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 June 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 xNo  ̈



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 August 6, 2012, there were 7,002,208
shares of the registrant’s common stock outstanding.











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 June 30, 2012 and December 31, 2011                               
|           |                       |                                                                                                                     
|           |                       | Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2012 and 2011
|           |                       |                                                                                                                     
|           |                       | Consolidated Statements of Changes in Stockholder’s Equity for the six months ended June 30, 2012                   
|           |                       |                                                                                                                     
|           |                       | Consolidated Statements of Cash Flows for the six months ended June 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     |                                                                                                                     
|           |                       |                                                                                                                     
|           | 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 |                       | 36                                                                                                                  
|           |                       |                                                                                                                     
|Exhibits   |                       |                                                                                                                     



2







Part
I - FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements
(Unaudited)













Consolidated Statements of Financial
Condition

(In thousands, except share data)

|                                                                                                                                                                                    |  | June 30,    |         |   | December 31, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ------------ | -
|                                                                                                                                                                                    |  | 2012        |         |   | 2011         |  
|                                                                                                                                                                                    |  | (Unaudited) |         |   |              |  
|ASSETS                                                                                                                                                                              |  |             |         |   |              |  
|Cash and due from depository institutions                                                                                                                                           |  | $           | 21,910  |   |              | $
|Investment in federal funds                                                                                                                                                         |  |             | 868     |   |              |  
|Investment securities available-for-sale, at fair value                                                                                                                             |  |             | 26,512  |   |              |  
|Investment securities held-to-maturity, at amortized cost                                                                                                                           |  |             | 29,379  |   |              |  
|Loans held for sale                                                                                                                                                                 |  |             | 1,358   |   |              |  
|Loans receivable, net                                                                                                                                                               |  |             | 444,426 |   |              |  
|Accrued income receivable                                                                                                                                                           |  |             | 1,773   |   |              |  
|Foreclosed real estate and repossessed assets, net                                                                                                                                  |  |             | 403     |   |              |  
|Premises and equipment, net                                                                                                                                                         |  |             | 9,535   |   |              |  
|Bank owned life insurance                                                                                                                                                           |  |             | 9,707   |   |              |  
|Federal Home Loan Bank stock, at cost                                                                                                                                               |  |             | 5,917   |   |              |  
|Deferred income taxes                                                                                                                                                               |  |             | 2,480   |   |              |  
|Other assets                                                                                                                                                                        |  |             | 3,694   |   |              |  
|                                                                                                                                                                                    |  |             |         |   |              |  
|Total assets                                                                                                                                                                        |  | $           | 557,962 |   |              | $
|                                                                                                                                                                                    |  |             |         |   |              |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                |  |             |         |   |              |  
|Liabilities                                                                                                                                                                         |  |             |         |   |              |  
|Deposits                                                                                                                                                                            |  | $           | 411,346 |   |              | $
|Borrowed funds                                                                                                                                                                      |  |             | 57,252  |   |              |  
|Mortgagors' escrow accounts                                                                                                                                                         |  |             | 4,621   |   |              |  
|Other liabilities                                                                                                                                                                   |  |             | 4,088   |   |              |  
|                                                                                                                                                                                    |  |             |         |   |              |  
|Total liabilities                                                                                                                                                                   |  |             | 477,307 |   |              |  
|                                                                                                                                                                                    |  |             |         |   |              |  
|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 June 30, 2012  and 7,002,292 outstanding at December 31, 2011. |  |             | 70      |   |              |  
|Paid-in capital                                                                                                                                                                     |  |             | 58,909  |   |              |  
|Retained earnings                                                                                                                                                                   |  |             | 24,922  |   |              |  
|Unearned ESOP shares (391,479 shares at June 30, 2012 and December 31, 2011)                                                                                                        |  |             | (3,442  | ) |              |  
|Unearned stock awards (997 shares at June 30, 2012 and 1,395 shares at December 31, 2011)                                                                                           |  |             | (9      | ) |              |  
|Treasury stock, at cost (158 shares at June 30, 2012 and 74 shares at December 31, 2011)                                                                                            |  |             | (1      | ) |              |  
|Accumulated other comprehensive income (loss)                                                                                                                                       |  |             | 206     |   |              |  
|                                                                                                                                                                                    |  |             |         |   |              |  
|Total stockholders' equity                                                                                                                                                          |  |             | 80,655  |   |              |  
|                                                                                                                                                                                    |  |             |         |   |              |  
|Total liabilities and stockholders' equity                                                                                                                                          |  | $           | 557,962 |   |              | $



