10-Q 1 v351578_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

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 organization)		(I.R.S. Employer Identification No.)

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

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

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

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No £

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

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

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

Yes ¨ No x

As of August 12, 2013, there were 7,002,128 shares of the registrant’s common stock outstanding.

NAUGATUCK VALLEY FINANCIAL CORPORATION

Table of Contents

		Page No.

Part I. Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition at June 30, 2013 and December 31, 2012	3

	Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012	5

	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013 and 2012	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

	Liquidity and Capital Resources	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

Item 4.	Controls and Procedures	46

Part II. Other Information

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

Signatures		49

Exhibits

Part I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Consolidated Statements of Financial Condition (unaudited)

	June 30,			December 31,
(In thousands, except share data)	2013			2012

ASSETS
Cash and due from depository institutions	$	31,835		$	23,123
Federal funds sold		1,944			106
Cash and cash equivalents		33,779			23,229
Investment securities available-for-sale, at fair value		20,170			23,484
Investment securities held-to-maturity, at amortized cost		21,499			25,519
Loans held for sale		331			2,761
Loans receivable, net		389,248			417,613
Accrued income receivable		1,574			1,761
Foreclosed real estate		234			735
Premises and equipment, net		9,240			9,491
Bank owned life insurance		9,995			9,854
Federal Home Loan Bank stock, at cost		5,444			5,917
Loan sales proceeds held in escrow		11,753			-
Other assets		7,550			6,033
Total assets	$	510,817		$	526,397

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	399,409		$	402,902
Federal Home Loan Bank ("FHLB") advances		32,510			41,476
Other borrowed funds		5,450			6,394
Mortgagors' escrow accounts		4,688			4,628
Other liabilities		7,736			4,089
Total liabilities		449,793			459,489

Stockholders' equity
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, $.01 par value; 25,000,000 shares authorized; 7,002,366 shares issued; 7,002,208 shares outstanding at June 30, 2013 and December 31, 2012.		70			70
Paid-in capital		58,842			58,842
Retained earnings		5,774			11,164
Unearned employee stock ownership plan ("ESOP") shares (395,115 shares at June 30, 2013 and December 31, 2012)		(3,143	)		(3,143	)
Unearned stock awards (200 shares at June 30, 2013 and December 31, 2012)		(3	)		(3	)
Treasury stock, at cost (158 shares at June 30, 2013 and December 31, 2012)		(1	)		(1	)
Accumulated other comprehensive loss		(515	)		(21	)
Total stockholders' equity		61,024			66,908
Total liabilities and stockholders' equity	$	510,817		$	526,397

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Operations (unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands, except share data)	2013			2012			2013			2012

Interest income
Interest on loans	$	5,021		$	5,652		$	10,072		$	11,699
Interest and dividends on investments and deposits		292			398			612			817
Total interest income		5,313			6,050			10,684			12,516

Interest expense
Interest on deposits		752			975			1,538			2,069
Interest on borrowed funds		249			432			543			890
Total interest expense		1,001			1,407			2,081			2,959

Net interest income		4,312			4,643			8,603			9,557

Provision for loan losses		3,550			2,147			3,850			6,692

Net interest income after provision for loan losses		762			2,496			4,753			2,865

Noninterest income
Deposit fees/service charges		182			204			360			406
Gain on sales of loans		308			562			728			896
Fees for other services		180			188			290			387
Mortgage servicing income		85			63			167			119
Income from bank owned life insurance		70			76			140			151
Income from investment advisory services, net		87			51			139			107
Other income		28			30			53			55
Total noninterest income		940			1,174			1,877			2,121

Noninterest expense
Compensation, taxes and benefits		2,896			2,705			5,573			5,314
Professional fees		637			244			1,296			537
Property taxes on loan sales		765			-			765			-
Office occupancy		587			575			1,198			1,150
Expenses on foreclosed properties, net		202			141			559			266
Writedowns on foreclosed properties		49			63			60			75
FDIC insurance premiums		249			187			454			321
Insurance		124			35			282			73
Computer processing		183			194			380			368
Directors compensation		77			130			211			335
Advertising		108			160			195			286
Office supplies		48			53			109			107
Deposit related charge		-			(88	)		-			712
Other expenses		576			396			938			659
Total noninterest expense		6,501			4,795			12,020			10,203

Loss before provision (benefit) for income taxes		(4,799	)		(1,125	)		(5,390	)		(5,217	)

Provision (benefit) for income taxes		-			(410	)		-			(1,826	)

Net loss	$	(4,799	)	$	(715	)	$	(5,390	)	$	(3,391	)
Loss per common share - basic and diluted	$	(0.72	)	$	(0.11	)	$	(0.81	)	$	(0.51	)

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2013			2012			2013			2012

Net loss	$	(4,799	)	$	(715	)	$	(5,390	)	$	(3,391	)
Other comprehensive (loss) income:
Unrealized (loss) gain on available-for-sale investment securities		(684	)		(68	)		(735	)		427
Income tax effect		241			-			241			-
Other comprehensive (loss) income		(443	)		(68	)		(494	)		427
Total comprehensive loss	$	(5,242	)	$	(783	)	$	(5,884	)	$	(2,964	)

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Changes in Stockholders’ Equity

Six months ended June 30, 2013 and 2012 (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		-		-		(5,390	)		-			-			-						(5,390	)
Other comprehensive income (loss)		-		-		-			-			-			-			(494	)		(494	)

Balance at June 30, 2013	$	70	$	58,842	$	5,774		$	(3,143	)	$	(3	)	$	(1	)	$	(515	)	$	61,024

	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, 2011	$	70	$	58,908	$	27,014		$	(3,442	)	$	(14	)	$	(1	)	$	(221	)	$	82,314
Dividends declared ($0.06 per common share)		-		-		(397	)		-			-			-			-			(397	)
Stock based compensation (199 shares vested and 199 shares forfeited)		-		-		(2	)		-			5			-			-			3
Stock based compensation		-		1		-			-			-			-			-			1
Other comprehensive income (loss)		-		-		(3,391	)		-			-			-			427			(2,964	)

Balance at June 30, 2012	$	70	$	58,909	$	23,224		$	(3,442	)	$	(9	)	$	(1	)	$	206		$	78,957

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended
	June 30,
(In thousands)	2013			2012
Cash flows from operating activities
Net loss	$	(5,390	)	$	(3,391	)
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Provision for loan losses		3,850			6,692
Depreciation and amortization expense		354			351
Net loss on sales of foreclosed assets		65			173
Writedowns on foreclosed real estate		60			-
Gain on sale of loans		(728	)		(898	)
Loans originated for sale		(17,575	)		(35,179	)
Proceeds from sale of loans held for sale		18,189			37,711
Net amortization from investments		212			177
Amortization of intangible assets		-			17
Provision for deferred taxes		-			(973	)
Stock-based compensation		-			123
Net change in:
Accrued income receivable		187			159
Deferred loan fees		(49	)		(54	)
Cash surrender value of life insurance		(141	)		(151	)
Loan sales proceeds held in escrow		(11,753	)		-
Other assets		(1,276	)		648
Other liabilities		3,647			(577	)
Net cash (used in) provided by operating activities		(10,348	)		4,828
Cash flows from investing activities
Proceeds from maturities and repayments of available-for-sale securities		2,487			2,786
Proceeds from sale of available-for-sale securities		762			300
Proceeds from maturities of held-to-maturity securities		3,910			3,178
Redemption of Federal Home Loan Bank stock		473			335
Purchase of available-for-sale securities		(772	)		(4,216	)
Purchase of held-to-maturity securities		-			(7,386	)
Loan originations net of principal payments		26,857			18,217
Purchase of premises and equipment		(103	)		(248	)
Proceeds from the sale of foreclosed assets		627			556
Net cash provided by investing activities		34,241			13,522
Cash flows from financing activities
Net change in time deposits		(12,881	)		(13,790	)
Net change in other deposit accounts		9,388			14,248
Repayment of FHLB advances		(8,966	)		(11,387	)
Net change in mortgagors' escrow accounts		60			(134	)
Change in other borrowings		(944	)		(2,178	)
Forfeited restricted shares		-			(2	)
Common stock repurchased		-			(1	)
Cash dividends to common stockholders		-			(397	)
Net cash used in financing activities		(13,343	)		(13,641	)
Net change in cash and cash equivalents		10,550			4,709
Cash and cash equivalents at beginning of period		23,229			18,069
Cash and cash equivalents at end of period	$	33,779		$	22,778
Supplementary Disclosures of Cash Flow Information:
Non-cash investing activities:
Transfer of loans to foreclosed assets	$	251		$	258
Cash paid during the period for:
Interest	$	2,112		$	2,989
Income taxes		-			151
Unrealized (losses) gains on available for sale securities arising during the period	$	(735	)	$	427

See accompanying notes to unaudited consolidated financial statements.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

(a)

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.

(b)

Basis of Presentation

The accompanying consolidated interim financial statements are unaudited and include the accounts of the Company, the Bank, and the Bank’s wholly owned 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, 2012 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. 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.

Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

Certain reclassifications have been made to the June 30, 2012 amounts to conform with the June 30, 2013 consolidated financial statement presentation. These reclassifications only changed the reporting categories and did not affect the Company’s results of operations or financial position.

(c)

Significant Accounting Policies

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2012 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, 2012, except for the addition of the policy concerning transfers of financial assets shown below.

Transfers of financial assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company –put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for the transferor, and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity of (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.

