Naugatuck Valley Financial Corp - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Naugatuck Valley Financial Corp	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - Naugatuck Valley Financial Corp	v393103_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Naugatuck Valley Financial Corp	v393103_ex31-1.htm
EX-32 - EXHIBIT 32 - Naugatuck Valley Financial Corp	v393103_ex32.htm

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 September 30, 2014

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

For the transition period from ______________ to _____________

Commission file number: 0-54447

NAUGATUCK VALLEY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Yes 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 November 10, 2014, there were 7,002,208 shares of the registrant’s common stock outstanding.

NAUGATUCK VALLEY FINANCIAL CORPORATION

Table of Contents

Part I.	Financial Information		Page No.

	Item 1.	Consolidated Financial Statements (unaudited)

		Consolidated Statements of Financial Condition at September 30, 2014 and December 31, 2013	3

		Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013	4

		Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013	5

		Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 and 2013	6

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	7

		Notes to Unaudited Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

		Liquidity and Capital Resources	50

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

	Item 4.	Controls and Procedures	53

Part II.	Other Information

	Item 1.	Legal Proceedings	53

	Item 1A.	Risk Factors	54

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

	Item 3.	Defaults Upon Senior Securities	54

	Item 4.	Mine Safety Disclosures	54

	Item 5.	Other Information	54

	Item 6.	Exhibits	54

Signatures			55

Exhibits

Part I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited)

Consolidated Statements of Financial Condition (unaudited)

(In thousands)	September 30, 2014			December 31, 2013

ASSETS
Cash and due from depository institutions	$	9,238		$	26,330
Federal funds sold		49			44
Cash and cash equivalents		9,287			26,374
Investment securities available-for-sale, at fair value		78,963			49,771
Investment securities held-to-maturity, at amortized cost		14,364			18,149
Loans held for sale		835			1,079
Loans receivable, net		357,249			360,568
Accrued income receivable		1,598			1,494
Foreclosed real estate		458			1,846
Premises and equipment, net		9,270			9,364
Bank owned life insurance		10,327			10,132
Federal Home Loan Bank ("FHLB") of Boston stock, at cost		4,548			5,444
Other assets		2,226			2,560
Total assets	$	489,125		$	486,781
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	376,911		$	390,847
FHLB advances		46,556			25,293
Other borrowed funds		-			4,173
Mortgagors' escrow accounts		2,379			4,392
Other liabilities		3,846			3,842
Total liabilities		429,692			428,547
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding		-			-
Common stock, $.01 par value; 25,000,000 shares authorized; 7,002,366 shares issued; 7,002,208 shares outstanding at September 30, 2014 and December 31, 2013, respectively		70			70
Paid-in capital		58,776			58,757
Retained earnings		2,663			2,322
Unearned employee stock ownership plan ("ESOP") shares (326,751 shares at September 30, 2014 and December 31, 2013)		(2,824	)		(2,824	)
Treasury Stock, at cost (158 shares at September 30, 2014 and December 31, 2013)		(1	)		(1	)
Accumulated other comprehensive income (loss), net of tax		749			(90	)
Total stockholders' equity		59,433			58,234
Total liabilities and stockholders' equity	$	489,125		$	486,781

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Operations (unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands, except share data)	2014			2013			2014			2013

Interest income
Interest and fees on loans	$	4,141		$	4,416		$	12,552		$	14,488
Interest and dividends on investments and deposits		758			267			2,276			879
Total interest income		4,899			4,683			14,828			15,367
Interest expense
Interest on deposits		597			652			1,799			2,190
Interest on borrowed funds		188			173			530			716
Total interest expense		785			825			2,329			2,906
Net interest income		4,114			3,858			12,499			12,461
(Credit) provision for loan losses		(50	)		300			(789	)		4,150

Net interest income after provision\credit for loan losses		4,164			3,558			13,288			8,311
Noninterest income
Service charge income		186			195			535			555
Fees for other services		186			139			419			429
Mortgage banking income		486			212			762			1,107
Income from bank owned life insurance		66			71			195			211
Net gain (loss) on sale of investments		1,034			-			1,227			(4	)
Income from investment advisory services, net		79			68			246			207
Other income		33			25			96			76
Total noninterest income		2,070			710			3,480			2,581
Noninterest expense
Compensation, taxes and benefits		2,879			3,046			8,868			8,620
Occupancy		568			466			1,692			1,413
Professional fees		420			312			1,263			1,608
FDIC insurance premiums		88			227			619			682
Insurance		175			149			436			430
Computer processing		343			335			1,039			966
Expenses on foreclosed real estate, net		63			96			441			655
Writedowns on foreclosed real estate		-			-			38			60
Directors' compensation		54			64			226			275
Advertising		101			115			314			310
Supplies		68			61			197			170
Expenses related to sale of loans		51			11			247			776
Other expenses		368			417			1,047			1,348
Total noninterest expense		5,178			5,299			16,427			17,313
Income (loss) before provision (benefit) for income taxes		1,056			(1,031	)		341			(6,421	)
Provision (benefit) for income taxes		-			-			-			-
Net income (loss)	$	1,056		$	(1,031	)	$	341		$	(6,421	)
Earnings (loss) per common share - basic and diluted	$	0.16		$	(0.16	)	$	0.05		$	(0.97	)

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2014			2013			2014			2013

Net income (loss)	$	1,056		$	(1,031	)	$	341		$	(6,421	)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investment securities		593			(550	)		2,453			(1,289	)
Reclassification adjustment for gain (loss) recognized in net income (loss) (1)		(1,034	)		-			(1,227	)		4
Other comprehensive income (loss) before tax effect		(441	)		(550	)		1,226			(1,285	)
Income tax expense (benefit) related to items in other
comprehensive income (loss)		151			-			(387	)		241
Other comprehensive income (loss), net of tax effect		(290	)		(550	)		839			(1,044	)
Total comprehensive income (loss)	$	766		$	(1,581	)	$	1,180		$	(7,465	)

(1) Net gain (loss) on sale of investments is the affected line item in the Consolidated Statements of Operations.

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Changes in Stockholders’ Equity

Nine months ended September 30, 2014 and 2013 (unaudited)

	Common		Paid-in		Retained		Unearned ESOP			Unearned Stock		Treasury			Accumulated Other Comprehensive
(In thousands)	Stock		Capital		Earnings		Shares			Awards		Stock			Income (Loss)			Total

Balance at December 31, 2013	$	70	$	58,757	$	2,322	$	(2,824	)	$	-	$	(1	)	$	(90	)	$	58,234
Net income (loss)		-		-		341		-			-		-			-			341
Stock based compensation		-		19		-		-			-		-			-			19
Other comprehensive income (loss)		-		-		-		-			-		-			839			839

Balance at September 30, 2014	$	70	$	58,776	$	2,663	$	(2,824	)	$	-	$	(1	)	$	749		$	59,433

	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 income (loss)		-		-		(6,421	)		-			-			-			-			(6,421	)
Stock based compensation		-		-		(3	)		-			3			-			-			-
Other comprehensive income (loss)		-		-		-			-			-			-			(1,044	)		(1,044	)

Balance at September 30, 2013	$	70	$	58,842	$	4,740		$	(3,143	)	$	-		$	(1	)	$	(1,065	)	$	59,443

See accompanying notes to unaudited consolidated financial statements.

Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended
	September 30,
(In thousands)	2014			2013
Cash flows from operating activities
Net income (loss)	$	341		$	(6,421	)
Adjustments to reconcile net loss to cash provided by operating activities:
(Credit) provision for loan losses		(789	)		4,150
Depreciation and amortization expense		566			515
Net loss on sales of foreclosed assets		60			68
Writedowns on foreclosed real estate		38			60
Gain on sale of mortgage servicing rights		(255	)		-
Mortgage banking activity:
Gain on sales of mortgage loans		(441	)		(852	)
Mortgage loans originated for sale		(25,359	)		(28,616	)
Proceeds from sale of mortgage loans		26,044			31,576
Net amortization of investment premiums and discounts		4			344
Net gain on sale of investments		(1,227	)		4
Stock-based compensation		19			-
Net change in:
Accrued income receivable		(104	)		288
Deferred loan fees		(21	)		(99	)
Cash surrender value of life insurance		(195	)		(211	)
Other assets		(628	)		1,309
Other liabilities		(383	)		(644	)
Net cash (used in)/provided by operating activities		(2,330	)		1,471
Cash flows from investing activities
Proceeds from maturities and repayments of available-for-sale securities		27,403			3,555
Proceeds from sale of available-for-sale securities		18,124			749
Proceeds from maturities of held-to-maturity securities		3,644			6,030
Redemption of Federal Home Loan Bank stock		896			473
Purchase of available-for-sale securities		(72,129	)		(10,207	)
Loan originations net of principal payments		(842	)		31,634
Purchase of premises and equipment		(472	)		(169	)
Proceeds from sale of mortgage servicing rights		1,217			-
Proceeds from the sale of commercial loans		4,580			-
Proceeds from the sale of foreclosed assets		1,681			674
Net cash (used in)/provided by investing activities		(15,898	)		32,739
Cash flows from financing activities
Net change in time deposits		(8,041	)		(21,065	)
Net change in other deposit accounts		(5,895	)		6,161
Proceeds from FHLB advances		47,500			-
Repayment of FHLB advances		(26,237	)		(12,445	)
Net change in mortgagors' escrow accounts		(2,013	)		(2,279	)
Change in other borrowings		(4,173	)		(1,369	)
Net cash provided by/(used in) financing activities		1,141			(30,997	)
Net change in cash and cash equivalents		(17,087	)		3,213
Cash and cash equivalents at beginning of period		26,374			23,229
Cash and cash equivalents at end of period	$	9,287		$	26,442
Supplementary disclosures of cash flow information:
Non-cash investing activities:
Transfer of loans to foreclosed assets	$	391		$	954
Transfer of loans to loans held for sale	$	3,957		$	-
Cash paid during the period for:
Interest	$	2,313		$	2,945
Unrealized gains (losses) on available for sale securities arising during the period	$	1,226		$	(1,285	)

See accompanying notes to unaudited consolidated financial statements.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

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

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

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

Basis of Presentation

The accompanying consolidated interim financial statements are unaudited and include the accounts of the Company, the Bank, and the Bank’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, 2013 audited Consolidated Financial Statements and the accompanying Notes included in our Annual Report on Form 10-K. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and the results of its operations and its cash flows at the dates and for the periods presented.

In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition, and the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, deferred income taxes and the valuation of and the evaluation for other than temporary impairment (“OTTI”) on investment securities. While management uses available information to recognize losses and properly value these assets, future adjustments may be necessary based on changes in economic conditions both in Connecticut and nationally.

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

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

Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Certain reclassifications have been made to the prior period amounts to conform with the September 30, 2014 consolidated financial statement presentation. These reclassifications only changed the reporting categories and did not affect the Company’s results of operations or financial position.

Significant Accounting Policies

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

Recently Issued Accounting Pronouncements

Income Taxes- Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists: (a consensus of the FASB Emerging Issues Task Force). In July 2013, the FASB issued ASU 2013-11. Per this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU became effective during the three months ended June 30, 2014. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.

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

Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB issued ASU 2014-09. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. The Company will also need to apply new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016, with no early adoption permitted, using either of two methods: (a) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (b) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined in ASU 2014-09. The Company has not yet selected a transition method and is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements.

NOTE 2 – REGULATORY MATTERS

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

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

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

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

Subjects the Bank to six month financial and operational examination review. The most recent examination occurred in July 2014. The next scheduled review is expected in the first quarter 2015.

