Naugatuck Valley Financial 10-Q 2014 Q1 Quarterly report

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, 2014

OR

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

For the transition period from ______________ to _____________

Commission file number:0-54447

NAUGATUCK VALLEY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(203) 720-5000

(Registrant’s telephone number, including area code)

N/A

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

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

Yesx No¨

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

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

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

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

Yes¨ Nox

As of May 12, 2014, there were 7,002,208 shares of the registrant’s common stock outstanding.

NAUGATUCK VALLEY FINANCIAL CORPORATION

Table of Contents

		Page No.
Part I.  Financial Information
Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Statements of Financial Condition at March 31, 2014 and December 31, 2013	3
	Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013	4
	Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2014 and 2013	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2014 and 2013	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Liquidity and Capital Resources	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
Part II.  Other Information
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
Signatures		51
Exhibits

2

Part I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Statements of Financial Condition (unaudited)

(Dollars in thousands)	March 31, 2014			December 31, 2013
ASSETS
Cash and due from depository institutions	$	9,620		$	26,330
Federal funds sold		2,094			44
Cash and cash equivalents		11,714			26,374
Investment securities available-for-sale, at fair value		87,787			49,771
Investment securities held-to-maturity, at amortized cost		16,890			18,149
Loans held for sale		676			1,079
Loans receivable, net		359,925			360,568
Accrued income receivable		1,735			1,494
Foreclosed real estate		1,114			1,846
Premises and equipment, net		9,392			9,364
Bank owned life insurance		10,198			10,132
Federal Home Loan Bank of Boston stock, at cost		5,444			5,444
Other assets		2,414			2,376
Total assets	$	507,289		$	486,597
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	388,912		$	390,847
Federal Home Loan Bank ("FHLB") advances		49,216			25,293
Other borrowed funds		6,185			4,173
Mortgagors' escrow accounts		2,263			4,392
Other liabilities		2,969			3,658
Total liabilities		449,545			428,363
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, $.01 par value; 25,000,000 shares authorized; 7,002,366 shares issued; 7,002,208 shares outstanding at  March 31, 2014 and December 31, 2013, respectively		70			70
Paid-in capital		58,757			58,757
Retained earnings		1,513			2,322
Unearned employee stock ownership plan ("ESOP") shares (326,751 shares at  March 31, 2014 and December 31, 2013)		(2,824	)		(2,824	)
Treasury Stock, at cost (158 shares at March 31, 2014 and December 31, 2013)		(1	)		(1	)
Accumulated other comprehensive income (loss)		229			(90	)
Total stockholders' equity		57,744			58,234
Total liabilities and stockholders' equity	$	507,289		$	486,597

See accompanying notes to unaudited consolidated financial statements.

3

Consolidated Statements of Operations (unaudited)

	Three Months Ended
	March 31,
(In thousands, except share data)	2014			2013
Interest income
Interest and fees on loans	$	4,212		$	5,051
Interest and dividends on investments and deposits		662			319
Total interest income		4,874			5,370
Interest expense
Interest on deposits		604			786
Interest on borrowed funds		154			293
Total interest expense		758			1,079
Net interest income		4,116			4,291
Provision for loan losses		-			300
Net interest income after provision for loan losses		4,116			3,991
Noninterest income
Service charge income		173			178
Fees for other services		95			110
Mortgage banking income		136			502
Income from bank owned life insurance		66			71
Net gain on sale of investments		158			-
Income from investment advisory services, net		94			52
Other income		32			24
Total noninterest income		754			937
Noninterest expense
Compensation, taxes and benefits		3,016			2,677
Occupancy		543			491
Professional fees		518			660
FDIC insurance premiums		261			206
Insurance		145			158
Computer processing		369			316
Expenses on foreclosed real estate, net		210			357
Writedowns on foreclosed real estate		27			12
Directors' compensation		102			134
Advertising		96			87
Office supplies		69			61
Other expenses		323			360
Total noninterest expense		5,679			5,519
Loss before provision (benefit) for income taxes		(809	)		(591	)
Provision (benefit) for income taxes		-			-
Net loss	$	(809	)	$	(591	)
Loss per common share - basic and diluted	$	(0.12	)	$	(0.09	)

See accompanying notes to unaudited consolidated financial statements.

4

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

	Three Months Ended
	March 31,
(In thousands)	2014			2013
Net loss	$	(809	)	$	(591	)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investment securities		347			(51	)
Income tax effect		(118	)		-
Other comprehensive income (loss)		229			(51	)
Total comprehensive loss	$	(580	)	$	(642	)

See accompanying notes to unaudited consolidated financial statements.

5

Consolidated Statements of Changes in Stockholders’ Equity

Three months ended March 31, 2014 and 2013(Unaudited)

	Common		Paid-in		Retained			Unearned ESOP			Unearned Stock			Treasury			Accumulated Other Comprehensive
(In thousands)	Stock		Capital		Earnings			Shares			Awards			Stock			Income (Loss)			Total
Balance at December 31, 2012	$	70	$	58,842	$	11,164		$	(3,143	)	$	(3	)	$	(1	)	$	(21	)	$	66,908
Net loss		-		-		(591	)		-			-			-			-			(591	)
Other comprehensive income (loss)		-		-		-			-			-			-			(51	)		(51	)
Balance at March 31, 2013	$	70	$	58,842	$	10,573		$	(3,143	)	$	(3	)	$	(1	)	$	(72	)	$	66,266

	Common		Paid-in		Retained			Unearned ESOP			Unearned Stock		Treasury			Accumulated Other Comprehensive
(In thousands)	Stock		Capital		Earnings			Shares			Awards		Stock			Income (Loss)			Total
Balance At December 31, 2013	$	70	$	58,757	$	2,322		$	(2,824	)	$	-	$	(1	)	$	(90	)	$	58,234
Net loss		-		-		(809	)		-			-		-			-			(809	)
Other comprehensive income (loss)		-		-		-			-			-		-			319			319
Balance at March 31, 2014	$	70	$	58,757	$	1,513		$	(2,824	)	$	-	$	(1	)	$	229		$	57,744

See accompanying notes to unaudited consolidated financial statements.

6

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended
	March 31,
(In thousands)	2014			2013
Cash flows from operating activities
Net loss	$	(809	)	$	(591	)
Adjustments to reconcile net loss to cash provided by operating activities:
Provision for loan losses		-			300
Depreciation and amortization expense		180			182
Net loss on sales of foreclosed real estate		65			39
Writedowns on foreclosed real estate		27			12
Gain on sale of loans		(131	)		(420	)
Loans originated for sale		(3,616	)		(6,698	)
Proceeds from sale of loans held for sale		4,150			8,771
Net amortization from investments		36			107
Net gain on sale of investments		(158	)		-
Net gain of disposal of fixed assets		-			4
Net change in:
Accrued income receivable		(241	)		70
Deferred loan fees		(9	)		(19	)
Cash surrender value of life insurance		(66	)		(71	)
Other assets		(39	)		552
Other liabilities		(807	)		(804	)
Net cash (used in)/provided by operating activities		(1,418	)		1,434
Cash flows from investing activities
Proceeds from calls, maturities and repayments of available-for-sale securities		4,348			1,232
Proceeds from sale of available-for-sale securities		6,052			-
Proceeds from maturities and repayments of held-to-maturity securities		1,212			2,046
Redemption of Federal Home Loan Bank stock		-			473
Purchase of available-for-sale securities		(47,809	)		-
Loan originations net of principal payments		314			4,175
Purchase of premises and equipment		(208	)		(42	)
Proceeds from the sale of foreclosed real estate		978			186
Net cash (used in)/provided by investing activities		(35,113	)		8,070
Cash flows from financing activities
Net change in time deposits		(823	)		(7,154	)
Net change in other deposit accounts		(1,112	)		5,490
Proceeds from FHLB advances		24,000			500
Repayment of FHLB advances		(77	)		(3,292	)
Net change in mortgagors' escrow accounts		(2,129	)		(2,226	)
Change in other borrowed funds		2,012			8,124
Net cash provided by financing activities		21,871			1,442
Net change in cash and cash equivalents		(14,660	)		10,946
Cash and cash equivalents at beginning of period		26,374			23,229
Cash and cash equivalents at end of period	$	11,714		$	34,175
Supplementary Disclosures of Cash Flow Information:
Non-cash investing activities:
Transfer of loans to foreclosed assets	$	338		$	-
Cash paid during the period for:
Interest	$	743		$	1,083
Unrealized gains (losses) on available for sale securities arising during the period	$	438		$	(51	)

See accompanying notes to unaudited consolidated financial statements.

7

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Naugatuck Valley Financial Corporation (“Naugatuck Valley Financial” or the “Company”) is a stock savings and loan holding company incorporated in the State of Maryland. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary bank, Naugatuck Valley Savings and Loan (“Naugatuck Valley Savings” or the “Bank”). The Company became the holding company for the Bank effective June 29, 2011.

Naugatuck Valley Savings is a federally chartered stock savings association and has served its customers in Connecticut since 1922. The Bank operates as a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses with a variety of deposit and lending products from its full service banking offices in the Greater Naugatuck Valley region of southwestern Connecticut. The Bank attracts deposits from the general public and uses those funds to originate one-to-four family, multi-family and commercial real estate, construction, commercial business and consumer loans.

Naugatuck Valley Savings has two wholly owned subsidiaries, Naugatuck Valley Mortgage Servicing Corporation and Church Street OREO One, LLC. Naugatuck Valley Mortgage Servicing Corporation qualifies and operates as a passive investment company pursuant to Connecticut regulation. Church Street OREO One, LLC was established in February 2013 to hold properties acquired through foreclosure as well as from nonjudicial proceedings.

Basis of Presentation

The accompanying consolidated interim financial statements are unaudited and include the accounts of the Company, the Bank, and the Bank’swholly owned subsidiaries, Naugatuck Valley Mortgage Servicing Corporation and Church Street OREO One, LLC. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the December 31, 2013 audited Consolidated Financial Statements and the accompanying Notes included in our Annual Report on Form 10-K. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and the results of its operations and its cash flows at the dates and for the periods presented.

In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition, and the reported amounts of income and expenses for the reporting 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 loan losses, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, deferred income taxes and the valuation of and the evaluation for other than temporary impairment (“OTTI”) on 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.

The Company’s only business segment is Community Banking. This segment represented all the revenues, income and assets of the consolidated Company and therefore, is the only reported segment as defined by FASB ASC 820, Segment Reporting.

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

8

Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Certain reclassifications have been made to the prior period amounts to conform with the March 31, 2014 consolidated financial statement presentation. These reclassifications only changed the reporting categories and did not affect the Company’s results of operations or financial position.

Significant Accounting Policies

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2013 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies compared with those contained in our Form 10-K disclosure for the year ended December 31, 2013.

Recently Issued Accounting Pronouncements

Income Taxes- Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists:(a consensus of the FASB Emerging Issues Task Force). In July 2013, the FASB issued ASU 2013-11. Per this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU became effective during the three months ended March 31, 2014. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

Receivables – Troubled Debt Restructurings by Creditors: In January 2014, the FASB issued ASU 2014-04. This update clarifies that when an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan, upon either: (i) the creditor obtaining legal title to the property upon completion of the foreclosure; or (ii) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. ASU 2014-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014 and is not expected to have a material impact upon the Company’s consolidated financial statements.

NOTE 2 – REGULATORY MATTERS

Effective January 17, 2012, the Bank entered into a written Formal Agreement (the “Agreement”) with the Office of the Comptroller of the Currency (the “OCC”). The Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain operational areas of the Bank, including the following:

· Restricts the Bank from declaring or paying any dividends or other capital distributions to the Company without prior written regulatory approval. This provision relates to upstreaming intercompany dividends or other capital distributions from the Bank to the Company.

· Provide prior written notice to the OCC before appointing an individual to serve as a senior executive officer or as a director of the Bank.

· Restricts the Bank from entering into, renewing, extending or revising any contractual arrangement relating to the compensation or benefits for any senior executive officer of the Bank, unless the Bank provides the OCC with prior written notice of the proposed transaction.

· Subjects the Bank to six month financial and operational examination review. The most recent examination occurred in January 2014. The next scheduled review is expected in the third quarter 2014.

In April and May 2013, additional senior management team members were retained to assist the new CEO (who was hired in September 2012) to address the provisions of the Agreement.

The Agreement and each of its provisions will remain in effect until these provisions are amended in writing by mutual consent or waived in writing by the OCC or terminated in writing by the OCC.

