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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

OR

For the transition period from                      to                     

Commission file number: 0-50876

NAUGATUCK VALLEY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

(203) 720-5000

(Registrant’s telephone number, including area code)

N/A

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

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

Yes  x No  ¨

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

Yes  ¨ No  x

As of November 1, 2004, there were 7,604,375 shares of the registrant’s common stock outstanding.

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NAUGATUCK VALLEY FINANCIAL CORPORATION

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Condensed Consolidated Statements of Financial Condition

(In Thousands)

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Consolidated Statements of Income

(In Thousands)

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Consolidated Statements of Cash Flows

(In Thousands)

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NOTE 1 - MUTUAL HOLDING COMPANY REORGANIZATION AND MINORITY STOCK ISSUANCE

On May 17, 2004, and as amended and restated on June 15, 2004, the Board of Directors of Naugatuck Valley Savings and Loan (the “Bank”) unanimously adopted a Plan of Reorganization and Minority Stock Issuance (the “Plan of Reorganization”). Pursuant to the Plan of Reorganization, which was approved by the Bank’s depositors at a special meeting of depositors held on September 16, 2004, the reorganization was consummated on September 30, 2004. As part of the Plan of Reorganization, the Bank: (i) converted to a stock savings bank as the successor to the Bank in its former mutual form; (ii) organized Naugatuck Valley Financial Corporation (the “Company”) as a federally chartered corporation that now owns 100% of the common stock of the Bank; and (iii) organized Naugatuck Valley Mutual Holding Company (the “Mutual Holding Company”) as a federally chartered mutual holding company that will own at least a majority of the common stock of the Company so long as the Mutual Holding Company remains in existence. The Bank in its stock form succeeded the business and operations of the Bank in its mutual form and the Company sold a minority interest in its common stock in a public stock offering.

All depositors who had membership or liquidation rights with respect to the Bank as of September 30, 2004, the effective date of the reorganization, continue to have such rights solely with respect to the Mutual Holding Company so long as they continue to hold deposit accounts with the Bank. In addition, all persons who become depositors of the Bank subsequent to the reorganization will have such membership and liquidation rights with respect to the Mutual Holding Company.

On September 30, 2004, the Bank completed its mutual holding company reorganization. In connection with the reorganization, the Company issued a total of 7,604,375 shares consisting of the following:

Cost incurred in connection with the offering were recorded as a reduction of the proceeds from the offering and amounted to $959,227 at September 30, 2004

NOTE 2 - BASIS OF PRESENTATION

The accompanying condensed consolidated interim financial statements are unaudited and include the accounts of the Company, the Bank, and those of Naugatuck Valley Mortgage Servicing Corporation, a wholly-owned subsidiary of the Bank. 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 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 the consolidation. These financial statements reflect, in the opinion of Management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and the results of its operations and its cash flows for the periods presented. Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Bank’s 2003 Consolidated Financial Statements included in the Company’s Registration Statement on Form S-1, as amended.

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

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NOTE 3 – EARNINGS PER SHARE

When presented, basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earning per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Because the formation of the Company was completed on September 30, 2004, per share earnings data is not meaningful for this quarter or prior comparative periods and is therefore not presented.

NOTE 4 - COMPREHENSIVE INCOME

Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income,” establishes standards for disclosure of comprehensive income, which includes net income and 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 report 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 one source of other comprehensive income is the net unrealized gain (loss) on its available-for-sale securities.

NOTE 5 - 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 Company considers the following to be critical accounting policies: allowance for loan losses and deferred income taxes.

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

Although 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. The Company engages an independent review of its commercial loan portfolio annually and adjusts 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. Such agencies may require the Company to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination.

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

This discussion should be read in conjunction with the Bank’s Consolidated Financial Statements for the year ended December 31, 2003 included in the Company’s Registration Statement on Form S-1, as amended.

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 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. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Comparison of Financial Condition at September 30, 2004 and December 31, 2003

Total assets increased by $85.7 million during the period from December 31, 2003 to September 30, 2004, primarily due to an increase in investment in federal funds of $75.9 million and an increase in loans of $21.8 million. The increase in federal funds is the result of proceeds of the stock subscription and the increase in loans primarily reflects an increase in our multi-family and commercial loans. These increases were partially offset by a decrease in our investment securities of $14.1 million because of sales, maturities and principal pay downs of our investments.

Total liabilities were $278.5 million at September 30, 2004 compared to $222.7 million at December 31, 2003. Deposits at September 30, 2004 increased $11.5 million or 6.2% over December 31, 2003 primarily due to the continued growth of our two offices in the lower Naugatuck Valley combined with increased advertising expenditures to promote low-cost or no-cost checking products. Advances from the Federal Home Loan Bank of Boston decreased from $35.0 million to $25.0 million as a result of early payoffs. Other liabilities increased primarily due to the liability for outstanding checks on the oversubscriptions received in the stock offering.