(d)

Recently Issued Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income: In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02. This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The Company adopted this update during the quarter ended March 31, 2013. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Balance Sheet — Disclosures about Offsetting Assets and Liabilities: In December 2011, the FASB issued Accounting Standards Update No. 2011-11, which requires an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. This update became effective in the quarter ended March 31, 2013. The adoption of this guidance did not have a material impact on 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 up streaming 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 2013. The next scheduled review is expected in the third quarter 2013.

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.

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 June 30, 2013, with a Tier 1 leverage ratio of 10.06% and a total risk-based capital ratio of 15.54%.

As a source of strength to its subsidiary bank, the Company had liquid assets of approximately $7.5 million at June 30, 2013, 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 June 30, 2013, the Bank would have had a Tier 1 leverage ratio of approximately 11.34%.

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.

The following table is a summary 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 June 30, 2013.

At June 30, 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		$	61,539		12.04	%

Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			61,539		17.76	%

Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			65,450		19.03	%

The Bank
Tier 1 Leverage Capital (1)	$	20,813		4.00	%	$	46,829		9.00	%	$	52,359		10.06	%

Tier 1 Risk-Based Capital (2)		14,678		4.00	%		N/A		N/A			52,359		14.27	%

Total Risk-Based Capital (2)		29,357		8.00	%		47,704		13.00	%		57,030		15.54	%

(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 2012	Adequately Capitalized Requirements					Actual
(Dollars in thousands)	$		%			$		%
The Company Consolidated
Tier 1 Leverage Capital (1)		N/A		N/A		$	66,929		12.71	%

Tier 1 Risk-Based Capital (2)		N/A		N/A			66,929		19.35	%

Total Risk-Based Capital (2)		N/A		N/A			71,378		20.64	%

The Bank
Tier 1 Leverage Capital (1)	$	21,087		4.00	%	$	52,618		9.98	%

Tier 1 Risk-Based Capital (2)		14,105		4.00	%		52,618		14.92	%

Total Risk-Based Capital (2)		28,210		8.00	%		57,162		16.21	%

(1) Tier 1 capital to total assets.

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

As of June 30, 2013, the most recent regulatory notifications categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action.

NOTE 3 – INVESTMENT SECURITIES

At June 30, 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	$	1,002	$	8	$	-		$	1,010
U.S. Government agency mortgage-backed securities		11,021		456		-			11,477
U.S. Government agency collateralized mortgage obligations		677		12		-			689
Private label collateralized mortgage obligations		285		-		(9	)		276
Total debt securities		12,985		476		(9	)		13,452
Auction-rate trust preferred securities		7,700		-		(982	)		6,718

Total available-for-sale securities	$	20,685	$	476	$	(991	)	$	20,170

	Amortized		Gross Unrealized				Fair
(In thousands)	Cost Basis		Gains		Losses		Value
Held-to-maturity securities:
U.S. Government agency mortgage-backed securities	$	21,499	$	343	$	-	$	21,842

Total held-to-maturity securities	$	21,499	$	343	$	-	$	21,842

At December 31, 2012, the composition of the investment portfolio was:

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Available-for-sale securities:
U.S. government and agency obligations	$	1,006	$	23	$	-		$	1,029
U.S. Government agency mortgage-backed securities		13,270		690		-			13,960
U.S. Government agency collateralized mortgage obligations		974		11		-			985
Private label collateralized mortgage obligations		314		-		(20	)		294
Total debt securities		15,564		724		(20	)		16,268
Auction-rate trust preferred securities		7,700		-		(484	)		7,216

Total available-for-sale securities	$	23,264	$	724	$	(504	)	$	23,484

	Amortized		Gross Unrealized				Fair
(In thousands)	Cost Basis		Gains		Losses		Value
Held-to-maturity securities:
U.S. Government agency mortgage-backed securities	$	25,519	$	588	$	-	$	26,107

Total held-to-maturity securities	$	25,519	$	588	$	-	$	26,107

The following is a summary of the fair values and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013, and December 31, 2012:

	At June 30, 2013
	Securities in Continuous Unrealized
	Loss Position 12 or More Consecutive Months
	Number of		Fair Market		Unrealized
(Dollars in thousands)	Securities		Value		Loss

Private label collateralized mortgage obligations		1	$	276	$	(9	)
Auction-rate trust preferred securities		5		6,718		(982	)
						.
Total securities in unrealized loss position		6	$	6,994	$	(991	)

	At December 31, 2012
	Securities in Continuous Unrealized
	Loss Position 12 or More Consecutive Months
	Number of		Fair Market		Unrealized
(Dollars in thousands)	Securities		Value		Loss

Private label collateralized mortgage obligations		1	$	294	$	(20	)
Auction-rate trust preferred securities		5		7,216		(484	)

Total securities in unrealized loss position		6	$	7,510	$	(504	)

There were no securities in a continuous unrealized loss position for less than 12 months at June 30, 2013 or December 31, 2012.

The amortized cost and fair value of securities at June 30, 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 June 30, 2013	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
U.S. Government agency mortgage-backed securities	$	11,021	$	11,477	$	21,499	$	21,842
U.S. Government agency collateralized mortgage obligations		677		689		-		-
Private label collateralized mortgage obligations		285		276		-		-
		11,983		12,442		21,499		21,842
Securities with Fixed Maturities:
Due in one year or less		1,002		1,010		-		-
Due after five years through ten years		7,700		6,718		-		-
		8,702		7,728		-		-
Total	$	20,685	$	20,170	$	21,499	$	21,842

	Available-for-Sale				Held-to-Maturity
At December 31, 2012	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
U.S. Government agency mortgage-backed securities	$	13,270	$	13,960	$	25,519	$	26,107
U.S. Government agency collateralized mortgage obligations		974		985		-		-
Private label collateralized mortgage obligations		314		294		-		-
		14,558		15,239		25,519		26,107
Securities with Fixed Maturities:
Due in one year or less		1,006		1,029		-		-
Due after five years through ten years		7,700		7,216		-		-
		8,706		8,245		-		-
Total		23,264		23,484		25,519		26,107
	$	23,264	$	23,484	$	25,519	$	26,107

NOTE 4 – LOANS RECEIVABLE

A summary of loans receivable at June 30, 2013 and December 31, 2012 is as follows:

	June 30,		December 31,
(Dollars in thousands)	2013		2012

Real estate loans:
One-to-four family	$	205,685	$	209,004
Multi-family and commercial real estate		129,789		133,549
Construction and land development		11,300		28,357
Total real estate loans		346,774		370,910

Commercial business loans		28,007		32,970
Consumer loans:
Home equity		26,420		28,829
Other consumer		925		1,297
Total consumer loans		27,345		30,126
Total loans		402,126		434,006

Less:
Allowance for loan losses		10,746		14,500
Undisbursed construction loans		2,012		1,724
Deferred loan origination fees, Net		120		169
Loans receivable, net	$	389,248	$	417,613

In June 2013, in connection with the Company’s plan to reduce the Level of impaired Loans, the Company sold $20.8 million in credit impaired loans in three separate transactions of a similar nature in which the financial assets transferred satisfy all of the criteria to be accounted for as sales of financial assets. In these transactions, the Company sold approximately $14.1 million in loans secured by commercial real estate properties, $6.0 in construction and land development loans and $0.7 million in loans secured by owner occupied one-to-four family properties. Because of the credit impaired quality of these assets transferred, the impact of these sales resulted in $5.1 million in net charge-offs against the Company’s allowance for loan losses.

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 conservative 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.

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 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.

The following tables are a summary of the loan portfolio credit quality indicators, by loan class, as of June 30, 2013 and December 31, 2012:

	Credit Risk Profile by Internally Assigned Grade:
June 30, 2013	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
Risk Rating:
Pass	$	194,276	$	98,012	$	1,332	$	19,878	$	26,457	$	339,955
Special Mention		4,643		25,122		1,348		4,162		249		35,524
Substandard:
- Accruing		674		3,771		2,998		1,164		89		8,696
- Nonaccruing (1)		6,092		2,884		5,622		2,803		550		17,951
Subtotal - substandard		6,766		6,655		8,620		3,967		639		26,647
Doubtful		-		-		-		-		-		-
Total	$	205,685	$	129,789	$	11,300	$	28,007	$	27,345	$	402,126

	Multi-Family and Commercial Real Estate
	Credit Risk Profile by Internally Assigned Grade:
June 30, 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	$	12,436	$	23,936	$	19,828	$	15,589	$	26,223	$	98,012
Special Mention		3,557		7,678		2,831		5,263		5,793		25,122
Substandard:
- Accruing		116		1,835		380		940		500		3,771
- Nonaccruing (1)		1,198		156		356		-		1,174		2,884
Subtotal - substandard		1,314		1,991		736		940		1,674		6,655
Doubtful		-		-		-				-		-
Total	$	17,307	$	33,605	$	23,395	$	21,792	$	33,690	$	129,789

	Credit Risk Profile by Internally Assigned Grade:
	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Total
December 31, 2012
Risk Rating:
Pass	$	198,800	$	90,544	$	14,541	$	24,271	$	328,156
Special Mention		4,807		26,198		2,159		3,255		36,419
Substandard:
- Accruing		1,709		7,776		2,402		2,043		13,930
- Nonaccruing (1)		3,688		9,031		9,255		3,401		25,375
Subtotal - substandard		5,397		16,807		11,657		5,444		39,305
Doubtful		-		-		-		-		-
Total	$	209,004	$	133,549	$	28,357	$	32,970	$	403,880

Consumer loans were not risk rated at December 31, 2012 and the credit risk profile was based on payment activity. The following table represents the credit risk profile on consumer loans as of December 31, 2012.

