UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One)





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





For
the fiscal year ended December 31, 2008





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





For the transition period from
__________________ to
__________________





Commission
File Number: 0-50876





NAUGATUCK
VALLEY FINANCIAL CORPORATION


(Exact
name of registrant as specified in its charter)





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





333 Church Street, Naugatuck,
      Connecticut
                06770(Address
      of principal executive offices)
                (Zip
      Code)





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





Securities
registered pursuant to Section 12(b) of the Act:




Title of each class
                Name of each exchange on which
      registeredCommon
      Stock, par value $0.01 per share
                Nasdaq
      Global Market




Securities
registered pursuant to Section 12(g) of the Act:  None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  £    No  T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  £    No  T





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 for 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  T   No  £





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x





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 the definitions of “accelerated filer,” “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large accelerated filer  £
                  Accelerated
      filer                   £Non-accelerated filer    £
      (Do not check if a smaller reporting company)
                  Smaller
      reporting company T





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


Yes  £No  T





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2008, was $20,731,421.





The
number of shares outstanding of the registrant’s common stock as of March 20,
2009 was 7,026,894. Of such shares outstanding, 4,182,407 shares were held by
Naugatuck Valley Mutual Holding Company.






DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the 2008 Annual Report to Stockholders and portions of the Proxy Statement
for the 2009 Annual Meeting of Stockholders are incorporated by reference in
Parts II and III, respectively, of this Form 10-K.










INDEX





Part
I





PageItem
      1.
                                                      Business
                                                      1Item
      1A.
                                                      Risk Factors
                                                      15Item
      1B.
                                                      Unresolved Staff Comments
                                                      18Item
      2.
                                                      Properties
                                                      19Item
      3.
                                                      Legal Proceedings
                                                      20Item
      4.
                                                      Submission of Matters to a Vote of Securities
      Holders
                                                      20Part
      IIItem
      5.
                                                      Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                                                      20Item
      6.
                                                      Selected Financial Data
                                                      20Item
      7.
                                                      Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
                                                      21Item
      7A.
                                                      Quantitative and Qualitative Disclosures About Market
      Risk
                                                      21Item
      8.
                                                      Financial Statements and Supplementary
    Data
                                                      21Item
      9.
                                                      Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
                                                      21Item
      9A(T).
                                                      Controls and Procedures
                                                      21Item
      9B.
                                                      Other Information
                                                      22Part
      IIIItem
      10.
                                                      Directors, Executive Officers and Corporate
      Governance
                                                      22Item
      11.
                                                      Executive Compensation
                                                      22Item
      12.
                                                      Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                                                      22Item
      13.
                                                      Certain Relationships and Related Transactions, and
      Director Independence
                                                      23Item
      14.
                                                      Principal Accountant Fees and Services
                                                      23Part
      IVItem
      15.
                                                      Exhibits and Financial Statement
    Schedules
                                                      24SIGNATURES




Index




This
report contains certain “forward-looking statements” within the meaning of the
federal securities laws.  These statements are not historical facts,
rather statements based on Naugatuck Valley Financial Corporation’s current
expectations regarding its business strategies, intended results and future
performance.  Forward-looking statements are preceded by terms such as
“expects,” “believes,” “anticipates,” “intends” and similar
expressions.





Management’s ability to predict
results or the effect of future plans or strategies is inherently
uncertain.  Factors which could affect actual results include interest
rate trends, the general economic climate in the market area in which Naugatuck
Valley Financial operates, as well as nationwide, Naugatuck Valley Financial’s
ability to control costs and expenses, competitive products and pricing, loan
delinquency rates and changes in federal and state legislation and regulation.Additional factors that
may affect our results are discussed in this Annual Report on Form 10-K under
“Item 1A. Risk Factors.”These factors should be considered
in evaluating the forward-looking statements and undue reliance should not be
placed on such statements.  Except as may be required by applicable
law or regulation, Naugatuck Valley Financial assumes no obligation to update
any forward-looking statements.








PART
I





ITEM 1.
            BUSINESS.





General





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





Naugatuck
Valley Financial’s business activity is the ownership of the outstanding capital
stock of Naugatuck Valley Savings and management of the investment of offering
proceeds retained from the offering.  Naugatuck Valley Financial
neither owns nor leases any property but instead uses the premises, equipment
and other property of Naugatuck Valley Savings with the payment of appropriate
rental fees, as required by applicable law and regulations.  In the
future, Naugatuck Valley Financial may acquire or organize other operating
subsidiaries, however, there are no current plans, arrangements, agreements or
understandings, written or oral, to do so.  Naugatuck Valley Financial
has no significant assets, other than all of the outstanding shares of Naugatuck
Valley Savings and U.S. government and agency securities, and no significant
liabilities.  Accordingly, the information set forth in this report,
including the consolidated financial statements and related financial data,
relates primarily to Naugatuck Valley Savings.





Naugatuck
Valley Savings is a federally chartered savings bank, and has served its
customers in Connecticut since 1922.  We operate as a
community-oriented financial institution offering traditional financial services
to consumers and businesses in our market area.  We attract deposits
from the general public and use those funds to originate one- to four-family,
multi-family and commercial real estate, construction, commercial business, and
consumer loans, which we primarily hold for investment.





Naugatuck
Valley Mutual is our federally chartered mutual holding company
parent.  As a mutual holding company, Naugatuck Valley Mutual is a
non-stock company that has as its members the depositors of Naugatuck Valley
Savings.  Naugatuck Valley Mutual does not engage in any business
activity other than owning a majority of the common stock of Naugatuck Valley
Financial.





Available
Information





Naugatuck
Valley Financial’s Annual Report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to such
reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, are made available free of charge
on our website, www.nvsl.com,





Index





as soon
as reasonably practicable after such reports are electronically filed with, or
furnished to, the Securities and Exchange Commission.  Information on
our website shall not be considered a part of this Form 10-K.





Market
Area





We are
headquartered in Naugatuck, Connecticut, which is located in south-western
Connecticut approximately six miles south of Waterbury and 26 miles north of
Bridgeport.  In addition to our main office, we operate nine branch
offices in the Greater Naugatuck Valley which we consider our market
area.  The Greater Naugatuck Valley encompasses the communities in the
central and lower Naugatuck Valley regions in New Haven and Fairfield
Counties.  The economy in our market area is primarily oriented to the
service, retail, construction, and manufacturing industries.





Competition





We face
significant competition for the attraction of deposits and origination of
loans.  Our most direct competition for deposits has historically come
from the several financial institutions operating in our market area and, to a
lesser extent, from other financial service companies, such as brokerage firms,
credit unions and insurance companies.  We also face competition for
investors’ funds from money market funds and other corporate and government
securities.  In addition, banks owned by Bank of America Corporation,
Wells Fargo & Company, J.P. Morgan Chase & Co. and TD Bank Financial
Group, all of which are large super-regional bank holding companies, also
operate in our market area.  These institutions are significantly
larger than us and, therefore, have significantly greater
resources.





Our
competition for loans comes from financial institutions in our market area and
from other financial service providers, such as mortgage companies and mortgage
brokers.  Competition for loans also comes from the non-depository
financial service companies in the mortgage market, such as insurance companies,
securities companies and specialty finance companies.





We expect
competition to continue in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial
services industry.  Technological advances, for example, have lowered
the barriers to enter new market areas, allowed banks to expand their geographic
reach by providing services over the internet and made it possible for
non-depository institutions to offer products and services that traditionally
have been provided by banks.  Changes in federal law permit
affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services
industry.  Banks that have received Federal Government assistance
under the Economic Stabilization Act of 2008 may be able to pay higher rates on
deposits and charge lower rates on loans due to their improved capital
position.  Competition for deposits and the origination of loans could
limit our growth in the future.





Lending
Activities





General.Our loan portfolio consists of one- to
four-family residential mortgage loans, multi-family and commercial real estate
loans, construction loans, commercial business loans and consumer
loans.  Substantially all of our loans are made to borrowers residing
within Connecticut.





One-
to Four-Family Residential Loans.We
originate mortgage loans to enable borrowers to purchase or refinance existing
homes or to construct new residential dwellings in our market
area.  We generally offer fixed-rate and adjustable-rate mortgage
loans with terms up to 30 years.  Borrower demand for adjustable-rate
loans versus fixed-rate loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates, the difference between
the interest rates and loan fees offered for fixed-rate mortgage loans and the
initial period interest rates and loan fees for adjustable-rate
loans.  The relative amount of fixed-rate mortgage loans and
adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment and the effect
each has on our interest rate risk.  The loan fees charged, interest
rates and other provisions of mortgage loans are determined by us on the basis
of our own pricing criteria and competitive market conditions.





2
 Index




We offer
fixed-rate loans with terms of either 10, 15, 20 or 30 years.  Our
adjustable-rate mortgage loans are based on either a 15, 20 or 30-year
amortization schedule and interest rates and payments on our adjustable-rate
mortgage loans adjust annually after either a one, three, five or seven year
initial fixed period.  Interest rates and payments on our
adjustable-rate loans generally are adjusted to a rate typically equal to 2.75%
above the one-year constant maturity Treasury index.  The maximum
amount by which the interest rate may be increased or decreased is generally 2%
per adjustment period and the lifetime interest rate cap is generally 6% over
the initial interest rate of the loan.