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 |        |   | Six Months Ended |  
|----------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | -
|                                                                        |  | June 30,           |        |   | June 30,         |  
|                                                                        |  | 2012               |        |   | 2011             |  
|                                                                        |  | (Unaudited)        |       
|Interest income                                                         |  |                    |        |   |                  |  
|Interest on loans                                                       |  | $                  | 5,652  |   |                  | $
|Interest and dividends on investments and deposits                      |  |                    | 398    |   |                  |  
|Total interest income                                                   |  |                    | 6,050  |   |                  |  
|                                                                        |  |                    |        |   |                  |  
|Interest expense                                                        |  |                    |        |   |                  |  
|Interest on deposits                                                    |  |                    | 975    |   |                  |  
|Interest on borrowed funds                                              |  |                    | 432    |   |                  |  
|Total interest expense                                                  |  |                    | 1,407  |   |                  |  
|                                                                        |  |                    |        |   |                  |  
|Net interest income                                                     |  |                    | 4,643  |   |                  |  
|                                                                        |  |                    |        |   |                  |  
|Provision for loan losses                                               |  |                    | 2,147  |   |                  |  
|                                                                        |  |                    |        |   |                  |  
|Net interest income after provision for loan losses                     |  |                    | 2,496  |   |                  |  
|                                                                        |  |                    |        |   |                  |  
|Noninterest income                                                      |  |                    |        |   |                  |  
|Mortgage banking income                                                 |  |                    | 625    |   |                  |  
|Fees for other services                                                 |  |                    | 263    |   |                  |  
|Fees for services related to deposit accounts                           |  |                    | 204    |   |                  |  
|Income from bank owned life insurance                                   |  |                    | 76     |   |                  |  
|Income from investment advisory services, net                           |  |                    | 51     |   |                  |  
|Net gain on investments                                                 |  |                    | -      |   |                  |  
|Recovery from legal settlement                                          |  |                    | -      |   |                  |  
|Other income                                                            |  |                    | 30     |   |                  |  
|Total noninterest income                                                |  |                    | 1,249  |   |                  |  
|                                                                        |  |                    |        |   |                  |  
|Noninterest expense                                                     |  |                    |        |   |                  |  
|Compensation, taxes and benefits                                        |  |                    | 2,705  |   |                  |  
|Office occupancy                                                        |  |                    | 575    |   |                  |  
|Professional fees                                                       |  |                    | 244    |   |                  |  
|Loss on foreclosed real estate, net                                     |  |                    | 204    |   |                  |  
|Computer processing                                                     |  |                    | 194    |   |                  |  
|FDIC insurance premiums                                                 |  |                    | 187    |   |                  |  
|Advertising                                                             |  |                    | 160    |   |                  |  
|Directors compensation                                                  |  |                    | 130    |   |                  |  
|Office supplies                                                         |  |                    | 53     |   |                  |  
|Public company expenses                                                 |  |                    | 38     |   |                  |  
|Deposit related charge (reduction)                                      |  |                    | (88    | ) |                  |  
|Other expenses                                                          |  |                    | 468    |   |                  |  
|Total noninterest expense                                               |  |                    | 4,870  |   |                  |  
|                                                                        |  |                    |        |   |                  |  
|Income (loss) before provision for income taxes                         |  |                    | (1,125 | ) |                  |  
|Provision (benefit) for income taxes                                    |  |                    | (410   | ) |                  |  
|                                                                        |  |                    |        |   |                  |  
|Net income (loss)                                                       |  | $                  | (715   | ) |                  | $
|Other Comprehensive income (loss)                                       |  |                    |        |   |                  |  
|Changes in unrealized gain (loss) on securities available-for-sale, net |  |                    | (68    | ) |                  |  
|Total other comprehensive income                                        |  |                    | (68    | ) |                  |  
|Comprehensive income (loss)                                             |  | $                  | (783   | ) |                  | $
|Earnings (loss) per common share - basic and diluted                    |  | $                  | (0.11  | ) |                  | $



See accompanying notes to unaudited consolidated financial
statements.



4











Consolidated Statements of Changes in
Stockholder’s Equity

Six months ended June 30, 2012



(Unaudited,
in thousands, except share data)

|                                                                           |  | Common |    |  | Paid-in |   |        | Retained |  |   | Unearned ESOP |   |  | Unearned Stock |        |   | Treasury |   |     | Accumulated Other Comprehensive |  |   |       |  
|-------------------------------------------------------------------------- |  | ------ | -- |  | ------- | - | ------ | -------- |  | - | ------------- | - |  | -------------- | ------ | - | -------- | - | --- | ------------------------------- |  | - | ----- | -
|                                                                           |  | 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 ($0.06 per common share)                                |  |        | -  |  |         |   | -      |          |  |   | (397          | ) |  |                | -      |   |          |   | -   |                                 |  |   | -     |  
|Stock based compensation
    (199 shares vested and  199 shares forfeited) |  |        | -  |  |         |   | -      |          |  |   | (3            | ) |  |                | -      |   |          |   | 5   |                                 |  |   | -     |  
|Stock based compensation
    options                                       |  |        | -  |  |         |   | 1      |          |  |   | -             |   |  |                | -      |   |          |   | -   |                                 |  |   | -     |  
|Treasury stock acquired
    (84 shares)                                    |  |        | -  |  |         |   | -      |          |  |   | -             |   |  |                | -      |   |          |   | -   |                                 |  |   | -     |  
|Comprehensive
    income (loss)                                            |  |        | -  |  |         |   | -      |          |  |   | (1,692        | ) |  |                | -      |   |          |   | -   |                                 |  |   | -     |  
|                                                                           |  |        |    |  |         |   |        |          |  |   |               |   |  |                |        |   |          |   |     |                                 |  |   |       |  
|Balance
    at June 30, 2012                                               |  | $      | 70 |  |         | $ | 58,909 |          |  | $ | 24,922        |   |  | $              | (3,442 | ) |          |   | (9  | )                               |  | $ | (1    | )





See accompanying notes to unaudited consolidated financial
statements.



5











Consolidated Statements of Cash Flows(In thousands)

