UNITED
STATES



SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON,
DC 20549












FORM 10-Q

(Mark One)



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



For the quarterly
period ended September 30, 2012



OR



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



For the transition
period from ______________ to _____________



Commission file
number: 0-54447



|NAUGATUCK
    VALLEY FINANCIAL CORPORATION            
|------------------------------------------------------
|(Exact name of registrant as specified in its charter)



|MARYLAND                                         |  | 01-0969655                          
|------------------------------------------------ |  | ------------------------------------
|(State or other jurisdiction of incorporation or |  | (I.R.S. Employer Identification No.)
|organization)                                    |  |                                     



|333
    CHURCH STREET, NAUGATUCK, CONNECTICUT |  | 06770     
|--------------------------------------------- |  | ----------
|(Address of principal executive offices)      |  | (Zip Code)



|(203)
    720-5000                                  
|----------------------------------------------------
|(Registrant’s telephone number, including area code)





|N/A                                                                                   
|--------------------------------------------------------------------------------------
|(Former name, former address and former fiscal year, if changed
    since last report)



Indicate by
check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes x            No ̈



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x
    No  ̈



Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act (Check one):



| | Large Accelerated Filer  ̈                     | Accelerated Filer  ̈        
| | --------------------------------------------- | ---------------------------
| | Non-accelerated Filer  ̈                       | Smaller Reporting Company x
| | (Do not check if a smaller reporting company) |                            



Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    ̈       No   x



As of November
26 2012, there were 7,002,208 shares of the registrant’s common stock outstanding.













Explanatory
Note

In
connection with the filing of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (“Form 10-Q”),
Naugatuck Valley Financial Corporation (the “Company”) is relying on Release No. 68224 issued by the Securities and
Exchange Commission (the “SEC”), titled “Order Under Section 17A and Section 36 of the Securities Exchange Act
of 1934 Granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder,” which provides that
filings by registrants unable to meeting filing deadlines due to Hurricane Sandy and its aftermath shall be considered timely so
long as the filing is made on or before November 21, 2012, and the conditions contained therein are satisfied. The Company was
unable to file its Form 10-Q on a timely basis due to the disruptions caused by Hurricane Sandy on the Company’s offices
and employees, as well as the Company’s independent auditors, which are all primarily located in regions of Connecticut that
were impacted by Hurricane Sandy.















NAUGATUCK
VALLEY FINANCIAL CORPORATION



Table of
Contents



|                              | Page No.                                                                                                                      
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------
|                              |                                                                                                                               
|Part I. Financial Information |                                                                                                                               
|                              |                                                                                                                               
|Item 1.                       | Consolidated Financial Statements (Unaudited)                                                                                 
|                              |                                                                                                                               
|                              | Consolidated Statements of Financial Condition at September 30, 2012 and December 31, 2011                                    
|                              |                                                                                                                               
|                              | Consolidated Statements of Income and Comprehensive Income for the three and nine months ended
    September 30, 2012 and 2011
|                              |                                                                                                                               
|                              | Consolidated Statements of Changes in Stockholder’s Equity for the nine months ended
    September 30, 2012                   
|                              |                                                                                                                               
|                              | Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011                                   
|                              |                                                                                                                               
|                              | Notes to Unaudited Consolidated Financial Statements                                                                          
|                              |                                                                                                                               
|Item 2.                       | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                         
|                              |                                                                                                                               
|                              | Liquidity and Capital Resources                                                                                               
|                              |                                                                                                                               
|Item 3.                       | Quantitative and Qualitative Disclosures About Market Risk                                                                    
|                              |                                                                                                                               
|Item 4.                       | Controls and Procedures                                                                                                       
|                              |                                                                                                                               
|Part II.  Other Information   | 34                                                                                                                            
|                              |                                                                                                                               
|Item 1.                       | Legal Proceedings                                                                                                             
|                              |                                                                                                                               
|Item 1A.                      | Risk Factors                                                                                                                  
|                              |                                                                                                                               
|Item 2.                       | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   
|                              |                                                                                                                               
|Item 3.                       | Defaults Upon Senior Securities                                                                                               
|                              |                                                                                                                               
|Item 4.                       | Mine Safety Disclosures                                                                                                       
|                              |                                                                                                                               
|Item 5.                       | Other Information                                                                                                             
|                              |                                                                                                                               
|Item 6.                       | Exhibits                                                                                                                      
|                              |                                                                                                                               
|Signatures                    |                                                                                                                               
|                              |                                                                                                                               
|Exhibits                      |                                                                                                                               



2







Part
I - FINANCIAL INFORMATION



Item 1. Consolidated
Financial Statements (Unaudited)





Consolidated Statements of Financial
Condition

(In thousands, except share data)

|                                                                                                                                                                                            |  | September 30, |         |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | -
|                                                                                                                                                                                            |  | 2012          |         |   | 2011         |  
|                                                                                                                                                                                            |  | (Unaudited)   |         |   |              |  
|ASSETS                                                                                                                                                                                      |  |               |         |   |              |  
|Cash and due from depository
    institutions                                                                                                                                               |  | $             | 25,209  |   |              | $
|Investment in federal funds                                                                                                                                                                 |  |               | 682     |   |              |  
|Investment securities available-for-sale,
    at fair value                                                                                                                                 |  |               | 25,522  |   |              |  
|Investment securities held-to-maturity,
    at amortized cost                                                                                                                               |  |               | 27,523  |   |              |  
|Loans held for sale                                                                                                                                                                         |  |               | 2,807   |   |              |  
|Loans receivable, net                                                                                                                                                                       |  |               | 423,527 |   |              |  
|Accrued income receivable                                                                                                                                                                   |  |               | 1,844   |   |              |  
|Foreclosed real estate and repossessed
    assets, net                                                                                                                                      |  |               | 356     |   |              |  
|Premises and equipment, net                                                                                                                                                                 |  |               | 9,522   |   |              |  
|Bank owned life insurance                                                                                                                                                                   |  |               | 9,781   |   |              |  
|Federal Home Loan Bank stock, at cost                                                                                                                                                       |  |               | 5,917   |   |              |  
|Deferred income taxes                                                                                                                                                                       |  |               | 5,487   |   |              |  
|Other assets                                                                                                                                                                                |  |               | 4,637   |   |              |  
|                                                                                                                                                                                            |  |               |         |   |              |  
|Total
    assets                                                                                                                                                                            |  | $             | 542,814 |   |              | $
|                                                                                                                                                                                            |  |               |         |   |              |  
|LIABILITIES AND STOCKHOLDERS'
    EQUITY                                                                                                                                                    |  |               |         |   |              |  
|Liabilities                                                                                                                                                                                 |  |               |         |   |              |  
|Deposits                                                                                                                                                                                    |  | $             | 403,408 |   |              | $
|Borrowed funds                                                                                                                                                                              |  |               | 61,354  |   |              |  
|Mortgagors' escrow accounts                                                                                                                                                                 |  |               | 2,181   |   |              |  
|Other liabilities                                                                                                                                                                           |  |               | 3,114   |   |              |  
|                                                                                                                                                                                            |  |               |         |   |              |  
|Total liabilities                                                                                                                                                                           |  |               | 470,057 |   |              |  
|                                                                                                                                                                                            |  |               |         |   |              |  
|Commitments and contingencies                                                                                                                                                               |  |               |         |   |              |  
|                                                                                                                                                                                            |  |               |         |   |              |  
|Stockholders' equity                                                                                                                                                                        |  |               |         |   |              |  
|Preferred stock, $.01 par value; 1,000,000
    shares authorized; no shares issued or outstanding                                                                                           |  |               | -       |   |              |  
|Common stock, $.01 par value; 25,000,000 shares authorized;
    7,002,366 shares issued; 7,002,208 shares outstanding at September 30, 2012 and 7,002,292 outstanding at December 31, 2011. |  |               | 70      |   |              |  
|Paid-in capital                                                                                                                                                                             |  |               | 58,910  |   |              |  
|Retained earnings                                                                                                                                                                           |  |               | 16,860  |   |              |  
|Unearned ESOP shares (391,479 shares at September 30,
    2012 and December 31, 2011)                                                                                                       |  |               | (3,442  | ) |              |  
|Unearned stock awards (997 shares at September 30, 2012
    and 1,395 shares at December 31, 2011)                                                                                          |  |               | (3      | ) |              |  
|Treasury stock, at cost (158 shares at September 30, 2012
    and 74 shares at December 31, 2011)                                                                                           |  |               | (1      | ) |              |  
|Accumulated other
    comprehensive income (loss)                                                                                                                                           |  |               | 363     |   |              |  
|                                                                                                                                                                                            |  |               |         |   |              |  
|Total stockholders'
    equity                                                                                                                                                              |  |               | 72,757  |   |              |  
|                                                                                                                                                                                            |  |               |         |   |              |  
|Total
    liabilities and stockholders' equity                                                                                                                                              |  | $             | 542,814 |   |              | $



See accompanying notes to unaudited
consolidated financial statements.



3











Consolidated
Statements of Income and Comprehensive Income

(In thousands, except per share
data)





|                                                                            |  | Three Months Ended |        |   | Nine Months Ended |  
|--------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                                            |  | September 30,      |        |   | September 30,     |  
|                                                                            |  | 2012               |        |   | 2011              |  
|                                                                            |  | (Unaudited)        |       
|Interest income                                                             |  |                    |        |   |                   |  
|Interest on loans                                                           |  | $                  | 5,491  |   |                   | $
|Interest and dividends on investments
    and deposits                      |  |                    | 397    |   |                   |  
|Total interest income                                                       |  |                    | 5,888  |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Interest expense                                                            |  |                    |        |   |                   |  
|Interest on deposits                                                        |  |                    | 887    |   |                   |  
|Interest on borrowed funds                                                  |  |                    | 370    |   |                   |  
|Total interest expense                                                      |  |                    | 1,257  |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Net interest income                                                         |  |                    | 4,631  |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Provision for
    loan losses                                               |  |                    | 10,312 |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Net interest
    income (loss) after provision for loan losses              |  |                    | (5,681 | ) |                   |  
|                                                                            |  |                    |        |   |                   |  
|Noninterest income                                                          |  |                    |        |   |                   |  
|Mortgage banking income                                                     |  |                    | 776    |   |                   |  
|Fees for other services                                                     |  |                    | 245    |   |                   |  
|Fees for services related to deposit accounts                               |  |                    | 210    |   |                   |  
|Income from bank owned life insurance                                       |  |                    | 75     |   |                   |  
|Income from investment advisory services, net                               |  |                    | 46     |   |                   |  
|Net gain on investments                                                     |  |                    | -      |   |                   |  
|Recovery from legal settlement                                              |  |                    | -      |   |                   |  
|Other than temporary impairment losses on investments                       |  |                    | -      |   |                   |  
|Other income                                                                |  |                    | 23     |   |                   |  
|Total noninterest income                                                    |  |                    | 1,375  |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Noninterest expense                                                         |  |                    |        |   |                   |  
|Compensation, taxes and benefits                                            |  |                    | 2,711  |   |                   |  
|Office occupancy                                                            |  |                    | 564    |   |                   |  
|Professional fees                                                           |  |                    | 576    |   |                   |  
|Loss on foreclosed real estate, net                                         |  |                    | 66     |   |                   |  
|Computer processing                                                         |  |                    | 179    |   |                   |  
|FDIC insurance premiums                                                     |  |                    | 185    |   |                   |  
|Advertising                                                                 |  |                    | 122    |   |                   |  
|Directors compensation                                                      |  |                    | 152    |   |                   |  
|Office supplies                                                             |  |                    | 63     |   |                   |  
|Public company expenses                                                     |  |                    | 23     |   |                   |  
|Deposit related charge                                                      |  |                    | -      |   |                   |  
|Other expenses                                                              |  |                    | 452    |   |                   |  
|Total noninterest expense                                                   |  |                    | 5,093  |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Income (loss) before provision for
    income taxes                         |  |                    | (9,399 | ) |                   |  
|                                                                            |  |                    |        |   |                   |  
|Provision (benefit)
    for income taxes                                    |  |                    | (3,238 | ) |                   |  
|                                                                            |  |                    |        |   |                   |  
|Net income (loss)                                                           |  | $                  | (6,161 | ) |                   | $
|Other Comprehensive income (loss)                                           |  |                    |        |   |                   |  
|Changes in unrealized gain (loss) on securities available-for-sale,
    net |  |                    | 157    |   |                   |  
|Total other
    comprehensive income                                        |  | $                  | 157    |   |                   | $
|Comprehensive
    income (loss)                                             |  | $                  | (6,004 | ) |                   | $
|Earnings
    (loss) per common share - basic and diluted                    |  | $                  | (0.93  | ) |                   | $





See accompanying notes to unaudited
consolidated financial statements.