(In thousands)	At December 31, 2012
Grade:
Performing	$	29,853
Nonperforming (1)		273
Total	$	30,126

(1)	Non-accrual loans included substandard nonaccruing loans and non-performing consumer loans.

(a)

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 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 months) to establish a reliable assessment of collectibility.

The following tables set forth certain information with respect to our loan portfolio delinquencies, by loan class, as of June 30, 2013 and December 31, 2012:

	Delinquencies
													Carrying
					Greater								Amount > 90
	31-60 Days Past		61-90 Days		Than		Total Past						Days and
	Due		Past Due		90 Days		Due		Current		Total Loans		Accruing
As of June 30, 2013
(In thousands)
Real estate loans
One-to-four family	$	4,410	$	1,564	$	2,143	$	8,117	$	197,568	$	205,685	$	-
Construction and land development		915		-		5,012		5,927		5,373		11,300		-
Multi-family and commercial real estate:														-
Investor owned one-to-four family and multi-family		533		-		627		1,160		16,147		17,307
Industrial and Warehouse		35		661		120		816		32,789		33,605		-
Office buildings		-		-		357		357		23,038		23,395
Retail properties		162		-		-		162		21,630		21,792	$	-
Special use properties		247		-		331		578		33,112		33,690		-
Subtotal Multi-family and commercial real estate		977		661		1,435		3,073		126,716		129,789
Commercial business loans		371		115		1,747		2,233		25,774		28,007
Consumer loans:
Home equity loans		75		-		126		201		26,219		26,420		-
Other consumer loans		1		-		-		1		924		925
Subtotal Consumer		76		-		126		202		27,143		27,345		-
Total	$	6,749	$	2,340	$	10,463	$	19,552	$	382,574	$	402,126	$	-

(b)

Impaired loans and nonperforming assets

The following tables set forth certain information with respect to our nonperforming assets as of June 30, 2013 and December 31, 2012:

	June 30,			December 31,
	2013			2012
Nonperforming Assets	(Dollars in thousands)
Nonaccrual loans	$	10,624		$	22,306
TDRs nonaccruing		6,619			8,277
Subtotal nonperforming loans		17,243			30,583
Foreclosed real estate		234			735
Total nonperforming assets	$	17,477		$	31,318

Total nonperforming loans to total loans		4.29	%		7.57	%

Total nonperforming assets to total assets		3.42	%		5.95	%

Nonperforming loans (defined as nonaccrual loans and nonperforming troubled debt restructured loans (“TDRs”)) totaled $17.2 million at June 30, 2013 compared to $30.6 million at December 31, 2012. The amount of income that was contractually due but not recognized on nonperforming loans totaled $149,000 and $321,000 for the quarters ended June 30, 2013 and June 30, 2012, respectively.

At June 30, 2013, the Company had 99 loans on nonaccrual status of which 51 loans were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectibility.

At December 31, 2012, the Company had 111 loans on nonaccrual status of which 49 loans were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectibility.

The Company accounts for impaired loans in accordance with GAAP. An impaired loan generally is one for which it is probable, based on current information, that the 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 June 30, 2013 and December 31, 2012:

	Recorded Investment with		Recorded Investment with
As of June 30, 2013	No Specific Valuation Allowance		Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Real estate loans
One-to four-family	$	4,613	$	1,479	$	6,092	$	6,709	$	75
Construction and land development		4,151		1,471		5,622		10,640		629
Multi-family and commercial real estate
Investor owned one-to-four family and multi-family properties		968		230		1,198		1,282		18
Industrial and warehouse properties		156		-		156		293		-
Office buildings		-		356		356		407		82
Retail properties		-		-		-		-		-
Special use properties		524		650		1,174		1,614		38
Subtotal		1,648		1,236		2,884		3,596		138
Commercial business loans		1,448		1,355		2,803		3,265		681
Consumer loans		479		71		550		643		32
Total impaired loans	$	12,339	$	5,612	$	17,951	$	24,853	$	1,555

	Recorded Investment with		Recorded Investment with
As of December 31, 2012	No Specific Valuation Allowance		Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Real estate loans
One-to four-family	$	4,422	$	119	$	4,541	$	4,944	$	5
Construction and land development		5,884		2,402		8,286		15,298		119
Multi-family and commercial real estate		12,177		2,196		14,373		16,832		271
Commercial business loans		2,731		1,214		3,945		4,419		340
Consumer loans		255		45		300		385		1
Total impaired loans	$	25,469	$	5,976	$	31,445	$	41,878	$	736

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 collectibility assessments by the Bank and less any amounts paid by borrowers on nonaccrual loans which were recognized as principal curtailments. On nonaccrual loans, the Bank applies any borrower payments first against the principal balance of the loan and once the entire principal balance has been recovered, any subsequent payments are recognized as interest income.

The following table relates to interest income recognized by segment of impaired loans for the six months ended June 30, 2013 and 2012:

	Six Months Ended June 30,
	2013				2012
	Average Recorded Investments		Interest Income Recognized		Average Recorded Investments		Interest Income Recognized
	(In thousands)
Real estate loans
One-to four-family	$	6,143	$	63	$	4,784	$	84
Construction		6,124		20		13,443		139
Multi-family and commercial real estate		2,913		15		9,195		85
Commercial business loans		2,826		42		937		7
Consumer loans		555		9		259		6
Total	$	18,561	$	149	$	28,618	$	321

(c)

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.

The recorded investment balance of performing and nonperforming TDRs as of June 30, 2013 and December 31, 2012 are as follows:

(In thousands)	As of June 30, 2013		As of December 31, 2012

Aggregate recorded investment of impaired loans performing under terms modified through a troubled debt restructuring:
Performing	$	4,438	$	3,573
Nonperforming		3,514		5,566
Total	$	7,952	$	9,139

The following table presents a summary of loans that were restructured during the six months ended June 30, 2013 and June 30, 2012:

	For the Six Months Ended June 30, 2013
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Funds Disbursed		Interest and Escrow Capitalized		Post- Modification Recorded Investment

Real estate loans:
One-to-four family		3	$	132	$	6	$	-	$	138
Multi-family and commercial real estate		4		716		47		1		764
Commercial business loans		5		394		10		2		406
Consumer loans		-		-		-		-		-
Total TDRs restructured during the period		12	$	1,242	$	63	$	3	$	1,308
TDRs, still accruing interest		3	$	205	$	6	$	-	$	211
TDRs, included in nonaccrual		8		867		57		3		927
Sold		1		170		-		-		170
Total		12	$	1,242	$	63	$	3	$	1,308

	For the Six Months Ended June 30, 2012
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Funds Disbursed		Interest and Escrow Capitalized		Post- Modification Recorded Investment

Real estate loans:
One-to four-family		4	$	989	$	-	$	3	$	992
Construction		-		-		-		-		-
Multi-family and commercial real estate		1		426		-		-		426
Commercial business loans		-		-		-		-		-
Consumer loans:
Home equity		3		123		-		-		123
Total TDRs restructured during the period		8	$	1,538	$	-	$	3	$	1,541
TDRs, still accruing interest		3	$	567	$	-	$	-	$	567
TDRs, included in nonaccrual		5		971		-		3		974
Total		8	$	1,538	$	-	$	3	$	1,541

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.

Of the twelve loans modified during the six months ended June 30, 2013, nine loans with a total outstanding principal balance of $959,000 were granted term extensions as a concession. Two TDRs with an outstanding principal balance of $232,000 were granted forebearance of interest only payments over their remaining term to maturity. The remaining TDR with an outstanding balance of $51,000 was granted a rate reduction. For the nine TDRs granted term extentions, new funds in the amount of $63,000 were advanced to cover past due property taxes and other expenses based upon cross-collateralization with related loans to better improve the Bank’s collateral position. One of the two TDRs granted forebearance was part of the second quarter loan sale.

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 forebearance 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 loans. The Bank estimates the necessary allowance for loan losses on TDRs using the same guidance as other impaired loans.

There were no TDRs that had been modified during the previous twelve months ended June 30, 2013 that subsequently defaulted or were charged off during the six months ended June 30, 2013.

(d) 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.

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 $14.5 million at December 31, 2012 to $10.7 million at June 30, 2013, a decrease of $3.8 million, or 25.9%. This decrease in the ALLL was directionally consistent with the improvement in the Bank’s asset quality trends during this six month period. During this period, the Bank’s nonperforming loans decreased $13.3 million, or 43.6%, and its adversely classified loans decreased by $12.7 million or 29.3%. Furthermore, the improvement in the risk profile of the loan portfolio can also be demonstrated by the significant reduction in construction and land development loans of $17.1 million, or 60.2%, and to a lesser extent, the reduction in commercial real estate loans of $3.8 million or 2.8%. These improvements in the Bank’s asset quality were attributable to the more aggressive workout efforts in the past six months, and the loan sale transactions consummated in June 2013.

As of June 30, 2013, the Company adopted significant changes to its ALLL methodology, which are summarized as follows:

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

A different basis on which historical loss experience is calculated to determine inherent losses on the collectively evaluated portion of the loan portfolio; 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.