|                                                                                            |  | Six Months Ended |        
|------------------------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                                            |  | June 30,         |        
|                                                                                            |  | 2012             |        
|Cash flows from operating activities                                                        |  | (Unaudited)      |        
|Net income (loss)                                                                           |  | $                | (1,692 
|Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: |  |                  |        
|Provision for loan losses                                                                   |  |                  | 4,119  
|Depreciation and amortization expense                                                       |  |                  | 351    
|Net loss on foreclosed assets                                                               |  |                  | 172    
|Gain on sale of loans                                                                       |  |                  | (810   
|Loans originated for sale                                                                   |  |                  | (35,179
|Proceeds from sale of loans held for sale                                                   |  |                  | 37,623 
|Net amortization from investments                                                           |  |                  | 177    
|Amortization of intangible assets                                                           |  |                  | 17     
|Provision for deferred taxes                                                                |  |                  | -      
|Net gain on investments                                                                     |  |                  | -      
|Stock-based compensation                                                                    |  |                  | 123    
|Net change in:                                                                              |  |                  |        
|Accrued income receivable                                                                   |  |                  | 159    
|Deferred loan fees                                                                          |  |                  | (54    
|Cash surrender value of life insurance                                                      |  |                  | (151   
|Other assets                                                                                |  |                  | 550    
|Other liabilities                                                                           |  |                  | (577   
|Net cash provided by operating activities                                                   |  |                  | 4,828  
|Cash flows from investing activities                                                        |  |                  |        
|Proceeds from maturities and repayments of available-for-sale securities                    |  |                  | 2,786  
|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                                                 |  |                  | 18,217 
|Purchase of premises and equipment                                                          |  |                  | (248   
|Proceeds from the sale of foreclosed assets                                                 |  |                  | 556    
|Net cash provided (used) by investing activities                                            |  |                  | 13,522 
|Cash flows from financing activities                                                        |  |                  |        
|Net change in time deposits                                                                 |  |                  | (13,790
|Net change in other deposit accounts                                                        |  |                  | 14,248 
|Advances in borrowed funds                                                                  |  |                  | -      
|Repayment of borrowed funds                                                                 |  |                  | (11,387
|Net change in mortgagors' escrow accounts                                                   |  |                  | (134   
|Change in short term borrowings                                                             |  |                  | (2,178 
|Proceeds from common stock offering, net of offering costs                                  |  |                  | -      
|Purchase of shares by ESOP pursuant to reorganization                                       |  |                  | -      
|Forfeited restricted shares                                                                 |  |                  | (2     
|Common stock repurchased                                                                    |  |                  | (1     
|Cash dividends to common stockholders                                                       |  |                  | (397   
|Net cash  (used) provided by financing activities                                           |  |                  | (13,641
|Net change in cash and cash equivalents                                                     |  |                  | 4,709  
|Cash and cash equivalents at beginning of period                                            |  |                  | 18,069 
|Cash and cash equivalents at end of period                                                  |  | $                | 22,778 
|Non-cash investing activities:                                                              |  |                  |        
|Transfer of loans to foreclosed assets                                                      |  | $                | 258    
|Cash paid during the period for:                                                            |  |                  |        
|Interest                                                                                    |  | $                | 2,989  
|Income taxes                                                                                |  |                  | 151    



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’swholly 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 six months ended June 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 prior period consolidated
financial statements to conform to the June 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 second quarter ended June 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 June 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                    |  | $          | 1,010  |  |                  | $ | 40  |        | 
|Government guaranteed mortgage-backed securities          |  |            | 15,698 |  |                  |   | 728 |        | 
|Government guaranteed collateralized mortgage obligations |  |            | 1,328  |  |                  |   | 18  |        | 
|Private label collateralized mortgage obligations         |  |            | 334    |  |                  |   | -   |        | 
|Total debt securities                                     |  |            | 18,370 |  |                  |   | 786 |        | 
|Auction-rate trust preferred securities                   |  |            | 7,700  |  |                  |   | -   |        | 
|                                                          |  |            |        |  |                  |   |     |        | 
|Total available-for-sale securities                       |  | $          | 26,070 |  |                  | $ | 786 |        | 



|                                                 |  | Amortized  |        |  | Gross Unrealized |   |     | Fair   | 
|------------------------------------------------ |  | ---------- | ------ |  | ---------------- | - | --- | ------ | 
|(In thousands)                                   |  | Cost Basis |        |  | Gains            |   |     | Losses | 
|Held-to-maturity securities:                     |  |            |        |  |                  |   |     |        | 
|Government guaranteed mortgage-backed securities |  | $          | 29,379 |  |                  | $ | 818 |        | 
|                                                 |  |            |        |  |                  |   |     |        | 
|Total held-to-maturity securities                |  | $          | 29,379 |  |                  | $ | 818 |        | 



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 June 30, 2012, and December 31, 2011.



|                                                 |  | At June 30, 2012                    | 
|------------------------------------------------ |  | ----------------------------------- | 
|                                                 |  | 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                                           | 



|                                                 |  | 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 June 30, 2012 and December
31, 2011 is as follows:



|                                        |  | June 30, |         |   | December 31, |  
|--------------------------------------- |  | -------- | ------- | - | ------------ | -
|(Dollars in thousands)                  |  | 2012     |         |   | 2011         |  
|                                        |  |          |         |   |              |  
|Real estate loans:                      |  |          |         |   |              |  
|One-to four-family                      |  | $        | 208,653 |   |              | $
|Commercial real estate and multi-family |  |          | 150,083 |   |              |  
|Construction                            |  |          | 33,399  |   |              |  
|Total real estate loans                 |  |          | 392,135 |   |              |  
|                                        |  |          |         |   |              |  
|Commercial business loans               |  |          | 32,869  |   |              |  
|Consumer loans:                         |  |          |         |   |              |  
|Home equity                             |  |          | 29,277  |   |              |  
|Savings accounts                        |  |          | 749     |   |              |  
|Automobile                              |  |          | 487     |   |              |  
|Personal                                |  |          | 162     |   |              |  
|Total consumer loans                    |  |          | 30,675  |   |              |  
|Totals loans                            |  |          | 455,679 |   |              |  
|                                        |  |          |         |   |              |  
|Less:                                   |  |          |         |   |              |  
|Allowance for loan losses               |  |          | 8,399   |   |              |  
|Undisbursed construction loans          |  |          | 2,574   |   |              |  
|Deferred loan origination fees, net     |  |          | 280     |   |              |  
|Loans receivable, net                   |  | $        | 444,426 |   |              | $
|                                        |  |          |         |   |              |  
|Weighted average yield                  |  |          | 5.16    | % |              |  



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.



12







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.



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.



13







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.