Due to
historically low interest rate levels, borrowers generally have preferred
fixed-rate loans in recent years.  While we anticipate that our
adjustable-rate loans will better offset the adverse effects on our net interest
income of an increase in interest rates as compared to fixed-rate mortgages, the
increased mortgage payments required of adjustable-rate loans in a rising
interest rate environment could cause an increase in delinquencies and
defaults.  The marketability of the underlying property also may be
adversely affected in a high interest rate environment.  In addition,
although adjustable-rate mortgage loans help make our asset base more responsive
to changes in interest rates, the extent of this interest sensitivity is limited
by the annual and lifetime interest rate adjustment limits.





While
one- to four-family residential real estate loans are normally originated with
up to 30-year terms, such loans typically remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original
loan.  Therefore, average loan maturity is a function of, among other
factors, the level of purchase and sale activity in the real estate market,
prevailing interest rates and the interest rates payable on outstanding
loans.  As interest rates declined and remained low over the past few
years, we have experienced high levels of loan repayments and
refinancings.





We
generally do not make conventional loans with loan-to-value ratios exceeding 97%
and generally make loans with a loan-to-value ratio in excess of 80% only when
secured by first liens on owner-occupied one- to four-family
residences.  Loans with loan-to-value ratios in excess of 80% require
private mortgage insurance or additional collateral.  We require all
properties securing mortgage loans to be appraised by a Board-approved
independent appraiser.  We require title insurance on all first
mortgage loans.  Borrowers must obtain hazard insurance, or flood
insurance for loans on property located in a flood zone, before closing the
loan.





In an
effort to provide financing for first-time buyers, we offer a first-time home
buyers program.  We offer fixed-rate residential mortgage loans
through this program to qualified individuals and originate the loans using
modified underwriting guidelines, lower rates and terms of up to 40
years.





Multi-Family
and Commercial Real Estate Loans.We
offer adjustable-rate mortgage loans secured by multi-family and commercial real
estate.  Our multi-family and commercial real estate loans are
generally secured by condominiums, apartment buildings, offices, retail and
other income producing properties, as well as owner-occupied properties used for
businesses.  We intend to continue to grow this segment of our loan
portfolio.





We
originate multi-family and commercial real estate loans for terms generally up
to 20 years.  Interest rates and payments on adjustable-rate loans
adjust every one, three, five or ten years.  Interest rates on our
adjustable rate loans generally are adjusted to a rate typically equal to 2.00
to 2.50% above the one-year, three-year, five-year or ten-year Federal Home Loan
Bank classic advance rate.There are no
adjustment period or lifetime interest rate caps.  Loan amounts
generally do not exceed 80% of the appraised value.





Loans
secured by multi-family and commercial real estate generally have larger
balances and involve a greater degree of risk than one- to four-family
residential mortgage loans.  Of primary concern in multi-family and
commercial real estate lending is the borrower’s creditworthiness and the
feasibility and cash flow potential of the project.  Payments on loans
secured by income properties often depend on successful operation and management
of the properties.  As a result, repayment of such loans may be
subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy.  To monitor cash
flows on income properties, we require borrowers and loan guarantors, where
applicable, to provide annual financial statements on multi-family and
commercial real estate loans.  In reaching a decision on whether to
make a multi-family or commercial real estate loan, we consider the net
operating income of the property, the borrower’s expertise, credit history,
profitability and the value of the underlying property.  We require an
environmental survey for multi-family and commercial real estate
loans.  The largest outstanding multi-family or commercial real estate
loan at December 31, 2008 was $4.8 million, of which $4.8 million was
outstanding.





3
 Index





This loan
was secured by land for retail development and was performing according to its
terms at December 31, 2008.





Construction
Loans.We
originate loans to individuals to finance the construction of residential
dwellings for personal use.  Our construction loans generally provide
for the payment of interest only during the construction phase, which is usually
nine months.  At the end of the construction phase, the loan converts
to a permanent mortgage loan.  Loans generally can be made with a
maximum loan to value ratio of 80% of the appraised value with a maximum term of
30 years. The largest outstanding residential construction loan at December 31,
2008 was $2.0 million, $2.0 million of which was outstanding.  This
loan was performing according to its terms at December 31, 2008.  We
also make commercial construction loans for commercial development projects,
including condominiums, apartments buildings, single family subdivisions; as
well as office buildings, retail and other income producing
properties.  These loans provide for payment of interest only during
the construction phase and may, in the case of an apartment or commercial
building, convert to a permanent mortgage loan or, in the case of a single
family subdivision or construction or builder loan, be paid in full with the
sale of the property after construction is complete.  In the case of a
commercial construction loan, the construction period may be from nine months to
two years.  Loans are generally made to a maximum of 80% of the
appraised value as determined by an appraisal of the property made by an
independent licensed appraiser.  We also require an inspection of the
property before disbursement of funds during the term of the construction loan
for both residential and commercial construction loans.  The largest
outstanding commercial construction loan at December 31, 2008 was $5.4 million,
of which $2.6 million was outstanding.  This loan was secured by real
estate for the construction of single family homes, and was performing according
to its terms at December 31, 2008.  Our largest commercial real estate
loan relationship at December 31, 2008 involved loans totaling $6.0 million,
secured by two warehouse and distribution facilities.  These loans
were performing according to their original terms at December 31,
2008.





We
originate land loans to individuals on approved residential building lots for
personal use for terms of up to 20 years and to a maximum loan-to-value ratio of
75% of the lower of the appraisal value or purchase price.  Our land
loans adjust annually after a five-year initial fixed
period.  Interest rates are equal to 2.75% above the one-year constant
maturity Treasury index.





We also
originate loans to local contractors and developers for the purpose of making
improvements to, and on, approved subdivisions and condominium projects within
two years of the date of the original loan.  Such loans generally are
written with a maximum loan-to-value ratio of 80% of the lower of the appraised
value or purchase price of the land.  These loans adjust when and as
the index changes at a rate that is generally equal to the prime rate as
published in The Wall Street
Journal plus 1%.  We require title insurance and, if
applicable, a hazardous waste survey reporting that the land is free of
hazardous or toxic waste.





Construction
financing is generally considered to involve a higher degree of risk of loss
than long-term financing on improved, occupied real estate.  Risk of
loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction or development
and the estimated cost (including interest) of construction.  During
the construction phase, a number of factors could result in delays and cost
overruns.  If the estimate of construction costs proves to be
inaccurate, we may be required to advance funds beyond the amount originally
committed to permit completion of the development.  If the estimate of
value proves to be inaccurate, we may be confronted, at or before the maturity
of the loan, with a project having a value which is insufficient to assure full
repayment.  As a result of the foregoing, construction lending often
involves the disbursement of substantial funds with repayment dependent, in
part, on the success of the ultimate project rather than the ability of the
borrower or guarantor to repay principal and interest.  If we are
forced to foreclose on a project before or at completion due to a default, there
can be no assurance that we will be able to recover all of the unpaid balance
of, and accrued interest on, the loan as well as related foreclosure and holding
costs.





Commercial
Business Loans.We
make commercial business loans to a variety of professionals, sole
proprietorships and small businesses primarily in our market area.  We
offer a variety of commercial lending products.  These loans are
typically secured, primarily by business assets.  These loans are
originated with maximum loan-to-value ratios of 75% of the value of the business
assets.  We originate one- to ten-year term loans for the acquisition
of equipment or business expansion, lines of credit for seasonal financing needs
and demand loans for short term financing needs with specific repayment
sources.  Commercial business loans are generally written at variable
rates which use the prime rate as published in The Wall Street Journal as an
index and, depending on the qualifications of the borrower, a zero to 3.0%
margin is added.  These rates will change when and as the index rate
changes without caps.  Fixed-rate loans are written at market rates
determined at the time the loan is granted and are based on the length of the
term and the qualifications of the borrower.





4
 Index





Our
largest commercial business loan relationship at December 31, 2008 was a loan in
the amount of $1.2 million of which $173,000 was outstanding and performing
according to the original terms at December 31, 2008.  This loan is
secured by accounts receivable, business assets and inventory.





When
making commercial business loans, we consider the financial statements of the
borrower, the borrower’s payment history of both corporate and personal debt,
the debt service capabilities of the borrower, the projected cash flows of the
business, and viability of the industry in which the customer operates and the
value of the collateral.





Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial business loans are of higher risk and typically are
made on the basis of the borrower’s ability to make repayment from the cash flow
of the borrower’s business.  As a result, the availability of funds
for the repayment of commercial business loans may depend substantially on the
success of the business itself.  Further, any collateral securing such
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value.





Consumer
Loans.We
offer a variety of consumer loans, primarily second mortgage loans and home
equity lines of credit, and, to a much lesser extent, loans secured by passbook
or certificate accounts, automobiles, as well as unsecured personal loans and
overdraft protection accounts.  Unsecured loans generally have a
maximum borrowing limit of $5,000 and a maximum term of three
years.





The
procedures for underwriting consumer loans include an assessment of the
applicant’s payment history on other debts and ability to meet existing
obligations and payments on the proposed loans.  Although the
applicant’s creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral, if any, to
the proposed loan amount.  Second mortgage loans have fixed rates of
interest for terms of up to 20 years.  These loans are originated with
maximum combined loan-to-value ratios of 80% of the appraised value of the
property.  Home equity lines of credit have adjustable rates of
interest that are indexed to the prime rate as published in The Wall Street Journal for
terms of up to 10 years.  These loans are originated with maximum
loan-to-value ratios of 80% of the appraised value of the property and we
require that we have a second lien position on the property.





Consumer
loans may entail greater risk than do residential mortgage loans, particularly
in the case of consumer loans that are unsecured or secured by assets that
depreciate rapidly.  In such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower.  In addition,
consumer loan collections depend on the borrower’s continuing financial
stability, and therefore are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy.  Furthermore, the application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such
loans.