9

The OCC regulations require savings institutions to maintain minimum levels of regulatory capital. Effective June 4, 2013, the OCC imposed individual minimum capital requirements (“IMCRs”) on the Bank. The IMCRs require the Bank to maintain a Tier 1 leverage capital to adjusted total assets ratio of at least 9.00% and a total risk-based capital to risk-rated assets ratio of at least 13.00%. Before the establishment of the IMCRs, the Bank had been operating under these capital parameters by self-imposing these capital levels as part of the capital plan the Bank was required to implement under the terms of the previously disclosed January 2012 Formal Agreement between the Bank and the OCC. The Bank exceeded the IMCRs at March 31, 2014, with a Tier 1 leverage ratio of 10.44% and a total risk-based capital ratio of 17.77%.

As a source of strength to its subsidiary bank, the Company had liquid assets of approximately $2.9 million at March 31, 2014, which the Company could contribute to the Bank if needed, to enhance the Bank’s capital levels. If the Company had contributed those assets to the Bank as of March 31, 2014, the Bank would have had a Tier 1 leverage ratio of approximately 10.96%.

On May 21, 2013, the Company entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Boston. Among other things, the MOU prohibits the Company from paying dividends, repurchasing its stock or making other capital distributions without prior written approval of the Federal Reserve Bank of Boston,

As a savings and loan holding company regulated by the Federal Reserve Board, the Company is not currently subject to specific regulatory capital requirements. The Dodd- Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. There is a five- year transition period (from the July 21, 2010 effective date of the Dodd- Frank Act) before the capital requirements will apply to savings and loan holding companies.

10

The following tables are summaries of the Company’s consolidated capital amounts and ratios and the Bank’s actual capital amounts and ratios as computed under the standards established by the Federal Deposit Insurance Act at March 31, 2014 and December 31, 2013.

At March 31, 2014	Adequately Capitalized Requirements					Individual Minimum Capital Requirements (3)					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1  Leverage Capital (1)		N/A		N/A			N/A		N/A		$	57,514		11.35	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			57,514		17.96	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			61,589		19.23	%
The Bank
Tier 1  Leverage Capital (1)	$	20,354		4.00	%	$	45,797		9.00	%	$	53,147		10.44	%
Tier 1 Risk-Based Capital (2)		12,886		4.00	%		N/A		N/A			53,147		16.50	%
Total Risk-Based Capital (2)		25,772		8.00	%		41,879		13.00	%		57,246		17.77	%

(1) Tier 1 capital to total assets.

(2) Tier 1 or total risk-based capital to risk-weighted assets.

(3) Effective June 4, 2013.

At December 31, 2013	Adequately Capitalized Requirements					Individual Minimum Capital Requirements (3)					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1 Leverage Capital (1)		N/A		N/A			N/A		N/A		$	58,323		11.98	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			58,323		18.21	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			62,399		19.49	%
The Bank
Tier 1 Leverage Capital (1)	$	19,545		4.00	%	$	43,977		9.00	%	$	53,946		11.04	%
Tier 1 Risk-Based Capital (2)		12,891		4.00	%		N/A		N/A			53,946		16.74	%
Total Risk-Based Capital (2)		25,783		8.00	%		41,897		13.00	%		58,047		18.01	%

(1) Tier 1 capital to total assets.

(2) Tier 1 or total risk-based capital to risk-weighted assets.

(3) Effective June 4, 2013.

As of March 31, 2014, the most recent regulatory notifications categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action.

11

NOTE 3 – INVESTMENT SECURITIES

At March 31, 2014, 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	$	42,185	$	202	$	(154	)	$	42,233
Asset-backed securities
U.S. Government agency mortgage-backed securities		29,028		602		(388	)		29,242
U.S. Government agency collateralized mortgage obligations		8,635		47		(8	)		8,674
Small Business Administration loan pools		2,015		12		-			2,027
Private label collateralized mortgage obligations		252		-		(4	)		248
Obligations of state and municipal subdivisions		4,825		36		-			4,861
Mutual fund - fixed income securities		500		2		-			502
Total available-for-sale securities	$	87,440	$	901	$	(554	)	$	87,787

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Held-to-maturity securities:
U.S. Government agency mortgage-backed securities	$	16,890	$	176	$	(9	)	$	17,057
Total held-to-maturity securities	$	16,890	$	176	$	(9	)	$	17,057

At December 31, 2013, 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	$	16,601	$	35	$	(130	)	$	16,506
U.S. Government agency mortgage-backed securities		22,874		527		(532	)		22,869
U.S. Government agency collateralized mortgage obligations		3,736		11		(9	)		3,738
Private label collateralized mortgage obligations		258		8		-			266
Auction-rate trust preferred securities		5,893		-		-			5,893
Mutual fund - fixed income securities		500		-		(1	)		499
Total available-for-sale securities	$	49,862	$	581	$	(672	)	$	49,771

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Held-to-maturity securities:
U.S. Government agency mortgage-backed securities	$	18,149	$	134	$	(40	)	$	18,243
Total held-to-maturity securities	$	18,149	$	134	$	(40	)	$	18,243

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, 2014, and December 31, 2013:

At March 31, 2014	Less than 12 Months				12 Months or Greater				Total
(Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Government agency obligations	$	10,745	$	154	$	-	$	-	$	10,745	$	154
U.S. Government agency mortgage-backed securities		12,428		387		66		1		12,494		388
U.S. Government agency collateralized mortgage obligations		3,043		8		-		-		3,043		8
Private label collateralized mortgage obligations		248		4		-		-		248		4
Total securities in unrealized loss position	$	26,464	$	553	$	66	$	1	$	26,530	$	554

12

At December 31, 2013	Less than 12 Months				12 Months or Greater				Total
(Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Government agency obligations	$	9,865	$	130	$	-	$	-	$	9,865	$	130
U.S. Government agency mortgage-backed securities		8,075		531		65		1		8,140		532
U.S. Government agency collateralized mortgage obligations		3,228		9		-		-		3,228		9
Mutual fund - fixed Income securities		499		1		-		-		499		1
Total securities in unrealized loss position	$	21,667	$	671	$	65	$	1	$	21,732	$	672

The amortized cost and fair value of securities at March 31, 2014 and December 31, 2013, by expected maturity, are set forth below. Actual maturities of mortgage-backed securities and collateralized mortgage obligations may differ from contractual maturities because the mortgages underlying the securities may be prepaid or called with or without call or prepayment penalties. Because these securities are not due at a single maturity date, the maturity information is not presented.

	Available-for-Sale				Held-to-Maturity
At March 31, 2014	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
U.S. Government agency mortgage-backed securities	$	29,028	$	29,242	$	16,890	$	17,057
U.S. Government agency collateralized mortgage obligations		8,635		8,674		-		-
Small Business Administration loan pools		2,015		2,027
Private label collateralized mortgage obligations		252		248		-		-
Mutual fund - fixed Income securities		500		502		-		-
Subtotal		40,430		40,693		16,890		17,057
Securities with Fixed Maturities:
Due in one year or less		-		-		-		-
Due after one year through five years		5,051		5,075		-		-
Due after five years through ten years		22,337		22,344		-		-
Due after ten years		19,622		19,675		-		-
Subtotal		47,010		47,094		-		-
Grand totals	$	87,440	$	87,787	$	16,890	$	17,057

	Available-for-Sale				Held-to-Maturity
At December 31, 2013	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
U.S. Government agency mortgage-backed securities	$	22,874	$	22,869	$	18,149	$	18,243
U.S. Government agency collateralized mortgage obligations		3,736		3,738		-		-
Private label collateralized mortgage obligations		258		266		-		-
Mutual fund - fixed Income securities		500		499		-		-
Subtotal		27,368		27,372		18,149		18,243
Securities with fixed Maturities:
Due in one year or less						-		-
Due after one year through five years		6,606		6,641		-		-
Due after five years through ten years		9,995		9,865		-		-
Due after ten years		5,893		5,893		-		-
Subtotal		22,494		22,399		-		-
Grand totals	$	49,862	$	49,771	$	18,149	$	18,243

As of March 31, 2014 and December 31, 2013, securities with an amortized cost of $18.76 million and $19.53 million, and a fair value of $18.97 million and $19.67 million, respectively, were pledged as collateral to secure municipal deposits and repurchase agreements.

13

NOTE 4 – LOANS RECEIVABLE

A summary of loans receivable at March 31, 2014 and December 31, 2013 is as follows:

	March 31,		December 31,
(Dollars in thousands)	2014		2013
Real estate loans:
One-to-four family	$	184,531	$	186,985
Multi-family and commercial real estate		122,329		123,134
Construction and land development		5,528		5,609
Total real estate loans		312,388		315,728
Commercial business loans		24,250		25,506
Consumer loans:
Home equity		27,267		26,960
Other consumer		5,932		2,321
Total consumer loans		33,199		29,281
Total loans		369,837		370,515
Less:
Allowance for loan losses		9,865		9,891
Deferred loan origination fees, net		47		56
Loans receivable, net	$	359,925	$	360,568

Credit quality of financing receivables

Management segregates the loan portfolio into portfolio segments which are 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.

During the second quarter of 2013, management analyzed the risk concentration within the loan portfolio. As a result of this analysis, the loan portfolio was further disaggregated by expanding the number of loan segments from six segments to ten segments as of June 30, 2013. The commercial real estate loan segment, the second largest grouping of loans after one-to-four family owner occupied loans, was expanded into five segments to increase the granularity of analysis of the risks inherent in the loans in these segments. The expanded commercial loan segments are: investor owned one-to-four family and multi-family properties, industrial and warehouse properties, office buildings, retail properties and special use properties.

The Company’s loan portfolio is segregated as follows:

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

Multi-family and Commercial Real Estate Loans. As described above, this portfolio grouping has been further disaggregated into loans secured by:

· Investor owned one-to-four family and multi-family properties;

· Industrial and warehouse properties;

· Office buildings;

· Retail properties; and

· Special use properties.

14

Loans secured by these types of commercial real estate collateral generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

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

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

Real Estate Secured Consumer 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 no lower than 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.

Other 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.

Credit Quality Indicators

The Company’s policies provide for the classification of loans into the following categories: pass (1 - 5), special mention (6), substandard-accruing (7), substandard-nonaccruing (8), doubtful (9), and loss (10). In June 2013, the Company added substandard-accruing as an additional risk grade to further delineate the Bank’s risk profile in the previous substandard category. Consistent with regulatory guidelines, loans that are considered to be of lesser quality are considered adversely classified as substandard, doubtful or loss. A loan 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 loans include those loans characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loans 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. Loans (or portions of loans) classified as loss are those considered uncollectible. The Company generally charges off loans or portions of loans as soon as they are considered to be uncollectible and of little value. Loans 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 loans are classified as special mention, substandard or doubtful, management focuses increased monitoring and attention on these loans in assessing the credit risk and specific allowance requirements for these loans.

15

The following tables are a summary of the loan portfolio credit quality indicators, by loan class, as of March 31, 2014 and December 31, 2013:

	Credit Risk Profile by Internally Assigned Grade:
March 31, 2014	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
Risk Rating:
Pass	$	178,689	$	98,536	$	3,490	$	19,080	$	32,641	$	332,436
Special Mention		754		13,934		454		3,042		268		18,452
Substandard:
- Accruing		97		6,987		-		1,233		42		8,359
- Nonaccruing		4,991		2,872		1,584		805		248		10,500
Subtotal - substandard		5,088		9,859		1,584		2,038		290		18,859
Doubtful		-		-		-		90		-		90
Total	$	184,531	$	122,329	$	5,528	$	24,250	$	33,199	$	369,837

	Multi-Family and Commercial Real Estate
	Credit Risk Profile by Internally Assigned Grade:
March 31, 2014	Investor Owned One-to-Four family and multi- family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi-Family and Commercial Real Estate
Risk Rating:
Pass	$	13,524	$	23,728	$	17,609	$	17,655	$	26,020	$	98,536
Special Mention		2,351		4,724		2,644		493		3,722		13,934
Substandard:
- Accruing		-		1,144		472		4,758		613		6,987
- Nonaccruing		1,154		29		206		377		1,106		2,872
Subtotal - substandard		1,154		1,173		678		5,135		1,719		9,859
Doubtful		-		-		-				-		-
Total	$	17,029	$	29,625	$	20,931	$	23,283	$	31,461	$	122,329

	Credit Risk Profile by Internally Assigned Grade:
December 31, 2013	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
Risk Rating:
Pass	$	180,704	$	90,462	$	3,102	$	18,939	$	28,603	$	321,810
Special Mention		500		26,832		946		3,869		262		32,409
Substandard:
- Accruing		349		2,470		-		-		94		2,913
- Nonaccruing		5,432		3,370		1,561		2,605		322		13,290
Subtotal - substandard		5,781		5,840		1,561		2,605		416		16,203
Doubtful		-		-		-		93		-		93
Total	$	186,985	$	123,134	$	5,609	$	25,506	$	29,281	$	370,515

	Multi-Family and Commercial Real Estate
	Credit Risk Profile by Internally Assigned Grade:
December 31, 2013	Investor Owned One-to-Four family and multi- family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi-Family and Commercial Real Estate
Risk Rating:
Pass	$	10,682	$	21,500	$	16,821	$	16,250	$	25,209	$	90,462
Special Mention		4,523		7,310		4,015		6,130		4,854		26,832
Substandard:
- Accruing		-		1,155		370		457		488		2,470
- Nonaccruing		1,167		31		206		682		1,284		3,370
Subtotal - substandard		1,167		1,186		576		1,139		1,772		5,840
Doubtful		-		-		-				-		-
Total	$	16,372	$	29,996	$	21,412	$	23,519	$	31,835	$	123,134

16

Delinquencies

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 attempts 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.