4











Consolidated
Statements of Changes in Stockholder’s Equity

Nine months ended September 30,
2012



(Unaudited,
in thousands, except share data)

|                                                 |  | Common |    |  | Paid-in |   |        | Retained |  |   | UnearnedESOP |   |  | UnearnedStock |        |   | Treasury |   |     | AccumulatedOtherComprehensive |  |   |       |  
|------------------------------------------------ |  | ------ | -- |  | ------- | - | ------ | -------- |  | - | ------------ | - |  | ------------- | ------ | - | -------- | - | --- | ----------------------------- |  | - | ----- | -
|                                                 |  | Stock  |    |  | Capital |   |        | Earnings |  |   | Shares       |   |  | Awards        |        |   | Stock    |   |     | Income (Loss)                 |  |   | Total |  
|                                                 |  |        |    |  |         |   |        |          |  |   |              |   |  |               |        |   |          |   |     |                               |  |   |       |  
|Balance
    at December 31, 2011                 |  | $      | 70 |  |         | $ | 58,908 |          |  | $ | 27,014       |   |  | $             | (3,442 | ) |          | $ | (14 | )                             |  | $ | (1    | )
|Dividends
    declared                           |  |        |    |  |         |   |        |          |  |   |              |   |  |               |        |   |          |   |     |                               |  |   |       |  
|($0.09 per common share)                         |  |        | -  |  |         |   | -      |          |  |   | (599         | ) |  |               | -      |   |          |   | -   |                               |  |   | -     |  
|Stock based
    compensation                     |  |        |    |  |         |   |        |          |  |   |              |   |  |               |        |   |          |   |     |                               |  |   |       |  
|(199 shares vested and 199
    shares forfeited) |  |        | -  |  |         |   | -      |          |  |   | (3           | ) |  |               | -      |   |          |   | 11  |                               |  |   | -     |  
|Stock based
    compensation options             |  |        | -  |  |         |   | 2      |          |  |   | -            |   |  |               | -      |   |          |   | -   |                               |  |   | -     |  
|Treasury
    stock acquired                      |  |        |    |  |         |   |        |          |  |   |              |   |  |               |        |   |          |   |     |                               |  |   |       |  
|(84 shares)                                      |  |        | -  |  |         |   | -      |          |  |   | -            |   |  |               | -      |   |          |   | -   |                               |  |   | -     |  
|Comprehensive
    income (loss)                  |  |        | -  |  |         |   | -      |          |  |   | (9,552       | ) |  |               | -      |   |          |   | -   |                               |  |   | -     |  
|                                                 |  |        |    |  |         |   |        |          |  |   |              |   |  |               |        |   |          |   |     |                               |  |   |       |  
|Balance
    at September 30, 2012                |  | $      | 70 |  |         | $ | 58,910 |          |  | $ | 16,860       |   |  | $             | (3,442 | ) |          |   | (3  | )                             |  | $ | (1    | )





See accompanying notes to unaudited
consolidated financial statements.



5











Consolidated
Statements of Cash Flows(In thousands)

|                                                                                                |  | Nine Months Ended |        
|----------------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                                |  | September 30,     |        
|                                                                                                |  | 2012              |        
|                                                                                                |  | (Unaudited)       |        
|Cash flows from operating activities                                                            |  |                   |        
|Net (loss) income                                                                               |  | $                 | (9,552 
|Adjustments to reconcile net income (loss)
    to cash provided (used) by operating activities: |  |                   |        
|Provision for loan losses                                                                       |  |                   | 17,005 
|Depreciation and amortization expense                                                           |  |                   | 532    
|Net loss on foreclosed assets                                                                   |  |                   | 69     
|Gain on sale of loans                                                                           |  |                   | (1,421 
|Loans originated for sale                                                                       |  |                   | (64,789
|Proceeds from sale of loans held for
    sale                                                   |  |                   | 66,395 
|Net amortization from investments                                                               |  |                   | 270    
|Amortization of intangible assets                                                               |  |                   | 20     
|Provision for deferred taxes                                                                    |  |                   | (3,050 
|Net gain on investments                                                                         |  |                   | -      
|Stock-based compensation                                                                        |  |                   | 184    
|Net change in:                                                                                  |  |                   |        
|Accrued income receivable                                                                       |  |                   | 88     
|Deferred loan fees                                                                              |  |                   | (92    
|Cash surrender value of life insurance                                                          |  |                   | (226   
|Other assets                                                                                    |  |                   | (1,504 
|Other liabilities                                                                               |  |                   | (504   
|Net
    cash provided by operating activities                                                   |  |                   | 3,425  
|Cash flows from investing
    activities                                                        |  |                   |        
|Proceeds from maturities and repayments
    of available-for-sale securities                    |  |                   | 5,738  
|Proceeds from sale of available-for-sale
    securities                                         |  |                   | 300    
|Proceeds from maturities of held-to-maturity
    securities                                     |  |                   | 3,178  
|Redemption of Federal Home Loan Bank
    stock                                                  |  |                   | 335    
|Purchase of available-for-sale securities                                                       |  |                   | (4,216 
|Purchase of held-to-maturity securities                                                         |  |                   | (7,386 
|Loan originations net of principal payments                                                     |  |                   | 26,169 
|Purchase of premises and equipment                                                              |  |                   | (407   
|Proceeds from the
    sale of foreclosed assets                                                 |  |                   | 804    
|Net
    cash provided (used) by investing activities                                            |  |                   | 24,515 
|Cash flows from financing
    activities                                                        |  |                   |        
|Net change in time deposits                                                                     |  |                   | (22,439
|Net change in other deposit accounts                                                            |  |                   | 14,960 
|Advances in borrowed funds                                                                      |  |                   | 8,509  
|Repayment of borrowed funds                                                                     |  |                   | (17,972
|Net change in mortgagors' escrow accounts                                                       |  |                   | (2,573 
|Change in short term borrowings                                                                 |  |                   | -      
|Proceeds from common stock offering,
    net of offering costs                                  |  |                   | -      
|Purchase of shares by ESOP pursuant to
    reorganization                                       |  |                   | -      
|Forfeited restricted shares                                                                     |  |                   | (3     
|Common stock repurchased                                                                        |  |                   | (1     
|Cash dividends to
    common stockholders                                                       |  |                   | (599   
|Net
    cash (used) provided by financing activities                                            |  |                   | (20,118
|Net change in cash and cash equivalents                                                         |  |                   | 7,822  
|Cash and cash equivalents
    at beginning of period                                            |  |                   | 18,069 
|Cash
    and cash equivalents at end of period                                                  |  | $                 | 25,891 
|Non-cash investing activities:                                                                  |  |                   |        
|Transfer of loans to foreclosed assets                                                          |  | $                 | 356    
|Cash paid during the period for:                                                                |  |                   |        
|Interest                                                                                        |  | $                 | 4,266  
|Income taxes                                                                                    |  |                   | 198    



See accompanying notes to unaudited
consolidated financial statements.



6







Notes to
Unaudited Consolidated Financial Statements



NOTE 1 –
NATURE OF OPERATIONS



Effective June 29, 2011, Naugatuck
Valley Financial Corporation (the “Company”) completed its public stock offering in connection with the conversion
of Naugatuck Valley Mutual Holding Company (the “MHC”) from the mutual holding company to the stock holding company
form of organization (the “Conversion”). As a result of the Conversion, the Company succeeded Naugatuck Valley Financial
Corporation, a Federal corporation (the “Federal Corporation”), as the holding company for Naugatuck Valley Savings
and Loan (the “Bank”) and the MHC ceased to exist. A total of 4,173,008 shares of Company common stock were sold in
a subscription and community offering at $8.00 per share, including 250,380 shares purchased by the Naugatuck Valley Savings and
Loan Employee Stock Ownership Plan (the “ESOP”). Additionally, shares totaling 2,829,358 were issued to the stockholders
of the Federal Corporation (other than the MHC) in exchange for their shares of Federal Corporation common stock at an exchange
ratio of 0.9978 share of Company common stock for each share of Federal Corporation common stock. Shares outstanding after the
stock offering and the exchange totaled 7,002,366. Net proceeds from the reorganization and stock offering totaled $31.3 million,
after deducting offering costs of $2.1 million.



Originally organized in 1922, the
Bank is a federally chartered 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 Naugatuck Valley Mortgage
Servicing Corporation, which qualifies and operates as a Connecticut passive investment company pursuant to legislation.



NOTE 2 -
BASIS OF PRESENTATION



The accompanying consolidated interim
financial statements are unaudited and include the accounts of the Company, the Bank, and the Bank’s wholly owned subsidiary,
Naugatuck Valley Mortgage Servicing Corporation. The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for interim financial information and with
the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q. Accordingly, they do not include all the
information and footnotes required by GAAP for complete financial statements. All significant intercompany accounts and transactions
have been eliminated in consolidation. These consolidated financial statements reflect, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and
the results of its operations and its cash flows at the dates and for the periods presented.



In preparing the consolidated 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 statement of condition, and income and expenses for the interim 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 allowance for losses on loans, the valuation of real estate acquired in connection with foreclosure or in satisfaction
of loans, deferred income taxes and the valuation of certain investment securities. While management uses available information
to recognize losses and properly value these assets, future adjustments may be necessary based on changes in economic conditions
both in Connecticut and nationally.



Management has evaluated subsequent
events for potential recognition or disclosure in the financial statements. No subsequent events were identified that would have
required a change to the financial statements or disclosure in the notes to the financial statements.



Operating results for the nine months
ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.



7







These consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K/A for the year ended December 31, 2011.



Certain reclassifications have been
made to consolidated financial statements to conform to the September 30, 2012 consolidated financial statement presentation.
These reclassifications only changed the reporting categories and did not affect the Company’s results of operations or
financial position.



NOTE 3 - CRITICAL ACCOUNTING
POLICIES



The Company considers 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. The accounting policies related to loans and the allowance
for loan losses are presented below. For a summary of all other significant accounting policies, please refer to Note 4, “Summary
of Significant Accounting Policies”, contained in the Company’s Annual Report on Form 10-K/A for the year ended December
31, 2011.



Allowance for Loan Losses.Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Although the Company
believes that it uses 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.
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 collectability of the loan portfolio.



The Company engages an independent
review of its commercial loan portfolio on a quarterly basis and considers adjustments to its loan ratings based upon this review.
In addition, the Company’s regulatory authorities, as an integral part of their examination process, periodically review
the Company’s allowance for loan losses and may require the Company to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their examination.



Impaired Loans-Impaired
loans consist of non-accrual loans and troubled debt restructurings (“TDRs”) in accordance with applicable authoritative
accounting guidance. With the exception of loans that were restructured and still accruing interest, a loan is considered impaired
when, based on current information and events, it is probable that the Company will be unable to collect all contractual principal
and interest due according to the terms of the loan agreement. Loans deemed to be impaired are classified as non-accrual.



Impairment is measured by estimating
the value of the loan based on the present value of expected future cash flows discounted at the loan’s initial effective
interest rate or the fair value of the underlying collateral less costs to sell, if repayment of the loan is considered collateral-dependent.
All impaired loans are included in non-performing assets.



Non-accrual loans.Loans
are automatically placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are
also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured.
When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only
to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan
is less than 90 days delinquent.



Troubled
Debt Restructurings. TDRs are loans for which the original contractual terms of the
loans have been modified and both of the following conditions exist: (i) the restructuring constitutes a concession (including
reduction of interest rates or extension of maturity dates) and (ii) the borrower is experiencing financial difficulties. Loans
are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments
to be received. The Company’s TDRs are determined on a case-by-case basis in connection with ongoing loan collection processes.



The Company does not accrue interest
on any TDRs unless it believes collection of all principal and interest under the modified terms is reasonably assured. Generally,
six consecutive months of payment performance by the borrower under the restructured terms is required before a TDR is returned
to accrual status assuming the loan is restructured at market rates. However, the period could vary depending upon the individual
facts and circumstances of the loan.



8







For a TDR to begin accruing interest,
the borrower must demonstrate both some level of performance and the capacity to perform under the modified terms. A history of
timely payments and adherence to financial covenants generally serve as sufficient evidence of the borrower’s performance.
An evaluation of the borrower’s current creditworthiness is used to assess whether the borrower has the capacity to repay
the loan under the modified terms. This evaluation includes an estimate of expected cash flows, evidence of strong financial position,
and estimates of the value of collateral, if applicable.



NOTE 4 — Accounting Standards
Updates



Recently Adopted Accounting
Guidance



Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”):In April 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the wording used
to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.
The guidance does not extend the use of fair value accounting, but clarifies the wording on how it should be applied to be consistent
with IFRS and expands certain disclosure requirements relating to Level 3 fair value measurements. For many of the requirements,
the FASB does not intend for the amendments in this update to result in a change in application from current guidance. This guidance
is to be applied prospectively for interim and annual periods beginning after December 15, 2011. Since the guidance only relates
to disclosure, the adoption of this guidance did not impact the Company’s financial condition, results of operations, or
liquidity.



Statement of Comprehensive Income:In April 2011, the FASB issued accounting guidance requiring companies to include a statement of comprehensive income as part
of its interim and annual financial statements. The new guidance gives companies the option to present net income and comprehensive
income either in one continuous statement or in two separate, but consecutive statements. This approach represents a change from
current GAAP, which allows companies to report Other Comprehensive Income (“OCI”) and its components in the statement
of shareholder’s equity. The guidance also allows companies to present OCI either net of tax with details in the notes or
shown gross of tax (with tax effects shown parenthetically). This guidance is effective for fiscal years beginning after December
15, 2011, but early adoption is permitted. Since the guidance only relates to disclosure, the adoption of this guidance did not
impact the Company’s financial condition, results of operations, or liquidity.



Recently Issued Accounting
Guidance



There were no additional accounting
standards updates applicable to the Company issued by FASB during the third quarter ended September 30, 2012. Other accounting
standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material
impact on the Company’s financial position, results of operations or cash flows.



