Naugatuck Valley Financial Corp - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Naugatuck Valley Financial Corp	ex32.htm
EX-31.2 - EXHIBIT 31.2 - Naugatuck Valley Financial Corp	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Naugatuck Valley Financial Corp	ex31_1.htm

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 March 31, 2011

o	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: 0-50876

NAUGATUCK VALLEY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

	UNITED STATES		65-1233977
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(203) 720-5000

(Registrant’s telephone number, including area code)

N/A

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

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

Yes x No o

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 £ 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 o		Accelerated Filer o
Non-accelerated Filer o		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 o No x

As of May 10, 2011, there were 7,018,627 shares of the registrant’s common stock outstanding.

NAUGATUCK VALLEY FINANCIAL CORPORATION

Table of Contents

Part I. Financial Information

		Page No.
Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition at March 31, 2011 and December 31, 2010	3

	Consolidated Statements of Income for the three months ended March 31, 2011 and 2010	4

	Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010	5

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

	Liquidity and Capital Resources	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

Part II. Other Information

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	(Removed and Reserved)	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

Signatures

Exhibits

Table of Contents

Part I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Table of Contents

Consolidated Statements of Financial Condition

(In thousands, except share data)

	March 31, 2011			December 31, 2010
	(Unaudited)
ASSETS
Cash and due from depository institutions	$	6,455		$	11,686
Investment in federal funds		1,156			2,577
Investment securities available-for-sale, at fair value		30,411			31,683
Investment securities held-to-maturity, at amortized cost		14,819			15,334
Loans held for sale		950			81
Loans receivable, net		476,888			473,521
Accrued income receivable		1,984			1,979
Foreclosed real estate and repossessed assets, net		528			421
Premises and equipment, net		9,670			9,612
Bank owned life insurance		9,325			9,248
Federal Home Loan Bank stock, at cost		6,252			6,252
Deferred income taxes		2,310			2,413
Other assets		3,391			3,446

Total assets	$	564,139		$	568,253

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	414,080		$	405,875
Borrowed funds		93,421			102,842
Mortgagors' escrow accounts		2,406			4,832
Other liabilities		1,811			2,444

Total liabilities		511,718			515,993

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;
7,604,375 shares issued, 7,018,627 shares outstanding at March
31, 2011 and 7,018,823 shares outstanding at December 31, 2010		76			76
Paid-in capital		33,788			33,786
Retained earnings		26,242			25,986
Unearned ESOP shares (173,846 shares at March 31, 2011
and December 31, 2010)		(1,738	)		(1,738	)
Unearned stock awards (2,200 shares at March 31, 2011
and 2,900 shares at December 31, 2010)		(21	)		(29	)
Treasury stock, at cost 589,071 shares at March 31, 2011
and 588,875 shares at December 31, 2010)		(6,178	)		(6,176	)
Accumulated other comprehensive income		252			355

Total stockholders' equity		52,421			52,260

Total liabilities and stockholders' equity	$	564,139		$	568,253

See accompanying notes to consolidated financial statements

Table of Contents

Consolidated Statements of Income

(In thousands, except per share data)

	Three Months Ended March 31,
	2011		2010
	(Unaudited)
Interest income
Interest on loans	$	6,332	$	6,684
Interest and dividends on investments and deposits		430		459
Total interest income		6,762		7,143

Interest expense
Interest on deposits		1,746		1,811
Interest on borrowed funds		612		804
Total interest expense		2,358		2,615

Net interest income		4,404		4,528

Provision for loan losses		438		809

Net interest income after provision for loan losses		3,966		3,719

Noninterest income
Fees for services related to deposit accounts		213		246
Fees for other services		174		139
Net gain on investments		147		8
Mortgage banking income		128		26
Income from bank owned life insurance		77		84
Income from investment advisory services, net		74		41
Other income		24		27
Total noninterest income		837		571

Noninterest expense
Compensation, taxes and benefits		2,357		2,075
Office occupancy		607		587
Computer processing		262		229
FDIC insurance premiums		204		162
Directors compensation		176		216
Professional fees		138		111
Advertising		99		73
Office supplies		47		51
Loss on foreclosed real estate, net		39		18
Public company expenses		18		11
Costs related to terminated merger		-		66
Other expenses		304		255
Total noninterest expense		4,251		3,854

Income before provision
for income taxes		552		436

Provision for income taxes		156		122

Net income	$	396	$	314

Earnings per common share - basic and diluted	$	0.06	$	0.05

See accompanying notes to consolidated financial statements

Table of Contents

Consolidated Statements of Cash Flows (In thousands)

	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities	(Unaudited)
Net income	$	396		$	314
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		438			809
Depreciation and amortization expense		199			197
Gain on sale of loans held for sale		(77	)		-
Origination of loans held for sale		(4,653	)		-
Proceeds from sale of loans held for sale		3,780			-
Net amortization from investments		39			8
Amortization of intangible assets		8			8
Deferred income tax provision		124			-
Stock-based compensation		47			169
Net gain on investments		(147	)		(8	)
Net change in:
Accrued income receivable		(5	)		23
Deferred loan fees		(30	)		(46	)
Cash surrender value of life insurance		(77	)		(84	)
Other assets		49			210
Other liabilities		(669	)		(72	)
Net cash (used) provided by operating activities		(578	)		1,528
Cash flows from investing activities
Proceeds from maturities and repayments of available-for-sale securities		1,131			1,578
Proceeds from sale of available-for-sale securities		147			1,982
Proceeds from maturities of held-to-maturity securities		492			75
Purchase of available-for-sale securities		-			(6,204	)
Loan originations net of principal payments		(3,921	)		(8,614	)
Purchase of property and equipment		(259	)		(115	)
Proceeds from the sale of other real estate owned		120			140
Net cash used by investing activities		(2,290	)		(11,158	)
Cash flows from financing activities
Net change in time deposits		(2,351	)		3,065
Net change in other deposit accounts		10,556			4,081
Net change in mortgagors' escrow deposits		(2,427	)		(2,268	)
Advances from Federal Home Loan Bank		-			3,000
Repayment of advances from Federal Home Loan Bank		(14,882	)		(8,782	)
Net change in repurchase agreements		5,461			7,731
Treasury stock acquired		(1	)		(1	)
Dividends paid to stockholders		(140	)		(79	)
Net cash (used) provided by financing activities		(3,784	)		6,747
Net change in cash and cash equivalents		(6,652	)		(2,883	)
Cash and cash equivalents at beginning of period		14,263			12,146
Cash and cash equivalents at end of period	$	7,611		$	9,263
Cash paid during the period for:
Interest	$	2,381		$	2,607
Income taxes		1			1
Non-cash transactions:
Transfer of loans to foreclosed assets	$	227		$	120