Loans, including TDRs, are automatically placed on nonaccrual status when payment of principal or interest is more than 90 days delinquent. Loans may also be placed on nonaccrual status if collection of principal or interest in full, or in part, is in doubt or if the loan has been restructured. When loans are placed on nonaccrual 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 for a reasonable period of time (usually six consecutive months) to establish a reliable assessment of collectability.

17

The following tables set forth certain information with respect to our loan portfolio delinquencies, by loan class, as of March 31, 2014 and December 31, 2013:

	Delinquencies
As of March 31, 2014	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Carrying Amount > 90 Days and Accruing
(In thousands)
Real estate loans
One-to-four family	$	1,240	$	15	$	2,603	$	3,858	$	180,673	$	184,531	$	-
Construction and land development		3		-		1,637		1,640		3,888		5,528		56
Multi-family and commercial real estate:
Investor owned one-to-four family and multi-family		514		-		692		1,206		15,823		17,029		73
Industrial and Warehouse		617		-		-		617		29,008		29,625		-
Office buildings		368		-		205		573		20,358		20,931		-
Retail properties		-		-		-		-		23,283		23,283		-
Special use properties		582		-		169		751		30,710		31,461		-
Subtotal Multi-family and commercial real estate		2,081		-		1,066		3,147		119,182		122,329		73
Commercial business loans		1,994		-		756		2,750		21,500		24,250		-
Consumer loans:
Home equity loans		69		100		158		327		26,940		27,267		-
Other consumer loans		1		-		-		1		5,931		5,932		-
Subtotal Consumer		70		100		158		328		32,871		33,199		-
Total	$	5,388	$	115	$	6,220	$	11,723	$	358,114	$	369,837	$	129

	Delinquencies
As of December 31, 2013	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Carrying Amount > 90 Days and Accruing
(In thousands)
Real estate loans
One-to-four family	$	1,217	$	397	$	2,564	$	4,178	$	182,807	$	186,985	$	-
Construction and land development		970		538		1,799		3,307		2,302		5,609		-
Multi-family and commercial real estate:														-
Investor owned one-to-four family and multi-family		861		-		621		1,482		14,890		16,372		-
Industrial and Warehouse		-		-		32		32		29,964		29,996		-
Office buildings		-		108		206		314		21,098		21,412		-
Retail properties		423		-		-		423		23,096		23,519		-
Special use properties		346		-		169		515		31,320		31,835		-
Subtotal Multi-family and commercial real estate		1,630		108		1,028		2,766		120,368		123,134		-
Commercial business loans		487		153		1,598		2,238		23,268		25,506		-
Consumer loans:
Home equity loans		155		28		142		325		26,635		26,960		-
Other consumer loans		2		3		-		5		2,316		2,321		-
Subtotal Consumer		157		31		142		330		28,951		29,281		-
Total	$	4,461	$	1,227	$	7,131	$	12,819	$	357,696	$	370,515	$	-

18

Impaired loans and nonperforming assets

The following table sets forth certain information with respect to our nonperforming assets as of March 31, 2014 and December 31, 2013:

	March 31,			December 31,
	2014			2013
Nonperforming Assets	(Dollars in thousands)
Nonaccrual loans	$	5,821		$	7,953
TDRs nonaccruing		4,769			5,430
Subtotal nonperforming loans		10,590			13,383
Foreclosed real estate		1,114			1,846
Total nonperforming assets	$	11,704		$	15,229
Total nonperforming loans to total loans		2.86	%		3.61	%
Total nonperforming assets to total assets		2.31	%		3.13	%

Nonperforming loans (defined as nonaccrual loans and nonperforming TDRs totaled $10.6 million at March 31, 2014 compared to $13.4 million at December 31, 2013. The amount of income that was contractually due but not recognized on nonperforming loans totaled $61,000 and $187,000 for the three months ended March 31, 2014 and March 31, 2013, respectively.

At March 31, 2014, the Company had 62 loans on nonaccrual status of which 27 were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.

At December 31, 2013, the Company had 90 loans on nonaccrual status of which 44 were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.

An impaired loan generally is one for which it is probable, based on current information, that the Company will not collect all the amounts due under the contractual terms of the loan. All impaired loans are individually evaluated for impairment at least quarterly. As a result of this impairment evaluation, the Company provides a specific reserve for, or charges off, that portion of the asset that is deemed uncollectible.

The following tables summarize impaired loans by portfolio segment as of March 31, 2014 and December 31, 2013:

As of March 31, 2014	Recorded Investment with No Specific Valuation Allowance		Recorded Investment with Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Real estate loans
One-to four-family	$	4,533	$	2,257	$	6,790	$	7,392	$	49
Construction and land development		1,290		294		1,584		2,115		21
Multi-family and commercial real estate:
Investor owned one-to-four family and multi-family properties		1,154		-		1,154		1,270		-
Industrial and warehouse properties		29		-		29		32		-
Office buildings		206		-		206		405		-
Retail properties		-		377		377		458		12
Special use properties		1,106		-		1,106		1,624		-
Subtotal		2,495		377		2,872		3,789		12
Commercial business loans		969		314		1,283		1,357		88
Consumer loans		129		370		499		631		46
Total impaired loans	$	9,416	$	3,612	$	13,028	$	15,284	$	216

19

As of December 31, 2013	Recorded Investment with No Specific Valuation Allowance		Recorded Investment with Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Real estate loans
One-to four-family	$	4,570	$	2,431	$	7,001	$	7,734	$	70
Construction and land development		1,405		449		1,854		2,424		75
Multi-family and commercial real estate:
Investor owned one-to-four family and multi-family properties		1,167		-		1,167		1,274		-
Industrial and warehouse properties		565		-		565		567		-
Office buildings		206		-		206		405		-
Retail properties		158		389		547		621		23
Special use properties		1,600		-		1,600		2,086		-
Subtotal		3,696		389		4,085		4,953		23
Commercial business loans		1,996		584		2,580		2,693		105
Consumer loans		412		167		579		805		10
Total impaired loans	$	12,079	$	4,020	$	16,099	$	18,609	$	283

In the above table, the unpaid contractual principal balance represents the aggregate amounts legally owed to the Bank under the terms of the borrowers’ loan agreements. The recorded investment amounts shown above represent the unpaid contractual principal balance owed to the Bank less any amounts charged off based on collectability assessments by the Bank and less any amounts paid by borrowers on nonaccrual loans which were recognized as principal curtailments.

The following table relates to interest income recognized by segment of impaired loans for the three months ended March 31, 2014 and 2013:

	Three Months ended March 31,
	2014				2013
	Average Recorded Investments		Interest Income Recognized		Average Recorded Investments		Interest Income Recognized
	(In thousands)
Real estate loans
One-to four-family	$	6,896	$	53	$	5,231	$	32
Construction and land development		1,715		1		9,833		15
Multi-family and commercial real estate		3,479		17		15,658		114
Commercial business loans		1,931		22		3,910		23
Consumer loans		539		5		448		3
Total	$	14,560	$	98	$	35,080	$	187

Interest payments received on nonaccrual loans are accounted for on the cash-basis method or the cost recovery method until qualifying for return to accrual status. Under the cost recovery method, the interest payment is applied to the principal balance of the loan. The table above shows the interest income recognized on nonaccrual loans on the cash-basis method. For the three month periods ended March 31, 2014 and 2013, the amount of interest payments applied to principal under the cost recovery method was $61,000 and $71,000, respectively.

Troubled Debt Restructured Loans

A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment, whether on accrual or nonaccrual status.

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

20

The recorded investment balance of performing and nonperforming TDRs as of March 31, 2014 and December 31, 2013 are as follows:

(In thousands)	As of March 31, 2014		As of December 31, 2013
Aggregate recorded investment of impaired loans performing under
terms modified through a troubled debt restructuring:
Performing (1)	$	4,494	$	4,195
Nonperforming		2,600		3,051
Total	$	7,094	$	7,246

(1) Of the $4,494,000 in TDRs which were performing under the modified terms of their agreements at March 31, 2014, there were $2,169,000 in TDRs that remain on nonaccrual status because these TDRs have not yet demonstrated the requisite period of sustained performance. The combination of these $2,169,000 in TDRs and the $2,600,000 nonperforming TDRs at March 31, 2014 equal the $4,769,000 in TDRs that were on nonaccrual status at March 31, 2014.

Of the $4,195,000 in TDRs which were performing under the modified terms of their agreements at December 31, 2013, there were $2,379,000 in TDRs that remain on nonaccrual status because these TDRs have not yet demonstrated the requisite period of sustained performance. The combination of these $2,379,000 in TDRs and the $3,051,000 nonperforming TDRs at December 31, 2013 equal the $5,430,000 in TDRs that were on nonaccrual status at December 31, 2013.

As illustrated in the table below, during the three months ended March 31, 2014, the following concessions were made on five loans totaling $248,000 (measured as a percentage of loan balances on TDRs):

· Deferral of principal payments for 48.4% (1 loan for $120,000);

· Reduced interest rate for 12.1% (3 loans for $30,000); and

· Extension of payment terms for 39.5% (1 loan for $98,000).

The following tables present a breakdown of the type of concessions made by loan class during the three months ended March 31, 2014 and March 31, 2013:

	For the Three Months Ended March 31, 2014
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		%
Below market interest rate:
Commercial business loans		3	$	30	$	30		12.1	%
Subtotals		3		30		30		12.1	%
Extended payment terms:
Commercial business loans		1		98		98		39.5	%
Subtotals		1		98		98		39.5	%
Principal payments deferred
Real estate loans:
One-to-four family		1		120		120		48.4	%
Subtotals		1		120		120		48.4	%
Grand Totals		5	$	248	$	248		100.0	%

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	For the Three Months Ended March 31, 2013
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		%
Extended payment terms:
Commercial business loans		5	$	393	$	453		72.7	%
Subtotals		5		393		453		72.7	%
Principal payments deferred
Commercial business loans		1		170		170		27.3	%
Subtotals		1		170		170		27.3	%
Grand Totals		6	$	563	$	623		100.0	%

The majority of the Bank’s TDRs are a result of granting extensions to troubled credits which have already been adversely classified. The Bank grants such an extension to reassess the borrower’s financial status and to develop a plan for repayment. Certain modifications with extension may also include interest rate reductions. These modifications did not have a material effect on the Company.

The financial effects of each modification will vary based on the specific restructure. For some of the Bank’s TDRs, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the terms are consistent with the market, the Bank might not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Bank might not collect all the principal and interest based on the original contractual terms. The Bank applies its procedures for placing TDRs on accrual or nonaccrual status using the same general guidance as for loans. The Bank estimates the necessary allowance for loan losses on TDRs using the same guidance as for other impaired loans.

There were no TDRs that had been modified during the previous twelve months ended March 31, 2014 that subsequently defaulted or were charged off during the three months ended March 31, 2014.

Allowance for Loan Losses

The allowance for loan losses (“ALLL”) is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio.