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 June 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 six months ended June 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 Six Months
 Ended
    June 30, 2012         |  |                         |         |   |              |   |        |                        |  |   |            |   |  |          |        |   |       |  
|(In
    thousands)                                            |  |                         |         |   |              |   |        |                        |  |   |            |   |  |          |        |   |       |  
|Allowance for loan losses:                                    |  |                         |         |   |              |   |        |                        |  |   |            |   |  |          |        |   |       |  
|Beginning
    balance                                         |  | $                       | 1,745   |   |              | $ | 1,327  |                        |  | $ | 3,745      |   |  | $        | 754    |   |       | $
|Provision for loan losses                                     |  |                         | 611     |   |              |   | 374    |                        |  |   | 901        |   |  |          | 2,081  |   |       |  
|Charge-offs                                                   |  |                         | (347    | ) |              |   | (629   | )                      |  |   | (1,245     | ) |  |          | (1,416 | ) |       |  
|Recoveries                                                    |  |                         | 4       |   |              |   | -      |                        |  |   | -          |   |  |          | 5      |   |       |  
|Ending balance                                                |  | $                       | 2,013   |   |              | $ | 1,072  |                        |  | $ | 3,401      |   |  | $        | 1,424  |   |       | $
|Ending
    loan balance individually evaluated for impairment |  | $                       | 4,636   |   |              | $ | 13,209 |                        |  | $ | 8,892      |   |  | $        | 801    |   |       | $
|Ending
    loan balance collectively evaluated for impairment |  | $                       | 204,017 |   |              | $ | 20,190 |                        |  | $ | 141,191    |   |  | $        | 32,068 |   |       | $
|                                                              |  |                         |         |   |              |   |        |                        |  |   |            |   |  |          |        |   |       |  
|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.



14







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.



The following tables are a summary of the
loan portfolio quality indicators by loan class as of June 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.



15









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.



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



|                                        |  | Credit Quality Information |      
|--------------------------------------- |  | -------------------------- | -----
|                                        |  |                            |      
|                                        |  |                            |      
|                                        |  | 31-60 Days                 |      
|                                        |  | Past Due                   |      
|As of June 30, 2012                     |  |                            |      
|(In thousands)                          |  |                            |      
|Real estate loans                       |  |                            |      
|One-to four-family                      |  | $                          | 1,539
|Construction                            |  |                            | -    
|Commercial real estate and multi-family |  |                            | 750  
|Commercial business loans               |  |                            | 347  
|Consumer - other                        |  |                            | 390  
|Total                                   |  | $                          | 3,026
|                                        |  |                            |      
|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
$29.1 million at June 30, 2012 compared to $24.7 million at December 31, 2011 ($1.3 million of which at both dates is fully guaranteed
by the U.S. Small Business Administration). The amount of income that was contractually due but not recognized on nonperforming
loans totaled $329,000 and $1.3 million for the quarter and six months ended June 30, 2012, respectively, compared with $365,000
for the year ended December 31, 2011.



At June 30 2012, there were no loans 90 or more days past due
and still accruing interest. At June 30, 2012, the Company had 106 loans on non-accrual status with foregone interest for the period
since the loans were placed on non-accrual status in the amount of approximately $1.3 million. Included in these loans were 46
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 June 30, 2012, the Company had $27.8 million of loans which
were considered to be impaired, with a valuation allowance of $305,000, compared to $19.4 million of such loans at December 31,
2011 with a valuation allowance of $1.1 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 six 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 June 30, 2012 and December 31, 2011:



|                                                 |  |                |        |  | Unpaid    |   |        |           |  |   | Average  |  |  | Interest   |       
|------------------------------------------------ |  | -------------- | ------ |  | --------- | - | ------ | --------- |  | - | -------- |  |  | ---------- | ------
|                                                 |  | Carrying       |        |  | Principal |   |        | Related   |  |   | Carrying |  |  | Income     |       
|As of June 30, 2012                              |  | Amount         |        |  | Balance   |   |        | Allowance |  |   | Amount   |  |  | Recognized |       
|                                                 |  | (In thousands) |       
|Impaired loans without valuation allowance:      |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Real estate loans                                |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|One-to four-family                               |  | $              | 4,621  |  |           | $ | 5,002  |           |  | $ | -        |  |  | $          | 4,784 
|Construction                                     |  |                | 10,339 |  |           |   | 12,205 |           |  |   | -        |  |  |            | 10,485
|Commercial real estate and multi-family          |  |                | 9,109  |  |           |   | 10,390 |           |  |   | -        |  |  |            | 9,195 
|Commercial business loans                        |  |                | 763    |  |           |   | 1,811  |           |  |   | -        |  |  |            | 937   
|Consumer - other                                 |  |                | 221    |  |           |   | 397    |           |  |   | -        |  |  |            | 259   
|Total impaired loans without valuation allowance |  |                | 25,053 |  |           |   | 29,805 |           |  |   | -        |  |  |            | 25,660
|Impaired loans with valuation allowance:         |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Real estate loans                                |  |                |        |  |           |   |        |           |  |   |          |  |  |            |       
|Construction                                     |  |                | 2,717  |  |           |   | 3,439  |           |  |   | 305      |  |  |            | 2,958 
|Total impaired loans with valuation allowance    |  |                | 2,717  |  |           |   | 3,439  |           |  |   | 305      |  |  |            | 2,958 
|Total impaired loans                             |  | $              | 27,770 |  |           | $ | 33,244 |           |  | $ | 305      |  |  | $          | 28,618



|                                                 |  |                |        |  | 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 June 30, 2012 and December 31, 2011:



|                                                                                                           |  | As of    |        |  | As of        |  
|---------------------------------------------------------------------------------------------------------- |  | -------- | ------ |  | ------------ | -
|                                                                                                           |  | June 30, |        |  | December 31, |  
|(In thousands)                                                                                             |  | 2012     |        |  | 2011         |  
|                                                                                                           |  |          |        |  |              |  
|Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring: |  |          |        |  |              |  
|Accruing interest                                                                                          |  | $        | 656    |  |              | $
|Nonaccrual                                                                                                 |  |          | 10,565 |  |              |  
|Total                                                                                                      |  | $        | 11,221 |  |              | $



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



|                                          |  | For the Six Months Ended June 30, 2012 |  
|----------------------------------------- |  | -------------------------------------- | -
|(Dollars in thousands)                    |  | Number of Loans                        |  
|                                          |  |                                        |  
|Real estate loans:                        |  |                                        |  
|One-to four-family                        |  |                                        | 4
|Multi-family and commercial real estate   |  |                                        | 1
|Consumer loans:                           |  |                                        |  
|Home equity                               |  |                                        | 3
|Total TDRs restructured during the period |  |                                        | 8
|                                          |  |                                        |  
|TDRs, still accruing interest             |  |                                        | 3
|TDRs, included in nonaccrual              |  |                                        | 5
|Total                                     |  |                                        | 8



|                                          |  | 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



18







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 six months ended June 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.



