluctuate. At
December 31, 2002, core deposits represented 48.5% of deposits and, at December
31, 2004, this percentage had increased to 58.0%. By offering a variety of
deposit products and providing exceptional customer service, we seek to attract
and maintain deposits. Additionally, we believe that our expanding branch
network has and will contribute to increasing core deposits.

      Increasing noninterest income

      Our profits rely heavily on the spread between the interest earned on
loans and investments and interest paid on deposits and borrowings. In order to
decrease our reliance on interest rate spread income, we have pursued
initiatives to increase noninterest income. During the third quarter of 2003, we
began offering investment advisory services through a third party registered
broker-dealer and purchased key executive life insurance policies, from which we
derive income. These new initiatives accounted for 27.3% of noninterest income
during the year ended December 31, 2004. We intend to continue to pursue
initiatives to increase noninterest income.


                                       6
<PAGE>

Balance Sheet

      Loans. Our primary lending activity is the origination of loans secured by
real estate primarily located in our market area. We originate real estate loans
secured by one- to four-family residential homes and, to a much lesser but
growing extent, we originate multi-family and commercial real estate and
construction loans. At December 31, 2004, real estate loans totaled $174.8
million, or 84.0% of total loans compared to $159.7 million, or 86.3% of total
loans at December 31, 2003 and $149.3 million, or 88.0% of total loans at
December 31, 2002. Real estate loans have increased since December 31, 2001 due
to historically low interest rates, our expanding branch network and significant
growth in both residential and commercial real estate development, which we
believe is attributable to the availability of lower cost land and expansion of
commuting patterns in southwest Connecticut.

      The largest segment of our real estate loans is one- to four-family
residential loans. At December 31, 2004, these loans totaled $134.8 million and
represented 77.1% of real estate loans and 64.8% of total loans compared to
$131.4 million, which represented 82.2% of real estate loans and 71.0% of total
loans, at December 31, 2003. One- to four-family residential loans increased
$3.4 million, or 2.6%, from December 31, 2003 to December 31, 2004 and decreased
$781,000, or 0.6%, from December 31, 2002 to December 31, 2003, reflecting a
large volume of loan originations offset by loan repayments and sales of
fixed-rate residential loans. In periods of low and falling interest rates, loan
demand increases, but repayments of loans also increase as borrowers refinance
in order to benefit from lower available interest rates.

      Multi-family and commercial real estate loans is the second largest
segment of our real estate loan portfolio. This portfolio was $22.6 million and
represented 12.9% of real estate loans and 10.8% of total loans at December 31,
2004 compared to $14.3 million, which represented 8.9% of real estate loans and
7.7% of total loans, at December 31, 2003. Multi-family and commercial real
estate loans increased $8.3 million, or 58.1%, for the year ended December 31,
2004 and $4.0 million, or 38.8%, in the year ended December 31, 2003 due to
significant new development within parts of our market area and increased market
share.

      We also originate construction loans secured by residential and commercial
real estate. This portfolio was $17.5 million and represented 10.0% of real
estate loans and 8.4% of total loans at December 31, 2004 compared to $14.1
million, which represented 8.8% of real estate loans and 7.6% of total loans at
December 31, 2003. Construction loans increased $3.4 million, or 24.1%, for the
year ended December 31, 2004 and $7.2 million, or 104.6%, in the year ended
December 31, 2003 primarily due to significant new development within parts of
our market area and increased market share.

      We originate commercial business loans secured by business assets other
than real estate, such as business equipment, inventory and accounts receivable
and letters of credit. Commercial business loans totaled $5.0 million, and
represented 2.4% of total loans at December 31, 2004 and compared to $4.2
million, representing 2.3% of total loans, at December 31, 2003.

      We also originate a variety of consumer loans, including second mortgage
loans, home equity lines of credit, loans secured by savings accounts and
automobiles. Consumer loans totaled $28.3 million and represented 13.6% of total
loans at December 31, 2004 compared to $21.1 million, which represented 11.4% of
total loans at December 31, 2003. The $7.3 million, or 34.4%, increase for the
year ended December 31, 2004 and the $2.4 million, or 12.6%, increase for the
2003 fiscal year was due to targeted increased marketing activities and
competitive pricing on our home equity products.


                                       7
<PAGE>

      The following table sets forth the composition of our loan portfolio at
the dates indicated.

<TABLE>
<CAPTION>
                                                                       At December 31,
                                   ---------------------------------------------------------------------------------------
                                            2004                 2003                  2002                  2001
                                   ---------------------------------------------------------------------------------------
                                      Amount    Percent    Amount     Percent    Amount     Percent    Amount     Percent
                                      ------    -------    ------     -------    ------     -------    ------     -------
                                                                       (Dollars in thousands)
<S>                                  <C>        <C>       <C>         <C>       <C>         <C>       <C>         <C>
Real estate loans:
   One- to four-family ...........   $134,785    64.75%   $131,353     70.98%   $132,134     77.85%   $126,482     78.07%
   Construction ..................     17,486     8.40      14,094      7.62       6,888      4.06       6,526      4.03
   Multi-family and commercial
      real estate ................     22,559    10.84      14,273      7.71      10,285      6.06       7,172      4.43
                                     --------   ------    --------    ------    --------    ------    --------    ------
         Total real estate loans .    174,830    83.99     159,720     86.31     149,307     87.97     140,180     86.52
                                     --------   ------    --------    ------    --------    ------    --------    ------
Commercial business loans ........      4,989     2.40       4,240      2.29       1,693      1.00         875      0.54
Consumer loans:
   Savings accounts ..............        679     0.33         592      0.32         519      0.31         738      0.46
   Personal ......................        217     0.10         139      0.08         153      0.09         116      0.07
   Automobile ....................         98     0.05         143      0.08         181      0.11         291      0.18
   Home equity ...................     27,342    13.13      20,212     10.92      17,873     10.53      19,815     12.23
                                     --------   ------    --------    ------    --------    ------    --------    ------
         Total consumer loans ....     28,336    13.61      21,086     11.40      18,726     11.03      20,960     12.94
                                     --------   ------    --------    ------    --------    ------    --------    ------
           Total loans ...........    208,155   100.00%    185,046    100.00%    169,726    100.00%    162,015    100.00%
                                                ======                ======                ======                ======

Less:
   Allowance for loan losses .....      1,829                1,810                 1,994                 1,856
   Undisbursed construction loans.      2,094                2,519                 1,168                 1,071
   Deferred loan origination fees.        412                  339                   518                   632
                                     --------             --------              --------              --------
           Loans receivable, net..   $203,820             $180,378              $166,046              $158,456
                                     ========             ========              ========              ========
<CAPTION>
                                     At December 31,
                                   ------------------
                                          2000
                                   ------------------
                                     Amount   Percent
                                     ------   -------

<S>                                 <C>       <C>
Real estate loans:
   One- to four-family ...........  $123,170   82.41%
   Construction ..................     4,762    3.19
   Multi-family and commercial
      real estate ................     2,599    1.74
                                    --------  ------
         Total real estate loans .   130,531   87.34
                                    --------  ------
Commercial business loans ........       520    0.35
Consumer loans:
   Savings accounts ..............       596    0.40
   Personal ......................       126    0.08
   Automobile ....................       508    0.34
   Home equity ...................    17,170   11.49
                                    --------  ------
         Total consumer loans ....    18,400   12.31
                                    --------  ------
           Total loans ...........   149,451  100.00%
                                              ======

Less:
   Allowance for loan losses .....     1,749
   Undisbursed construction loans.     1,260
   Deferred loan origination fees.       611
                                    --------
           Loans receivable, net..  $145,831
                                    ========
</TABLE>


                                       8
<PAGE>

      The following table sets forth certain information at December 31, 2004
regarding the dollar amount of loans repricing or maturing during the periods
indicated. The table does not include any estimate of prepayments which
significantly shorten the average life of all loans and may cause our actual
repayment experience to differ from that shown below. Demand loans having no
stated maturity are reported as due in one year or less.

<TABLE>
<CAPTION>
                                                             At December 31, 2004
                                           ---------------------------------------------------------
                                                            Commercial
                                             Real Estate     Business       Consumer      Total
                                                Loans          Loans         Loans        Loans
                                           --------------  -------------- -----------  -------------
                                                                (In thousands)
<S>                                          <C>                <C>           <C>       <C>
   One year or less......................    $  34,743          $3,210        $16,031   $   53,984
   More than one year to five years......       17,152           1,281          1,305       19,738
   More than five years..................      122,935             498         11,000      134,433
                                              --------          ------        -------     --------
      Total..............................     $174,830          $4,989        $28,336     $208,155
                                              ========          ======        =======     ========
</TABLE>

      The following table sets forth the dollar amount of all loans at December
31, 2004 that are due after December 31, 2005 and have either fixed interest
rates or floating or adjustable interest rates. The amounts shown below exclude
applicable loans in process, nonperforming loans and deferred loan fees, net.

<TABLE>
<CAPTION>
                                                                        Floating or
                                                    Fixed-Rates       Adjustable-Rates          Total
                                                   --------------    -------------------    --------------
                                                                        (In thousands)
<S>                                                   <C>                <C>                   <C>
        Real estate loans:
           One- to four-family....................    $105,159           $14,563               $119,722
           Construction...........................       5,155             1,392                  6,547
           Multi-family and commercial............       2,027            11,850                 13,877
        Commercial business loans.................       1,307               472                  1,779
        Consumer loans............................      12,173               133                 12,306
                                                      --------           -------               --------
              Total...............................    $125,821           $28,410               $154,231
                                                      ========           =======               ========
</TABLE>

      The following table shows loan origination activity during the periods
indicated.

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                  ---------------------------------------
                                                      2004         2003          2002
                                                  -----------  -------------  -----------
                                                              (In thousands)
<S>                                                  <C>          <C>          <C>
Total loans at beginning of period...............    $185,046     $169,726     $162,015
Loans originated:
   Real estate loans:
      One- to four-family........................      30,002       64,689       41,395
      Construction...............................      20,598       13,489        7,844
      Multi-family and commercial................      10,865        5,365        3,823
   Commercial business loans.....................       3,962        3,196          976
   Consumer loans................................      18,416       14,307       10,255
                                                     --------     --------     --------
         Total loans originated..................      83,843      101,046       64,293
Loans purchased..................................          --           --           --
Deduct:
   Real estate loan principal repayments.........     (44,622)     (67,857)     (35,560)
   Loan sales....................................      (1,927)      (8,851)      (6,971)
   Other repayments..............................     (14,185)      (9,018)     (14,051)
                                                     --------     --------     --------
Net loan activity................................      23,109       15,320        7,711
                                                     --------     --------     --------
Total loans at end of period.....................    $208,155     $185,046     $169,726
                                                     ========     ========     ========
</TABLE>


                                       9
<PAGE>

      Allowance for Loan Losses and Asset Quality. The allowance for loan losses
is a valuation allowance for the probable losses inherent in the loan portfolio.
We evaluate the need to establish allowances against losses on loans on a
quarterly basis. When additional allowances are needed a provision for loan
losses is charged against earnings. The recommendations for increases or
decreases to the allowance are presented by management to the Board of
Directors.

      The allowance for loan losses is established to recognize the inherent
losses associated with lending activities. Loss and risk factors are based on
our historical loss experience and industry averages and may be adjusted for
significant factors that in management's judgment affect the collectibility of
the portfolio as of the evaluation date. These significant factors may include
changes in lending policies and procedures, changes in existing general economic
and business conditions affecting our primary lending area, credit quality
trends, collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, specific industry conditions within portfolio segments, recent loss
experience in particular segments of the portfolio, duration of the current
business cycle, and bank regulatory examination results.

      Our methodology for assessing the appropriateness of the allowance for
loan losses consists of the following procedures. The loan portfolio is
segregated first between passed and classified assets.

      Passed Assets. Our assets designated as pass or bankable with care by our
internal classification system are aggregated by loan category and an allowance
percentage is assigned based on estimated inherent losses associated with each
type of lending. Our passed and bankable with care assets are loans for which
the borrower is established and represents a reasonable credit risk.

      Classified Assets. Our assets classified as special mention, substandard
or doubtful (all regulatory classifications for problem assets) by our internal
classification system are individually evaluated by management and an allowance
percentage, increasing as the probability of loss increases, is assigned to each
classified asset based on the collateral value and loan balance. The level of
the allowance percentage is further dependent on whether the loan is secured by
real estate, secured by assets other than real estate or unsecured. Loans
classified as loss are charged off and, if the loan is secured by real estate
collateral, the real estate is transferred to foreclosed real estate.

      The loss factors which are presently used to determine the reserve level
were updated in 2003 based on various risk factors such as type of loan,
collateral and loss history. These factors are subject to ongoing evaluation to
ensure their relevance in the current economic environment.

      When we determine that a loan is troubled and where, based on current
information and events, it is probable that we will not be able to collect all
amounts due, we classify as loss any excess of the recorded investment in the
loan over its fair market value less the estimated cost to sell the asset, and
we classify as substandard the remainder.

      We identify loans which may require charge off as a loss by reviewing all
delinquent loans, significant credits, loans classified as substandard,
doubtful, loss, or special mention by our internal classification system, and
other loans that management may have concerns about collectibility, such as
loans to a specific industry. For individually reviewed loans, a borrower's
inability to service a credit according to the contractual terms based on the
borrower's cash flow and or a shortfall in collateral value would result in the
recording of a charge off of the loan or the portion of the loan that was
impaired.

      We retain a general loan loss allowance which has not been allocated to
particular problem assets or loan categories. This unallocated portion of our
allowance is determined based on our historical loss experience, delinquency
trends, and management's evaluation of the loan portfolio and may be adjusted
for significant factors that in management's judgment affect the collectibility
of the portfolio as of the evaluation date. These significant factors may
include changes in general economic and business conditions affecting our
primary lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, recent loss experience in
particular segments of the portfolio, duration of the current business cycle and
bank regulatory examination results. These factors are reviewed regularly to
ensure their relevance in the prevailing business environment.


                                       10
<PAGE>

      Our banking regulators, as an integral part of their examination process,
periodically review our allowance for loan losses. The examinations may require
us to make additional provisions for loan losses based on judgments different
from ours. In addition, we engage an independent consultant to review our
commercial loan portfolio and make recommendations based on their review as to
the classification of specific credits in the portfolio.

      The following table sets forth the breakdown of the allowance for loan
losses based on the components of our allowance at the dates indicated.

<TABLE>
<CAPTION>
                                        At December 31, 2004          At December 31, 2003
                                      -------------------------    --------------------------
<S>                                           <C>                           <C>
Passed Asset.....................             $1,343                        $1,152
Classified Assets................                389                           406
Unallocated......................                 97                           252
                                              ------                        ------
Total.......................                  $1,829                        $1,810
                                              ======                        ======
</TABLE>

      At December 31, 2004, our allowance for loan losses represented 0.89% of
total gross loans and 306.88% of nonperforming loans. The allowance for loan
losses increased $19,000 from December 31, 2003 to December 31, 2004. The
increase in the allowance was the result of net recoveries.

      At December 31, 2003, our allowance for loan losses represented 0.99% of
total gross loans and 199.78% of nonperforming loans. The allowance for loan
losses decreased from $2.0 million at December 31, 2002 to $1.8 million at
December 31, 2003 due to charge-offs of $265,000 offset by a provision for loan
losses of $45,000 that reflected decreased delinquencies and nonperforming
loans. The increase in charge-offs was primarily due to a one time charge,
required by the Federal Deposit Insurance Corporation, to write down to market
value loans for which we had previously established specific reserves.

      Total non-performing loans decreased during the year ended December 31,
2004 due to improved economic conditions, improved asset quality and the
completion and sale of a number of foreclosures during 2004. There were no
additions to the provision for loan losses made during 2004.

      Although we believe that we use 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 we believe we have established our
allowance for loan losses in conformity with generally accepted accounting
principles, there can be no assurance that regulators, in reviewing our loan
portfolio, will not request us to increase our allowance for loan losses. In
addition, because further 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. Any
material increase in the allowance for loan losses may adversely affect our
financial condition and results of operations.


                                       11
<PAGE>

      Summary of Loan Loss Experience. The following table sets forth an
analysis of the allowance for loan losses for the periods indicated. Where
specific loan loss allowances have been established, any difference between the
loss allowance and the amount of loss realized has been charged or credited to
current income.

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                          --------------------------------------------------
                                           2004       2003       2002       2001       2000
                                           ----       ----       ----       ----       ----
                                                          (Dollars in thousands)
<S>                                       <C>         <C>       <C>       <C>         <C>
Allowance at beginning of period ......   $ 1,810     $1,994    $1,856    $ 1,749     $1,935
                                          -------     ------    ------    -------     ------
Provision for loan losses .............        --         45       231         80         72
Less:  Charge offs:
   Real estate loans ..................        --        265       112         28        280
   Commercial business loans ..........        51         --        --         --         --
   Consumer loans .....................         5          2         5          3          1
                                          -------     ------    ------    -------     ------
      Total charge-offs ...............        56        267       117         31        281
                                          -------     ------    ------    -------     ------

Plus:  Recoveries:
   Real estate loans ..................        43         38        23         57         23
   Commercial business loans ..........        --         --        --         --         --
   Consumer loans .....................        32         --         1          1         --
                                          -------     ------    ------    -------     ------
      Total recoveries ................        75         38        24         58         23
                                          -------     ------    ------    -------     ------
Net charge-offs (recoveries) ..........       (19)       229        93        (27)       258
                                          -------     ------    ------    -------     ------
   Allowance at end of period .........   $ 1,829     $1,810    $1,994    $ 1,856     $1,749
                                          =======     ======    ======    =======     ======

Allowance to nonperforming loans ......    306.88%    199.78%   162.91%    144.66%    171.14%
Allowance to total loans outstanding
   at the end of the period ...........      0.89%      0.99%     1.19%      1.16%      1.18%
Net charge-offs (recoveries) to average
   loans outstanding during the period      (0.01)%     0.13%     0.05%     (0.02)%     0.18%
</TABLE>

      The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.