The allowance for loan losses is established through a provision for loan losses charged to operations. Management periodically reviews the allowance for loan losses in order to identify those known and inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process begins with an individual evaluation of loans that are considered impaired. For these loans, an allowance is 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 dependent, the fair value of the collateral.

All other loans are segregated into segments 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; however, this analysis and loss trends do not form a sufficient basis, by themselves, to determine the appropriate level of the loan loss allowance. Management also considers qualitative and environmental factors for each loan segment that are likely to impact, directly or indirectly, the inherent loss exposure of the loan portfolio. These factors include but are not limited to: changes in the amount and severity of delinquencies, non-accrual and adversely classified loans, changes in local, regional, and national economic conditions that will affect the collectability of the portfolio, changes in the nature and volume of loans in the portfolio, changes in concentrations of credit, lending area, industry concentrations, or types of borrowers, changes in lending policies, procedures, competition, management, portfolio mix, competition, pricing, loan to value trends, extension and modification requests, and loan quality trends. As of June 30, 2013, management added factors to more granularly assess loan quality trends, specifically, the changes and the trend in charge-offs and recoveries, changes in volume of Watch and Special Mention loans and the changes in the quality of the Bank’s loan review system. This analysis establishes factors that are applied to each of the segregated groups of loans to determine an appropriate level of loan loss allowance.

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

The allowance generally consists of specific (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 observable market price or collateral value, if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

The ALLL balance decreased from $9.89 million at December 31, 2013 to $9.87 million at March 31, 2014, a decrease of $26,000, or 0.3%. This decrease in the ALLL was consistent with the improvement in the Bank’s asset quality trends during this three month period. During this period, the Bank’s nonperforming loans decreased $2.8 million, or 20.9%. The Bank’s adversely classified loans increased by $2.7 million, or 16.9%, primarily as a result of a downgrade of the Bank’s largest commercial real estate exposure of $4.3 million from Special Mention to Substandard – Accruing offset the solid underlying improvements in seven of nine loan concentrations. On this $4.3 million commercial real estate exposure, there was no impairment at March 31, 2014 based on the fair value of the underlying collateral. Management expects a positive resolution within six months to the recently downgraded exposure. These improvements in the Bank’s asset quality were attributable to the more aggressive workout efforts in the past three months which is a continuation of a trend initiated in mid-year 2013.

As previously discussed in the Company’s Form 10-K for the year ended December 31, 2013, the Company adopted significant changes to its ALLL methodology as of June 30, 2013, including:

· Adoption of a two year weighted average as a basis for the calculation of its historical loss experience;

· Further disaggregated the commercial real estate loan segment to increase the granularity of the risks inherent in the loans in the expanded segments; and

· Changes in the utilization of qualitative risk adjustment factors (“Q factors”) including an increased number of these Q factors and a change in the calibration and application of the Q factors.

As discussed in the Company’s filed Form 10-K for the year ended December 31, 2013, the Company also believes it has significantly improved its risk grades (and its risk grading process) over the past nine months during which the new executive management team has been in place at the Bank. This improvement has been the result of increased workout efforts, including the sale of $20.8 million in adversely classified loans in June 2013.

The Company continues 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 on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

The following tables set forth the balance of and transactions in the allowance for loan losses at March 31, 2014, December 31, 2013 and March 31, 2013, by portfolio segment, disaggregated by impairment methodology, which is then further segregated by loans evaluated for impairment individually and collectively.

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As of and for the Three Months	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
Ended March 31, 2014
(In thousands)
Allowance for loan losses:
Beginning balance	$	1,849		$	5,097		$	1,118		$	1,443		$	384		$	9,891
Provision for loan losses		117			177			84			(309	)		(69	)		-
Charge-offs		(32	)		(12	)		(102	)		(36	)		(2	)		(184	)
Recoveries		-			-			15			57			86			158
Balance at March 31, 2014	$	1,934		$	5,262		$	1,115		$	1,155		$	399		$	9,865
Allowance related to loans:
Individually evaluated for impairment	$	49		$	12		$	21		$	88		$	46		$	216
Collectively evaluated for impairment		1,885			5,250			1,094			1,067			353			9,649
Total Allowance	$	1,934		$	5,262		$	1,115		$	1,155		$	399		$	9,865
Ending loan balance individually evaluated for impairment	$	6,790		$	2,872		$	1,584		$	1,283		$	499		$	13,028
Ending loan balance collectively evaluated for impairment		177,741			119,457			3,944			22,967			32,700			356,809
Total Loans	$	184,531		$	122,329		$	5,528		$	24,250		$	33,199		$	369,837

	Multi-Family and Commercial Real Estate
As of and for the Three Months	Investor one- to-four family and multi- family			Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties			Total Multi- Family and Commercial Real Estate
Ended March 31, 2014
(In thousands)
Allowance for loan losses:
Beginning balance		515		$	1,034	$	563	$	856	$	2,129		$	5,097
Provision for loan losses		(59	)		32		23		217		(36	)		177
Charge-offs		-			-		-		-		(12	)		(12	)
Recoveries		-			-		-		-		-			-
Balance at March 31, 2014	$	456		$	1,066	$	586	$	1,073	$	2,081		$	5,262
Allowance related to loans:
Individually evaluated for impairment	$	-		$	-	$	-	$	12	$	-		$	12
Collectively evaluated for impairment		456			1,066		586		1,061		2,081			5,250
Total Allowance	$	456		$	1,066	$	586	$	1,073	$	2,081		$	5,262
Ending loan balance individually evaluated for impairment	$	1,154		$	29	$	206	$	377	$	1,106		$	2,872
Ending loan balance collectively evaluated for impairment		15,875			29,596		20,725		22,906		30,355			119,457
Total Loans	$	17,029		$	29,625	$	20,931	$	23,283	$	31,461		$	122,329

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As of and for the Three Months	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans		Total
Ended March 31, 2013
(In thousands)
Allowance for Loan Losses:
Beginning Balance	$	1,988		$	4,892		$	4,468		$	2,725		$	427	$	14,500
Provision for loan losses		50			200			-			50			-		300
Charge-offs		(151	)		(224	)		(6	)		(184	)		-		(565	)
Recoveries		-			9			-			9			-		18
Ending Balance	$	1,887		$	4,877		$	4,462		$	2,600		$	427	$	14,253
Allowance related to loans:
Individually evaluated for impairment	$	49		$	346		$	117		$	216		$	-	$	728
Collectively evaluated for impairment		1,838			4,531			4,345			2,384			427		13,525
Total Allowance	$	1,887		$	4,877		$	4,462		$	2,600		$	427	$	14,253
Ending loan balance individually evaluated for impairment	$	5,132		$	15,573		$	9,843		$	3,802		$	445	$	34,795
Ending loan balance collectively evaluated for impairment		201,585			127,479			9,306			27,512			28,593		394,475
Total Loans	$	206,717		$	143,052		$	19,149		$	31,314		$	29,038	$	429,270

	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
As of December 31, 2013
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	70	$	23	$	75	$	105	$	10	$	283
Collectively evaluated for impairment		1,779		5,074		1,043		1,338		374		9,608
Total Allowance	$	1,849	$	5,097	$	1,118	$	1,443	$	384	$	9,891
Ending loan balance individually evaluated for impairment	$	7,001	$	4,085	$	1,854	$	2,580	$	579	$	16,099
Ending loan balance collectively evaluated for impairment		179,984		119,049		3,755		22,926		28,702		354,416
Total Loans	$	186,985	$	123,134	$	5,609	$	25,506	$	29,281	$	370,515

	Multi-Family and Commercial Real Estate
	Investor one- to-four family and multi- family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi- Family and Commercial Real Estate
As of December 31, 2013
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	23	$	-	$	23
Collectively evaluated for impairment		515		1,034		563		833		2,129		5,074
Total Allowance	$	515	$	1,034	$	563	$	856	$	2,129	$	5,097
Ending loan balance individually evaluated for impairment	$	1,167	$	565	$	206	$	547	$	1,600	$	4,085
Ending loan balance collectively evaluated for impairment		15,205		29,431		21,206		22,973		30,234		119,049
Total Loans	$	16,372	$	29,996	$	21,412	$	23,520	$	31,834	$	123,134

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. Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examination may require us to make additional provisions for loan losses based on judgments different from ours. The Company also periodically engages an independent consultant to review our credit risk grading process and the risk grades on selected portfolio segments as well as the methodology, analysis and adequacy of the allowance for loan and lease losses.

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Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

NOTE 5 - MORTGAGE BANKING ACTIVITY

Mortgage banking includes two components: (1) the origination of residential mortgage loans for sale in the secondary market and (2) the servicing of mortgage loans sold to investors. The following represents the Company’s noninterest income derived from these activities:

	For the Three Months Ended March 31,
(In Thousands)	2014		2013
Gain on sales of loans	$	131	$	420
Mortgage servicing income		5		82
Total	$	136	$	502

The Bank originates government residential mortgage loans which are sold servicing released. The Bank also originates conventional residential mortgage loans for its portfolio and for sale, both on a servicing rights retained and released basis.

NOTE 6 – FORECLOSED REAL ESTATE

Changes in foreclosed real estate during the three months ended March 31, 2014 and March 31, 2013 are as follows:

	For the Three Months Ended March 31,
(In thousands)	2014			2013
Beginning Balance	$	1,846		$	735
Additions		338			-
Proceeds from dispositions		(978	)		(186	)
Loss on sales		(65	)		(39	)
Writedowns		(27	)		(12	)
Balance at end of period	$	1,114		$	498

At March 31, 2014, the Bank held seven properties consisting of one parcel of developed residential lots with an aggregate value of $0.5 million, four single family residences and two unimproved parcels — one zoned as commercial and the other zoned as residential.

The Company records the gain (loss) on sale of foreclosed real estate in the expenses on foreclosed properties, net category along with expenses for acquiring and maintaining foreclosed real estate properties.

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NOTE 7 – DEPOSITS

A summary of deposits at March 31, 2014 and December 31, 2013 consisted of the following:

	March 31, 2014					December 31, 2013
	Amount		Percent			Amount		Percent
Noninterest bearing demand deposits	$	65,158		16.8	%	$	69,147		17.7	%
Interest bearing deposits
Now accounts and money market accounts		53,723		13.8	%		49,514		12.7	%
Savings accounts		115,672		29.8	%		117,004		29.9	%
Certificates of deposit		154,359		39.6	%		155,182		39.7	%
Total interest bearing deposits		323,754		83.2	%		321,700		82.3	%
Total deposits	$	388,912		100.0	%	$	390,847		100.0	%

Scheduled maturities of certificates of deposit are as follows:

	At March 31, 2014		At December 31, 2013
One year or less	$	72,979	$	74,268
Over one year through three years		56,141		50,858
Over three years		25,239		30,056
	$	154,359	$	155,182

The aggregate amount of individual certificate of deposit accounts of $100,000 or more at March 31, 2014 and December 31, 2013 was $62.6 million and $62.5 million, respectively. Deposits up to $250,000 are federally insured through the Federal Deposit Insurance Corporation (“FDIC”). The aggregate amount of individual certificate of deposit accounts of $250,000 or more at March 31, 2014 and December 31, 2013 was $11.8 million and $11.5 million, respectively.

NOTE 8 – FHLB ADVANCES

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). At March 31, 2014, the Bank had the ability to borrow from the FHLB based on a certain percentage of the value of the Bank’s qualified collateral, as defined in the FHLB Statement of Products Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

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

	At March 31, 2014					At December 31, 2013
(Dollars in thousands)	Amount Due (1)		Weighted Average Cost			Amount Due (1)		Weighted Average Cost
Year of maturity:
2014	$	8,943		0.68	%	$	1,377		2.64	%
2015		5,533		0.68	%		1,500		0.80	%
2016		12,717		0.81	%		2,800		0.90	%
2017 - 2021		20,797		2.34	%		18,368		2.56	%
2022 - 2026		622		0.27	%		638		0.27	%
2027 - 2029		604		-			610		-
Total FHLB advances	$	49,216		1.42	%	$	25,293		2.16	%

(1) Amount due includes scheduled principal payments on amortizing advances.

The Bank is required to maintain an investment in capital stock of the FHLB in an amount that is based on a percentage of its outstanding residential first mortgage loans. The stock is bought from and sold to the Federal Home Loan Bank based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation persists; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to its operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.

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NOTE 9 – OTHER BORROWED FUNDS

The Bank utilizes securities sold under agreements to repurchase to accommodate its customers’ needs to invest funds short term and as a source of borrowings.