Shareholders equity increased from $21.2 million at December 31, 2003 to $51.2 million at September 30, 2004 primarily as a result of the net proceeds of the stock offering.

Comparison of Operating Results For The Three and Nine Months Ended September 30, 2004 and 2003

General. For the three months ended September 30, 2004, the Company had a net loss of $893,000 as compared to net income of $427,000 the three months ended September 30, 2003, primarily due to an increase in noninterest

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expense and a decrease in noninterest income, partially offset by an increase in net interest income. For the nine months ended September 30, 2004 the Company had a net loss of $115,000 as compared to net income of $1.3 million for the nine months ended September 30, 2003, primarily due to an increase in noninterest expense and a decrease in noninterest income, partially offset by an increase in net interest income.

Net Interest Income. Net interest income increased $224,000, or 10.7%, to $2.3 million for the three months ended September 30, 2004. Net interest income increased $300,000, or 4.8%, to $6.6 million for the nine months ended September 30, 2004. The primary reason for the increase in net interest income for both the three and nine month periods was the decrease in interest expense. Interest expense decreased in both periods as we were able to lower rates on all categories of deposit accounts in 2004 and as maturing certificates of deposit renewed at lower rates. We also experienced an increase in lower rate core deposit accounts as a result of promotion of low-cost or no-cost checking accounts for businesses and consumers, which decreased our cost of funds.

The following table summarizes changes in interest income and interest expense for the three and nine months ended September 30, 2004 and 2003.

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The following table summarizes average balances and average yields and costs for the three and nine months ended September 30, 2004 and 2003.

Interest and dividend income increased $157,000, or 5.1%, for the three months ended September 30, 2004 as a result of an increase in the average balance of interest-earning assets to $251.4 million from $217.8 million partially offset by decrease in the average yield on interest-earning assets to 5.20% from 5.71%. Interest and dividend income decreased $177,000, or 1.9%, for the nine months ended September 30, 2004 as a result of a decrease in the average yield on interest-earning assets to 5.35% from 5.92% partially offset by an increase in the average balance of interest-earning assets to $233.0 million from $214.5 million.

Interest on loans increased during the three months ended September 30, 2004 and decreased during the nine months ended September 30, 2004 due to the increase in the average balance of those assets, offset by the decrease in the average yield on loans. Interest on Federal funds sold increased during the three and nine months ended September 30, 2004 due to the increase in the average balance of those assets and an increase in the average yield. Interest on securities decreased during the three and nine months ended September 30, 2004 due to the decrease in the average yield on securities and the decrease in the average balance of those assets. During the three and nine months ended September 30, 2004, the Company originated loans at lower interest rates and its securities had lower average yields due to the prevailing low interest rate environment.

Net interest income increased $224,000, or 10.7%, for the three months ended September 30, 2004 and increased by $300,000 or 4.8% for the nine months ended September 30, 2004 as a result of a decrease in the average cost of interest-bearing liabilities to 1.51% from 1.90% for the three month period and a decrease to 1.62% from 2.09% for the nine month period along with an increase in the average balance of interest-earning assets to $251.3 million from $217.8 million for the three month period and an increase to $233.0 million from $214.5 million for the nine month period. Interest expense decreased $67,000, or 6.6%, for the three months ended September 30, 2004 and decreased by $477,000, or 14.6% for the nine month period ended September 30, 2004 as a result of a decrease in the average cost of interest-bearing liabilities to 1.51% from 1.90% for the three month period and to 1.62% from 2.09% for the nine month period which was partially offset by an increase in the average balance of interest-bearing liabilities to $250.2 million from $212.5 million for the three month period and an increase to $229.9 million from $209 million for the nine month period. Rates paid on interest-bearing liabilities decreased during both the three and nine months ended September 30, 2004 due to a decline in market interest rates.

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Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three and nine months ended September 30, 2004 and 2003.

The Company did not record a provision for loan losses for either the three or nine month period ended September 30, 2004. The lack of provision in 2004 reflected lower charge-offs and decreased non-performing assets. The charge-offs during the 2003 periods are due to a one time charge to write down to market value loans for which the Bank had previously established specific allowance.

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

Noninterest Income. The following table summarizes noninterest income for the three and nine months ended September 30, 2004 and 2003.

Noninterest income decreased during the three months ended September 30, 2004 primarily as a result of the loss on

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sale of investments partially offset by income from investment advisory services. In the third quarter of 2003, we began offering investment advisory services through a third party registered broker-dealer. Noninterest income decreased during the nine months ended September 30, 2004 primarily as a result of loss on sale of investments offset by income from investment advisory services and income from bank owned life insurance. During 2003 the Bank purchased life insurance policies, from which it derives income, on certain key executives.

Noninterest Expense. The following table summarizes noninterest expense for the three and nine months ended September 30, 2004 and 2003.