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-weighted 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 Agreement. The Bank exceeded the IMCRs at September 30, 2014, with a Tier 1 leverage ratio of 11.10% and a total risk-based capital ratio of 18.56%.

As a source of strength to its subsidiary bank, the Company had liquid assets of approximately $2.8 million at September 30, 2014, which the Company could contribute to the Bank if needed, to enhance the Bank’s capital levels. If the Company had contributed those assets to the Bank as of September 30, 2014, the Bank would have had a Tier 1 leverage ratio of approximately 11.58%.

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

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

The following tables are summaries of the Company’s consolidated capital amounts and ratios and the Bank’s actual capital amounts and ratios as computed under the standards established by the Federal Deposit Insurance Act at September 30, 2014 and December 31, 2013.

At September 30, 2014	Adequately Capitalized Requirements					Individual Minimum Capital Requirements (3)					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1 Leverage Capital (1)		N/A		N/A			N/A		N/A		$	58,684		12.03	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			58,684		18.78	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			62,627		20.04	%
The Bank
Tier 1 Leverage Capital (1)	$	19,592		4.00	%	$	44,082		9.00	%	$	54,379		11.10	%
Tier 1 Risk-Based Capital (2)		12,573		4.00	%		N/A		N/A			54,379		17.30	%
Total Risk-Based Capital (2)		25,145		8.00	%		40,861		13.00	%		58,346		18.56	%

(1) Tier 1 capital to total assets.

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

(3) Effective June 4, 2013.

At December 31, 2013	Adequately Capitalized Requirements					Individual Minimum Capital Requirements					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1 Leverage Capital (1)		N/A		N/A			N/A		N/A		$	58,323		11.98	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			58,323		18.21	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			62,399		19.49	%

The Bank
Tier 1 Leverage Capital (1)	$	19,545		4.00	%	$	43,977		9.00	%	$	53,946		11.04	%
Tier 1 Risk-Based Capital (2)		12,891		4.00	%		N/A		N/A			53,946		16.74	%
Total Risk-Based Capital (2)		25,783		8.00	%		41,897		13.00	%		58,047		18.01	%
(1) Tier 1 capital to total assets.

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

As of September 30, 2014, the most recent regulatory notifications categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action.

NOTE 3 – INVESTMENT SECURITIES

At September 30, 2014, the composition of the investment portfolio was:

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Available-for-sale securities:
U.S. Government and agency obligations	$	16,473	$	171	$	(1	)	$	16,643
U.S. Government agency mortgage-backed securities		40,385		820		(303	)		40,902
U.S. Government agency collateralized mortgage obligations		13,146		203		-			13,349
Small Business Administration securitized pool of loans		1,976		48		-			2,024
Obligations of state and municipal subdivisions		5,348		189		-			5,537
Subtotal		77,328		1,431		(304	)		78,455
Mutual fund - fixed income securities		500		8		-			508
Total available-for-sale securities	$	77,828	$	1,439	$	(304	)	$	78,963

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Held-to-maturity securities:
U.S. Government agency mortgage-backed securities	$	14,364	$	176	$	(12	)	$	14,528
Total held-to-maturity securities	$	14,364	$	176	$	(12	)	$	14,528

At December 31, 2013, the composition of the investment portfolio was:

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Available-for-sale securities:
U.S. Government and agency obligations	$	16,601	$	35	$	(130	)	$	16,506
U.S. Government agency mortgage-backed securities		22,874		527		(532	)		22,869
U.S. Government agency collateralized mortgage obligations		3,736		11		(9	)		3,738
Private label collateralized mortgage obligations		258		8		-			266
Subtotal		43,469		581		(671	)		43,379
Auction-rate trust preferred securities		5,893		-		-			5,893
Mutual fund - Fixed Income securities		500		-		(1	)		499

Total available-for-sale securities	$	49,862	$	581	$	(672	)	$	49,771

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

Total held-to-maturity securities	$	18,149	$	134	$	(40	)	$	18,243

The following is a summary of the fair values and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2014, and December 31, 2013:

At September 30, 2014	Less than 12 Months				12 Months or Greater				Total
(In thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Government agency obligations	$	1,999	$	1	$	-	$	-	$	1,999	$	1
U.S. Government agency mortgage-backed securities		16,815		293		1,756		10		18,571		303
Total securities in unrealized loss position	$	18,814	$	294	$	1,756	$	10	$	20,570	$	304

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

The amortized cost and fair value of securities at September 30, 2014 and December 31, 2013, by expected maturity, are set forth below. Actual maturities of mortgage-backed securities and collateralized mortgage obligations may differ from contractual maturities because the mortgages underlying the securities may be prepaid or called with or without call or prepayment penalties. Because these securities are not due at a single maturity date, the maturity information is not presented.

	Available-for-Sale				Held-to-Maturity
At September 30, 2014	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
U.S. Government agency mortgage-backed securities	$	40,385	$	40,902	$	14,364	$	14,528
U.S. Government agency collateralized mortgage obligations		13,146		13,349		-		-
Small Business Administration securitized pool of loans		1,976		2,024		-		-
Mutual fund - fixed income securities		500		508		-		-
Subtotal		56,007		56,783		14,364		14,528
Securities with Fixed Maturities:
Due in one year or less		-		-		-		-
Due after one year through five years		2,961		2,983		-		-
Due after five years through ten years		6,895		1,900		-		-
Due after ten years		11,965		17,297		-		-
Subtotal		21,821		22,180		-		-
Total	$	77,828	$	78,963	$	14,364	$	14,528

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

As of September 30, 2014 and December 31, 2013, securities with an amortized cost of $17.90 million and $19.53 million, respectively, and a fair value of $18.96 million and $19.67 million, respectively, were pledged as collateral to secure municipal deposits and repurchase agreements.

NOTE 4 – LOANS RECEIVABLE

A summary of loans receivable at September 30, 2014 and December 31, 2013 is as follows:

	September 30,		December 31,
(In thousands)	2014		2013

Real estate loans:
One-to-four family	$	179,077	$	186,985
Multi-family and commercial real estate		118,435		123,134
Construction and land development		5,042		5,609
Total real estate loans		302,554		315,728

Commercial business loans		24,825		25,506
Consumer loans:
Home equity		28,220		26,960
Other consumer		8,656		2,321
Total consumer loans		36,876		29,281
Total loans		364,255		370,515

Less:
Allowance for loan losses		6,971		9,891
Deferred loan origination fees, net		35		56
Loans receivable, net	$	357,249	$	360,568

In June 2014, the Company offered for sale $11.4 million principal amount of primarily adversely classified loans (i.e. loans classified substandard or doubtful) in connection with its plan to reduce the level of classified loans. $4.9 million of commercial loans were sold in June 2014 in two separate transactions in which the financial assets transferred satisfied all of the criteria to be accounted for as sales of financial assets. The remaining loans (comprised of $2.9 million in mortgage loans and $3.1 million in commercial loans) were transferred to Loans held for sale at June 30, 2014 and sold in July 2014.

The impact of these two sale transactions and the writedown of the carrying value of these loans held for sale amounted to $247,000 in expenses on the sale of loans and $1.7 million in net charge-offs against the Company’s allowance for loan losses.

Furthermore, these transactions resulted in a $10.2 million reduction in adversely classified loans.

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 September 30, 2013. The commercial real estate loan segment, the second largest grouping of loans after one-to-four family owner occupied loans, was expanded into five segments to increase the granularity of analysis of the risks inherent in the loans in these segments. The expanded commercial loan segments are: investor owned one-to-four family and multi-family properties, industrial and warehouse properties, office buildings, retail properties and special use properties.

The Company’s loan portfolio is segregated as follows:

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

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

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

Industrial and warehouse properties;

Office buildings;

Retail properties; and

Special use properties.

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

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

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

Real Estate Secured Consumer Loans. This portfolio segment includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type are written at a maximum of 75% of the appraised value of the property and we require that we have no lower than a second lien position on the property. These loans are written at a higher interest rate and a shorter term than mortgage loans. The Company has experienced a low level of foreclosure in this type of loan during recent periods. These loans can be affected by economic conditions and the values of the underlying properties.

Other Consumer Loans. This portfolio segment includes loans secured by passbook or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan may entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.

Credit Quality Indicators

The Company’s policies provide for the classification of loans into the following categories: pass (1 - 5), special mention (6), substandard-accruing (7), substandard-nonaccruing (8), doubtful (9), and loss (10). In June 2013, the Company added substandard-accruing as an additional risk grade to further delineate the Bank’s risk profile in the previous substandard category. Consistent with regulatory guidelines, loans that are considered to be of lesser quality are considered adversely classified as substandard, doubtful or loss. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans (or portions of loans) classified as loss are those considered uncollectible. The Company generally charges off loans or portions of loans as soon as they are considered to be uncollectible and of little value. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention. When loans are classified as special mention, substandard or doubtful, management focuses increased monitoring and attention on these loans in assessing the credit risk and specific allowance requirements for these loans.

The following tables are a summary of the loan portfolio credit quality indicators, by loan class, as of September 30, 2014 and December 31, 2013:

	Credit Risk Profile by Internally Assigned Grade:
September 30, 2014	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
(In thousands)
Risk Rating:
Pass	$	175,542	$	107,127	$	3,839	$	21,021	$	36,360	$	343,889
Special Mention		759		9,698		305		2,369		263		13,394
Substandard:
- Accruing		204		953		-		383		41		1,581
- Nonaccruing		2,572		657		898		719		212		5,058
Subtotal - substandard		2,776		1,610		898		1,102		253		6,639
Doubtful		-		-		-		333		-		333
Total	$	179,077	$	118,435	$	5,042	$	24,825	$	36,876	$	364,255

	Multi-Family and Commercial Real Estate
	Credit Risk Profile by Internally Assigned Grade:
September 30, 2014	Investor Owned One-to-Four family and multi- family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi-Family and Commercial Real Estate
(In thousands)
Risk Rating:
Pass	$	19,456	$	24,063	$	20,333	$	17,093	$	26,182	$	107,127
Special Mention		2,043		3,632		1,619		282		2,122		9,698
Substandard:
- Accruing		-		-		457		152		344		953
- Nonaccruing		389		25		205		-		38		657
Subtotal - substandard		389		25		662		152		382		1,610
Doubtful		-		-		-		-		-		-
Total	$	21,888	$	27,720	$	22,614	$	17,527	$	28,686	$	118,435

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

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

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

Delinquencies

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

Loans, including troubled debt restructurings (“TDRs”), are automatically placed on nonaccrual status when payment of principal or interest is more than 90 days delinquent. Loans may also be placed on nonaccrual status if collection of principal or interest in full, or in part, is in doubt or if the loan has been restructured. When loans are placed on nonaccrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan’s payment status is current for a reasonable period of time (usually six consecutive months) to establish a reliable assessment of collectability.