The following table presents certain information regarding our repurchase agreements during the year to date periods or at the dates indicated.

	At or for the year to date period ended
(Dollars in thousands)	March 31, 2014			December 31, 2013
Maximum amount of advances outstanding during the period	$	8,355		$	21,256
Average advances outstanding during the period	$	6,530		$	10,866
Weighted average interest rate during the period		0.01	%		0.24	%
Balance outstanding at end of period	$	6,185		$	4,173
Weighted average interest rate at end of period		0.01	%		0.01	%

The Bank maintains a credit facility with the Federal Reserve Bank of Boston for which certain assets are pledged to secure such borrowings. As of March 31, 2014 and December 31, 2013, there were no borrowings outstanding under this facility. In addition, the Federal Reserve Bank of Boston, as one of the Bank’s correspondent banks, requires the Bank to pledge at least $1 million in loans and/or investment securities for potential daylight overdraft exposure. At March 31, 2014 and December 31, 2013, the Bank had $3.3 million and $3.4 million, respectively, in commercial real estate loans pledged with the Federal Reserve Bank of Boston.

At March 31, 2014, the Bank had reserve requirements with the Federal Reserve Bank of Boston amounting to $2.6 million. In addition to the Bank’s $2.2 million in vault cash, the use of $0.4 million in balances held at the Federal Reserve Bank of Boston was restricted to meet these reserve requirements.

NOTE 10 – STOCKHOLDERS’ EQUITY

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed in a manner similar to basic net income (loss) 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 relate solely to stock option 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, 2014, anti-dilutive options excluded from the calculations totaled 102,996 options (with an exercise price of $11.12 per share) and 4,290 options (with an exercise price of $12.51 per share). For the three months ended March 31, 2013, anti-dilutive options excluded from the calculations totaled 192,994 options (with an exercise price of $11.12 per share) and 4,290 options (with an exercise price of $12.51 per share). Unreleased 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,
	2014			2013
Net loss	$	(809,000	)	$	(591,000	)
Weighted-average common shares outstanding:
Basic		6,675,457			6,643,093
Diluted		6,675,457			6,643,093
Loss per common share;
Basic	$	(0.12	)	$	(0.09	)
Diluted	$	(0.12	)	$	(0.09	)

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Dividends

The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. Due to current regulatory restrictions, the Company is not allowed to pay dividends to the Company’s shareholders and the Bank is not allowed to pay dividends to the Company.

NOTE 11 – STOCK BASED COMPENSATION

Stock options generally vest over six years and expire ten years after the date of the grant. The vesting schedule for stock options is 0% in year one and 20% annually for years two through six. Restricted stock vests ratably over five years. The Company has not granted any stock options, nor any restricted stock awards since July 26, 2008. During the three months ended March 31, 2014, there were no stock options exercised.

NOTE 12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The contractual amounts of commitments to extend credit represents the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults, and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis.

The Company controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral that it deems necessary.

Financial instruments whose contractual amounts represent credit risk at March 31, 2014 and December 31, 2013 were as follows:

	March 31,		December 31,
(In thousands)	2014		2013
Commitments to extend credit:
Commercial real estate loan commitments	$	23,576	$	12,572
Unused home equity lines of credit		19,148		19,169
Commercial and industrial loan commitments		10,052		10,153
Amounts due on other commitments		6,870		6,618
Commercial letters of credit		1,182		1,371

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral held varies, but may include residential and commercial property, deposits and securities.

NOTE 13 – FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below:

Cash and cash equivalents—The carrying amounts for cash and due from banks and federal funds sold approximate fair value because of the short maturities of those investments. The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 1 within the fair value hierarchy.

29

Available for sale and held to maturity securities—Where quoted prices are available in an active market, the securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include mutual funds. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and the securities are classified within Level 2 of the valuation hierarchy. Examples of such instruments include U.S. government agency bonds, U.S. government agency mortgage-backed securities and private label collateralized mortgage obligations. The auction rate trust preferred securities (“ARPs”) that were held as of December 31, 2013 were identified as “impermissible” investments under Volcker rule interpretations by the OCC and as such, the Company liquidated these securities in February 2014. Based on management’s assessment as of December 31, 2013 that the ARPs market is not an active one and to liquidate these securities would require a “forced redemption” from the trust to request delivery of the underlying preferred stock collateral for sale, the Company calculated the fair value (and the determination of the OTTI) on these securities at December 31, 2013 utilizing the current market prices of the underlying preferred stock and classified these investments as a Level 2 in the fair value hierarchy. Securities classified within Level 3 of the valuation hierarchy are securities for which significant unobservable inputs are utilized. Available for sale securities are recorded at fair value on a recurring basis and held to maturity securities are only disclosed at fair value.

Loans held for sale—The carrying amounts of these assets approximate fair value because these loans, are generally sold through forward sales (either already contracted or soon to be executed at the recording date). The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 2 within the fair value hierarchy.

Loans receivable—For variable rate loans that reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the loan portfolio. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated period end market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the loan portfolio. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments are based on unobservable inputs, the resulting fair value measurement is categorized as a Level 3 measurement.

Accrued interest receivable—The carrying amount approximates fair value. The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 1 within the fair value hierarchy.

Mortgage servicing assets—The fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company does not record these assets at fair value on a recurring basis. Servicing assets are classified as Level 2 within the fair value hierarchy.

Federal Home Loan Bank stock—The Bank is a member of the FHLB and is required to maintain an investment in capital stock of the FHLB. The carrying amount is a reasonable estimate of fair value. The Company does not record this asset at fair value on a recurring basis. Based on redemption provisions, the stock of the FHLB has no quoted market value and is carried at cost. FHLB stock is classified as Level 3 within the fair value hierarchy.

Foreclosed real estate— Foreclosed real estate represents real estate acquired through or in lieu of foreclosure and which are recorded at fair value on a nonrecurring basis. Fair value is based upon appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company classifies the fair value measurement as Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company classifies the fair value measurement as Level 3. The Company classified these assets as Level 3 within the fair value hierarchy.

Deposit liabilities—The fair value of demand deposits, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered by market participants for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities of such deposits. The Company does not record deposits at fair value on a recurring basis. Demand deposits, savings and money market deposits are classified as Level 1 within the fair value hierarchy. Certificates of deposit are classified as Level 2 within the fair value hierarchy.

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Borrowed funds—The fair value of FHLB advances and other borrowed funds (repurchase agreements) are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company does not record this liability at fair value on a recurring basis. FHLB advances and other borrowings are classified as Level 2 within the fair value hierarchy.

Accrued interest payable—The carrying amounts approximates fair value. The Company does not record the liability at fair value on a recurring basis. This liability is classified as Level 1 within the fair value hierarchy.

Mortgagors’ escrow accounts—The carrying amount approximates fair value. The Company does not record this liability at fair value on a recurring basis. This liability is classified as Level 2 within the fair value hierarchy.

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The following is a summary of the carrying values and estimated fair values of the Company’s significant financial instruments as of March 31, 2014 and December 31, 2013:

		March 31, 2014				December 31, 2013
	Fair Value	Carrying		Fair		Carrying		Fair
(In thousands)	Hierarchy Level	Value		Value		Value		Value
Financial Assets
Cash and cash equivalents	Level 1	$	9,620	$	9,620	$	26,374	$	26,374
Investment securities, available-for-sale:
Mutual fund -fixed income securities	Level 1		502		502		499		499
Other	Level 2		87,285		87,285		49,272		49,272
Investment securities, held-to-maturity	Level 2		16,890		17,057		18,149		18,243
Loans held for sale	Level 2		676		676		1,079		1,079
Loans receivable, net:
Performing	Level 2		346,897		349,793		344,468		347,496
Impaired	Level 3		13,028		12,812		16,100		15,816
Accrued interest receivable	Level 1		1,735		1,735		1,494		1,494
Mortgage servicing assets	Level 3		1,035		1,648		1,093		1,598
FHLB Stock	Level 3		5,444		5,444		5,444		5,444
Financial Liabilities
Demand deposits, savings, Now and money market deposits	Level 1		234,553		234,553		235,665		235,665
Time deposits	Level 2		154,359		156,607		155,182		157,591
FHLB advances	Level 2		49,216		49,776		25,293		25,942
Borrowed funds	Level 2		6,185		6,185		4,173		4,173
Mortgagors' escrow accounts	Level 2		2,263		2,263		4,392		4,392
Accrued interest payable	Level 1		66		66		51		51

The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The estimated fair value amounts as of March 31, 2014 and December 31, 2013 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at such dates.

The information presented should not be interpreted as an estimate of the fair value of the Company as a whole since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

The Company uses fair value measurements to record available-for sale investment securities and residential loans held for sale at fair value on a recurring basis. Additionally, the Company uses fair value measurements to measure the reported amounts of impaired loans, foreclosed real estate and mortgage-servicing rights at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or market value accounting or write-downs of individual assets.

Unrecognized financial instruments—Loan commitments on which the committed interest rate is less than the current market rate were insignificant at March 31, 2014 and December 31, 2013.

The following table represents a further breakdown of investment securities and other financial instruments measured at fair value on a recurring basis.

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	Fair Value At March 31, 2014
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a recurring basis:
Available-for-sale investment securities:
U.S. Government and agency obligations	$	-	$	42,233	$	-	$	42,233
U.S. Government agency mortgage-backed obligations		-		29,242		-		29,242
U.S. Government agency collateralized mortgage obligations		-		8,674		-		8,674
Small Business Administration loan pools		-		2,027		-		2,027
Obligations of state and municipal subdivisions		-		4,861		-		4,861
Private label collateralized mortgage obligations		-		248		-		248
Mutual fund - fixed income securities		502		-		-		502

	Fair Value At December 31, 2013
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a recurring basis:
Available-for-sale investment securities:
U.S. Government and agency obligations	$	-	$	16,506	$	-	$	16,506
U.S. Government agency mortgage-backed obligations		-		22,869		-		22,869
U.S. Government agency collateralized mortgage obligations		-		3,738		-		3,738
Private label collateralized mortgage obligations		-		266		-		266
Auction-rate trust preferred securities		-		5,893		-		5,893
Mutual fund - fixed income securities		499		-		-		499

The following table represents assets measured at fair value on a non-recurring basis.

	Fair Value At March 31, 2014
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a non-recurring basis:
Impaired loans	$	-	$	-	$	12,812	$	12,812
Foreclosed real estate		-		-		1,114		1,114
Mortgage servicing rights		-		-		1,648		1,648

	Fair Value At December 31, 2013
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a non-recurring basis:
Impaired loans	$	-	$	-	$	15,816	$	15,816
Foreclosed real estate		-		-		1,846		1,846
Mortgage servicing rights		-		-		1,598		1,598

During the three months ended March 31, 2014, the following fair values of those reflected in the above table were remeasured:

· $729,000 in collateral dependent impaired loans,

· $159,000 in foreclosed real estate, and

· $1.6 million in mortgage servicing rights.

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

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The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent management believes necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment.

Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

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

The following discussion and analysis is intended to assist you in understanding the financial condition and results of operations of the Company. This discussion should be read in conjunction with the accompanying unaudited financial statements as of and for the three months ended March 31, 2014 and 2013 together with the audited financial statements as of and for the year ended December 31, 2013, included in the Company’s Form 10-K initially filed with the Securities and Exchange Commission on March 31, 2014.

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 under “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. 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.

Overview

As of March 31, 2014, the Company had $507.2 million of total assets, $369.8 million of gross loans receivable, and $388.9million of total deposits. Total equity capital at March 31, 2014 was $57.7 million.

The Company had a net loss for the quarter ended March 31, 2014 of $809,000 (or basic and diluted loss per share of $0.12) as compared to a net loss of $591,000 (or basic and diluted loss per share of $0.09) for the first quarter of 2013. Despite a $300,000 decrease in the provision for loan losses, the increase in the Company’s net loss was largely attributable to a $366,000 decrease in mortgage banking income and a $160,000 increase in noninterest expenses for the three months ended March 31, 2014 compared to the same period in 2013.