Previously, the Company’s historical loss experience was derived from the net loan charge-offs incurred in the prior four quarters and apportioned against the related loan portfolio segment to determine an average loss history factor for each segment. For the June 30, 2013 calculation, the Company adopted a two year weighted average as the basis for the calculation of its historical loss experience in which the current year is weighted 56% versus 44% for the prior year experience. While the Company is mindful of its loss history, loss experience from the past four quarters may not accurately reflect losses embedded in the older vintages of loans originated in prior years. It is therefore considered by the Company to be more appropriate to look back at least two years in establishing loss history, albeit more heavily weighted to the current year. As discussed above, the Company believes it has significantly improved its risk grades through its increased workout efforts and as evidenced by the sale of $15.2 million in adversely classified loans in June 2013. The general loan loss component derived from the loss history utilizing a longer time period which contains more heightened, recent losses will be more consistent with, and reflective of, the inherent loss experience in the loan portfolio. The new methodology for the calculation of historical loss factors has generated higher levels of general loan loss allowance reserves, which is in line with the most recent experience, which is itself driven by the acceleration of charge-offs due to the June 2013 loan sale. This methodology change related to the historical loss experience resulted in a $2.0 million increase in the ALLL balance at June 30, 2013.

With respect to the Q Factors, the new methodology increased the number of Q factors, in particular, factors to measure the changes in the level and trends in net charge-offs. Despite the addition to the number of Q Factors, the overall impact of the Q Factors is greatly diminished due to the improvement in the Bank’s asset quality cited above. The related charge-offs and their impact on the recent and more heavily weighted loss experience, limits, to a large extent, the need for additions to reserves resulting from Q Factors, and increases the confidence level in historical loss experience as an indicator of losses inherent in the loan portfolio. The difference in the methodologies related to the Q Factors was a reduction of $5.8 million in ALLL balance. The combined impact of the ALLL methodology changes was a reduction in the ALLL Balance of $3.8 million as of June 30, 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 June 30, 2013, December 31, 2012 and June 30, 2012, by portfolio segment, disaggregated by impairment methodology, which is then further segregated by loans evaluated for impairment individually and collectively:

As of and for the Six Months	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
Ended June 30, 2013
(In thousands)
Allowance for loan losses:
Beginning balance	$	1,988		$	4,892		$	4,468		$	2,725		$	427		$	14,500
Provision for loan losses		(423	)		3,689			(277	)		883			(22	)		3,850
Charge-offs		(496	)		(4,351	)		(1,984	)		(1,796	)		(44	)		(8,671	)
Recoveries		-			590			102			374			1			1,067
Ending balance	$	1,069		$	4,820		$	2,309		$	2,186		$	362		$	10,746
Allowance related to loans:
Individually evaluated for impairment	$	75		$	138		$	629		$	681		$	32		$	1,555
Collectively evaluated for impairment	$	994		$	4,682		$	1,680		$	1,505		$	330		$	9,191

Ending loan balance individually evaluated for impairment	$	6,092		$	2,884		$	5,622		$	2,803		$	550		$	17,951
Ending loan balance collectively evaluated for impairment		199,593			126,905			5,678			25,204			26,795			384,175
Total Loans	$	205,685		$	129,789		$	11,300		$	28,007		$	27,345		$	402,126

	Multi-Family and Commercial Real Estate
As of and for the Six Months	Investor one- to-four family and multi- family		Industrial and Warehouse Propertie		Office Buildings		Retail Properties		Special Use Properties		Total Multi- Family and Commercial Real Estate
Ended June 30, 2013
(In thousands)
Allowance for loan losses:
Beginning balance	$	-	$	-	$	-	$	-	$	-	$	4,892
Provision for loan losses		-		-		-		-		-		3,689
Charge-offs		-		-		-		-		-		(4,351	)
Recoveries		-		-		-		-		-		590
Ending Balance												4,820
Redistributed through segment expansion		526		818		421		519		2,536		4,820
Segment Ending Balance	$	526	$	818	$	421	$	519	$	2,536	$	4,820
Allowance related to loans:
Individually evaluated for impairment	$	18	$	-	$	82	$	-	$	38	$	138
Collectively evaluated for impairment	$	508	$	818	$	339	$	519	$	2,498	$	4,682

Ending loan balance individually evaluated for impairment	$	1,198	$	156	$	356	$	-	$	1,174	$	2,884
Ending loan balance collectively evaluated for impairment		16,109		33,449		23,039		21,792		32,516		126,905
Total Loans	$	17,307	$	33,605	$	23,395	$	21,792	$	33,690	$	129,789

As of and for the Six Months	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
Ended June 30, 2012
(In thousands)
Allowance for Loan Losses:
Beginning Balance	$	1,745		$	3,745		$	1,327		$	754		$	482		$	8,053
Provision for loan losses		804			1,789			842			3,052			205			6,692
Charge-offs		(347	)		(1,245	)		(629	)		(1,416	)		(146	)		(3,783	)
Recoveries		4			-			-			5			1			10
Ending Balance	$	2,206		$	4,289		$	1,540		$	2,395		$	542		$	10,972
Allowance related to loans:
Individually evaluated for impairment	$	-		$	-		$	305		$	-		$	-		$	305
Collectively evaluated for impairment	$	2,206		$	4,289		$	1,235		$	2,395		$	542		$	10,667

Ending loan balance individually evaluated for impairment	$	4,636		$	13,209		$	8,892		$	801		$	175		$	27,713
Ending loan balance collectively evaluated for impairment		204,017			20,190			141,191			32,068			30,500			427,966
Total Loans	$	208,653		$	33,399		$	150,083		$	32,869		$	30,675		$	455,679

At December 31, 2012
Ending balance	$	1,988		$	4,892		$	4,468		$	2,725		$	427		$	14,500
Allowance related to loans:
Individually evaluated for impairment	$	5		$	271		$	119		$	340		$	1		$	736
Collectively evaluated for impairment	$	1,983		$	4,621		$	4,349		$	2,385		$	426		$	13,764

Ending loan balance individually evaluated for impairment	$	4,541		$	14,373		$	8,286		$	3,945		$	300		$	31,445
Ending loan balance collectively evaluated for impairment		204,463			119,176			20,071			29,025			29,826			402,561
Total Loans	$	209,004		$	133,549		$	28,357		$	32,970		$	30,126		$	434,006

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.

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 – FORECLOSED REAL ESTATE

Changes in foreclosed real estate during the three and six months ended June 30, 2013 and June 30, 2012 are as follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(In thousands)	2013			2012			2013			2012

Beginning Balance	$	498		$	947		$	735		$	873
Additions		251			-			251			258
Proceeds from dispositions		(441	)		(402	)		(627	)		(556	)
Loss on sales		(26	)		(143	)		(65	)		(173	)
Writedowns		(48	)		-			(60	)		-

Balance at end of period	$	234		$	402		$	234		$	402

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.

NOTE 6 – DEPOSITS

A summary of deposits at June 30, 2013 and December 31, 2012 consisted of the following:

	June 30, 2013					December 31, 2012
	Amount		Percent			Amount		Percent
Noninterest bearing demand deposits	$	75,394		18.9	%	$	70,300		17.4	%
Interest bearing demand deposits
Now accounts and money market accounts		40,837		10.2	%		38,965		9.7	%
Savings accounts		119,681		30.0	%		117,259		29.1	%
Time certificates, less than $100,000		97,376		24.3	%		105,893		26.3	%
Time certificates, $100,000 or more		66,121		16.6	%		70,485		17.5	%
Total interest bearing	$	324,015		81.1	%	$	332,602		82.6	%
Total deposits	$	399,409		100.0	%	$	402,902		100.0	%

Scheduled maturities of certificates of deposit for future years are as follows:

	At June 30, 2013		At December 31, 2012
Three months or less	$	38,647	$	29,644
Over three months through twelve months		39,529		60,729
Over one year through three years		48,503		44,433
Over three years		36,818		41,572
	$	163,497	$	176,378

NOTE 7 – FHLB ADVANCES

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). At June 30, 2013, 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 June 30, 2013					At December 31, 2012
			Weighted					Weighted
	Amount		Average			Amount		Average
(Dollars in thousands)	Due		Cost			Due		Cost
Year of maturity:
2013	$	9,868		2.26	%	$	24,088		2.65	%
2014		13,700		2.86	%		15,693		2.96	%
2015		4,850		2.92	%		624		3.34	%
2016 - 2020		2,800		0.90	%		443		0.19	%
2021 - 2025		669		0.27	%		318		0.18	%
2026 - 2028		623		-			310		-

Total FHLB advances	$	32,510		2.41	%	$	41,476		2.72	%

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.

NOTE 8 – OTHER BORROWED FUNDS

The Bank will occasionally borrow short-term from customers to cover temporary cash needs. We also use securities sold under agreements to repurchase as a source of borrowings.

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

	At or for the period ended
(Dollars in thousands)	June 30, 2013			December 31, 2012

Maximum amount of advances outstanding during the period	$	14,560		$	19,283

Average advances outstanding during the period	$	11,054		$	11,608

Weighted average interest rate during the period		0.39	%		0.47	%

Balance outstanding at end of period	$	5,450		$	6,394

Weighted average interest rate at end of period		0.22	%		0.45	%

NOTE 9 – STOCKHOLDERS’ EQUITY

(a)

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 six months ended June 30, 2013, anti-dilutive options excluded from the calculations totaled 229,723 options (with an exercise price of $11.12) and 4,290 options (with an exercise price of $12.51). For the six months ended June 30, 2012, anti-dilutive options excluded from the calculations totaled 278,813 options (with an exercise price of $11.12) and 5,886 options (with an exercise price of $12.51). 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						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012

Net loss	$	(4,799,000	)	$	(715,000	)	$	(5,390,000	)	$	(3,391,000	)

Weighted-average common shares outstanding:
Basic		6,643,093			6,610,729			6,643,093			6,610,766
Diluted		6,643,093			6,610,729			6,643,093			6,610,766

Loss per common share;
Basic	$	(0.72	)	$	(0.11	)	$	(0.81	)	$	(0.51	)
Diluted	$	(0.72	)	$	(0.11	)	$	(0.81	)	$	(0.51	)

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 10 – 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 six months ended June 30, 2013, there were no stock options exercised.