The following tables set forth certain information with respect to our loan portfolio delinquencies, by loan class, as of September 30, 2014 and December 31, 2013:

	Delinquencies
As of September 30, 2014	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total loans		Carrying Amount > 90 Days and Accruing
(In thousands)
Real estate loans
One-to-four family	$	181	$	-	$	2,336	$	2,517	$	176,560	$	179,077	$	-
Construction and land development		-		-		898		898		4,144		5,042		-
Multi-family and commercial real estate:
Investor owned one-to-four family and multi-family		396		-		389		785		21,103		21,888		-
Industrial and Warehouse		2,865		-		-		2,865		24,855		27,720		-
Office buildings		644		-		206		850		21,764		22,614		-
Retail properties		-		-		-		-		17,527		17,527		-
Special use properties		-		-		-		-		28,686		28,686		-
Subtotal Multi-family and commercial real estate		3,905		-		595		4,500		113,935		118,435		-
Commercial business loans		114		47		832		993		23,832		24,825		-
Consumer loans:
Home equity loans		363		111		96		570		27,650		28,220		-
Other consumer loans		3		3		-		6		8,650		8,656		-
Subtotal Consumer		366		114		96		576		36,300		36,876		-
Total	$	4,566	$	161	$	4,757	$	9,484	$	354,771	$	364,255	$	-

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

Impaired loans and nonperforming assets

The following table sets forth certain information with respect to our nonperforming assets as of September 30, 2014 and December 31, 2013:

	September 30,			December 31,
	2014			2013
Nonperforming Assets	(In thousands)
Nonaccrual loans	$	3,748		$	7,953
TDRs nonaccruing		1,643			5,430
Subtotal nonperforming loans		5,391			13,383
Foreclosed real estate		458			1,846
Total nonperforming assets	$	5,849		$	15,229

Total nonperforming loans to total loans		1.48	%		3.61	%

Total nonperforming assets to total assets		1.20	%		3.13	%

Nonperforming loans (defined as nonaccrual loans and nonperforming TDRs) totaled $5.4 million at September 30, 2014 compared to $13.4 million at December 31, 2013, a decrease of $8.0 million. Of the loans sold in June and July 2014, there were $4.7 million in nonaccruing loans. The amount of income that was contractually due but not recognized on nonperforming loans totaled $31,000 and $258,000 for the nine months ended September 30, 2014 and September 30, 2013, respectively.

At September 30, 2014, the Company had 38 loans on nonaccrual status of which 12 were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.

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

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

The following tables summarize impaired loans by portfolio segment as of September 30, 2014 and December 31, 2013:

As of September 30, 2014	Recorded Investment with No Specific Valuation Allowance		Recorded Investment with Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
					(In thousands)
Real estate loans
One-to four-family	$	3,051	$	1,364	$	4,415	$	4,767	$	26
Construction and land development		898		-		898		1,193		-
Multi-family and commercial real estate:
Investor owned one-to-four family and multi-family properties		389		-		389		395		-
Industrial and warehouse properties		25		-		25		29		-
Office buildings		206		-		206		404		-
Retail properties		-		-		-		-		-
Special use properties		37		-		37		51		-
Subtotal		657		-		657		879		-
Commercial business loans		798		435		1,233		1,358		97
Consumer loans		284		230		514		544		8
Total impaired loans	$	5,688	$	2,029	$	7,717	$	8,741	$	131

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

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

The following table relates to interest income recognized by segment of impaired loans for the nine months ended September 30, 2014 and 2013:

	Nine Months Ended September 30,
	2014				2013
	Average Recorded Investments		Interest Income Recognized		Average Recorded Investments		Interest Income Recognized
				(In thousands)
Real estate loans
One-to four-family	$	5,567	$	237	$	6,896	$	144
Construction		1,400		9		3,953		6
Multi-family and commercial real estate		2,109		111		5,529		41
Commercial business loans		1,554		85		556		45
Consumer loans		498		17		696		15
Total	$	11,128	$	459	$	17,630	$	251

Interest payments received on nonaccrual loans are accounted for on the cash-basis method or the cost recovery method until qualifying for return to accrual status. The table above shows the interest income recognized on nonaccrual loans on the cash-basis method. Under the cost recovery method, the interest payment is applied to the principal balance of the loan. For the nine month periods ended September 30, 2014 and 2013, the amount of interest payments applied to principal under the cost recovery method was $37,000 and $266,000, respectively.

Troubled Debt Restructured Loans

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

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

The recorded investment balance of performing and nonperforming TDRs as of September 30, 2014 and December 31, 2013 are as follows:

(In thousands)	As of September 30, 2014		As of December 31, 2013
Aggregate recorded investment of impaired loans performing under terms modified through a troubled debt restructuring:
Performing (1)	$	2,400	$	4,195
Nonperforming (2)		1,466		3,051
Total	$	3,866	$	7,246

(1)

Of the $2,400,000 in TDRs which were performing under the modified terms of their agreements at September 30, 2014, there were $218,000 in TDRs that remain on nonaccrual status because these TDRs have not yet demonstrated the requisite period of sustained performance. The combination of the $218,000 performing TDRs and the $1,425,000 nonperforming TDRs on nonaccrual status at September 30, 2014 equal the $1,643,000 in TDRs that were on nonaccrual status at September 30, 2014.

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

(2)

Of the $1,466,000 in TDRs that were not performing under the modified terms of their agreements at September 30, 2014, all of these loans, except for one loan in the amount of $41,000, were on nonaccrual status.

All of the $3,051,000 in TDRs which were not performing under the modified terms of their agreements at December 31, 2013, were on nonaccrual status.

As illustrated in the table below, during the nine months ended September 30, 2014, the following concessions were made on nine loans totaling $602,000 (measured as a percentage of loan balances on TDRs):

Deferral of principal payments for 72.9% (4 loans for $439,000);

Reduced interest rate for 10.8% (4 loans for $65,000); and

Extension of payment terms for 16.3% (1 loan for $98,000).

The following tables present a breakdown of the type of concessions made by loan class during the nine months ended September 30, 2014 and September 30, 2013:

	For the Nine Months Ended September 30, 2014
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		%
Below market interest rate:
Real estate loans:
One-to-four family		1	$	35	$	35		5.8	%
Commercial business loans		3		30		30		5.0	%
Subtotal		4		65		65		10.8	%

Extended payment terms:
Commercial business loans		1		98		98		16.3	%
Subtotal		1		98		98		16.3	%

Principal payments deferred:
Consumer loans - home equity		1		28		28		4.7	%
Real estate loans:
One-to-four family		3		411		411		68.2	%
Subtotal		4		439		439		72.9	%

Grand Totals		9	$	602	$	602		100.0	%

	For the Nine Months Ended September 30, 2013
(Dollars in thousands)	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		%
Below market interest rate:
Consumer-home equity		1	$	51	$	51		1.7	%

Extended payment terms:
Real estate loans:
One-to-four family		2		343		350		11.6	%
Commercial real estate loans		4		225		271		8.9	%
Commercial business loans		5		1,087		1,097		36.2	%
Subtotals		11		1,655		1,718		56.7	%

Principal payments deferred:
Real estate loans:
One-to-four family		4		1,091		1,091		36.0	%
Commercial real estate loans		1		170		170		5.6	%
Subtotals		5		1,261		1,261		41.6	%

Grand Totals		17	$	2,967	$	3,030		100.0	%

The majority of the Bank’s TDRs are a result of principal payment deferrals to troubled credits which have already been adversely classified. The Bank grants such consessions to reassess the borrower’s financial status and to develop a plan for repayment. These modifications did not have a material effect on the Company.

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

There were no TDRs that had been modified during the previous twelve months ended September 30, 2014 that subsequently defaulted or were charged off during the three months ended September 30, 2014.

Allowance for Loan Losses

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

The allowance for loan losses is established through a provision for loan losses charged to operations. Management periodically reviews the allowance for loan losses in order to identify those known and inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process begins with an individual evaluation of loans that are considered impaired. For these loans, an allowance is established based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or for loans that are considered collateral dependent, the fair value of the collateral.

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

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

The allowance generally consists of specific (or allocated) and general components. The specific component relates to loans that are recognized as impaired. For such impaired loans, an allowance is established when the discounted cash flows (or observable market price or collateral value, if the loan is collateral dependent) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.

The ALLL balance decreased from $9.89 million at December 31, 2013 to $6.97 million at September 30, 2014, a decrease of $2.92 million, or 29.5%. The decrease was primarily the result of chargeoffs of $2.4 million and a $789,000 credit provision for loan losses in the nine months ended September 30, 2014. The decrease in the ALLL was consistent with the improvement in the Bank’s asset quality trends during this nine month period. The Bank’s nonperforming loans decreased $8.0 million, or 60%, for the nine months ended September 30, 2014. The Bank’s adversely classified loans decreased $9.3 million, or 57%, for the nine months ended September 30, 2014, primarily attributable to the more aggressive workout efforts during the nine month period ended September 30, 2014. This improvement in adversely classified loans was a continuation of a trend initiated in mid-year 2013 as well as the sale of $10.2 million in adversely classified loans in June and July 2014.

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

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

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

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

The Company also believes it has significantly improved its risk grades (and its risk grading process) over the past eighteen months during which the new executive management team has been in place at the Bank. The improvement in the Company’s asset quality metrics has been the result of increased workout efforts and the sales of adversely classified loans in June 2013 and in June and July 2014.

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 September 30, 2014, December 31, 2013 and September 30, 2013, 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 Nine Months	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
Ended September 30, 2014
(In thousands)
Allowance for loan losses:
Beginning balance	$	1,849		$	5,097		$	1,118		$	1,443		$	384		$	9,891
Provision for loan losses		326			(205	)		(23	)		(757	)		(130	)		(789	)
Charge-offs		(541	)		(1,306	)		(442	)		(133	)		(13	)		(2,435	)
Recoveries		10			25			44			139			86			304
Balance at September 30, 2014	$	1,644		$	3,611		$	697		$	692		$	327		$	6,971
Allowance related to loans:
Individually evaluated for impairment	$	26		$	-		$	-		$	97		$	8		$	131
Collectively evaluated for impairment		1,618			3,611			697			595			319			6,840
Total allowance	$	1,644		$	3,611		$	697		$	692		$	327		$	6,971

Ending loan balance individually evaluated for impairment	$	4,415		$	657		$	898		$	1,233		$	514		$	7,717
Ending loan balance collectively evaluated for impairment		174,662			117,778			4,144			23,592			36,362			356,538
Total loans	$	179,077		$	118,435		$	5,042		$	24,825		$	36,876		$	364,255

	Multi-Family and Commercial Real Estate
As of and for the Nine Months	Investor one- to-four family and multi-family			Industrial and Warehouse Properties			Office Buildings			Retail Properties			Special Use Properties			Total Multi- Family and Commercial Real Estate
Ended September 30, 2014
(In thousands)
Allowance for loan losses:
Beginning balance	$	515		$	1,034		$	563		$	856		$	2,129		$	5,097
Provision for loan losses		136			(60	)		(187	)		185			(279	)		(205	)
Charge-offs		(166	)		(234	)		-			(491	)		(415	)		(1,306	)
Recoveries		1			5			-			-			19			25
Balance at September 30, 2014	$	486		$	745		$	376		$	550		$	1,454		$	3,611
Allowance related to loans:
Individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated for impairment		486			745			376			550			1,454			3,611
Total allowance	$	486		$	745		$	376		$	550		$	1,454		$	3,611

Ending loan balance individually evaluated for impairment	$	389		$	25		$	206		$	-		$	37		$	657
Ending loan balance collectively evaluated for impairment		21,499			27,695			22,408			17,527			28,649			117,778
Total loans	$	21,888		$	27,720		$	22,614		$	17,527		$	28,686		$	118,435