See accompanying notes to consolidated financial statements.

Table of Contents

Notes to Consolidated Financial Statements

March 31, 2011 and 2010 (unaudited)

and December 31, 2010

NOTE 1 – NATURE OF OPERATIONS

Naugatuck Valley Financial Corporation (the “Company”) was organized as a federal corporation at the direction of Naugatuck Valley Savings and Loan (the “Bank”) in connection with the mutual holding company reorganization of Naugatuck Valley Savings. The reorganization and initial public offering of Naugatuck Valley Financial was completed on September 30, 2004. In the offering, Naugatuck Valley Financial issued a majority of its outstanding shares of common stock to Naugatuck Valley Mutual Holding Company, the mutual holding company parent of the Bank. As long as Naugatuck Valley Mutual exists, it will own at least a majority of Naugatuck Valley Financial Corporation’s common stock.

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

NOTE 2 - BASIS OF PRESENTATION

The accompanying consolidated interim financial statements are unaudited and include the accounts of the Company, the Bank, and the Bank’s wholly owned subsidiary, Naugatuck Valley Mortgage Servicing Corporation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to 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 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 financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and income and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the 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 three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

These 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 for the year ended December 31, 2010. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Table of Contents

Certain reclassifications have been made to prior period financial statements to conform to the March 31, 2011 financial statement presentation. These reclassifications only changed the reporting categories but did not affect our 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 Company considers the following to be critical accounting policies: other-than-temporary impairment, allowance for loan losses and deferred income taxes.

Other-than-temporary impairment. Each quarter, the Company reviews its investment portfolio to determine whether unrealized losses are temporary, based on an evaluation of the creditworthiness of the issuers/guarantors as well as the underlying collateral, if applicable, as well as the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an other-than-temporary impairment condition. This includes, but is not limited to, an evaluation of the type of security and length of time and extent to which the fair value has been less than cost as well as certain collateral related characteristics.

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 collectability 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 at least 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 an agency 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.

Deferred Income Taxes. The Company accounts for certain income and expense items differently for financial reporting purposes than for income tax purposes. Provisions for deferred taxes are being made in recognition of these temporary differences. It is the Company's policy to recognize interest and penalties related to unrecognized tax liabilities within income tax expense in the consolidated statements of income.

NOTE 4 — Accounting Standards Updates

On April 5, 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (Topic 310). This update clarifies, when evaluating a restructuring as a troubled debt restructuring, whether a creditor has granted a concession to a debtor and whether the debtor is experiencing financial difficulties. The objective of this amendment is to promote greater consistency in the application of U.S. GAAP for debt restructurings from the creditor’s perspective. The effective date of this update is for the first interim period beginning after June 15, 2011, and should be applied retrospectively to the beginning of the current year. The Company has not determined the impact, if any, of the adoption of the standard.

Table of Contents

NOTE 5 – INVESTMENT SECURITIES

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

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Available-for-sale securities:
U.S. government and agency obligations	$	1,020	$	62	$	-		$	1,082
Mortgage-backed securities - GSEs		18,115		812		-			18,927
Collateralized mortgage obligations		2,539		27		(63	)		2,503
Total debt securities		21,674		901		(63	)		22,512
Auction-rate trust preferred securities		8,200		-		(301	)		7,899

Total available-for-sale securities	$	29,874	$	901	$	(364	)	$	30,411


	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Held-to-maturity securities:
Mortgage-backed securities	$	14,819	$	40	$	(240	)	$	14,619

Total held-to-maturity securities	$	14,819	$	40	$	(240	)	$	14,619

At December 31, 2010, the composition of the investment portfolio was:

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Available-for-sale securities:
U.S. government and agency obligations	$	1,022	$	65	$	-		$	1,087
Mortgage-backed securities - GSEs		19,093		867		-			19,960
Collateralized mortgage obligations		2,706		31		(61	)		2,676
Total debt securities		22,821		963		(61	)		23,723
Auction-rate trust preferred securities		8,200		-		(240	)		7,960

Total available-for-sale securities	$	31,021	$	963	$	(301	)	$	31,683


	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Held-to-maturity securities:
Mortgage-backed securities	$	15,334	$	26	$	(256	)	$	15,104

Total held-to-maturity securities	$	15,334	$	26	$	(256	)	$	15,104

Included in collateralized mortgage obligations was one private label security with an amortized cost of $419,000 and $436,000, and fair value of $356,000 and $376,000 at March 31, 2011 and December 31, 2010, respectively.

The Company has identified 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 have undergone 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.

Table of Contents

As a result of the reviews, management has determined that there has been no deterioration 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.

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 March 31, 2011, and December 31, 2010.