9







NOTE 5 – INVESTMENT SECURITIES



At September 30, 2012, the composition
of the investment portfolio was:



|                                                              |  | Amortized  |        |  | Gross Unrealized |   |     | Fair   | 
|------------------------------------------------------------- |  | ---------- | ------ |  | ---------------- | - | --- | ------ | 
|(In thousands)                                                |  | Cost Basis |        |  | Gains            |   |     | Losses | 
|Available-for-sale securities:                                |  |            |        |  |                  |   |     |        | 
|U.S. government and agency
    obligations                    |  | $          | 1,008  |  |                  | $ | 33  |        | 
|Corporate bonds                                               |  |            | -      |  |                  |   | -   |        | 
|Government guaranteed mortgage-backed
    securities          |  |            | 14,693 |  |                  |   | 802 |        | 
|Government guaranteed collateralized
    mortgage obligations |  |            | 1,152  |  |                  |   | 14  |        | 
|Private label collateralized
    mortgage obligations         |  |            | 327    |  |                  |   | -   |        | 
|Total debt securities                                         |  |            | 17,180 |  |                  |   | 849 |        | 
|Auction-rate trust
    preferred securities                   |  |            | 7,700  |  |                  |   | -   |        | 
|                                                              |  |            |        |  |                  |   |     |        | 
|Total
    available-for-sale securities                       |  | $          | 24,880 |  |                  | $ | 849 |        | 



|                                                     |  | Amortized  |        |  | Gross Unrealized |   |     | Fair   | 
|---------------------------------------------------- |  | ---------- | ------ |  | ---------------- | - | --- | ------ | 
|(In thousands)                                       |  | Cost Basis |        |  | Gains            |   |     | Losses | 
|Held-to-maturity securities:                         |  |            |        |  |                  |   |     |        | 
|Government
    guaranteed mortgage-backed securities |  | $          | 27,523 |  |                  | $ | 704 |        | 
|                                                     |  |            |        |  |                  |   |     |        | 
|Total
    held-to-maturity securities                |  | $          | 27,523 |  |                  | $ | 704 |        | 



At December 31, 2011, the composition
of the investment portfolio was:



|                                                              |  | Amortized  |        |  | Gross Unrealized |   |     | Fair   | 
|------------------------------------------------------------- |  | ---------- | ------ |  | ---------------- | - | --- | ------ | 
|(In thousands)                                                |  | Cost Basis |        |  | Gains            |   |     | Losses | 
|Available-for-sale securities:                                |  |            |        |  |                  |   |     |        | 
|U.S. government and agency
    obligations                    |  | $          | 1,014  |  |                  | $ | 54  |        | 
|Government guaranteed mortgage-backed
    securities          |  |            | 13,919 |  |                  |   | 844 |        | 
|Government guaranteed collateralized
    mortgage obligations |  |            | 1,711  |  |                  |   | 10  |        | 
|Private label collateralized
    mortgage obligations         |  |            | 352    |  |                  |   | -   |        | 
|Total debt securities                                         |  |            | 16,996 |  |                  |   | 908 |        | 
|Auction-rate trust
    preferred securities                   |  |            | 8,000  |  |                  |   | -   |        | 
|                                                              |  |            |        |  |                  |   |     |        | 
|Total
    available-for-sale securities                       |  | $          | 24,996 |  |                  | $ | 908 |        | 



|                                                     |  | Amortized  |        |  | Gross Unrealized |   |     | Fair   | 
|---------------------------------------------------- |  | ---------- | ------ |  | ---------------- | - | --- | ------ | 
|(In thousands)                                       |  | Cost Basis |        |  | Gains            |   |     | Losses | 
|Held-to-maturity securities:                         |  |            |        |  |                  |   |     |        | 
|Government
    guaranteed mortgage-backed securities |  | $          | 25,292 |  |                  | $ | 387 |        | 
|                                                     |  |            |        |  |                  |   |     |        | 
|Total
    held-to-maturity securities                |  | $          | 25,292 |  |                  | $ | 387 |        | 



The Company has identified certain
investment securities in which the fair value of the security is less than the cost of the security. This can be from an increase
in interest rates since the time of purchase or from deterioration in the credit quality of the issuer. All investment securities
which have unrealized losses undergo an internal impairment review.



Management’s review for
impairment generally entails identification and analysis of individual investments that have fair values less than amortized
cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected
recovery period; discussion of evidential matter, including an evaluation of factors or triggers that could cause individual
investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary
impairment; and documentation of the results of these analyses. As a result of the reviews, management has determined that
there are no other investment securities which have deteriorated in credit quality subsequent to purchase, and believes that
these unrealized losses are temporary and are the result of changes in market interest rates and market conditions over the
past several years.



10









The following is a summary of the
fair values and related unrealized losses aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position at September 30, 2012, and December 31, 2011. There have been no securities in a continuous unrealized loss position for less than 12 months at September
30, 2012





|                                                      |  | Securities in Continuous Unrealized         |  
|----------------------------------------------------- |  | ------------------------------------------- | -
|                                                      |  | Loss Position 12 or More Consecutive Months |  
|                                                      |  | Number of                                   |  
|(Dollars in thousands)                                |  | Securities                                  |  
|                                                      |  |                                             |  
|Private label collateralized
    mortgage obligations |  |                                             | 1
|Auction-rate trust
    preferred securities           |  |                                             | 2
|                                                      |  |                                             |  
|Total
    securities in unrealized loss position      |  |                                             | 3



|                                                     |  | At December 31, 2011                |  
|---------------------------------------------------- |  | ----------------------------------- | -
|                                                     |  | Securities in Continuous Unrealized |  
|                                                     |  | Loss Position Less Than 12 Months   |  
|                                                     |  | Number of                           |  
|(Dollars in thousands)                               |  | Securities                          |  
|                                                     |  |                                     |  
|Government
    guaranteed mortgage backed securities |  |                                     | 2
|                                                     |  |                                     |  
|Total
    securities in unrealized loss position     |  |                                     | 2



|                                                      |  | Securities in Continuous Unrealized         |  
|----------------------------------------------------- |  | ------------------------------------------- | -
|                                                      |  | Loss Position 12 or More Consecutive Months |  
|                                                      |  | Number of                                   |  
|(Dollars in thousands)                                |  | Securities                                  |  
|                                                      |  |                                             |  
|Private label collateralized
    mortgage obligations |  |                                             | 1
|Auction-rate trust
    preferred securities           |  |                                             | 2
|                                                      |  |                                             |  
|Total
    securities in unrealized loss position      |  |                                             | 3



11







NOTE 6 – LOANS RECEIVABLE



A summary of loans receivable at
September 30, 2012 and December 31, 2011 is as follows:



|                                        |  | September 30, |         |   | December 31, |  
|--------------------------------------- |  | ------------- | ------- | - | ------------ | -
|(Dollars in thousands)                  |  | 2012          |         |   | 2011         |  
|                                        |  |               |         |   |              |  
|Real estate loans:                      |  |               |         |   |              |  
|One-to four-family                      |  | $             | 210,311 |   |              | $
|Commercial real estate and multi-family |  |               | 141,521 |   |              |  
|Construction                            |  |               | 24,388  |   |              |  
|Total real estate
    loans             |  |               | 376,220 |   |              |  
|                                        |  |               |         |   |              |  
|Commercial business loans               |  |               | 34,279  |   |              |  
|Consumer loans:                         |  |               |         |   |              |  
|Home equity                             |  |               | 29,720  |   |              |  
|Savings accounts                        |  |               | 592     |   |              |  
|Automobile                              |  |               | 475     |   |              |  
|Personal                                |  |               | 210     |   |              |  
|Total consumer loans                    |  |               | 30,997  |   |              |  
|Totals loans                            |  |               | 441,496 |   |              |  
|                                        |  |               |         |   |              |  
|Less:                                   |  |               |         |   |              |  
|Allowance for loan losses               |  |               | 15,801  |   |              |  
|Undisbursed construction loans          |  |               | 1,927   |   |              |  
|Deferred loan origination
    fees, net |  |               | 241     |   |              |  
|Loans receivable,
    net               |  | $             | 423,527 |   |              | $
|                                        |  |               |         |   |              |  
|Weighted average yield                  |  |               | 5.13    | % |              |  



Credit
Quality of Financing Receivables and the Allowance for Loan Losses



Management segregates the loan portfolio
into portfolio segments, which are defined as the levels at which the Company develops and documents a systematic method for determining
its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present
in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.



The Company’s loan portfolio
is segregated into the following portfolio segments:



One-to Four-Family
Owner Occupied Loans. This portfolio segment consists of the origination of first mortgage loans secured by one-to four-family
owner occupied residential properties and residential construction loans to individuals to finance the construction of residential
dwellings for personal use located in our market area. Although the Company has experienced an increase in foreclosures on its
owner occupied loan portfolio over the past year, foreclosures are still at relatively low levels and believe this is due mainly
to its conservative underwriting and lending policies which do not allow for risky loans such as “Option ARM,” “sub-prime”
or “Alt-A” loans.



Commercial Real Estate
and Multi-family Loans. This portfolio segment includes loans secured by commercial real estate, non-owner occupied one-to
four-family and multi-family dwellings for property owners and businesses in our market area. Loans secured by commercial real
estate generally have larger loan balances and more credit risk than owner occupied one-to four-family mortgage loans. The increased
risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the
impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty
of evaluating and monitoring these types of loans.



Construction and Land
Development Loans. This portfolio segment includes commercial construction loans for commercial development projects, including
condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing
properties and land loans, which are loans made with land as security. Construction and land development financing generally involves
greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends
largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated
cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate,
the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of
the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property
with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements
will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful
operation or sale of the properties, which may cause some borrowers to be unable to continue with debt service which exposes the
Company to greater risk of non-payment and loss. Additionally, economic factors such as the decline of property values may have
an adverse effect on the ability of the borrower to sell the property.



12







Commercial Business
Loans. This portfolio segment includes commercial business loans secured by real estate, assignments of corporate assets,
and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms
than other loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk
of default since their repayment generally depends on the successful operation of the borrower’s business.



Real Estate Secured
Loans. This portfolio segment includes home equity loans and home equity lines of credit secured by owner occupied one-to
four-family residential properties. Loans of this type are generally written at a maximum of 75% of the appraised value of the
property and require that the Company has a second lien position on the property. These loans are written at a higher interest
rate and a shorter term than mortgage loans. The Company has experienced a low level of foreclosure in this type of loan during
recent periods. These loans can be affected by economic conditions and the values of the underlying properties.



Consumer Loans.
This portfolio segment includes loans secured by passbook or certificate accounts, or automobiles, as well as unsecured personal
loans and overdraft lines of credit. This type of loan may entail greater risk than do residential mortgage loans, particularly
in the case of loans that are unsecured or secured by assets that depreciate rapidly.



Loans are generally carried at the
amount of unpaid principal, less the allowance for loan losses and adjusted for deferred loan fees, which are amortized over the
term of the loan using the interest method. Interest on loans is accrued based on the principal amounts outstanding. It is the
Company’s policy to discontinue the accrual of interest when a loan is specifically determined to be impaired or when the
principal or interest is delinquent for more than 90 days. When a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period interest income.



The allowance for loan losses is
established through a provision for loan losses. The Company maintains the allowance at a level believed, to the best of management’s
knowledge, adequate to cover all known and inherent losses in the loan portfolio that are both probable and reasonable to estimate
at each reporting date.



Management reviews the allowance
for loan losses on at least a quarterly basis in order to identify those inherent losses and to assess the overall collection
probability for the loan portfolio. The evaluation process by portfolio segment includes, among other things, an analysis of delinquency
trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the
volume of loan originations, the type, size and geographic concentration of the loans, the value of collateral securing the loan,
the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight,
local economic conditions and industry experience.



The establishment of the allowance
for loan losses is significantly affected by management’s judgment and uncertainties, and there is a likelihood that different
amounts would be reported under different conditions or assumptions. The Office of the Comptroller of the Currency (“OCC”),
as an integral part of its examination process, periodically reviews the allowance for loan losses and may require the Company
to make additional provisions for estimated loan losses based upon judgments different from those of management.



The allowance generally consists
of specific and general components. The specific component relates to loans that have been evaluated and determined to be impaired
under ASC 310-10-35. For such impaired loans, when the discounted cash flows (or collateral value or observable market price if
the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan, the Company will charge
the difference to loss or establish a specific allowance if the loss is not confirmed. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative factors. Additional allowances are placed on loans classified
as either doubtful, substandard or special mention. Although for analytical purposes, certain allowances are attributed to loans
that are impaired and general components are attributed to loans evaluated collectively. The allowance is available to cover all
charge offs that arise from the loan portfolio.



13







The Company will continue to monitor
and modify its allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan
losses will cover all of the inherent losses in the loan portfolio or that future adjustments to the allowance for loan losses
will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management
to determine the current level of the allowance for loan losses.



The following tables set forth the
balance of the allowance for loan losses at September 30, 2012 and December 31, 2011, by portfolio segment, disaggregated by impairment
methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. Also included
is a summary of transactions in the allowance for loan losses for the nine months ended September 30, 2012 and the year ended
December 31, 2011. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses
in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.





|                                                              |  | One-to Four-
    Family |         |   | Construction |   |        | Commercial
    Real Estate |  |   | Commercial |   |  | Consumer |        |   | Total |  
|------------------------------------------------------------- |  | ----------------------- | ------- | - | ------------ | - | ------ | -------------------------- |  | - | ---------- | - |  | -------- | ------ | - | ----- | -
|As of and for the Nine
    Months                             |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|Ended
    September 30, 2012                                  |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|(In
    thousands)                                            |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|Allowance for loan losses:                                    |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|Beginning
    balance                                         |  | $                       | 1,745   |   |              | $ | 1,327  |                            |  | $ | 3,745      |   |  | $        | 754    |   |       | $
|Provision for loan losses                                     |  |                         | 2233    |   |              |   | 6,070  |                            |  |   | 4,897      |   |  |          | 3,249  |   |       |  
|Charge-offs                                                   |  |                         | (571    | ) |              |   | (5,504 | )                          |  |   | (934       | ) |  |          | (2,260 | ) |       |  
|Recoveries                                                    |  |                         | 4       |   |              |   | -      |                            |  |   | -          |   |  |          | 6      |   |       |  
|Ending balance                                                |  | $                       | 3,411   |   |              | $ | 1,893  |                            |  | $ | 7,708      |   |  | $        | 1,749  |   |       | $
|Ending
    loan balance individually evaluated for impairment |  | $                       | 7,050   |   |              | $ | 15,146 |                            |  | $ | 13,382     |   |  | $        | 1,858  |   |       | $
|Ending
    loan balance collectively evaluated for impairment |  | $                       | 203,261 |   |              | $ | 9,242  |                            |  | $ | 128,139    |   |  | $        | 32,421 |   |       | $
|As
    of and for the Year                                    |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|Ended
    December 31, 2011                                   |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|(In
    thousands)                                            |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|Allowance for loan losses:                                    |  |                         |         |   |              |   |        |                            |  |   |            |   |  |          |        |   |       |  
|Beginning balance                                             |  | $                       | 1,585   |   |              | $ | 600    |                            |  | $ | 2,714      |   |  | $        | 884    |   |       | $
|Provision for loan losses                                     |  |                         | 377     |   |              |   | 1,449  |                            |  |   | 1,942      |   |  |          | 383    |   |       |  
|Charge-offs                                                   |  |                         | (217    | ) |              |   | (722   | )                          |  |   | (911       | ) |  |          | (516   | ) |       |  
|Recoveries                                                    |  |                         | -       |   |              |   | -      |                            |  |   | -          |   |  |          | 3      |   |       |  
|Ending balance                                                |  | $                       | 1,745   |   |              | $ | 1,327  |                            |  | $ | 3,745      |   |  | $        | 754    |   |       | $
|Ending
    loan balance individually evaluated for impairment |  | $                       | 2,721   |   |              | $ | 8,474  |                            |  | $ | 4,422      |   |  | $        | 3,585  |   |       | $
|Ending
    loan balance collectively evaluated for impairment |  | $                       | 215,172 |   |              | $ | 21,260 |                            |  | $ | 156,436    |   |  | $        | 33,060 |   |       | $



The Company’s policies provide
for the classification of loans and other assets into the following categories: pass (1 - 4), bankable with care (5), special
mention (6), substandard (7), doubtful (8) and loss (9). Consistent with regulatory guidelines, loans and other assets that are
considered to be of lesser quality are classified as substandard, doubtful, or loss assets. An asset is considered substandard
if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies
are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the
added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered
uncollectible and of such little value that their continuance as assets without establishment of a specific valuation allowance
or charge-off is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned
categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.