<TABLE>
<CAPTION>
                                                                         At December 31,
                                ----------------------------------------------------------------------------------------------------
                                             2004                              2003                              2002
                                ------------------------------    --------------------------------  --------------------------------
                                                        % of                                % of                             % of
                                            % of      Loans in                 % of       Loans in               % of      Loans in
                                          Allowance   Category               Allowance    Category             Allowance   Category
                                          to Total    to Total               to Total     to Total             to Total    to Total
                                 Amount   Allowance     Loans      Amount    Allowance      Loans    Amount    Allowance     Loans
                                -------   ---------   --------    --------  ----------   ---------  --------  -----------  ---------
                                                                    (Dollars in thousands)
<S>                             <C>          <C>       <C>         <C>         <C>        <C>       <C>          <C>        <C>
One- to four-family ..........  $   864       47.25%    64.75%     $   927      51.22%     70.98%   $ 1,566       78.54%     77.85%
Construction .................      142        7.76      8.40          185      10.22       7.62        100        5.02       4.06
Multi-family and commercial
  real estate ................      374       20.45     10.84          321      17.73       7.71        148        7.42       6.06
Commercial business ..........       50        2.73      2.40           92       5.08       2.29         59        2.96       1.00
Consumer loans ...............      302       16.51     13.61          232      12.82      11.40         78        3.91      11.03
Unallocated ..................       97        5.30        --           53       2.93         --         43        2.16         --
                                -------   ---------   -------      -------    -------    -------    -------     -------    -------
      Total allowance for
        loan losses ..........  $ 1,829      100.00%   100.00%     $ 1,810     100.00%    100.00%   $ 1,994      100.00%    100.00%
                                =======   =========   =======      =======    =======    =======    =======     =======    =======
</TABLE>


                                       12

<PAGE>

<TABLE>
<CAPTION>
                                                                       At December 31,
                                          ------------------------------------------------------------------------
                                                        2001                                  2000
                                          ----------------------------------    ----------------------------------
                                                                     % of                                  % of
                                                        % of       Loans in                   % of       Loans in
                                                      Allowance    Category                 Allowance    Category
                                                      to Total     to Total                 to Total     to Total
                                           Amount     Allowance      Loans       Amount     Allowance      Loans
                                          ---------   ---------    ---------    ---------   ---------    ---------
                                                                   (Dollars in thousands)
<S>                                       <C>            <C>          <C>       <C>            <C>          <C>
One- to four-family ...................   $   1,633       87.98%       78.07%   $   1,586       90.68%       82.41%
Construction ..........................          44        2.37         4.03           15        0.86         3.19
Multi-family and commercial real estate          37        1.99         4.43           14        0.80         1.74
Commercial business ...................           4        0.22         0.54            3        0.17         0.35
Consumer loans ........................          83        4.47        12.93           62        3.54        12.31
Unallocated ...........................          55        2.96           --           69        3.95           --
                                          ---------   ---------    ---------    ---------   ---------    ---------
      Total allowance for loan losses .   $   1,856      100.00%      100.00%   $   1,749      100.00%      100.00%
                                          =========   =========    =========    =========   =========    =========
</TABLE>

      Nonperforming and Classified Assets. When a loan becomes 90 days
delinquent, the loan is placed on nonaccrual status at which time the accrual of
interest ceases, the interest previously accrued to income is reversed and the
loan is placed on a cash basis. Payments on a nonaccrual loan are applied to the
outstanding principal and interest as determined at the time of collection of
the loan.

      We consider repossessed assets and loans that are 90 days or more past due
to be nonperforming assets. Real estate that we acquire as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real
estate until it is sold. When property is acquired it is recorded at the lower
of its cost, which is the unpaid balance of the loan, or fair market value at
the date of foreclosure. Holding costs and declines in fair value after
acquisition of the property are charged against income.

      Nonperforming assets totaled $664,000, or 0.25% of total assets, at
December 31, 2004, which was a decrease of $450,000, or 40.4%, from December 31,
2003. Nonaccrual loans accounted for 89.8% of the total nonperforming assets at
December 31, 2004. At December 31, 2004, $74,000 of the allowance for loan
losses was related to nonaccrual real estate loans.

      Nonperforming assets totaled $1.1 million, or 0.5% of total assets, at
December 31, 2003, which was a decrease of $218,000, or 16.4%, from $1.3
million, or 0.6% of total assets, at December 31, 2002. Nonaccrual loans
accounted for 81.3% of the total nonperforming assets at December 31, 2003 and
91.8% of nonperforming assets at December 31, 2002. At December 31, 2003,
$98,000 of the allowance for loan losses was related to nonaccrual real estate
loans. At December 31, 2002, $294,000 of the allowance for loan losses was
related to nonaccrual real estate loans.

      Under current accounting guidelines, a loan is defined as impaired when,
based on current information and events, it is probable that the creditor will
be unable to collect all amounts due under the contractual terms of the loan
agreement. We consider one- to four-family mortgage loans and consumer loans to
be homogeneous and only evaluate them for impairment separately when they are
delinquent or classified. Other loans are evaluated for impairment on an
individual basis. At December 31, 2004, no loans were considered impaired.


                                       13

<PAGE>

      The following table provides information with respect to our nonperforming
assets at the dates indicated. We did not have any troubled debt restructurings
or any accruing loans past due 90 days or more at the dates presented.

<TABLE>
<CAPTION>
                                                           At December 31,
                                             -------------------------------------------
                                             2004     2003      2002      2001      2000
                                             ----     ----      ----      ----      ----
                                                         (Dollars in thousands)
<S>                                          <C>     <C>       <C>       <C>       <C>
Nonaccrual loans:
  One- to four-family ....................   $474    $  500    $1,041    $1,217    $  985
  Multi-family and commercial real
     estate ..............................    119       315       117        --        --
  Commercial business ....................      3        15        --        --        --
  Consumer ...............................     --        76        66        66        37
                                             ----    ------    ------    ------    ------
         Total ...........................    596       906     1,224     1,283     1,022

Foreclosed real estate ...................     68       208       108       160       136
                                             ----    ------    ------    ------    ------

Total nonperforming assets ...............   $664    $1,114    $1,332    $1,443    $1,158
                                             ====    ======    ======    ======    ======

Total nonperforming loans to total loans .   0.29%     0.50%     0.73%     0.80%     0.69%

Total nonperforming loans to total assets    0.22%     0.37%     0.54%     0.64%     0.58%

Total nonperforming assets to total assets   0.25%     0.46%     0.58%     0.72%     0.65%
</TABLE>

      Other than disclosed above, there are no other loans at December 31, 2004
that we have serious doubts about the ability of the borrowers to comply with
the present loan repayment terms.

      Interest income that would have been recorded for the years ended December
31, 2004 and December 31, 2003 had nonaccruing loans been current according to
their original terms amounted to $44,600 and $50,100, respectively. Income
related to nonaccrual loans included in interest income for the years ended
December 31, 2004 and December 31, 2003 amounted to $20,000 and $32,600,
respectively.

      Federal regulations require us to regularly review and classify our
assets. In addition, our regulators have the authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. "Substandard
assets" must have one or more defined weaknesses and are characterized by the
distinct possibility that we will sustain some loss if the deficiencies are not
corrected. "Doubtful assets" have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
"loss" is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. The regulations also provide for a
"special mention" category, described as assets which do not currently expose us
to a sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving our close attention. When we
classify an asset as substandard or doubtful, we must establish a general
allowance for loan losses. If we classify an asset as loss, we must charge off
such amount.


                                       14
<PAGE>

      The following table shows the aggregate amounts of our classified assets
at the dates indicated.

                                                        At December 31,
                                                  --------------------------
                                                   2004                2003
                                                  ------              ------
                                                        (In thousands)

Special mention assets...................         $3,022              $1,020
Substandard assets ......................          2,058               2,745
Doubtful assets..........................             --                  23
Loss assets..............................             --                  --
                                                  ------              ------
   Total classified assets...............         $5,080              $3,788
                                                  ======              ======

      Special mention assets at December 31, 2004 and December 31, 2003 did not
include any nonaccrual loans. Substandard assets at December 31, 2004 and
December 31, 2003 included nonaccrual loans of $581,000 and $883,000,
respectively. All doubtful assets at December 31, 2004 and December 31, 2003
were nonaccrual loans and all loss assets at December 31, 2004 were nonaccrual
loans.

      Delinquencies. The following table provides information about
delinquencies in our loan portfolios at the dates indicated.

<TABLE>
<CAPTION>
                                                             At December 31,
                                     ---------------------------------------------------------------
                                             2004                  2003                  2002
                                     -------------------   --------------------  -------------------
                                      30-59      60-89      30-59       60-89     30-59      60-89
                                       Days       Days       Days        Days      Days       Days
                                     Past Due   Past Due   Past Due    Past Due  Past Due   Past Due
                                     --------   --------   --------    --------  --------   --------

<S>                                    <C>        <C>     <C>            <C>     <C>           <C>
One- to four-family.................   $2,017     $581    $   999        $670    $   931       $715
Multi-family and commercial
  real estate.......................      510      150        272          62         --         --
Commercial business.................       64       15         20          --         --         --
Consumer loans......................      135       12         61          75        138         40
                                       ------     ----    -------        ----    -------       ----
    Total...........................   $2,726     $758    $ 1,352        $807    $ 1,069       $755
                                       ======     ====    =======        ====    =======       ====
</TABLE>

      Securities. Our securities portfolio consists primarily of U.S. Government
and agency obligations as well as mortgage-backed securities and collateralized
mortgage obligations with maturities of 30 years or less. Securities decreased
by $2.5 million in the year ended December 31, 2004 primarily due to the sale of
$9.3 million of securities with a weighted average rate of 3.56%. This was
partially offset by the purchase of new securities using proceeds from the stock
offering. Securities increased by $4.8 million during 2003 as a result of funds
generated due to deposit inflows exceeding loan demand and due to the sale of
fixed-rate mortgages. All of our mortgage-backed securities and collateralized
mortgage obligations were issued either by Ginnie Mae, Fannie Mae or Freddie
Mac. In addition, our securities portfolio includes interest-bearing balances
(certificates of deposits) at other institutions. The interest-bearing balances
are all held-to-maturity and all mature within five years.


                                       15
<PAGE>

      The following table sets forth the amortized costs and fair values of our
securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                  At December 31,
                                           ---------------------------------------------------------------
                                                   2004                 2003                 2002
                                           --------------------  -------------------  --------------------
                                           Amortized    Fair     Amortized    Fair    Amortized    Fair
                                              Cost      Value       Cost      Value      Cost      Value
                                           ---------  ---------  ---------  --------  ---------  ---------
<S>                                          <C>        <C>       <C>        <C>       <C>        <C>
Available-for-sale securities:
   U.S. Government and agency obligations.   $15,072    $15,210   $22,861    $23,356   $19,912    $20,876
   Mortgage-backed securities.............    12,249     12,092     7,865      7,748     2,482      2,512
   Collateralized mortgage obligations....     3,812      3,794     6,031      6,062     9,044      9,124

Held-to-maturity securities:
   U.S. Government and agency obligations.       703        708       706        722       699        730
   Interest-bearing balances..............     4,465      4,465       855        855       665        665
   Collateralized mortgage obligations....        --         --        --         --        --         --
                                             -------    -------   -------    -------   -------    -------

         Total............................   $36,301    $36,269   $38,318    $38,743   $32,802    $33,907
                                             =======    =======   =======    =======   =======    =======
</TABLE>

      At December 31, 2004, we did not own any securities, other than U.S.
Government and agency securities, that had an aggregate book value in excess of
10% of our total capital at that date.


                                       16
<PAGE>

      The following table sets forth the maturities and weighted average yields
of securities at December 31, 2004. Certain mortgage-backed securities and
collateralized mortgage obligations have adjustable interest rates and reprice
annually within the various maturity ranges. These repricing schedules are not
reflected in the table below. At December 31, 2004, mortgage-backed securities
and collateralized mortgage obligations with adjustable rates totaled $13.5
million.

<TABLE>
<CAPTION>
                                                                            More than                More than
                                                   Less Than               One Year to             Five Years to
                                                    One Year                Five Years                Ten Years
                                              ---------------------    ---------------------    ---------------------
                                                          Weighted                 Weighted                 Weighted
                                              Carrying     Average     Carrying     Average     Carrying     Average
                                                Value       Yield        Value       Yield        Value       Yield
                                              ---------   ---------    ---------   ---------    ---------   ---------
                                                                       (Dollars in thousands)
<S>                                           <C>              <C>     <C>              <C>     <C>              <C>
Available-for-sale securities:
   U.S. Government and agency
      obligations .........................   $   3,277        5.35%   $  10,952        4.05%   $     981        5.25%
   Mortgage-backed securities .............          --          --           --          --        2,270        3.59
   Collateralized mortgage
     obligations ..........................          --          --           --          --           --          --
                                              ---------                ---------                ---------
        Total available-for-sale securities       3,277        5.35       10,952        4.05        3,251        4.16
                                              ---------                ---------                ---------
Held-to-maturity securities:
   U.S. Government and agency
      obligations .........................         151        1.80          552        3.95           --          --
   Interest-bearing balances ..............         760        1.94        3,705        2.64           --          --
                                              ---------                ---------                ---------
        Total held-to-maturity securities .         911        1.92        4,257        2.81           --          --
                                              ---------                ---------                ---------
        Total .............................   $   4,188        4.60%   $  15,209        3.70%   $   3,251        4.16%
                                              =========                =========                =========

<CAPTION>
                                                    More than
                                                    Ten Years                  Total
                                              ---------------------    ---------------------
                                                          Weighted                 Weighted
                                              Carrying     Average     Carrying     Average
                                                Value       Yield        Value       Yield
                                              ---------   ---------    ---------   ---------
                                                          (Dollars in thousands)
<S>                                           <C>              <C>     <C>              <C>
Available-for-sale securities:
   U.S. Government and agency
      obligations .........................   $      --          --%   $  15,210        4.41%
   Mortgage-backed securities .............       9,822        4.19       12,092        4.10
   Collateralized mortgage
     obligations ..........................       3,794        3.56        3,794        3.56
                                              ---------                ---------
        Total available-for-sale securities      13,616        4.01       31,096        4.18
                                              ---------                ---------
Held-to-maturity securities:
   U.S. Government and agency
      obligations .........................          --          --          703        3.49
   Interest-bearing balances ..............          --          --        4,465        2.52
                                              ---------                ---------
        Total held-to-maturity securities .          --          --        5,168        2.65
                                              ---------                ---------
        Total .............................   $  13,616        4.01%   $  36,264        3.96%
                                              =========                =========
</TABLE>


                                       17
<PAGE>

      Bank Owned Life Insurance. During 2003, we purchased life insurance
policies on certain key executives. We record bank owned life insurance as an
asset at the lower of its cash surrender value or the amount that can be
realized.

      Deposits. Our primary source of funds are retail deposit accounts held
primarily by individuals and businesses within our market area. The deposit base
is comprised of certificate accounts, regular savings accounts, checking and NOW
accounts and money market savings accounts. At December 31, 2004, we had no
brokered deposits. Total deposits increased $9.9 million or 5.4% in the year
ended December 31, 2004. During that time period, certificate accounts decreased
5.8%, regular savings accounts increased by 9.3%, checking and NOW accounts
increased by 13.1% and money market deposit accounts increased by 28.2%. These
increases in our deposit accounts, primarily core deposit accounts, are
primarily due to sales efforts throughout our branch system, advertising and
competitive interest rates.

      The following table sets forth the balances of our deposit products at the
date indicated.

<TABLE>
<CAPTION>
                                                                  At December 31,
                                                        ----------------------------------
                                                          2004         2003          2002
                                                        --------    ---------     --------
                                                                 (In thousands)
<S>                                                     <C>          <C>          <C>
      Certificate accounts..........................    $ 81,200     $ 86,192     $ 89,283
      Regular savings accounts......................      43,941       40,185       36,835
      Checking and NOW accounts.....................      37,003       32,723       28,346
      Money market savings accounts.................      31,222       24,355       18,767
                                                        --------     --------     --------
            Total...................................    $193,366     $183,455     $173,231
                                                        ========     ========     ========
</TABLE>

      The following table indicates the amount of jumbo certificate accounts by
time remaining until maturity at December 31, 2004. Jumbo certificate accounts
require minimum deposits of $100,000.

                                                           Certificate
           Maturity Period                                   Accounts
           -------------------                          -------------------
                                                          (In thousands)

           Three months or less .....................         $ 2,229
           Over three through six months.............           2,518
           Over six through twelve months............           4,013
           Over twelve months........................           7,884
                                                              -------
                Total................................         $16,644
                                                              =======

      The following table sets forth the certificate accounts classified by
rates at the dates indicated.