	At March 31, 2011
	Securities in Continuous Unrealized Loss Position Less Than 12 Months
(Dollars in thousands)	Number of Securities		Market Value		Unrealized Loss

Mortgage backed securities		3	$	9,719	$	(240	)

Total securities in unrealized loss position		3	$	9,719	$	(240	)


	Securities in Continuous Unrealized Loss Position 12 or More Consecutive Months
	Number of Securities		Market Value		Unrealized Loss
(Dollars in thousands)
Collateralized mortgage obligations		1	$	356	$	(63	)
Money market preferred stocks		2		2,099		(301	)

Total securities in unrealized loss position		3	$	2,455	$	(364	)

	At December 31, 2010
	Securities in Continuous Unrealized Loss Position Less Than 12 Months
(Dollars in thousands)	Number of Securities		Market Value		Unrealized Loss

Collateralized mortgage obligations		1	$	182	$	(3	)
Mortgage backed securities		5		14,028		(256	)

Total securities in unrealized loss position		6	$	14,210	$	(259	)


	Securities in Continuous Unrealized Loss Position 12 or More Consecutive Months
	Number of Securities		Market Value		Unrealized Loss
(Dollars in thousands)
Collateralized mortgage obligations		1	$	376	$	(58	)
Money market preferred stocks		2		2,160		(240	)

Total securities in unrealized loss position		3	$	2,536	$	(298	)

Table of Contents

NOTE 6 – LOANS RECEIVABLE

A summary of loans receivable at March 31, 2011 and December 31, 2010 is as follows:

(Dollars in thousands)	March 31, 2011			December 31, 2010

Real estate loans:
One-to-four family	$	217,778		$	219,286
Construction		27,429			30,921
Multi-family and commercial real estate		168,387			160,235
Total real estate loans		413,594			410,442

Commercial business loans		36,395			34,742
Consumer loans:
Savings accounts		938			956
Personal		216			236
Automobile		168			168
Home equity		33,564			34,807
Total consumer loans		34,886			36,167
Totals loans		484,875			481,351

Less:
Allowance for loan losses		6,684			6,393
Undisbursed construction loans		929			1,034
Deferred loan origination fees		374			403
Loans receivable, net	$	476,888		$	473,521

Weighted average yield		5.42	%		5.47	%

Credit Quality of Financing Receivables and the Allowance for Loan Losses

Management segregates the loan portfolio into portfolio segments which is defined as the level 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. The Company has experienced a low level of foreclosures on its owner occupied loan portfolio during recent periods and believe this is due mainly to its conservative underwriting and lending strategies which do not allow for risky loans such as “Option ARM,” “sub-prime” or “Alt-A” loans.

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

Construction and Land Development Loans. This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss

Table of Contents

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.

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 written at a maximum of 75% of the appraised value of the property and we require that we have 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 90 days or more. 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 no less than 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 Thrift Supervision, as an integral part of its examination process, periodically reviews the allowance for loan losses and may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.

The allowance generally consists of specific (or allocated) and general components. The specific component relates to loans that are recognized as impaired. For such impaired loans, an allowance is established 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 general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Additional general reserves are placed on loans classified as either doubtful, substandard or special mention.

Table of Contents

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.

Transactions in the allowance for loan losses account were as follows for the periods indicated:

(In thousands)	Three Months Ended March 31, 2011			For the Year Ended December 31, 2010

Balance at beginning of year	$	6,393		$	3,996
Provision for loan losses		438			3,360
Charge-offs		(147	)		(978	)
Recoveries		-			15

Balance at end of period	$	6,684		$	6,393

The following tables set forth the balance of the allowance for loan losses at March 31, 2011 and December 31, 2010, 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 and lease losses for the quarter ended March 31, 2011 and the year ended December 31, 2010. 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.

	For the Three Months Ended March 31, 2011
(In thousands)	One-to-Four Family			Construction			Commercial Real Estate		Commercial			Consumer		Total
Allowance for Loan Losses:

Beginning Balance	$	1,585		$	600		$	2,714	$	884		$	610	$	6,393
Charge-offs		(115	)		-			-		(32	)		-		(147	)
Recoveries		-			-			-		-			-		-
Provisions		54			(45	)		441		(110	)		98		438
Ending Balance	$	1,524		$	555		$	3,155	$	742		$	708	$	6,684
Ending Balance individually evaluated for impairment	$	2,489		$	4,723		$	2,601	$	87		$	372	$	10,272
Ending Balance collectively evaluated for impairment	$	-		$	-		$	-	$	-		$	-	$	-

Table of Contents

	For the Year Ended December 31, 2010
(In thousands)	One-to-Four Family			Construction			Commercial Real Estate		Commercial			Consumer			Total
Allowance for Loan Losses:

Beginning Balance	$	1,044		$	632		$	1,489	$	481		$	350		$	3,996
Charge-offs		(27	)		(170	)		-		(754	)		(27	)		(978	)
Recoveries		-			-			-		15			-			15
Provisions		568			138			1,225		1,142			287			3,360
Ending Balance	$	1,585		$	600		$	2,714	$	884		$	610		$	6,393
Ending Balance individually evaluated for impairment	$	2,677		$	4,059		$	1,106	$	1,598		$	277		$	9,717
Ending Balance collectively evaluated for impairment	$	-		$	-		$	-	$	-		$	-		$	-

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 there continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

When assets are classified as special mention, substandard or doubtful, the Company disaggregates these assets and allocates a portion of the related general loss allowances to such assets as the Company deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by our principal federal regulator, the Office of Thrift Supervision, 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 March 31, 2011:

Commercial Loans - Credit Risk Profile by Internally Assigned Grade:
		At March 31, 2011
(In thousands)		Commercial Loans		Commercial Real Estate Construction		Commercial Real Estate
Grade:
	4	$	5,828	$	220	$	34,143
	5		25,094		9,922		105,104
	6		3,012		5,847		16,644
	7		2,374		8,977		12,496
	8		87		-		-
Total		$	36,395	$	24,966	$	168,387

Table of Contents

Consumer Loans - Credit Risk Profile by Internally Assigned Grade:
	At March 31, 2011
(In thousands)	Residential - Prime		Residential - Subprime

Grade:
Pass	$	212,870	$	-
Special Mention		410		-
Substandard		3,586		-
Doubtful		912		-
Total	$	217,778	$	-