Loan
Originations, Purchases and Sales.Loan
originations come from a number of sources.  The primary source of
loan originations are our in-house loan originators, and to a lesser extent,
local mortgage brokers, advertising and referrals from customers.  We
occasionally purchase loans or participation interests in loans.





We
consider loan sales as a part of our interest rate risk management
efforts.  We have the ability to sell longer-term fixed-rate loans in
the secondary market based on prevailing market interest rate conditions, an
analysis of the composition and risk of the loan portfolio, liquidity needs and
interest rate risk management goals.  Generally, loans are sold
without recourse and with servicing retained.  We did not sell any
loans in the years ended December 31, 2008 or 2007.  We occasionally
sell participation interests in loans.





Loan
Approval Procedures and Authority.Our
lending activities follow written, nondiscriminatory, underwriting standards and
loan origination procedures established by our Board of Directors and
management.





5
 Index




For one-
to four-family loans and owner occupied residential construction loans, two
members of the mortgage loan committee, one of which must be a vice president or
above, may approve loans up to $417,000 and a majority of the members of the
Board loan committee must approve loans over $417,000.  For unsecured
commercial business loans, a majority of the members of the Board must approve
loans over $500,000 and two members of the Board of Directors loan committee
must approve loans over $250,000 and up to $500,000.  Unsecured
business loans of $250,000 or less must be approved by two members of the
officers’ loan committee.  Loans of $100,000 or less which are
unsecured can be approved by one member of the officers’ loan committee and
later presented to the officers’ loan committee for ratification.  For
secured commercial loans and commercial construction loans, a majority of the
members of the Board must approve loans over $1.5 million and two members of the
Board of Directors loan committee must approve loans over $750,000 and up to
$1.5 million.  Loans of $500,001 to $750,000, secured by real estate,
where the loan to value ratio is 80% or less supported by a conforming
appraisal, can be approved by the officers’ loan committee.  Loans of
$500,000 or less secured by real estate where the loan-to-value is 80% or less
can be approved by two members of the officers’ loan committee and for $100,000
or less secured by real estate with an 80% loan-to-value one member of the
officers’ loan committee can approve with a later ratification by the officers’
loan committee.  The Board of Directors must approve all consumer
loans over $200,000.  Various bank personnel have been delegated
authority to approve smaller commercial loans and consumer loans.





Loans
to One Borrower.The maximum amount that we may lend to
one borrower and the borrower’s related entities is limited, by regulation, to
generally 15% of our stated capital and reserves.  At December 31,
2008, our regulatory limit on loans to one borrower was$6.5 million.  At that date,
our largest lending relationship was$6.0 million and included two warehouse
and distribution facilities all of which were performing according to the
original repayment terms at December 31, 2008.





Loan
Commitments.We issue commitments for fixed-rate and
adjustable-rate mortgage loans conditioned upon the occurrence of certain
events.  Commitments to originate mortgage loans are legally binding
agreements to lend to our customers and generally expire in 45 days or
less.





Delinquencies.When
a borrower fails to make a required loan payment, we take a number of steps to
have the borrower cure the delinquency and restore the loan to current
status.  We make initial contact with the borrower when the loan
becomes 15 days past due.  If payment is not then received by the
30th
day of delinquency, additional letters and phone calls are made.  We
send a letter notifying the borrower that we will commence foreclosure
proceedings if the loan is not brought current within 91 days.  At
this point, we may consider loan workout arrangements with certain borrowers
under certain circumstances.  If our workout efforts are unsuccessful,
we generally commence foreclosure proceedings against any real property that
secures the loan or attempt to repossess any personal property that secures a
consumer loan.  If a foreclosure action is instituted and the loan is
not brought current, paid in full, or refinanced before the foreclosure sale,
the real property securing the loan generally is sold at foreclosure or taken by
the bank as other real estate owned.





Management
informs the Board of Directors on a monthly basis of the amount of loans
delinquent more than 30 days.  Management also provides detailed
reporting of loans greater than 90 days delinquent, all loans in foreclosure and
all foreclosed and repossessed property that we own.





Investment
Activities





We have
legal authority to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various federal agencies and of state and
municipal governments, mortgage-backed securities and certificates of deposit of
federally insured institutions.  Within certain regulatory limits, we
also may invest a portion of our assets in corporate securities and mutual
funds.  We also are required to maintain an investment in Federal Home
Loan Bank of Boston stock.





At
December 31, 2008, our investment portfolio consisted of U.S. government and
agency securities with maturities primarily less than five years,
mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with
stated final maturities of 30 years or less, collateralized mortgage obligations
with stated final maturities of 30 years or less, municipal securities with
maturities of 15 years or less and preferred money market securities with terms
of primarily 91 days or less.





6
 Index




Our
investment objectives are to provide and maintain liquidity, to maintain a
balance of high quality, diversified investments to minimize risk, to provide
collateral for pledging requirements, to establish an acceptable level of
interest rate risk, to provide an alternate source of low-risk investments when
demand for loans is weak, and to generate a favorable return.  During
2008 we enhanced overall portfolio yield by reducing our position in insured
certificates of deposit, municipal, and U.S. government and agency securities
and increasing our position in mortgage-backed securities.Our Board of Directors
has the overall responsibility for our investment portfolio, including approval
of our investment policy and appointment of our Asset/Liability
Committee.  The Asset/Liability Committee is responsible for approval
of investment strategies and monitoring of investment
performance.  Our Executive Vice President and our Controller are
co-designated investment portfolio managers who are responsible for the daily
investment activities and are authorized to make investment decisions consistent
with our investment policy.  The Asset/Liability Committee meets
regularly with the Controller, the Executive Vice President and President and
Chief Executive Officer in order to determine and review investment strategies
and transactions.





Deposit
Activities and Other Sources of Funds





General.Deposits and loan repayments are the
major sources of our funds for lending and other investment
purposes.  Loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and money market
conditions.





Deposit
Accounts.The vast majority of our depositors are
residents of the State of Connecticut.  Deposits are attracted from
within our primary market area through the offering of a broad selection of
deposit instruments, including NOW accounts, checking accounts, money market
accounts, regular savings accounts, club savings accounts, certificate accounts,
health savings accounts and various retirement accounts.Generally, we do not utilize brokered
funds.  Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors.  In determining the terms of our deposit
accounts, we consider the rates offered by our competition, profitability to us,
matching deposit and loan products and customer preferences and
concerns.  We generally review our deposit mix and pricing
weekly.  Our current strategy is to offer competitive rates, but not
be the market leader in every type and maturity.





Borrowings.We
borrow from the Federal Home Loan Bank of Boston to supplement our supply of
lendable funds and to meet deposit withdrawal requirements.  The
Federal Home Loan Bank functions as a central reserve bank providing credit for
member financial institutions.  As a member, we are required to own
capital stock in the Federal Home Loan Bank of Boston and are authorized to
apply for advances on the security of such stock and certain of our mortgage
loans and other assets (principally securities which are obligations of, or
guaranteed by, the United States), provided certain standards related to
creditworthiness have been met.  Advances are made under several
different programs, each having its own interest rate and range of
maturities.  Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution’s net worth or
on the Federal Home Loan Bank’s assessment of the institution’s
creditworthiness.  Under its current credit policies, the Federal Home
Loan Bank generally limits advances to 25% of a member’s assets, and short-term
borrowings of less than one year may not exceed 10% of the institution’s
assets.  The Federal Home Loan Bank determines specific lines of
credit for each member institution.





We also
use securities sold under agreements to repurchase as a source of borrowings,
and we occasionally borrow short-term from correspondent banks tocover temporary cash
needs.





Subsidiaries





Naugatuck
Valley Financial’s sole subsidiary is Naugatuck Valley Savings.





Naugatuck
Valley Savings has one subsidiary, Naugatuck Valley Mortgage Servicing
Corporation.  Naugatuck Valley Mortgage Servicing, established in 1999
under Connecticut law, is a passive investment corporation organized in order to
take advantage of certain state tax benefits.  Its primary business is
to service mortgage loans which we have originated and subsequently transferred
to Naugatuck Valley Mortgage Servicing.  At December 31, 2008,
Naugatuck Valley Mortgage Servicing had $256.5 million in
assets.





7
 Index





Personnel





At
December 31, 2008, we had 117 full-time employees and 16 part-time employees,
none of whom are represented by a collective bargaining unit.  We
believe our relationship with our employees is good.





Regulation and
Supervision





General





Naugatuck
Valley Savings is subject to extensive regulation, examination and supervision
by the Office of Thrift Supervision, as its primary federal regulator, and the
Federal Deposit Insurance Corporation, as its deposits
insurer.  Naugatuck Valley Savings is a member of the Federal Home
Loan Bank System and its deposit accounts are insured up to applicable limits by
the Deposit Insurance Fund managed by the Federal Deposit Insurance
Corporation.  Naugatuck Valley Savings must file reports with the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions.  There are
periodic examinations by the Office of Thrift Supervision and, under certain
circumstances, the Federal Deposit Insurance Corporation to evaluate Naugatuck
Valley Savings’ safety and soundness and compliance with various regulatory
requirements.  This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and
depositors.  The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes.  Any change in such policies,
whether by the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation or Congress, could have a material adverse impact on Naugatuck
Valley Financial, Naugatuck Valley Mutual and Naugatuck Valley Savings and their
operations.  Naugatuck Valley Financial and Naugatuck Valley Mutual,
as savings and loan holding companies, are required to file certain reports
with, are subject to examination by, and otherwise must comply with the rules
and regulations of the Office of Thrift Supervision.  Naugatuck Valley
Financial is also subject to the rules and regulations of the Securities and
Exchange Commission under the federal securities laws.