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
six months ended June 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 six months ended June 30, 2011, anti-dilutive
options excluded from the calculations totaled 315,827 options (with an exercise price of $11.12) and 7,483 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 |           |   | Six Months Ended |  
|------------------------------------------------------------- |  | ------------------ | --------- | - | ---------------- | -
|                                                              |  | June 30,           |           |   | June 30,         |  
|                                                              |  | 2012               |           |   | 2011             |  
|                                                              |  |                    |           |   |                  |  
|Net income (loss)                                             |  | $                  | (715,000  | ) |                  | $
|                                                              |  |                    |           |   |                  |  
|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                                                         |  | $                  | (0.11     | ) |                  | $
|Diluted                                                       |  | $                  | (0.11     | ) |                  | $



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 |      |   | Six Months Ended |  
|----------------------------------------------------------------------- |  | ------------------ | ---- | - | ---------------- | -
|                                                                        |  | June 30,           |      |   | June 30,         |  
|                                                                        |  | 2012               |      |   | 2011             |  
|                                                                        |  | (In thousands)     |     
|                                                                        |  |                    |      |   |                  |  
|Net income (loss)                                                       |  | $                  | (715 | ) |                  | $
|                                                                        |  |                    |      |   |                  |  
|Other comprehensive income:                                             |  |                    |      |   |                  |  
|Unrealized gain (loss) on securities available-for-sale                 |  |                    | (76  | ) |                  |  
|Reclassification adjustment for (gain) loss realized in net income      |  |                    | -    |   |                  |  
|                                                                        |  |                    |      |   |                  |  
|Other comprehensive income (loss) before tax effect                     |  |                    | (76  | ) |                  |  
|                                                                        |  |                    |      |   |                  |  
|Income tax effect related to items of other comprehensive income (loss) |  |                    | (8   | ) |                  |  
|                                                                        |  |                    |      |   |                  |  
|Other comprehensive income (loss) net of tax effect                     |  |                    | (68  | ) |                  |  
|                                                                        |  |                    |      |   |                  |  
|Total comprehensive income (loss)                                       |  | $                  | (783 | ) |                  | $



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 share-based
compensation expense of $2,065 and $3,148 for the three and six months ended June 30, 2012, respectively, compared to $4,550 and
$10,301 for the three and six months ended June 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 May 16, 2012, the Company's Board of Directors declared a
cash dividend of $0.03 per outstanding common share, which was paid on June 15, 2012, to stockholders of record as of the close
of business on May 28, 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.







21







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



|                            |  | June 30, 2012 |         |  | December 31, 2011 |  
|--------------------------- |  | ------------- | ------- |  | ----------------- | -
|                            |  | Carrying      |         |  | Estimated         |  
|(In thousands)              |  | Amount        |         |  | Fair Value        |  
|                            |  |               |         |  |                   |  
|Financial Assets            |  |               |         |  |                   |  
|Cash and cash equivalents   |  | $             | 22,778  |  |                   | $
|Investment securities       |  |               | 55,891  |  |                   |  
|Loans held for sale         |  |               | 1,358   |  |                   |  
|Loans receivable, net       |  |               | 444,426 |  |                   |  
|Accrued income receivable   |  |               | 1,773   |  |                   |  
|Mortgage servicing rights   |  |               | 685     |  |                   |  
|                            |  |               |         |  |                   |  
|Financial Liabilities       |  |               |         |  |                   |  
|Deposits                    |  |               | 411,346 |  |                   |  
|Borrowed funds              |  |               | 57,252  |  |                   |  
|Mortgagors' escrow accounts |  |               | 4,621   |  |                   |  



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.



22







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.



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 six months ended June 30, 2012 and 2011, foreclosed properties and repossessed assets with
a carrying value of $258,000 and $488,000, 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 six months ended June 30, 2012. There were no subsequent valuation adjustments
to foreclosed properties and repossessed assets for the six months ended June 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.



23







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 June 30, 2012 and December 31, 2011 are summarized below:



|                                                          |  | June 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 six months ended June 30, 2012.







24









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 Six  |       |   | For the Year |  
|-------------------------------------------------------------------------------------------------- |  | ------------ | ----- | - | ------------ | -
|                                                                                                   |  | Months Ended |       |   | Ended        |  
|                                                                                                   |  | June 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 |  |              | 507   |   |              |  
|Redemptions at par                                                                                 |  |              | (300  | ) |              |  
|Balance at end of period                                                                           |  | $            | 7,451 |   |              | $



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 June 30, 2012 and December
31, 2011



Total assets contracted $14.3 million from $572.2 million at
December 31, 2011 to $558.0 million at June 30, 2012. Net loans receivable decreased by $22.5 million, or 4.8%, partially offset
by an increase in investments of $5.5 million and an increase in cash and cash equivalents of $4.7 million. Multi-family and commercial
real estate loans decreased by $10.8 million, one-to four-family loans decreased by $9.2 million, commercial business loans decreased
by $3.8 million and consumer loans decreased by $3.0 million. These decreases were partially offset by an increase in construction
loans of $3.7 million, primarily due to a reclassification of one large loan from the commercial business loan portfolio. 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.



25







Total liabilities were $477.3 million at June 30, 2012 compared
to $489.9 million at December 31, 2011. Deposits at June 30, 2012 were relatively flat with an increase of $459,000, or 0.1%,
from December 31, 2011. Between December 31, 2011 and June 30, 2012, core deposits (defined as all deposits other than certificates
of deposit) increased $14.2 million while certificates of deposit decreased $13.8 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 $11.4 million, from $64.3 million at December 31, 2011 to $52.9 million at June
30, 2012. Reverse repurchase agreements decreased $2.2 million, from $6.5 million to $4.3 million over the same period.