The Company’s operating results for the first quarter of 2014, when compared to the same period of 2013, were influenced by the following factors:

· Net interest income decreased by $175,000 due to the combined effects of decreases in loan volume and a decline in yields in the loan portfolio, which were partially offset by decreases in liability volumes and lower rates paid on interest bearing liabilities;

· Provision for loan losses decreased by $300,000 primarily due to improvements in asset quality metrics during the first quarter of 2014;

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· Noninterest income decreased by $183,000 primarily because of a $366,000 decrease in mortgage banking income, consisting of a $171,000 decrease in gains on sales of mortgage loans and a $195,000 decrease in mortgage servicing income during the three months ended March 31, 2014, partially offset by a $158,000 gain on the sale of investments compared to the same period of 2013;

· Noninterest expenses increased by $160,000, or 2.9%, during the first quarter of 2014 compared to the same period of 2013 primarily due to increases in: compensation of $339,000; FDIC insurance premiums of $55,000; computer processing expenses of $53,000; and occupancy expenses of $52,000, partially offset by decreases in: expenses on foreclosed properties of $147,000; professional fees of $142,000; and directors’ compensation of $32,000.

Critical Accounting Policies

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

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 we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. We engage an independent firm to review our commercial loan portfolio at least quarterly and adjust our loan ratings based in part upon this review. In addition, our banking regulator, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination.

Other-Than-Temporary Impairments in the Market Value of Investments. Investment securities are reviewed at each reporting period for other-than-temporary impairment. For debt securities, an unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis. The credit loss component of an other than temporary impairment write-down is recorded in earnings, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided the Company does not intend to sell the underlying debt security and it is more likely than not that the Company will not be required to sell the debt security prior to recovery. In determining whether a credit loss exists and the period over which the fair value of the debt security is expected to recover, management considers the following factors: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, any external credit ratings, the level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities, the level of credit enhancement provided by the structure and the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. If an equity security is deemed other-than-temporarily impaired, the full impairment is considered credit related and a charge to earnings is recorded.

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

Fair Value of Financial Instruments.We use fair value measurements to record certain assets at fair value on a recurring basis, primarily related to the carrying amounts for available-for-sale investment securities. Additionally, we may be required to record at fair value other assets, such as foreclosed real estate, on a nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or market value accounting or write-down of individual assets. Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time, they are susceptible to material near-term changes. The fair values disclosed do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect the possible tax ramifications or estimated transaction costs.

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This discussion should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K.

Results of Operations for the Three Months Ended March 31, 2014 and 2013

Earnings Summary. For the three months ended March 31, 2014, the Company incurred a net loss of $809,000 compared to a net loss of $591,000 for the same period in 2013. The quarter-over-quarter increase in net loss was the result of a decrease in net interest income of $175,000, a decrease in noninterest income of $183,000 and an increase in noninterest expenses of $160,000, partially offset by a $300,000 decrease in the provision for loan losses.

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Average Balance and Yields.The following table summarizes average balances and average yields and costs for the three months ended March 31, 2014 and 2013. For the purpose of this table, average balances have been calculated using the average daily balances and nonaccrual loans are included in average balances.

	For the Three Months Ended March 31,
	2014							2013
			Interest		Annualized					Interest		Annualized
	Average		Earned/		Average			Average		Earned/		Average
	Balance		Paid		Yield/Rate			Balance		Paid		Yield/Rate
	(Dollars in thousands)
Interest-earning assets
Loans	$	371,182	$	4,212		4.60	%	$	432,456	$	5,051		4.74	%
Investment securities and Fed funds sold		86,210		637		3.00			49,053		302		2.50
Overnight Funds		7,518		5		0.27			19,958		11		0.22
Federal Home Loan Bank stock		5,444		20		1.49			5,901		6		0.41
Total interest-earning assets		470,354		4,874		4.20	%		507,368		5,370		4.29	%
Non interest-earning assets		21,432		-					19,366		-
Total Assets	$	491,786	$	4,874				$	526,734	$	5,370
Interest-bearing liabilities
Certificate accounts	$	154,621		508		1.33	%	$	172,071	$	665		1.56	%
Regular savings accounts & escrow		118,093		49		0.17			119,596		86		0.29
Checking and NOW accounts		91,153		35		0.16			81,915		18		0.10
Money market savings accounts		25,685		12		0.19			26,140		17		0.27
Total interest-bearing deposits		389,552		604		0.63			399,722		786		0.79
FHLB advances		33,800		154		1.85			41,051		278		2.73
Other borrowings		6,530		-		0.01			15,112		15		0.46
Total interest-bearing liabilities		429,882		758		0.72	%		455,885		1,079		0.96	%
Non interest-bearing liabilities		3,578							3,825
Total Liabilities		433,460							459,710
Total Stockholders' Equity		58,326							67,024
Total Liabilities and Stockholders' Equity	$	491,786						$	526,734
Net interest income			$	4,116						$	4,291
Net interest spread						3.48	%						3.33	%
Net interest margin						3.55	%						3.43	%
Average interest earning assets to average interest bearing liabilities						109.41	%						111.29	%

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Rate / Volume Analysis.The following table summarizes the changes in the components of net interest income attributable to both rate and volume for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014 Compared to 2013
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest income:
Loans	$	(694	)	$	(145	)	$	(839	)
Investment securities / Federal funds sold		265			70			335
Overnight funds		(7	)		1			(6	)
Federal Home Loan Bank stock		-			14			14
Total interest income		(436	)		(60	)		(496	)
Interest expense:
Certificate accounts		(62	)		(91	)		(153	)
Regular savings accounts		(1	)		(36	)		(37	)
Checking and NOW accounts		2			13			15
Money market savings accounts		-			(7	)		(7	)
Total deposit expense		(61	)		(121	)		(182	)
FHLB advances		(43	)		(79	)		(122	)
Other borrowings		(6	)		(11	)		(17	)
Total interest expense		(110	)		(211	)		(321	)
Increase (decrease) in net interest income	$	(326	)	$	151		$	(175	)

Net Interest Income.Net interest income for the quarter ended March 31, 2014 totaled $4.1 million compared to $4.3 million for the quarter ended March 31, 2013, a decrease of $175,000, or 4.1%. The $839,000, or 16.6%, decrease in interest on loans is due to a decrease in both volume and rate. For the quarter ended March 31, 2014, average interest earning assets decreased $37.0 million, or 7.3%, to $470.4 million from $507.4 million for the quarter ended March 31, 2013. Of this $37.0 million decrease, $61.3 million was due to a decrease in the average balance of loans which was offset by an increase of $37.2 million in the average balance of investments. The decrease in average loans was driven primarily by reductions in average balances for commercial mortgages, construction loans, residential mortgages and home equity loans. These decreases in loans were primarily attributable to loan sales in June 2013 and loan workout efforts as well as loan runoff and payoffs exceeding the slow loan demand year-over-year. The increase in the average balance of investments year-over-year was primarily attributable to the purchase of $47.8 million in investment securities during the first quarter of 2014, partially offset by the sale of the auction rate preferred securities of $5.9 million in the first quarter of 2014 as well as ongoing scheduled paydowns and prepayments of mortgage-backed securities. The continued decline in market interest rates and the change in asset mix primarily from loans into investment securities caused the weighted average yield for interest earning assets to decrease by 9 basis points to 4.20% for the quarter ended March 31, 2014 as compared to 4.29% for the first quarter of 2013.

Interest expense for the quarter ended March 31, 2014 of $758,000 was comprised of deposit interest expense and interest on borrowed funds of $604,000 and $154,000, respectively. These amounts are compared to $786,000 and $293,000, respectively, for the same period in 2013. During the quarter ended March 31, 2014, average interest bearing liabilities decreased $26.0 million, or 5.7%, to $429.9 million for the first quarter of 2014 from $455.9 million for the same period in 2013. This shift in average interest bearing liability balances reflects reductions in average FHLB advances of $7.3 million and interest bearing deposits of $10.2 million, respectively. The decrease in average FHLB advances was caused by the payoff of FHLB advances at maturity due to their higher cost than other funding sources during 2013, which was partially offset by the new advances in the first quarter of 2014 to fund net asset growth. The decrease in average balance of interest bearing deposits was caused by a greater movement out of time deposits offset by an increase in lower cost transaction and savings accounts. These changes caused the weighted cost of interest bearing liabilities to decrease by 24 basis points to 0.72% for the quarter ended March 31, 2014 as compared to 0.96% for the same period in 2013.

While net interest income for the 2014 quarter was $175,000 less than the 2013 quarter, the Company’s net interest spread and net interest margin increased year-over-year by 15 basis points (from 3.33% to 3.48%) and by 12 basis points (from 3.43% to 3.55%), respectively. While the overall decrease in net interest income was primarily volume related, the rate related changes, primarily the reduction in the Company’s cost of funds aided by the impact of asset mix changes, softened the overall decrease in the net interest income.

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Provision for Loan Losses.For the three months ended March 31, 2014, the Company did not record any provision for loan losses, compared to $300,000 for the same period in 2013. Net charge-offs were $26,000 during the three months ended March 31, 2014, compared to $547,000 during the three months ended March 31, 2013. The decreased provision for the 2014 period was attributable to (i) management’s judgment that the inherent credit risk exposure in the loan portfolio has somewhat stabilized due to increased loan workout efforts, including the sale of $20.8 million in credit-impaired loans in the secondary market in June 2013, which resulted in improvement in the Company’s asset quality metrics; and (ii) a $521,000 decrease in net charge-offs in the three month period ended March 31, 2014, compared to the same period in 2013. In addition, residential mortgage, construction, multi-family, commercial residential, commercial business and consumer portfolios appear to have stabilized in many of our lending markets.

Noninterest Income.The following table summarizes the components of noninterest income for the three months ended March 31, 2014 and 2013:

	Three Months
	Ended March 31,
(Dollars in thousands)	2014		2013
Service charge income	$	173	$	178
Fees for other services		95		110
Mortgage banking income		136		502
Income from bank owned life insurance		66		71
Net gain on sale of investments		158		-
Income from investment advisory services, net		94		52
Other income		32		24
Total noninterest income	$	754	$	937

Noninterest income was $754,000 for the quarter ended March 31, 2014 and $937,000 for the same period in 2013, a decrease of $183,000, or 19.5%. The largest year-over-year change was in mortgage banking income which decreased by $366,000, or 72.9%. The components of mortgage banking income, gains on sales of loans and mortgage servicing income, both decreased significantly year-over-year, as the Company originated and sold a lower volume of mortgage loans during the 2014 quarter due to a national trend of reduction in residential mortgage refinancing beginning in the second quarter of 2013, primarily attributable to an increase in market interest rates on residential mortgage loans, and a somewhat tepid level of purchase related mortgage financings during the past year. Furthermore, the volume of mortgage loans sold on a servicing retained basis versus on a servicing released basis during the 2014 quarter was also less than the 2013 quarter activity, thus accounting for the reduction in servicing rights capitalized in total, and in relation to the amortization of mortgage servicing rights in the 2014 quarter and its impact on that quarter’s mortgage servicing income. The impact of the decrease in mortgage banking income was somewhat reduced by a $158,000 net gain on the sale of investment securities and, to a lesser extent, the $42,000 increase in investment advisory services income. The gain on sale of investment securities was the result of the sale of the auction rate preferred securities in February, after the Company experienced a $1.8 million other-than temporary impairment on these securities in the fourth quarter of 2013 based on these securities being identified as “impermissible” under Volcker rule interpretations. The increase in income from investment advisory services was due to higher transaction volume and related fees during the 2014 quarter. In other areas of noninterest income, such as service charge income and fees for other services, the year-over-year decreases were primarily transaction volume related, such as a lower volume of overdraft transactions in the 2014 quarter due to the Bank more aggressively monitoring and controlling such activity. The decrease in income from bank owned life insurance was attributable to a lower crediting rate on certain policies during the past year as the insurance carriers have reacted to the continuation of low market interest rates and their effect on investment portfolio yields. The $8,000 increase in other income was primarily the result of increases in rental income on existing leased properties.

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Noninterest Expense. The following table summarizes the components of noninterest expense for the three months ended March 31, 2014 and 2013.

	Three Months
	Ended March 31,
(Dollars in thousands)	2014		2013
Compensation, taxes and benefits	$	3,016	$	2,677
Occupancy		543		491
Professional fees		518		660
FDIC insurance premiums		261		206
Insurance		145		158
Computer processing		369		316
Expenses on foreclosed real estate, net		210		357
Writedowns on foreclosed real estate		27		12
Directors' compensation		102		134
Advertising		96		87
Office supplies		69		61
Other expenses		323		360
Total	$	5,679	$	5,519

Noninterest expense was $5.7 million for the quarter ended March 31, 2014 compared to $5.5 million for the quarter ended March 31, 2013, an increase of $160,000 or 2.9%.