Certain
of the regulatory requirements that are applicable to Naugatuck Valley Savings,
Naugatuck Valley Financial and Naugatuck Valley Mutual are described
below.  This description of statutes and regulations is not intended
to be a complete explanation of such statutes and regulations and their effects
on Naugatuck Valley Savings, Naugatuck Valley Financial and Naugatuck Valley
Mutual and is qualified in its entirety by reference to the actual statutes and
regulations.





Regulation
of Federal Savings Associations





Business
Activities. Federal law
and regulations govern the activities of federal savings banks, such as
Naugatuck Valley Savings.  These laws and regulations delineate the
nature and extent of the activities in which federal savings banks may
engage.  In particular, certain lending authority for federal savings
banks, e.g., commercial, non-residential real property loans and consumer loans,
is limited to a specified percentage of the institution’s capital or
assets.





Capital
Requirements.The
Office of Thrift Supervision’s capital regulations require federal savings
institutions to meet three minimum capital standards: a 1.5% tangible capital to
total assets ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS examination rating system) and an 8% risk-based
capital ratio.  In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS system) and, together with the risk-based capital standard itself,
a 4% Tier 1 risk-based capital standard.  The Office of Thrift
Supervision regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.





8
 Index




The
risk-based capital standard requires federal savings institutions to maintain
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively.  In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, recourse obligations,
residual interests and direct credit substitutes, are multiplied by a
risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
capital regulation based on the risks believed inherent in the type of
asset.  Tier 1 (core) capital is generally defined as common
stockholders’ equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships.  The
components of supplementary (Tier 2) capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock, the allowance
for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets
and up to 45% of unrealized gains on available-for-sale equity securities with
readily determinable fair market values.  Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.





The
Office of Thrift Supervision also has authority to establish individual minimum
capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the
particular circumstances.  At December 31, 2008 Naugatuck Valley
Savings met each of its capital requirements.





Prompt
Corrective Regulatory Action.The Office of Thrift Supervision is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution’s degree of
undercapitalization.  Generally, a savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
1 (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be “undercapitalized.” A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be “significantly undercapitalized” and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
“critically undercapitalized.” Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator within
specified time frames for an institution that is “critically undercapitalized.”
An institution must file a capital restoration plan with the Office of Thrift
Supervision within 45 days of the date it receives notice that it is
“undercapitalized,” “significantly undercapitalized” or “critically
undercapitalized.” Compliance with the plan must be guaranteed by any parent
holding company to the amount of 5% of the institution’s total assets when
notified that it was undercapitalized or the amount necessary to restore the
institution to adequately capitalized status.  In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  “Significantly undercapitalized” and “critically
undercapitalized” institutions are subject to more extensive mandatory
regulatory actions.  The Office of Thrift Supervision could also take
any one of a number of discretionary supervisory actions, including the issuance
of a capital directive and the replacement of senior executive officers and
directors.





Loans
to One Borrower.
Federal law provides that savings institutions are generally subject to the
limits on loans to one borrower applicable to national banks.  Subject
to certain exceptions, a savings institution may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus.  An additional amount may be lent,
equal to 10% of unimpaired capital and surplus, if secured by specified
readily-marketable collateral.





Standards
for Safety and Soundness.The federal
banking agencies have adopted Interagency Guidelines prescribing Standards for
Safety and Soundness.  The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired.  If the Office of Thrift Supervision determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
Office of Thrift Supervision may require the institution to submit an acceptable
plan to achieve compliance with the standard.





Limitation
on Capital Distributions.Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out
merger.  Under the regulations, an application to and the prior
approval of the Office of Thrift Supervision is required before any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under Office of Thrift Supervision regulations (i.e.,
generally, examination and Community Reinvestment Act ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with the Office of Thrift Supervision.





9
 Index





If an
application is not required, the institution must still provide prior notice to
the Office of Thrift Supervision of the capital distribution if, like Naugatuck
Valley Savings, it is a subsidiary of a holding company.  If Naugatuck
Valley Savings’ capital were ever to fall below its regulatory requirements or
the Office of Thrift Supervision notified it that it was in need of increased
supervision, its ability to make capital distributions could be
restricted.  In addition, the Office of Thrift Supervision could
prohibit a proposed capital distribution that would otherwise be permitted by
the regulation, if the agency determines that such distribution would constitute
an unsafe or unsound practice.





Qualified
Thrift Lender Test.Federal
law requires savings institutions to meet a qualified thrift lender
test.  Under the test, a savings association is required to either
qualify as a “domestic building and loan association” under the Internal Revenue
Code or maintain at least 65% of its “portfolio assets” (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
“qualified thrift investments” (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each twelve-month period.  Legislation has expanded the
extent to which education loans, credit card loans and small business loans may
be considered “qualified thrift investments.”





A savings
institution that fails the qualified thrift lender test is subject to certain
operating restrictions and may be required to convert to a bank
charter.  As of December 31, 2008, Naugatuck Valley Savings maintained
89.1% of its portfolio assets in qualified thrift investments and, therefore,
met the qualified thrift lender test.





Transactions
with Related Parties.Federal law
limits Naugatuck Valley Savings’ authority to make loans to, and engage in
certain other transactions with (collectively, “covered transactions”),
“affiliates” (i.e., generally, any company that controls or is under common
control with an institution), including Naugatuck Valley Financial and Naugatuck
Valley Mutual and their non-savings institution subsidiaries.  The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings
institution.  The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institution’s capital and
surplus.  Loans and other specified transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law.  The purchase of low quality assets from affiliates is
generally prohibited.  Transactions with affiliates must be on terms
and under circumstances that are at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies.  In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.





The
Sarbanes-Oxley Act generally prohibits loans by Naugatuck Valley Financial to
its executive officers and directors.  However, the Sarbanes-Oxley Act
contains a specific exemption from such prohibition for loans by Naugatuck
Valley Savings to its executive officers and directors in compliance with
federal banking regulations.  Federal regulations impose certain
quantitative limits and require, among other things, that all loans or
extensions of credit to executive officers and directors of insured institutions
must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and must not involve more than the normal risk of repayment or
present other unfavorable features.  Naugatuck Valley Savings is
therefore generally prohibited from making any new loans or extensions of credit
to executive officers and directors at different rates or terms than those
offered to the general public.  Notwithstanding this rule, federal
regulations permit Naugatuck Valley Savings to make loans to executive officers
and directors at reduced interest rates if the loan is made under a benefit
program generally available to all other employees and does not give preference
to any executive officer or director over any other employee.





In
addition, loans made to a director or executive officer in an amount that, when
aggregated with the amount of all other loans to the person and his or her
related interests, are in excess of the greater of $25,000 or 5% of Naugatuck
Valley Savings’ capital and surplus, or, in any event, greater than $500,000,
must be approved in advance by a majority of the disinterested members of the
board of directors.





Loans to
executive officers are subject to additional restrictions based on the category
of loan involved.





10
 Index




Enforcement. The
Office of Thrift Supervision has primary enforcement responsibility over federal
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution.  Formal enforcement action may range from the issuance of
a capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance.  Civil penalties cover a wide range of violations
and can amount to $25,000 per day, or even $1 million per day in especially
egregious cases.  The Federal Deposit Insurance Corporation has
authority to recommend to the Director of the Office of Thrift Supervision that
enforcement action be taken with respect to a particular savings
institution.  If action is not taken by the Director, the Federal
Deposit Insurance Corporation has authority to take such action under certain
circumstances.  Federal law also establishes criminal penalties for
certain violations.





Assessments. Federal
savings banks are required to pay assessments to the Office of Thrift
Supervision to fund its operations.  The general assessments, paid on
a semi-annual basis, are based upon the savings institution’s total assets,
including consolidated subsidiaries, financial condition and complexity of its
portfolio.  The Office of Thrift Supervision assessments paid by
Naugatuck Valley Savings for the year ended December 31, 2008 totaled
$115,273.





Insurance
of Deposit Accounts.The deposits of
Naugatuck Valley Savings are insured up to applicable limits by the Deposit
Insurance Fund of the Federal Deposit Insurance Corporation.  The
Deposit Insurance Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006.  Under
the Federal Deposit Insurance Corporation’s risk-based assessment system,
insured institutions are assigned to one of four risk categories based on
supervisory evaluations, regulatory capital levels and certain other factors,
with less risky institutions paying lower assessments.  An
institution’s assessment rate depends upon the category to which it is
assigned.  For 2008, assessments ranged from five to forty-three basis
points of assessable deposits.  Due to losses incurred by the Deposit
Insurance Fund in 2008 from failed institutions, and anticipated future losses,
the Federal Deposit Insurance Corporation has adopted an across the board seven
basis point increase in the assessment range for the first quarter of
2009.  The Federal Deposit Insurance Corporation has adopted further
refinements to its risk-based assessment that are effective April 1, 2009 and
would effectively make the range seven to 77.5 basis points.  The
Federal Deposit Insurance Corporation may adjust the scale uniformly from one
quarter to the next, except that no adjustment can deviate more than three basis
points from the base scale without notice and comment rulemaking.  No
institution may pay a dividend if it is in default of the federal deposit
insurance assessment.