                                                   At December 31,
                                        --------------------------------------
                                         2004              2003          2002
                                        -------          -------       -------
                                                  (In thousands)
       0.00 - 0.99%................     $13,094          $15,170       $    --
       1.00 - 1.99.................      31,371           34,215        25,103
       2.00 - 2.99.................      14,704           14,026        28,029
       3.00 - 3.99.................      14,228           12,953        10,705
       4.00 - 4.99.................       6,884            8,546        15,749
       5.00 - 5.99.................         919            1,282         4,830
       6.00 - 6.99.................          --               --         4,867
                                        -------          -------       -------
            Total..................     $81,200          $86,192       $89,283
                                        =======          =======       =======


                                       18
<PAGE>

      The following table sets forth the amount and maturities of certificate
accounts at December 31, 2004.

<TABLE>
<CAPTION>
                                                      Amount Due
                         -----------------------------------------------------------------------
                                                                                                                Percent of
                           Less       More Than       More Than       More Than                                    Total
                           Than      One Year to      Two Years       Three to        More Than                 Certificate
                         One Year     Two Years     to Three Years   Four Years      Four Years      Total       Accounts
                         --------    ------------   --------------   -----------     -----------    --------   -------------
                                                               (Dollars in thousands)
<S>                      <C>           <C>             <C>             <C>             <C>          <C>              <C>
0.00 - 0.99% .........   $ 13,027      $     67        $    --         $    --         $    --      $ 13,094         16.13%
1.00 - 1.99 ..........     27,634         3,507            230              --              --        31,371         38.63
2.00 - 2.99 ..........      4,812         7,474          1,443             975              --        14,704         18.11
3.00 - 3.99 ..........      1,908           300          1,883           6,837           3,300        14,228         17.52
4.00 - 4.99 ..........      1,079         1,893          3,251             579              82         6,884          8.48
5.00 - 5.99 ..........        919            --             --              --              --           919          1.13
                         --------      --------        -------         -------         -------      --------       -------
     Total ...........   $ 49,379      $ 13,241        $ 6,807         $ 8,391         $ 3,382      $ 81,200        100.00%
                         ========      ========        =======         =======         =======      ========       =======
</TABLE>

      The following table sets forth the savings activity for the periods
indicated.

                                                    Year Ended December 31,
                                              ----------------------------------

                                                2004         2003         2002
                                              --------     --------     --------
                                                       (In thousands)

Beginning balance .......................     $183,455     $173,231     $156,662
Increase before interest credited .......        7,654        7,376       12,655
Interest credited .......................        2,257        2,848        3,914
                                              --------     --------     --------
Net increase in savings deposits ........        9,911       10,224       16,569
                                              --------     --------     --------
Ending balance ..........................     $193,366     $183,455     $173,231
                                              ========     ========     ========

      Borrowings. We borrow funds from the Federal Home Loan Bank of Boston
during periods of low liquidity to match fund increases in our fixed-rate
mortgage portfolio and to provide long-term fixed-rate funding with the goal of
decreasing our exposure to an increase in interest rates. In addition, we
occasionally borrow short-term from correspondent banks to cover temporary cash
needs. At December 31, 2004, we had the ability to borrow a total of $2.0
million from a correspondent bank, none of which was borrowed at such date.

      The following table presents certain information regarding our Federal
Home Loan Bank advances during the periods and at the dates indicated.

                                                     Year Ended December 31,
                                                -------------------------------
                                                  2004        2003        2002
                                                -------     -------     -------
                                                     (Dollars in thousands)

Maximum amount of advances outstanding
   at any month end during the period ......    $34,643     $34,990     $31,119
Average advances outstanding
   during the period .......................     27,379      27,765      24,376
Weighted average interest rate
   during the period .......................       4.59%       5.02%       5.68%
Balance outstanding at end of period .......    $15,826     $34,990     $31,119
Weighted average interest rate
   at end of period ........................       4.42%       4.37%       4.65%


                                       19
<PAGE>

      Capital. Total capital increased by $30.4 million, or 143.4%, to $51.6
million at December 31, 2004 from $21.2 million at December 31, 2003. Total
capital increased $1.4 million, or 6.9%, to $21.2 million at December 31, 2002
from $19.9 million at December 31, 2002. Our average equity to average assets
ratio was 11.43% at December 31, 2004 compared to 9.02% at December 31, 2003 and
8.86% at December 31, 2002. Total capital has increased since December 31, 2002
primarily due to our net income in the 2002 and 2003 periods. The minority stock
issuance was the primary reason for the increase in 2004, along with net income.

Comparison of Operating Results for the Years Ended December 31, 2004, 2003 and
2002

     Overview.

<TABLE>
<CAPTION>
                                                                                  % Change    % Change
                                                 2004       2003       2002      2004/2003    2003/2002
                                                -------    -------    ------    -----------  -----------
                                                                (Dollars in thousands)
<S>                                             <C>        <C>        <C>         <C>           <C>
         Net income..........................   $   415    $1,806     $1,920      (77.02)%      (5.94)%
         Return on average assets............      0.16%     0.77%      0.91%     (79.22)      (15.38)
         Return on average equity............      1.41%     8.59%     10.23%     (83.59)      (16.03)
</TABLE>

      2004 v. 2003. Net income decreased primarily due to an increase in
noninterest expense. The increase in noninterest expense was primarily the
result of a charitable contribution expense of $1.5 million to establish the
Naugatuck Valley Savings and Loan Foundation and a prepayment fee of $498,000
paid to the Federal Home Loan Bank of Boston for the early payoff of $9.6
million in advances.

      2003 v. 2002. Net income decreased primarily due to an increase in
noninterest expense, partially offset by an increase in net interest income and
noninterest income. Noninterest expense increased primarily as a result of
higher compensation, taxes and benefits expense.

      Net Interest Income.

      2004 v. 2003. Net interest income increased $751,000, or 8.9%, to $9.2
million for 2004. This increase in net interest income for 2004 can be
attributed primarily to a lower cost of funds along with higher balances of
interest earning assets.

      Interest and dividend income for 2004 was $12.7 million, compared to $12.6
million for 2003, an increase of $69,000, or 0.55%. This increase is
attributable to an increase in average interest-earning assets of $19.2 million,
or 8.8%, from $218.5 million in 2003 to $237.7 million in 2004, partially offset
by a 44 basis point decrease in the average yield from 5.79% to 5.35%. The
increase in the average balance was primarily in the loan portfolio.

      Interest expense for 2004 was $3.6 million compared to $4.2 million for
2003, a decrease of $682,000 or 16.1%. This decrease resulted from a 41 basis
point decrease in the rates paid on interest-bearing liabilities to 1.60% in
2004 from 2.01% in 2003 due to a decline in market interest rates, partially
offset by an increase in the average balance of interest-bearing liabilities of
$11.5 million, or 5.5%, to $222.3 million in 2004 from $210.8 in 2003. The
increase in the average interest-bearing liabilities was due to increases in
regular savings, checking and money market savings accounts.

      2003 v. 2002. Net interest income increased $524,000, or 6.7%, to $8.4
million for 2003. The increase in net interest income for 2003 was primarily
attributable to a higher volume of interest-earning assets and a decrease in the
cost of funds.

      Total interest and dividend income for 2003 was $12.6 million, compared to
$13.2 million for 2002, a decrease of $534,000, or 4.1%. Substantially all of
the decrease in interest income resulted from a decrease in the average yield on
interest-earning assets of 74 basis points from 6.53% to 5.79% due primarily to
a decline in market


                                       20
<PAGE>

interest rates. The effect of the lower rate environment on interest and
dividend income was partially offset by an increase in average interest-earning
assets of $16.6 million, or 8.2%, from $202.0 million in 2002 to $218.5 million
in 2003. The increase in the average balance primarily occurred in investment
securities.

      Interest expense for 2003 was $4.2 million compared to $5.3 million for
2002, a decrease of $1.1 million, or 20.0%. This decrease resulted from a 75
basis point decrease in the rate paid on interest-bearing liabilities to 2.01%
in 2003 from 2.76% in 2002 due to a decline in market interest rates, partially
offset by a 9.8% increase in the average balance of interest-bearing liabilities
of $18.9 million to $210.8 million in 2003 from $191.9 million in 2002. The
increase in the average interest-bearing liabilities was due to increases in
regular savings, checking and money market savings accounts and in advances from
the Federal Home Loan Bank.

      Average Balances and Yields. The following table presents information
regarding average balances of assets and liabilities, the total dollar amounts
of interest income and dividends, the total dollar amount of interest expense
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. For purposes of
this table, average balances have been calculated using the average of daily
balances and nonaccrual loans are included in average balances only. We did not
hold any non-taxable investment securities during any of the periods presented
in the table.

<TABLE>
<CAPTION>
                                                             2004                                 2003
                                              ----------------------------------    ----------------------------------
                                                          Interest                              Interest
                                               Average       and        Yield/       Average       and        Yield/
                                               Balance    Dividends      Cost        Balance    Dividends      Cost
                                              ---------   ---------    ---------    ---------   ---------    ---------
                                                                       (Dollars in thousands)
<S>                                           <C>         <C>              <C>      <C>         <C>              <C>
Interest-earning assets:
 Loans ....................................   $ 190,713   $  11,240        5.89%    $ 171,796   $  11,052        6.43%
 Fed Funds sold ...........................      11,703         174        1.49         6,024          64        1.06
 Investment securities ....................      33,330       1,245        3.74        39,150       1,480        3.78
 Federal Home Loan Bank
   stock ..................................       1,950          54        2.77         1,562          48        3.07
                                              ---------   ---------                 ---------   ---------
     Total interest-earning assets ........     237,696      12,713        5.35       218,532      12,644        5.79
                                                          ---------                             ---------
Noninterest-earning assets ................      19,731                                14,534
                                              ---------                             ---------
     Total assets .........................   $ 257,427                             $ 233,066
                                              =========                             =========

Interest-bearing liabilities:
 Certificate accounts .....................   $  84,890   $   1,784        2.10     $  89,938   $   2,315        2.57
 Regular savings accounts .................      44,909         209        0.47        40,905         229        0.56
 Checking and NOW accounts ................      37,620          49        0.13        30,544          81        0.27
 Money market savings
   accounts ...............................      27,547         261        0.95        21,599         223        1.03
                                              ---------   ---------                 ---------   ---------
   Total interest-bearing deposits ........     194,966       2,303        1.18       182,986       2,848        1.56

FHLB advances .............................      27,379       1,256        4.59        27,765       1,393        5.02
   Total interest-bearing
liabilities ...............................     222,345       3,559        1.60       210,751       4,241        2.01
                                                          ---------                             ---------

Noninterest-bearing liabilities ...........       5,649                                 1,285
                                              ---------                             ---------
     Total liabilities ....................     227,994                               212,036
                                              ---------                             ---------

Capital ...................................      29,433                                21,030
                                              ---------                             ---------
 Total liabilities and capital ............   $ 257,427                             $ 233,066
                                              =========                             =========
 Net interest income ......................               $   9,154                             $   8,403
                                                          =========                             =========
 Interest rate spread .....................                                3.75%                                 3.77%
                                                                         ======                                ======
 Net interest margin ......................                                3.85%                                 3.85%
                                                                         ======                                ======
 Average interest-earning assets to
   average interest-bearing liabilities                                  106.90%                               103.69%
                                                                         ======                                ======

<CAPTION>

                                                            2002
                                              ----------------------------------
                                                          Interest
                                               Average       and        Yield/
                                               Balance    Dividends      Cost
                                              ---------   ---------    ---------
                                                   (Dollars in thousands)
<S>                                           <C>         <C>           <C>
Interest-earning assets:
 Loans ....................................   $ 169,396   $  11,841       6.99%
 Fed Funds sold ...........................       3,549          56       1.58
 Investment securities ....................      27,606       1,230       4.46
 Federal Home Loan Bank
   stock ..................................       1,404          51       3.63
                                              ---------   ---------
     Total interest-earning assets ........     201,955      13,178       6.53
                                                          ---------
Noninterest-earning assets ................       9,852
                                              ---------
     Total assets .........................   $ 211,807
                                              =========

Interest-bearing liabilities:
 Certificate accounts .....................   $  89,205   $   3,185       3.57
 Regular savings accounts .................      37,412         381       1.02
 Checking and NOW accounts ................      25,887          99       0.38
 Money market savings
   accounts ...............................      15,099         249       1.65
                                              ---------   ---------
   Total interest-bearing deposits ........     167,603       3,914       2.34

FHLB advances .............................      24,376       1,385       5.68
   Total interest-bearing
liabilities ...............................     191,979       5,299       2.76
                                                          ---------

Noninterest-bearing liabilities ...........       1,064
                                              ---------
     Total liabilities ....................     193,043
                                              ---------

Capital ...................................      18,764
                                              ---------
 Total liabilities and capital ............   $ 211,807
                                              =========
 Net interest income ......................               $   7,879
                                                          =========
 Interest rate spread .....................                               3.77%
                                                                        ======
 Net interest margin ......................                               3.90%
                                                                        ======
 Average interest-earning assets to
   average interest-bearing liabilities                                 105.20%
                                                                        ======
</TABLE>


                                       21
<PAGE>

      Rate/Volume Analysis. The following table sets forth the effects of
changing rates and volumes on our net interest income. 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). For purposes of this table,
changes attributable to changes in both rate and volume that cannot be
segregated have been allocated proportionately based on the changes due to rate
and the changes due to volume. The net column represents the sum of the prior
columns.

<TABLE>
<CAPTION>
                                    2004 Compared to 2003            2003 Compared to 2002
                                 -----------------------------   ------------------------------
                                 Increase (Decrease)              Increase (Decrease)
                                        Due to                           Due to
                                 -------------------    ------    -------------------    ------
                                 Volume        Rate      Net      Volume        Rate      Net
                                 ------       ------    ------    ------       ------    ------
<S>                              <C>          <C>       <C>       <C>          <C>       <C>
Interest income:
 Loans .......................   $  789       $ (601)   $  188    $  171       $ (960)   $ (789)
 Fed Funds sold ..............       77           33       110        15           (7)        8
 Investment securities .......     (218)         (17)     (235)      392         (142)      250
 Federal Home Loan Bank
  stock ......................       10           (4)        6         8          (11)       (3)
                                 ------       ------    ------    ------       ------    ------
        Total interest income       658         (589)       69       586       (1,120)     (534)
Interest expense:
  Certificate accounts .......     (124)        (407)     (531)       26         (896)     (870)
  Regular savings accounts ...       28          (48)      (20)       40         (192)     (152)
  Checking and NOW accounts ..       27          (59)      (32)        9          (27)      (18)
  Money market savings
   accounts ..................       54          (16)       38      (198)         172       (26)
                                 ------       ------    ------    ------       ------    ------
        Total deposit expense       (16)        (529)     (545)     (123)        (943)   (1,066)
FHLBB advances ...............      (19)        (118)     (137)       50          (42)        8
                                 ------       ------    ------    ------       ------    ------
        Total interest expense      (35)        (647)     (682)      (72)        (986)   (1,058)
                                 ------       ------    ------    ------       ------    ------
Net interest income ..........   $  693       $   58    $  751    $  658       $ (134)   $  524
                                 ======       ======    ======    ======       ======    ======
</TABLE>

      Provision for Loan Losses.

      2004 v. 2003. In 2004, no provision was made to the allowance for loan
losses. During 2004 there was a decrease in nonperforming loans and assets as
well as improved asset quality ratios. Although no provision for loan losses was
made in 2004, there was an increase in the allowance due to net recoveries. As a
result there was an increase in the ratio of the allowance to nonperforming
loans.

      2003 v. 2002. The provision for loan losses in 2003 was $45,000 compared
to $231,000 in 2002. During 2003, management determined to reduce the provision
for loan losses based on the decrease in nonperforming loans and improved asset
quality ratios. As a result of the decrease in nonperforming loans, and despite
the decrease in the provision for loan losses, the percentage of the allowance
for loan losses to nonperforming loans increased.

      An analysis of the changes in the allowance for loan losses is presented
under "-Allowance for Loan Losses and Asset Quality."


                                       22
<PAGE>

      Noninterest Income. The following table shows the components of
noninterest income and the percentage changes from 2004 to 2003 and from 2003 to
2002.

<TABLE>
<CAPTION>
                                                                            % Change    % Change
                                                2004      2003    2002     2004/2003   2003/2002
                                              --------  -------- ------   ----------  ----------
                                                           (Dollars in thousands)
<S>                                           <C>        <C>      <C>     <C>            <C>
      Loan fees and service charges .......   $   872    $  851   $ 793         2.47%      7.31%
      Income from bank owned life insurance       201       133      --        51.13        N/A
      Gain on sale of mortgages ...........         5        14     100       (64.29)    (86.00)
      Gain on sale of investments .........      (156)        1       3   (15,700.00)    (66.67)
      Income from investment advisory
         services, net ....................        93        45      --       106.67        N/A
      Other income ........................        63        71      76       (11.27)     (6.58)
                                              -------    ------   -----   ----------     ------
            Total .........................   $ 1,078    $1,115   $ 972         3.32%     14.71%
                                              =======    ======   =====   ==========     ======
</TABLE>

      2004 v. 2003. Income from investment advisory services totaled $93,000 for
the year ended December 31, 2004 compared to $45,000 for the year ended December
31, 2003. Income from bank owned life insurance increased to $201,000 for the
year ended December 31, 2004, up from $133,000 for the year ended December 31,
2003. The overall decrease of 3.32% in non-interest income for the year ended
December 31, 2004 was primarily due to the $156,000 loss on the sale of
investments.