When assets are classified as special
mention, substandard or doubtful, the Company disaggregates these assets and allocates a portion of the related general loss allowances
to such assets as the Company deems prudent. Determinations as to the classification of assets and the amount of loss allowances
are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that
we establish additional loss allowances. The Company regularly reviews its asset portfolio to determine whether any assets require
classification in accordance with applicable regulations.



14







The following
tables are a summary of the loan portfolio quality indicators by loan class as of September 30, 2012 and December 31, 2011:



|Commercial Loans  - Credit Risk Profile by Internally Assigned Grade:
|---------------------------------------------------------------------
|                                                                     
|(In thousands)                                                       
|Grade:                                                               
|4                                                                    
|5                                                                    
|6                                                                    
|7                                                                    
|8                                                                    
|Total                                                                



|Consumer Loans - Credit Risk Profile by Internally Assigned Grade:
|------------------------------------------------------------------
|                                                                  
|(In thousands)                                                    
|                                                                  
|Grade:                                                            
|Pass                                                              
|Special Mention                                                   
|Substandard                                                       
|Doubtful                                                          
|Total                                                             



|Consumer Loans - Credit Risk Profile Based on Payment Activity:
|---------------------------------------------------------------
|                                                               
|(In thousands)                                                 
|Grade:                                                         
|Performing                                                     
|Nonperforming                                                  
|Total                                                          



When a loan is 15 days past due,
the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected
promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding
the borrower of the delinquency, and attempt to contact the borrower personally to determine the reason for the delinquency in
order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due
date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter.
By the 90th day of delinquency, the Company will send the borrower a final demand for payment and may recommend foreclosure. A
summary report of all loans 30 days or more past due is provided to the board of directors of the Company each month, and more
frequently to the Asset Quality Committee of the Board of Directors.



Loans are automatically placed on
non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual
status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed
on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received.
The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent.
Management works closely with the Asset Quality Committee of the Board of Directors in an effort to resolve nonperforming assets
in a manner most advantageous to the Company.



15







The following tables set forth certain
information with respect to our loan portfolio delinquencies by loan class and amount as of September 30, 2012 and December 31,
2011:



|                                            |  | Credit Quality Information |      
|------------------------------------------- |  | -------------------------- | -----
|                                            |  |                            |      
|                                            |  |                            |      
|                                            |  | 31-60 Days                 |      
|                                            |  | Past Due                   |      
|As
    of September 30, 2012                |  |                            |      
|(In
    thousands)                          |  |                            |      
|Real estate
    loans                       |  |                            |      
|One-to four-family                          |  | $                          | 794  
|Construction                                |  |                            | -    
|Commercial
    real estate and multi-family |  |                            | 842  
|Commercial
    business loans               |  |                            | 208  
|Consumer
    - other                        |  |                            | 163  
|Total                                       |  | $                          | 2,007
|                                            |  |                            |      
|As
    of December 31, 2011                 |  |                            |      
|(In
    thousands)                          |  |                            |      
|Real estate
    loans                       |  |                            |      
|One-to four-family                          |  | $                          | 1,379
|Construction                                |  |                            | 270  
|Commercial
    real estate and multi-family |  |                            | 654  
|Commercial
    business loans               |  |                            | 396  
|Consumer
    - other                        |  |                            | 467  
|Total                                       |  | $                          | 3,166



Nonperforming loans (defined as
nonaccrual loans and TDRs) totaled $25.2 million at September 30, 2012 compared to $24.7 million at December 31, 2011. The amount of income that was contractually
due but not recognized on nonperforming loans totaled $275,000 and $1.6 million for the quarter and nine months ended September
30, 2012, respectively, compared with $365,000 for the year ended December 31, 2011.



At September 30 2012, there were
no loans 90 or more days past due and still accruing interest. At September 30, 2012, the Company had 108 loans on non-accrual
status with foregone interest of approximately $1.6 million for the period since the loans were placed on non-accrual status.
Included in these loans were 62 loans which were not 90 days past due, but were placed on non-accrual status as a result of a
recent modification or the identification of a weakness on the loan.



The Company accounts for impaired
loans in accordance with GAAP. An impaired loan generally is one for which it is probable, based on current information, that
the lender will not collect all the amounts due under the contractual terms of the loan. Loans are individually evaluated for
impairment. When the Company classifies a problem asset as impaired, it makes a specific allowance for that portion of the asset
that is deemed uncollectible.



At September 30, 2012, the Company
had $26.0 million of loans which were considered to be impaired, with a valuation allowance of $1.3 million, compared to $19.4
million of such loans at December 31, 2011 with a valuation allowance of $1.3 million. The increase is primarily due to the classification
of the following as impaired during the period: three residential development loans, fourteen commercial real estate loans, ten
commercial loans secured by business assets, fifteen residential mortgage loans and four home equity loans. The increases were
partially offset by removing from impaired status: one residential mortgage loan, three home equity loans and nine commercial
business loans. Additionally, $1.1 million of specific allowances that were allowed under previous regulatory supervision were
charged off against the loan balances as required under current regulatory supervision.



16







The following tables are a summary
of impaired loans by class of loans as of September 30, 2012 and December 31, 2011:





|                                                     |  |                |        |  | Unpaid    |   |        |           |  |   | Average  |  |  | Interest   |       
|---------------------------------------------------- |  | -------------- | ------ |  | --------- | - | ------ | --------- |  | - | -------- |  |  | ---------- | ------
|                                                     |  | Carrying       |        |  | Principal |   |        | Related   |  |   | Carrying |  |  | Income     |       
|As of September
    30, 2012                         |  | Amount         |        |  | Balance   |   |        | Allowance |  |   | Amount   |  |  | Recognized |       
|                                                     |  | (In thousands) |       
|Impaired loans without
    valuation allowance:      |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Real estate loans                                    |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|One-to four-family                                   |  | $              | 4,874  |  |           | $ | 5,335  |           |  | $ | -        |  |  | $          | 4,925 
|Construction                                         |  |                | 7,515  |  |           |   | 14,355 |           |  |   | -        |  |  |            | 10,784
|Commercial real estate and multi-family              |  |                | 10,257 |  |           |   | 12,485 |           |  |   | -        |  |  |            | 11,379
|Commercial business loans                            |  |                | 1,453  |  |           |   | 1,764  |           |  |   | -        |  |  |            | 1,534 
|Consumer
    - other                                 |  |                | 306    |  |           |   | 390    |           |  |   | -        |  |  |            | 340   
|Total impaired
    loans without valuation allowance |  |                | 24,405 |  |           |   | 34,329 |           |  |   | -        |  |  |            | 28,962
|Impaired loans with
    valuation allowance:         |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Real estate loans                                    |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Construction                                         |  |                | 352    |  |           |   | 407    |           |  |   | -        |  |  |            | 394   
|Commercial
    real estate                           |  |                | 1,306  |  |           |   | 1,306  |           |  |   | 1,306    |  |  |            | 1,326 
|Total impaired
    loans with valuation allowance    |  |                | 1,658  |  |           |   | 1,713  |           |  |   | 1,306    |  |  |            | 1,720 
|Total impaired
    loans                             |  | $              | 26,063 |  |           | $ | 36,042 |           |  | $ | 1,306    |  |  | $          | 30,682



|                                                     |  |                |        |  | Unpaid    |   |        |           |  |   | Average  |  |  | Interest   |       
|---------------------------------------------------- |  | -------------- | ------ |  | --------- | - | ------ | --------- |  | - | -------- |  |  | ---------- | ------
|                                                     |  | Carrying       |        |  | Principal |   |        | Related   |  |   | Carrying |  |  | Income     |       
|As of December 31, 2011                              |  | Amount         |        |  | Balance   |   |        | Allowance |  |   | Amount   |  |  | Recognized |       
|                                                     |  | (In thousands) |       
|Impaired
    loans without valuation allowance:      |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Real estate
    loans                                |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|One-to four-family                                   |  | $              | 1,360  |  |           | $ | 1,375  |           |  | $ | -        |  |  | $          | 1,368 
|Construction                                         |  |                | 959    |  |           |   | 959    |           |  |   | -        |  |  |            | 944   
|Commercial
    real estate and multi-family          |  |                | 3,334  |  |           |   | 3,352  |           |  |   | -        |  |  |            | 3,370 
|Commercial
    business loans                        |  |                | 2,870  |  |           |   | 3,094  |           |  |   | -        |  |  |            | 239   
|Consumer
    - other                                 |  |                | 101    |  |           |   | 353    |           |  |   | -        |  |  |            | 206   
|Total
    impaired loans without valuation allowance |  |                | 8,624  |  |           |   | 9,133  |           |  |   | -        |  |  |            | 6,127 
|Impaired
    loans with valuation allowance:         |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Real estate
    loans                                |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|One-to four-family                                   |  |                | 1,361  |  |           |   | 1,361  |           |  |   | 109      |  |  |            | 1,362 
|Construction                                         |  |                | 7,515  |  |           |   | 8,980  |           |  |   | 510      |  |  |            | 4,173 
|Commercial
    real estate and multi-family          |  |                | 1,088  |  |           |   | 1,088  |           |  |   | 336      |  |  |            | 1,097 
|Commercial
    business loans                        |  |                | 715    |  |           |   | 715    |           |  |   | 46       |  |  |            | 662   
|Consumer
    – other                                 |  |                | 124    |  |           |   | 124    |           |  |   | 71       |  |  |            | 125   
|Total
    impaired loans with valuation allowance    |  |                | 10,803 |  |           |   | 12,268 |           |  |   | 1,072    |  |  |            | 7,419 
|Total
    impaired loans                             |  | $              | 19,427 |  |           | $ | 21,401 |           |  | $ | 1,072    |  |  | $          | 13,546



Loan modifications are generally
performed at the request of the individual borrower and may include reduction in interest rates, changes in payments, and maturity
date extensions. TDRs are loans for which the original contractual terms of the loans have been modified and both of the following
conditions exist: (i) the restructuring constitutes a concession (including reduction of interest rates or extension of maturity
dates) and (ii) the borrower is experiencing financial difficulties. Loans are not classified as TDRs when the modification is
short-term or results in only an insignificant delay or shortfall in the payments to be received. The Company’s loan modifications
are determined on a case-by-case basis in connection with ongoing loan collection processes.



17







The following table displays information
for impaired loans modified through a TDR at September 30, 2012 and December 31, 2011:



|                                                                                                               |  | As of         |       |  | As of        |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------- | ----- |  | ------------ | -
|                                                                                                               |  | September 30, |       |  | December 31, |  
|(In thousands)                                                                                                 |  | 2012          |       |  | 2011         |  
|                                                                                                               |  |               |       |  |              |  
|Aggregate recorded investment of impaired
    loans with terms modified through a troubled debt restructuring: |  |               |       |  |              |  
|Accruing interest                                                                                              |  | $             | 566   |  |              | $
|Nonaccrual                                                                                                     |  |               | 8,232 |  |              |  
|Total                                                                                                          |  | $             | 8,798 |  |              | $



The following
table presents a summary of loans that were restructured during the nine months ended September 30, 2012 and for the year ended
December 31, 2011:



|                                          |  | For the Nine Months Ended September 30, 2012 |   
|----------------------------------------- |  | -------------------------------------------- | --
|(Dollars in thousands)                    |  | Number of Loans                              |   
|                                          |  |                                              |   
|Real estate loans:                        |  |                                              |   
|One-to four-family                        |  |                                              | 6 
|Multi-family and commercial real estate   |  |                                              | 1 
|Commercial business
    loans             |  |                                              | 2 
|Consumer loans:                           |  |                                              |   
|Home equity                               |  |                                              | 3 
|Total TDRs restructured during the period |  |                                              | 12
|                                          |  |                                              |   
|TDRs, still accruing interest             |  |                                              | 4 
|TDRs, included in
    nonaccrual          |  |                                              | 8 
|Total                                     |  |                                              | 12



|                                              |  | For the Year Ended December 31, 2011 |   
|--------------------------------------------- |  | ------------------------------------ | --
|(Dollars in thousands)                        |  | Number of Loans                      |   
|                                              |  |                                      |   
|Real estate loans:                            |  |                                      |   
|One-to-four family                            |  |                                      | 2 
|Construction                                  |  |                                      | 1 
|Commercial real estate and multi-family       |  |                                      | 5 
|Commercial business
    loans                 |  |                                      | 3 
|Total TDRs restructured
    during the period |  |                                      | 11
|                                              |  |                                      |   
|TDRs, still accruing interest                 |  |                                      | - 
|TDRs, included in
    nonaccrual              |  |                                      | 11
|Total                                         |  |                                      | 11



The specific allowances for loan
losses on TDRs is determined by discounting the restructured cash flows at the original effective rate of the loan before modification
or is based on the underlying collateral value less costs to sell, if repayment of the loan is considered collateral-dependent.
If the resulting amount is less than the recorded book value, the Company either establishes a specific valuation allowance as
a component of the allowance for loan losses, or charges off the impaired balance if it determines that such amount is a confirmed
loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance
based on a loss migration analysis for each loan category for loans that are not individually evaluated for specific impairment.
All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment. During the nine months
ended September 30, 2012, the Company charged off $2.1 million of loans previously classified as TDRs, on which there were $743,000
of related specific allowances.