Consumer Loans - Credit Risk Profile Based on Payment Activity:
	At March 31, 2011
(In thousands)	Consumer - Other
Grade:
Performing	$	34,374
Nonperforming		512
Total	$	34,886

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

Loans are automatically placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if the loan has been restructured. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent. Management works closely with the asset quality committee of the board of directors 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 March 31, 2011 and December 31, 2010:

Table of Contents

	Age Analysis of Past Due Financing Receivables As of March 31, 2011

(In thousands)	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days (Nonaccrual)		Total Past Due		Current		Carrying Amount > 90 Days and Accruing		Considered Current That Have Been Modified in Previous Year
Commercial
Commercial - other	$	111	$	121	$	1,198	$	1,430	$	34,965	$	-	$	2,248
Commercial RE construction		433		-		5,892		6,325		18,641		-		5,587
Commercial RE		1,510		-		5,695		7,205		161,182		-		17,491
Consumer								-
Consumer - other		63		440		512		1,015		33,871		-		298
Residential								-
Residential -prime		1,014		393		3,843		5,250		214,991		-		976
Residential -subprime		-		-		-		-		-		-		-
Total	$	3,131	$	954	$	17,140	$	21,225	$	463,650	$	-	$	26,600

Age Analysis of Past Due Financing Receivables As of December 31, 2010

(In thousands)	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days (Nonaccrual)		Total Past Due		Current		Carrying Amount > 90 Days and Accruing		Considered Current That Have Been Modified in Previous Year
Commercial
Commercial - real estate	$	60	$	115	$	1,356	$	1,531	$	33,211	$	-	$	2,494
Commercial RE construction		2,707		-		5,151		7,858		20,284		-		4,379
Commercial RE		1,686		258		6,242		8,186		152,049		-		16,525
Consumer								-
Consumer - other		470		100		515		1,085		35,082		-		208
Residential								-
Residential -prime		1,745		18		4,624		6,387		215,678		-		1,141
Residential -subprime		-		-		-		-		-		-		-
Total	$	6,668	$	491	$	17,888	$	25,047	$	456,304	$	-	$	24,747

The following table is a summary of nonaccrual loans by loan class as of March 31, 2011 and December 31, 2010:

Loans on Nonaccrual Status
	As of
(In thousands)	March 31, 2011		December 31, 2010

Commercial	$	1,198	$	1,356
Commercial - real estate
Commercial RE construction		5,892		5,151
Commercial RE		5,695		6,242
Consumer
Consumer - other		512		515
Residential
Residential -prime		3,843		4,624
Residential -subprime		-		-
Total	$	17,140	$	17,888

Nonperforming loans (defined as nonaccrual loans and troubled debt restructurings) totaled $17.1 million at March 31, 2011 compared to $17.9 million at December 31, 2010. The amount of income that was contractually due but not recognized on nonperforming loans totaled $655,000 at March 31, 2011, compared with $513,000 at December 31, 2010.

Table of Contents

At March 31, 2011, there were no loans 90 or more days past due and still accruing interest. At March 31, 2011, the Company had 64 loans on non-accrual status with foregone interest in the amount of approximately $655,000. Included in these loans are 26 loans which are not 90 days past due, but were placed on non-accrual status as a result of a recent modification or a doubtful classification.

The Company accounts for impaired loans under generally accepted accounting principles. 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 provides a specific reserve for that portion of the asset that is deemed uncollectible.

At March 31, 2011, the Bank had $10.3 million of loans which were considered to be impaired, with an allocated allowance of $918,000, compared to $9.7 million of such loans at December 31, 2010 with an allowance of $929,000. The increase is primarily due to one commercial loan secured by real estate, two residential mortgage loans and one home equity loan which were classified during the period, partially offset by removing one commercial business loan and the partial charge off of one residential mortgage loan.

The following tables are a summary of impaired loans by class of loans as of March 31, 2011 and December 31, 2010:

	Impaired Loans For the Three Months Ended March 31, 2011
(In thousands)	Carrying Amount		Unpaid Principal Balance		Associated Allowance		Average Carrying Amount		Interest Income Recognized
With no specific allowance recorded:
Commercial	$	4,209	$	4,209	$	-	$	4,110	$	-
Consumer - other		1,577		1,577		-		1,458		11
With an allowance recorded:
Commercial		3,202		3,202		548		2,738		18
Consumer - other		1,284		1,284		370		1,284		8
Total:
Commercial		7,411		7,411		548		6,848		18
Consumer - other		2,861		2,861		370		2,742		19

	Impaired Loans For the Year Ended December 31, 2010
(In thousands)	Carrying Amount		Unpaid Principal Balance		Associated Allowance		Average Carrying Amount		Interest Income Recognized
With no specific allowance recorded:
Commercial	$	4,011	$	4,011	$	-	$	3,985	$	4
Consumer - other		1,137		1,137		-		1,139		28
With an allowance recorded:
Commercial		2,752		2,752		504		2,758		50
Consumer - other		1,816		1,816		425		1,802		53
Total:
Commercial		6,763		6,763		504		6,743		54
Consumer - other		2,953		2,953		425		2,941		81

Table of Contents

NOTE 7 - EARNINGS PER SHARE

Basic net income 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 net income per common share is computed in a manner similar to basic net income 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 months ended March 31, 2011, anti-dilutive options excluded from the calculations totaled 318,800 options (with an exercise price of $11.10) and 7,500 options (with an exercise price of $12.49). For the three months ended March 31, 2010, anti-dilutive options excluded from the calculations totaled 345,930 options (with an exercise price of $11.10) and 7,500 options (with an exercise price of $12.49). 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 March 31,
	2011		2010

Net income	$	396,000	$	314,000

Weighted-average common shares outstanding:
Basic		6,844,958		6,829,108
Effect of dilutive stock options
and restrictive stock awards		-		-
Diluted		6,844,958		6,829,108

Net income per common share:
Basic	$	0.06	$	0.05
Diluted	$	0.06	$	0.05

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.