      2003 v. 2002. During the third quarter of 2003, we began offering
investment advisory services through a third party broker-dealer and purchased
life insurance policies, from which we derive income, on certain key executives.

      Noninterest Expense. The following table shows the components of
noninterest expense and the percentage changes from 2004 to 2003 and from 2003
to 2002.

<TABLE>
<CAPTION>
                                                                                 % Change      % Change
                                                    2004       2003     2002    2004/2003     2003/2002
                                                  ---------  -------- -------  ----------    ----------
                                                                   (Dollars in thousands)
<S>                                                <C>        <C>      <C>        <C>             <C>
      Compensation, taxes and benefits .........   $ 4,636    $4,024   $3,304       15.21%        21.79%
      Charitable contributions .................     1,587        50       44     3074.00         13.64
      Office occupancy .........................     1,078     1,041      877        3.55         18.70
      Computer processing ......................       547       507      446        7.89         13.68
      Prepayment fee on Federal Home Loan
        Bank advances ..........................       498        --       --         N/A           N/A
      Advertising ..............................       318       240      183       32.50         31.15
      Professional fees ........................       272       143      113       90.21         26.55
      Office supplies ..........................       190       201      155       (5.47)        29.68
      (Gain) Loss on foreclosed real estate, net       (57)        2       51    (2950.00)       (96.08)
      Other expenses ...........................       734       637      647       15.23         (1.55)
                                                   -------    ------   ------   ---------     ---------
            Total ..............................   $ 9,803    $6,845   $5,820       43.21%        17.61%
                                                   =======    ======   ======   =========     =========
</TABLE>

      Other expenses for all periods includes, among other items, rental
expense, insurance and postage.

      2004 v. 2003. Compensation, taxes and benefits increased due to salary
increases, benefits increases and additional compensation related to new
employees and resulting payroll taxes. The increase in employees is the result
of additional back-office staff and new employees to staff the office in
Seymour. Charitable contributions increased in 2004 due to the formation and
funding of the Naugatuck Valley Savings and Loan Foundation. The increase in
professional fees is primarily the result of increases in legal, consulting and
accounting services associated with the new holding company structure.


                                       23
<PAGE>

      2003 v. 2002. Compensation taxes and benefits increased due to salary
increases, benefits increases and additional compensation related to new
employees and resulting payroll taxes. The increase in employees is primarily
the result of the opening of the Derby branch office. As we continue to pursue
branch expansion opportunities, we expect to hire additional employees resulting
in an increase in compensation, taxes and benefits in future periods. Office
occupancy and computer processing increased primarily as a result of the opening
of the Derby branch office.

      Income Taxes

      2004 v. 2003. Income taxes decreased due to a lower level of taxable
income primarily due to the charitable contribution resulting from the formation
and funding of Naugatuck Valley Savings and Loan Foundation, an increase in
non-taxable income, and deferred tax benefits related to tax bad debt reserves.
The effective tax rate for 2004 was 3.3% compared to 31.3% for 2003.

      2003 v. 2002. Income taxes decreased due to a lower level of taxable
income. The effective tax rate for 2003 was 31.3% compared to 31.4% for 2002.

Market Risk Analysis

      Qualitative Aspects of Market Risk. Our most significant form of market
risk is interest rate risk. We manage the interest rate sensitivity of our
interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest
rates than mortgage loans because of the shorter maturities of deposits. As a
result, sharp increases in interest rates may adversely affect our earnings
while decreases in interest rates may beneficially affect our earnings. To
reduce the potential volatility of our earnings, we have sought to improve the
match between assets and liability maturities (or rate adjustment periods),
while maintaining an acceptable interest rate spread, by originating
adjustable-rate mortgage loans for retention in our loan portfolio,
variable-rate home equity lines and variable-rate commercial loans and by
purchasing variable-rate investments and investments with expected maturities of
less than 10 years. Beginning in 2002, we began selling a small percentage of
our originations of longer term fixed-rate one- to four-family mortgage loans in
the secondary market based on prevailing market interest rate conditions, an
analysis of the composition and risk of the loan portfolio, liquidity needs and
interest rate risk management goals. Mortgage loan sales totaled $1.9 million in
2004. Generally, loans are sold without recourse and with servicing retained. We
currently do not participate in hedging programs, interest rate swaps or other
activities involving the use of off-balance sheet derivative financial
instruments.

      Our Asset/Liability Committee communicates, coordinates and controls all
aspects of asset/liability management. The committee establishes and monitors
the volume and mix of assets and funding sources with the objective of managing
assets and funding sources.

      Quantitative Aspects of Market Risk. We use an interest rate sensitivity
analysis prepared by the Office of Thrift Supervision to review our level of
interest rate risk. This analysis measures interest rate risk by computing
changes in net portfolio value of our cash flows from assets, liabilities and
off-balance sheet items in the event of a range of assumed changes in market
interest rates. Net portfolio value represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 to 300 basis point increase or 100 basis point decrease
in market interest rates with no effect given to any steps that we might take to
counter the effect of that interest rate movement. Because of the low level of
market interest rates, this analysis is not performed for decreases of more than
100 basis points. We measure interest rate risk by modeling the changes in net
portfolio value over a variety of interest rate scenarios. The following table,
which is based on information that we provide to the Office of Thrift
Supervision, presents the change in our net portfolio value at December 31, 2004
that would occur in the event of an immediate change in interest rates based on
Office of Thrift Supervision assumptions, with no effect given to any steps that
we might take to counteract that change.


                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                                    Net Portfolio Value as % of
                                         Net Portfolio Value          Present Value of Assets
Basis Point ("bp")                 -------------------------------  ---------------------------
Change in Rates                    $ Amount   $ Change    % Change     NPV Ratio       Change
-------------------------------    --------   --------    --------  --------------  -----------
                                         (Dollars in thousands)
<S>                                 <C>        <C>            <C>        <C>          <C>
        300 bp ................     41,074     (9,625)        (19)%      16.16%       (2.71)%
        200 ...................     44,698     (6,001)        (12)%      17.23%       (1.64)%
        100 ...................     48,148     (2,551)         (5)%      18.21%       (0.66)%
          0 ...................     50,699         --          --        18.87%          --
       (100) ..................     50,736         37           0%       18.75%       (0.12)%
</TABLE>

      The Office of Thrift Supervision uses certain assumptions in assessing the
interest rate risk of savings associations. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under differing interest rate scenarios, among others. As with
any method of measuring interest rate risk, certain shortcomings are inherent in
the method of analysis presented in the foregoing table. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate mortgage loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.

Liquidity and Capital Resources

      Liquidity is the ability to meet current and future short-term financial
obligations. Our primary sources of funds consist of deposit inflows, loan
repayments and maturities and sales of investment securities and advances from
the Federal Home Loan Bank of Boston. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.

      Each quarter we project liquidity availability and demands on this
liquidity for the next 90 days. We regularly adjust our investments in liquid
assets based upon our assessment of (1) expected loan demand, (2) expected
deposit flows, (3) yields available on interest-earning deposits and securities,
and (4) the objectives of our asset/liability management program. Excess liquid
assets are invested generally in interest-earning deposits, Federal funds and
short- and intermediate-term U.S. Government agency obligations.

      Our most liquid assets are cash and cash equivalents and interest-bearing
deposits. The levels of these assets depend on our operating, financing, lending
and investing activities during any given period. At December 31, 2004, December
31, 2003 and December 31, 2002, cash and cash equivalents totaled $7.6 million,
$9.8 million and $18.1 million, respectively, including Federal funds of
$23,000, $5.0 million and $13.1 million, respectively. Securities classified as
available-for-sale, which provide additional sources of liquidity, totaled $31.1
million, $37.2 million and $32.5 million at December 31, 2004, December 31, 2003
and December 31, 2002, respectively. At December 31, 2004, December 31, 2003 and
December 31, 2002, we had the ability to borrow a total of $95.9 million, $97.1
million and $93.8 million, respectively, from the Federal Home Loan Bank of
Boston, of which $15.8 million, $35.0 million and $31.1 million was outstanding,
respectively. At December 31, 2004, December 31, 2003 and December 31, 2002, we
had arranged overnight lines of credit of $2.5 million with the Federal Home
Loan Bank of Boston for all periods. We had no overnight advances outstanding
with the Federal Home Loan Bank of Boston on these dates. In addition, at
December 31, 2004, December 31, 2003 and December 31, 2002, we had ability to
borrow $2.0 million from a correspondent bank for all periods. We had no
advances outstanding on this line on these dates.


                                       25
<PAGE>

      At December 31, 2004, we had $14.3 million in unused line availability on
home equity lines of credit, $1.5 million in unadvanced commercial lines, $2.7
million in mortgage commitments, $2.0 million in commercial mortgage loan
commitments, $14.5 million in unadvanced construction mortgage commitments, $2.2
million in letters of credit, and $113,000 in overdraft line of credit
availability. Certificates of deposit due within one year of December 31, 2004
totaled $49.4 million, or 25.5% of total deposits. If these deposits do not
remain with us, we will be required to seek other sources of funds, including
other certificates of deposit and lines of credit. Depending on market
conditions, we may be required to pay higher rates on such deposits or other
borrowings than we currently pay on the certificates of deposit due on or before
December 31, 2005. We believe, however, based on past experience, that a
significant portion of our certificates of deposit will remain with us. We have
the ability to attract and retain deposits by adjusting the interest rates
offered.

      Historically, we have remained highly liquid, with our liquidity position
increasing substantially over the past two fiscal years. We expect that all of
our liquidity needs, including the contractual commitments set forth in the
table below, the estimated costs of our branch expansion plans and increases in
loan demand can be met by our currently available liquid assets and cash flows.
If loan demand were to increase at a pace greater than expected, or any
unforeseen demand or commitment were to occur, we would access our borrowing
capacity with the Federal Home Loan Bank of Boston. We expect that our currently
available liquid assets and our ability to borrow from the Federal Home Loan
Bank of Boston would be sufficient to satisfy our liquidity needs without any
material adverse effect on our liquidity. We are not aware of any trends and/or
demands, commitments, events or uncertainties that could result in a material
decrease in liquidity.

      The following table presents certain of our contractual obligations at
December 31, 2004.

<TABLE>
<CAPTION>
                                                                 Payments Due by Period
                                             --------------------------------------------------------------
         Contractual                                       Less than                            More than 5
         Obligations                           Total         1 year     1-3 years   3-5 years      years
         ------------------                  ---------    -----------  -----------  ----------  -----------
                                                                   (In thousands)
<S>                                           <C>            <C>          <C>         <C>           <C>
         Long-term debt obligations.......    $15,826        $3,724       $6,167      $3,302        $2,633
         Operating lease obligations......      2,105           192          324         305         1,284
                                              -------        ------       ------      ------        ------
                Total.....................    $17,931        $3,916       $6,491      $3,607        $3,917
                                              =======        ======       ======      ======        ======
</TABLE>

      Our primary investing activities are the origination of loans and the
purchase of securities. For the year ended December 31, 2004 we originated $83.8
million of loans and purchased $24.4 million of securities. During this period
we also paid off $19.2 million in Federal Home Loan Bank advances. In 2003, we
originated $101.0 million of loans and purchased $20.5 million of securities. In
2002, we originated $64.3 million of loans and purchased $20.8 million of
securities. During the year ended December 31, 2004, these activities were
funded primarily by the net proceeds from the stock issuance of $31.6 million,
proceeds from sales and maturities of available-for-sale securities of $26.2
million, an increase of deposits of $9.9 million and proceeds from the sale of
loans of $1.9 million. During 2003, these activities were funded primarily by
the proceeds from maturities of available-for-sale securities of $14.4 million,
advances from the Federal Home Loan Bank of Boston of $13.9 million, an increase
of deposits of $10.2 million, proceeds from the sale of loans of $8.9 million
and uninvested cash and cash equivalents of $8.0 million. During 2002, these
activities were funded primarily by an increase of deposits of $16.6 million,
advances from the Federal Home Loan Bank of Boston of $12.8 million, the
proceeds from maturities of available-for-sale securities of $8.4 million and
the proceeds from the sale of loans of $7.1 million.

      Historically, our investment portfolio has been funded by excess liquidity
when deposit inflows exceed loan demand. When we have not had such excess
liquidity, we have not borrowed from the Federal Home Loan Bank of Boston to
supplement our investment portfolio.

      Financing activities consist primarily of activity in deposit accounts and
in Federal Home Loan Bank advances. We experienced a net increase in total
deposits of $9.9 million, $10.2 million and $16.6 million for the year ended
December 31, 2004, 2003 and 2002, respectively. Deposit flows are affected by
the overall level of interest rates, the interest rates and products offered by
us and our local competitors and other factors. We generally manage the pricing
of our deposits to be competitive and to increase core deposit relationships.
Occasionally, we


                                       26
<PAGE>

offer promotional rates on certain deposit products in order to attract
deposits. We experienced a decrease in Federal Home Loan Bank advances of $19.1
million for the year ended December 31, 2004 and increases in Federal Home Loan
Bank advances of $3.9 million and $7.7 million for the years ended December 31,
2003 and 2002. During 2004, $9.6 million of advances with an average rate of
5.29% were prepaid in an effort to reduce the cost of funds. The increases in
deposit accounts and Federal Home Loan Bank advances primarily fund our
investing and lending activities.

      We are subject to various regulatory capital requirements administered by
the Office of Thrift Supervision, 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 December 31, 2004, we
exceeded all of our regulatory capital requirements. We are considered "well
capitalized" under regulatory guidelines. See note 13 of the notes to the
financial statements in this annual report.

Off-Balance Sheet Arrangements

      In the normal course of operations, we engage in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in our financial statements. These transactions involve, to
varying degrees, elements of credit, interest rate, and liquidity risk. Such
transactions are used primarily to manage customers' requests for funding and
take the form of loan commitments, unused lines of credit, amounts due
mortgagors on construction loans, amounts due on commercial loans, commercial
letters of credit and commitments to sell loans. See note 15 of the notes to the
financial statements in this annual report.

      For the years ended December 31, 2004, 2003 and 2002, we engaged in no
off-balance-sheet transactions reasonably likely to have a material effect on
our financial condition, results of operations or cash flows.

Impact of Recent Accounting Pronouncements

      In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
Interpretation No. 45 requires a guarantor entity at the inception of a
guarantee covered by the measurement provisions of the interpretation, to record
a liability for the fair value of the obligation undertaken in issuing the
guarantee. In addition, Interpretation No. 45 elaborates on previously existing
disclosure requirements for most guarantees, including loan guarantees such a
standby letters of credit. We did not have financial letters of credit at
December 31, 2004 and December 31, 2003.

      In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns, or both. Interpretation No. 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. On December
17, 2003, the Financial Accounting Standards Board revised Interpretation No. 46
and deferred the effective date of Interpretation No. 46 to no later than the
end of the first reporting period that ends after March 15, 2004. For
special-purpose entities, however, Interpretation No. 46 would be required to be
applied as of December 31, 2003. We have not established any variable interest
entities. The adoption of Interpretation No. 46 and Interpretation No. 46R did
not have a material effect on our financial statements.

      In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" which clarifies certain
implementation issues raised by constituents and amends Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to include the conclusions reached by the Financial Accounting
Standards Board on certain Financial Accounting Standards Board Staff
Implementation Issues that, while inconsistent with Statement 133's discussion
of financial guarantee contracts and the application of the shortcut method to
an interest rate swap agreement that includes an embedded option and amends
other pronouncements. The guidance in Statement 149 is effective for new
contracts entered into or


                                       27
<PAGE>

modified after June 30, 2003 and for hedging relationships designated after that
date, except for the following: guidance incorporated from FASB Staff
Implementation Issues that was effective for periods beginning before June 15,
2003 should continue to be applied according to the effective dates in those
issues; and guidance relating to forward purchase and sale agreements involving
"when-issued" securities should be applied to both existing contracts and new
contracts entered into after June 30, 2003. The adoption of Statement of
Financial Accounting Standards No.149 did not have a material effect on our
financial statements.

      In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which changes
the classification in the statement of financial position of certain common
financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings.
Statement of Financial Accounting Standards No. 150 requires an issuer to
classify certain financial instruments as liabilities, including mandatorily
redeemable preferred and common stocks. Statement of Financial Accounting
Standards No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and, with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003 (July 1,
2003 as to Naugatuck Valley Savings and Loan). The adoption of Statement of
Financial Accounting Standards No. 150 did not have a material effect on our
financial statements.

      In December 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132(R), "Employer's Disclosures
About Pensions and Other Postretirement Benefits". Statement No. 132(R) replaces
the original Statement No. 132 and revises employers' disclosures about pension
plans and other postretirement benefit plans to require more information about
the economic resources and obligations of such plans. Statement No. 132(R)
amends the disclosure requirements of Statements Nos. 87, 88, and 106, however
the measurement and recognition guidance is not affected. The adoption of
Statement 132(R) did not have a material effect on our financial statements.