Total stockholders’ equity was $80.7 million at June
30, 2012 compared to $82.3 million at December 31, 2011. The decrease in stockholders’ equity was primarily due to the net
loss of $1.7 million experienced for the six month period and dividends of $397,000 paid to shareholders, partially offset by
a net decrease in the unrealized loss on available for sale securities of $427,000.



Comparison of Operating Results For the Three and Six Months
Ended June 30, 2012 and 2011



General. For the three months ended June 30, 2012,
the Company recorded a net loss of $715,000 compared to net income of $505,000 for the three months ended June 30, 2011, a decrease
of $1.2 million or 241.6%. The Company recorded a net loss of $1.7 million for the six month period ended June 30, 2012, compared
to net income of $901,000 for the six months ended June 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 June 30, 2012 totaled $4.64 million compared to $4.58 million for the quarter ended
June 30, 2011, an increase of $62,000 or 1.4%. For the six month period ended June 30, 2012, net interest income totaled $9.6 million,
compared to $9.0 million for the six months ended June 30, 2011. The increase in net interest income was primarily due to a decrease
in interest expense in both periods. Interest expense decreased by $875,000, or 38.3%, in the three month period and decreased
by $1.7 million, or 36.2%, in the six 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 57 basis points in both the three and six month
periods. 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 8.3% and 6.5% for the three and six months ended June 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 $813,000, or 11.8%, in the three month period and decreased by $1.1 million, or
8.1% in the six 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 six month periods,
respectively. Additionally, the average balances of interest earning assets decreased by 4.0% and 2.4% for the three and six months
ended June 30, 2012. The decrease in interest earning assets is attributed to decreases of 6.6% and 4.5% in the average balance
of the loan portfolio in the three and six month periods, respectively, partially offset by increases of 23.1% and 18.3% 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.



26







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



|                                |  | Three Months           |       |  |      |   |       | Six Months     |  |  |        |   
|------------------------------- |  | ---------------------- | ----- |  | ---- | - | ----- | -------------- |  |  | ------ | --
|                                |  | Ended June 30,         |       |  |      |   |       | Ended June 30, |  |  |        |   
|                                |  | 2012                   |       |  | 2011 |   |       | % Change       |  |  | 2012   |   
|                                |  | (Dollars in thousands) |      
|Interest income:                |  |                        |       |  |      |   |       |                |  |  |        |   
|Loans                           |  | $                      | 5,652 |  |      | $ | 6,452 |                |  |  | (12.40 | )%
|Investment securities           |  |                        | 390   |  |      |   | 406   |                |  |  | (3.94  | ) 
|Federal Home Loan Bank stock    |  |                        | 8     |  |      |   | 5     |                |  |  | 60.00  |   
|Total interest income           |  |                        | 6,050 |  |      |   | 6,863 |                |  |  | (11.85 | ) 
|Interest expense:               |  |                        |       |  |      |   |       |                |  |  |        |   
|Certificate accounts            |  |                        | 854   |  |      |   | 1,541 |                |  |  | (44.58 | ) 
|Regular savings accounts        |  |                        | 88    |  |      |   | 119   |                |  |  | (26.05 | ) 
|Checking and NOW accounts       |  |                        | 12    |  |      |   | 11    |                |  |  | 9.09   |   
|Money market savings accounts   |  |                        | 21    |  |      |   | 47    |                |  |  | (55.32 | ) 
|Total interest-bearing deposits |  |                        | 975   |  |      |   | 1,718 |                |  |  | (43.25 | ) 
|FHLB advances                   |  |                        | 425   |  |      |   | 547   |                |  |  | (22.30 | ) 
|Other borrowings                |  |                        | 7     |  |      |   | 17    |                |  |  | (58.82 | ) 
|Total interest expense          |  |                        | 1,407 |  |      |   | 2,282 |                |  |  | (38.34 | ) 
|Net interest income             |  | $                      | 4,643 |  |      | $ | 4,581 |                |  |  | 1.35   | % 



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



|                                   |  | Three Months Ended June 30, |         |  | Six Months Ended June 30, | 
|---------------------------------- |  | --------------------------- | ------- |  | ------------------------- | 
|                                   |  | 2012                        |         |  | 2011                      | 
|                                   |  | Average                     |         |  | Yield/                    | 
|                                   |  | Balance                     |         |  | Cost                      | 
|                                   |  | (Dollars in thousands)      |        
|                                   |  |                             |         |  |                           | 
|Interest-earning assets            |  |                             |         |  |                           | 
|Loans                              |  | $                           | 450,939 |  |                           | 
|Fed Funds sold                     |  |                             | 2,985   |  |                           | 
|Investment securities              |  |                             | 53,609  |  |                           | 
|Federal Home Loan Bank stock       |  |                             | 5,917   |  |                           | 
|                                   |  |                             |         |  |                           | 
|Total interest-earning assets      |  | $                           | 513,450 |  |                           | 
|                                   |  |                             |         |  |                           | 
|Interest-bearing liabilities       |  |                             |         |  |                           | 
|Certificate accounts               |  | $                           | 194,199 |  |                           | 
|Regular savings accounts & escrow  |  |                             | 116,007 |  |                           | 
|Checking and NOW accounts          |  |                             | 73,494  |  |                           | 
|Money market savings accounts      |  |                             | 27,628  |  |                           | 
|                                   |  |                             |         |  |                           | 
|Total interest-bearing deposits    |  |                             | 411,328 |  |                           | 
|FHLB advances                      |  |                             | 59,865  |  |                           | 
|Other borrowings                   |  |                             | 7,510   |  |                           | 
|                                   |  |                             |         |  |                           | 
|Total interest-bearing liabilities |  | $                           | 478,703 |  |                           | 



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:



27







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 collectibility 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.