Due to
the recent difficult economic conditions, deposit insurance per account owner
has been raised to $250,000 for all types of accounts until January 1,
2010.  In addition, the FDIC adopted an optional Temporary Liquidity
Guarantee Program by which, for a fee, noninterest bearing transaction accounts
would receive unlimited insurance coverage until December 31, 2009 and certain
senior unsecured debt issued by institutions and their holding companies between
October 13, 2008 and June 30, 2009 would be guaranteed by the FDIC through June
30, 2012.  Naugatuck Valley Savings made the business decision to
participatein the
unlimited noninterest bearing transaction account coverage and Naugatuck Valley
Savings and its holding companies optedto participate in the
unsecured debt guarantee program.





Federal
law also provided for a one-time credit for eligible institutions based on their
assessment base as of December 31, 1996.  Subject to certain
limitations, credits could be used beginning in 2007 to offset assessments until
exhausted.  Naugatuck Valley Savings’ one-time credit approximated
$161,695, of which $80,651 and $81,044 was used to offset assessments in 2007
and 2008, respectively.  The Reform Act also provided for the
possibility that the Federal Deposit Insurance Corporation may pay dividends to
insured institutions once the Deposit Insurance fund reserve ratio equals or
exceeds 1.35% of estimated insured deposits.





In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund.  That payment is
established quarterly and during the calendar year ending December 31, 2008
averaged 1.12 basis points of assessable deposits.





11
 Index




The
Federal Deposit Insurance Corporation has authority to increase insurance
assessments.  A significant increase in insurance premiums would
likely have an adverse effect on the operating expenses and results of
operations of Naugatuck Valley Savings.  On February 27, 2009, the
Federal Deposit Insurance Corporation took action designed to allow the Deposit
Insurance Fund to withstand the problems facing the banking
industry.  The proposed action will impose a special emergency
assessment on all insured banks amounting to 20 basis points on insured deposits
as of June 30, 2009 and payable on September 30, 2009.  As a result of
this action, the Bank may be subject to a potential assessment of approximately
$775,000.  Management cannot predict what insurance assessment rates
will be in the future.





Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the Federal
Deposit Insurance Corporation or the Office of Thrift
Supervision.  The management of Naugatuck Valley Savings does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.





Federal
Home Loan Bank System.Naugatuck
Valley Savings is a member of the Federal Home Loan Bank System, which consists
of twelve regional Federal Home Loan Banks.  The Federal Home Loan
Bank provides a central credit facility primarily for member
institutions.  Naugatuck Valley Savings, as a member of the Federal
Home Loan Bank of Boston, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank.  Naugatuck Valley Savings was in
compliance with this requirement with an investment in Federal Home Loan Bank
stock at December 31, 2008 of $6.3 million.  Federal Home Loan Bank
advances must be secured by specified types of collateral.





The
Federal Home Loan Banks are required to provide funds for the resolution of
insolvent thrifts in the late 1980s and to contribute funds for affordable
housing programs.  These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members.  If dividends were reduced, or interest on
future Federal Home Loan Bank advances increased, our net interest income would
likely also be reduced.





Federal
Reserve System.





The
Federal Reserve Board regulations require savings institutions to maintain
noninterest earning reserves against their transaction accounts (primarily
Negotiable Order of Withdrawal (NOW) and regular checking
accounts).  The regulations generally provide that reserves be
maintained against aggregate transaction accounts as follows: a 3% reserve ratio
is assessed on net transaction accounts up to and including $44.4 million; a 10%
reserve ratio is applied above $44.4 million.  The first $10.3 million
of otherwise reservable balances are exempted from the reserve
requirements.  The amounts are adjusted annually.  Naugatuck
Valley Savings complies with the foregoing requirements.





12
 Index





Holding
Company Regulation





General.
Naugatuck Valley Financial and Naugatuck Valley Mutual are savings and loan
holding companies within the meaning of federal law.  As such, they
are registered with the Office of Thrift Supervision and are subject to Office
of Thrift Supervision regulations, examinations, supervision, reporting
requirements and regulations concerning corporate governance and
activities.  In addition, the Office of Thrift Supervision has
enforcement authority over Naugatuck Valley Financial and Naugatuck Valley
Mutual and their non-savings institution subsidiaries.  Among other
things, this authority permits the Office of Thrift Supervision to restrict or
prohibit activities that are determined to be a serious risk to Naugatuck Valley
Savings.





Restrictions
Applicable to Mutual Holding Companies.According to
federal law and Office of Thrift Supervision regulations, a mutual holding
company, such as Naugatuck Valley Mutual, may generally engage in the following
activities: (1) investing in the stock of a savings association; (2) acquiring a
mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (3) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; and (4) any
activity approved by the Federal Reserve Board for a bank holding company or
financial holding company or previously approved by the Office of Thrift
Supervision for multiple savings and loan holding companies.  In
addition, mutual holding companies may engage in activities permitted for
financial holding companies.  Financial holding companies may engage
in a broad array of financial service activities including insurance and
securities.





Federal
law prohibits a savings and loan holding company, including a federal mutual
holding company, from directly or indirectly, or through one or more
subsidiaries, acquiring more than 5% of the voting stock of another savings
association, or its holding company, without prior written approval of the
Office of Thrift Supervision.  Federal law also prohibits a savings
and loan holding company from acquiring more than 5% of a company engaged in
activities other than those authorized for savings and loan holding companies by
federal law, or acquiring or retaining control of a depository institution that
is not insured by the Federal Deposit Insurance Corporation.  In
evaluating applications by holding companies to acquire savings associations,
the Office of Thrift Supervision must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.





The
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
associations in more than one state, except: (1) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (2) the
acquisition of a savings association in another state if the laws of the state
of the target savings institution specifically permit such
acquisitions.  The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.





If the
savings association subsidiary of a savings and loan holding company fails to
meet the qualified thrift lender test, the holding company must register with
the Federal Reserve Board as a bank holding company within one year of the
savings association’s failure to so qualify.





Stock
Holding Company Subsidiary Regulation.The Office of
Thrift Supervision has adopted regulations governing the two-tier mutual holding
company form of organization and subsidiary stock holding companies that are
controlled by mutual holding companies.  Naugatuck Valley Financial is
the stock holding company subsidiary of Naugatuck Valley
Mutual.  Naugatuck Valley Financial is permitted to engage in
activities that are permitted for Naugatuck Valley Mutual subject to the same
restrictions and conditions.





Waivers
of Dividends by Naugatuck Valley Mutual. Office of
Thrift Supervision regulations require Naugatuck Valley Mutual to notify the
Office of Thrift Supervision if it proposes to waive receipt of dividends from
Naugatuck Valley Financial.  The Office of Thrift Supervision reviews
dividend waiver notices on a case-by-case basis, and, in general, does not
object to any such waiver if: (i) the waiver would not be detrimental to the
safe and sound operation of the savings association; and (ii) the mutual holding
company’s board of directors determines that such waiver is consistent with such
directors’ fiduciary duties to the mutual holding company’s
members.





13
 Index




Conversion
of Naugatuck Valley Mutual to Stock Form.Office of
Thrift Supervision regulations permit Naugatuck Valley Mutual to convert from
the mutual form of organization to the capital stock form of
organization.  There can be no assurance of when, if ever, a
conversion transaction will occur, and the Board of Directors has no current
intention or plan to undertake a conversion transaction.  In a
conversion transaction, a new holding company would be formed as the successor
to Naugatuck Valley Financial, Naugatuck Valley Mutual’s corporate existence
would end, and certain depositors of Naugatuck Valley Savings would receive the
right to subscribe for additional shares of the new holding
company.  In a conversion transaction, each share of common stock held
by stockholders other than Naugatuck Valley Mutual would be automatically
converted into a number of shares of common stock of the new holding company
based on an exchange ratio determined at the time of conversion that ensures
that stockholders other than Naugatuck Valley Mutual own the same percentage of
common stock in the new holding company as they owned in Naugatuck Valley
Financial immediately before conversion.  The total number of shares
held by stockholders other than Naugatuck Valley Mutual after a conversion
transaction would be increased by any purchases by such stockholders in the
stock offering conducted as part of the conversion transaction.





Acquisition
of Control.
Under the federal Change in Bank Control Act, a notice must be submitted to the
Office of Thrift Supervision if any person (including a company), or group
acting in concert, seeks to acquire “control” of a savings and loan holding
company or savings association.  An acquisition of “control” can occur
upon the acquisition of 10% or more of the voting stock of a savings and loan
holding company or savings institution or as otherwise defined by the Office of
Thrift Supervision.  Under the Change in Bank Control Act, the Office
of Thrift Supervision has 60 days from the filing of a complete notice to act,
taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition.  Any company that so acquires control would then be
subject to regulation as a savings and loan holding company.





Federal
Securities Laws





Naugatuck
Valley Financial’s common stock is registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.  Naugatuck
Valley Financial is subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Securities Exchange Act of
1934.





Executive
Officers of the Registrant





The
executive officers of Naugatuck Valley Financial, Naugatuck Valley Mutual
Holding Company and Naugatuck Valley Savings are elected annually by the Board
of Directors and serve at the Board’s discretion.  The executive
officers of Naugatuck Valley Financial, Naugatuck Valley Mutual Holding Company
and Naugatuck Valley Savings are:





Name
                                        
                                        PositionJohn
      C. Roman
                                        
                                        President
      and Chief Executive Officer of Naugatuck Valley Financial, Naugatuck
      Valley Mutual and Naugatuck Valley SavingsDominic
      J. Alegi, Jr.
                                        
                                        Executive
      Vice President of Naugatuck Valley Financial, Naugatuck Valley Mutual and
      Naugatuck Valley SavingsLee
      R. Schlesinger
                                        
                                        Senior
      Vice President and Chief Financial Officer of Naugatuck Valley Financial,
      Naugatuck Valley Mutual and Naugatuck Valley SavingsWilliam
      C. Nimons
                                        
                                        Senior
      Vice President of Naugatuck Valley Financial, Naugatuck Valley Mutual and
      Naugatuck Valley SavingsMark
      S. Graveline
                                        
                                        Senior
      Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual;
      Senior Vice President and Chief Lending Officer of Naugatuck Valley
      Savings





Below is
information regarding the executive officers who are not also
directors.  Unless otherwise stated, each executive officer has held
his current position for at least the last five years.  Ages presented
are as of December 31, 2008.