      In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.123(R), "Share-Based Payment",
that will require compensation costs related to share-based payment transactions
to be recognized in the financial statements. That cost will be measured based
on the grant-date fair value of equity or liability instruments issued.
Statement 123(R) replaces Statement No. 123, "Accounting for Stock-Based
Compensation", and supercedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees". The Company will adopt Statement No. 123(R) as of July 1, 2005
(its effective date). The Company does not currently provide share-based
compensation awards to its employees, and believes its adoption will not have a
material effect on the financial statements.

Effect of Inflation and Changing Prices

      We have prepared the financial statements and related financial data
presented in this report in accordance with generally accepted accounting
principles in the United States, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on our operations is reflected in
increased operating costs. Unlike most industrial companies, virtually all of
our assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on our performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.


                                       28
<PAGE>

                     [LETTERHEAD OF SNYDER & HALLER, P.C.]

Report of Independent Registered Public Accounting Firm

To The Board of Directors
Naugatuck Valley Financial Corporation

We have audited the accompanying  consolidated statements of financial condition
of Naugatuck Valley  Financial  Corporation (the "Company") and subsidiary as of
December 31, 2004 and 2003, and the related  consolidated  statements of income,
changes  in  capital  accounts,  and cash flows for the each of the years in the
three  year  period  ended  December  31,  2004.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Companies
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Naugatuck Valley
Financial  Corporation  and  subsidiary  at December 31, 2004 and 2003,  and the
results of its  operations and its cash flows for each of the years in the three
year period ended  December 31, 2004 in conformity  with  accounting  principles
generally accepted in the United States of America.


                                                    /s/ Snyder & Haller, P.C.

Hartford, Connecticut
January 28, 2005


30 Atwood Street o Hartford o Connecticut o 06105-1801
o 860 249-3900 o 860 247-8071 FAX


                                       29
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Consolidated Statements of Financial Condition
(Dollars in thousands)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                                  December 31,
                                                                            2004               2003
------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                <C>
ASSETS
Cash and due from depository institutions                                $    7,552         $    4,752
Investment in federal funds                                                      23              5,023
Investment securities                                                        36,264             38,727
Loans receivable, net                                                       203,820            180,378
Accrued income receivable                                                     1,077              1,071
Foreclosed real estate, net                                                      68                208
Premises and equipment, net                                                   7,765              6,119
Deferred income taxes                                                         1,042                427
Bank owned life insurance asset                                               4,934              4,734
Federal Home Loan Bank stock                                                  2,180              1,757
Other assets                                                                    724                760
                                                                         ----------         ----------

     Total assets                                                        $  265,449         $  243,956
                                                                         ----------         ----------

LIABILITIES AND CAPITAL ACCOUNTS
Liabilities
  Deposits                                                               $  193,366         $  183,455
  Advances from Federal Home Loan Bank                                       15,826             34,990
  Mortgagors' escrow accounts                                                 3,058              2,634
  Other liabilities                                                           1,628              1,660
                                                                         ----------         ----------

        Total liabilities                                                   213,878            222,739
                                                                         ----------         ----------

Commitments and contingencies

Capital accounts
  Common stock, $.01 par value; 25,000,000 shares authorized;
    7,604,375 shares issued and outstanding                                      76                 --
  Preferred stock, $.01 par value; 1,000,000 shares authorized;
    no shares issued or outstanding                                              --                 --
  Paid-in capital                                                            33,089                 --
  Retained earnings                                                          21,362             20,947
  Unearned ESOP shares (293,180 shares)                                      (2,932)                --
  Accumulated other comprehensive income (loss)                                 (24)               270
                                                                         ----------         ----------

        Total capital accounts                                               51,571             21,217
                                                                         ----------         ----------

     Total liabilities and capital accounts                              $  265,449         $  243,956
======================================================================================================
</TABLE>

See notes to consolidated financial statements.


                                       30
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                               Consolidated Statements of Income
                                                          (Dollars in thousands)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                            For the Years Ended December 31,
                                                                        2004               2003              2002
--------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                <C>               <C>
Interest and dividend income
Interest on loans                                                    $   11,240         $   11,052        $   11,841
Interest and dividends on investments and deposits                        1,473              1,592             1,337
                                                                     ----------         ----------        ----------
   Total interest income                                                 12,713             12,644            13,178
                                                                     ----------         ----------        ----------

Interest expense
Interest on deposits                                                      2,303              2,848             3,914
Interest on borrowed funds                                                1,256              1,393             1,385
                                                                     ----------         ----------        ----------
   Total interest expense                                                 3,559              4,241             5,299
                                                                     ----------         ----------        ----------

Net interest income                                                       9,154              8,403             7,879

Provision for loan losses                                                    --                 45               231
                                                                     ----------         ----------        ----------

Net interest income after provision for loan losses                       9,154              8,358             7,648
                                                                     ----------         ----------        ----------

Noninterest income
Loan fees and service charges                                               872                851               793
Income from bank owned life insurance                                       201                133                --
Gain on sale of mortgages                                                     5                 14               100
(Loss) gain on sale of investments                                         (156)                 1                 3
Income from investment advisory services, net                                93                 45                --
Other income                                                                 63                 71                76
                                                                     ----------         ----------        ----------
   Total noninterest income                                               1,078              1,115               972
                                                                     ----------         ----------        ----------

Noninterest expense
Compensation, taxes and benefits                                          4,636              4,024             3,304
Contributions                                                             1,587                 50                44
Office occupancy                                                          1,078              1,041               877
Prepayment fee on Federal Home Loan Bank advances                           498                 --                --
Computer processing                                                         547                507               446
Advertising                                                                 318                240               183
Professional fees                                                           272                143               113
Office supplies                                                             190                201               155
(Gain) loss on foreclosed real estate, net                                  (57)                 2                51
Other expenses                                                              734                637               647
                                                                     ----------         ----------        ----------
   Total noninterest expense                                              9,803              6,845             5,820
                                                                     ----------         ----------        ----------

Income before provision for income taxes                                    429              2,628             2,800

Provision for income taxes                                                   14                822               880
                                                                     ----------         ----------        ----------

   Net income                                                        $      415         $    1,806        $    1,920
====================================================================================================================

Basic earnings per share                                                    N/M                N/A               N/A
====================================================================================================================
</TABLE>

                                 See notes to consolidated financial statements.


                                       31
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Consolidated Statements of Changes in Capital Accounts
(Dollars in thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------


                                                                      Common Stock
                                                                  ---------------------
                                                                  Shares         Amount
---------------------------------------------------------------------------------------
<S>                                                              <C>             <C>
Balance at December 31, 2002                                            --       $   --
Comprehensive income:
   Net income                                                           --           --
   Net change in unrealized holding gain on available-for-
         sale securities, net of tax effect
           Comprehensive income                                         --           --
                                                                ----------       ------

Balance at December 31, 2003                                            --           --
Issuance of 7,604,375 shares of common stock related to
   initial public offering, net of costs                         7,604,375           76
298,091 shares of common stock acquired by ESOP                         --           --
ESOP shares released                                                    --           --
Comprehensive income:
   Net income                                                           --           --
   Net change in unrealized holding gain on available-for-
         sale securities, net of tax effect
           Comprehensive income                                         --           --
                                                                ----------       ------

Balance at December 31, 2004                                     7,604,375       $   76
=======================================================================================
</TABLE>

See notes to consolidated financial statements.


                                       32
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Accumulated
                                                                                   Unearned ESOP Shares        Other         Total
                                                             Paid-in   Retained    --------------------    Comprehensive   Capital
                                                             Capital   Earnings      Shares      Amount    Income (Loss)   Accounts
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>        <C>         <C>         <C>           <C>          <C>
Balance at December 31, 2002                                 $    --    $19,141           --    $    --       $   709      $ 19,850
Comprehensive income:
   Net income                                                     --      1,806           --         --            --
   Net change in unrealized holding gain on available-for-
         sale securities, net of tax effect                                                                      (439)
           Comprehensive income                                   --         --           --         --                       1,367
                                                             -------    -------     --------    -------       -------      --------

Balance at December 31, 2003                                      --     20,947           --         --           270        21,217
Issuance of 7,604,375 shares of common stock related to
   initial public offering, net of costs                      33,085         --           --         --            --        33,161
298,091 shares of common stock acquired by ESOP                   --         --     (298,091)    (2,981)           --        (2,981)
ESOP shares released                                               4         --        4,911         49            --            53
Comprehensive income:
   Net income                                                     --        415           --         --            --
   Net change in unrealized holding gain on available-for-
         sale securities, net of tax effect                                                                      (294)
           Comprehensive income                                   --         --           --         --                         121
                                                             -------    -------     --------    -------       -------      --------

Balance at December 31, 2004                                 $33,089    $21,362     (293,180)   $(2,932)      $   (24)     $ 51,571
===================================================================================================================================
</TABLE>

                                 See notes to consolidated financial statements.


                                       33
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Consolidated Statements of Cash Flows
(Dollars in thousands)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                                    For the Years Ended December 31,
                                                                    2004           2003           2002
--------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>
Cash flows from operating activities
Net income                                                        $    415       $  1,806       $  1,920
Adjustments to reconcile net income to cash
  provided by operating activities:
       Provision for loan losses                                        --             45            231
       Contribution of common stock to charitable foundation         1,519             --             --
       Depreciation and amortization expense                           642            662            588
       Provision for deferred tax (benefit)                           (464)           171            (97)
       Net gain on sale of real estate owned                           (68)           (53)            (6)
       Gain on sale of mortgages                                        (5)           (14)          (100)
       Loans originated for sale                                    (1,930)        (8,851)        (6,971)
       Proceeds from sale of loans                                   1,935          8,865          7,071
       Loss (gain) on sale of investments                              156             (1)            (3)
       Increase in accrued income receivable                            (5)           (27)           (14)
       Increase (decrease) in deferred loan fees                        73           (178)          (114)
       Increase in bank owned life insurance asset                    (201)          (133)            --
       Decrease (increase) in other assets                               2           (283)          (214)
       (Decrease) increase in other liabilities                        (33)           420            (86)
       ESOP shares released                                             53             --             --
                                                                  --------       --------       --------
Net cash provided by operating activities                            2,089          2,429          2,205
                                                                  --------       --------       --------

Cash flows from investing activities
Proceeds from sales and maturities of
  available-for-sale securities                                     26,204         14,395          8,363
Proceeds from maturities of held-to-maturity securities                 --            450            144
Purchase of available-for-sale securities                          (20,830)       (19,838)       (20,091)
Purchase of held-to-maturity securities                             (3,610)          (647)          (749)
Loan originations net of principal payments                        (23,582)       (14,504)        (7,762)
Purchase of Federal Home Loan Bank stock                              (423)          (196)          (225)
Proceeds from the sale of foreclosed real estate                       277            258            113
Purchase of property and equipment                                  (2,157)          (497)        (1,110)
Purchase of bank owned life insurance asset                             --         (4,600)            --
                                                                  --------       --------       --------
Net cash used by investing activities                              (24,121)       (25,179)       (21,317)
                                                                  --------       --------       --------
</TABLE>

See notes to consolidated financial statements.


                                       34
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                              For the Years Ended December 31,
                                                           2004           2003              2002
---------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>              <C>
Cash flows from financing activities
Net change in time deposits                                (4,992)          (3,091)            (416)
Net change in other deposit accounts                       14,903           13,316           16,985
Advances from Federal Home Loan Bank                       19,650           13,903           12,750
Repayment of Advances from Federal Home Loan Bank         (38,814)         (10,032)          (5,003)
Net change in mortgagors' escrow accounts                     424              271              311
Proceeds from issuance of common stock                     32,601               --               --
Cost of issuance of common stock                             (959)              --               --
Payments to acquire common stock for ESOP                  (2,981)              --               --
                                                       ----------       ----------       ----------
Net cash provided by financing activities                  19,832           14,367           24,627
                                                       ----------       ----------       ----------

(Decrease) Increase in cash and cash equivalents           (2,200)          (8,383)           5,515
Cash and cash equivalents at beginning of year              9,775           18,158           12,643
                                                       ----------       ----------       ----------

   Cash and cash equivalents at end of year            $    7,575       $    9,775       $   18,158
---------------------------------------------------------------------------------------------------

Supplemental disclosures
   Non-cash investing activities:
      Transfer of loans to foreclosed real estate      $       67       $      305       $       55

   Cash paid during the year for:
      Interest                                         $    3,562       $    4,243       $    5,298
      Income taxes                                            454              701              931
</TABLE>

                                 See notes to consolidated financial statements.


                                       35
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

1.  Nature of Operations

Naugatuck Valley Financial  Corporation (the "Company") is a federally chartered
holding company formed on September 30, 2004 for the purpose of acquiring all of
the  common  stock  of the  Naugatuck  Valley  Savings  and  Loan  (the  "Bank")
concurrent  with its  reorganization  from a mutual  savings  institution to the
mutual holding company form of organization.  The reorganization was consummated
on September 30, 2004. In connection with the  reorganization,  the Company sold
3,269,881  shares  of  its  common  stock,  par  value  $.01  per  share,  in  a
subscription  offering and issued  4,182,407  shares to Naugatuck  Valley Mutual
Holding   Company,   raising   approximately   $31.7  million,   net  of  costs.
Approximately  $15.9 million of the proceeds were  contributed  to the Bank. The
Company is a majority  owned  subsidiary  of  Naugatuck  Valley  Mutual  Holding
Company, a federally chartered mutual holding company.

In addition, at the time of the reorganization,  the Company contributed 152,087
shares of its stock to the Naugatuck  Valley  Savings and Loan  Foundation.  The
foundation  is a  501(c)(3)  organization  formed  by  the  Company  to  support
charitable activities within its community.

Originally organized in 1922, the Bank is a federally charted stock savings bank
which is headquartered in Naugatuck, Connecticut. The Bank provides a full range
of personal banking services to individual and small business  customers located
primarily in the Naugatuck Valley and the immediate  surrounding vicinity. It is
subject to competition from other financial institutions  throughout the region.
The Bank is also  subject to the  regulations  of various  federal  agencies and
undergoes periodic examinations by those regulatory authorities.

The  Bank  owns the  Naugatuck  Valley  Mortgage  Servicing  Corporation,  which
qualifies and operates as a Connecticut  passive  investment company pursuant to
legislation.

2. Summary of Significant Accounting Policies

The accounting and reporting  policies of the Company and its subsidiary conform
to generally accepted accounting  principles in the United States of America and
to general  practices  within  the  thrift  industry.  Such  policies  have been
followed on a  consistent  basis.  The  significant  accounting  policies of the
Company are summarized below.

Use of estimates
----------------

In preparing the financial statements,  management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance  sheet,  and income and expenses for the period.  Actual
results could differ from those estimates.

Material  estimates that are particularly  susceptible to significant  change in
the near-term relate to the determination of the reserve for losses on loans and
the  valuation of real estate  acquired in  connection  with  foreclosure  or in
satisfaction of loans. While management uses available  information to recognize
losses on loans and foreclosed  real estate,  future  additions to the allowance
may be necessary based on


                                       36
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

changes in economic conditions, particularly in Connecticut.

Principles of consolidation
---------------------------

The consolidated  financial  statements include the accounts of the Company, the
Bank and the Bank's wholly-owned subsidiary, Naugatuck Valley Mortgage Servicing
Corporation.  All significant  intercompany  accounts and transactions have been
eliminated in consolidation.

Investment securities
---------------------

Investments are accounted for in accordance with the intent of management at the
time of purchase.  If management  has the intent and the Company has the ability
at the  time of  purchase  to hold  debt  securities  until  maturity,  they are
classified as held-to-maturity.  These securities are carried at historical cost
adjusted for the amortization of premiums and accretion of discounts,  which are
recognized as adjustments to interest income.

Securities  to be  held  for  indefinite  periods  of  time  are  classified  as
available-for-sale  and are  carried  at fair value  with  unrealized  gains and
losses  reported  as a separate  component  of capital net of  estimated  income
taxes.

The Company has no securities held for trading.

Gains or  losses  on the  sales  of  securities  are  recognized  at trade  date
utilizing the specific identification method.

Loans receivable and allowance for loan losses
----------------------------------------------

Loans receivable are stated at unpaid  principal  balance less loans in process,
deferred loan fees, and allowances for loan losses.

Uncollected  interest on loans  receivable  is accrued as earned  based on rates
applied to principal amounts  outstanding.  Recognition of income on the accrual
basis is discontinued when there is sufficient question as to the collectibility
of the interest.  In these cases, the interest  previously  accrued to income is
reversed, and the loans are placed on the cash basis.

Loan  origination  fees and  certain  direct  loan  origination  costs are being
deferred and the net amount amortized on a level-yield basis as an adjustment to
the  related  loan yield over its  contractual  life.  Unamortized  net fees are
recognized upon early repayment of the loans.

The allowance for loan losses is established by a provision  charged to earnings
and is maintained at a level  considered  adequate to provide for potential loan
losses based on management's  evaluation of known and inherent risks in the loan
portfolio. When a loan or portion of a loan is considered  uncollectible,  it is
charged  against the allowance for loan losses.  Recoveries of loans  previously
charged-off are credited to the allowance when collected.

Management  makes  regular  evaluations  of the loan  portfolio to determine the
adequacy of the level of the  allowance  for loan losses.  Numerous  factors are
considered in the evaluation,  including a review of certain  borrowers' current
financial status and credit standing,  available collateral,  loss experience in
relation to outstanding loans, the overall loan portfolio quality,  management's
judgment regarding  prevailing and anticipated  economic  conditions,  and other
relevant factors.