As of and for the Nine Months	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
Ended September 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		34			4,117			(570	)		526			43			4,150
Charge-offs		(585	)		(4,418	)		(2,147	)		(1,808	)		(55	)		(9,013	)
Recoveries		-			590			102			514			5			1,211
Ending balance	$	1,437		$	5,181		$	1,853		$	1,957		$	420		$	10,848
Allowance related to loans:
Individually evaluated for impairment	$	55		$	155		$	570		$	590		$	16		$	1,386
Collectively evaluated for impairment		1,382			5,026			1,283			1,367			404			9,462
Total allowance	$	1,437		$	5,181		$	1,853		$	1,957		$	420		$	10,848

Ending loan balance individually evaluated for impairment	$	6,823		$	3,230		$	3,923		$	2,810		$	685		$	17,471
Ending loan balance collectively evaluated for impairment		194,929			122,516			5,606			23,792			27,578			374,421
Total loans	$	201,752		$	125,746		$	9,529		$	26,602		$	28,263		$	391,892

	Multi-Family and Commercial Real Estate
As of and for the Nine Months	Investor one- to-four family and multi-family			Industrial and Warehouse Properties		Office Buildings		Retail Properties			Special Use Properties		Total Multi- Family and Commercial Real Estate
Ended September 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 as of June 30, 2013	$	526		$	818	$	421	$	519		$	2,536	$	4,820

Provision for loan losses in third quarter	$	(48	)	$	150	$	33	$	186		$	107	$	428
Chargeoffs in third quarter		-			-		-		(67	)		-		(67	)
Recoveries in third quarter		-			-		-		-			-		-
Segment ending balance as of September 30, 2013	$	478		$	968	$	454	$	638		$	2,643	$	5,181
Allowance related to loans:
Individually evaluated for impairment	$	22		$	6	$	75	$	34		$	18	$	155
Collectively evaluated for impairment		456			962		379		604			2,625		5,026
Total allowance	$	478		$	968	$	454	$	638		$	2,643	$	5,181

Ending loan balance individually evaluated for impairment	$	1,182		$	155	$	350	$	400		$	1,143	$	3,230
Ending loan balance collectively evaluated for impairment		15,232			32,288		21,799		21,324			31,873		122,516
Total loans	$	16,414		$	32,443	$	22,149	$	21,724		$	33,016	$	125,746

As of and for the Year	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
Ended December 31, 2013
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	70	$	23	$	75	$	105	$	10	$	283
Collectively evaluated for impairment		1,779		5,074		1,043		1,338		374		9,608
Total allowance	$	1,849	$	5,097	$	1,118	$	1,443	$	384	$	9,891

Ending loan balance individually evaluated for impairment	$	7,001	$	4,085	$	1,854	$	2,580	$	579	$	16,099
Ending loan balance collectively evaluated for impairment		179,984		119,049		3,755		22,926		28,702		354,416
Total loans	$	186,985	$	123,134	$	5,609	$	25,506	$	29,281	$	370,515

	Multi-Family and Commercial Real Estate
As of and for the Year	Investor one- to-four family and multi-family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi- Family and Commercial Real Estate
Ended December 31, 2013
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	23	$	-	$	23
Collectively evaluated for impairment		515		1,034		563		833		2,129		5,074
Total allowance	$	515	$	1,034	$	563	$	856	$	2,129	$	5,097

Ending loan balance individually evaluated for impairment	$	1,167	$	565	$	206	$	547	$	1,600	$	4,085
Ending loan balance collectively evaluated for impairment		15,205		29,431		21,206		22,973		30,234		119,049
Total loans	$	16,372	$	29,996	$	21,412	$	23,520	$	31,834	$	123,134

The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments. Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examination may require us to make additional provisions for loan losses based on judgments different from ours. The Company also periodically engages an independent consultant to review our credit risk grading process and the risk grades on selected portfolio segments as well as the methodology, analysis and adequacy of the allowance for loan and lease losses.

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

NOTE 5 - MORTGAGE BANKING ACTIVITY

Mortgage banking includes three components: (1) the origination of residential mortgage loans for sale in the secondary market, (2) the servicing of mortgage loans sold to investors, and (3) the sale of mortgage servicing rights. The following represents the Company’s noninterest income derived from these activities:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In thousands)	2014		2013		2014		2013
Gain on sales of mortgage loans	$	170	$	124	$	441	$	852
Gain on sale of mortgage servicing rights		255		-		255		-
Mortgage servicing income		61		88		66		255
Total	$	486	$	212	$	762	$	1,107

The Bank originates government sponsored residential mortgage loans which are sold servicing released. The Bank also originates conventional residential mortgage loans for its portfolio and for sale, both on a servicing rights retained and released basis. The significant increase in the Bank’s mortgage banking income for the three month period ended September 30, 2014 compared to the same period in 2013 is due to the sale of mortgage servicing rights detailed below. The significant decline in the Bank’s mortgage servicing income for the nine month period in 2014 compared with the same period in 2013 was the result of the Bank selling most of their loans on the secondary market on a servicing released basis such that the amortization of the existing mortgage servicing rights significantly exceeded the value of the newly capitalized mortgage servicing rights as shown in the table below.

As of August 29, 2014, the Company sold its mortgage servicing rights with a book value of approximately $948,000 relating to loans previously sold to and serviced for Federal Home Loan Mortgage Company (“Freddie Mac”) of approximately $134.8 million to another financial institution. This transaction closed on September 18, 2014 with a servicing transfer date of October 16, 2014 and satisfied all of the criteria to be accounted for as a sale of financial assets as of September 30, 2014. Other than acting as interim subservicer between the sale date and the servicing transfer date, the Company does not have any continuing involvement with these financial assets. The Company will have potential repurchase exposure on these underlying mortgage loans based on investor demands related to facts and circumstances which may have pre-dated this transaction. After considering an estimated repurchase liability of $77,000 for any payoffs within the 90 day period subsequent to August 29, 2014, the gain on sale of mortgage servicing rights amounted to $255,000 as shown in the table above.

The balance of mortgage-servicing rights, included in other assets, and the changes therein for the three and nine months ended September 30, 2014 and 2013 were as follows:

	For the Three Months ended September 30,						For the Nine Months ended September 30,
(In thousands)	2014			2013			2014			2013
Beginning balance	$	912		$	1,169		$	1,093		$	1,039
Servicing rights capitalized		36			69			36			341
Amortization of servicing rights		-			(83	)		(195	)		(279	)
Periodic impairment		-			(33	)		14			21
Servicing rights sale		(948	)		-			(948	)		-
Balance at the end of the period	$	-		$	1,122		$	-		$	1,122

NOTE 6 – FORECLOSED REAL ESTATE

Changes in foreclosed real estate during the three and nine months ended September 30, 2014 and September 30, 2013 are as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(In thousands)	2014			2013			2014			2013
Beginning balance	$	536		$	234		$	1,846		$	735
Additions		-			707			391			954
Proceeds from dispositions		(77	)		(51	)		(1,681	)		(674	)
Gain (loss) on sales		(1	)		(3	)		(60	)		(68	)
Writedowns		-			-			(38	)		(60	)
Balance at end of period	$	458		$	887		$	458		$	887

At September 30, 2014, the Bank held four properties consisting of three single family residences and one unimproved parcel zoned as residential.

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

NOTE 7 – DEPOSITS

A summary of deposits at September 30, 2014 and December 31, 2013 consisted of the following:

	September 30, 2014					December 31, 2013
(In thousands)	Amount		Percent			Amount		Percent
Noninterest bearing demand deposits	$	69,028		18.3	%	$	69,147		17.7	%
Interest bearing deposits
Now accounts and money market accounts		51,125		13.6	%		49,514		12.7	%
Savings accounts		109,617		29.1	%		117,004		29.9	%
Certificates of deposit		147,141		39.0	%		155,182		39.7	%
Total interest bearing deposits		307,883		81.7	%		321,700		82.3	%
Total deposits	$	376,911		100.0	%	$	390,847		100.0	%

Scheduled maturities of certificates of deposit are as follows:

(In thousands)	At September 30, 2014		At December 31, 2013
Through twelve months	$	59,366	$	74,268
Twelve months through three years		74,818		50,858
Over three years		12,957		30,056
	$	147,141	$	155,182

The aggregate amount of individual certificate of deposit accounts of $100,000 or more at September 30, 2014 and December 31, 2013 was $60.9 million and $62.5 million, respectively. Deposits up to $250,000 are federally insured through the Federal Deposit Insurance Corporation (“FDIC”). The aggregate amount of individual certificate of deposit accounts of $250,000 or more at September 30, 2014 and December 31, 2013 was $13.7 million and $11.5 million, respectively.

NOTE 8 – FHLB ADVANCES

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). At September 30, 2014, the Bank had the ability to borrow from the FHLB based on a certain percentage of the value of the Bank’s qualified collateral, as defined in the FHLB Statement of Products Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

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

	At September 30, 2014					At December 31, 2013
			Weighted					Weighted
	Amount		Average			Amount		Average
(Dollars in thousands)	Due		Cost			Due		Cost
Year of maturity: (1)
2014	$	2,882		1.45	%	$	1,377		2.64	%
2015		5,528		0.67	%		1,500		0.80	%
2016		13,717		0.85	%		2,800		0.90	%
2017 - 2021		23,248		2.23	%		18,368		2.56	%
2022 - 2026		590		0.27	%		638		0.27	%
2027 - 2029		591		-			610		-

Total FHLB advances	$	46,556		1.54	%	$	25,293		2.16	%

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

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

NOTE 9 – OTHER BORROWED FUNDS

The Bank utilized securities sold under agreements to repurchase to accommodate its customers’ needs to invest funds short term and as a source of borrowings. The Bank eliminated the repurchase agreement product type in July 2014. This option is no longer available to our customers.

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

	At or for the year to date period ended
(Dollars in thousands)	September 30, 2014			December 31, 2013

Maximum amount of advances outstanding during the period	$	8,355		$	21,256

Average advances outstanding during the period	$	5,686		$	10,866

Weighted average interest rate during the period		0.01	%		0.24	%

Balance outstanding at end of period	$	-		$	4,173

Weighted average interest rate at end of period		0.00	%		0.01	%

The Bank maintains a credit facility with the Federal Reserve Bank of Boston for which certain assets are pledged to secure such borrowings. As of September 30, 2014 and December 31, 2013, there were no borrowings outstanding under this facility. In addition, the Federal Reserve Bank of Boston, as one of the Bank’s correspondent banks, requires the Bank to pledge at least $1 million in loans and/or investment securities for potential daylight overdraft exposure. At September 30, 2014 and December 31, 2013, the Bank had $7.5 million and $3.4 million, respectively, in commercial real estate loans pledged with the Federal Reserve Bank of Boston.

At September 30, 2014, the Bank had reserve requirements with the Federal Reserve Bank of Boston amounting to $3.4 million. In addition to the Bank’s $2.4 million in vault cash, the use of $1.0 million in balances held at the Federal Reserve Bank of Boston was restricted to meet these reserve requirements.

NOTE 10 – STOCKHOLDERS’ EQUITY

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed in a manner similar to basic net income (loss) per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Company’s common stock equivalents relate solely to stock option and restricted stock awards. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. For the three and nine months ended September 30, 2014, anti-dilutive options excluded from the calculations totaled 97,163 options (with an exercise price of $11.12 per share), and 3,392 options (with an exercise price of $12.51 per share). For the three and nine months ended September 30, 2013, anti-dilutive options excluded from the calculations totaled 229,764 options (with an exercise price of $11.12 per share) and 4,290 options (with an exercise price of $12.51 per share), respectively. 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					Nine Months Ended
	September 30,					September 30,
	2014		2013			2014		2013
(in thousands except for per share data)
Net income (loss)	$	1,056	$	(1,031	)	$	341	$	(6,421	)

Weighted-average common shares outstanding:
Basic		6,675,457		6,643,093			6,675,457		6,643,093
Diluted		6,680,475		6,643,093			6,677,441		6,643,093

Earnings loss per common share:
Basic	$	0.16	$	(0.16	)	$	0.05	$	(0.97	)
Diluted	$	0.16	$	(0.16	)	$	0.05	$	(0.97	)

Dividends

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

NOTE 11 – STOCK BASED COMPENSATION

Both stock options and restricted stock awards vest at 20% per year beginning on the first anniversary of the date of grant. The Company records stock-based compensation expense related to outstanding stock options and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. Stock options expire ten years after the date of the grant.