14
 Index




Dominic J. Alegi,
Jr. has served as Executive Vice President of Naugatuck Valley Financial
and Naugatuck Valley Mutual since September 2004 and has been Executive Vice
President of Naugatuck Valley Savings since 1989.  Mr. Alegi has
served with Naugatuck Valley Savings since 1970.  Age 62.





Lee R.
Schlesingerwas appointed Senior Vice
President and Chief Financial Officer of Naugatuck Valley Mutual, Naugatuck
Valley Financial and Naugatuck Valley Savings in December,
2007.  Prior to that, he served as Vice President and Treasurer of
Naugatuck Valley Financial and Naugatuck Valley Mutual since September 2004, and
as Vice President and Treasurer of Naugatuck Valley Savings since August
2004.  Mr. Schlesinger served as Vice President and Controller of
Naugatuck Valley Savings from 2003 to 2004 and as Assistant Vice President and
Controller of Naugatuck Valley Savings from 2000 to 2003.  Mr.
Schlesinger has served with Naugatuck Valley Savings since 1983.  Age
48.





William C.
Nimons has served as Senior Vice President of Naugatuck Valley Financial
and Naugatuck Valley Mutual since September 2004 and has been Senior Vice
President of Naugatuck Valley Savings since 2001.  Mr. Nimons
previously was the Manager-Network Management of Prudential Real Estate and
Relocation, a real estate and relocation firm and was an Executive Vice
President at Shelton Savings Bank.  Age 62.





Mark S.
Graveline has served as Senior Vice President of Naugatuck Valley
Financial and Naugatuck Valley Mutual and as Senior Vice President and Chief
Lending Officer of Naugatuck Valley Savings since February 2005.  Mr.
Graveline previously was a Vice President of Banknorth-Connecticut and a Vice
President of North American Bank and Trust.  Age 52.





ITEM 1A.
            RISK
      FACTORS.





Changes
in interest rates could reduce our net interest income and
earnings.





Our net
interest income is the interest we earn on loans and investment less the
interest we pay on our deposits and borrowings. Our net interest yield is the
difference between the yield we earn on our assets and the interest rate we pay
for deposits and our other sources of funding.  Changes in interest
rates—up or down—could adversely affect our net interest yield and, as a result,
our net interest income. Although the yield we earn on our assets and our
funding costs tend to move in the same direction in response to changes in
interest rates, one can rise or fall faster than the other, causing our net
interest margin to expand or contract. Our liabilities tend to be shorter in
duration than our assets, so they may adjust faster in response to changes in
interest rates. As a result, when interest rates rise, our funding costs may
rise faster than the yield we earn on our assets, causing our net interest
margin to contract until the yield catches up.  Changes in the slope
of the “yield curve”—or the spread between short-term and long-term interest
rates—could also reduce our net interest margin. Normally, the yield curve is
upward sloping, meaning short-term rates are lower than long-term rates. Because
our liabilities tend to be shorter in duration than our assets, when the yield
curve flattens or even inverts, we could experience pressure on our net interest
margin as our cost of funds increases relative to the yield we can earn on our
assets.





If
we do not achieve profitability on new branches, the new branches may negatively
impact our earnings.





We opened
a new branch office in the Heritage Village section of Southbury, Connecticut in
June 2008.  In addition, we opened three new branch offices in
Waterbury, Southbury and Cheshire, Connecticut in the third quarter of 2006, and
we opened a new branch office in Seymour, Connecticut in January
2005.    We intend to continue to pursue opportunities to
pursue expansion of our branch network, as well as to upgrade our current branch
facilities.  We cannot assure you that our branch expansion strategy
and our branch upgrading will be accretive to our earnings, or that it will be
accretive to earnings within a reasonable period of time.  Numerous
factors contribute to the performance of a new branch, such as a suitable
location, qualified personnel and an effective marketing
strategy.  Additionally, it takes time for a new branch to generate
significant deposits and make sufficient loans to produce enough income to
offset expenses, some of which, like salaries and occupancy expense, are
relatively fixed costs.  In addition to branch employees, we will hire
lending and other employees to support our expanded infrastructure.





15
 Index




Our
increased emphasis on commercial and construction lending and the unseasoned
nature of these loans may expose us to increased lending risks and could impact
the level of our allowance for loan losses.





Since
December 31, 2002, our commercial real estate, commercial business and
residential construction loan portfolio has increased $160.3 million, or 849.8%,
and at December 31, 2008, $179.2 million, or 41.0%, of our loan portfolio
consisted of these commercial real estate, construction and commercial business
loans.  We intend to continue to emphasize these types of
lending.  These types of loans generally expose a lender to greater
risk of non-payment and loss than one- to four-family residential mortgage loans
because repayment of the loans often depends on the successful operation of the
property, the income stream of the borrowers for commercial business loans and
for construction loans, the accuracy of the estimate of the property’s value at
completion of construction and the estimated cost of
construction.  These factors can be impacted by many variables
including economic events beyond the borrowers’ control.  Such loans
typically involve larger loan balances to single borrowers or groups of related
borrowers compared to one- to four-family residential mortgage
loans.  Also, many of our commercial and construction borrowers have
more than one loan outstanding with us.  Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.





Because
of our planned continued emphasis on commercial and construction lending and the
unseasoned nature of many of these loans, we may determine it necessary to
increase the level of our allowance for loan losses.  We make various
judgments about the collectibility of our loans, including the creditworthiness
of our borrowers and the value of the real estate and other assets serving as
collateral for our loans.  In determining the amount of the allowance
for loan losses, we review our loans and our loan loss and delinquency
experience, and we evaluate economic conditions.  However, as a result
of our recent expansion, a significant portion of our commercial and
construction loans are unseasoned, with the risk that these loans may not have
had sufficient time to perform to properly indicate the potential magnitude of
losses.  If our judgments are incorrect, our allowance for loan losses
may not be sufficient to cover future losses, which will result in additions to
our allowance through increased provisions for loan losses.  In
addition, bank regulators periodically review our allowance for loan losses and
may require us to increase our provision for loan losses or recognize further
loan charge-offs.  Increased provisions for loan losses would increase
our expenses and reduce our profits.  Finally, during our recent
expansion, we have also experienced a historically low interest rate
environment.  Our unseasoned adjustable rate loans have not,
therefore, been subject to a rising interest rate environment which could cause
them to adjust to their maximum interest rate level.  Such an increase
could increase collection risks resulting from potentially higher payment
obligations by the borrower.





If
we conclude that the decline in value of any of our investment securities is
other than temporary, we are required to write down the value of that security
through a charge to earnings.





We review
our investment securities portfolio at each quarter-end reporting period to
determine whether the fair value is below the current carrying value. When the
fair value of any of our investment securities has declined below its carrying
value, we are required to assess whether the decline is other than temporary. If
we conclude that the decline is other than temporary, we are required to write
down the value of that security through a charge to earnings. As of December 31,
2008, our investment portfolio included securities with a book value of $66.3
million and an estimated fair value of $63.8 million.  Changes in the
expected cash flows of these securities and/or prolonged price declines may
result in our concluding in future periods that the impairment of these
securities is other than temporary, which would require a charge to earnings to
write down theses securities to their fair value. Any charges for
other-than-temporary impairment would not impact cash flow, tangible capital or
liquidity.  See note 3 of the notes to financial statements in the
Company’s 2008 Annual Report to stockholders.





A
downturn in the local economy or a decline in real estate values could reduce
our profits.





Most of
our loans are secured by real estate or made to businesses in the Greater
Naugatuck Valley.  As a result of this concentration, a downturn in
the local economy could cause significant increases in nonperforming loans,
which would reduce our profits.  A decline in real estate values could
also cause some of our mortgage and home equity loans to become inadequately
collateralized, which would expose us to a greater risk of loss.  In
addition, decreases in asset quality could require additions to our allowance
for loan losses through increased provisions for loan losses, which would
further reduce our profits.





16
 Index




Future
FDIC Assessments Will Hurt Our Earnings





In
February 2009, the FDIC adopted an interim final rule imposing a special
assessment on all insured institutions due to recent bank and savings
association failures.  The emergency assessment, of up to 20 basis
points of assessed deposits as of June 30, 2009, will be collected on September
30, 2009.  The special assessment will negatively impact the Company’s
earnings and the Company expects that non-interest expenses will increase as
much as $750,000 in 2009 as compared to 2008 as a result of this special
assessment.  In addition, the interim rule would also permit the FDIC
to impose additional emergency special assessments after June 30, 2009, of up to
10 basis points per quarter if necessary to maintain public confidence in
federal deposit insurance, or as a result of deterioration in the deposit
insurance fund reserve ratio due to institution failures.  Any
additional emergency special assessment imposed by the FDIC will further hurt
the Company’s earnings.





The
market price of our common stock may be materially adversely affected by market
volatility.





Many
publicly traded financial services companies have recently experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance or prospects of such companies.  We may
experience market fluctuations that are not directly related to our operating
performance but are influenced by the market’s perception of the state of
the financial services industry in general and, in particular, the market’s
assessment of general credit quality conditions, including default and
foreclosure rates in the industry.