In  addition,  various  regulatory  agencies,  as  an  integral  part  of  their
examination  process,  periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their  judgments  about  information  available  to them at the time of their
examination.


                                       37
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies - (Continued)

Loan sales and mortgage-servicing rights
----------------------------------------

Residential   mortgage  loans  originated  and  held  for  sale  are  classified
separately in the consolidated  statement of financial condition and reported at
the lower of amortized cost or market value (based on secondary  market prices).
There were no loans held for sale at December 31, 2004 and 2003. Gains or losses
on the sale of loans are determined using the specific identification method.

The Bank sells residential mortgage loans with servicing rights retained. At the
time of the  sale,  the Bank  determines  the  value of the  retained  servicing
rights,  which  represents  the present  value of the  differential  between the
contractual  servicing  fee  and  adequate  compensation,  defined  as the fee a
sub-servicer would require to assume the role of servicer, after considering the
estimated effects of prepayments. If material, a portion of the gain on the sale
of the loan is  recognized as due to the value of the  servicing  rights,  and a
servicing asset is recorded.  The Bank has had no loan sales which have resulted
in the  recording  of a  servicing  asset,  due to the  immaterial  differential
between  the   contractual   servicing   fee  (25  basis  points)  and  adequate
compensation, as described above.

Foreclosed real estate
----------------------

Real estate  properties  acquired  through loan foreclosure and other partial or
total  satisfaction  of problem  loans are carried at the lower of fair value or
the related loan balance at the date of foreclosure.

Valuations are periodically  performed by management and an allowance for losses
is established if the carrying value of a property subsequently exceeds its fair
value less estimated  disposal costs.  Losses arising at the time of acquisition
of such properties are charged against the allowance for loan losses. Subsequent
write-downs  in the  carrying  value  and  expenses  incurred  to  maintain  the
properties are charged to expense.

Premises and equipment
----------------------

Premises and equipment are stated at cost less accumulated depreciation computed
on the straight-line method at rates based on estimated useful lives.

Expenditures   for   replacements  or  major   improvements   are   capitalized.
Expenditures  for  normal  maintenance  and  repairs  are  charged to expense as
incurred.  Upon the sale or retirement of premises and  equipment,  the cost and
accumulated depreciation are removed from their respective accounts and any gain
or loss is included in income.

Bank owned life insurance asset
-------------------------------

The cash  surrender  value of bank owned life  insurance  relates to policies on
employees of the Bank for which the Bank is the  beneficiary.  Increases in cash
surrender value are included in non-interest  income in the consolidated  income
statements.

Income from investment advisory services, net
---------------------------------------------

In conjunction  with a third party,  an employee of the Bank is licensed to sell
non-deposit  investment  products,  including mutual funds,  annuities and other
insurance products.  The Bank records, as non-interest  income,  revenues earned
from product sales in accordance  with the terms of revenue  sharing  agreements
with the third party, net of certain marketing and other


                                       38
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

expenses shared with the third party. The Bank currently  employs the individual
authorized  to sell these  products and pays most of the direct costs related to
the sales  activities.  These costs are charged to expense as incurred,  and are
classified primarily in compensation and benefits expense.

Income taxes
------------

The Company  accounts  for  certain  income and expense  items  differently  for
financial  reporting  purposes  than for income  tax  purposes.  Provisions  for
deferred taxes are being made in recognition of these temporary differences.

Earnings per share
------------------

When  presented,  basic  earnings  per  share is  computed  by  dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding  for the period.  Because the formation of the Company was completed
on September 30, 2004,  per share  earnings data is not meaningful for 2004. The
Company did not have any shares outstanding in 2003 or 2002.

Computation of fair values
--------------------------

The  calculation of fair value  estimates of financial  instruments is dependent
upon certain  subjective  assumptions  and involves  significant  uncertainties.
Changes in assumptions could significantly affect the estimates. These estimates
do not reflect any possible tax  ramifications,  estimated  transaction costs or
any premium or discount  that could result from  offering the  Company's  entire
holdings of a particular financial instrument.

The following methods and assumptions were utilized by the Company in estimating
the fair values of its on-balance sheet financial instruments:

Cash and cash  equivalents - The carrying  amounts  reported in the statement of
financial condition approximate these assets' fair value.

Investment  securities  - Fair  values for  investment  securities  are based on
quoted market prices where available. If quoted market prices are not available,
fair values are based on market prices for comparable instruments.

Loans  receivable - For variable rate loans that reprice  frequently and without
significant change in credit risk, fair values are based on carrying values. The
fair value of other loans are  estimated  using  discounted  cash flow  analyses
using  interest  rates  currently  being offered for loans with similar terms to
borrowers of similar  credit  quality.  The fair value of  nonaccrual  loans was
estimated using the estimated fair values of the underlying collateral.

Deposits  liabilities  - The fair  values  of  non-interest-bearing  demand  and
savings  deposits are, by  definition,  equal to the amount payable on demand at
the  reporting  date,  i.e.,  their  carrying  amounts.  Fair  values  for  time
certificates  of deposit are estimated  using a discounted  cash flow  technique
that applies  interest rates currently being offered to a schedule of aggregated
expected monthly maturities on time deposits.

Advances from Federal Home Loan Bank of Boston - Fair values are estimated using
discounted cash flow analyses based on the Bank's current incremental  borrowing
rates for similar types of borrowing arrangements.

Mortgagors'  escrow accounts - The carrying amounts reported in the statement of
financial  condition  approximate  the  fair  value  of the  mortgagors'  escrow
accounts.


                                       39
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies - (Continued)

Recent Accounting Pronouncements
--------------------------------

In December 2003, the Financial  Accounting Standards Board ("FASB") issued SFAS
132(R), which revised the disclosures  requirements related to pension plans and
other  postretirement  benefit plans.  These disclosures are effective for years
ending after June 15, 2004.

In November 2003,  FASB ratified the Emerging  Issues Task Force's  consensus on
EITF 03-01 regarding  disclosure about unrealized  losses on marketable debt and
equity  securities  accounted  for  under  SFAS  115,  "Accounting  for  Certain
Investments  in Debt and  Equity  Securities",  that are  classified  as  either
held-to-maturity  or  available-for-sale.   The  consensus  on  qualitative  and
quantitative disclosures is effective for fiscal years ending after December 15,
2003. Comparative information for earlier periods presented is not required.

Reclassification
----------------

The financial  statements for the prior years have been  reclassified to conform
with changes in the current financial statement presentation.

3. Investment Securities

A summary of investment securities at December 31, 2004 and 2003 follows:

<TABLE>
<CAPTION>
                                             2004                            2003
---------------------------------------------------------------------------------------------
                                    Carrying       Estimated        Carrying      Estimated
(In thousands)                       Amount       Market Value       Amount      Market Value
---------------------------------------------------------------------------------------------
<S>                                <C>             <C>             <C>             <C>
Available-for-sale securities      $   31,096      $   31,096      $   37,166      $   37,166
Held-to-maturity securities             5,168           5,173           1,561           1,577
                                   ----------      ----------      ----------      ----------

   Total investment securities     $   36,264      $   36,269      $   38,727      $   38,743
=============================================================================================
</TABLE>

At December 31, 2004, the composition of the investment portfolio was:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                   Gross Unrealized
                                                Amortized      --------------------------      Estimated
(In thousands)                                  Cost Basis        Gain            Loss        Market Value
----------------------------------------------------------------------------------------------------------
<S>                                            <C>             <C>             <C>              <C>
Available-for-sale securities:
US government and agency obligations
   From one through five years                 $   14,072      $      193      $      (36)      $   14,229
   From five through ten years                      1,000              --             (19)             981
Mortgage-backed securities                         12,249               6            (163)          12,092
Collateralized mortgage obligations                 3,812              13             (31)           3,794
                                               ----------      ----------      ----------       ----------

      Total available-for-sale securities      $   31,133      $      212      $     (249)      $   31,096
                                               ===========================================================

Held-to-maturity securities:
US government and agency obligations
   From one through five years                 $      703      $        9      $       (4)      $      708
Interest bearing balances
   From one through five years                      4,465              --              --            4,465
                                               ----------      ----------      ----------       ----------

      Total held-to-maturity securities        $    5,168      $        9      $       (4)      $    5,173
==========================================================================================================
</TABLE>


                                       40
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

For the year ended  December  31,  2004,  the  Company  realized  gross gains of
$23,787  and gross  losses of $179,952  compared  with  realized  gross gains of
$6,213 and gross  losses of $5,377 for the year ended  December  31,  2003,  and
realized gross gains of $2,812 on sales of investment securities during the year
ended December 31, 2002. There were no gross losses realized in 2002.

At December 31, 2004 and 2003, securities with a carrying value of $700,000, and
market values of approximately $709,000 and $730,000, respectively, were pledged
as collateral to secure municipal deposits.

The Bank has  certain  investment  securities  in which the market  value of the
security is less than the cost of the security.  Management  believes that these
unrealized losses are temporary and are the result of changes in market interest
rates. In making this  determination,  management  considered the period of time
the  securities  have  been  in a  loss  position,  the  percentage  decline  in
comparison to the  securities'  amortized  cost, the financial  condition of the
issuer and the Company's ability and intent to hold these securities until their
fair value  recovers to their  amortized  cost.  At  December  31,  2004,  these
securities  had an  aggregate  market  value of  $18,537,000  which  resulted in
unrealized losses of $253,000.

The  following  is a summary of the market value and related  unrealized  losses
aggregated by investment category and length of time that individual  securities
have been in a continuous unrealized loss position at December 31, 2004.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                         Securities in Continuous Unrealized
                                                          Loss Position Less Than 12 Months
                                                  ------------------------------------------------
                                                   Number of          Market           Unrealized
(Dollars in thousands)                             Securities          Value              Loss
--------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>               <C>
US government and agency obligations                   11           $      6,151      $        (40)
Mortgage-backed securities                             10                 11,406              (194)
                                                  ------------      ------------      ------------
Total securities in unrealized loss position           21           $     17,557      $       (234)
==================================================================================================

<CAPTION>
--------------------------------------------------------------------------------------------------
                                                         Securities in Continuous Unrealized
                                                     Loss Position 12 or More Consecutive Months
                                                  ------------------------------------------------
                                                    Number of          Market          Unrealized
(Dollars in thousands)                             Securities           Value             Loss
--------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>               <C>
US government and agency obligations                   1            $        980      $        (19)
                                                  ------------      ------------      ------------

Total securities in unrealized loss position           1            $        980      $        (19)
==================================================================================================
</TABLE>


                                       41
<PAGE>


[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

3. Investment Securities - (Continued)

At December 31, 2003, the composition of the investment portfolio was:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                 Gross Unrealized
                                             Amortized      --------------------------       Estimated
(In thousands)                              Cost Basis         Gain            Loss        Market Value
-------------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>             <C>              <C>
Available-for-sale securities:
US government and agency obligations        $   22,861      $      583      $      (88)      $   23,356
Mortgage-backed securities                       7,865               7            (124)           7,748
Collateralized mortgage obligations              6,031              31              --            6,062
                                            ----------      ----------      ----------       ----------

   Total available-for-sale securities      $   36,757      $      621      $     (212)      $   37,166
                                            ----------      ----------      ----------       ----------

Held-to-maturity securities:
US government and agency obligations        $      706      $       17      $       (1)      $      722
Interest bearing balances                          855              --              --              855
                                            ----------      ----------      ----------       ----------

   Total held-to-maturity securities        $    1,561      $       17      $       (1)      $    1,577
=======================================================================================================
</TABLE>

4. Loans Receivable

A summary of loans receivable at December 31, 2004 and 2003 is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                                          2004              2003
---------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>
Loans secured by first mortgages on real estate:
Conventional:
  Fixed rate mortgage loans                                                $    108,786      $    107,858
  Adjustable rate mortgage loans                                                 23,439            21,913
  Construction loans                                                              6,547             6,621
Commercial loans                                                                 41,047            27,568
Loans on savings accounts                                                           679               592
Personal, auto and property improvement loans                                    27,657            20,494
                                                                           ------------      ------------
                                                                                208,155           185,046
Less: Allowance for loan losses                                                   1,829             1,810
      Undisbursed construction loans                                              2,094             2,519
      Deferred loan origination fees                                                412               339
                                                                           ------------      ------------

    Loans receivable, net                                                  $    203,820      $    180,378
=========================================================================================================

    Weighted average yield                                                         5.71%             5.81%
=========================================================================================================
</TABLE>


                                       42
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

The Bank's lending activities are conducted  principally in the Naugatuck Valley
area of Connecticut. The Bank's investment in loans includes both adjustable and
fixed rate loans.  At December 31, 2004 and 2003, the  composition of the Bank's
investment in fixed rate loans was as follows:

                                    Fixed Rate
      ---------------------------------------------------------------
                Term to Maturity                 2004          2003
      ---------------------------------------------------------------
      (In thousands)
                Less than 1 year               $  4,040      $  6,563
                   1 - 3 years                      817           674
                   3 - 5 years                    2,449         2,159
                  5 - 10 years                   16,955        12,543
                  10 - 20 years                  49,928        51,341
                  Over 20 years                  55,612        49,768
                                               --------      --------

           Total loans at fixed rates          $129,801      $123,048
      ===============================================================

Adjustable rate loans have interest rate adjustment limitations and are
generally indexed to one year, three year or five year treasury notes, or prime
rate. At December 31, 2004 and 2003, the Bank had the following adjustable rate
loans:

                                  Adjustable Rate
      ===============================================================
                 Rate Adjustment                 2004          2003
      ---------------------------------------------------------------
      (In thousands)
                Less than 1 year               $ 49,944      $ 37,956
                   1 - 3 years                    7,875         8,159
                   3 - 5 years                    8,597         7,989
                   5 - 7 years                   11,938         7,574
                  Over 7 years                       --           320
                                               --------      --------

          Total loans at adjustable rates      $ 78,354      $ 61,998
      ===============================================================

Nonperforming loans totaled approximately  $596,000 and $906,000 at December 31,
2004 and 2003, respectively.  These loans, primarily delinquent 90 days or more,
were  accounted  for on a  nonaccrual  basis.  The  amount  of  income  that was
contractually   due  but  not   recognized   on   nonperforming   loans  totaled
approximately   $44,600,   $50,100  and   $128,000  in  2004,   2003  and  2002,
respectively.

There were no loans on a nonaccrual  basis or  considered  to be impaired by the
Bank at December 31, 2004. The recorded  investment in loans that are considered
to be impaired by the Bank was $118,234 at December  31, 2003.  $96,542 of these
loans were  accounted  for on a nonaccrual  basis as of December  31, 2003.  The
allowance for loan losses related to these impaired  investments  was $16,462 at
December 31, 2003.


                                       43
<PAGE>


[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

4. Loans Receivable - (Continued)

Transactions  in the  allowance  for loan  losses  account  for the years  ended
December 31, 2004, 2003 and 2002 were as follows:

      ------------------------------------------------------------------------
      (In thousands)                        2004          2003          2002
      ------------------------------------------------------------------------
         Balance at beginning of year      $ 1,810       $ 1,994       $ 1,856
         Provision for loan losses              --            45           231
         Loans written off                     (56)         (267)         (117)
         Recoveries of loans written off        75            38            24
                                           -------       -------       -------

         Balance at end of year            $ 1,829       $ 1,810       $ 1,994
      =========================================================================

As of December 31, 2004 and 2003, loans to related parties totaled approximately
$3,480,000 and $2,846,000,  respectively.  For the year ended December 31, 2004,
new  loans  of  approximately  $1,422,000  were  granted  to these  parties  and
principal payments of approximately  $788,000 were received.  For the year ended
December 31, 2003, new loans of  approximately  $1,351,000 were granted to these
parties and principal payments of approximately  $484,000 were received.  During
2003, an additional $201,000 in existing loans were included in loans to related
parties for  individuals  who became related  parties  during the year.  Related
parties include directors and officers of the Bank, any respective affiliates in
which they have a controlling  interest,  and their immediate families.  For the
years  ended  December  31,  2004 and 2003,  all loans to related  parties  were
performing in accordance with the original terms.

The Bank services loans for other  financial  institutions  and agencies.  These
loans are  originated by the Bank and then sold.  The Bank  continues to service
these loans and remits the payments received to the purchasing institution.  The
amounts  of these  loans  were  approximately  $11,888,000  and  $12,056,000  at
December 31, 2004 and 2003, respectively.

5. Premises and Equipment

Premises and equipment at December 31, 2004 and 2003 are summarized as follows:

      -------------------------------------------------------------------------
      (In thousands)                                       2004           2003
      -------------------------------------------------------------------------
         Banking offices and branch buildings           $  5,916       $  4,611
         Furniture and equipment                           2,170          1,872
         Land                                              1,538          1,012
         Leasehold improvements                              604            604
                                                        --------       --------
                                                          10,228          8,099
         Accumulated depreciation and amortization        (2,463)        (1,980)
                                                        --------       --------

         Premises and equipment, net                    $  7,765       $  6,119
      ==========================================================================


                                       44
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

Depreciation and amortization expense is computed using the straight-line method
over the estimated  useful life of an asset.  Estimated  useful lives range from
three to ten  years  for  furniture  and  equipment,  39 years  for the  banking
offices,  and the initial  lease term for  leasehold  improvements.  Land is not
depreciated.