Table of Contents

	Three Months Ended March 31,
	2011			2010
	(In thousands)

Net income	$	396		$	314

Other comprehensive income:
Unrealized gain (loss) on securities available-for-sale		(125	)		169
Reclassification adjustment for gains (losses)
realized in net income		-			(8	)

Other comprehensive income (loss) before tax effect		(125	)		161

Income tax effect related to items of other
comprehensive income		(22	)		59

Other comprehensive income (loss) net of tax effect		(103	)		102

Total comprehensive income	$	293		$	416

NOTE 9 - EQUITY INCENTIVE PLAN

Under the Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan (the “Incentive Plan”), the Company may grant up to 372,614 stock options and 149,045 shares of restricted stock to its employees, officers and directors for an aggregate amount of up to 521,659 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		December 18, 2007		March 20, 2007		March 21, 2006		July 26, 2005

Option awards
Awarded		1,000		2,000		7,500		6,500		354,580
Exercise price	$	11.10	$	11.10	$	12.49	$	11.10	$	11.10
Maximum term in years		10		10		10		10		10
Restricted stock awards
Awarded		1,000		3,000		2,000		1,500		139,712

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 $11.10, 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 is recording 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 $5,751 for the three months ended March 31, 2011, compared to $138,940 for the three months ended March 31, 2010 in connection with the stock option and restricted stock awards. The expense declined in the 2010 period due to the final vesting of the initial grants.

Table of Contents

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:

Grant date	July 26, 2008			December 18, 2007			March 20, 2007			March 21, 2006			July 26, 2005

Dividend yield		2.74	%		2.20	%		1.60	%		1.89	%		1.44	%
Expected volatility		13.40	%		11.00	%		10.49	%		11.20	%		11.47	%
Risk-free rate		3.56	%		3.63	%		4.48	%		4.61	%		4.18	%
Expected life in years		6.5			6.5			6.5			6.5			6.5

Weighted average fair value
of options at grant date	$	1.51		$	1.18		$	2.55		$	2.25		$	2.47

NOTE 10 - DIVIDENDS

On January 25, 2011, the Company's Board of Directors declared a cash dividend of $0.03 per outstanding common share, which was paid on March 1, 2011, to stockholders of record as of the close of business on February 8, 2011.

Naugatuck Valley Mutual Holding Company, the Company's mutual holding company and majority stockholder, waived receipt of all except $60,000 of the dividend payable to it, with the non-objection of the Office of Thrift Supervision ("OTS").

NOTE 11 – FAIR VALUE

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

The following is a summary of the carrying value and estimated fair value of the Company’s significant financial instruments as of March 31, 2011 and December 31, 2010:

Table of Contents

	March 31, 2011				December 31, 2010
(In thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value

Financial Assets
Cash and cash equivalents	$	7,611	$	7,611	$	14,263	$	14,263
Investment securities available for sale		30,411		30,411		31,683		31,683
Investment securities held-to-maturity		14,819		14,619		15,334		15,104
Loans held for sale		950		967		81		81
Loans receivable, net		476,888		491,043		473,521		478,104
Accrued income receivable		1,984		1,984		1,979		1,979
Servicing rights		384		460		364		420

Financial Liabilities
Deposits	$	414,080	$	411,026	$	405,875	$	403,091
Borrowed funds		93,421		95,122		102,842		104,766
Mortgagors' escrow accounts		2,406		2,406		4,832		4,832

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. The Company had no securities classified as level 1 at March 31, 2011 or December 31, 2010.

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.

Table of Contents

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 Bank sells residential mortgage loans with servicing rights retained. At the time of the sale, the Bank determines the value of the retained servicing rights, which represents the present value of the differential between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments. If material, a portion of the gain on the sale of the loan is recognized as due to the value of the servicing rights, and a servicing asset is recorded.

The Bank has 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 three months ended March 31, 2011 and 2010, foreclosed properties and repossessed assets with a carrying value of $227,000 and $120,000, 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 no subsequent valuation adjustments to foreclosed properties and repossessed assets for the three months ended March 31, 2011 and 2010. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements are classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements are classified as Level 3.

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.

Table of Contents

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

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

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

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

	March 31, 2011 Fair Value Measurements
(In thousands)	Level 1		Level 2		Level 3		Total

Assets measured at fair value on a recurring basis:
Available-for-sale investment securities	$	-	$	22,512	$	7,899	$	30,411

Assets measured at fair value on a non-recurring basis:
Servicing rights		-		-		460		460
Impaired loans		-		9,346		9		9,355
Real estate owned and other repossessed assets		-		-		528		528

There were no significant transfers of assets between Levels 1, 2 or 3 of the fair value hierarchy during the three months ended March 31, 2011.

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

(In thousands)	For the Three Months Ended March 31, 2011			For the Year Ended December 31, 2010

Balance at beginning of period	$	7,960		$	7,880
New purchases		-			-
Transfer to (from) level 3		-			-
Increase (decrease) in fair value of securities
included in accumulated other
comprehensive income		(61	)		80
Impairment charges included in net income		-			-
Proceeds from sale of level 3 securities		-			-
Redemptions at par		-			-
Balance at end of period	$	7,899		$	7,960

Table of Contents

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, 2010 included in the Company’s Annual Report on Form 10-K.

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 for the year ended December 31, 2010 and Part II of this Quarterly Report on Form 10-Q under “Item 1A. Risk Factors”. 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 March 31, 2011 and December 31, 2010

Total assets decreased by $4.1 million, or 0.7%, to $564.1 million from December 31, 2010 to March 31, 2011, primarily due to a decrease of $6.7 million in cash and cash equivalents and a decrease of $1.8 million in investments, partially offset by an increase of $3.4 million in loans. The increase in loans primarily reflects an increase of $8.1 million in multi-family and commercial real estate loans and an increase of $1.6 million in commercial business loans, partially offset by a decrease of $3.5 million in construction loans, a decrease of $1.5 million in residential mortgage loans and a decrease of $1.3 million in consumer loans. The increase in loans was primarily funded by increases in deposits. The decrease in the residential mortgage portfolio is due to the sale of fixed rate residential mortgage loans through our secondary mortgage operation.