NOTE 11 – 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 become 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 contract amounts represent credit risk at June 30, 2013 and December 31, 2012 were as follows:

	June 30,		December 31,
(In thousands)	2013		2012
Commitments to extend credit:
Commercial loan committments	$	6,093	$	4,327
Unused home equity lines of credit		19,266		21,434
Commercial and industrial loan commitments		15,893		13,134
Amounts due on commercial loans		15,044		20,790
Commercial letters of credit		3,096		3,964

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 12 – 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.

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. 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. On the auction rate trust preferred securities, the Company determined the fair value of these investments based on the current market price of the underlying collateral preferred shares and therefore classified these investments as 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 1 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 Federal Home Loan Bank (“FHLB”) of Boston 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.

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 are classified as Level 2 within the fair value hierarchy.

The following is a summary of the carrying values and estimated fair values of the Company’s significant financial instruments as of June 30, 2013 and December 31, 2012:

		June 30, 2013				December 31, 2012
	Fair Value	Carrying		Fair		Carrying		Fair
(In thousands)	Hierarchy Level	Value		Value		Value		Value

Financial Assets
Cash and cash equivalents	Level 1	$	33,779	$	33,779	$	23,229	$	23,229
Investment securities, available-for-sale	Level 2		20,170		20,170		23,484		23,484
Investment securities, held-to-maturity	Level 2		21,499		21,842		25,519		26,107
Loans held for sale	Level 1		331		331		2,761		2,761
Loans receivable, net:
Performing	Level 2		371,297		379,922		386,168		405,977
Impaired	Level 3		17,951		16,408		31,445		30,709
Accrued interest receivable	Level 1		1,574		1,574		1,761		1,761
Mortgage servicing assets	Level 3		1,171		1,629		1,039		1,633
FHLB Stock	Level 3		5,444		5,444		5,917		5,917
Financial Liabilities
Demand deposits, savings, Now and money market deposits	Level 1		235,912		239,184		226,524		228,851
Time deposits	Level 2		163,497		165,838		176,378		179,125
FHLB advances	Level 2		32,510		33,075		41,476		42,453
Borrowed funds	Level 2		5,450		5,450		6,394		6,398
Mortgagors' escrow accounts	Level 2		4,688		4,688		4,628		4,628
Accrued interest payable	Level 1		70		70		99		99

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 June 30, 2013 and December 31, 2012 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 June 30, 2013 and December 31, 2012.

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

	Fair Value At June 30, 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	$	-	$	1,010	$	-	$	1,010
U.S. Government agency mortgage-backed obligations		-		11,477		-		11,477
U.S. Government agency collateralized mortgage obligations		-		689		-		689
Private label collateralized mortgage obligations		-		276		-		276
Auction-rate trust preferred securities		-		6,718		-		6,718

	Fair Value At December 31, 2012
(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	$	-	$	1,029	$	-	$	1,029
U.S. Government agency mortgage-backed obligations		-		13,960		-		13,960
U.S. Government agency collateralized mortgage obligations		-		985		-		985
Private label collateralized mortgage obligations		-		294		-		294
Auction-rate trust preferred securities		-		7,216		-		7,216

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

	Fair Value At June 30, 2013
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a non-recurring basis:
Impaired loans	$	-	$	-		16,408	$	16,408
Foreclosed real estate		-		-		234		234
Mortgage servicing rights		-		-		1,629		1,629

	Fair Value At December 31, 2012
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a non-recurring basis:
Impaired loans	$	-	$	-		30,709	$	30,709
Foreclosed real estate		-		-		735		735
Mortgage servicing rights		-		-		1,633		1,633

During the six months ended June 30, 2013, the following fair values of those reflected in the above table were remeasured:

$ 8.7 million in collateral dependent impaired loans,

$153,000 in foreclosed real estate, and

$1.6 million in mortgage servicing rights.

During 2012, the Company modified its methodology for determining the fair value of its investment in auction-rate preferred securities, which were previously valued using a discounted cash flow model and classified as Level 3 in the fair value hierarchy. At December 31, 2012, the Company determined the fair value of these investments based on the current market prices of the underlying collateral preferred shares, and classified these investments as Level 2 in the fair value hierarchy.

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.

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 and six months ended June 30, 2013 and 2012 together with the audited financial statements as of and for the year ended December 31, 2012, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 1, 2013.

(a)

Overview

As of June 30, 2013, the Company had $510.8 million of total assets, $402.1 million of gross loans receivable, and $399.4 million of total deposits. Total equity capital at June 30, 2013 was $61.0 million.

The Company had a net loss for the quarter ended June 30, 2013 of $4.8 million (or basic and diluted loss per share of $0.72) as compared to a net loss of $715,000 (or basic and diluted loss per share of $0.11) for the second quarter of 2012. The decline in the Company’s net income was largely attributable to an increase in the provision for loan losses to $3.6 million for the three months ended June 30, 2013 compared to the provision for loan losses of $2.1 million for the same period in 2012.

The Company’s operating results for the second quarter of 2013, when compared to the same period of 2012, were influenced by the following factors:

Net interest income decreased by $331,000 due to the combined effects of decreases in loan volume and lower yields on interest earning assets primarily attributable to 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 increased by $1.4 million primarily due to an increase in charge-offs related to the sale of loans in the secondary market during the second quarter of 2013;

Noninterest income decreased by $234,000 because of a $254,000 decrease in gains on sales of mortgage loans during the three months ended June 30, 2013 compared to the same period of 2012;

Noninterest expenses increased by $1.7 million, or 35.6%, during the first quarter of 2013 compared to the same period of 2012 primarily due to $765,000 in loan sale expenses as well as increases in professional fees of $393,000, compensation of $191,000, expenses on foreclosed properties of $60,000, FDIC insurance premiums of $62,000, and other expenses of $356,000.

The Company had a net loss for the six months ended June 30, 2013 of $5.4 million (or basic and diluted loss per share of $0.81) as compared to a net loss of $3.4 million (or basic and diluted loss per share of $0.51) for the six months ended June 30, 2012. The increase in the Company’s net loss was largely attributable to decrease in the income tax benefit from $1.8 million to $0 for the six months ended June 30, 2013.

In concert with many of the factors cited above in the comparison of second quarter operating results, the six month year-over-year comparisons are similarly influenced, particularly in net interest income, noninterest income and non-interest expenses. In addition, the Company experienced the following:

A $2.8 million decrease in the provision for loan losses for the 2013 six month period as the Company’s asset quality has improved year-over-year and especially during the six months ended June 30, 2013 through management’s increased workout efforts and as evidenced by the sale of $15.2 million in adversely classified loans in June 2013; and

During the six months ended June 30, 2012, the Company recognized $1.8 million in income tax benefits. However, at December 31, 2012, the Company recorded a full valuation allowance to offset its deferred tax asset and continued to do so during 2013.

(b)

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 of 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.

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 carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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.

This discussion should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the size, quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, and changes in relevant accounting principles and guidelines. Additional factors are discussed under “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Comparison of Financial Condition at June 30, 2013 and December 31, 2012

Total assets were $510.8 million as of June 30, 2013, a decline of $15.6 million or 3.0% from $526.4 million as of December 31, 2012. Loans receivable, gross decreased by $31.9 million or 7.3%, and investment securities decreased by $7.3 million or 15.0%, partially offset by an increase in cash and cash equivalents of $10.5 million or 45.4%. The loan portfolio decreased during the period by type as follows: real estate loans decreased by $24.1 million or 6.5%; commercial business loans decreased by $5.0 million, or 15.1%; and consumer loans (mostly home equity loans) decreased by $2.8 million, or 9.2%. The reduction in the loan portfolio was primarily due to the $20.8 million in loan sales in June 2013 as well as normal amortization, repayments, charge offs, and decreased loan demand.

Total liabilities were $449.8 million at June 30, 2013 compared to $459.5 million at December 31, 2012. Deposits decreased $3.5 million or 0.9% to $399.4 million at June 30, 2013 from $402.9 million at December 31, 2012. Between December 31, 2012 and June 30, 2013, core deposits (defined as all deposits other than certificates of deposit) increased $9.4 million while certificates of deposit decreased $12.9 million. Management attributes the increase in core deposits primarily to depositor preference to maintain funds in more liquid deposits given the unfavorable risk/return for maturity extension in certificates of deposit and the expectation for higher market interest rates in future periods. Advances from the Federal Home Loan Bank of Boston decreased by $9.0 million, from $41.5 million at December 31, 2012 to $32.5 million at June 30, 2013, as the Bank repaid most of the maturing advances. Other borrowed funds decreased $944,000, to $5.5 million from $6.4 million over the same period.

Total stockholders’ equity was $61.0 million at June 30, 2013 compared to $66.9 million at December 31, 2012. The decrease in stockholders’ equity was due to the net loss of $5.4 million for the six month period ended June 30, 2013 and an increase in accumulated other comprehensive loss of $494,000.