Naugatuck
Valley Mutual’s majority control of our common stock enables it to exercise
voting control over most matters put to a vote of stockholders, including
preventing sale or merger transactions you may be in favor of or a second-step
conversion by Naugatuck Valley Mutual.





Naugatuck
Valley Mutual owns a majority of our common stock and, through its Board of
Directors, is able to exercise voting control over most matters put to a vote of
stockholders.  The same directors and officers manage Naugatuck Valley
Financial, Naugatuck Valley Savings and Naugatuck Valley Mutual.  As a
federally chartered mutual holding company, the Board of Directors of Naugatuck
Valley Mutual must ensure that the interests of depositors of Naugatuck Valley
Savings are represented and considered in matters put to a vote of stockholders
of Naugatuck Valley Financial.  Therefore, the votes cast by Naugatuck
Valley Mutual may not be in your personal best interests as a
stockholder.  For example, Naugatuck Valley Mutual may exercise its
voting control to defeat a stockholder nominee for election to the board of
directors of Naugatuck Valley Financial.  In addition, stockholders
will not be able to force a merger or second-step conversion transaction without
the consent of Naugatuck Valley Mutual.  Some stockholders may desire
a sale or merger transaction, since stockholders typically receive a premium for
their shares, or a second-step conversion transaction, since fully converted
institutions tend to trade at higher multiples than mutual holding
companies.





Office
of Thrift Supervision policy on remutualization transactions could prohibit the
merger or an acquisition of us, which may lower our stock price.





Current
Office of Thrift Supervision regulations permit a mutual holding company to be
acquired by a mutual institution in a remutualization
transaction.  However, the Office of Thrift Supervision has issued a
policy statement indicating that it views remutualization transactions as
raising significant issues concerning disparate treatment of minority
stockholders and mutual members of the target entity and as raising issues
concerning the effect on the mutual members of the acquiring
entity.  Under certain circumstances, the Office of Thrift Supervision
intends to give these issues special scrutiny and reject applications for the
remutualization of a mutual holding company unless the applicant can clearly
demonstrate that the Office of Thrift Supervision’s concerns are not warranted
in the particular case.  Should the Office of Thrift Supervision
prohibit or otherwise restrict these transactions in the future, our stock price
may be adversely affected.  We have no current plans to undertake a
remutualization transaction.





Strong
competition within our market area could hurt our profits and slow
growth.





Although
we consider ourselves competitive in the Greater Naugatuck Valley, which we
consider our market area, we face intense competition both in making loans and
attracting deposits.  Price competition for loans and deposits might
result in us earning less on our loans and paying more on our deposits, which
reduces net interest income.





17
 Index




Some of
the institutions with which we compete have substantially greater resources and
lending limits than we have and may offer services that we do not
provide.  We expect competition to increase in the future as a result
of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry.  Our profitability
depends upon our continued ability to compete successfully in our market
area.





We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.





We are
subject to extensive government regulation, supervision and
examination.  Such regulation, supervision and examination govern the
activities in which we may engage, and is intended primarily for the protection
of the deposit insurance fund and our depositors.  Regulatory
authorities have extensive discretion in their supervisory and enforcement
activities, including the imposition of restrictions on our operations, the
classification of our assets and determination of the level of our allowance for
loan losses.  Any change in such regulation and oversight, whether in
the form of regulatory policy, regulations, legislation or supervisory action,
may have a material impact on our operations.





ITEM
      1B.
            UNRESOLVED STAFF
      COMMENTS.





None.





18
 Index




ITEM
      2.
            PROPERTIES.





We
conduct our business through our main office and branch offices.  The
following table sets forth certain information relating to these facilities as
of December 31, 2008.





Location
                                    
                                    Year
                                      Opened/
                                      Acquired
                                    
                                    Net
      Book Value at
                                      December
      31, 2008
                                    
                                    Square
                                      Footage
                                    
                                    Owned/
                                      Leased
                                    
                                    Date
      of Lease
                                      Expiration(Dollars
      in thousands)Main
      Office:333
      Church Street
                                      Naugatuck,
      CT  06770
                                    
                                    1996
                                    
                                    $2,572
                                    
                                    23,000
                                    
                                    
                                    Owned
                                    
                                    —Branches:1009
      New Haven Road
                                      Naugatuck,
      CT  06770
                                    
                                    2001
                                    
                                    1,235
                                    
                                    3,300
                                    
                                    
                                    Owned
                                    
                                    —127
      South Main Street
                                      Beacon
      Falls, CT  06403
                                    
                                    1997
                                    
                                    272
                                    
                                    960
                                    
                                    
                                    Owned
                                    
                                    —49
      Pershing Drive
                                      Derby,
      CT  06418
                                    
                                    2003
                                    
                                    125
                                    
                                    1,950
                                    
                                    
                                    Leased
                                    
                                    2013
      (1)249
      West Street (2)
                                      Seymour,
      CT  06483
                                    
                                    2002
                                    
                                    2,240
                                    
                                    9,500
                                    
                                    
                                    Owned
                                    
                                    —504
      Bridgeport Avenue
                                      Shelton,
      CT  06484
                                    
                                    2004
                                    
                                    476
                                    
                                    3,000
                                    
                                    
                                    Leased
                                    
                                    2020
      (3)1699
      Highland Avenue, Cheshire, CT  06410
                                    
                                    2006
                                    
                                    71
                                    
                                    3,000
                                    
                                    
                                    Leased
                                    
                                    2011
      (4)450
      Heritage Road, Suite 3C
                                      Southbury,
      CT  06488
                                    
                                    2008
                                    
                                    95
                                    
                                    3,000
                                    
                                    
                                    Leased
                                    
                                    2018
      (5)1570
      Southford Road (6)
                                      Southbury,
      CT  06488
                                    
                                    2006
                                    
                                    1,738
                                    
                                    4,823
                                    
                                    
                                    Owned
                                    
                                    —1030
      Hamilton Avenue Waterbury, CT  06706
                                    
                                    2006
                                    
                                    15
                                    
                                    1,239
                                    
                                    
                                    Leased
                                    
                                    2011
      (7)Other
      Properties:1007
      New Haven Road
                                      Naugatuck,
      CT  06770
                                    
                                    1974
                                    
                                    23
                                    
                                    1,725
                                    
                                    
                                    Leased
                                    
                                    2014
      (8)135
      South Main Street (9)
                                      Beacon
      Falls, CT  06403
                                    
                                    2003
                                    
                                    159
                                    
                                    N/A
                                    
                                    
                                    Owned
                                    
                                    —


_________________________


(1)
            We
      have an option to renew this lease for three additional five-year
      periods.


(2)
            This
      branch occupies 3,500 square feet of this building and 1,465 square feet
      is utilized as a training facility for the bank.  The building
      also includes 4,535 square feet of rentable space which is currently
      leased until 2013.  The tenant has an option to renew this lease
      for three additional five year
periods.


(3)
            We
      have an option to renew this lease for five additional five-year
      periods.


(4)
            We
      have an option to renew this lease for three additional five-year
      periods.


(5)
            We
      have an option to renew this lease for two additional five-year
      periods.


(6)
            This
      branch occupies 3,383 square feet of this building.  The
      building also includes 1,440 square feet of rental space, none of which
      was rented as of December 31, 2008.


(7)
            We
      have an option to renew this lease for four additional five-year
      periods.


(8)
            Former
      branch site.  We have an option to renew this lease for two
      additional ten-year periods.  This property has been leased to a
      subtenant under a lease that expires in
2011.


(9)
            This
      property is designated for future parking, additional access and possible
      future expansions of our Beacon Falls
branch.




19
 Index




ITEM 3.
            LEGAL
      PROCEEDINGS.





Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business.  We are not a party to any
pending legal proceedings that we believe would have a material adverse effect
on our financial condition, results of operations or cash flows.





ITEM 4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.





None.




PART
II





ITEM 5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.





The
information required by this item regarding the market for Naugatuck Valley
Financial’s common equity and related stockholder matters, other than
information relating to restrictions on Naugatuck Valley Financial’s payment of
dividends which is provided below, is incorporated herein by reference to
Naugatuck Valley Financial’s 2008 Annual Report to Stockholders at “Investor and Corporate
Information.”





Naugatuck
Valley Financial’s ability to pay dividends is dependent on dividends received
from Naugatuck Valley Savings.  For a discussion of restrictions on
the payment of cash dividends by Naugatuck Valley Savings, see “Business—Regulation and
Supervision—Regulation of Federal Savings Associations—Limitation on Capital
Distributions” in this Annual Report on Form 10-K and note 13 to the
Consolidated Financial Statements included in Naugatuck Valley Financial’s 2008
Annual Report to Stockholders.





The
following table presents information regarding Naugatuck Valley Financial stock
repurchases during the three months ended December 31, 2008





Period
                    Total
      Number of
                      Shares
      Purchased
                    Average
      Price Paid
                      per
      Share
                    Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                    Maximum
      Number of Shares that May Yet Be Purchased Under the Plans or
      ProgramsOctober
                    --
                    --
                    --
                    163,704November
                    --
                    --
                    --
                    163,704December
                    --
                    --
                    --
                    163,704Total
                    --
                    --
                    --
                    163,704





On
February 19, 2008, the Company announced that the Board of Directors authorized
the Company to repurchase up to 361,207 shares, or approximately 5%, of the
outstanding shares of common stock, including the shares held by Naugatuck
Valley Mutual Holding Company.  The repurchases will be conducted
through open-market purchases or privately negotiated transactions and will be
made from time to time depending on market conditions and other
factors.  No time limit was placed on the duration of the share
repurchase program.  Any repurchased shares will be held as treasury
stock and will be available for general corporate purposes.  The
number of shares remaining to be purchased under the plan in the table above
does not reflect the number of shares authorized in this repurchase
plan.