18







NOTE 7 - EARNINGS PER SHARE



Basic earnings per common share
is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per common share is computed in a manner similar to basic earnings per common share except
that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed
using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued
during the period. The Company's common stock equivalents are comprised of stock options and restricted stock awards. Anti-dilutive
shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the
periods presented. For the three and nine months ended September 30, 2012, anti-dilutive options excluded from the calculations
totaled 278,813 options (with an exercise price of $11.12) and 5,886 options (with an exercise price of $12.51). For the three
and nine months ended September 30, 2011, anti-dilutive options excluded from the calculations totaled 306,827 options (with an
exercise price of $11.12) and 7,482 options (with an exercise price of $12.51). Unallocated common shares held by the ESOP are
not included in the weighted-average number of common shares outstanding for purposes of calculating either basic or diluted net
income per common share.



|                                                                  |  | Three Months Ended |            |   | Nine Months Ended |  
|----------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | -
|                                                                  |  | September 30,      |            |   | September 30,     |  
|                                                                  |  | 2012               |            |   | 2011              |  
|                                                                  |  |                    |            |   |                   |  
|Net income (loss)                                                 |  | $                  | (6,161,000 | ) |                   | $
|                                                                  |  |                    |            |   |                   |  
|Weighted-average common shares outstanding:                       |  |                    |            |   |                   |  
|Basic                                                             |  |                    | 6,610,729  |   |                   |  
|Effect of dilutive
    stock options and restrictive stock awards |  |                    | -          |   |                   |  
|Diluted                                                           |  |                    | 6,610,729  |   |                   |  
|                                                                  |  |                    |            |   |                   |  
|Earnings (loss) per common share:                                 |  |                    |            |   |                   |  
|Basic                                                             |  | $                  | (0.93      | ) |                   | $
|Diluted                                                           |  | $                  | (0.93      | ) |                   | $



NOTE 8 - COMPREHENSIVE INCOME



Comprehensive income is net income
adjusted for any changes in equity from non-owner sources that are not recorded in the income statement (such as changes in the
net unrealized gain/loss on available-for-sale securities). The purpose of reporting comprehensive income is to provide a measure
of all changes in equity that result from recognized transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The Company’s sole source of other comprehensive income is the net unrealized gain
on its available-for-sale securities.



19









|                                                                            |  | Three Months Ended |        |   | Nine Months Ended |  
|--------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                                            |  | September 30,      |        |   | September 30,     |  
|                                                                            |  | 2012               |        |   | 2011              |  
|                                                                            |  | (In thousands)     |       
|                                                                            |  |                    |        |   |                   |  
|Net income (loss)                                                           |  | $                  | (6,161 | ) |                   | $
|Other comprehensive income:                                                 |  |                    |        |   |                   |  
|Unrealized gain (loss) on securities available-for-sale                     |  |                    | 201    |   |                   |  
|Reclassification adjustment for
    (gain) loss realized in net income      |  |                    | -      |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Other comprehensive income (loss) before tax effect                         |  |                    | 201    |   |                   |  
|Income tax effect related to items
    of other comprehensive income (loss) |  |                    | 44     |   |                   |  
|Other comprehensive income (loss) net of tax effect                         |  |                    | 157    |   |                   |  
|                                                                            |  |                    |        |   |                   |  
|Total comprehensive income (loss)                                           |  | $                  | (6,004 | ) |                   | $



The Company has not recognized deferred taxes related to unrealized
capital losses in other comprehensive income due to its current inability to use them.



NOTE 9 - EQUITY INCENTIVE PLAN



Under the Naugatuck Valley Financial Corporation 2005 Equity
Incentive Plan (the “Incentive Plan”), the Company may grant up to 371,794 stock options and 148,717 shares of restricted
stock to its employees, officers and directors for an aggregate amount of up to 520,511 shares of the Company’s common stock
for issuance upon the grant or exercise of awards. Both incentive stock options and non-statutory stock options may be granted
under the Incentive Plan.



The amounts and terms of the awards granted under the Incentive
Plan are summarized in the following table.



|                        |  | Grant date |      
|----------------------- |  | ---------- | -----
|                        |  | July 26,   |      
|                        |  | 2008       |      
|                        |  |            |      
|Option awards           |  |            |      
|Awarded                 |  |            | 997  
|Exercise price          |  | $          | 11.12
|Maximum term in years   |  |            | 10   
|Restricted stock awards |  |            |      
|Awarded                 |  |            | 997  



To date, stock option awards have been granted with an exercise
price equal to the higher of the market price of the Company’s stock at the date of grant or $11.12, which was the market
price of the Company’s stock at the date stock option awards were initially granted under the Incentive Plan. All granted
stock options and restricted stock awards vest at 20% per year beginning on the first anniversary of the date of grant.



Stock options and restricted stock awards are considered common
stock equivalents for the purpose of computing earnings per share on a diluted basis.



The Company records share-based compensation expense related
to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period
of such awards on a straight-line basis. The fair value of each restricted stock allocation, based on the market price at the
date of grant, is recorded to unearned stock awards. Compensation expenses related to unearned restricted shares are amortized
to compensation, taxes and benefits expense over the vesting period of the restricted stock awards. The fair value of each stock
option award is estimated on the date of grant using the Black-Scholes option pricing method as described below. The Company recorded
a share-based compensation benefit of $2,480 and expense of $669 for the three and nine months ended September 30, 2012, respectively,
due to forfeited options in September 2012, compared to $4,550 and $14,851 for the three and nine months ended September 30, 2011,
respectively, in connection with the stock option and restricted stock awards.



20







The fair value of each stock option award is estimated on the
date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends,
expected term and risk-free rate for each stock option award. In determining the expected term of the option awards, the Company
elected to follow the simplified method as permitted by the SEC Staff Accounting Bulletin 107. Under this method, the Company
has estimated the expected term of the options as being equal to the average of the vesting term plus the original contractual
term. The Company estimated its volatility using the historical volatility of other, similar companies during a period of time
equal to the expected life of the options. The risk-free rate for the periods within the contractual life of the options is based
upon the U.S. Treasury yield curve in effect at the time of grant. Assumptions used to determine the weighted-average fair value
of stock options granted were as follows:



|                                                         |  | July 26, |       |   | December 18, |   |       | March 20, |  |   | March 21, |  
|-------------------------------------------------------- |  | -------- | ----- | - | ------------ | - | ----- | --------- |  | - | --------- | -
|Grant date                                               |  | 2008     |       |   | 2007         |   |       | 2007      |  |   | 2006      |  
|                                                         |  |          |       |   |              |   |       |           |  |   |           |  
|Dividend yield                                           |  |          | 2.74  | % |              |   | 2.20  | %         |  |   | 1.60      | %
|Expected volatility                                      |  |          | 13.40 | % |              |   | 11.00 | %         |  |   | 10.49     | %
|Risk-free rate                                           |  |          | 3.56  | % |              |   | 3.63  | %         |  |   | 4.48      | %
|Expected life in years                                   |  |          | 6.5   |   |              |   | 6.5   |           |  |   | 6.5       |  
|                                                         |  |          |       |   |              |   |       |           |  |   |           |  
|Weighted average fair value of options at grant
    date |  | $        | 1.51  |   |              | $ | 1.18  |           |  | $ | 2.55      |  



NOTE 10 - DIVIDENDS



On July 25, 2012, the Company's Board of Directors declared
a cash dividend of $0.03 per outstanding common share, which was paid on September 4, 2012, to stockholders of record as of the
close of business on August 15, 2012.



NOTE 11 – FAIR VALUE



The Company uses fair value to record adjustments to certain
assets and liabilities and to prepare required disclosures. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best
determined using market quotes. However, in many instances, there are no quoted market prices available. In such instances, fair
values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying
these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or
liability.



The following is a summary of the carrying
value and estimated fair value of the Company’s significant financial instruments as of September 30, 2012 and December
31, 2011:



|                            |  | September 30, 2012 |         |  | December 31, 2011 |  
|--------------------------- |  | ------------------ | ------- |  | ----------------- | -
|                            |  | Carrying           |         |  | Estimated         |  
|(In thousands)              |  | Amount             |         |  | Fair Value        |  
|                            |  |                    |         |  |                   |  
|Financial Assets            |  |                    |         |  |                   |  
|Cash and cash equivalents   |  | $                  | 25,891  |  |                   | $
|Investment securities       |  |                    | 53,045  |  |                   |  
|Loans held for sale         |  |                    | 2,807   |  |                   |  
|Loans receivable, net       |  |                    | 423,527 |  |                   |  
|Accrued income receivable   |  |                    | 1,844   |  |                   |  
|Mortgage servicing rights   |  |                    | 877     |  |                   |  
|                            |  |                    |         |  |                   |  
|Financial Liabilities       |  |                    |         |  |                   |  
|Deposits                    |  |                    | 403,408 |  |                   |  
|Borrowed funds              |  |                    | 61,354  |  |                   |  
|Mortgagors' escrow accounts |  |                    | 2,181   |  |                   |  



21







Fair Value Hierarchy



Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Current
accounting guidance establishes a fair value hierarchy based on the transparency of inputs participants use to price an asset
or liability. The fair value hierarchy prioritizes these inputs into the following three levels:



| | · | Level
                                                                                                             1:Valuation
                                                                                                             is based upon unadjusted
                                                                                                             quoted prices in
                                                                                                             active markets for
                                                                                                             identical assets
                                                                                                             or liabilities that
                                                                                                             the reporting entity
                                                                                                             has the ability to
                                                                                                             access at the measurement
                                                                                                             date.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Level
                                                                                                             2: Fair value
                                                                                                             is calculated using
                                                                                                             inputs other than
                                                                                                             quoted market prices
                                                                                                             that are directly
                                                                                                             or indirectly observable
                                                                                                             for the asset or
                                                                                                             liability. The valuation
                                                                                                             may rely on quoted
                                                                                                             prices for similar
                                                                                                             assets or liabilities
                                                                                                             in active markets,
                                                                                                             quoted prices for
                                                                                                             identical or similar
                                                                                                             assets or liabilities
                                                                                                             in inactive markets,
                                                                                                             inputs other than
                                                                                                             quoted prices that
                                                                                                             are observable for
                                                                                                             the asset or liability
                                                                                                             (such as interest
                                                                                                             rates, volatilities,
                                                                                                             prepayment speeds,
                                                                                                             credit ratings, etc.)
                                                                                                             or inputs that are
                                                                                                             derived principally
                                                                                                             or corroborated by
                                                                                                             market data by correlation
                                                                                                             or other means.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Level
                                                                                                             3: Inputs for
                                                                                                             determining the fair
                                                                                                             value of the respective
                                                                                                             assets or liabilities
                                                                                                             are not observable.
                                                                                                             Level 3 valuations
                                                                                                             are reliant upon
                                                                                                             pricing models and
                                                                                                             techniques that require
                                                                                                             significant management
                                                                                                             judgment or estimation.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Categorization within the valuation hierarchy is based upon
the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used
by the Company is presented below:



Cash and cash equivalents- The carrying amount
of cash, due from banks, and interest-bearing deposits is used to approximate fair value, given the short timeframe to maturity
and as such assets do not present unanticipated credit concerns.



Investment Securities- When quoted prices are available
in an active market, the Company classifies securities within Level 1 of the valuation hierarchy. If quoted market prices are
not available, the Company employs an independent pricing service who utilizes matrix pricing to calculate fair value. Such fair
value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels,
trade execution data, market consensus prepayments speeds, credit information, and the respective terms and conditions for debt
instruments. Level 2 securities include CMOs, mortgage backed securities and corporate bonds issued by GSEs.



When a market is illiquid or there is a lack of transparency
around the inputs to valuation, the respective securities are classified as Level 3 and reliance is placed upon internally developed
models and management judgment and evaluation for valuation. Auction-rate trust preferred securities (“ARPs”) are
currently classified as Level 3.



Management uses an internally developed model to value ARPs.
The valuation model is based on a discounted cash flow using the expected value of the collateral preferred shares, either at
call dates or the maturity date of the trust, the credit rating of the issuer of each of the ARPs, the expected yield during the
holding period and current rates for U.S. Treasury securities matching the expected remaining term of the trust. The expected
value of the collateral preferred shares (either when called or upon maturity of the trust) is assumed to range between current
market prices and par. Discount rates are implied from observable market inputs. The resulting discounted cash flows for each
of the ARPs indicated little to no impairment in the fair value of the securities. On a quarterly basis, management reviews the
trust preferred securities pricing generated from our internal model.



Loans Receivable- Loans held for sale are accounted
for at the lower of cost or market. The fair value of loans held for sale are based on quoted market prices of similar or identical
loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics. The Company
employs an independent third party to provide fair value estimates for loans held for investment. Such estimates are calculated
using discounted cash flow analysis, using market interest rates for comparable loans. The associated cash flows are adjusted
for credit and other potential losses. Fair value for impaired loans is estimated using the net present value of the expected
cash flows or the fair value of the underlying collateral if repayment is collateral dependent.



22







Accrued income receivable – The carrying amounts
reported in the statement of financial condition approximate these assets’ fair value.