Total liabilities were $511.7 million at March 31, 2011 compared to $516.0 million at December 31, 2010. Deposits at March 31, 2011 increased $8.2 million, or 2.0%, over December 31, 2010. Between December 31, 2010 and March 31, 2011, core deposits (defined as all deposits other than certificates of deposit) increased $10.6 million while certificates of deposit decreased $2.4 million. Management attributes the increase in core deposits to depositor preference to maintain funds in short term accounts given the expectation for higher market interest rates. Borrowed funds, including advances from the Federal Home Loan Bank of Boston and reverse repurchase agreements, decreased $9.4 million, from $102.8 million at December 31, 2010 to $93.4 million at March 31, 2011. The increases in deposits were used primarily to fund the growth in loans and to repay borrowings.

Total stockholders’ equity increased $161,000, from $52.3 million at December 31, 2010 to $52.4 million at March 31, 2011. The increase in stockholders’ equity was due to net income of $396,000 for the three months and $13,000 in capital adjustments related to our 2005 Equity Incentive Plan, partially offset by dividends of $145,000 paid to stockholders and a net decrease in the unrealized gain on available for sale securities of $103,000.

Comparison of Operating Results For the Three Months Ended March 31, 2011 and 2010

General. For the three months ended March 31, 2011, net income was $396,000 compared to $314,000 for the three months ended March 31, 2010, an increase of $82,000 or 26.1%. The increase in the three month period was primarily due to lower loan loss provisions and higher noninterest income, partially offset by a lower level of net interest income and higher noninterest expense.

Table of Contents

Net Interest Income. Net interest income for the quarter ended March 31, 2011 totaled $4.4 million compared to $4.5 million for the quarter ended March 31, 2010, a decrease of $124,000 or 2.7%. The decrease in net interest income was primarily due to a decrease in interest income of $381,000, or 5.3%. The decrease was primarily due to a 32 basis point decrease in the average rates earned on interest earning assets, from 5.44% for the three months ended March 31, 2010 to 5.12% for the three months ended March 31, 2011, primarily as a result of lower market interest rates.

The decrease in interest income was partially offset by a decrease in interest expense. The average rates paid on interest bearing liabilities decreased by 22 basis points from 2.06% for the three months ended March 31, 2010 to 1.84% for the three months ended March 31, 2011 primarily as a result of lower market interest rates. The average balances of deposits increased by 6.6% for the three months ended March 31, 2011. The average balances of borrowings decreased by 17.4% over the same period. Increases in the average balances of deposits were experienced in all categories of deposits. The increases in deposits were primarily used to pay down advances from the Federal Home Loan Bank.

The following table summarizes changes in interest income and interest expense for the three months ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011		2010		% Change
	(Dollars in thousands)
Interest income:
Loans	$	6,332	$	6,684		(5.27	)%
Fed Funds sold		-		1		(100.00	)
Investment securities		430		458		(6.11	)
Total interest income		6,762		7,143		(5.33	)
Interest expense:
Certificate accounts		1,587		1,658		(4.28	)
Regular savings accounts		104		85		22.35
Checking and NOW accounts		11		11		-
Money market savings accounts		44		57		(22.81	)
Total interest-bearing deposits		1,746		1,811		(3.59	)
FHLB advances		589		772		(23.70	)
Other borrowings		23		32		(28.13	)
Total interest expense		2,358		2,615		(9.83	)
Net interest income	$	4,404	$	4,528		(2.74	)%

Table of Contents

The following table summarizes average balances and average yields and costs for the three months ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011					2010
	Average Balance		Yield/ Cost			Average Balance		Yield/ Cost
	(Dollars in thousands)

Interest-earning assets
Loans	$	473,877		5.34	%	$	474,976		5.63	%
Fed Funds sold		2,154		0.00			4,128		0.10
Investment securities		45,543		3.78			39,873		4.59
Federal Home Loan Bank stock		6,252		0.00			6,252		0.00

Total interest-earning assets	$	527,826		5.12		$	525,229		5.44

Interest-bearing liabilities
Certificate accounts	$	238,272		2.66		$	233,657		2.84
Regular savings accounts & escrow		85,227		0.49			68,421		0.50
Checking and NOW accounts		59,408		0.07			56,269		0.08
Money market savings accounts		26,799		0.66			25,881		0.88

Total interest-bearing deposits		409,706		1.70			384,228		1.89
FHLB advances		88,641		2.66			109,895		2.81
Other borrowings		12,966		0.71			13,170		0.97

Total interest-bearing liabilities	$	511,313		1.84	%	$	507,293		2.06	%

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 appropriateness of the allowance for loan losses consists of the following process:

On a quarterly basis, or more often if warranted, management analyzes the loan portfolio. For individually evaluated loans that are considered impaired, an allowance will be established 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. 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.

Table of Contents

In addition, we engage an independent consultant to review our commercial loan portfolio and consider recommendations based on their review of specific credits in the portfolio for classifying and monitoring these loans.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. 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 we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio during their examination process, will not request us 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 our 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 months ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011			2010
	(In thousands)
Allowance at beginning of period	$	6,393		$	3,996
Provision for loan losses		438			809

Charge-offs		(147	)		(10	)
Recoveries		-			-
Net recoveries (charge-offs)		(147	)		(10	)
Allowance at end of period	$	6,684		$	4,795

The provision for loan losses was $438,000 for the three months ended March 31, 2011, compared to $809,000 for the same period in 2010. The balances of non-performing assets decreased $641,000 between December 31, 2010 and March 31, 2011. Classified assets also decreased $1.9 million over the same period. As a result, the level of allowance for loan losses to gross loans rose from 0.99% at March 31, 2010 to 1.38% at March 31, 2011, allowing for the lower provision in the 2011 period. Charge-offs were $147,000 during the three months ended March 31, 2011, compared to $10,000 during the three months ended March 31, 2010. The charge-offs in the 2011 period were due to the write-down of $115,000 on a one- to four-family loan which is in the process of foreclosure, and the partial charge off in the amount of $32,000 of two commercial term loans as a part of a workout of a non-performing commercial relationship. The balance of this relationship was paid in full during March 2011.