ITEM 6.
            SELECTED
      FINANCIAL DATA.





The
information required by this item is incorporated herein by reference to the
Section captioned “Selected Consolidated Financial and Other Data” in Naugatuck
Valley Financial’s 2008 Annual Report to Stockholders.





20
 Index




ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION.





The
information required by this item is incorporated herein by reference to the
Section captioned “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in the 2008 Annual Report to
Stockholders.





ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





The
information required by this item is incorporated herein by reference to the
Section captioned “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in the 2008 Annual Report to
Stockholders.





ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTAL DATA.





The
information regarding financial statements is incorporated herein by reference
to Naugatuck Valley Financial’s 2008 Annual Report to Stockholders in the
Consolidated Financial Statements and the Notes thereto.





ITEM 9.
            CHANGE
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





Not
applicable.





ITEM 9A(T).
            CONTROLS
      AND PROCEDURES.





(a)
            Disclosure
      Controls and Procedures





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”).  Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.





(b)
            Internal
      Controls Over Financial Reporting





Management’s
annual report on internal control over financial reporting is incorporated
herein by reference to the Company’s 2008 Annual Report to
Stockholders.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.





(c)
            Changes
      to Internal Control Over Financial
Reporting





There
were no changes in the Company’s internal control over financial reporting
during the three months ended December 31, 2008 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.





21
 Index




ITEM 9B.
            OTHER
      INFORMATION.





Not
applicable.





PART
III





ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Directors





For
information concerning Naugatuck Valley Financial’s directors, the information
contained under the section captioned “Proposal 1—Election of
Directors” in Naugatuck Valley Financial’s Proxy Statement for the 2009
Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by
reference.





Executive
Officers





For
information relating to officers of Naugatuck Valley Financial, the section
captioned “Proposal 1—Election
of Directors” in the Proxy Statement, and Part I, Item 1, “Description of Business—Executive
Officers of the Registrant” in this Annual Report on Form 10-K, are
incorporated by reference.





Compliance
with Section 16(a) of the Exchange Act





For
information regarding compliance with Section 16(a) of the Exchange Act, the
information contained under the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement is incorporated herein by
reference.





Disclosure
of Code of Ethics





Naugatuck
Valley Financial has adopted a Code of Ethics and Business
Conduct.  See the Exhibits to this Annual Report on Form
10-K.





Corporate
Governance





For
information regarding the audit committee and its composition and the audit
committee financial expert, the section captioned “Corporate Governance” in the
Proxy Statement is incorporated herein by reference.





ITEM 11.
            EXECUTIVE
      COMPENSATION.





The
information regarding executive compensation is incorporated herein by reference
to Naugatuck Valley Financial’s Proxy Statement for the 2009 Annual Meeting of
Stockholders.








ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDERS MATTERS.





(a)
            Security
      Ownership of Certain Beneficial
Owners





Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in Naugatuck Valley Financial’s Proxy Statement for
the 2009 Annual Meeting of Stockholders.





(b)
            Security
      Ownership of Management





Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in Naugatuck Valley Financial’s Proxy Statement for
the 2009 Annual Meeting of Stockholders.





22
 Index




(c)
            Changes
      in Control





Management
of Naugatuck Valley Financial knows of no arrangements, including any pledge by
any person or securities of Naugatuck Valley Financial, the operation of which
may at a subsequent date result in a change in control of the
registrant.





(d)
            Equity
      Compensation Plan Information





The
following table sets forth information as of December 31, 2008 about Company
common stock that may be issued under the Naugatuck Valley Financial Corporation
2005 Equity Incentive Plan.  The plan was approved by the Company’s
stockholders.





PLAN
      CATEGORY
                
                Number
      of securities
                  to
      be issued upon
                  the
      exercise of
                  outstanding
      options,
                  warrants
      and rights
                
                Weighted-average
                  exercise
      price of
                  outstanding
      options,
                  warrants
      and rights
                
                Number
      of securities
                  remaining
      available
                  for
      future issuance under equity compensation plans (excluding securities
      reflected in the first column)Equity
      compensation plans approved by security holders
                
                353,580
                
                $11.13
                
                20,627Equity
      compensation plans not approved by security holders
                
                n/a
                
                n/a
                
                n/aTotal
                
                353,580
                
                $11.13
                
                20,627








ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





The
information relating to certain relationships and related transactions, and
director independence is incorporated herein by reference to the section
captioned “Corporate Governance and Board Matters” in Naugatuck Valley
Financial’s Proxy Statement for the 2009 Annual Meeting of
Stockholders.





ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND EXPENSES.





The
information relating to the principal accountant fees and expenses is
incorporated herein by reference to the section captioned “Items to be Voted on
by Stockholders – Item 2 – Ratification of Independent Registered Public
Accounting Firm” in Naugatuck Valley Financial’s Proxy Statement for the 2009
Annual Meeting of Stockholders.





23
 Index





PART
IV





ITEM 15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES.





(1)
            The
      following are filed as a part of this report by means of incorporation by
      reference to Naugatuck Valley Financial’s 2008 Annual Report to
      Stockholders:





●
            Report
      of Independent Registered Public Accounting
Firm





●
            Consolidated
      Statements of Financial Condition as of December 31, 2008 and
      2007





●
            Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007 and
      2006





●
            Consolidated
      Statements of Changes in Stockholders’ Equity for the Years Ended December
      31, 2008 and 2007





●
            Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006





●
            Notes
      to Consolidated Financial
Statements





(2)
            All
      financial statement schedules are omitted because they are not required or
      applicable, or the required information is shown in the consolidated
      financial statements or the notes
thereto.





(3)
            Exhibits





Exhibit
      No.
            Description





3.1
            Charter
      of Naugatuck Valley Financial Corporation
(1)


3.2
            Bylaws
      of Naugatuck Valley Financial Corporation
(2)


4.0
            Specimen
      Stock Certificate of Naugatuck Valley Financial Corporation
      (3)


10.1
            Naugatuck
      Valley Financial Corporation and Naugatuck Valley Savings Employment
      Agreement with John C. Roman (4)*


10.2
            Naugatuck
      Valley Savings Change in Control Agreement with Dominic J. Alegi, Jr. (4)
      *


10.3
            Naugatuck
      Valley Financial Corporation and Naugatuck Valley Savings Deferred
      Compensation Plan for Directors
(5)*


10.4
            Form
      of Naugatuck Valley Savings Employee Severance Compensation Plan
      (3)*


10.5
            Naugatuck
      Valley Savings Death Benefit Agreement with John C. Roman, as amended
      (3)*


10.6
            Naugatuck
      Valley Savings Death Benefit Agreement with Dominic J. Alegi, Jr.
      (3)*


10.7
            Naugatuck
      Valley Financial Corporation 2005 Equity Incentive Plan
    (6)*


10.8
            Naugatuck
      Valley Savings Change in Control Agreement with Mark S. Graveline
      *


13.0
            Annual
      Report to Stockholders


14.0
            Code
      of Ethics and Business Conduct (7)


21.0
            List
      of Subsidiaries


23.0
            Consent
      of Whittlesey & Hadley, P.C.


31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer


31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer


32.0
            Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer


______________________________


*Management
contract or compensation plan arrangement


(1)
            Incorporated
      by reference to Exhibit 3.1 to the Company’s Form 10-Q for the three
      months ended September 30, 2004.


(2)
            Incorporated
      by reference to Exhibit 3 to the Company’s Current Report on Form 8-K
      filed with the SEC on October 18,
2007.





24
 Index




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


(4)
            Incorporated
      by reference to the Company’s Form 10-K for the fiscal year ended December
      31, 2007.


(5)
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Form 10-Q for the three
      months ended March 31, 2007, filed on May 15,
  2007.


(6)
            Incorporated
      by reference to Appendix C to the Proxy Statement for the 2005 Annual
      Meeting of Stockholders filed on April 1,
2005.


(7)
            Incorporated
      by reference to the Company’s Form 10-K for the fiscal year ended December
      31, 2004.




25
 Index





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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 CORPORATIONDate:
      March 25, 2009
                By:
                /s/ John C. RomanJohn
      C. RomanPresident
      and Chief Executive
Officer





Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.





Name
                  
                  Title
                  
                  Date/s/ John C. Roman
                  
                  President,
      Chief Executive Officer
                  
                  March
      25, 2009John
      C. Roman
                  
                  and
      Director(principal
      executive officer)/s/ Lee R. Schlesinger
                  
                  Senior
      Vice President and Chief
                  
                  March
      25, 2009Lee
      R. Schlesinger
                  
                  Financial
      Officer(principal
      accounting andfinancial
      officer)/s/ Ronald D. Lengyel
                  
                  Director
                  
                  March
      25, 2009Ronald
      D. Lengyel/s/ Carlos S. Batista
                  
                  Director
                  
                  March
      25, 2009Carlos
      S. Batista/s/ Richard M. Famiglietti
                  
                  Director
                  
                  March
      25, 2009Richard
      M. Famiglietti/s/ James A. Mengacci
                  
                  Director
                  
                  March
      25, 2009James
      A. Mengacci/s/ Michael S. Plude
                  
                  Director
                  
                  March
      25, 2009Michael
      S. Plude/s/ Camilo P. Vieira
                  
                  Director
                  
                  March
      25, 2009Camilo
      P. Vieira/s/ Jane H. Walsh
                  
                  Director
                  
                  March
      25, 2009Jane
      H. Walsh