Mortgage-servicing rights – The Company sells
residential mortgage loans with servicing rights retained. At the time of the sale, the Company 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 Company has engaged an independent third party to perform
the servicing rights analysis on a quarterly basis. The cost basis of loan servicing rights is amortized on a level yield basis
over the period of estimated net servicing revenue and such amortization is included in the consolidated statement of income as
a reduction of loan servicing fee income. Servicing rights are evaluated for impairment by comparing their aggregate carrying
amount to their fair value. The fair value of loan servicing rights is estimated using a present value cash flow model. The most
important assumptions used in the valuation model are the anticipated rate of loan prepayments and discount rates. All assumptions
are based on standards used by market participants. Impairment is recognized as an adjustment to loan
and servicing income.



Foreclosed Property and Repossessed Assets - Foreclosed
property and repossessed assets are recorded as held for sale initially at the lower of the loan balance or fair value of the
collateral less estimated selling costs. For the nine months ended September 30, 2012 and 2011, foreclosed properties and repossessed
assets with a carrying value of $356,000 and $732,000, respectively, were transferred to foreclosed property and repossessed assets
from loans. Prior to the transfer, the assets whose fair value less costs to sell was less than their carrying value, were written
down to fair value through a charge to the allowance for loan losses. Subsequent to foreclosure, valuations are updated periodically,
and the assets may be marked down further, reflecting a new cost basis. There were subsequent valuation adjustments to five foreclosed
properties in the amount of $94,000 for the nine months ended September 30, 2012. There were no subsequent valuation adjustments
to foreclosed properties and repossessed assets for the nine months ended September 30, 2011. Collateral dependent impaired loans
and foreclosed real estate and repossessed assets are considered Level 3, as the fair value is based on an appraisal and the adjustment
to comparable sales made by the appraiser are unobservable. Non collateral dependent loans are measured using a discounted cash
flow technique and are also considered Level 3, as the inputs are the Bank’s own assumptions.



Deposit Liabilities - The fair values disclosed for
demand deposits are by definition equal to the amount payable on demand at the reporting date which is also their carrying value.
The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation
that applies market interest rates on comparable instruments to a schedule of aggregated expensed monthly maturities on time deposits.



Borrowed Funds -Carrying value
is as an estimate of fair value for securities sold under agreements to repurchase and other short term debt that matures within
90 days. The fair values of other borrowings are estimated using discounted cash flow analyses based on current market rates adjusted,
as appropriate, for associated credit and option risks.



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



Under certain circumstances we make adjustment to fair value
for our assets although they are not measured at fair value on an ongoing basis. These include assets that are measured at the
lower of cost or market that were recognized at fair value (i.e., below cost) at the end of the period, as well as assets that
are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when
there is evidence of impairment).



Assets and liabilities measured at fair value on a recurring
and non-recurring basis at September 30, 2012 and December 31, 2011 are summarized below:



23







|                                                              |  | September 30, 2012 |  
|------------------------------------------------------------- |  | ------------------ | -
|                                                              |  | Carrying Value     |  
|(In thousands)                                                |  | Level 1            |  
|Assets measured at fair value on a recurring
    basis:       |  |                    |  
|Available-for-sale investment securities:                     |  |                    |  
|U.S. Government and agency obligations                        |  | $                  | -
|Government guaranteed mortgage-backed securities              |  |                    | -
|Government guaranteed collateralized mortgage
    obligations |  |                    | -
|Private label collateralized mortgage obligations             |  |                    | -
|Auction-rate trust preferred securities                       |  |                    | -
|Residential loans held for sale                               |  |                    | -
|Assets measured at fair value on a non-recurring
    basis:   |  |                    |  
|Impaired loans                                                |  | $                  | -
|Foreclosed real estate and other repossessed
    assets       |  |                    | -
|Mortgage-servicing rights                                     |  |                    | -



|                                                              |  | December 31, 2011 |  
|------------------------------------------------------------- |  | ----------------- | -
|                                                              |  | Carrying Value    |  
|(In thousands)                                                |  | Level 1           |  
|Assets measured at fair value on a recurring
    basis:       |  |                   |  
|Available-for-sale investment securities:                     |  |                   |  
|U.S. Government and agency obligations                        |  | $                 | -
|Government guaranteed mortgage-backed securities              |  |                   | -
|Government guaranteed collateralized mortgage
    obligations |  |                   | -
|Private label collateralized mortgage obligations             |  |                   | -
|Auction-rate trust preferred securities                       |  |                   | -
|Residential loans held for sale                               |  |                   | -
|Assets measured at fair value on a non-recurring
    basis:   |  |                   |  
|Impaired loans                                                |  | $                 | -
|Foreclosed real estate and other repossessed
    assets       |  |                   | -
|Mortgage-servicing rights                                     |  |                   | -



There were no significant transfers of assets between Levels
1, 2 or 3 of the fair value hierarchy during the three or nine months ended September 30, 2012.



The following table shows a reconciliation of the beginning
and ending balances for Level 3 assets measured at fair value on a recurring basis:



|                                                                                                       |  | For the Nine  |       |   | For the Year |  
|------------------------------------------------------------------------------------------------------ |  | ------------- | ----- | - | ------------ | -
|                                                                                                       |  | Months Ended  |       |   | Ended        |  
|                                                                                                       |  | September 30, |       |   | December 31, |  
|(In thousands)                                                                                         |  | 2012          |       |   | 2011         |  
|                                                                                                       |  |               |       |   |              |  
|Balance at beginning of period                                                                         |  | $             | 7,244 |   |              | $
|Increase (decrease) in fair value of securities included
    in accumulated other comprehensive income |  |               | 578   |   |              |  
|Redemptions at par                                                                                     |  |               | (300  | ) |              |  
|Balance at end of period                                                                               |  | $             | 7,522 |   |              | $



24







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



This discussion should be read in conjunction with the Company’s
Consolidated Financial Statements for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K/A.



Forward-Looking Statements



This report contains forward-looking statements that are based
on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are
generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”,
“estimate”, “project” or similar expressions. The Company’s ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic
conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the
U.S. Treasury and the Federal Reserve Board, the size, quality and composition of the loan or investment portfolios, demand for
loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate
market values in the Company’s market area, and changes in relevant accounting principles and guidelines. Additional factors
are discussed below under “Item 1A – Risk Factors” and in the Company’s Annual Report on Form 10-K/A for
the year ended December 31, 2011. These risks and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does
not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence
of anticipated or unanticipated events.



Comparison of Financial Condition at September 30, 2012
and December 31, 2011



Total assets contracted $29.4 million from $572.2 million at
December 31, 2011 to $542.8 million at September 30, 2012. Net loans receivable decreased by $43.4 million or 9.3%, partially
offset by an increase in investments of $2.7 million and an increase in cash and cash equivalents of $9.7 million. Multi-family
and commercial real estate loans decreased by $19.3 million, one-to four-family loans decreased by $7.6 million, commercial business
loans decreased by $2.4 million and consumer loans decreased by $2.7 million. The decrease in one-to four-family loans is primarily
related to the sale of new production fixed rate mortgages on the secondary market. Commercial real estate loans and commercial
business loans decreased primarily due to normal amortization, repayments, charge offs, and decreased demand for these types of
products. Consumer loans have decreased as customers have been paying off second mortgages as they refinance into first mortgages.



Total liabilities were $470.1 million at September 30, 2012
compared to $489.9 million at December 31, 2011. Deposits decreased $7.5 million or 1.8% to $403.4 million at September 30, 2012
from $410.9 million at December 31, 2011. Between December 31, 2011 and September 30, 2012, core deposits (defined as all deposits
other than certificates of deposit) increased $14.9 million while certificates of deposit decreased $22.4 million. Management
attributes the increase in core deposits to management’s strategy to offer competitive short term rates and products, as
well as depositor preference to maintain funds in short term accounts given the expectation for higher market interest rates in
future periods. Advances from the Federal Home Loan Bank of Boston decreased by $18.0 million, from $64.3 million at December
31, 2011 to $46.3 million at September 30, 2012. Reverse repurchase agreements increased $8.5 million, from $6.5 million to $15
million over the same period.



Total stockholders’ equity was $72.8 million at September
30, 2012 compared to $82.3 million at December 31, 2011. The decrease in stockholders’ equity was primarily due to the net
loss of $9.6 million experienced for the nine month period and dividends of $595,000 paid to shareholders, partially offset by
a net decrease in the unrealized loss on available for sale securities of $566,000.



25







Comparison of Operating Results For the Three and Nine Months
Ended September 30, 2012 and 2011



General. For the three months ended September
30, 2012, the Company recorded a net loss of $6.2 million compared to net income of $747,000 for the three months ended September
30, 2011, a decrease of $6.9 million or 924.8%. The Company recorded a net loss of $9.6 million for the nine month period ended
September 30, 2012, compared to net income of $1.6 million for the nine months ended September 30, 2011. The decrease was primarily
due to increased loan loss provisions and a higher level of noninterest expense, including the previously reported deposit related
charge relating to the underpayment of interest on certain certificate of deposit accounts. These increases were partially offset
by higher levels of net interest income and noninterest income.



Net Interest Income.Net
interest income for the quarter ended September 30, 2012 totaled $4.6 million compared to $5.0 million for the quarter ended
September 30, 2011, a decrease of $380,000 or 7.6%. For the nine month period ended September 30, 2012, net interest income
totaled $14.2 million, compared to $14.0 million for the nine months ended September 30, 2011. The increase in net interest
income was primarily due to a decrease in interest expense in both periods. Interest expense decreased by $665,000, or 34.6%,
in the three month period and decreased by $2.3 million, or 35.7%, in the nine month period. The decrease was primarily due
to a decrease in the average rates paid on interest bearing liabilities. The average rates paid on deposits and borrowings
decreased by 48 and 78 basis points in both the three and nine month periods, respectively. The rate decrease is mainly due
to certificates of deposit renewing at lower rates or being transferred to savings accounts during the period, combined with
the payoff of higher rate borrowings from the Federal Home Loan Bank at maturity. The average balances of interest bearing
liabilities decreased by 5.9% and 6.3% for the three and nine months ended September 30, 2012, respectively. The decrease in
interest bearing liabilities is attributed primarily to a decrease in the average balance of borrowings in both periods.



The decrease in interest expense was partially offset by
a decrease in interest income. Interest income decreased by $1 million, or 15.1%, in the three month period and decreased by
$2.2 million, or 10.5% in the nine month period. The decrease was primarily due to a decrease in the average rates earned on
loans and investments. The average rates earned on loans and investments decreased by 42 basis points and 30 basis points in
the three and nine month periods, respectively. Additionally, the average balances of interest earning assets decreased by
9.6% and 6.2% for the three and nine months ended September 30, 2012. The decrease in interest earning assets is attributed
to decreases of 6.7% and 3.8% in the average balance of the loan portfolio in the three and nine month periods, respectively,
partially offset by increases of 20.5% and 19.1% in the average balance of the investment portfolio over the same periods.
The decreases in the loan portfolio are due primarily to the sale of new production of residential mortgages through the
Bank’s secondary mortgage operation, combined with loan payoffs.



The following table summarizes changes in interest income and
interest expense for the three and nine months ended September 30, 2012 and 2011:



|                                |  | Three Months           |       |  |      |   |       | Nine Months         |  |  |        |   
|------------------------------- |  | ---------------------- | ----- |  | ---- | - | ----- | ------------------- |  |  | ------ | --
|                                |  | Ended September 30,    |       |  |      |   |       | Ended September 30, |  |  |        |   
|                                |  | 2012                   |       |  | 2011 |   |       | % Change            |  |  | 2012   |   
|                                |  | (Dollars in thousands) |      
|Interest income:                |  |                        |       |  |      |   |       |                     |  |  |        |   
|Loans                           |  | $                      | 5,491 |  |      | $ | 6,520 |                     |  |  | (15.78 | )%
|Fed Funds sold                  |  |                        | 1     |  |      |   | -     |                     |  |  | N/A    |   
|Investment securities           |  |                        | 388   |  |      |   | 409   |                     |  |  | (5.13  | ) 
|Federal Home Loan Bank stock    |  |                        | 8     |  |      |   | 4     |                     |  |  | 100.00 |   
|Total interest income           |  |                        | 5,888 |  |      |   | 6,933 |                     |  |  | (15.07 | ) 
|Interest expense:               |  |                        |       |  |      |   |       |                     |  |  |        |   
|Certificate accounts            |  |                        | 760   |  |      |   | 1,175 |                     |  |  | (35.32 | ) 
|Regular savings accounts        |  |                        | 93    |  |      |   | 139   |                     |  |  | (33.09 | ) 
|Checking and NOW accounts       |  |                        | 14    |  |      |   | 12    |                     |  |  | 16.67  |   
|Money market savings accounts   |  |                        | 20    |  |      |   | 45    |                     |  |  | (55.56 | ) 
|Total interest-bearing deposits |  |                        | 887   |  |      |   | 1,371 |                     |  |  | (35.30 | ) 
|FHLB advances                   |  |                        | 356   |  |      |   | 524   |                     |  |  | (32.06 | ) 
|Other borrowings                |  |                        | 14    |  |      |   | 26    |                     |  |  | (46.15 | ) 
|Total interest expense          |  |                        | 1,257 |  |      |   | 1,921 |                     |  |  | (34.56 | ) 
|Net interest income             |  | $                      | 4,631 |  |      | $ | 5,012 |                     |  |  | (7.60  | )%





26







The following table summarizes average balances and average
yields and costs for the three and nine months ended September 30, 2012 and 2011:



|                                   |  | Three Months Ended September 30 |         |  | Nine Months Ended September 30, | 
|---------------------------------- |  | ------------------------------- | ------- |  | ------------------------------- | 
|                                   |  | 2012                            |         |  | 2011                            | 
|                                   |  | Average                         |         |  | Yield/                          | 
|                                   |  | Balance                         |         |  | Cost                            | 
|                                   |  | (Dollars in thousands)          |        
|                                   |  |                                 |         |  |                                 | 
|Interest-earning assets            |  |                                 |         |  |                                 | 
|Loans                              |  | $                               | 437,430 |  |                                 | 
|Fed Funds sold                     |  |                                 | 3,341   |  |                                 | 
|Investment securities              |  |                                 | 54,113  |  |                                 | 
|Federal Home Loan Bank stock       |  |                                 | 5,917   |  |                                 | 
|                                   |  |                                 |         |  |                                 | 
|Total interest-earning assets      |  | $                               | 500,801 |  |                                 | 
|                                   |  |                                 |         |  |                                 | 
|Interest-bearing liabilities       |  |                                 |         |  |                                 | 
|Certificate accounts               |  | $                               | 185,202 |  |                                 | 
|Regular savings accounts & escrow  |  |                                 | 117,573 |  |                                 | 
|Checking and NOW accounts          |  |                                 | 76,894  |  |                                 | 
|Money market savings accounts      |  |                                 | 26,917  |  |                                 | 
|                                   |  |                                 |         |  |                                 | 
|Total interest-bearing deposits    |  |                                 | 406,586 |  |                                 | 
|FHLB advances                      |  |                                 | 51,137  |  |                                 | 
|Other borrowings                   |  |                                 | 12,256  |  |                                 | 
|                                   |  |                                 |         |  |                                 | 
|Total interest-bearing liabilities |  | $                               | 469,979 |  |                                 | 



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, or more often if warranted. 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 on a quarterly basis, or more often if warranted. The methodology for assessing
the adequacy of the allowance for loan losses consists of the following process:



On a quarterly basis, or more often if warranted, management
analyzes the loan portfolio. For individually evaluated loans that are considered impaired, a charge to the allowance will be
made based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the
loan’s observable market price, or for loans that are considered collateral dependant, the fair value of the collateral
when a loss in not confirmed. A loan is considered impaired when, based on current information and events, it is probable that
a creditor will be unable to collect all amounts due under the contractual term of the loan agreement.