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 six months ended June 30, 2012 and 2011:



|                                 |  | Three Months   |       |   | Six Months     |  
|-------------------------------- |  | -------------- | ----- | - | -------------- | -
|                                 |  | Ended June 30, |       |   | Ended June 30, |  
|                                 |  | 2012           |       |   | 2011           |  
|                                 |  | (In thousands) |      
|Allowance at beginning of period |  | $              | 7,220 |   |                | $
|Provision for loan losses        |  |                | 2,147 |   |                |  
|                                 |  |                |       |   |                |  
|Charge-offs                      |  |                | (972  | ) |                |  
|Recoveries                       |  |                | 4     |   |                |  
|Net charge-offs                  |  |                | (968  | ) |                |  
|Allowance at end of period       |  | $              | 8,399 |   |                | $



28







The provision for loan losses was $2.1 million for the three
months ended June 30, 2012, compared to $1.0 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 $4.1 million and $1.5 million were recorded for the six months
ended June 30, 2012 and 2011, respectively. The balances of non-performing assets increased $4.0 million between December 31, 2011
and June 30, 2012, primarily as a result of higher balances of nonaccrual loans. Classified assets increased $7.3 million over
the same period as several large loans were downgraded. Classified assets consisted primarily of loans rated special mention, substandard
or doubtful in accordance with regulatory guidance. Additionally, three investments totaling $2.5 million, which were performing
at the end of the period, and real estate acquired through foreclosure in the amount of $403,000 are included in the substandard
category. Charge-offs were $972,000 and $3.8 million during the three and six months ended June 30, 2012, respectively, compared
to $116,000 and $263,000 during the three and six months ended June 30, 2011, respectively. The charge-offs in the 2012 period
were due to the write-down of $347,000 on 17 one- to four-family loans, one of which was for a deed-in-lieu of foreclosure, the
write-down of $145,000 on six 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 $1.2 million and $629,000, 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.



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 June 30,            |        |   | At December 31, |   |        |          | 
|------------------------------------------ |  | ---------------------- | ------ | - | --------------- | - | ------ | -------- | 
|                                           |  | 2012                   |        |   | 2011            |   |        | % Change | 
|                                           |  | (Dollars in thousands) |        |   |                 |  
|Nonaccrual loans                           |  | $                      | 25,262 |   |                 | $ | 16,187 |          | 
|Troubled debt restructurings               |  |                        | 3,875  |   |                 |   | 8,494  |          | 
|Real estate owned                          |  |                        | 403    |   |                 |   | 783    |          | 
|Other repossessed assets                   |  |                        | -      |   |                 |   | 90     |          | 
|Total nonperforming assets                 |  | $                      | 29,540 |   |                 | $ | 25,554 |          | 
|                                           |  |                        |        |   |                 |   |        |          | 
|Total nonperforming loans to total loans   |  |                        | 6.43   | % |                 |   | 5.20   | %        | 
|                                           |  |                        |        |   |                 |   |        |          | 
|Total nonperforming loans to total assets  |  |                        | 5.22   | % |                 |   | 4.31   | %        | 
|                                           |  |                        |        |   |                 |   |        |          | 
|Total nonperforming assets to total assets |  |                        | 5.29   | % |                 |   | 4.47   | %        | 



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



|                        |  | At June 30,    |        |  | At December 31, |  
|----------------------- |  | -------------- | ------ |  | --------------- | -
|                        |  | 2012           |        |  | 2011            |  
|                        |  | (In thousands) |       
|                        |  |                |        |  |                 |  
|Special mention assets  |  | $              | 26,425 |  |                 | $
|Substandard assets      |  |                | 42,937 |  |                 |  
|Doubtful assets         |  |                | 218    |  |                 |  
|Loss assets             |  |                | -      |  |                 |  
|Total classified assets |  | $              | 69,580 |  |                 | $



The 11.7% increase in the level of classified assets from December
31, 2011 to June 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 June 30, 2012, $29.5 million of classified assets were nonperforming assets, compared to
$25.6 million at December 31, 2011.



29









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



|                                              |  | Three Months   |       |  |      |   |       | Six Months     |  |  |         |  
|--------------------------------------------- |  | -------------- | ----- |  | ---- | - | ----- | -------------- |  |  | ------- | -
|                                              |  | Ended June 30, |       |  |      |   |       | Ended June 30, |  |  |         |  
|                                              |  | 2012           |       |  | 2011 |   |       | % Change       |  |  | 2012    |  
|(Dollars in thousands)                        |  |                |       |  |      |   |       |                |  |  |         |  
|Mortgage banking income                       |  | $              | 625   |  |      | $ | 355   |                |  |  | 76.06   | %
|Fees for other services                       |  |                | 263   |  |      |   | 233   |                |  |  | 12.88   |  
|Fees for services related to deposit accounts |  |                | 204   |  |      |   | 213   |                |  |  | (4.23   | )
|Income from bank owned life insurance         |  |                | 76    |  |      |   | 78    |                |  |  | (2.56   | )
|Income from investment advisory services, net |  |                | 51    |  |      |   | 65    |                |  |  | (21.54  | )
|Net gain on investments                       |  |                | -     |  |      |   | 86    |                |  |  | (100.00 | )
|Recovery from legal settlement                |  |                | -     |  |      |   | -     |                |  |  | N/A     |  
|Other income                                  |  |                | 30    |  |      |   | 32    |                |  |  | (6.25   | )
|Total                                         |  | $              | 1,249 |  |      | $ | 1,062 |                |  |  | 17.61   | %



Noninterest income was $1.2 million for the quarter ended June
30, 2012 compared to $1.0 million for the quarter ended June 30, 2011, an increase of 17.6%. For the six months ended June 30,
2012 noninterest income was $2.3 million compared to $1.9 million for the period ended June 30, 2011, an increase of 19.0%. The
increase in both periods is primarily due to an increase 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. Additionally, $147,000, 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, is included in noninterest income
for the six month period ended June 30, 2011.