Depreciation and amortization expenses were $511,159,  $503,425 and $436,091 for
the years ended December 31, 2004, 2003 and 2002, respectively.

At December 31, 2004,  future  minimum  rental income and lease payment  expense
were expected to be:

     --------------------------------------------------------------------
      (In thousands)                          Income             Expense
     --------------------------------------------------------------------
              2005                          $       31         $      192
              2006                                  26                174
              2007                                  --                150
              2008                                  --                152
              2009                                  --                153
           Thereafter                               --              1,284
                                            ----------         ----------

      Total future minimum rents            $       57         $    2,105
     ====================================================================

6. Other Assets

In October,  2002,  the Financial  Accounting  Standards  Board  ("FASB)  issued
Statement of Financial  Accounting  Standard ("SFAS") No. 147,  "Acquisitions of
Certain  Financial  Institutions".  This  standard  removes the  accounting  for
certain  branch  acquisitions  from the scope of SFAS No.  72,  "Accounting  for
Certain Acquisitions of Banking or Thrift Institutions".

For branch  acquisitions  completed before October,  2002, SFAS No. 147 requires
that the carrying amount of any intangible asset which meets certain recognition
criteria be accounted for separately and not be  reclassified  as goodwill.  The
standard  indicates these assets are to be accounted for in accordance with SFAS
No. 141, "Business Combinations", and continue to be amortized.

The Bank  adopted SFAS No. 147 as of its October 1, 2002 (its  effective  date),
and  determined  its  intangible  asset  met  the  recognition  criteria  of the
Standards. Accordingly, the Bank is continuing to amortize the intangible asset.

At December 31, 2004 and 2003,  the remaining  intangible  asset is $256,000 and
$289,000, respectively, and is being amortized on the straight-line basis over a
15 year  period.  Amortization  expense  was $33,720 for each of the years ended
December 31, 2004, 2003 and 2002.


                                       45
<PAGE>


[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

7. Deposits

Deposits and weighted average rates at December 31, 2004 and 2003 are summarized
as follows:

<TABLE>
<CAPTION>
      -----------------------------------------------------------------------------------------
                                                  2004                           2003
                                       --------------------------     -------------------------
                                                         Weighted                      Weighted
                                                         Average                       Average
      (In thousands)                       Amount          Cost        Amount            Cost
      -----------------------------------------------------------------------------------------
<S>                                      <C>               <C>        <C>               <C>
      Certificate accounts               $ 81,200          2.24%      $ 86,192          2.19%
      Regular savings accounts             43,941          0.35%        40,185          0.40%
      Checking and NOW accounts            37,003          0.15%        32,723          0.25%
      Money market savings accounts        31,222          1.05%        24,355          0.85%
                                         --------                     --------

          Total deposits                 $193,366          1.22%      $183,455          1.27%
      =========================================================================================
</TABLE>

The aggregate amount of individual  certificate  accounts of $100,000 or more at
December  31,  2004 and  2003  was  $16,644,000  and  $16,983,000  respectively.
Deposits up to $100,000 are federally insured.

At December 31, 2004 and 2003 the remaining  maturities for certificate accounts
were:

<TABLE>
<CAPTION>
            -------------------------------------------------------------------------------
            (In thousands)                                             2004          2003
            -------------------------------------------------------------------------------
<S>                                                                 <C>            <C>
               Certificate accounts maturing in:
                  Under 12 months                                   $  49,379      $  52,466
                  12 to 36 months                                      20,048         20,049
                  Over 36 months                                       11,773         13,677
                                                                    ---------      ---------

                        Total certificate accounts                  $  81,200      $  86,192
            ================================================================================
</TABLE>

8. Advances from Federal Home Loan Bank of Boston

The Bank has an  agreement  with  Federal  Home  Loan  Bank of  Boston  ("FHLB")
providing  for future  credit  availability  of up to twenty times the amount of
FHLB stock held by the Bank,  not to exceed  30% of its total  assets.  The Bank
held  $2,179,700  in  Federal  Home Loan Bank stock at  December  31,  2004.  In
additional to the outstanding advances, the Bank has a $2,540,000 line of credit
available  from FHLB and a  $2,000,000  line of credit  available  from  another
correspondent bank.

During   2004,   the  Bank  prepaid   $9,561,780   of  FHLB   advances   with  a
weighted-average  rate of 5.29%.  The Bank  incurred  a  prepayment  penalty  of
$498,000 as a part of the transaction.


                                       46
<PAGE>


                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

FHLB  advances are secured by a blanket lien on the Bank's  assets.  Outstanding
advances with calendar-year maturity dates and weighted average cost of funds at
December 31, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------------
    (Dollars in thousands)                     2004                            2003
    -----------------------------------------------------------     ---------------------------
                                                       Weighted                        Weighted
                                       Amount          Average         Amount           Average
            Year of Maturity             Due            Cost            Due              Cost
    -------------------------------------------------------------------------------------------
<S>                                  <C>                 <C>        <C>                 <C>
                  2004               $        --           --       $     9,864         3.41%
                  2005                     3,724         5.84%            5,123         5.59%
                  2006                     2,818         4.31%            5,223         5.07%
                  2007                     3,349         3.82%            6,828         4.47%
                  2008                     1,384         3.65%            2,939         4.36%
                  2009                     1,918         3.89%            2,380         4.16%
                  2010                       703         4.01%              703         4.01%
                  2011                       657         4.09%              657         4.09%
                  2012                       684         4.09%              684         4.09%
                  2013                       579         4.13%              579         4.13%
                  2014                        10         3.94%               10         3.94%
                                     -----------                    -----------

            Total advances           $    15,826         4.42%      $    34,990         4.37%
    ===========================================================================================
</TABLE>

9. Pension and Other Post-Retirement Benefits

Pension Plan
------------

The Bank participates in a multi-employer  defined benefit pension plan covering
all of its full time (as defined)  employees  who have been employed by the Bank
for more than six  months  and are at least  twenty-one  years of age.  Benefits
under this plan become fully vested after five years of service.  The Bank's net
pension cost for the period is the amount of  contributions  due.  Total pension
expense was $441,262 for the year ended December 31, 2004 compared with $335,300
and $225,899 for 2003 and 2002,  respectively.  Current valuations of the Bank's
allocation of the plan's pooled assets are not available.

Defined Contribution Plan
-------------------------

The Bank has a defined  contribution 401(k) plan for eligible employees.  During
2003, the plan was amended and restated to comply with various legislative acts,
collectively  referred  to as  "GUST".  As  amended,  the  401(k)  plan  permits
participants to contribute the maximum  percentage  allowable  subject to limits
provided  by  the  new  law.   The  Bank   provides  50%  matching  of  employee
contributions, with a maximum contribution on up to 6% of the employee's salary.
The Bank's contribution vests over a 6 year graded vesting schedule.  The Bank's
contribution  to the plan was  $65,496,  $58,675 and $23,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.


                                       47
<PAGE>


[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

9. Pension and Other Post-Retirement Benefits - (Continued)

Directors Retirement Plan
-------------------------

The Bank sponsors a retirement and benefits plan for non-employee  directors who
attain age 70 and meet certain  other  qualifying  criteria.  Annual  retirement
benefits for qualifying individuals are payable in ten semi-annual installments.

Healthcare Benefits
-------------------

In addition to providing pension benefits, the Bank provides certain health care
benefits to retired  employees.  Substantially  all of the Bank's  employees may
become eligible for those benefits.  The Bank's policy is to accrue the expected
cost of providing those benefits during the years that the employee  renders the
necessary service.

The Medicare  Prescription Drug,  Improvement and Modernization Act of 2003 (the
"Act") was signed into law on December 8, 2003.  In  accordance  with FASB Staff
Position FAS 106-1,  the Bank made a one-time  election to defer  recognition of
the effects of the Act in the accounting for its postretirement benefit plan and
in providing related disclosures until authoritative  guidance on the accounting
for the federal  prescription  drug subsidy is issued.  The amounts disclosed in
this report do not  reflect  the  effects of the Act on the Plan.  Authoritative
guidance  is  pending,  and  when  issued,  could  require  the  Bank to  change
previously reported information.

Obligation and Funded Status
----------------------------

The following table summarizes the obligation and funded status,  as well as the
amounts recognized in the consolidated statements of financial condition for the
Directors  Retirement  Plan and the Healthcare  Benefits plan as of December 31,
2004 and 2003:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                               Directors Retirement Plan           Healthcare Benefit Plan
                                            -----------------------------      ------------------------------
(Dollars in thousands)                         2004               2003             2004               2003
-------------------------------------------------------------------------------------------------------------
<S>                                         <C>                 <C>             <C>                 <C>
Measurement date                            12/31/2004          12/31/2003      12/31/2004          12/31/2003

Projected benefit obligation                $(401,353)          $(490,344)      $(419,379)          $(414,768)
Fair value of plan assets                          --                  --              --                  --
                                            ---------           ---------       ---------           ---------
  Funded status                             $(401,353)          $(490,344)      $(419,379)          $(414,768)
-------------------------------------------------------------------------------------------------------------

Accrued benefit cost recognized in the
  statement of financial condition          $(227,552)          $(309,956)      $(419,379)          $(414,768)
=============================================================================================================
</TABLE>


                                       48
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

Net Periodic Benefit Cost and Contributions
-------------------------------------------

The  benefit  costs and  contributions  the  Directors  Retirement  Plan and the
Healthcare Benefits plan for the years ended December 31, 2004 and 2003 were:

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------------------
                                            Directors Retirement Plan         Healthcare Benefit Plan
                                            --------------------------      --------------------------
     (Dollars in thousands)                    2004            2003            2004            2003
     -------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>             <C>             <C>
      Net periodic benefit cost             $   23,924      $   29,665      $    4,611      $   53,991
      Employer contributions                        --              --              --              --
      Plan participants' contributions              --              --              --              --
      Benefits paid during the year            106,329         106,329          15,757          15,067
      ================================================================================================
</TABLE>

Due to the  unfunded  status of the plans,  the Bank expects to  contribute  the
amount of the  estimated  benefit  payments for the next fiscal  year,  which is
$59,143 and $19,792 for Directors  Retirement  Plan and the Healthcare  Benefits
Plan, respectively.

Assumptions and Effects
-----------------------

The actuarial  assumptions used to determine the projected  benefit  obligations
and net  periodic  benefit  cost for the years ended  December 31, 2004 and 2003
were as follows:

<TABLE>
<CAPTION>
      -------------------------------------------------------------------------------------------------------
                                                     Directors Retirement Plan        Healthcare Benefit Plan
                                                     -------------------------        -----------------------
      Weighted-average assumptions:                  2004                2003        2004                2003
      -------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>         <C>                 <C>
      Discount rate                                  7.00%               7.00%       5.75%               5.75%
      Rate of compensation increase                  4.25%               4.25%         --                  --
      Medical trend rate next year                     --                  --        7.00%              10.00%
      Ultimate medical trend rate                      --                  --        5.00%               5.00%
      Year ultimate trend rate is achieved             --                  --        2006                2006
      =======================================================================================================
</TABLE>

Assumed  health care cost trend rates have a  significant  effect on the amounts
reported  for  the  Healthcare  Benefits  plan.  At  December  31,  2004,  a one
percentage-point  increase in the assumed health care trend rates would increase
the  projected  benefit  obligation  by  $87,736  compared  with a  decrease  of
$(63,643)  if the  assumed  health  care  trend  rate  were to  decrease  by one
percentage-point.

10. Employee Stock Ownership Plan

On September 30, 2004, the date the  reorganization  was  consummated,  the Bank
implemented the Naugatuck  Valley Savings and Loan Employee Stock Ownership Plan
(the "ESOP").  On September 30, 2004, the ESOP  purchased  298,091 shares of the
common stock of the Company. To fund the purchase,  the ESOP borrowed $2,980,910
from the Company.  The  borrowing  is at an interest  rate of 4.75% and is to be
repaid on a pro-rata basis in fifteen annual installments of $282,520 commencing
with the quarter


                                       49
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

10. Employee Stock Ownership Plan - (Continued)

ended December 31, 2004 through September 30, 2019. In addition,  dividends paid
on the unreleased  shares are used to reduce the principal  balance of the loan.
The collateral for the loan is the common stock of the Company  purchased by the
ESOP. Contributions by the Bank to the ESOP are discretionary, however, the Bank
intends to make annual  contributions  in an aggregate  amount at least equal to
the principal and interest requirement on the debt.

The shares of stock  purchased by the ESOP are held in a suspense  account until
they are released for allocation among participants. The shares will be released
annually  from the suspense  account and the  released  shares will be allocated
among the participants on the basis of each  participant's  compensation for the
year of allocation. As shares are released from collateral,  the Bank recognizes
compensation  expense equal to the average market price of the shares during the
period and the shares will be outstanding for  earning-per-share  purposes.  The
shares not released are reported as unearned ESOP shares in the capital accounts
of the consolidated statements of financial condition. ESOP expense for the year
ended  December  31, 2004 was $53,284.  At December  31, 2004,  there were 4,911
unallocated  and 293,180  unreleased ESOP shares.  The unreleased  shares had an
aggregate fair value of $3,155,000.

11. Income Taxes

Retained earnings at December 31, 2004 includes approximately $948,000 for which
no  provision  for  Federal  income tax has been made.  This  amount  represents
aggregate  allocations  of income to bad debt  deductions for tax purposes only.
Reduction  of amounts so allocated  for purposes  other than tax bad debt losses
will create  income for tax purposes  only,  which will be subjected to the then
current corporate income tax rate.

The Bank's  wholly-owned  subsidiary,  the Naugatuck  Valley Mortgage  Servicing
Corporation,  qualifies and operates as a Connecticut passive investment company
pursuant  to  legislation.  Because the  subsidiary  earns  income from  passive
investments  which is exempt from Connecticut  Corporation  Business Tax and its
dividends to the Bank are exempt from state tax,  the Bank no longer  expects to
incur state income tax expense.

Deferred income taxes reflect the impact of "temporary  differences" between the
amount of assets and  liabilities  for  financial  reporting  purposes  and such
amounts as measured by tax laws and  regulations.  Principle items making up the
deferred   income  tax   provision   include  a  carry   forward  of  charitable
contributions,  the provision for loan losses,  accelerated tax depreciation and
deferred mortgage fee income. The Company records a valuation  allowance against
deferred tax assets if, based on the weight of  available  evidence,  it is more
likely  than  not,  that  some or all of the  deferred  tax  assets  will not be
realized.  The Company believes that all deferred tax assets will be realized in
the future and that no valuation allowance is necessary.


                                       50
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

Income taxes receivable and payable included in the balance sheet at December
31, 2004 and 2003 were:

<TABLE>
<CAPTION>
      -------------------------------------------------------------------------------
      (In thousands)                                           2004            2003
      -------------------------------------------------------------------------------
<S>                                                         <C>             <C>
      Current tax receivable                                $       1       $      26
                                                            =========       =========

      Deferred tax receivable
         Charitable contributions carryforward              $     465       $      --
         Reserve for loan losses                                  382             340
         Post-retirement benefits                                 220             246
         Deferred income                                          142             117
         Available-for-sale securities                             12              --
                                                            ---------       ---------
               Total deferred tax receivable                    1,221             703
                                                            ---------       ---------

      Deferred tax payable
         Available-for-sale securities                      $      --       $    (139)
         Depreciation                                            (153)           (110)
         Other items                                              (26)            (27)
                                                            ---------       ---------
                Total deferred tax payable                       (179)           (276)
                                                            ---------       ---------

            Net deferred tax receivable                     $   1,042       $     427
      ===============================================================================
</TABLE>

The provision for income tax expense for the year ended December 31, 2004,  2003
and 2002 consists of:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(In thousands)                                            2004            2003            2002
------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>             <C>
Current income tax expense                             $     478       $     651       $     977

Deferred income tax expense (benefit), due to:
   Charitable contributions                                 (465)             --              --
   Reserve for loan losses                                   (42)            (26)           (151)
   Deferred income                                           (25)             60              39
   Post retirement benefits                                   26               8              36
   Depreciation                                               43             131             (21)
   Other items                                                (1)             (2)             --
                                                       ---------       ---------       ---------
      Total deferred income tax expense (benefit)           (464)            171             (97)
                                                       ---------       ---------       ---------

      Provision for income taxes                       $      14       $     822       $     880
================================================================================================
</TABLE>


                                       51
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

11. Income Taxes - (Continued)

A  reconciliation  of the  statutory  federal  income tax rate applied to income
before income taxes with the income tax provision is as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                        Year Ended December 31,
                                                               -------------------------------------------
(Dollars in thousands)                                            2004            2003             2002
----------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>              <C>
Income tax expense at statutory rate of 34%                    $     146        $     894        $     952
Increase (decrease) in income tax expense resulting from:
   Income exempt from income tax                                     (68)             (46)              --
   Changes in tax bad debt base year reserves                        (65)             (28)             (74)
   Other items, net                                                    1                2                2
                                                               ---------        ---------        ---------

      Provision for income taxes                               $      14        $     822        $     880
==========================================================================================================

Effective rate of income tax expense                                 3.3%            31.3%            31.4%
==========================================================================================================
</TABLE>

12. Consolidated Statement of Comprehensive Income

The source of the Company's other  comprehensive  income is the unrealized gains
and losses on its available for sale securities.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                    For the Years Ended December 31,
(In thousands)                                                  2004             2003             2002
---------------------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>              <C>
Net income                                                   $      415       $    1,806       $    1,920
                                                             ----------       ----------       ----------

Other comprehensive (loss) income:
Unrealized (loss) gain on securities available-for-sale            (601)            (664)             658
Reclassification adjustment for losses (gains)
  realized in net income                                            156               (1)              (3)
                                                             ----------       ----------       ----------

Other comprehensive (loss) income before tax effect                (445)            (665)             655

Income tax (benefit) expense related to items of other
    comprehensive (loss) income                                    (151)            (226)             222
                                                             ----------       ----------       ----------

Other comprehensive (loss) income net of tax                       (294)            (439)             433
                                                             ----------       ----------       ----------

    Total comprehensive income                               $      121       $    1,367       $    2,353
=========================================================================================================
</TABLE>


                                       52
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

13. Regulatory Capital

The  Company,  as a  federally  chartered  holding  company,  is not  subject to
regulatory  capital  requirements.  The Bank is subject  to  various  regulatory
capital  requirements  administered by the federal banking agencies.  Failure to
meet minimum capital  requirements can initiate  certain  mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements.