All other loans, including loans that are individually evaluated
but not considered impaired, are segregated into groups based on similar risk factors. Each of these groups is then evaluated
based on several factors to estimate credit losses. Management will determine for each category of loans with similar risk characteristics
the historical loss rate. Historical loss rates provide a reasonable starting point for the Bank’s analysis but analysis
and trends in losses do not form a sufficient basis to determine the appropriate level of the loan loss allowance. Management
also considers qualitative and environmental factors likely to cause losses. These factors include but are not limited to: changes
in the amount and severity of past due, non-accrual and adversely classified loans; changes in local, regional, and national economic
conditions that will affect the collectability of the portfolio; changes in the nature and volume of loans in the portfolio; changes
in concentrations of credit, lending area, industry concentrations, or types of borrowers; changes in lending policies, procedures,
competition, management, portfolio mix, competition, pricing, loan to value trends, extension and modification requests; and loan
quality trends. This analysis establishes factors that are applied to each of the segregated groups of loans to determine an acceptable
level of loan loss allowance.



In addition, the Company engages an independent consultant
to review the commercial loan portfolio and considers recommendations based on their review of specific credits in the portfolio
for classifying and monitoring these loans.



27







Although the Company believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and
results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the
determinations. 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.



Furthermore, while the Company believes it has established
the allowance for loan losses in conformity with GAAP, there can be no assurance that regulators, in reviewing the Company’s
loan portfolio during their examination process, will not request the Company to increase our allowance for loan losses based
on information available to them at the time of their examination and their judgment, which may differ from ours.



Any material increase in the allowance for loan losses may
adversely affect the Company’s financial condition and results of operations.



The following table summarizes the activity in the allowance
for loan losses and provision for loan losses for the three and nine months ended September 30, 2012 and 2011:



|                             |  | Nine Months Ended |        |   | For the Year Ended |  
|---------------------------- |  | ----------------- | ------ | - | ------------------ | -
|                             |  | September 30,     |        |   | December 31,       |  
|(In thousands)               |  | 2012              |        |   | 2011               |  
|                             |  |                   |        |   |                    |  
|Balance at beginning of year |  | $                 | 8,053  |   |                    | $
|Provision for loan losses    |  |                   | 17,005 |   |                    |  
|Charge-offs                  |  |                   | (9,269 | ) |                    |  
|Recoveries                   |  |                   | 12     |   |                    |  
|                             |  |                   |        |   |                    |  
|Balance at end of period     |  | $                 | 15,801 |   |                    | $



The provision for loan losses was $10.3 for the three
months ended September 30, 2012, compared to $1.2 million for the same period in 2011. The increased provision in the 2012
period is due to management’s estimate of possible losses in the loan portfolio, primarily due to increased
non-performing loans, charge offs and continuing recessionary economic conditions. Provisions of $17.0 million and $2.7
million were recorded for the nine months ended September 30, 2012 and 2011, respectively. The balances of non-performing
assets increased $48,000 between December 31, 2011 and September 30, 2012, primarily as a result of charge-offs. Classified
assets decreased $2.9 million over the same period due to charge-offs in the portfolio. Classified assets consisted primarily of
loans rated special mention, substandard or doubtful in accordance with regulatory guidance. Additionally, three investments
totaling $2.7 million, which were performing at the end of the period, and real estate acquired through foreclosure in the
amount of $356,000, are included in the substandard category. Charge-offs were $5.5 million and $9.3 million during the three
and nine months ended September 30, 2012, respectively, compared to $83,000 and $346,000 during the three and nine months
ended September 30, 2011, respectively. The charge-offs in the 2012 period were due to the write-down of $396,000 on one- to
four-family loans, one of which was for a deed-in-lieu of foreclosure, the write-down of $145,000 on home equity loans, one
of which was to facilitate a short sale of the collateral property, the write down of 13 commercial real estate loans and
seven construction loans in the amounts of $2.1 million and $5.3 million, respectively, and the charge-off of 21 commercial
business loans totaling $1.4 million. Included in the charge-off amounts this period was the write off of $1.1 million of
specific reserves that were allowed under previous regulatory supervision, but are now required to be charged directly
against the loan balances.



28







The following table provides information with respect to the
Company’s nonperforming assets at the dates indicated. The Company did not have any accruing loans past due 90 days or more
at the dates presented:



|                                           |  | At September 30,       |        |   | At December 31, |   |        |          | 
|------------------------------------------ |  | ---------------------- | ------ | - | --------------- | - | ------ | -------- | 
|                                           |  | 2012                   |        |   | 2011            |   |        | % Change | 
|                                           |  | (Dollars in thousands) |        |   |                 |  
|Nonaccrual loans                           |  | $                      | 17,014 |   |                 | $ | 16,187 |          | 
|Troubled debt restructurings               |  |                        | 8,232  |   |                 |   | 8,494  |          | 
|Real estate owned                          |  |                        | 356    |   |                 |   | 783    |          | 
|Other repossessed assets                   |  |                        | -      |   |                 |   | 90     |          | 
|Total nonperforming assets                 |  | $                      | 25,602 |   |                 | $ | 25,554 |          | 
|                                           |  |                        |        |   |                 |   |        |          | 
|Total nonperforming loans to total loans   |  |                        | 5.96   | % |                 |   | 5.20   | %        | 
|                                           |  |                        |        |   |                 |   |        |          | 
|Total nonperforming loans to total assets  |  |                        | 4.65   | % |                 |   | 4.31   | %        | 
|                                           |  |                        |        |   |                 |   |        |          | 
|Total nonperforming assets to total assets |  |                        | 4.72   | % |                 |   | 4.47   | %        | 



The following table shows the aggregate amounts of the Company’s
classified assets at the dates indicated:



|                        |  | At September 30, |        |  | At December 31, |  
|----------------------- |  | ---------------- | ------ |  | --------------- | -
|                        |  | 2012             |        |  | 2011            |  
|                        |  | (In thousands)   |       
|                        |  |                  |        |  |                 |  
|Special mention assets  |  | $                | 23,763 |  |                 | $
|Substandard assets      |  |                  | 33,968 |  |                 |  
|Doubtful assets         |  |                  | 1,672  |  |                 |  
|Loss assets             |  |                  | -      |  |                 |  
|Total classified assets |  | $                | 59,403 |  |                 | $



The 4.6% decrease in the level of classified assets from December
31, 2011 to September 30, 2012 was primarily in the commercial loan portfolio. Classified assets are primarily loans rated special
mention or substandard in accordance with regulatory guidance. These assets warrant and receive increased management oversight
and allowance for loan losses (both general allowances and, in certain cases, specific allowances) have been established to account
for the increased credit risk of these assets.  At September 30, 2012, $25.6 million of classified assets were nonperforming
assets, compared to $25.6 million at December 31, 2011.



Noninterest Income.The following table summarizes
noninterest income for the three and nine months ended September 30, 2012 and 2011.



|                                                      |  | Three Months            |       |  |      |   |       | Nine Months             |  |  |         |   
|----------------------------------------------------- |  | ----------------------- | ----- |  | ---- | - | ----- | ----------------------- |  |  | ------- | --
|                                                      |  | Ended September
    30, |       |  |      |   |       | Ended September
    30, |  |  |         |   
|(Dollars in thousands)                                |  | 2012                    |       |  | 2011 |   |       | % Change                |  |  | 2012    |   
|                                                      |  |                         |       |  |      |   |       |                         |  |  |         |   
|Mortgage banking income                               |  | $                       | 776   |  |      | $ | 666   |                         |  |  | 16.52   | % 
|Fees for other services                               |  |                         | 245   |  |      |   | 215   |                         |  |  | 13.95   |   
|Fees for services related to deposit accounts         |  |                         | 210   |  |      |   | 231   |                         |  |  | (9.09   | ) 
|Income from bank owned life insurance                 |  |                         | 75    |  |      |   | 77    |                         |  |  | (2.60   | ) 
|Income from investment advisory services, net         |  |                         | 46    |  |      |   | 89    |                         |  |  | (48.31  | ) 
|Net gain on investments                               |  |                         | -     |  |      |   | -     |                         |  |  | N/A     |   
|Recovery from legal settlement                        |  |                         | -     |  |      |   | 508   |                         |  |  | (100.00 | ) 
|Other than temporary impairment losses on investments |  |                         | -     |  |      |   | (19   | )                       |  |  | (100.00 | ) 
|Other income                                          |  |                         | 23    |  |      |   | 25    |                         |  |  | (8.00   | ) 
|Total                                                 |  | $                       | 1,375 |  |      | $ | 1,792 |                         |  |  | (23.27  | )%



Noninterest income was $1.3 million for the quarter ended September
30, 2012 compared to $1.8 million for the quarter ended September 30, 2011, an decrease of 23.3%. For the nine months ended September
30, 2012 noninterest income was $3.6 million compared to $3.7 million for the period ended September 30, 2011, a decrease of 1.5%.
The decrease in both periods is primarily due to $508,000 included in the three months ended September 30, 2011 and $655,000 is
included in the nine months ended September 30, 2011, representing a partial recovery with respect to Fannie Mae auction rate
pass-through certificates on which an other-than-temporary impairment charge was recorded in the third quarter of 2008. There
were increases in income generated by increased sales of mortgage loans in the secondary mortgage market, combined with increases
in fees for other services. These increases were partially offset by decreases in gains on investments, income from investment
advisory services, fees for services related to deposit accounts and income from bank owned life insurance.



29







Noninterest Expense. The
following table summarizes noninterest expense for the three and nine months ended September 30, 2012 and 2011.



|                                    |  | Three Months        |       |   |      |   |       | Nine Months         |  |  |        |   
|----------------------------------- |  | ------------------- | ----- | - | ---- | - | ----- | ------------------- |  |  | ------ | --
|                                    |  | Ended September 30, |       |   |      |   |       | Ended September 30, |  |  |        |   
|                                    |  | 2012                |       |   | 2011 |   |       | % Change            |  |  | 2012   |   
|(Dollars in thousands)              |  |                     |       |   |      |   |       |                     |  |  |        |   
|Compensation, taxes and benefits    |  | $                   | 2,711 |   |      | $ | 2,721 |                     |  |  | (0.37  | )%
|Office occupancy                    |  |                     | 564   |   |      |   | 579   |                     |  |  | (2.59  | ) 
|Professional fees                   |  |                     | 576   |   |      |   | 143   |                     |  |  | 302.80 |   
|Loss on foreclosed real estate, net |  |                     | 66    |   |      |   | 131   |                     |  |  | (49.62 | ) 
|Computer processing                 |  |                     | 179   |   |      |   | 123   |                     |  |  | 45.53  |   
|FDIC insurance premiums             |  |                     | 185   |   |      |   | 104   |                     |  |  | 77.88  |   
|Advertising                         |  |                     | 122   |   |      |   | 98    |                     |  |  | 24.49  |   
|Directors compensation              |  |                     | 152   |   |      |   | 96    |                     |  |  | 58.33  |   
|Office supplies                     |  |                     | 63    |   |      |   | 67    |                     |  |  | (5.97  | ) 
|Public company expenses             |  |                     | 23    |   |      |   | 19    |                     |  |  | 21.05  |   
|Deposit related charge (reduction)  |  |                     | (36   | ) |      |   | -     |                     |  |  | N/A    |   
|Other expenses                      |  |                     | 488   |   |      |   | 419   |                     |  |  | 16.47  |   
|Total                               |  | $                   | 5,093 |   |      | $ | 4,500 |                     |  |  | 13.18  | % 



Noninterest expense was $5.1 million for the quarter
ended September 30, 2012 compared to $4.5 million for the quarter ended September 30, 2011. For the nine months ended
September 30, 2012 noninterest expense was $15.4 million, compared to $12.7 million for the nine months ended September 30,
2011. The increase was the result of increases in compensation costs, professional fees, net loss on foreclosed real estate,
advertising, directors compensation, and office supplies over the 2011 period. These increases were partially offset by
decreases in office occupancy and FDIC insurance premiums in the nine month period. The increases in compensation and
professional fees are due to additional staff hired and additional work performed by legal and accounting professionals
related to compliance with the previously announced regulatory order. A net charge of $712,000 related to the previously
announced deposit related charge is included in non-interest expense for the nine month period ended September 30, 2012.