The year-over-year increase was primarily the result of increases in: compensation, taxes and benefits of $339,000; FDIC insurance of $55,000; computer processing of $53,000; occupancy expense of $52,000; advertising of $9,000 and office supplies of $8,000 over the same period in 2013. These increases were partially offset by decreases in: expenses on foreclosed real estate of $147,000; professional fees of $142,000; other expenses of $37,000; directors compensation of $32,000; and insurance and surety bond expense of $13,000. The $339,000 increase in compensation was attributable to (i) increased cost of replacing existing management, outsourced finance positions and other key staff with more experienced and skilled personnel; and (ii) increases in employee benefits and payroll taxes. Some of the year-over-year increase in compensation was partially offset by a lower level of mortgage commissions for first quarter of 2014 compared to those for the 2013 period. Expenses on foreclosed real estate decreased by $147,000, or 41.2%, due to lower property taxes and decreases in other costs of acquiring and maintaining foreclosed real estate. FDIC insurance premiums increased by $55,000, or 26.7%, due to the impact of the regulatory agreement. Professional fees were lower in 2014 due to a decline in expenses paid to outside attorneys and advisors and to the decreased use of consultants due to previous vacant positions being filled later in 2013. This decrease was partially offset by a $54,000 increase in external audit fees. The $53,000 increase in computer processing was attributable to the cost of acquiring additional functionality and processing capability related to the automation of certain key processes including the allowance for loan losses calculation, credit administration functions, enterprise risk management and call report preparation. The $52,000 increase in occupancy was due to higher utilities, repairs and maintenance somewhat related to a harsher winter in 2014 in addition to an increase in property taxes for the 2014 period. Other expenses decreased by $37,000. The most significant variance in this category was a $42,000 decrease in appraisal expense which resulted from a decrease in the number of collateral dependent impaired real estate loans requiring appraisals. The $32,000 decrease in directors’ compensation was the result of fewer meetings in 2014.

Income Tax Expense (Benefit).The Company has reported no tax benefit for its pre-tax operating loss for the quarter ended March 31, 2014 or for the prior period. At March 31, 2014, there was a 100% valuation allowance on the deferred tax asset. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The valuation allowance was established during the year ended December 31, 2012, at which time the Company had $5.3 million in net deferred tax assets related to the provision for loan losses and current year operating losses. Management concluded that it was more likely-than-not that the Company would not be able to realize its deferred tax assets and accordingly has established a 100% valuation allowance equal to the net deferred tax asset balance at March 31, 2014. If, in the future, the Company generates taxable income on a sustained basis sufficient to support the deferred tax assets, management’s conclusion regarding the need for a deferred tax valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation at that time.

40

Management regularly analyzes the Company’s tax positions and at March 31, 2014, does not believe that the Company has taken any tax positions where future deductibility is not certain. As of March 31, 2014, the Company is subject to unexpired statutes of limitation for examination of its tax returns for U.S. federal and Connecticut income taxes for the years 2010-2012.

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

Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Overview

Total assets were $507.2 million as of March 31, 2014, an increase of $20.6 million or 4.2% from $486.6 million as of December 31, 2013. Loans receivable, gross of $369.8 million decreased by $678,000 or 0.2%, and investment securities increased by $36.8 million, or 54.1%, partially offset by a decrease in cash and cash equivalents of $14.7 million or 55.6%. The loan portfolio decreased during the period by type as follows: real estate loans decreased by $3.3 million or 1.1%; commercial business loans decreased by $1.3 million, or 4.9%. These decreases were offset by an increase in consumer loans (mostly purchased indirect auto loans) of $3.9 million, or 13.4%. The reduction in the loan portfolio was primarily due to contractual amortization, repayments, charge offs, and decreased loan demand.

Total liabilities were $449.4 million at March 31, 2014 compared to $428.4 million at December 31, 2013. Deposits decreased $1.9 million, or 0.5%, to $388.9 million at March 31, 2014 from $390.8 million at December 31, 2013. Between December 31, 2013 and March 31, 2014, core deposits (defined as all deposits other than certificates of deposit) of $234.6 million decreased $1.1 million in concert with a decrease of $823,000 in certificates of deposit. Management attributes the slight decrease in deposits primarily to the seasonal needs of depositors for purposes such as income tax payments. Advances from the Federal Home Loan Bank of Boston increased by $23.9 million, from $25.3 million at December 31, 2013 to $49.2 million at March 31, 2014, as the Bank funded its balance sheet growth with FHLB advances. Other borrowed funds increased $2.0 million, to $6.2 million from $4.2 million over the same period.

Total stockholders’ equity was $57.7 million at March 31, 2014 compared to $58.2 million at December 31, 2013. The decrease in stockholders’ equity was due to the net loss of $809,000 for the three month period ended March 31, 2014 and an increase in unrealized gain in available for sale investment securities of $319,000.

Lending Activities

As indicated in the table below, total loans receivable decreased $678,000, or 0.2%, to $369.8 million at March 31, 2014 from $370.5 million at December 31, 2013.

41

	March 31,		December 31,
(Dollars in thousands)	2014		2013
Real estate loans:
One-to-four family	$	184,531	$	186,985
Multi-family and commercial real estate		122,329		123,134
Construction and land development		5,528		5,609
Total real estate loans		312,388		315,728
Commercial business loans		24,250		25,506
Consumer loans:
Home equity		27,267		26,960
Other consumer		5,932		2,321
Total consumer loans		33,199		29,281
Total loans		369,837		370,515
Less:
Allowance for loan losses		9,865		9,891
Deferred loan origination fees, net		47		56
Loans receivable, net	$	359,925	$	360,568

Nonperforming Assets

The following table provides information with respect to the Company’s nonperforming assets at the dates indicated.

	March 31,			December 31,
	2014			2013
Nonperforming Assets	(Dollars in thousands)
Nonaccrual loans	$	5,821		$	7,953
TDRs nonaccruing		4,769			5,430
Subtotal nonperforming loans		10,590			13,383
Foreclosed real estate		1,114			1,846
Total nonperforming assets	$	11,704		$	15,229
Total nonperforming loans to total loans		2.86	%		3.61	%
Total nonperforming assets to total assets		2.31	%		3.13	%

The following table shows the aggregate amounts of the Company’s adversely classified loans and criticized loans at the dates indicated:

	At March 31,		At December 31,
	2014		2013
	(dollars in thousands)
Loans by risk grade:
Special mention	$	18,452	$	32,511
Substandard		18,859		16,289
Doubtful		90		93
Subtotal - Adversely classified loans		18,949		16,382
Total criticized loans	$	37,401	$	48,893

The balances of nonperforming loans decreased $2.8 million between December 31, 2013 and March 31, 2014. While the Bank’s adversely classified loans increased by $2.6 million or 15.7%, a downgrade of the Bank’s largest commercial real estate loan of $4.3 million from Special Mention to Substandard Accruing during the first quarter of 2014 offset the solid underlying improvement in seven of the nine loan concentrations. On this $4.3 million commercial real estate exposure, there was no impairment at March 31, 2014 based on the fair value of the underlying collateral. Management expects a positive resolution within six months to the recently downgraded exposure. In addition to the improvement in nonperforming loans, the Company has also experienced a reduction of $14.1 million, or 43.2%, in its Special Mention loans during the first quarter of 2014. The levels and trends of adversely classified loans, and to a certain extent, the trend in Special Mention loans, warrant and receive management oversight and focus in management’s estimates related to the allowance for loan losses. In certain cases, where appropriate, specific allowances have been established to account for the increased credit risk of these assets.

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

On a quarterly basis, or more often if warranted, management analyzes the loan portfolio. For individually evaluated loans that are considered impaired, an allowance is established as required, 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 dependent, the fair value of the collateral. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due under the contractual term of the loan agreement.

All other loans, excluding loans that are individually evaluated, including those 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; however, this analysis and loss trends do not form a sufficient basis, by themselves, to determine the appropriate level of the loan loss allowance. Management also considers qualitative and environmental factors for each loan segment that are likely to impact, directly or indirectly, the inherent loss exposure of the loan portfolio. These factors include but are not limited to: changes in the amount and severity of delinquencies, non-accrual and adversely classified loans, changes in local, regional, and national economic conditions that will affect the collectability of the portfolio, changes in the nature and volume of loans in the portfolio, changes in concentrations of credit, lending area, industry concentrations, or types of borrowers, changes in lending policies, procedures, competition, management, portfolio mix, competition, pricing, loan to value trends, extension and modification requests, and loan quality trends. As of June 30, 2013, management added factors to assess with greater granularity loan quality trends, in particular, the changes and the trend in charge-offs and recoveries, change in volume of loans classified as Watch or Special Mention, and the changes in the quality of the Bank’s loan review system. This analysis establishes factors that are applied to each of the segregated groups of loans to determine an appropriate level of loan loss allowance.

Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examination may require us to make additional provisions for loan losses based on judgments different from ours. The Company also periodically engages an independent consultant to review our credit risk grading process and the risk grades on selected portfolio segments as well as the methodology, analysis and adequacy of the allowance for loan and lease losses.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

43

The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three months ended March 31, 2014 and 2013:

As of and for the Three Months Ended March 31, 2014	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
(In thousands)
Allowance for loan losses:
Beginning balance	$	1,849		$	5,097		$	1,118		$	1,443		$	384		$	9,891
Provision for loan losses		117			177			84			(309	)		(69	)		-
Charge-offs		(32	)		(12	)		(102	)		(36	)		(2	)		(184	)
Recoveries		-			-			15			57			86			158
Balance at March 31, 2014	$	1,934		$	5,262		$	1,115		$	1,155		$	399		$	9,865
Allowance related to loans:
Individually evaluated for impairment	$	49		$	12		$	21		$	88		$	46		$	216
Collectively evaluated for impairment		1,885			5,250			1,094			1,067			353			9,649
Total Allowance	$	1,934		$	5,262		$	1,115		$	1,155		$	399		$	9,865
Ending loan balance individually evaluated for impairment	$	6,790		$	2,872		$	1,584		$	1,283		$	499		$	13,028
Ending loan balance collectively evaluated for impairment		177,741			119,457			3,944			22,967			32,700			356,809
Total Loans	$	184,531		$	122,329		$	5,528		$	24,250		$	33,199		$	369,837

	Multi-Family and Commercial Real Estate
As of and for the Three Months Ended March 31, 2014	Investor one- to-four family and multi- family			Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties			Total Multi- Family and Commercial Real Estate
(In thousands)
Allowance for loan losses:
Beginning balance		515		$	1,034	$	563	$	856	$	2,129		$	5,097
Provision for loan losses		(59	)		32		23		217		(36	)		177
Charge-offs		-			-		-		-		(12	)		(12	)
Recoveries		-			-		-		-		-			-
Balance at March 31, 2014	$	456		$	1,066	$	586	$	1,073	$	2,081		$	5,262
Allowance related to loans:
Individually evaluated for impairment	$	-		$	-	$	-	$	12	$	-		$	12
Collectively evaluated for impairment		456			1,066		586		1,061		2,081			5,250
Total Allowance	$	456		$	1,066	$	586	$	1,073	$	2,081		$	5,262
Ending loan balance individually evaluated for impairment	$	1,154		$	29	$	206	$	377	$	1,106		$	2,872
Ending loan balance collectively evaluated for impairment		15,875			29,596		20,725		22,906		30,355			119,457
Total Loans	$	17,029		$	29,625	$	20,931	$	23,283	$	31,461		$	122,329

44

As of and for the Three Months Ended March 31, 2013	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans		Total
(In thousands)
Allowance for Loan Losses:
Beginning Balance	$	1,988		$	4,892		$	4,468		$	2,725		$	427	$	14,500
Provision for loan losses		50			200			-			50			-		300
Charge-offs		(151	)		(224	)		(6	)		(184	)		-		(565	)
Recoveries		-			9			-			9			-		18
Ending Balance	$	1,887		$	4,877		$	4,462		$	2,600		$	427	$	14,253
Allowance related to loans:
Individually evaluated for impairment	$	49		$	346		$	117		$	216		$	-	$	728
Collectively evaluated for impairment		1,838			4,531			4,345			2,384			427		13,525
Total Allowance	$	1,887		$	4,877		$	4,462		$	2,600		$	427	$	14,253
Ending loan balance individually evaluated for impairment	$	5,132		$	15,573		$	9,843		$	3,802		$	445	$	34,795
Ending loan balance collectively evaluated for impairment		201,585			127,479			9,306			27,512			28,593		394,475
Total Loans	$	206,717		$	143,052		$	19,149		$	31,314		$	29,038	$	429,270