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.

Table of Contents

	At March 31, 2011			At December 31, 2010			% Change
	(Dollars in thousands)
Nonaccrual loans	$	10,524		$	11,127			(5.42	)%
Troubled debt restructurings		6,616			6,761			(2.14	)
Real estate owned		438			331			32.33
Other repossessed assets		90			90			-
Total nonperforming assets	$	17,668		$	18,309			(3.50	)%

Total nonperforming loans to total loans		3.54	%		3.73	%		(5.09	)%

Total nonperforming loans to total assets		3.04	%		3.15	%		(3.49	)%

Total nonperforming assets to total assets		3.13	%		3.22	%		(2.80	)%

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

	At March 31, 2011		At December 31, 2010
	(In thousands)

Special mention assets	$	29,730	$	28,593
Substandard assets		30,405		33,377
Doubtful assets		95		111
Loss assets		-		-
Total classified assets	$	60,230	$	62,081

The 3.0% decrease in the level of classified assets from December 31, 2010 to March 31, 2011 was primarily in our 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 reserves and, in certain cases, specific reserves) have been established to account for the increased credit risk of these assets. At March 31, 2011, $17.7 million of classified assets were nonperforming assets, compared to $18.3 million at December 31, 2010.

Noninterest Income. The following table summarizes noninterest income for the three months ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011		2010		% Change
	(Dollars in thousands)
Fees for services related to deposit accounts	$	213	$	246		(13.41	)%
Fees for other services		174		139		25.18
Net gain on investments		147		8		1,737.50
Mortgage banking income		128		26		392.31
Income from bank owned life insurance		77		84		(8.33	)
Income from investment advisory services, net		74		41		80.49
Other income		24		27		(11.11	)
Total	$	837	$	571		46.58	%

Noninterest income was $837,000 for the quarter ended March 31, 2011 compared to $571,000 for the quarter ended March 31, 2010, an increase of 46.6%. The increase is primarily due to a partial recovery of $147,000 with respect to Fannie Mae auction rate pass-through certificates on which we recorded an other-than-temporary impairment charge of $3.2 million in the third quarter of 2008. We also experienced a $102,000 increase in income generated by increased activity in the secondary mortgage market, combined with a $35,000 increase in fees for other services and $33,000 in increased income from investment advisory services. These increases were partially offset by a $33,000 decrease in fees for services related to deposit accounts and a $7,000 decrease in income from bank owned life insurance.

Table of Contents

Noninterest Expense. The following table summarizes noninterest expense for the three months ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011		2010		% Change
	(Dollars in thousands)
Compensation, taxes and benefits	$	2,357	$	2,075		13.59	%
Office occupancy		607		587		3.41
Computer processing		262		229		14.41
FDIC insurance premiums		204		162		25.93
Directors compensation		176		216		(18.52	)
Professional fees		138		111		24.32
Advertising		99		73		35.62
Office supplies		47		51		(7.84	)
Loss on foreclosed real estate, net		39		18		116.67
Public company expenses		18		11		63.64
Costs related to terminated merger		-		66		(100.00	)
Other expenses		304		255		19.22
Total	$	4,251	$	3,854		10.30	%

Noninterest expense was $4.3 million for the quarter ended March 31, 2011 compared to $3.9 million for the quarter ended March 31, 2010. The increase was the result of increases in compensation costs ($282,000), computer processing ($33,000), professional fees ($27,000), advertising ($26,000), loss on foreclosed real estate ($21,000), and office occupancy ($20,000), partially offset by a $40,000 decrease in directors’ compensation over the 2010 period. Increases in compensation, computer processing, advertising and office occupancy were due primarily to the expansion of our secondary mortgage operation. Additionally, costs of $66,000 associated with the terminated acquisition are included in the 2010 period.

Income Taxes. Provision for income taxes was $156,000 for the quarter ended March 31, 2011 compared to $122,000 for the quarter ended March 31, 2010 primarily due to the higher level of net income before provision for income taxes.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future short-term financial obligations. The Company’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 Company projects liquidity availability and demands on this liquidity for the next 90 days. The Company 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 Company’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 March 31, 2011, cash and cash equivalents totaled $7.6 million, including federal funds of $1.2 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $30.4 million at March 31, 2011. At March 31, 2011, the Company had the ability to borrow a total of $148.5 million from the Federal Home Loan Bank of Boston, of which $81.0 million in borrowings was outstanding, along with $12.4 million in repurchase agreements. At March 31, 2011, the Company had arranged overnight lines of credit of $2.5 million with the Federal Home Loan Bank of Boston. The Company had no overnight advances outstanding with the Federal Home Loan Bank of Boston as of that date. In addition, at March 31, 2011, the Company had the ability to borrow $3.5 million from a correspondent bank. The Company had no advances outstanding on this line at March 31, 2011.