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



|                                    |  | Three Months   |       |   |      |   |       | Six Months     |  |  |        |  
|----------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | -------------- |  |  | ------ | -
|                                    |  | Ended June 30, |       |   |      |   |       | Ended June 30, |  |  |        |  
|                                    |  | 2012           |       |   | 2011 |   |       | % Change       |  |  | 2012   |  
|(Dollars in thousands)              |  |                |       |   |      |   |       |                |  |  |        |  
|Compensation, taxes and benefits    |  | $              | 2,705 |   |      | $ | 2,326 |                |  |  | 16.29  | %
|Office occupancy                    |  |                | 575   |   |      |   | 565   |                |  |  | 1.77   |  
|Professional fees                   |  |                | 244   |   |      |   | 122   |                |  |  | 100.00 |  
|Loss on foreclosed real estate, net |  |                | 204   |   |      |   | 49    |                |  |  | 316.33 |  
|Computer processing                 |  |                | 194   |   |      |   | 64    |                |  |  | 203.13 |  
|FDIC insurance premiums             |  |                | 187   |   |      |   | 172   |                |  |  | 8.72   |  
|Advertising                         |  |                | 160   |   |      |   | 106   |                |  |  | 50.94  |  
|Directors compensation              |  |                | 130   |   |      |   | 110   |                |  |  | 18.18  |  
|Office supplies                     |  |                | 53    |   |      |   | 50    |                |  |  | 6.00   |  
|Public company expenses             |  |                | 38    |   |      |   | 30    |                |  |  | 26.67  |  
|Deposit related charge (reduction)  |  |                | (88   | ) |      |   | -     |                |  |  | N/A    |  
|Other expenses                      |  |                | 468   |   |      |   | 292   |                |  |  | 60.27  |  
|Total                               |  | $              | 4,870 |   |      | $ | 3,886 |                |  |  | 25.32  | %



Noninterest expense was $4.9 million for the quarter ended June
30, 2012 compared to $3.9 million for the quarter ended June 30, 2011. For the six months ended June 30, 2012 noninterest expense
was $10.3 million, compared to $8.1 million for the six months ended June 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
six 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. Additionally, an $88,000
reduction in the estimate for the previously announced $800,000 accrual for a deposit-related charge is included in noninterest
expense for the three month period. The net charge of $712,000 is included in noninterest expense for the six month period.



30







Income Taxes.Provision (benefit) for income taxes
was ($410,000) for the quarter ended June 30, 2012 compared to $212,000 for the quarter ended June 30, 2011, and ($951,000) for
the six months ended June 30, 2012 compared to $368,000 for the six months ended June 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.



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 June
30, 2012, cash and cash equivalents totaled $22.8 million, including federal funds of $868,000. Securities classified as available-for-sale,
which provide additional sources of liquidity, totaled $26.5 million at June 30, 2012. At June 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 $52.9 million in borrowings was outstanding,
along with $4.4 million in repurchase agreements. At June 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 June 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 June 30, 2012.



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



|                                             |  | June 30, |        |  | December 31, |  
|-------------------------------------------- |  | -------- | ------ |  | ------------ | -
|(In thousands)                               |  | 2012     |        |  | 2011         |  
|Commitments to extend credit:                |  |          |        |  |              |  
|Loan commitments on one-to four-family loans |  | $        | 8,655  |  |              | $
|Unused lines of credit                       |  |          | 20,044 |  |              |  
|Amounts due mortgagors on construction loans |  |          | 15,250 |  |              |  
|Amounts due on commercial loans              |  |          | 15,755 |  |              |  
|Commercial letters of credit                 |  |          | 4,015  |  |              |  



Certificates of deposit due within one year of June 30, 2012
totaled $94.7 million, or 23.0% 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 June 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.



31







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 six months ended June 30, 2012, the Bank originated $85.9 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 $6.3 million, proceeds of from the sale of loans in the secondary market in the amount
of $37.6 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 increase in total deposits of $458,000 for the six
months ended June 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 $11.4 million, and a decrease in
repurchase agreements of $2.2 million for the six months ended June 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 $11.5 million at June 30, 2012.



The Company is not subject to separate regulatory capital requirements.
At June 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 June 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 June 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 six months ended June 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.



32













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.



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 June 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 June 30, 2012              |      
|------------------ |  | ----------------------------- | -----
|                   |  | Percentage Change in          |      
|Basis Point (“bp”) |  | Estimated Net Interest Income |      
|Change in Rates    |  | Over 12 months                |      
|                   |  |                               |      
|+300 bp            |  |                               | -0.04
|+200               |  |                               | 0.54 
|+100               |  |                               | 0.60 
|Flat               |  |                               | 0.00 
|-100               |  |                               | -2.12





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 below
are assumed to occur immediately.



33







Item 4. Controls and Procedures.



The Company’s management, including the Company’s
principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure
controls and procedures”, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended, (the “Exchange Act”). Based upon that evaluation, the principal executive officer and principal financial
officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files
or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.



There were no changes in the Company’s internal control
over financial reporting during the three months ended June 30, 2012 that have materially affected, or are reasonable likely to
materially affect, the Company’s internal control over financial reporting.



Part II - OTHER INFORMATION



Item 1. - Legal Proceedings.



The Company is not involved in any pending legal proceedings.
The Bank 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 June 30, 2012.
| | --- | -----------------------------------------------------------------------------------------------------



Item 3. – Defaults Upon Senior Securities. Not
applicable



Item 4. – Mine Safety Disclosures.Not applicable



Item 5. – Other Information. Not applicable



34







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 June 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.








* 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 June 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 June 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 June 11, 2010.



35







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: August 13, 2012 | by: | /s/ Lee R. Schlesinger                           
|                      |     |                                                  
|                      |     | Lee R. Schlesinger                               
|                      |     | Senior Vice President and Chief Financial Officer
|                      |     | (principal executive and financial officer)      



36