Comparison of Operating Results for the Three and Six Months Ended June 30, 2013 and 2012

General. For the three months ended June 30, 2013, the Company incurred a net loss of $4.8 million compared to a net loss of $715,000 for the same period in 2012. In the second quarter of 2012, the Company incurred a pre-tax loss of $1.1 million before the tax benefit of $410,000. The year-over-year increase in net loss was the result of an increase in the provision for loan losses of $1.4 million, decreases in net interest income of $331,000 and in noninterest income of $234,000. For the six months ended June 30, 2013, the Company recorded a net loss of $5.4 million compared to net loss of $3.4 million for the six months ended June 30, 2012. For the six months ended June 30, 2012, the Company incurred a pre-tax loss of $5.2 million before the tax benefit of $1.8 million. The $173,000 year-over-year increase in pre-tax loss consisted of a decrease in net interest income of $954,000, a decrease of $2.8 million in provision for loan losses and a decrease of $244,000 in noninterest income as well as an increase of $1.8 million in noninterest expenses.

For the Three Months Ended June 30, 2013 and 2012

Net Interest Income. Net interest income for the quarter ended June 30, 2013 totaled $4.4 million compared to $4.6 million for the quarter ended June 30, 2012, a decrease of $331,000 or 7.1%. The $631,000 or 11.2% decrease in interest on loans is due to both volume and rate. For the quarter ended June 30, 2013, average interest earning assets decreased $33.1 million or 6.5%, to $477.7 million from $510.9 million for the quarter ended June 30, 2012. Of this $33.1 million decrease, $21.6 million was due to a decrease in the average balance of loans, which 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 the loan sales in June 2013 as well as loan runoff and payoffs exceeding the slow loan demand year-over-year. The decrease in average investments was caused by a decrease in mortgage-backed securities, resulting from ongoing scheduled paydowns and prepayments on the underlying mortgage loans. The continuation of the change in asset mix from loans and investment securities to lower yielding cash equivalents caused the weighted average yield for interest earning assets to decrease by 29 basis points to 4.45% for the quarter ended June 30, 2013 as compared to 4.74% for the second quarter of 2012.

Interest expense for the quarter ended June 30, 2013 of $1.0 million was comprised of deposit interest expense and interest on borrowed funds of $752,000 and $249,000, respectively. These amounts are compared to $975,000 and $432,000, respectively, for the same period in 2012. During the quarter ended June 30, 2013, average interest bearing liabilities decreased $32.4 million, or 6.8%, to $446.3 million for the second quarter of 2013 from $478.7 million for the same period in 2012. This shift in average interest bearing liability balances reflects a reduction in average FHLB advances of $22.7 million and deposits of $13.2 million, respectively, partially offset by an increase in the average balance of other borrowed funds of $3.5 million. 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. The decrease in average deposits was caused by a greater movement out of time deposits offset by an increase into lower cost non-interest bearing transaction and savings accounts. This change caused the weighted cost of interest bearing liabilities to decrease by 28 basis points to 0.90% for the quarter ended June 30, 2013 as compared to 1.18% for the same period in 2012.

For the Six Months Ended June 30, 2013 and 2012

Net Interest Income. Net interest income for the six months ended June 30, 2013 totaled $8.6 million compared to $9.6 million for the six months ended June 30, 2012, a decrease of $954,000, or 10.0%. The $1.6 million or 13.9% decrease in interest on loans is due to both volume and rate.

During the six months ended June 30, 2013, total average interest-earning assets declined $35.1 million, or 6.8% to $482.1 million from $517.2 million for the period ended June 30, 2012 Of this $35.1 million decrease, the average balance of loans declined 26.5 million, or 5.8%, during the same period. The decrease in loans was attributable to the loan sales in June 2013 as well as loan runoff and payoffs exceeding the slow loan demand year-over-year. The decrease in average investments of $8.3 million, or 14.9%, was caused by a decrease in mortgage-backed securities, resulting from ongoing scheduled paydowns and prepayments on the underlying mortgage loans. The continuation of the change in asset mix from loans and investment securities to lower yielding cash equivalents caused the weighted average yield for interest earning assets to decrease by 41 basis points to 4.43% for the six months ended June 30, 2013 as compared to 4.84% for the same period in 2012.

Interest expense for the six months ended June 30, 2013 of $2.1 million was comprised of deposit interest expense and interest on borrowed funds of $1.5 million and $543,000, respectively. These amounts are compared to $2.1 million and $890,000, respectively, for the same period in 2012. During the six months ended June 30, 2013, total average interest bearing liabilities decreased $33.2 million, or 6.9%, to $449.8 million from $483.0 million for the six months ended June 30, 2012. This shift in average interest bearing liability balances reflects a reduction in average FHLB advances of $22.7 million and interest-bearing deposits of $12.7 million, respectively, partially offset by an increase in the average balance of other borrowed funds of $2.2 million. 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. The decrease in average interest-bearing deposits was caused by a greater movement out of time deposits offset by an increase into non-interest bearing checking accounts and low cost transaction and savings accounts. This change caused the weighted cost of interest bearing liabilities to decrease by 30 basis points to 0.93% for the six months ended June 30, 2013 as compared to 1.23% for the same period in 2012.

The following table summarizes average balances and average yields and costs for the three months ended June 30, 2013 and 2012:

	For the Three Months Ended June 30,
	2013							2012
			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	$	426,760	$	5,021		4.71	%	$	448,366	$	5,652		5.04	%
Investment securities and Fed Funds sold		45,538		286		2.51			56,594		390		2.91
Federal Home Loan Bank stock		5,444		6		0.44			5,917		8		0.54
Total interest-earning assets		477,742		5,313		4.45	%		510,877		6,050		4.74	%
Non interest-earning assets		42,937							51,163
Total Assets	$	520,679						$	562,040
Interest-bearing liabilities
Certificate accounts	$	167,212		634		1.52	%	$	194,199	$	854		1.76	%
Regular savings accounts & escrow		117,894		72		0.24			116,007		88		0.30
Checking and NOW accounts		85,917		28		0.13			73,494		12		0.07
Money market savings accounts		27,135		18		0.27			27,628		21		0.30
Total interest-bearing deposits		398,158		752		0.76			411,328		975		0.95
FHLB advances		37,152		241		2.59			59,865		425		2.84
Other borrowings		11,020		8		0.29			7,510		7		0.37
Total interest-bearing liabilities		446,330		1,001		0.90	%		478,703		1,407		1.18	%
Non interest-bearing liabilities		7,899							2,859
Total Liabilities		454,229							481,562
Total Stockholders' Equity		66,450							80,478
Total Liabilities and Stockholders' Equity	$	520,679						$	562,040
Net interest income			$	4,312						$	4,643
Net interest spread						3.55	%						3.56	%
Net interest margin						3.62	%						3.64	%
Average interest earning assets to average interest bearing liabilities						107.04	%						106.72	%

The following table summarizes average balances and average yields and costs for the six months ended June 30, 2013 and 2012:

	For the Six Months Ended June 30,
	2013							2012
			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	$	429,166	$	10,072		4.69	%	$	455,621	$	11,699		5.14	%
Investment securities and Fed Funds sold		47,285		601		2.54			55,546		801		2.88
Federal Home Loan Bank stock		5,671		11		0.39			6,062		16		0.53
Total interest-earning assets		482,122		10,684		4.43	%		517,229		12,516		4.84	%
Non interest-earning assets		42,041							50,321
Total Assets	$	524,163						$	567,550
Interest-bearing liabilities
Certificate accounts	$	169,628		1,295		1.53	%	$	198,413		1,819		1.83	%
Regular savings accounts & escrow		117,473		158		0.27			113,297		179		0.32
Checking and NOW accounts		83,927		50		0.12			70,805		24		0.07
Money market savings accounts		26,640		35		0.26			27,893		47		0.34
Total interest-bearing deposits		397,668		1,538		0.77			410,408		2,069		1.01
FHLB advances		39,091		518		2.66			61,756		870		2.82
Other borrowings		13,054		25		0.37			10,826		20		0.37
Total interest-bearing liabilities		449,813		2,081		0.91	%		482,990		2,959		1.23	%
Non interest-bearing liabilities		7,615							2,832
Total Liabilities		457,428							485,822
Total Stockholders' Equity		66,735							81,728
Total Liabilities and Stockholders' Equity	$	524,163						$	567,550
Net interest income			$	8,603						$	9,557
Net interest spread						3.52	%						3.61	%
Net interest margin						3.60	%						3.70	%
Average interest earning assets to average interest bearing liabilities						107.18	%						107.09	%

The following table summarizes the changes in the components of net interest income attributable to both rate and volume for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended,									Six Months Ended,
	June 30, 2013 compared									June 30, 2013 compared
	to June 30, 2012									to June 30, 2012
	Increase (Decrease)									Increase (Decrease)
	Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans	$	(265	)	$	(366	)	$	(631	)	$	(656	)	$	(971	)	$	(1,627	)
Investment securities / Federal funds Sold		(72	)		(32	)		(104	)		(111	)		(89	)		(200	)
Federal Home Loan Bank stock		(1	)		(1	)		(2	)		(1	)		(4	)		(5	)
Total interest income		(338	)		(399	)		(737	)		(768	)		(1,064	)		(1,832	)
Interest expense:
Certificate accounts		(110	)		(110	)		(220	)		(244	)		(280	)		(524	)
Regular savings accounts		1			(17	)		(16	)		6			(27	)		(21	)
Checking and NOW accounts		2			14			16			5			21			26
Money market savings accounts		-			(3	)		(3	)		(2	)		(10	)		(12	)
Total deposit expense		(107	)		(116	)		(223	)		(235	)		(296	)		(531	)
FHLBB advances		(151	)		(33	)		(184	)		(303	)		(49	)		(352	)
Other borrowings		3			(2	)		1			4			1			5
Total interest expense		(255	)		(151	)		(406	)		(534	)		(344	)		(878	)
Increase (decrease) in net interest income	$	(83	)	$	(248	)	$	(331	)	$	(234	)	$	(720	)	$	(954	)

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.