Stock option awards have been granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock options and restricted stock awards are considered common stock equivalents for the purpose of computing earnings per share on a diluted basis.

A summary of the status of outstanding stock options at September 30, 2014 and changes therein was as follows:

	2014
	Number of Shares			Weighted Average Exercise Price
Options outstanding at the beginning of year		119,786		$	11.18
Granted		110,000			7.74
Forfeited		(19,231	)		11.17
Exercised		-			-
Expired		-			-
Options outstanding at September 30, 2014		210,555		$	9.38

Options exercisable at September 30, 2014		100,555		$	11.17

Weighted-average fair value of options granted during the year				$	2.55

The exercise price and weighted average remaining contractual life in years for all options outstanding at September 30, 2014 are detailed below.

Outstanding as of September 30, 2014		Exercise Price		Weighted Average Remaining Contractual Life (in years)
	97,163	$	11.12		0.8
	3,392	$	12.51		1.5
	110,000	$	7.74		9.7
	210,555

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award.

In determining the expected volatility of the options, the Company utilized the historical volatility of other similar companies during a period of time equal to the expected life of the options because the Company’s common shares have been publicly traded for a period less than the expected life of the options.

The Company assumed no dividend payments would be made during the expected contractual term of the option period.

The Company determined the expected contractual term of the options to be 6.5 years using the simplified method under SEC’s Staff Accounting Bulletin No. 110 due to the Company not having sufficient historical data to provide a reasonable basis for estimation.

The risk-free rate utilized for this calculation was based upon the U.S. Treasury yield curve in effect at the date of the options grant.

Assumptions used to determine the weighted average fair value of the stock options granted were as follows:

	Grant Date
	May 27, 2014
Dividend yield		0.00	%
Expected volatility		28.42	%
Risk-free rate		1.95	%
Expected life in years		6.5

Weighted-average fair value of options at grant date	$	2.55

The Company recorded stock-based compensation expense of $16,716 and $18,700 for the three and nine months ended September 30, 2014. At September 30, 2014 the Company has unrecognized option expense of $261,800 to be recognized over the remaining vesting period of the options.

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

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

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

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

Financial instruments whose contractual amounts represent credit risk at September 30, 2014 and December 31, 2013 were as follows:

	September 30,		December 31,
(In thousands)	2014		2013
Commitments to extend credit:
Commercial real estate loan commitments	$	17,682	$	12,572
Unused home equity lines of credit		18,441		19,169
Commercial and industrial loan commitments		12,272		10,153
Amounts due on other commitments		6,810		6,618
Commercial letters of credit		1,057		1,371

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

NOTE 13 – FAIR VALUE

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

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

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

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

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

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

Mortgage servicing assets—The fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The Company does not record these assets at fair value on a recurring basis. Servicing assets are classified as Level 2 within the fair value hierarchy. These assets were sold during the third quarter of 2014 and are not included on the Company’s balance sheet as of September 30, 2014.

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

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

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

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

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

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

The following is a summary of the carrying values and estimated fair values of the Company’s significant financial instruments as of September 30, 2014 and December 31, 2013:

		September 30, 2014				December 31, 2013
	Fair Value	Carrying		Fair		Carrying		Fair
(In thousands)	Hierarchy Level	Value		Value		Value		Value

Financial Assets
Cash and cash equivalents	Level 1	$	9,287	$	9,287	$	26,374	$	26,374
Investment securities, available-for-sale:
Mutual fund -fixed income securities	Level 1		508		508		499		499
Other	Level 2		78,455		78,455		49,272		49,272
Investment securities, held-to-maturity	Level 2		14,364		14,528		18,149		18,243
Loans held for sale	Level 2		835		835		1,079		1,079
Loans receivable, net:
Performing	Level 2		349,532		352,333		344,469		347,496
Impaired	Level 3		7,717		7,586		16,099		15,816
Accrued interest receivable	Level 1		1,598		1,598		1,494		1,494
Mortgage servicing assets	Level 3		-		-		1,093		1,598
FHLB Stock	Level 3		4,548		4,548		5,444		5,444
Financial Liabilities
Demand deposits, savings, Now and money market deposits	Level 1		229,770		229,770		235,665		235,665
Time deposits	Level 2		147,141		149,874		155,182		157,591
FHLB advances	Level 2		46,556		47,147		25,293		25,942
Borrowed funds	Level 2		-		-		4,173		4,173
Mortgagors' escrow accounts	Level 2		2,379		2,379		4,392		4,392
Accrued interest payable	Level 1		67		67		51		51

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

The estimated fair value amounts as of September 30, 2014 and December 31, 2013 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at such dates.

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

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

Unrecognized financial instruments—Loan commitments on which the committed interest rate is less than the current market rate were insignificant at September 30, 2014 and December 31, 2013.

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

	Fair Value At September 30, 2014
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a recurring basis:
Available-for-sale investment securities:
U.S. Government and agency obligations	$	-	$	16,643	$	-	$	16,643
U.S. Government agency mortgage-backed obligations		-		40,902		-		40,902
U.S. Government agency collateralized mortgage obligations		-		13,349		-		13,349
Small Business Administration securitized pool of loans		-		2,024		-		2,024
Obligations of state and municipal subdivisions		-		5,537		-		5,537
Mutual fund - fixed income securities		508		-		-		508
Total	$	508	$	78,455	$	-	$	78,963

	Fair Value At December 31, 2013
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a recurring basis:
Available-for-sale investment securities:
U.S. Government and agency obligations	$	-	$	16,506	$	-	$	16,506
U.S. Government agency mortgage-backed obligations		-		22,869		-		22,869
U.S. Government agency collateralized mortgage obligations		-		3,738		-		3,738
Private label collateralized mortgage obligations		-		266		-		266
Auction-rate trust preferred securities		-		5,893		-		5,893
Mutual fund - fixed income securities		499		-		-		499
Total	$	499	$	49,272	$	-	$	49,771

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

	Fair Value At September 30, 2014
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a non-recurring basis:
Impaired loans	$	-	$	-	$	7,586	$	7,586
Foreclosed real estate		-		-		458		458

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

During the nine months ended September 30, 2014, the following fair values of those reflected in the above table were remeasured:

$2.55 million in collateral dependent impaired loans; and

$302,000 in foreclosed real estate.

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 nine months ended September 30, 2014 and 2013 together with the audited financial statements as of and for the year ended December 31, 2013, included in the Company’s Form 10-K initially filed with the Securities and Exchange Commission on March 31, 2014.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the size, quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, and changes in relevant accounting principles and guidelines. Additional factors are discussed under “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

As of September 30, 2014, the Company had $489.1 million of total assets, $364.3 million of gross loans receivable, and $376.9 million of total deposits. Total stockholders’ equity at September 30, 2014 was $59.4 million.

The Company had net income for the quarter ended September 30, 2014 of $1.1 million (or basic and diluted income per share of $0.16) as compared to a net loss of $1.0 million (or basic and diluted loss per share of $0.16) for the third quarter of 2013. The improvement in the Company’s operating results was largely attributable to a gain on the sale of investments of $1.0 million for the three months ended September 30, 2014 compared to zero for the same period in 2013; a credit provision for loan losses of $50,000 for the three months ended September 30, 2014 compared to the provision for loan losses of $300,000 for the same period in 2013 for a net change of $350,000; and a gain on the sale of mortgage servicing rights of $255,000 in the quarter ended September 30, 2014.

The Company had net income for the nine months ended September 30, 2014 of $341,000 (or basic and diluted income per share of $0.05) as compared to a net loss of $6.4 million (or basic and diluted loss per share of $0.97) for the nine months ended September 30, 2013. The improvement in the Company’s earnings was largely attributable to a $1.2 million increase from the sales of investment securities, a decrease of $4.9 million in the provision for loan losses and lower noninterest expenses of $886,000.

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

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

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

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

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement 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, 2013 included in the Company’s Annual Report on Form 10-K.

Results of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

Earnings Summary. For the three months ended September 30, 2014, the Company recorded net income of $1.1 million compared to a net loss of $1.0 million for the same period in 2013. This improvement in the Company’s operating results was the result of a decrease in the provision for loan losses from $300,000 for the three months ended September 30, 2013 to a credit of $50,000 for the September 2014 period as well as an increase in net interest income of $256,000, an increase in noninterest income of $1.4 million (including the gain on sale of investments of $1.0 million) and a decrease in noninterest expenses of $121,000.

Average Balance and Yields. The following table summarizes average balances and average yields and costs for the three months ended September 30, 2014 and 2013. For the purpose of this table, average balances have been calculated using the average daily balances and nonaccrual loans are included in average balances.

	For the Quarter Ended September 30,
	2014							2013
			Interest		Annualized					Interest		Annualized
	Average		Earned/		Average			Average		Earned/		Average
	Balance		Paid		Yield/Rate			Balance		Paid		Yield/Rate
Interest-earning assets	(Dollars in thousands)
Loans	$	369,058	$	4,141		4.45	%	$	396,412	$	4,416		4.42	%
Investment securities and Fed Funds sold		95,734		733		3.04			42,371		242		2.27
Overnight Funds		9,075		5		0.22			27,047		20		0.29
Federal Home Loan Bank stock		4,764		20		1.67			5,444		5		0.36
Total interest-earning assets		478,631		4,899		4.06	%		471,274		4,683		3.94	%
Non interest-earning assets		23,550							28,768
Total Assets	$	502,181						$	500,042
Interest-bearing liabilities
Certificate accounts	$	149,343		507		1.35	%	$	157,564	$	535		1.35	%
Regular savings accounts and escrow		114,505		47		0.16			120,610		68		0.22
Checking and NOW accounts		96,439		33		0.14			86,839		33		0.15
Money market accounts		24,429		10		0.16			27,601		16		0.23
Total interest-bearing deposits		384,716		597		0.62			392,614		652		0.66
FHLB advances		52,260		188		1.43			29,104		171		2.33
Other borrowings		1,556		-		0.00			12,188		2		0.07
Total interest-bearing liabilities		438,532		785		0.71	%		433,906		825		0.75	%
Non interest-bearing liabilities		4,046							5,095
Total Liabilities		442,578							439,001
Total Stockholders' Equity		59,603							61,041
Total Liabilities and Stockholders' Equity	$	502,181						$	500,042
Net interest income			$	4,114						$	3,858
Net interest spread						3.35	%						3.19	%
Net interest margin						3.41	%						3.25	%
Average interest earning assets to average interest bearing liabilities						109.14	%						108.61	%

The following table summarizes average balances and average yields and costs for the nine months ended September 30, 2014 and 2013. For the purpose of this table, average balances have been calculated using the average daily balances and nonaccrual loans are included in average balances.