Table of Contents

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

(In thousands)	March 31, 2011		December 31, 2010
Commitments to extend credit:
Loan commitments	$	11,803	$	12,233
Unused lines of credit		20,397		19,751
Amounts due mortgagors on construction loans		15,911		17,867
Amounts due on commercial loans		22,325		19,788
Commercial letters of credit		4,112		4,198

Certificates of deposit due within one year of March 31, 2011 totaled $171.4 million, or 41.4% of total deposits. If these deposits do not remain with us, the Company will be required to seek other sources of funds, including other certificates of deposit and our available lines of credit. Depending on market conditions, the Company 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 March 31, 2012. Based on past experience, however, the Company believes that a significant portion of our certificates of deposit will remain with us. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

Historically, the Company (on a consolidated basis) has remained highly liquid. The Company is not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material decrease in liquidity. The Company expects that all of our liquidity needs, including the contractual commitments stated above, the estimated costs of our branch expansion plans and increases in loan demand can be met by our currently available liquid assets and cash flows. 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. The Company expects that our currently available liquid assets and our ability to borrow from the Federal Home Loan Bank of Boston would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.

The Company’s primary investing activities are the origination of loans and the purchase of securities. For the three months ended March 31, 2011, the Company originated $38.0 million of loans, including renewals, refinances and advances, and purchased $3.9 million of securities. These activities were funded primarily by the proceeds from sales and maturities of available-for-sale securities and held to maturity securities of $1.6 million and an increase of $8.2 million in deposits.

Financing activities consist primarily of activity in deposit accounts and in Federal Home Loan Bank advances. The Company experienced a net increase in total deposits of $8.2 million for the three months ended March 31, 2011. 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 Company generally manages the pricing of deposits to be competitive and to increase core deposit relationships. Occasionally, the Company offers promotional rates on certain deposit products in order to attract deposits. The Company experienced a net decrease in Federal Home Loan Bank advances and repurchase agreements of $9.4 million for the three months ended March 31, 2011. The increases in deposits were used primarily to fund the growth in loans and to repay borrowings.

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 also has repurchased shares of its common stock. 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 Office of Thrift Supervision (“OTS”) but with prior notice to the OTS, 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 $2.3 million at March 31, 2011.

Table of Contents

The Company is not subject to separate regulatory capital requirements. At March 31, 2011, the Bank was subject to the regulatory capital requirements of the OTS, 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 March 31, 2011, 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 OTS at March 31, 2011.

	OTS Regulation						Naugatuck Valley Savings and Loan
(Dollars in thousands)	Adequately Capitalized			Well Capitalized			Amount		Ratio

Total Risk-Based Capital (to Risk-Weighted Assets)		8.00	%		10.00	%	$	51,345		11.88	%

Tier I Risk-Based Capital (to Risk-Weighted Assets)		4.00	%		6.00	%		45,938		10.63	%

Tier I Capital (to Adjusted Total Assets)		4.00	%		5.00	%		45,938		8.17	%

Tangible Equity Capital (to Tangible Assets)		1.50	%		2.00	%		45,938		8.17	%

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity 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 three months ended March 31, 2011, the Company did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. The Company manages the interest rate sensitivity of its 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 the 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. 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.

Table of Contents

Quantitative Aspects of Market Risk. The Bank uses an interest rate sensitivity analysis prepared by the OTS to review its level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of the Bank’s cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 50 to 300 basis point increase or 50 to 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. The Bank measures interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table, which is based on information that the Bank provides to the OTS, presents the change in the Bank’s net portfolio value at December 31, 2010 (the most current information available) that would occur in the event of an immediate change in interest rates based on OTS assumptions, with no effect given to any steps that the Bank might take to counteract that change.

									Net Portfolio Value as % of
Basis Point ("bp")	Net Portfolio Value								Present Value of Assets
Change in Rates	$ Amount		$ Change			% Change			NPV Ratio			Change
	(Dollars in thousands)

300bp	$	40,012	$	(20,953	)		(34	)%		7.19	%		(3.13	)%
200		48,446		(12,519	)		(21	)%		8.51	%		(1.81	)%
100		56,076		(4,889	)		(8	)%		9.65	%		(0.67	)%
50		58,988		(1,977	)		(3	)%		10.06	%		(0.26	)%
0		60,965		-			-			10.32	%		-
(50)		61,850		885			1	%		10.42	%		0.10	%
(100)		62,552		1,587			3	%		10.50	%		0.18	%

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

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 Securities and Exchange Commission (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 March 31, 2011 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

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 our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem 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.

The following table sets forth information regarding the Company’s repurchases of its common stock for the quarter ended March 31, 2011.

	For the Three Months Ended March 31, 2011
Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

January		-	$	-		-		159,676
February		-	$	-		-		159,676
March		196	$	8.16		-		159,676

Total		196	$	8.16		-		159,676

(1) Included the withholding of 196 shares at an average price of $8.16 per share subject to restricted stock awards under the Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan as payment of taxes due upon the vesting of the restricted stock awards.

The Company announced on February 19, 2008, that the Board of Directors authorized the Company to repurchase up to 361,207 shares, or approximately 5%, of the outstanding shares including shares held by Naugatuck Valley Mutual Holding Company. The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors. No time limit was placed on the duration of the share repurchase program. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.

Item 3. – Defaults Upon Senior Securities. Not applicable

Item 4. – (Removed and Reserved)

Item 5. – Other Information. Not applicable

Table of Contents

Item 6. – Exhibits.

Exhibits –

	3.1	Charter 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.

____________________

(1) Incorporated by reference to the Exhibits to the Company’s Form 10-Q for the three months ended September 30, 2004.

(2) Incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 18, 2007 and to Exhibit 3(ii) to the Company’s Form 8-K filed on March 14, 2011.

(3) Incorporated herein by reference to the Exhibits to the Company’s Registration Statement on Form S-1, as amended, initially filed on June 18, 2004.

Table of Contents

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: May 16, 2011	By:	/s/ John C. Roman
		John C. Roman
		President and Chief Executive Officer
		(principal executive officer)

Date: May 16, 2011	by:	/s/ Lee R. Schlesinger
		Lee R. Schlesinger
		Senior Vice President and Chief Financial Officer
		(principal financial officer)

Attached files

Stock widget

Investing forum

Naugatuck Valley Financial Corp Reports