As of December 31, 2013	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	70	$	23	$	75	$	105	$	10	$	283
Collectively evaluated for impairment		1,779		5,074		1,043		1,338		374		9,608
Total Allowance	$	1,849	$	5,097	$	1,118	$	1,443	$	384	$	9,891
Ending loan balance individually evaluated for impairment	$	7,001	$	4,085	$	1,854	$	2,580	$	579	$	16,099
Ending loan balance collectively evaluated for impairment		179,984		119,049		3,755		22,926		28,702		354,416
Total Loans	$	186,985	$	123,134	$	5,609	$	25,506	$	29,281	$	370,515

	Multi-Family and Commercial Real Estate
As of December 31, 2013	Investor one- to-four family and multi- family		Industrial and Warehouse Properties			Office Buildings		Retail Properties		Special Use Properties		Total Multi- Family and Commercial Real Estate
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	-	$	-		$	-	$	23	$	-	$	23
Collectively evaluated for impairment		515		1,034			563		833		2,129		5,074
Total Allowance	$	515	$	1,034		$	563	$	856	$	2,129	$	5,097
Ending loan balance individually evaluated for impairment	$	1,167	$	565		$	206	$	547	$	1,600	$	4,085
Ending loan balance collectively evaluated for impairment		15,205		29,431	��		21,206		22,973		30,234		119,049
Total Loans	$	16,372	$	29,996		$	21,412	$	23,520	$	31,834	$	123,134

45

Liquidity and Capital Resources

Liquidity is the ability to meet current and future short-term financial obligations. The Bank’s primary sources of funds consist of retail deposit inflows, loan repayments, maturities and sales of investment securities and advances from the Federal Home Loan Bank of Boston. The deposit base is comprised of certificate accounts, regular savings accounts, checking and NOW accounts, money market savings accounts and health savings accounts. The Bank borrows funds from the Federal Home Loan Bank of Boston during periods of low liquidity to match fund increases in our fixed-rate mortgage portfolio and to provide long-term fixed-rate funding with the goal of decreasing our exposure to an increase in interest rates. We also use securities sold under agreements to repurchase as a source of borrowings.

Each quarter the Bank projects liquidity availability and demands on this liquidity for the next ninety days. The Bank regularly adjusts its investments in liquid assets based upon its assessment of (1) expected loan demand, (2) expected retail 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. While maturities and scheduled amortization of loans and securities are predictable sources of funds, retail deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank’s most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2014, cash and cash equivalents totaled $11.7 million, including federal funds sold of $2.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $87.8 million at March 31, 2014. At March 31, 2014, the Bank had the ability to borrow a total of $82.2 million from the Federal Home Loan Bank of Boston based on the collateral pledged, of which $49.2 million in borrowings was outstanding. The Bank also had other borrowed funds of $6.2 million in repurchase agreements with customers. In addition, at March 31, 2014, the Bank had the ability to borrow $1.6 million from the Federal Reserve Bank Discount Window which was not utilized at March 31, 2014.

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

	March 31,		December 31,
(In thousands)	2014		2013
Commitments to extend credit:
Commercial real estate loan commitments	$	23,576	$	12,572
Unused home equity lines of credit		19,148		19,169
Commercial and industrial loan commitments		10,052		10,153
Amounts due on other commitments		6,870		6,618
Commercial letters of credit		1,182		1,371

Certificates of deposit due within one year of March 31, 2014 totaled $73.0 million, or 18.8% of total deposits. If these deposits do not remain with the Bank, the Bank will need to seek other sources of funds, including other certificates of deposit, FHLB advances or other borrowings, and its available lines of credit. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than are currently paid on these maturing certificates of deposit. Based on past experience, however, the Bank believes that a significant portion of our certificates of deposit will remain with us. The Bank has the ability to attract and retain deposits by adjusting the interest rates offered.

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

46

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Company’s primary source of income is dividends received from the Bank. Under the Agreement with the OCC, the Bank is restricted from declaring or paying any dividends or other capital distributions to the Company without prior written approval from the OCC. This provision relates to up streaming intercompany dividends or other capital distributions from the Bank to the Company. On a stand-alone basis, the Company had liquid assets of $2.9 million at March 31, 2014.

Effective June 4, 2013, the OCC imposed IMCRs on the Bank. The IMCRs require the Bank to maintain a Tier 1 leverage capital to adjusted total assets ratio of at least 9.00% and a total risk-based capital to risk-rated assets ratio of at least 13.00%. Before the establishment of the IMCRs, the Bank had been operating under these capital parameters by self-imposing these capital levels as part of the capital plan the Bank was required to implement under the terms of the previously disclosed January 2012 Formal Agreement between the Bank and the OCC. The Bank exceeded the IMCRs at March 31, 2014, with a Tier 1 leverage ratio of 10.44% and a total risk-based capital ratio of 17.77%.

As a source of strength to its subsidiary bank, the Company has liquid assets which the Company could contribute to the Bank if needed to enhance the Bank’s capital levels. The Company’s liquid assets totaled approximately $2.9 million at March 31, 2014. If the Company had contributed those assets to the Bank as of March 31, 2014, the Bank would have had a Tier 1 leverage ratio of approximately 10.96%.

On May 21, 2013, the Company entered into a MOU with the Federal Reserve Bank of Boston. Among other things, the MOU prohibits the Company from paying dividends, repurchasing its stock or making other capital distributions without prior written approval of the Federal Reserve Bank of Boston.

The following tables are summaries of the Company’s consolidated and the Bank’s actual capital amounts and ratios at March 31, 2014 and December 31, 2013 as computed under the regulatory guidelines.

At March 31, 2014	Adequately Capitalized Requirements					Individual Minimum Capital Requirements (3)					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1  Leverage Capital (1)		N/A		N/A			N/A		N/A		$	57,514		11.35	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			57,514		17.96	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			61,589		19.23	%
The Bank
Tier 1  Leverage Capital (1)	$	20,354		4.00	%	$	45,797		9.00	%	$	53,147		10.44	%
Tier 1 Risk-Based Capital (2)		12,886		4.00	%		N/A		N/A			53,147		16.50	%
Total Risk-Based Capital (2)		25,772		8.00	%		41,879		13.00	%		57,246		17.77	%
(1) Tier 1 capital to total assets.
(2) Tier 1 or total risk-based capital to risk-weighted assets.
(3) Effective June 4, 2013.

At December 31, 2013	Adequately Capitalized Requirements					Individual Minimum Capital Requirements (3)					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1  Leverage Capital (1)		N/A		N/A			N/A		N/A		$	58,323		11.98	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			58,323		18.21	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			62,399		19.49	%
The Bank
Tier 1  Leverage Capital (1)	$	19,545		4.00	%	$	43,977		9.00	%	$	53,946		11.04	%
Tier 1 Risk-Based Capital (2)		12,891		4.00	%		N/A		N/A			53,946		16.74	%
Total Risk-Based Capital (2)		25,783		8.00	%		41,897		13.00	%		58,047		18.01	%
(1) Tier 1 capital to total assets.
(2) Tier 1 or total risk-based capital to risk-weighted assets.
(3) Effective June 4, 2013.

47

Off-Balance Sheet Arrangements

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

For the three months ended March 31, 2014, 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.

Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our annual report on Form 10-K for the year ended December 31, 2013.

We do not maintain a trading account for any class of financial instrument nor do we engage in hedging activities or purchase high-risk derivative instruments. Moreover, we have no material foreign currency exchange rate risk or commodity price risk.

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of March 31, 2014 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13(a)-15(f) of the Act) that occurred during the three months ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. - Legal Proceedings.

On November 8, 2012, John Roman, then a director of Naugatuck Valley Financial and Naugatuck Valley Savings and the former President and Chief Executive Officer of Naugatuck Valley Financial and Naugatuck Valley Savings, filed a complaint and an application for an injunction in Connecticut state court. Mr. Roman named Naugatuck Valley Financial, Naugatuck Valley Savings, and all of the other then existing directors of each entity as defendants. The complaint requested that the court enter temporary and permanent injunctions to prevent his removal as a director of Naugatuck Valley Savings. The complaint alleged that cause did not exist to remove Mr. Roman as required under the Bylaws, and that the removal vote was in retribution for his threatened legal action against Naugatuck Valley Savings based on his resignation as President and Chief Executive Officer. Subsequent to his removal as a director of Naugatuck Valley Savings on November 30, 2012, Mr. Roman modified his requested injunction, asking that the court reinstate him as a director of Naugatuck Valley Savings. A hearing on Mr. Roman’s request for a temporary injunction was held on February 26-27, 2013. By court order dated March 20, 2013, the court denied Mr. Roman’s request for a temporary injunction, finding that Mr. Roman was not “likely to prevail on the merits” and that there was not a “substantial probability” that any harm would result if his requested injunction was not granted. Effective May 16, 2013, Mr. Roman resigned as a director of Naugatuck Valley Financial. On May 28, 2013, the Board of Directors accepted Mr. Roman’s resignation.

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On June 17, 2013, Mr. Roman filed a request to amend his complaint, which was granted on July 16, 2013. The amended complaint dropped certain claims, including his request for injunctive relief, and added claims arising from his resignation as President and Chief Executive Officer of Naugatuck Valley Financial and Naugatuck Valley Savings, including claims for breach of his employment agreement, breach of the duty of good faith and fair dealing underlying that employment agreement, negligent infliction of emotional distress, and for indemnification for enforcement of his employment agreement. Mr. Roman requested unspecified damages as well as recovery of attorneys’ fees.

On February 20, 2014, the court entered a scheduling order providing a period for completion of discovery and the filing of dispositive motions. A trial date has been set for March 3, 2015.

Naugatuck Valley Financial and Naugatuck Valley Savings are also subject to claims and litigation that arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing Naugatuck Valley Financial and Naugatuck Valley Savings in connection with such claims and litigation, it is the opinion of management that the disposition or ultimate determination of such claims and litigation will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Naugatuck Valley Financial.

Item 1A. – Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

(a) Not applicable.

(b) Not applicable.

(c) The Company did not repurchase any shares of its common stock during the quarter ended March 31, 2014.

Item 3. – Defaults Upon Senior Securities. Not applicable

Item 4. – Mine Safety Disclosures.Not applicable

Item 5. – Other Information. Not applicable

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Item 6. – Exhibits.

Exhibits –

3.1 Articles of Incorporation of Naugatuck Valley Financial Corporation (1)

3.2 Bylaws of Naugatuck Valley Financial Corporation, as amended (2)

4.1 Specimen Stock Certificate of Naugatuck Valley Financial Corporation (3)

10.1 Standstill Agreement, dated March 12, 2014, by and among, Naugatuck Valley Financial Corporation, Naugatuck Valley Savings and Loan, Stilwell Value Partners II, L.P., Stilwell Value Partners VII, L.P., Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P., Stilwell Partners, L.P., Stilwell Value LLC, Mr. Joseph Stilwell and Robert M. Bolton. (4)

10.2 Agreement, dated March 21, 2014, by and among, Naugatuck Valley Financial Corporation, Naugatuck Valley Savings and Loan, Seidman and Associates, LLC, Seidman Investment Partnership, LP, Seidman Investment Partnership II, LP, LSBK06-08, LLC, Broad Park Investors, LLC, CBPS, LLC, 2514 Multi-Strategy Fund, LP, Veteri Place Corporation, Sonia Seidman, and Lawrence Seidman. (5)

31.1 Rule 13a-14(a)/15d-14(a) Certification.

31.2 Rule 13a-14(a)/15d-14(a) Certification.

32 Section 1350 Certifications.

101 The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

____________________

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

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

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

(4)     Incorporated herein by reference to Exhibit 10.1 to the Naugatuck Financial Corporation (File No. 000-54447) Current Report on Form 8-K, filed on March 14, 2014.

(5)     Incorporated herein by reference to Exhibit 10.1 to the Naugatuck Financial Corporation (File No. 000-54447) Current Report on Form 8-K, filed on March 27, 2014.

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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 13, 2014	by:	/s/William C. Calderara
	William C. Calderara
	President and Chief Executive Officer
	(principal executive officer)
Date: May 13, 2014	by:	/s/James Hastings
	James Hastings
	Executive Vice President and Chief Financial Officer
	(principal accounting and financial officer)

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