	For the Nine Months Ended September 30,
	2014							2013
			Interest		Annualized					Interest		Annualized
	Average		Earned/		Average			Average		Earned/		Average
	Balance		Paid		Yield/Rate			Balance		Paid		Yield/Rate
Interest-earning assets	(Dollars in thousands)
Loans	$	372,213	$	12,552		4.51	%		418,449	$	14,488		4.63	%
Investment securities and Fed Funds sold		95,507		2,202		3.08			45,629		818		2.40
Overnight Funds		7,173		14		0.26			23,102		45		0.26
Federal Home Loan Bank stock		5,163		60		1.55			5,595		16		0.38
Total interest-earning assets		480,056		14,828		4.13	%		492,775		15,367		4.17	%
Non interest-earning assets		22,128							23,084
Total Assets	$	502,184							515,859
Interest-bearing liabilities
Certificate accounts	$	151,902		1,520		1.34	%		165,563	$	1,830		1.48	%
Regular savings accounts & escrow		116,896		143		0.16			120,613		227		0.25
Checking and NOW acounts		94,007		104		0.15			84,908		82		0.13
Money Market accounts		24,948		32		0.17			26,964		51		0.25
Total interest-bearing deposits		387,753		1,799		0.62			398,048		2,190		0.74
FHLB advances		47,394		530		1.50			35,725		689		2.58
Other borrowings		4,523		-		0.00			12,763		27		0.28
Total interest-bearing liabilities		439,670		2,329		0.71	%		446,536		2,906		0.87	%
Non interest-bearing liabilities		3,899							4,507
Total Liabilities		443,569							451,043
Total Stockholders' Equity		58,615							64,816
Total Liabilities and Stockholders' Equity	$	502,184							515,859
Net interest income			$	12,499						$	12,461
Net interest spread						3.42	%						3.30	%
Net interest margin						3.48	%						3.38	%
Average interest earning assets to average interest bearing liabilities						109.19	%						110.36	%

Rate / Volume Analysis. The following table summarizes the changes in the components of net interest income attributable to both rate and volume for the three and nine months ended September 30, 2014 and 2013:

	For the Quarter Ended									Nine Months Ended
	September 30, 2014 compared to									September 30, 2014 compared to
	September 30, 2013									September 30, 2013
	Increase (Decrease)									Increase (Decrease)
	Due to									Due to
(In thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans	$	(305	)	$	30		$	(275	)	$	(1,568	)	$	(368	)	$	(1,936	)
Investment securities / Federal funds Sold		387			104			491			1,099			285			1,384
Overnight funds		(11	)		(4	)		(15	)		(31	)		-			(31	)
Federal Home Loan Bank stock		(1	)		16			15			(1	)		45			44
Total interest income		70			146			216			(501	)		(38	)		(539	)
Interest expense:
Certificate accounts		(28	)		-			(28	)		(144	)		(166	)		(310	)
Regular savings accounts		(3	)		(18	)		(21	)		(7	)		(77	)		(84	)
Checking and NOW accounts		4			(4	)		-			9			13			22
Money market accounts		(2	)		(4	)		(6	)		(4	)		(15	)		(19	)
Total deposit expense		(29	)		(26	)		(55	)		(146	)		(245	)		(391	)
FHLBB advances		122			(105	)		17			183			(342	)		(159	)
Other borrowings		(1	)		(1	)		(2	)		(10	)		(17	)		(27	)
Total interest expense		92			(132	)		(40	)		27			(604	)		(577	)
Increase (decrease) in net interest income	$	(22	)	$	278		$	256		$	(528	)	$	566		$	38

Net Interest Income. Net interest income for the quarter ended September 30, 2014 was $4.1 million, an increase of $256,000, or 6.6%, compared to $3.9 million for the quarter ended September 30, 2013. Interest income on earning assets for the quarter ended September 30, 2014 increased by $216,000, or 4.6%, compared to the comparable prior year period. This increase in interest income was the net result of a $506,000, or 204.9%, increase in interest income on investments and FHLB stock which was partially offset by a $290,000, or 6.5% decrease in interest income on loans and overnight funds. The $275,000, or 6.2%, decrease in interest on loans is due to a $27.4 million decrease in the average balance of loans outstanding during the 2014 period compared to the 2013 period. In addition to the $11 million in loans sold in June and July 2014, the Company experienced more loan payoffs than new loan originations during the third quarter of 2014. For the quarter ended September 30, 2014, average interest earning assets increased $7.4 million, or 1.6%, primarily the result of a $53.4 million increase in the average balance of investment securities offsetting the $27.4 million decrease in the average loan balances and the $18.7 million decrease in the average balance of overnight funds and FHLB Stock. The aforementioned $53.4 million increase in the average balance of investment securities was one component of management’s plan to enhance interest income on earning assets during 2014 while awaiting future loan portfolio growth through increased loan origination. During the nine months ended September 30, 2014, the Company purchased approximately $72.1 million in investment securities to grow its interest income on earning assets. In accordance with their plan, management sold approximately $23 million in these investment securities during the quarter and took advantage of market opportunities to sell some higher yielding, longer duration investment securities as the Company’s loan pipeline increased significantly near quarter-end. The weighted average yield for interest earning assets increased by 12 basis points to 4.06% for the quarter ended September 30, 2014 as compared to 3.94% for the same period in 2013 as a result of the purchase of higher yielding, longer duration investment securities early in 2014, and again in mid 2014, to temporarily improve earnings by deploying low yielding overnight funds and proceeds from the June and July 2014 loan sales.

Interest expense for the quarter ended September 30, 2014 decreased by $40,000 compared to the same period in 2013. This variance was principally attributable to a four basis point decline in the average cost of interest bearing liabilities to 0.71% for the 2014 quarter as compared to 0.75% for the same period in 2013. There was a $4.6 million increase in average interest bearing liability balances, representing a $12.5 million shift in the funding mix from deposits to borrowings from the 2013 quarter to the 2014 quarter. The decrease in average balance of interest bearing deposits was caused by a greater movement out of time deposits, savings accounts and money market accounts partially offset by an increase in lower cost transaction accounts, allowing the Bank to lower its cost of interest bearing deposits. Furthermore, utilizing a mix of intermediate term FHLB advances, management took advantage of declining market interest rates in 2014 and added some longer duration borrowings at favorable pricing.

Net interest income for the 2014 quarter was $256,000 higher than the 2013 quarter, resulting in a year-over year increase in the Company’s net interest spread and net interest margin of 16 basis points (from 3.19% to 3.35%) and 16 basis points (from 3.25% to 3.41%), respectively. The overall increase in net interest income was primarily due to rate related changes in the Company’s earning assets, partially offset by the impact of asset mix changes.

Interest income for the nine months ended September 30, 2014 decreased $539,000, or 3.5%, due to a decrease in both volume and rate. For the nine months ended September 30, 2014 and 2013, average interest earning assets decreased $12.3 million, or 2.5%, representing a deployment of funds from declining loan balances into investment securities, which continued to a lesser extent into the third quarter of 2014. The continued decline in market interest rates and the change in asset mix primarily from loans and overnight funds into investment securities caused the weighted average yield for interest earning assets to decrease by four basis points to 4.13% for the nine months ended September 30, 2014 as compared to 4.17% for the same period in 2013.

Interest expense for the nine months ended September 30, 2014 decreased $577,000, or 19.9%, compared to the 2013 comparable period. The factors influencing this category year-over-year in terms of rate/volume variances for the three month periods discussed above had a similar impact for the nine month period comparisons; however, the magnitude of impact of these factors was due to their relative timing. During the nine months ended September 30, 2014, average interest bearing liabilities decreased $6.9 million, or 1.5%, compared to the same period in 2013, reflecting customer movement out of time deposits and into low costing transaction accounts and other market alternatives during this period of declining market interest rates. As stated above, management took advantage of this rate scenario to increase the Bank’s FHLB advances through a mix of intermediate term borrowings at long run favorable pricing. These changes caused the weighted cost of interest bearing liabilities to decrease by 16 basis points to 0.71% for the nine months ended September 30, 2014 as compared to 0.87% for the same period in 2013.

As net interest income for the first nine months of 2014 increased $38,000 compared with the first nine months of 2013, the Company’s net interest spread and net interest margin increased year-over-year by 12 basis points (from 3.30% to 3.42%) and by 10 basis points (from 3.38% to 3.48%), respectively. This overall increase in net interest income was favorably influenced by the reduction in the Company’s cost of funds which was moderated by the impact of asset mix changes.

Provision for Loan Losses. For the three months ended September 30, 2014, the Company recorded a credit provision for loan losses of $50,000, compared to a $300,000 provision for loan losses for the same period in 2013. Net charge-offs were $276,000 and $2.1 million, respectively, during the three and nine month periods ended September 30, 2014, compared to $198,000 and $7.8 million during the same periods in 2013. The credit provision for the 2014 period was attributable to management’s judgment that the inherent credit risk exposure in the loan portfolio has been significantly reduced due to increased loan workout efforts, including the sale of $10.2 million in adversely classified loans in the secondary market in June and July 2014, which resulted in significant improvement in the Company’s asset quality metrics.

Noninterest Income. The following table summarizes the components of noninterest income for the three and nine months ended September 30, 2014 and 2013:

	Three Months				Nine months
	Ended September 30,				Ended September 30,
(In thousands)	2014		2013		2014		2013

Service charge income	$	186	$	195	$	535	$	555
Fees for other services		186		139		419		429
Mortgage banking income		486		212		762		1,107
Income from bank owned life insurance		66		71		195		211
Net gain (loss) on sale of investments		1,034		-		1,227		(4	)
Income from investment advisory services, net		79		68		246		207
Other income		33		25		96		76
Total noninterest income	$	2,070	$	710	$	3,480	$	2,581

Noninterest income increased $1.36 million, or 191.5%, for the quarter ended September 30, 2014 compared to the same period in 2013. The largest quarter-over-quarter changes were in gains on sale of investments which increased by $1.0 million, or 100%, and in mortgage banking income which increased by $274,000, or 129.3%. For the nine months ended September 30, 2014 compared to the same period in 2013, this category increased $899,000, or 34.8%. The largest year-over-year changes were in gains on sale of investments which increased by $1.2 million, or 100%, and in mortgage banking income which decreased by $345,000, or 31.2%.

The most dominant component of noninterest income in year-to-date 2014 was the gains on sales of investment securities. Management purchased approximately $30 million in U. S. Government agency obligations in early first quarter of 2014 with the objective of enhancing interest income on earning assets. As management increased its focus on business development and the growth of the Company’s loan pipeline grew significantly, management sold approximately $23 million of these investment securities in the third quarter of 2014 and generated $1.0 million in gains during the third quarter of 2014.

Mortgage banking income increased $274,000, or 129%, for the three months ended September 30, 2014 compared to the same period in 2013, primarily due to the $255,000 gain on sale of mortgage servicing rights during the third quarter of 2014. The remainder of the increase was attributable to a $46,000 increase in gain on sales of mortgage loans based on higher origination and sale of residential mortgage loans during the 2014 period.

For the nine months ended September 30, 2014, mortgage banking income decreased $345,000 compared to the same period in 2013. Exclusive of the aforementioned gain on sale of mortgage servicing rights, the year-over-year decrease of $600,000 was primarily due to a $411,000 decrease in gain on sales of mortgage loans which resulted from a lower volume of residential mortgage loans originated and sold in 2014 compared with the more heavily refinance oriented volume in the first and second quarters of 2013.