The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the six months ended June 30, 2013 and 2012:

As of and for the Six Months Ended June 30, 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		(423	)		3,689			(277	)		883			(22	)		3,850
Charge-offs		(496	)		(4,351	)		(1,984	)		(1,796	)		(44	)		(8,671	)
Recoveries		-			590			102			374			1			1,067
Ending balance	$	1,069		$	4,820		$	2,309		$	2,186		$	362		$	10,746
Allowance related to loans:
Individually evaluated for impairment	$	75		$	138		$	629		$	681		$	32		$	1,555
Collectively evaluated for impairment	$	994		$	4,682		$	1,680		$	1,505		$	330		$	9,191

Ending loan balance individually evaluated for impairment	$	6,092		$	2,884		$	5,622		$	2,803		$	550		$	17,951
Ending loan balance collectively evaluated for impairment		199,593			126,905			5,678			25,204			26,795			384,175
Total Loans	$	205,685		$	129,789		$	11,300		$	28,007		$	27,345		$	402,126

	Multi-Family and Commercial Real Estate
As of and for the Six Months Ended June 30, 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 for loan losses:
Beginning balance	$	-	$	-	$	-	$	-	$	-	$	4,892
Provision for loan losses		-		-		-		-		-		3,689
Charge-offs		-		-		-		-		-		(4,351	)
Recoveries		-		-		-		-		-		590
Ending Balance												4,820
Redistributed through segment expansion		526		818		421		519		2,536		4,820
Segment Ending Balance	$	526	$	818	$	421	$	519	$	2,536	$	4,820
Allowance related to loans:
Individually evaluated for impairment	$	18	$	-	$	82	$	-	$	38	$	138
Collectively evaluated for impairment	$	508	$	818	$	339	$	519	$	2,498	$	4,682

Ending loan balance individually evaluated for impairment	$	1,198	$	156	$	356	$	-	$	1,174	$	2,884
Ending loan balance collectively evaluated for impairment		16,109		33,449		23,039		21,792		32,516		126,905
Total Loans	$	17,307	$	33,605	$	23,395	$	21,792	$	33,690	$	129,789

As of and for the Six Months Ended June 30, 2012	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	$	1,745		$	3,745		$	1,327		$	754		$	482		$	8,053
Provision for loan losses		804			1,789			842			3,052			205			6,692
Charge-offs		(347	)		(1,245	)		(629	)		(1,416	)		(146	)		(3,783	)
Recoveries		4			-			-			5			1			10
Ending Balance	$	2,206		$	4,289		$	1,540		$	2,395		$	542		$	10,972
Allowance related to loans:
Individually evaluated for impairment	$	-		$	-		$	305		$	-		$	-		$	305
Collectively evaluated for impairment	$	2,206		$	4,289		$	1,235		$	2,395		$	542		$	10,667

Ending loan balance individually evaluated for impairment	$	4,636		$	13,209		$	8,892		$	801		$	175		$	27,713
Ending loan balance collectively evaluated for impairment		204,017			20,190			141,191			32,068			30,500			427,966
Total Loans	$	208,653		$	33,399		$	150,083		$	32,869		$	30,675		$	455,679

At December 31, 2012
Ending balance	$	1,988		$	4,892		$	4,468		$	2,725		$	427		$	14,500
Allowance related to loans:
Individually evaluated for impairment	$	5		$	271		$	119		$	340		$	1		$	736
Collectively evaluated for impairment	$	1,983		$	4,621		$	4,349		$	2,385		$	426		$	13,764

Ending loan balance individually evaluated for impairment	$	4,541		$	14,373		$	8,286		$	3,945		$	300		$	31,445
Ending loan balance collectively evaluated for impairment		204,463			119,176			20,071			29,025			29,826			402,561
Total Loans	$	209,004		$	133,549		$	28,357		$	32,970		$	30,126		$	434,006

The provision for loan losses was $3.9 million for the six months ended June 30, 2013, compared to $6.7 million for the same period in 2012. The decreased provision for the 2013 period was attributable to management’s judgment that the inherent credit risk exposure in the loan portfolio has somewhat stabilized along with the sale of loans in the secondary market in the six month period ended June 30, 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. The balances of nonperforming loans decreased $13.3 million between December 31, 2012 and June 30, 2013, primarily due to $15.2 million of adversely classified loans sold in June 2013. Adversely classified loans decreased $12.7 million compared to December 31, 2012. Adversely classified assets consisted primarily of loans rated substandard or doubtful in accordance with regulatory guidance. Net charge-offs were $7.6 million during the six months ended June 30, 2013, compared to $3.8 million during the six months ended June 30, 2012. Of the $7.6 million in net charge-offs, $5.1 million resulted from the June 2013 loan sales which consisted of primarily commercial real estate loans and construction and land development loans.

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

	June 30,			December 31,
	2013			2012
	(Dollars in thousands)
Nonperforming Assets
Nonaccrual loans	$	10,624		$	22,306
TDRs nonaccruing		6,619			8,277
Subtotal non performing loans		17,243			30,583
Foreclosed real estate		234			735
Total nonperforming assets	$	17,477		$	31,318

Total nonperforming loans to total loans		4.29	%		7.57	%
Total nonperforming assets to total assets		3.42	%		5.95	%

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

	At June 30,		At December 31,
	2013		2012
	(In thousands)
Loans by risk grade:

Special mention	$	35,524	$	36,419

Substandard		26,647		39,305
Doubtful		-		-
Subtotal - Adversely classified loans		26,647		39,305
Total criticized loans	$	62,171	$	75,724

The $12.7 million decrease in the level of adversely classified loans from December 31, 2012 to June 30, 2013 was primarily due to the June 2013 loan sales which included $15.2 million in adversely classified loans. Adversely classified loans are loans rated substandard or doubtful in accordance with regulatory guidance. These assets warrant and receive increased 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. At June 30, 2013, $17.2 million of classified loans were nonperforming loans, compared to $30.6 million at December 31, 2012.

Noninterest Income. The following table summarizes noninterest income for the three and six months ended June 30, 2013 and 2012:

	Three Months				Six Months
	Ended June 30,				Ended June 30,
(Dollars in thousands)	2013		2012		2013		2012

Deposit fees/service charges	$	182	$	204	$	360	$	406
Gain on sales of loans		308		562		728		896
Fees for other services		180		188	$	290		387
Mortgage servicing income		85		63		167		119
Income from bank owned life insurance		70		76	$	140		151
Income from investment advisory services, net		87		51		139		107
Other income		28		30		53		55
Total noninterest income		940		1,174		1,877		2,121

Noninterest income was $940,000 for the quarter ended June 30, 2013 and $1.2 million for the same period in 2012, a decrease of 19.9%. For the six months ended June 30, 2013, noninterest income was $1.9 million compared to $2.1 million for the six months ended June 30, 2012, a decrease of 11.5%. The decrease in both periods is related to the gains associated with sales of one-to-four family fixed rate mortgages in the secondary market, which decreased by $254,000, or 45.2%, as a result of lower sales volume during the 2013 quarter ($10.5 million sold in the second quarter of 2013 compared with $20.8 million sold in the same period in 2012). For the six months ended June 30, 2013, the gains associated with sales of one-to-four family fixed rate mortgages in the secondary market decreased by $168,000, or 18.8%, also as a result of lower sales volume ($21.3 million sold in the first half of 2013 compared with $38.4 million sold in the first half of 2012). Mortgage servicing income increased by $22,000, or 34.9%, and $48,000, or 40.3%, for the respective three month and six month periods to due to growth in the mortgage servicing portfolio year-over-year. Fees related to deposit accounts decreased by $22,000, or 10.8%, to $182,000 and $46,000, or 11.3%, to $360,000, for the three and six month periods, respectively, primarily attributable to a lower volume of overdraft transactions in the 2013 quarter and year to date due to the Bank more aggressively monitoring and controlling such activity. Fees for other services decreased to $180,000 for the quarter ended June 30, 2013 and to $290,000 for the year to date, driven by declines of $29,000 and $65,000 in reverse mortgage income, application fees of $16,000 and $28,000, offset by increases in prepayment fees of $49,000 and $27,000. The decrease in reverse mortgage fees was attributable to temporary discontinuation of this product offering and sale due to the loss of an experienced originator of this specialized product.

Noninterest Expense. The following table summarizes noninterest expense for the six months ended June 30, 2013 and 2012.

	Three Months					Six Months
	Ended June 30,					Ended June 30,
(Dollars in thousands)	2013		2012			2013		2012

Compensation, taxes and benefits	$	2,896	$	2,705		$	5,573	$	5,314
Professional fees		637		244			1,296		537
Property taxes on loan sales		765		-			765		-
Office occupancy		587		575			1,198		1,150
Expenses on foreclosed properties, net		202		141			559		266
Writedowns on foreclosed properties		49		63			60		75
FDIC insurance premiums		249		187			454		321
Insurance		124		35			282		73
Computer processing		183		194			380		368
Directors compensation		77		130			211		335
Advertising		108		160			195		286
Office supplies		48		53			109		107
Deposit related charge		-		(88	)		-		712
Other expenses		576		396			938		659
Total	$	6,501	$	4,795		$	12,020	$	10,203

Noninterest expense was $6.5 million for the quarter ended June 30, 2013 compared to $4.8 million for the quarter ended June 30, 2012, an increase of $1.7 million or 35.6%. For the six month period ended June 30, 2013, noninterest expense was $12.0 million compared to $10.2 million for the six month period ended June 30, 2012.