The Office of Thrift Supervision (OTS) regulations require savings  institutions
to maintain  minimum  levels of regulatory  capital.  Under the  regulations  in
effect at December 31, 2004,  the Bank was required to maintain a minimum  ratio
of tangible  capital to total adjusted assets of 1.5%; a minimum ratio of Tier 1
(core)  capital  to total  adjusted  assets of 4.0%;  a minimum  ratio of Tier I
capital to  risk-weighted  assets of 4.0% and a minimum ratio of total (core and
supplementary)  capital to risk-weighted assets of 8.0%. As of December 31, 2004
the Bank meets all capital requirements to which it is subject.

At December 31, 2004 the Bank was considered  "well  capitalized" for regulatory
purposes.  To be  categorized  as well  capitalized,  the Bank must  maintain  a
minimum ratio of tangible  capital to total adjusted  assets of 2.00%; a minimum
ratio of Tier 1 (core)  capital  to total  adjusted  assets of 5.00%;  a minimum
ratio of Tier I capital to risk-weighted  assets of 6.00% and a minimum ratio of
total (core and supplementary)  capital to risk-weighted assets of 10.00%. There
have been no  subsequent  conditions  or events which  management  believes have
changed the Bank's status.

Prior to its  reorganization  (see  note 1),  the Bank was  subject  to  capital
requirements  established  by the  FDIC.  Under  the  regulations  in  effect at
December 31, 2003, the Bank was required to maintain a Tier 1 capital to average
assets ratio of 4.00%,  a Tier 1 capital to risk-based  ratio of at least 4.00%;
and a total risk-based capital to risk-weighted  assets ratio of at least 8.00%.
At December 31, 2003, the Bank was considered "well  capitalized" for regulatory
purposes.

The  following is a summary of the Bank's actual  capital as computed  under the
standards  established  by the OTS and the FDIC at  December  31, 2004 and 2003,
respectively.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                    2004                        2003
                                                           ---------------------      ---------------------
(Dollars in thousands)                                      Amount        Ratio       Amount        Ratio
-----------------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>         <C>             <C>
Tier I  Capital (to Adjusted Total Assets in 2004 and
  to Average Assets in 2003)                               $37,937        14.78%      $20,658         8.64%

Tier I Risk-Based Capital (to Risk-Weighted Assets)         37,937        22.52%       20,658        14.96%

Total Risk-Based Capital (to Risk-Weighted Assets)          39,766        23.61%       22,386        16.21%

Tangible Equity Capital (to Tangible Assets)                37,937        14.78%          N/A          N/A
===========================================================================================================
</TABLE>


                                       53
<PAGE>


[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

13. Regulatory Capital - (Continued)

The  measurement of the Bank's capital as computed  under  regulatory  standards
differs from its measurement under generally accepted accounting  principles.  A
reconcilement of the Bank's capital follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                                                December 31,
                                                                        ---------------------------
(In thousands)                                                             2004             2003
---------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>
Total capital as calculated under generally accepted
  accounting principles (GAAP Capital)                                  $   38,256       $   21,217
Adjustments to reconcile Total GAAP Capital to Regulatory Capital:
    Intangible assets                                                         (256)            (289)
    Accumulated other comprehensive income
        from available-for-sale securities                                     (63)            (270)
                                                                        ----------       ----------
Tier I Risk-Based Capital                                                   37,937           20,658
    Includible portion of allowance for loan losses                          1,829            1,728
                                                                        ----------       ----------

Total Risk-Based Capital                                                $   39,766       $   22,386
===================================================================================================
</TABLE>

The ability of the Company to pay dividends depends,  in part, on the ability of
the Bank to pay  dividends to the Company.  The Bank will not be able to declare
or pay a cash dividend on, or repurchase any of its common stock,  if the effect
thereof would be to reduce the regulatory capital of the Bank to an amount below
amounts required under OTS rules and regulations.

14. Earnings per Share

Earnings  per  share  amounts  for the  year  ended  December  31,  2004 are not
meaningful  because the Company did not  complete  its initial  public  offering
until  September 30, 2004.  The  weighted-average  number of shares  outstanding
during the quarter ended December 31, 2004 was 7,306,337 shares.  Net income and
income available to common  shareholders for the quarter ended December 31, 2004
was  $530,000.  The basic  earnings  per share for the  quarter  was $0.07.  The
Company had no dilutive securities outstanding.

15. Financial Instruments

The Company is a party to financial  instruments with off-balance  sheet risk in
the normal course of business to meet the  financing  needs of its customers and
to reduce its own exposure to fluctuations  in interest  rates.  These financial
instruments include commitments to extend credit.  Those instruments involve, to
varying  degrees,  elements  of credit and  interest  rate risk in excess of the
amounts recognized in the balance sheet.


                                       54
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

Notes to Consolidated Financial Statements

The following table summarizes these financial instruments and other commitments
and contingent liabilities as of December 31, 2004 and 2003:

    ----------------------------------------------------------------------
    (In thousands)                                      2004        2003
    ----------------------------------------------------------------------

    Commitments to extend credit:
      Loan commitments                               $   4,694   $   7,754
      Unused lines of credit                            14,463      13,478
      Amounts due mortgagors on construction loans      14,491       2,519
      Amounts due on commercial  loans                   1,485       7,569
    Commercial letters of credit                         2,185         545
    ======================================================================

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the financial  instrument  for  commitments  to extend credit and
standby letters of credit is represented by the  contractual  notional amount of
those  instruments.  The  Company  uses  the  same  credit  policies  in  making
commitments  and  conditional  obligations  as  it  does  for  on-balance  sheet
instruments.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
are principally collateralized by mortgages on real estate, generally have fixed
expiration dates or other  termination  clauses and may require payment of fees.
Since some of the  commitments  may expire  without being drawn upon,  the total
commitment amounts do not necessarily represent future cash requirements.

The estimated fair value of the Company's financial instruments follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                               December 31,
                                        ----------------------------------------------------------
                                                  2004                             2003
                                        --------------------------      --------------------------
                                        Carrying        Estimated        Carrying        Estimated
(In thousands)                           Amount         Fair Value        Amount        Fair Value
--------------------------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C>             <C>
Financial assets
   Cash and cash equivalents            $    7,575      $    7,575      $    9,775      $    9,775
   Investment securities                    36,264          36,269          38,727          38,743
   Loans receivable, net                   203,820         205,659         180,378         184,572
   Accrued income receivable                 1,077           1,077           1,071           1,071

Financial Liabilities
   Deposits                             $  193,366      $  193,018      $  183,455      $  184,636
   Federal Home Loan Bank advances          15,826          15,612          34,990          35,944
   Mortgagors' escrow accounts               3,058           3,058           2,634           2,634
==================================================================================================
</TABLE>


                                       55
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

16. Selected Quarterly Consolidated Financial Information (unaudited)

The following tables present quarterly consolidated  information for the Company
for 2004 and 2003.

<TABLE>
<CAPTION>
                                                      For the Year Ended December 31, 2004
                                          -----------------------------------------------------------
                                            Fourth          Third            Second          First
(In thousands)                              Quarter        Quarter           Quarter        Quarter
-----------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>              <C>             <C>
Interest and dividend income              $    3,365      $    3,265       $    3,057      $    3,026
Interest expense                                 765             942              916             936
                                          ----------      ----------       ----------      ----------
  Net interest income                          2,600           2,323            2,141           2,090
Provision for loan losses                         --              --               --              --
                                          ----------      ----------       ----------      ----------
Net interest income after
  provision for loan losses                    2,600           2,323            2,141           2,090
Noninterest income                               290             149              306             333
Noninterest expense                            2,168           3,891            1,865           1,879
                                          ----------      ----------       ----------      ----------
Income (loss) before provision
  (benefit) for income taxes                     722          (1,419)             582             544
Provision (benefit) for income taxes             192            (526)             182             166
                                          ----------      ----------       ----------      ----------
    Net income (loss)                     $      530      $     (893)      $      400      $      378
                                          ==========      ==========       ==========      ==========

<CAPTION>
                                                       For the Year Ended December 31, 2003
                                          -----------------------------------------------------------
                                               Fourth         Third           Second          First
(In thousands)                                Quarter        Quarter         Quarter         Quarter
-----------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>              <C>             <C>
Interest and dividend income              $    3,119      $    3,108       $    3,161      $    3,256
Interest expense                                 970           1,009            1,090           1,172
                                          ----------      ----------       ----------      ----------
  Net interest income                          2,149           2,099            2,071           2,084
Provision for loan losses                         --              --               --              45
                                          ----------      ----------       ----------      ----------
Net interest income after
  provision for loan losses                    2,149           2,099            2,071           2,039
Noninterest income                               313             212              333             257
Noninterest expense                            1,828           1,686            1,681           1,650
                                          ----------      ----------       ----------      ----------
Income before provision for
  income taxes                                   634             625              723             646
Provision for income taxes                       177             197              231             217
                                          ----------      ----------       ----------      ----------
    Net income                            $      457      $      428       $      492      $      429
                                          ==========      ==========       ==========      ==========
</TABLE>


                                       56
<PAGE>

                                                    [LOGO] Naugatuck Valley
                                                           Financial Corporation

                                      Notes to Consolidated Financial Statements

17. Parent Company Only Financial Statements

The  following  financial  statements  are for  the  Company  (Naugatuck  Valley
Financial  Corporation)  only,  and  should  be read  in  conjunction  with  the
consolidated financial statements of the Company.

Statement of Financial Condition

December 31, 2004

<TABLE>
<CAPTION>
            (In thousands)
            ------------------------------------------------------------------------
<S>                                                                          <C>
            ASSETS
            Cash on deposit with Naugatuck Valley Savings and Loan           $    1,738
            Investment in subsidiary, Naugatuck Valley Savings and Loan          38,256
            Investment securities                                                10,880
            Loan to ESOP                                                          2,947
            Deferred income taxes                                                   510
            Other assets                                                            221
                                                                             ----------

                Total assets                                                 $   54,552
                                                                             ==========

            LIABILITIES AND STOCKHOLDERS' EQUITY
            Liabilities - due to subsidiary                                  $    2,981
            Stockholders' equity                                                 51,571
                                                                             ----------

                Total liabilities and stockholders' equity                   $   54,552
            ===========================================================================
</TABLE>

Statement of Operations

From Inception (September 30, 2004) through December 31, 2004

<TABLE>
<CAPTION>
            (In thousands)
            ------------------------------------------------------------------------
<S>                                                                          <C>
            Interest income                                                  $       90

            Other expense
               Charitable contribution                                            1,521
               Other expenses                                                        26
                                                                             ----------
                  Total other expense                                             1,547
                                                                             ----------
            Loss before income tax benefit and equity in undistributed
               net income of subsidiary                                          (1,457)
            Income tax benefit                                                     (495)
                                                                             ----------
            Loss before equity in undistributed net income of subsidiary           (962)
            Equity in undistributed net income of subsidiary                        488
                                                                             ----------

                     Net loss                                                $     (474)
            ===========================================================================
</TABLE>


                                       57
<PAGE>

[LOGO] Naugatuck Valley
       Financial Corporation

Notes to Consolidated Financial Statements

17. Parent Company Only Financial Statements - (Continued)

Statement of Cash flows

From Inception (September 30, 2004) through December 31, 2004

<TABLE>
<CAPTION>
            (In thousands)
            -------------------------------------------------------------------------
<S>                                                                          <C>
            Net cash used by operating activities                            $    (39)
                                                                             --------
            Cash flows from investing activities
            Purchase of available-for-sale securities                         (11,014)
            Loan to ESOP                                                       (2,981)
            Investment in subsidiary, Naugatuck Valley Savings and Loan       (15,870)
                                                                             --------
            Net cash used by investing activities                             (29,865)
                                                                             --------
            Cash flows from financing activities
            Proceeds from issuance of common stock                             32,601
            Cost of issuance of common stock                                     (959)
                                                                             --------
            Net cash provided by financing activities                          31,642
                                                                             --------

            Increase in cash and cash equivalents                               1,738
            Cash and cash equivalents at beginning of year                         --
                                                                             --------

               Cash and cash equivalents at end of year                      $  1,738
            =========================================================================
</TABLE>


                                       58



<PAGE>

                        Directors and Executive Officers

              Directors of Naugatuck Valley Financial Corporation,
                     Naugatuck Valley Mutual Holding Company
                      and Naugatuck Valley Savings and Loan
                      -------------------------------------

<TABLE>
<S>                                                        <C>
Carlos S. Batista
   Vice President - Bristol Babcock, Inc.                  Michael S. Plude, CPA
                                                               Managing Partner - Kaskie Plude & Co.
Richard M. Famiglietti
   Owner - CM Property Management                          John C. Roman
                                                               President and Chief Executive Officer -
Ronald D. Lengyel                                              Naugatuck Valley Financial Corporation,
   Chairman of the Board - Naugatuck Valley                    Naugatuck Valley Mutual Holding Company and
   Financial Corporation, Naugatuck Valley Mutual              Naugatuck Valley Savings and Loan
   Holding Company and Naugatuck Valley
   Savings and Loan                                        Camilo P. Vieira
                                                               Consultant - CM Property Management
   Director - Connecticut Water Service, Inc.
                                                           Jane H. Walsh
James A. Mengacci                                              Senior Vice President - Naugatuck Valley
   Owner - James A. Mengacci Associates LLC                    Financial Corporation, Naugatuck Valley Mutual
                                                               Holding Company and Naugatuck Valley Savings
   Partner - Allied Capital Management, LLC                    and Loan
</TABLE>

                              Executive Officers of
                     Naugatuck Valley Financial Corporation,
                     Naugatuck Valley Mutual Holding Company
                      and Naugatuck Valley Savings and Loan
                      -------------------------------------
<TABLE>
<S>                                                        <C>
John C. Roman                                              William C. Nimons
   President and Chief Executive Officer                       Senior Vice President

Dominic J. Alegi                                           Lee R. Schlesinger
   Executive Vice President                                    Vice President and Treasurer

Jane H. Walsh                                              Mark S. Graveline
   Senior Vice President                                       Senior Vice President
</TABLE>


                                       59
<PAGE>

                       Investor and Corporate Information

Annual Meeting

The annual meeting of stockholders will be held at 10:30 a.m., local time, on
May 5, 2005 at Leary's Crystal Room located at 98 School Street, Naugatuck,
Connecticut 06770.

Stock Listing

Naugatuck Valley Financial Corporation common stock is listed on the Nasdaq
National Market under the symbol "NVSL."

Price Range of Common Stock

On October 1, 2004, Naugatuck Valley Financial common stock commenced trading on
the Nasdaq National Market. The high and low sales prices of the common stock
during the quarter ended December 31, 2004 were $11.34 and $10.26 per share,
respectively. Naugatuck Valley Financial did not pay any dividends during the
quarter ended December 31, 2004.

At March 1, 2005, there were 935 holders of record of Naugatuck Valley Financial
common stock.

Stockholder and General Inquiries

John C. Roman
President and Chief Executive Officer
Naugatuck Valley Financial Corporation
333 Church Street
Naugatuck, Connecticut 06770
(203) 720-5000

Annual and Other Reports

A copy of the Naugatuck Valley Financial Annual Report on Form 10-K, without
exhibits, for the year ended December 31, 2004, as filed with the Securities and
Exchange Commission, may be obtained without charge by contacting Bernadette A.
Mole, Corporate Secretary, Naugatuck Valley Financial Corporation, 333 Church
Street, Naugatuck, Connecticut 06770.

Independent Registered Public Accounting Firm

Snyder & Haller, P.C.
30 Atwood Street
Hartford, Connecticut  06105

Corporate Counsel

Muldoon Murphy & Aguggia LLP
5101 Wisconsin Avenue, NW
Washington, DC 20016

Transfer Agent

Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016


                                       60
<PAGE>

                                Office Locations

Main Office
-----------

     333 Church Street
     Naugatuck, Connecticut 06770

Branch Offices
--------------

     1009 New Haven Road
     Naugatuck, Connecticut 06770

     127 South Main Street
     Beacon Falls, Connecticut 06403

     860 Bridgeport Avenue
     Shelton, Connecticut 06484

     49 Pershing Drive
     Derby, Connecticut 06418

     249 West Street
     Route 67
     Seymour, Connecticut 06483


                                       61