Fees for other services increased $47,000 for the three months ended September 30, 2014 compared with the same period in 2013 due to a $69,000 increase in loan prepayment penalties received during the 2014 period which was partially offset by $20,000 less in reverse mortgage fees during the 2014 period. For the nine months ended September 30, 2014, this category experienced a $10,000 decrease compared to the 2013 period due to a $19,000 increase in loan prepayment penalties received during the 2014 period which was more than offset by a net aggregate reduction in the volume of fees for other services.

The variances in investment advisory services income were primarily related to transaction volume and transaction mix as commissions on insurance products are significantly higher than brokerage commissions on other products such as mutual funds.

The decreases in service charge income were primarily transaction volume related, such as a lower volume of overdraft transactions due to the Bank more aggressively monitoring and controlling such activity.

The decrease in income from bank owned life insurance was attributable to a lower crediting rate on certain policies during the past year as the insurance carriers have reacted to the continuation of low market interest rates and the effect on their investment portfolio yields.

The increases in other income for the three month and nine month periods ended September 30, 2014 compared to 2013 were attributable to increases in rental income of $9,000 and $27,000, respectively.

Noninterest Expense. The following table summarizes the components of noninterest expense for the three and nine months ended September 30, 2014 and 2013:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(In thousands)	2014		2013		2014		2013
Compensation, taxes and benefits	$	2,879	$	3,046	$	8,868	$	8,620
Occupancy		568		466		1,692		1,413
Professional fees		420		312		1,263		1,608
FDIC insurance premiums		88		227		619		682
Insurance		175		149		436		430
Computer processing		343		335		1,039		966
Expenses on foreclosed real estate, net		63		96		441		655
Writedowns on foreclosed real estate		-		-		38		60
Directors' compensation		54		64		226		275
Advertising		101		115		314		310
Supplies		68		61		197		170
Expenses related to sale of loans		51		11		247		776
Other expenses		368		417		1,047		1,348
Total	$	5,178	$	5,299	$	16,427	$	17,313

Noninterest expense decreased $121,000, or 2.3%, and $886,000, or 5.1%, for the three and nine months ended September 30, 2014 compared to the same periods in 2013. The year-over-year quarterly decrease of $121,000 was primarily due to decreases in: expenses related to compensation, taxes and benefits of $167,000, or 5.5%, and FDIC insurance premiums of $139,000, or 61.2%, over the same period in 2013. These decreases were partially offset by increases in: occupancy expenses of $102,000, or 21.9%, and professional fees of $108,000, or 34.6%. The decrease in compensation, taxes and benefits was primarily due to a lower level of mortgage commissions during 2014, the elimination of temporary employment expenses in 2014 and a decrease in group insurance expense as a result of the curtailment of post-retirement benefits in early 2014. The reduction in the FDIC deposit insurance premiums was attributable to an improvement in premium rates assessed for the Bank. The increase in occupancy expenses for third quarter of 2014 related to increases in rental expense on leased premises, in property taxes and for depreciation on fixed assets, including software amortization.

For the comparable nine month periods, the $886,000 decrease in noninterest expense was primarily due to the $529,000, or 68.2%, decrease in expenses related to loan sales, decrease in professional fees of $345,000, or 21.5%, and decreases in expenses on foreclosed real estate of $214,000, or 32.7%. These decreases were partially offset by increases in compensation, taxes and benefits of $248,000, or 2.9%, and in occupancy expenses of $279,000, or 19.7%

The $529,000 decrease in expenses related to loan sales was primarily attributable to higher transaction costs, such as delinquent property taxes, in the June 2013 loan sales compared to the 2014 loan sales. Professional fees were lower in 2014 due to a decline in expenses paid to loan review firms, outside attorneys and advisors and a decreased use of consultants utilized to staff previously vacant positions. Expenses on foreclosed real estate decreased due to an overall reduced holding period attributable to an increase in the sales of properties, resulting in lower property taxes and decreases in other costs of acquiring and maintaining foreclosed real estate. The increase in occupancy expenses was due to increased cost of utilities and repairs and maintenance related to the harsh winter and an increase in property taxes. The increases in compensation were attributable to: (i) the increased cost of replacing existing management, outsourced finance positions and other key staff with more experienced and skilled personnel; and (ii) increases in employee benefits and payroll taxes. Some of the increases in compensation were partially offset by a lower level of mortgage commissions during 2014 compared to 2013.

Income Tax Expense (Benefit). The Company has reported no tax provision for its pre-tax operating income for the quarter and year-to-date periods ended September 30, 2014. At September 30, 2014, there was a 100% valuation allowance on the deferred tax asset. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than not that some or all of the deferred tax assets will not be realized.

The valuation allowance was established during the year ended December 31, 2012, at which time the Company had $5.3 million in net deferred tax assets related to the provision for loan losses and current year operating losses. Management concluded that it was more likely-than-not that the Company would not be able to realize its deferred tax assets and accordingly has established a 100% valuation allowance equal to the net deferred tax asset balance at September 30, 2014. If, in the future, the Company generates taxable income on a sustained basis sufficient to support the deferred tax assets, management’s conclusion regarding the need for a deferred tax valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation at that time.

Management regularly analyzes the Company’s tax positions and at September 30, 2014, does not believe that the Company has taken any tax positions where future deductibility is not certain. As of September 30, 2014, the Company is subject to unexpired statutes of limitation for examination of its tax returns for U.S. federal and Connecticut income taxes for the years 2010-2012.

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

Overview

Total assets were $489.1 million as of September 30, 2014, an increase of $2.3 million or 0.5%, from $486.8 million as of December 31, 2013. Loans receivable, gross of $364.3 million decreased by $6.3 million, or 1.7%, and investment securities increased by $25.4 million, or 37.4%, partially offset by a decrease in cash and cash equivalents of $17.1 million, or 64.8%. The loan portfolio decreased during the period by type as follows: real estate loans decreased by $13.2 million, or 4.2%; and commercial business loans decreased by $681,000, or 2.7%. These decreases were offset by an increase in consumer loans (mostly purchased indirect auto loans) of $7.6 million, or 25.9%. The net decrease in the loan portfolio was primarily due to the $10.4 million reduction from the loan sales in June 2014 and loans transferred to held for sale at June 30, 2014, which were sold in July 2014, contractual amortization, repayments, and charge offs, partially offset by new loan production.

Total liabilities were $429.7 million at September 30, 2014 compared to $428.5 million at December 31, 2013. Deposits decreased $13.9 million, or 3.6%, to $376.9 million at September 30, 2014 from $390.8 million at December 31, 2013. Between December 31, 2013 and September 30, 2014, core deposits (defined as all deposits other than certificates of deposit) of $229.8 million decreased $5.9 million in concert with a decrease of $8.0 million in certificates of deposit. Management attributes the slight decrease in deposits primarily to the seasonal needs of depositors. Advances from the FHLB increased by $21.3 million, from $25.3 million at December 31, 2013 to $46.6 million at September 30, 2014, primarily to fund the purchases of investment securities. Other borrowed funds decreased $4.2 million to zero as of September 30, 2014 as these funds represent customer repurchase agreements which are no longer offered. These customer funds, primarily from municipalities, have been transferred into other interest bearing deposit accounts.

Total stockholders’ equity was $59.4 million at September 30, 2014 compared to $58.2 million at December 31, 2013. The increase in stockholders’ equity was due to net income of $341,000 for the nine month period ended September 30, 2014 and an increase in unrealized gain on available for sale investment securities of $0.7 million.

Lending Activities

As indicated in the table below, total gross loans receivable decreased $6.3 million, or 1.7%, to $364.3 million at September 30, 2014 from $370.5 million at December 31, 2013.

	September 30,		December 31,
(In thousands)	2014		2013

Real estate loans:
One-to-four family	$	179,077	$	186,985
Multi-family and commercial real estate		118,435		123,134
Construction and land development		5,042		5,609
Total real estate loans		302,554		315,728

Commercial business loans		24,825		25,506
Consumer loans:
Home equity		28,220		26,960
Other consumer		8,656		2,321
Total consumer loans		36,876		29,281
Total loans		364,255		370,515

Less:
Allowance for loan losses		6,971		9,891
Deferred loan origination fees, net		35		56
Loans receivable, net	$	357,249	$	360,568

In June 2014, the Company offered for sale $11.4 million principal amount of primarily adversely classified loans (i.e. loans classified substandard or doubtful) in connection with its plan to reduce the level of classified loans. $4.9 million of commercial loans were sold in June 2014 in two separate transactions in which the financial assets transferred satisfied all of the criteria to be accounted for as sales of financial assets. The sale of the remaining loans (comprised of $2.9 million in mortgage loans and $3.1 million in commercial loans) were transferred to loans held for sale at June 30, 2014 and sold in July 2014.

These transactions resulted in a $10.2 million reduction in adversely classified loans.

Nonperforming Assets

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

	September 30,			December 31,
	2014			2013
Nonperforming Assets	(In thousands)
Nonaccrual loans	$	3,748		$	7,953
TDRs nonaccruing		1,643			5,430
Subtotal nonperforming loans		5,391			13,383
Foreclosed real estate		458			1,846
Total nonperforming assets	$	5,849		$	15,229

Total nonperforming loans to total loans		1.48	%		3.61	%

Total nonperforming assets to total assets		1.20	%		3.13	%

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

	At September 30,		At December 31,
	2014		2013
Loans by risk grade:	(In thousands)

Special mention	$	13,394	$	32,409

Substandard		6,639		16,203
Doubtful		333		93
Subtotal - adversely classified loans		6,972		16,296
Total criticized loans	$	20,366	$	48,705

The balances of nonperforming loans decreased $8.0 million, or 60%, between December 31, 2013 and September 30, 2014. During this same period, the Bank’s adversely classified loans decreased by $9.3 million, or 57%. This significant improvement in the Company’s asset quality metrics was primarily attributable to the impact of the June and July 2014 loan sales comprised of $10.2 million in adversely classified loans of which $4.7 million were nonaccrual loans. In addition to the improvement in nonperforming loans, and adversely classified loans, the Company has also experienced a reduction of $19.0 million, or 59%, in its special mention loans during the first nine months of 2014. The levels and trends of adversely classified loans, and to a certain extent, the trend in special mention loans, warrant and receive management oversight and focus in management’s estimates related to the allowance for loan losses. In certain cases, where appropriate, specific allowances have been established to account for the increased credit risk of these assets.

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 an increase to the allowance is needed, a provision for loan losses is charged against earnings. The recommendations for increases or decreases to the allowance are presented by management to the board of directors on a quarterly basis.

On a quarterly basis, or more often if warranted, management analyzes the loan portfolio. For individually evaluated loans that are considered impaired, an allowance is established as required, based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or for loans that are considered collateral dependent, the fair value of the collateral. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due under the contractual term of the loan agreement.