The quarter-over-quarter increase was primarily the result of increases in property taxes on loan sales of $765,000, professional fees of $393,000, compensation, taxes and benefits of $191,000, insurance and surety bond expense of $89,000, expenses on foreclosed real estate of $61,000, FDIC insurance of $62,000, office occupancy of $12,000, and other expenses of $356,000 over the same period in 2012. These increases were partially offset by decreases in advertising of $52,000, directors’ compensation of $53,000, and an $88,000 deposit related charge in 2012. The increase in professional fees was due to the hiring of outside attorneys, advisors and consultants. These costs related to the previously announced regulatory order as well as the use of consultants due to open positions. Expenses on foreclosed real estate increased by $61,000, or 43.3%, due to property taxes and other costs of acquiring and maintaining foreclosed real estate. FDIC insurance premiums increased by $62,000, or 33.2%, due to the impact of the regulatory agreement. Other expenses increased by $356,000 or 161.8% primarily resulting from the year-over-year increases in the cost for directors’ and officers’ insurance coverage and recruiting fees. Additionally, $765,000 of property taxes in the second quarter 2013 were for delinquent property taxes, incurred on loans sold in the secondary market, were not incurred in the same period of 2012.

The increase in noninterest expense for the six month period ended June 30, 2013 was primarily the result of increases in professional fees of $759,000, expenses on foreclosed real estate of $293,000, FDIC insurance of $133,000, insurance and surety bond expense of $209,000, office occupancy of $48,000, property taxes of $765,000, and other expenses of $279,000 over the same period in 2012. These increases were partially offset by decreases in advertising of $91,000, directors’ compensation of $124,000, and a $712,000 deposit related charge in 2012. The increase in professional fees was due to the hiring of outside attorneys, advisors and consultants. These costs related to the previously announced regulatory order as well as the use of consultants due to open positions, in particular, the interim Chief Financial Officer position and support. Expenses on foreclosed real estate increased by $293,000, or 110.2%, due to property taxes and other costs of acquiring and maintaining foreclosed real estate. FDIC insurance premiums increased by $133,000, or 41.4%, due to the impact of the regulatory agreement. Other expenses increased by $279,000 primarily resulting from the year-over-year increases in the cost for directors’ and officers’ insurance coverage and recruiting fees. Additionally, $712,000 of expenses in the first quarter 2012 for charges related to the underpayment of interest on certain certificates of deposit renewals, which was not incurred in the same period of 2013. This was offset by $765,000 incurred in the second quarter 2013 for delinquent property taxes on loans sold in the secondary market, which were not incurred in the same period of 2012.

Income Tax Expense (Benefit) The Company has reported no tax benefit for its pre-tax operating loss for the quarter ended June 30, 2013. At June 30, 2013, 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 June 30, 2013. 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.

Management regularly analyzes the Company’s tax positions and at June 30, 2013, does not believe that the Company has taken any tax positions where future deductibility is not certain. As of June 30, 2013, 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 is 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.

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 90 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 June 30, 2013, cash and cash equivalents totaled $33.8 million, including federal funds sold of $1.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $20.2 million at June 30, 2013. At June 30, 2013, the Bank had the ability to borrow a total of $100.1 million from the Federal Home Loan Bank of Boston; however, based on the collateral pledged, the Bank is currently able to borrow $80.9 million, of which $32.5 million in borrowings was outstanding. The Bank also had other borrowed funds of $5.4 million in repurchase agreements with customers. In addition, at June 30, 2013, the Bank had the ability to borrow $3.1 million from the Federal Reserve Bank Discount Window which was not utilized at June 30, 2013.

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

	June 30,		December 31,
(In thousands)	2013		2012
Commitments to extend credit:
Commercial loan commitments	$	6,093	$	4,327
Unused home equity lines of credit		19,266		21,434
Commercial and industrial loan commitments		15,893		13,134
Amounts due on commercial loans		15,044		20,790
Commercial letters of credit		3,096		3,964

Certificates of deposit due within one year of June 30, 2013 totaled $78.2 million, or 19.6% 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 Company has remained highly liquid. The Company is not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material decrease in liquidity. The Company expects that all of our liquidity needs, including the contractual commitments stated above and increases in loan demand, can be met by our currently available liquid assets and cash flows. In the event loan demand was to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or the Federal Reserve Bank Discount Window. The Company expects that our currently available liquid assets and our ability to borrow from both the Federal Home Loan Bank of Boston and the Federal Reserve Bank would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.

The 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 $7.5 million at June 30, 2013.

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 June 30, 2013, with a Tier 1 leverage ratio of 10.06% and a total risk-based capital ratio of 15.54%.

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 $7.5 million at June 30, 2013. If the Company had contributed those assets to the Bank as of June 30, 2013, the Bank would have had a Tier 1 leverage ratio of approximately 11.34%.

The following table is a summary of the Company’s consolidated and the Bank’s actual capital amounts and ratios at June 30, 2013 as computed under the regulatory guidelines.

At June 30, 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		$	61,539		12.04	%

Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			61,539		17.76	%

Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			65,450		19.03	%

The Bank
Tier 1 Leverage Capital (1)	$	20,813		4.00	%	$	46,829		9.00	%	$	52,359		10.06	%

Tier 1 Risk-Based Capital (2)		14,678		4.00	%		N/A		N/A			52,359		14.27	%

Total Risk-Based Capital (2)		29,357		8.00	%		47,704		13.00	%		57,030		15.54	%

(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 2012	Adequately Capitalized Requirements					Actual
(Dollars in thousands)	$		%			$		%
The Company Consolidated
Tier 1 Leverage Capital (1)		N/A		N/A		$	66,929		12.71	%

Tier 1 Risk-Based Capital (2)		N/A		N/A			66,929		19.35	%

Total Risk-Based Capital (2)		N/A		N/A			71,378		20.64	%

The Bank
Tier 1 Leverage Capital (1)	$	21,087		4.00	%	$	52,618		9.98	%

Tier 1 Risk-Based Capital (2)		14,105		4.00	%		52,618		14.92	%

Total Risk-Based Capital (2)		28,210		8.00	%		57,162		16.21	%

(1) Tier 1 capital to total assets.

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

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 amounts due on commercial loans, commercial letters of credit and commitments to sell loans.

For the six months ended June 30, 2013, 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, 2012.

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

Naugatuck Valley Financial Corporation’s Chief Executive Officer and Chief Financial Officer (collectively, the "Certifying Officers") evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, and in light of material weaknesses in internal control over financial reporting that existed throughout this period as described below, management concluded that the Company’s disclosure and procedures were not effective as of June 30, 2013.

(b)

Changes in Internal Control Over Financial Reporting

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

Allowances for Loan and Lease Losses:

During the second quarter of 2013, management implemented new state-of-the-art software to improve the ALLL process through integrated data capture and automation of calculation and analysis.

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

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

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

Strengthened internal controls by requiring additional detailed review and testing of all components of the Allowance for Loan and Lease Loss computations;

Requiring additional analytical review procedures of the Allowance computations, and requiring detailed review of the Allowance for Loan and Lease computations by senior management.

Financial & Accounting:

During the second quarter of 2013, hired a qualified and highly-experienced Chief Financial Officer with significant knowledge of GAAP, regulatory accounting and the banking industry who has the skills to effectively implement that knowledge.

Increased oversight of the financial reporting process through the Audit Committee.

Instituting additional preparer / reviewer verification procedures documented by reviewer sign-off.

Requiring additional management level reviews of financial work papers, documented by reviewer sign-off.

Part II - OTHER INFORMATION

Item 1. - Legal Proceedings.

On November 8, 2012, John Roman, a former director of Naugatuck Valley Financial and the former President and Chief Executive Officer of Naugatuck Valley Financial and former director of 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 directors of each entity as defendants. The complaint requests that the court enter temporary and permanent injunctions to prevent his removal as a director of Naugatuck Valley Savings. The complaint alleges that cause does not exist to remove Mr. Roman as required under the Bylaws, and that the removal vote is in retribution for his threatened legal action against the Naugatuck Valley Savings based on his resignation. 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. The suit for damages alleged in the complaint remains pending.

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 July 30, 2013, all defendants moved to strike certain allegations of his complaint. There has been no decision on that motion.

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 and, in accordance with the Company’s Bylaws, voted to reduce the size of the Board of Directors to eliminate the vacancy created by Mr. Roman’s resignation.

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, 2012, 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 June 30, 2013.

Item 3. – Defaults Upon Senior Securities. Not applicable

Item 4. – Mine Safety Disclosures. Not applicable

Item 5. – Other Information. Not applicable

Item 6. – Exhibits.

Exhibits –

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

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

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

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

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

32	Section 1350 Certifications.

101*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

____________________

* Furnished, not filed.

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

Signatures

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

			Naugatuck Valley Financial Corporation

Date:	August 19, 2013	by:	/s/ William C. Calderara
			William C. Calderara
			President and Chief Executive Officer
			(principal executive officer)

Date:	August 19, 2013	by:	/s/ James Hastings
			James Hastings
			Executive Vice President and Chief Financial Officer
			(principal accounting and financial officer)