Income Taxes.Provision (benefit) for
income taxes was ($3.2 million) for the quarter ended September 30, 2012 compared to $362,000 for the quarter ended September
30, 2011, and ($5.1 million) for the nine months ended September 30, 2012 compared to $730,000 for the nine months ended
September 30, 2011. The primary reason for the decrease was the net loss experienced before provision for income taxes.



Liquidity and Capital Resources



Liquidity is the ability to meet current
and future short-term financial obligations. The Bank’s primary sources of funds consist of deposit inflows, loan repayments,
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 the Bank projects liquidity availability and demands
on this liquidity for the next 90 days. The Bank regularly adjusts its investments in liquid assets based upon its 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 federal funds and short- and intermediate-term U.S. Government agency obligations.



30







The Bank’s most liquid assets are cash and cash equivalents.
The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September
30, 2012, cash and cash equivalents totaled $25.9 million, including federal funds of $682,000. Securities classified as available-for-sale,
which provide additional sources of liquidity, totaled $25.5 million at September 30, 2012. At September 30, 2012, the Bank had
the ability to borrow a total of $136.2 million from the Federal Home Loan Bank of Boston, of which $46.3 million in borrowings
was outstanding, along with $15.0 million in repurchase agreements. At September 30, 2012, the Bank had arranged overnight lines
of credit of $2.5 million with the Federal Home Loan Bank of Boston. The Bank had no overnight advances outstanding with the Federal
Home Loan Bank of Boston as of that date. In addition, at September 30, 2012, the Bank had the ability to borrow $15 million from
the Federal Reserve Bank Discount Window. The Bank had no advances outstanding on this line at September 30, 2012.



The following table summarizes the commitments and contingent
liabilities as of the dates indicated:



|                                             |  | September 30, |        |  | December 31, |  
|-------------------------------------------- |  | ------------- | ------ |  | ------------ | -
|(In thousands)                               |  | 2012          |        |  | 2011         |  
|Commitments to extend credit:                |  |               |        |  |              |  
|Loan commitments on one-to four-family loans |  | $             | 4,202  |  |              | $
|Unused lines of credit                       |  |               | 19,619 |  |              |  
|Amounts due mortgagors on construction loans |  |               | 13,522 |  |              |  
|Amounts due on commercial  loans             |  |               | 15,763 |  |              |  
|Commercial letters of credit                 |  |               | 3,820  |  |              |  



Certificates of deposit due within one year of September 30,
2012 totaled $32.7 million, 8.0% of total deposits. If these deposits do not remain with the Bank, it will be required to seek
other sources of funds, including other certificates of deposit and its available lines of credit. Depending on market conditions,
the Bank may be required to pay higher rates on such deposits or other borrowings than are currently paid on the certificates
of deposit due on or before September 30, 2013. Based on past experience, however, the Bank believes that a significant portion
of our certificates of deposit will remain with us. The Bank has the ability to attract and retain deposits by adjusting the interest
rates offered.



Historically, the Company (on a consolidated basis) has remained
highly liquid. The Company is not aware of any trends and/or demands, commitments, events or uncertainties that could result in
a material decrease in liquidity. The Company expects that all of our liquidity needs, including the contractual commitments stated
above and increases in loan demand, can be met by our currently available liquid assets and cash flows. In the event loan demand
was to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing
capacity with the Federal Home Loan Bank of Boston or the Federal Reserve Bank Discount Window. The Company expects that our currently
available liquid assets and our ability to borrow from both the Federal Home Loan Bank of Boston and the Federal Reserve Bank
would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.



The Bank’s primary investing activities are the origination
of loans and the purchase of securities. For the nine months ended September 30, 2012, the Bank originated $64.8 million of loans,
including renewals, refinances and advances. These activities were funded primarily by the proceeds from sales and maturities
of available-for-sale securities and held to maturity securities of $9.6 million, proceeds of from the sale of loans in the secondary
market in the amount of $65.0 million, and loan payoffs combined with normal amortization.



Financing activities consist primarily of activity in deposit
accounts and in Federal Home Loan Bank advances. The Bank experienced a net decrease in total deposits of $7.5 million for the
nine months ended September 30, 2012. Deposit flows are affected by the overall level of interest rates, the interest rates and
products offered by us and its local competitors and other factors. The Bank generally manages the pricing of deposits to be competitive
and to increase core deposit relationships. Occasionally, the Bank offers promotional rates on certain deposit products in order
to attract deposits. The Bank experienced a net decrease in Federal Home Loan Bank advances of $17.9 million, and an increase
in repurchase agreements of $8.5 million for the nine months ended September 30, 2012.



The Company is a separate legal entity from the Bank and must
provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for
paying any dividends declared to its shareholders. The Company’s primary source of income is dividends received from the
Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior
approval from the OCC but with prior notice to the OCC, cannot exceed net income for that year to date plus retained net income
(as defined) for the preceding two calendar years. On a stand-alone basis, the Company had liquid assets of $11.2 million at September
30, 2012.



31







The Company is not subject to separate regulatory capital requirements.
At September 30, 2012, the Bank was subject to the regulatory capital requirements of the OCC, including a risk-based capital
measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2012, the Bank
exceeded all of its regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines.



The following table is a summary of the Bank’s actual
capital as computed under the standards established by the OCC at September 30, 2012.



|                                                    |  |                |      |   |                  |  |       | Naugatuck Valley | 
|--------------------------------------------------- |  | -------------- | ---- | - | ---------------- |  | ----- | ---------------- | 
|                                                    |  | OCC Regulation |      |   | Savings and Loan | 
|                                                    |  | Adequately     |      |   | Well             |  |       |                  | 
|(Dollars in thousands)                              |  | Capitalized    |      |   | Capitalized      |  |       | Amount           | 
|                                                    |  |                |      |   |                  |  |       |                  | 
|Total Risk-Based Capital (to Risk-Weighted Assets)  |  |                | 8.00 | % |                  |  | 10.00 | %                | 
|                                                    |  |                |      |   |                  |  |       |                  | 
|Tier I Risk-Based Capital (to Risk-Weighted Assets) |  |                | 4.00 | % |                  |  | 6.00  | %                | 
|                                                    |  |                |      |   |                  |  |       |                  | 
|Tier I  Capital (to Adjusted Total Assets)          |  |                | 4.00 | % |                  |  | 5.00  | %                | 



Off-Balance Sheet Arrangements



In the normal course of operations, the Company
engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. These
transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risks. Such transactions are used primarily
to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit, amounts due on
construction loans, amounts due on commercial loans, commercial letters of credit and commitments to sell loans.



For the nine months ended September 30, 2012, the Company did
not engage in any off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results
of operations or cash flows.



Item 3. Quantitative and Qualitative Disclosures About Market
Risk.



Qualitative Aspects of Market Risk.The Company’s most significant form of market risk is interest rate risk. The Company manages 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 the Company’s
earnings while decreases in interest rates may beneficially affect the Company’s earnings. To reduce the potential volatility
of the Company’s earnings, the Company has 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. Generally, loans are sold without recourse and with servicing
retained. The Company currently does not participate in hedging programs, interest rate swaps or other activities involving the
use of off-balance sheet derivative financial instruments.



The Bank’s 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.



32







Quantitative Aspects of Market Risk.The Company also
uses a third party consultant to perform interest rate sensitivity and net interest income simulation analysis. The net interest
income simulation measures the volatility of net interest income as a consequence of different interest rate conditions at a particular
point in time. Using a range of assumptions, the simulations provide an estimate of the impact of changes in interest rates on
net interest income. The various assumptions used in the model are reviewed on a quarterly basis by the asset/liability committee.
Changes to these assumptions can significantly affect the results of the simulation.



The following table, which is based on information that we
provided to our third party consultant as of September 30, 2012, presents an approximation of our exposure as a percentage of
estimated net interest income for the next 12-month period using interest income simulation. The simulation uses projected repricing
of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment
speeds can have a significant impact on the interest income simulation. When interest rates rise, prepayment speeds tend to slow
down. When interest rates fall, prepayment speeds tend to increase. We believe that our assumptions included in the simulation
are reasonable; however, there can be no guarantee that these prepayment rates will approximate actual future repayment activity.



|                   |  | At September 30, 2012        
|------------------ |  | -----------------------------
|                   |  | Percentage Change in         
|Basis Point (“bp”) |  | Estimated Net Interest Income
|Change in Rates    |  | Over 12 months               
|                   |  |                              
|+300 bp            |  | -0.08%                       
|+200               |  | 0.55%                        
|+100               |  | 0.55%                        
|Flat               |  | 0.00%                        
|-100               |  | -2.13%                       



Our third party consultant also performs dynamic modeling.
This type of modeling employs a further set of assumptions attempting to simulate scenarios that are more likely than an immediate
and sustained shock of 100 to 300 basis points and include the business planning strategies. The changes in rates in the table
above are assumed to occur immediately.



Item 4. Controls and Procedures.



Naugatuck Valley Financial Corporation’s Chief Executive
Officer and Chief Financial Officer (collectively, the "Certifying Officers") evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of September 30,
2012 in connection with the filing of the initial Form 10-Q for that period.



The Certifying Officers evaluated the effectiveness of disclosure controls and procedures as of September
30, 2012.Based on that evaluation, and in light of material weaknesses in internal control over financial reporting that
existed throughout this quarter as described below, management concluded that the Company’s disclosure and procedures were
not effective as of September 30, 2012.



33







The Company's management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-l5(f)
under the Exchange Act.



Because of their inherent limitations, systems of internal control
over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can
only provide reasonable assurance with respect to financial statement preparation and presentation.



A "material weakness" in internal control over financial
reporting is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is reasonable
possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected
in a timely basis by the Company's internal controls.



Material Weaknesses In Internal Control



Allowance
for Loan and Lease Losses



Estimating the allowance for loan losses requires credit administration
staff to estimate the provision for loan losses based on the Company’s model, processes and procedures. Management identified deficiencies
within the credit administration function which compromised the operational effectiveness of the internal controls, particularly
in estimating the provision for loan losses. This led to management’s determination that there was a material weakness in internal
control over financial reporting in estimating the allowance for loan losses.



Financial & Accounting



Management concluded that a material weakness existed due to
ineffective staffing resources with the requisite skills and industry knowledge of U.S. GAAP and regulatory accounting, which
resulted in insufficient accounting supervision over the credit administration function.





34







Remediation and Compensating Controls:



The Company has implemented certain changes in its internal
controls as of the date of this report to address the material weaknesses. Specifically, management took the following steps to
remediate the material weaknesses set forth above:



Allowances for Loan and Lease Losses.



| | — | Engaged qualified outside consultants to review the compliance of the ALLL model for compliance with GAAP and regulatory requirements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| | — | The consultants also tested the ALLL model for integrity of input and accuracy of computations. Additionally, the consultants
reviewed the factors used in the model for reasonableness and consistency.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | — | Improved the processes for identifying loans and the determination of the amount of impairment.
| | - | -----------------------------------------------------------------------------------------------



Financial & Accounting



| | — | During
the Third quarter of 2012, hired a qualified and highly-experienced Interim Chief Financial Officer with sufficient knowledge
of US GAAP, regulatory accounting, and the banking industry and the skills to effectively implement that knowledge.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | — | Increased
oversight of the financial reporting process through the Audit Committee.
| | - | -----------------------------------------------------------------------------------





35







Part II - OTHER INFORMATION



Item 1. - Legal Proceedings.



The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course
of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to its financial condition
and results of operations.



Item 1A. – Risk Factors.



In addition to the other information set forth in this report,
you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual
Report on Form 10-K/A for the year ended December 31, 2011, which could materially affect the Company’s business, financial
condition or future results. The risks described in the Company’s Annual Report on Form 10-K/A are not the only risks that
the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to
be immaterial also may materially adversely affect our business, financial condition and/or operating results.



Item 2. – Unregistered Sales of Equity Securities
and Use of Proceeds.



| | (a) | Not applicable.
| | --- | ---------------



| | (b) | Not applicable.
| | --- | ---------------



| | (c) | The Company did not repurchase any shares of its common stock during
                                                           the quarter ended September 30, 2012.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 3. – Defaults Upon Senior Securities. Not
applicable



Item 4. – Mine Safety Disclosures.Not applicable



Item 5. – Other Information. Not applicable



Item 6. – Exhibits.



Exhibits –



| | 3.1  | Articles of Incorporation of Naugatuck Valley Financial Corporation (1)                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 3.2  | Bylaws of Naugatuck Valley Financial Corporation, as amended (2)                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4.1  | Specimen Stock Certificate of Naugatuck Valley Financial Corporation (3)                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 31.1 | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 31.2 | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 32   | Section 1350 Certifications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 101* | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012,
    formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the
    Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholder’s
    Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.



36







____________________

* Furnished, not filed.



(1)  Incorporated by reference to Exhibit 3.1 to
the Company’s Registration Statement on Form S-1, as amended, initially filed on September 11, 2010.



(2)  Incorporated herein by reference to Exhibit
3.2 to the Company’s Registration Statement on Form S-1, as amended, initially filed on September 11, 2010.



(3)  Incorporated herein by reference to Exhibit
4.0 to the Company’s Registration Statement on Form S-1, as amended, initially filed on September 11, 2010.



37







Signatures



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





|                        | Naugatuck Valley Financial Corporation
|----------------------- | --------------------------------------
|                        |                                       
|Date: November 28, 2012 | /s/ William C. Calderara              
|                        | William C. Calderara                  
|                        | President and Chief Executive Officer 
|                        | (principal executive officer)         
|                        |                                       
|Date: November 28, 2012 | /s/ Thomas Van Lenten                 
|                        | Thomas Van Lenten                     
|                        | Chief Financial Officer               
|                        |                                       
|                       



38