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

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

The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the nine months ended September 30, 2014 and 2013:

	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
As of and for the Nine Months
Ended September 30, 2014
(In thousands)
Allowance for loan losses:
Beginning balance	$	1,849		$	5,097		$	1,118		$	1,443		$	384		$	9,891
Provision for loan losses		326			(205	)		(23	)		(757	)		(130	)		(789	)
Charge-offs		(541	)		(1,306	)		(442	)		(133	)		(13	)		(2,435	)
Recoveries		10			25			44			139			86			304
Balance at September 30, 2014	$	1,644		$	3,611		$	697		$	692		$	327		$	6,971
Allowance related to loans:
Individually evaluated for impairment	$	26		$	-		$	-		$	97		$	8		$	131
Collectively evaluated for impairment		1,618			3,611			697			595			319			6,840
Total allowance	$	1,644		$	3,611		$	697		$	692		$	327		$	6,971

Ending loan balance individually evaluated for impairment	$	4,415		$	657		$	898		$	1,233		$	514		$	7,717
Ending loan balance collectively evaluated for impairment		174,662			117,778			4,144			23,592			36,362			356,538
Total loans	$	179,077		$	118,435		$	5,042		$	24,825		$	36,876		$	364,255

	Multi-Family and Commercial Real Estate
As of and for the Nine Months	Investor one-to-four family and multi-family			Industrial and Warehouse Properties			Office Buildings			Retail Properties			Special Use Properties			Total Multi-Family and Commercial Real Estate
Ended September 30, 2014
(In thousands)
Allowance for loan losses:
Beginning balance	$	515		$	1,034		$	563		$	856		$	2,129		$	5,097
Provision for loan losses		136			(60	)		(187	)		185			(279	)		(205	)
Charge-offs		(166	)		(234	)		-			(491	)		(415	)		(1,306	)
Recoveries		1			5			-			-			19			25
Balance at September 30, 2014	$	486		$	745		$	376		$	550		$	1,454		$	3,611
Allowance related to loans:
Individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated for impairment		486			745			376			550			1,454			3,611
Total allowance	$	486		$	745		$	376		$	550		$	1,454		$	3,611

Ending loan balance individually evaluated for impairment	$	389		$	25		$	206		$	-		$	37		$	657
Ending loan balance collectively evaluated for impairment		21,499			27,695			22,408			17,527			28,649			117,778
Total loans	$	21,888		$	27,720		$	22,614		$	17,527		$	28,686		$	118,435

	One-to-Four Family			Multi-Family and Commercial Real Estate			Construction and Land Development			Commercial Business Loans			Consumer Loans			Total
As of and for the Nine Months
Ended September 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		34			4,117			(570	)		526			43			4,150
Charge-offs		(585	)		(4,418	)		(2,147	)		(1,808	)		(55	)		(9,013	)
Recoveries		-			590			102			514			5			1,211
Ending balance	$	1,437		$	5,181		$	1,853		$	1,957		$	420		$	10,848
Allowance related to loans:
Individually evaluated for impairment	$	55		$	155		$	570		$	590		$	16		$	1,386
Collectively evaluated for impairment		1,382			5,026			1,283			1,367			404			9,462
Total allowance	$	1,437		$	5,181		$	1,853		$	1,957		$	420		$	10,848

Ending loan balance individually evaluated for impairment	$	6,823		$	3,230		$	3,923		$	2,810		$	685		$	17,471
Ending loan balance collectively evaluated for impairment		194,929			122,516			5,606			23,792			27,578			374,421
Total loans	$	201,752		$	125,746		$	9,529		$	26,602		$	28,263		$	391,892

	Multi-Family and Commercial Real Estate
As of and for the Nine Months	Investor one-to-four family and multi-family			Industrial and Warehouse Properties		Office Buildings		Retail Properties			Special Use Properties		Total Multi-Family and Commercial Real Estate
Ended September 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 as of June 30, 2013	$	526		$	818	$	421	$	519		$	2,536	$	4,820

Provision for loan losses in third quarter	$	(48	)	$	150	$	33	$	186		$	107	$	428
Chargeoffs in third quarter		-			-		-		(67	)		-		(67	)
Recoveries in third quarter		-			-		-		-			-		-
Segment ending balance as of September 30, 2013	$	478		$	968	$	454	$	638		$	2,643	$	5,181
Allowance related to loans:
Individually evaluated for impairment	$	22		$	6	$	75	$	34		$	18	$	155
Collectively evaluated for impairment		456			962		379		604			2,625		5,026
Total allowance	$	478		$	968	$	454	$	638		$	2,643	$	5,181

Ending loan balance individually evaluated for impairment	$	1,182		$	155	$	350	$	400		$	1,143	$	3,230
Ending loan balance collectively evaluated for impairment		15,232			32,288		21,799		21,324			31,873		122,516
Total loans	$	16,414		$	32,443	$	22,149	$	21,724		$	33,016	$	125,746

As of and for the Year	One-to-Four Family		Multi-Family and Commercial Real Estate		Construction and Land Development		Commercial Business Loans		Consumer Loans		Total
Ended December 31, 2013
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	70	$	23	$	75	$	105	$	10	$	283
Collectively evaluated for impairment		1,779		5,074		1,043		1,338		374		9,608
Total allowance	$	1,849	$	5,097	$	1,118	$	1,443	$	384	$	9,891

Ending loan balance individually evaluated for impairment	$	7,001	$	4,085	$	1,854	$	2,580	$	579	$	16,099
Ending loan balance collectively evaluated for impairment		179,984		119,049		3,755		22,926		28,702		354,416
Total loans	$	186,985	$	123,134	$	5,609	$	25,506	$	29,281	$	370,515

	Multi-Family and Commercial Real Estate
As of and for the Year	Investor one-to-four family and multi-family		Industrial and Warehouse Properties		Office Buildings		Retail Properties		Special Use Properties		Total Multi-Family and Commercial Real Estate
Ended December 31, 2013
(In thousands)
Allowance related to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	23	$	-	$	23
Collectively evaluated for impairment		515		1,034		563		833		2,129		5,074
Total allowance	$	515	$	1,034	$	563	$	856	$	2,129	$	5,097

Ending loan balance individually evaluated for impairment	$	1,167	$	565	$	206	$	547	$	1,600	$	4,085
Ending loan balance collectively evaluated for impairment		15,205		29,431		21,206		22,973		30,234		119,049
Total loans	$	16,372	$	29,996	$	21,412	$	23,520	$	31,834	$	123,134

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 loan portfolio and to decrease our exposure to changes in interest rates.

Each quarter the Bank projects liquidity availability and demands on this liquidity for the next ninety days and on a monthly basis for a rolling 12 month period. 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 investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, retail deposit flows and loan 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 September 30, 2014, cash and cash equivalents totaled $9.3 million, including federal funds sold of $49,000. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $79.0 million at September 30, 2014. At September 30, 2014, the Bank had the ability to borrow a total of $79.9 million from the FHLB based on the collateral pledged, of which $46.6 million in borrowings was outstanding. In addition, the Bank had the ability to borrow $1.4 million from the Federal Reserve Bank Discount Window which was not utilized at September 30, 2014.

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

	September 30,		December 31,
(In thousands)	2014		2013
Commitments to extend credit:
Commercial real estate loan commitments	$	17,682	$	12,572
Unused home equity lines of credit		18,441		19,169
Commercial and industrial loan commitments		12,272		10,153
Amounts due on other commitments		6,810		6,618
Commercial letters of credit		1,057		1,371

Certificates of deposit due within one year of September 30, 2014 totaled $59.4 million, or 15.8% of total deposits. If these deposits do not remain with the Bank, the Bank will need to seek other sources of funds, including other certificates of deposit, FHLB advances or other borrowings, and its available lines of credit. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than are currently paid on these maturing certificates of deposit. Based on past experience, however, the Bank believes that a significant portion of our certificates of deposit will remain with us. The Bank has the ability to attract and retain deposits by adjusting the interest rates offered.

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

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Company’s primary source of income is dividends received from the Bank. Under the Agreement with the OCC, the Bank is restricted from declaring or paying any dividends or other capital distributions to the Company without prior written approval from the OCC. This provision relates to up streaming intercompany dividends or other capital distributions from the Bank to the Company. On a stand-alone basis, the Company had liquid assets of $2.8 million at September 30, 2014.

Effective June 4, 2013, the OCC imposed IMCRs on the Bank. The IMCRs require the Bank to maintain a Tier 1 leverage capital to adjusted total assets ratio of at least 9.00% and a total risk-based capital to risk-weighted 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 Agreement. The Bank exceeded the IMCRs at September 30, 2014, with a Tier 1 leverage ratio of 11.10% and a total risk-based capital ratio 18.56%.

As a source of strength to its subsidiary bank, the Company has liquid assets which the Company could contribute to the Bank if needed to enhance the Bank’s capital levels. The Company’s liquid assets totaled approximately $2.8 million at September 30, 2014. If the Company had contributed those assets to the Bank as of September 30, 2014, the Bank would have had a Tier 1 leverage ratio of approximately 11.58%.

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

The following tables are summaries of the Company’s consolidated and the Bank’s actual capital amounts and ratios at September 30, 2014 and December 31, 2013 as computed under the regulatory guidelines.

At September 30, 2014	Adequately Capitalized Requirements					Individual Minimum Capital Requirements (3)					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1 Leverage Capital (1)		N/A		N/A			N/A		N/A		$	58,684		12.03	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			58,684		18.78	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			62,627		20.04	%
The Bank
Tier 1 Leverage Capital (1)	$	19,592		4.00	%	$	44,082		9.00	%	$	54,379		11.10	%
Tier 1 Risk-Based Capital (2)		12,573		4.00	%		N/A		N/A			54,379		17.30	%
Total Risk-Based Capital (2)		25,145		8.00	%		40,861		13.00	%		58,346		18.56	%

(1) Tier 1 capital to total assets.

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

(3) Effective June 4, 2013.

At December 31, 2013	Adequately Capitalized Requirements					Individual Minimum Capital Requirements					Actual
(Dollars in thousands)	$		%			$		%			$		%
The Company Consolidated
Tier 1 Leverage Capital (1)		N/A		N/A			N/A		N/A		$	58,323		11.98	%
Tier 1 Risk-Based Capital (2)		N/A		N/A			N/A		N/A			58,323		18.21	%
Total Risk-Based Capital (2)		N/A		N/A			N/A		N/A			62,399		19.49	%

The Bank
Tier 1 Leverage Capital (1)	$	19,545		4.00	%	$	43,977		9.00	%	$	53,946		11.04	%
Tier 1 Risk-Based Capital (2)		12,891		4.00	%		N/A		N/A			53,946		16.74	%
Total Risk-Based Capital (2)		25,783		8.00	%		41,897		13.00	%		58,047		18.01	%
(1) Tier 1 capital to total assets.

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

Off-Balance Sheet Arrangements

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

For the three months ended September 30, 2014, the Company did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2014 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13(a)-15(f) of the Act) that occurred during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. - Legal Proceedings.

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

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

On February 20, 2014, the court entered a scheduling order providing a period for completion of discovery and the filing of dispositive motions. A trial date has been set for March 3, 2015. However, on May 23, 2014 those deadlines were stayed by the court pending regulatory consideration of a settlement. The settlement agreement proposed by the parties is currently under review by the regulatory agencies.

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

Item 1A. – Risk Factors.

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

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

(a)

Not applicable.

(b)

Not applicable.

(c)

The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2014.

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)
	10.1	Employment Agreement by and between Naugatuck Valley Savings and Loan and William C. Calderara (4)
	10.2	Employment Agreement by and between Naugatuck Valley Savings and Loan and James E. Cotter (5)
	31.1	Rule 13a-14(a)/15d-14(a) Certification.
	31.2	Rule 13a-14(a)/15d-14(a) Certification.
	32	Section 1350 Certifications.
	101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

____________________

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

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

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

(4) Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 8, 2014.

(5) Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 25, 2014.

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: November 10, 2014	by:	/s/ William C. Calderara
	William C. Calderara
	President and Chief Executive Officer
	(principal executive officer)


Date: November 10, 2014	by:	/s/ James Hastings
	James Hastings
	Executive Vice President and Chief Financial Officer
	(principal accounting and financial officer)

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